BWB US Equity☆

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

The following discussion and analysis of the Company’s results of operations and financial condition should be read in conjunction with the Company’s consolidated financial statements and related notes included elsewhere in this report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth under “Forward-Looking Statements,” “Risk Factors” and elsewhere in this report, may cause actual results to differ materially from those projected in the forward-looking statements. The Company assumes no obligation to update any of these forward-looking statements. Readers of the Company’s Annual Report on Form 10-K should consider these risks and uncertainties in evaluating forward-looking statements and should not place undue reliance on forward-looking statements.

​

The following consolidated selected financial data is derived from the Company’s audited consolidated financial statements as of and for the five years ended December 31, 2021. This information should be read in connection with our audited consolidated financial statements and related notes appearing elsewhere in this report.

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ As of and for the year ended December 31, ​ ​

Per Common Share Data (1) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Selected Performance Ratios ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Yield on Total Loans, Gross ​ ​ 4.60 ​ ​ 4.90 ​ ​ 5.31 ​ ​ 5.23 ​ ​ 5.10 ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Selected Asset Quality Data ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Foreclosed Assets ​ $ — ​ $ — ​ $ — ​ $ — ​ $ 581 ​ ​

Nonaccrual Loans to Total Loans ​ ​ 0.03 % ​ 0.03 % ​ 0.02 % ​ 0.03 % ​ 0.08 % ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Capital Ratios (Bank Only) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Capital Ratios (Consolidated) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Growth Ratios ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ As of and for the year ended December 31,

Selected Balance Sheet Data ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Federal Funds Purchased ​ ​ — ​ ​ — ​ ​ — ​ ​ 18,000 ​ ​ 23,000

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ For the year ended December 31,

Selected Income Statement Data ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Preferred Stock Dividends ​ ​ 1,171 ​ ​ — ​ ​ — ​ ​ — ​ ​ —

​

Overview

The Company is a financial holding company headquartered in St. Louis Park, Minnesota. The principal sources of funds for loans and investments are transaction, savings, time, and other deposits, and short-term and long-term borrowings. The Company’s principal sources of income are interest and fees collected on loans, interest and dividends earned on investment securities and service charges. The Company’s principal expenses are interest paid on deposit accounts and borrowings, employee compensation and other overhead expenses. The Company’s simple, efficient business model of providing responsive support and unconventional experiences to clients continues to be the underlying principle that drives the Company’s profitable growth.

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Information Regarding COVID-19 Impact

The novel coronavirus, or COVID-19, pandemic was initially declared a pandemic by the World Health Organization in March of 2020 and has caused significant economic dislocation and extraordinary change for the Company, its clients, its communities and the country as a whole. At the onset of the pandemic, significant restrictions were placed on businesses and individuals, and while initial restrictions have been lifted, there is still the possibility that certain restrictions could be re-imposed or extended if the rate of infections surge in the Company’s market area.

Management continues to monitor and consider the impact of the COVID-19 pandemic closely, given the unpredictable nature and speed in which it is evolving. This includes the effects of the CARES Act and Coronavirus Relief Act and the prospects for additional fiscal stimulus programs, the acceptance of COVID-19 vaccines and the effects of new variants of the virus. The situation remains fluid and management cannot estimate the duration and full impact of the COVID-19 pandemic on the economy, financial markets and the Company’s financial condition and results of operations.

Critical Accounting Policies and Estimates

The consolidated financial statements of the Company are prepared based on the application of certain accounting policies, the most significant of which are described in Note 1 of the notes to the consolidated financial statements included as a part of this report. Certain policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect the reported results and financial position for the current period or in future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded or adjusted to reflect fair value. Assets carried at fair value inherently result in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on the future financial condition and results of operations. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with the Company’s Audit Committee.

The JOBS Act permits the Company an extended transition period for complying with new or revised accounting standards affecting public companies. The Company has elected to take advantage of this extended transition period, which means that the financial statements included in this report, as well as any financial statements filed in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as the Company remains an emerging growth company or until the Company affirmatively and irrevocably opts out of the extended transition period under the JOBS Act.

The following is a discussion of the critical accounting policies and significant estimates that require the Company to make complex and subjective judgments.

Allowance for Loan Losses

The allowance for loan losses, sometimes referred to as the “allowance,” is established through a provision for loan losses which is charged to expense. Loan losses are charged against the allowance when management determines all or a portion of the loan balance to be uncollectible. Subsequent recoveries, if any, are credited to the allowance for cash received on previously charged-off amounts. If the allowance is considered inadequate to absorb future loan losses on existing loans for any reason, including but not limited to, increases in the size of the loan portfolio, increases in charge-offs or changes in the risk characteristics of the loan portfolio, then the provision for loan losses is increased.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan agreement. The collection of all amounts due according to original contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. An impaired loan is measured based

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on the present value of expected future cash flows discounted at the loan’s effective interest rate, or, as a practical expedient, at the loan’s observable market price, or the fair value of the underlying collateral, reduced by costs to sell on a discounted basis, is used if a loan is collateral dependent.

Investment Securities Impairment

Periodically, the Company may need to assess whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other than temporary basis. In any such instance, the Company would consider many factors, including the length of time and the extent to which the fair value has been less than the amortized cost basis, the market liquidity for the security, the financial condition and the near-term prospects of the issuer, expected cash flows, and the intent and ability to hold the investment for a period of time sufficient to recover the temporary loss. Securities on which there is an unrealized loss that is deemed to be other than temporary are written down to fair value, with the write-down recorded as a realized loss in securities gains (losses).

The fair values of investment securities are generally determined by various pricing models. The Company evaluates the methodologies used to develop the resulting fair values. The Company performs an annual analysis on the pricing of investment securities to ensure that the prices represent reasonable estimates of fair value. The procedures include initial and ongoing reviews of pricing methodologies and trends. The Company seeks to ensure prices represent reasonable estimates of fair value through the use of broker quotes, current sales transactions from the portfolio and pricing techniques, which are based on the net present value of future expected cash flows discounted at a rate of return market participants would require. As a result of this analysis, if the Company determines there is a more appropriate fair value, the price is adjusted accordingly.

Fair Value of Financial Instruments

The fair value of a financial instrument is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts business. A framework has been established for measuring the fair value of financial instruments that considers the attributes specific to particular assets or liabilities and includes a three-level hierarchy for determining fair value based on the transparency of inputs to each valuation as of the measurement date. The Company estimates the fair value of financial instruments using a variety of valuation methods. When financial instruments are actively traded and have quoted market prices, quoted market prices are used for fair value and are classified as Level 1. When financial instruments, such as investment securities and derivatives, are not actively traded, the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar instruments where a price for the identical instrument is not observable. The fair values of these financial instruments, which are classified as Level 2, are determined by pricing models that consider observable market data such as interest rate volatilities, yield curve, credit spreads, prices from external market data providers and/or nonbinding broker-dealer quotations. When observable inputs do not exist, the Company estimates fair value based on available market data, and these values are classified as Level 3. Imprecision in estimating fair values can impact the carrying value of assets and liabilities and the amount of revenue or loss recorded.

Deferred Tax Asset

The Company uses the asset and liability method of accounting for income taxes as prescribed by GAAP. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. If currently available information indicates it is “more likely than not” that the deferred tax asset will not be realized, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Accounting for deferred income taxes is a critical accounting estimate because the Company exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. Management’s determination of the realization of deferred tax assets is based upon management’s judgment of various future events and uncertainties, including the timing and amount of future income, reversing temporary differences which may offset, and the implementation of various tax plans to maximize realization of the deferred tax asset. These

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judgments and estimates are inherently subjective and reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require the Company to record a valuation allowance against the deferred tax assets. A valuation allowance would result in additional income tax expense in such period, which would negatively affect earnings.

Results of Operations

Net Income

2021 Compared to 2020

Net income was $45.7 million for the year ended December 31, 2021, a 68.0% increase compared to net income of $27.2 million for the year ended December 31, 2020. Net income per diluted common share for the year ended December 31, 2021 was $1.54, a 64.8% increase, compared to $0.93 per diluted common share for the year ended December 31, 2020. Net income for the year ended December 31, 2020 was significantly impacted by increased provisions for loan losses, primarily attributable to economic uncertainties and evolving risks driven by the impacts of the COVID-19 pandemic, and non-recurring charges of $7.0 million related to prepayment fees associated with the early extinguishment of $94.0 million of higher priced FHLB term advances. ROA was 1.43% and 1.04% for the years ended December 31, 2021 and 2020, respectively. ROE was 14.45% and 10.51% for the years ended December 31, 2021 and 2020, respectively.

2020 Compared to 2019

Net income was $27.2 million for the year ended December 31, 2020, a 13.4% decrease compared to net income of $31.4 million for the year ended December 31, 2019. Net income per diluted common share for the year ended December 31, 2020 was $0.93, a 10.9% decrease, compared to $1.05 per diluted common share for the year ended December 31, 2019. ROA was 1.04% and 1.49% for the years ended December 31, 2020 and 2019, respectively. ROE was 10.51% and 13.50% for the years ended December 31, 2020 and 2019, respectively.

Net Interest Income

The Company’s primary source of revenue is net interest income, which is impacted by the level of interest earning assets and related funding sources, as well as changes in the level of interest rates. The difference between the average yield on earning assets and the average rate paid for interest bearing liabilities is the net interest spread. Noninterest bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. The impact of the noninterest bearing sources of funds is captured in the net interest margin, which is calculated as net interest income divided by average earning assets. Both the net interest margin and net interest spread are presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to pretax-equivalent income, assuming a 21% federal tax rate. Management’s ability to respond to changes in interest rates by using effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and the momentum of the Company’s primary source of earnings. In response to the COVID-19 pandemic, the Federal Open Market Committee, or FOMC, decreased the targeted federal funds rate by a total of 150 basis points in March 2020. This decrease may impact the comparability of net interest income between periods.

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Average Balances and Yields

The following table presents, for the years ended December 31, 2021, 2020 and 2019, the average balances of each principal category of assets, liabilities and shareholders’ equity, and an analysis of net interest income. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of net deferred loan origination fees and costs accounted for as yield adjustments. These tables are presented on a tax-equivalent basis, if applicable.

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Balance & Fees Rate Balance & Fees Rate Balance & Fees Rate

(dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Interest Earning Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Investment Securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Interest Bearing Liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Deposits: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Taxable Equivalent Adjustment: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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Interest Rates and Operating Interest Differential

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest earning assets and interest bearing liabilities, as well as changes in average interest rates. The following table presents the effect that these factors had on the interest earned on interest earning assets and the interest incurred on interest bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. The changes not attributable specifically to either volume or rate have been allocated to the changes due to volume. The following table presents the changes in the volume and rate of interest bearing assets and liabilities for the year ended December 31, 2021, compared to the year ended December 31, 2020, and for the year ended December 31, 2020, compared to the year ended December 31, 2019.

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ Year Ended December 31, 2021 ​ ​ Year Ended December 31, 2020

​ ​ ​ Compared with ​ ​ Compared with

​ ​ ​ Year Ended December 31, 2020 ​ ​ Year Ended December 31, 2019

​ ​ ​ Change Due To: ​ ​ Interest ​ ​ Change Due To: ​ ​ Interest

(dollars in thousands) ​ Volume ​ Rate ​ Variance ​ Volume ​ Rate ​ Variance

Interest Earning Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Investment Securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Federal Home Loan Bank Stock ​ ​ (153) ​ ​ (32) ​ ​ (185) ​ ​ 47 ​ ​ (1) ​ ​ 46

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Interest Bearing Liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Federal Funds Purchased ​ ​ (11) ​ ​ (94) ​ ​ (105) ​ ​ (3) ​ ​ (72) ​ ​ (75)

Notes Payable ​ ​ (369) ​ ​ (9) ​ ​ (378) ​ ​ (73) ​ ​ 11 ​ ​ (62)

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Interest Income, Interest Expense, and Net Interest Margin

2021 Compared to 2020

Net interest income was $109.5 million for the year ended December 31, 2021, an increase of $21.5 million, or 24.5%, compared to $88.0 million for the year ended December 31, 2020. The increase in net interest income was largely attributable to growth in average interest earning assets and lower rates paid on deposits, offset partially by declining yields on loans.

Net interest margin (on a fully tax-equivalent basis) for the year ended December 31, 2021 was 3.54%, compared to 3.46% for the year ended December 31, 2020, an increase of 8 basis points. Core net interest margin (on a fully tax-equivalent basis), a non-GAAP financial measure which excludes the impact of loan fees and PPP balances, interest, and fees, for the year ended December 31, 2021 was 3.28%, a 3 basis point increase from 3.25% for the year ended December 31, 2020. The expansion of core net interest margin, a non-GAAP financial measure, was primarily due to the repricing of deposits and the early extinguishment of higher priced FHLB term advances, offset partially by a decline in the core loan yield and higher average cash balances.

As the PPP loan portfolio pays down, the recognition of fees associated with the originations benefited net interest margin over the last year. The SBA has been forgiving PPP loans, which has accelerated the recognition of PPP fees starting in the fourth quarter of 2020 and continuing throughout 2021. The Company recognized $5.4 million of PPP originations for the year ended December 31, 2021, compared to $2.9 million for the year ended December 31, 2020. The elevated fee recognition is illustrated in the 6.24% PPP loan yield for the year ended December 31, 2021, compared to 3.39% for the year ended December 31, 2020. Remaining PPP origination fees to be recognized as of December 31, 2021 were $898,000.

The following table summarizes PPP loan originations and net origination fees as of December 31, 2021:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Originated ​ Outstanding ​ Program Lifetime

​ ​ Number ​ Principal ​ Number ​ Principal ​ Net Origination ​ Net Origination

​

Average interest earning assets for the year ended December 31, 2021 increased $550.0 million, or 21.4%, to $3.12 billion from $2.57 billion for the year ended December 31, 2020. The increase in average interest earning assets was primarily due to increased cash balances, continued purchases of investment securities, and strong organic growth in the loan portfolio, offset partially by the forgiveness of PPP loans. Average interest bearing liabilities increased $326.8 million, or 18.6%, to $2.09 billion for the year ended December 31, 2021, from $1.76 billion for the year ended December 31, 2020. The increase in average interest bearing liabilities was primarily due to an increase in interest bearing deposits and the issuance of subordinated debentures in the second quarter of 2021, partially offset by a decrease in notes payable and FHLB advances.

Average interest earning assets produced a fully tax-equivalent yield of 4.16% for the year ended December 31, 2021, compared to 4.51% for the year ended December 31, 2020. The decline in the yield on interest earning assets was primarily due to excess cash balances and the historically low interest rate environment resulting in lower loan and security yields. The average rate paid on interest bearing liabilities was 0.93% for the year ended December 31, 2021, compared to 1.53% for the year ended December 31, 2020 primarily due to lower rates paid on deposits, the payoff of the Company’s notes payable and the early extinguishment of $94.0 million of higher priced FHLB term advances, offset partially by strong growth of interest bearing deposits and the issuance of additional subordinated debentures.

Interest Income. Total interest income on a tax-equivalent basis was $129.7 million for the year ended December 31, 2021, compared to $115.7 million for the year ended December 31, 2020. The $14.0 million, or 12.1%,

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increase in total interest income on a tax-equivalent basis was primarily due to continued organic growth in the loan portfolio, as well as PPP loan income.

Interest income on cash investments increased $30,000, or 17.4%, for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to a $52.1 million, or 65.0%, increase in average cash balances, due to strong deposit inflows. Interest income on the investment securities portfolio on a fully-tax equivalent basis increased $738,000, or 7.7%, for the year ended December 31, 2021, compared to the year ended December 31, 2020, primarily due to a $70.8 million, or 22.0%, increase in average balances between the two periods, which was partially offset by a 34 basis point decline in the aggregate portfolio yield, driven by the historically low interest rate environment.

Interest income on loans, on a fully-tax equivalent basis, for the year ended December 31, 2021 was $119.0 million, compared to $105.6 million for the year ended December 31, 2020. The $13.4 million, or 12.7%, increase was due to a $430.4 million, or 20.0%, increase in the average balance of loans outstanding from continued organic loan growth, which was partially offset by a 30 basis point decline in the average yield on loans.

Loan interest income and loan fees remain the primary contributing factors to the changes in yield on interest earning assets. The aggregate loan yield, excluding PPP loans decreased to 4.54% for the year ended December 31, 2021, which was 45 basis points lower than 4.99% for the year ended December 31, 2020. While loan fees have maintained a relatively stable contribution to the aggregate loan yield, the historically low yield curve has resulted in a decline core yield on loans in comparison to the prior year.

The following table presents a summary of interest and fees recognized on loans, excluding PPP loans, for the years ended December 31, 2021, 2020 and 2019:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ For the year ended December 31,

Yield on Loans, Excluding PPP Loans ​ 4.54 % ​ 4.99 % ​ 5.31 %

​

Interest Expense. Interest expense on interest bearing liabilities decreased $7.5 million, or 27.9%, to $19.4 million for the year ended December 31, 2021, compared to $26.9 million for the year ended December 31, 2020. The cost of interest bearing liabilities declined 60 basis points to 0.93% for the year ended December 31, 2021, compared to 1.53% for the year ended December 31, 2020. The decline was primarily due to lower rates paid on deposits, and the early extinguishment of $94.0 million of higher priced FHLB term advances, offset partially by growth of interest bearing deposits and the issuance of additional subordinated debentures.

Interest expense on deposits decreased to $13.8 million for the year ended December 31, 2021, compared to $19.8 million for the year ended December 31, 2020. The $6.0 million, or 30.1%, decrease in interest expense on deposits was primarily due to deposit rate cuts consistent with a lower rate environment and the repricing of time deposits, partially offset by the average balance of interest bearing deposits increasing by $404.4 million, or 26.3%. The cost of total deposits declined 42 basis points from 0.93% for the year ended December 31, 2020, to 0.51% for the year ended December 31, 2021.

Interest expense on borrowings decreased $1.5 million to $5.5 million for the year ended December 31, 2021, compared to $7.0 million for the year ended December 31, 2020. This decrease was primarily due to the lower average balance of federal funds purchased, the payoff of the Company’s note payable, the early extinguishment of $94.0 million of higher priced FHLB term advances, and the partial early redemption of $11.3 million of subordinated debentures yielding 5.875%, offset partially by the issuance of $30.0 million of subordinated debentures in July 2021 yielding 3.25%.

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2020 Compared to 2019

Net interest income was $88.0 million for the year ended December 31, 2020, an increase of $13.8 million, or 18.7%, compared to $74.1 million for the year ended December 31, 2019. The increase in net interest income was largely attributable to growth in average interest earning assets, lower rates paid on deposits, and the recognition of PPP loan origination fees, offset partially by declining yields on loans and higher average balances of subordinated debentures.

Net interest margin (on a fully tax-equivalent basis) for the year ended December 31, 2020 was 3.46%, compared to 3.59% for the year ended December 31, 2019, a decrease of 13 basis points. Despite a significant reduction in interest bearing deposit costs throughout the year, the historically low interest rate environment coupled with a more liquid balance sheet mix pressured earning asset yields lower and ultimately compressed net interest margin.

Average interest earning assets for the year ended December 31, 2020 increased $474.7 million, or 22.7%, to $2.57 billion from $2.09 billion for the year ended December 31, 2019. The increase in average interest earning assets was due to continued organic growth in the loan portfolio as a result of increased loan production, including the funding of PPP loans. Average interest bearing liabilities increased $298.9 million, or 20.5%, to $1.76 billion for the year ended December 31, 2020, from $1.46 billion for the year ended December 31, 2019. The increase in average interest bearing liabilities was primarily due to an increase in interest bearing deposits and the issuance of subordinated debentures in the second quarter of 2020, partially offset by a decrease in notes payable.

Average interest earning assets produced a tax-equivalent yield of 4.51% for year ended December 31, 2020, compared to 5.01% for the year ended December 31, 2019. The average rate paid on interest bearing liabilities was 1.53% for the year ended December 31, 2020, compared to 2.03% for the year ended December 31, 2019.

Interest Income. Total interest income on a tax-equivalent basis was $115.7 million for the year ended December 31, 2020, compared to $104.7 million for the year ended December 31, 2019. The $11.1 million, or 10.6%, increase in total interest income on a tax-equivalent basis was primarily due to continued organic growth in the loan portfolio, as well as PPP loan income.

Interest income on cash investments decreased $585,000, or 77.5%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, despite a $33.8 million, or 72.8%, increase in average cash balances, due to the falling interest rate environment. The increase in average cash balances was due to extraordinary deposit inflows. Interest income on the investment securities portfolio on a fully-tax equivalent basis increased $838,000, or 9.7%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to a $71.5 million, or 28.5%, increase in average balances between the two periods, which was partially offset by a 51 basis point decrease in the aggregate portfolio yield, driven by the historically low interest rate environment.

Interest income on loans on a fully-tax equivalent basis for the year ended December 31, 2020 was $105.6 million, compared to $94.9 million for the year ended December 31, 2019. The $10.8 million, or 11.3%, increase was due to a $368.5 million, or 20.6%, increase in the average balance of loans outstanding, which was offset partially by a 41 basis point decrease in the average yield on loans, 9 basis points of which was attributed to the origination of PPP loans. The increase in the average balance of loans outstanding was due to organic loan growth and the funding of PPP loans. The decrease in yield on the loan portfolio was primarily due to the falling interest rate environment and the impact of PPP loans originated at a lower rate than the aggregate loan portfolio yield. The aggregate loan yield, excluding PPP loans, decreased to 4.99% for the year ended December 31, 2020, which was 32 basis points lower than 5.31% for the year ended December 31, 2019.

Interest Expense. Interest expense on interest bearing liabilities decreased $2.8 million, or 9.4%, to $26.9 million for the year ended December 31, 2020, compared to $29.6 million for the year ended December 31, 2019. The cost of interest bearing liabilities declined 50 basis points to 1.53% for the year ended December 31, 2020, compared to 2.03% for the year ended December 31, 2019. The decline was primarily due to lower rates paid on deposits, offset partially by growth of interest bearing deposits and additional subordinated debentures.

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Interest expense on deposits decreased to $19.8 million for the year ended December 31, 2020, compared to $24.0 million for the year ended December 31, 2019. The $4.2 million, or 17.4%, decrease in interest expense on deposits was primarily due to deposit rate cuts consistent with a lower rate environment and the repricing of time deposits. The cost of total deposits declined 49 basis points from 1.42% for the year ended December 31, 2019, to 0.93% for the year ended December 31, 2020.

Interest expense on borrowings increased $1.4 million to $7.0 million for the year ended December 31, 2020, compared to $5.7 million for the year ended December 31, 2019. This increase was due to the issuance of additional subordinated debentures in 2020.

Provision for Loan Losses

2021 Compared to 2020

The allowance for loan losses increased $5.2 million as of December 31, 2021, compared to December 31, 2020, reflecting a provision for loan losses of $5.2 million and net recoveries of $29,000 during 2021. The provision for loan losses was $5.2 million for the year ended December 31, 2021, a decrease of $7.6 million, compared to the provision for loan losses of $12.8 million for the year ended December 31, 2020. The decrease in the provision for loan losses related to improving economic conditions and increased clarity surrounding uncertainty and evolving risks driven by the impact of the COVID-19 pandemic, offset partially by growth of the loan portfolio.

The allowance for loan losses to total loans was 1.42% at December 31, 2021, compared to 1.50% at December 31, 2020. The allowance for loan losses to total loans, excluding PPP loans, was 1.43% at December 31, 2021, compared to 1.59% at December 31, 2020.

As an emerging growth company, the Company is not subject to Accounting Standards Update No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments,” or CECL, until January 1, 2023.

2020 Compared to 2019

The allowance for loan losses increased $12.3 million as of December 31, 2020, compared to December 31, 2019, reflecting a provision for loan losses of $12.8 million and net charge-offs of $435,000 during 2020. The provision for loan losses was $12.8 million for the year ended December 31, 2020, an increase of $10.1 million, compared to the provision for loan losses of $2.7 million for the year ended December 31, 2019. The increase in the provision for loan losses relates primarily to growth of the loan portfolio, economic uncertainties and evolving risks driven by the impact of the COVID-19 pandemic.

The allowance for loan losses to total loans was 1.50% at December 31, 2020, compared to 1.18% at December 31, 2019. The allowance for loan losses to total loans, excluding PPP loans, was 1.59% at December 31, 2020.

The following table presents a summary of the activity in the allowance for loan losses for the years ended December 31, 2021, 2020, and 2019:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended

​ ​ December 31, ​ December 31, ​ December 31,

​

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Noninterest Income

2021 Compared to 2020

Noninterest income was $5.3 million for the year ended December 31, 2021, compared to $5.8 million for the year ended December 31, 2020, a decrease of $530,000, or 9.1%. The decrease was primarily due to lower gains on sales of securities and swap fees, offset partially by bank owned-life insurance income.

2020 Compared to 2019

Noninterest income was $5.8 million for the year ended December 31, 2020, compared to $3.8 million for the year ended December 31, 2019, an increase of $2.0 million, or 52.6%. The increase was primarily due to an increase in gains on sales of securities, letter of credit fees, and swap fees.

The following table presents the major components of noninterest income for the year ended December 31, 2021, compared to the year ended December 31, 2020, and for the year ended December 31, 2020, compared to the year ended December 31, 2019:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended ​ ​ ​ ​ Year Ended ​ ​ ​

​ ​ December 31, ​ Increase/ ​ December 31, ​ Increase/

Noninterest Income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Net Gain on Sales of Foreclosed Assets ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 69 ​ ​ (69)

Bank-Owned Life Insurance ​ ​ 316 ​ ​ — ​ ​ 316 ​ ​ — ​ ​ — ​ ​ —

​

Noninterest Expense

2021 Compared to 2020

Noninterest expense totaled $48.1 million for the year ended December 31, 2021, a $2.7 million, or 6.0% increase from $45.4 million for the year ended December 31, 2020. The increase was primarily driven by a $5.3 million increase in salaries and employee benefits as the result of merit increases and increased staff to meet the needs of the Company’s growth, offset partially by a decrease in debt prepayment fees primarily attributable to a $7.0 million non-recurring prepayment fee associated with the early extinguishment of $94.0 million of higher priced FHLB term advances, incurred in 2020.

Full-time equivalent employees increased from 183 as of December 31, 2020, to 220 as of December 31, 2021. Despite the uncertainty surrounding the COVID-19 pandemic, the Company continues to add key talent across the organization.

Efficiency Ratio. The efficiency ratio, a non-GAAP financial measure, reports total noninterest expense, less amortization of intangible assets, as a percentage of net interest income plus total noninterest income less gains (losses) on sales of securities. Management believes this non-GAAP financial measure provides a meaningful comparison of operational performance and facilitates investors’ assessments of business performance and trends in comparison to peers in the banking industry. The Company’s efficiency ratio, and its comparability to some peers, is negatively impacted by the amortization of tax credit investments, as well as other non-routine items, within noninterest expense.

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The efficiency ratio was 42.0% for the year ended December 31, 2021, compared to 49.0% for the year ended December 31, 2020. The amortization of tax credit investments and other non-routine items elevated the level of operating expenses in both years, and while the recognition of the tax credits increases operating expenses, and concurrently the efficiency ratio, it directly reduces income tax expense and the effective tax rate. The adjusted efficiency ratio, a non-GAAP financial measure, which excludes the impact of certain non-routine income and expenses from noninterest expense, mildly increased to 41.0% for the year ended December 31, 2021, compared to 40.5% for the year ended December 31, 2020. The efficiencies of the Company's "branch-light" model have positioned the Company well to continue making investments in technology as the industry adapts to evolving client behavior.

2020 Compared to 2019

Noninterest expense totaled $45.4 million for the year ended December 31, 2020, a $8.5 million, or 22.9% increase from $36.9 million for the year ended December 31, 2019. The increase was primarily driven by a $3.5 million increase in salaries and employee benefits as the result of merit increases and increased staff to meet the needs of the Company’s growth, and a $7.0 million non-recurring prepayment fee associated with the early extinguishment of $94.0 million of higher priced FHLB term advances. The increases were partially offset by a decrease of $2.5 million in amortization of tax credit investments and a decrease of $719,000 in marketing and advertising expenses. Full-time equivalent employees increased from 160 as of December 31, 2019, to 183 as of December 31, 2020.

The efficiency ratio was 49.0% for the year ended December 31, 2020, compared to 47.4% for the year ended December 31, 2019. The adjusted efficiency ratio, a non-GAAP financial measure, which excludes the impact of certain non-routine income and expenses from noninterest expense, decreased to 40.5% for the year ended December 31, 2020, compared to 43.3% for the year ended December 31, 2019.

The following table presents the major components of noninterest expense for the year ended December 31, 2021, compared to the year ended December 31, 2020, and the year ended December 31, 2020, compared to the year ended December 31, 2019:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended ​ ​ ​ ​ Year Ended ​ ​ ​

​ ​ December 31, ​ Increase/ ​ December 31, ​ Increase/

Noninterest Expense: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Intangible Asset Amortization ​ ​ 191 ​ ​ 191 ​ ​ — ​ ​ 191 ​ ​ 191 ​ ​ —

​

The Company expects future increases in noninterest expense as the Company continues investing in infrastructure to support balance sheet growth. Management remains focused on supporting growth primarily by adding to staff, investing in technology, and by enhancing risk controls. At the same time, management seeks to contain costs whenever prudent, which is evident in the stable nature of the adjusted efficiency ratio.

Income Tax Expense

The provision for income taxes includes both federal and state taxes. Fluctuations in effective tax rates reflect the differences in the inclusion or deductibility of certain income and expenses for income tax purposes and the

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recognition of tax credits. The Company’s future effective income tax rate will fluctuate based on the mix of taxable and tax-free investments and loans, the recognition and availability of tax credit investments, and overall taxable income.

2021 Compared to 2020

Income tax expense was $15.9 million for the year ended December 31, 2021, compared to $8.5 million for the year ended December 31, 2020. The effective combined federal and state income tax rate for the year ended December 31, 2021 was 25.8%, compared to 23.8% for the year ended December 31, 2020. The higher effective combined rate was primarily due to fewer tax credits being recognized during 2021.

2020 Compared to 2019

Income tax expense was $8.5 million for the year ended December 31, 2020, compared to $6.9 million for the year ended December 31, 2019. The effective combined federal and state income tax rate for the year ended December 31, 2020 was 23.8%, compared to 18.1% for the year ended December 31, 2019. The higher effective combined rate was primarily due to fewer tax credits being recognized during 2020.

Financial Condition

Overview

Total assets at December 31, 2021 were $3.48 billion, an increase of $550.3 million, or 18.8%, compared to December 31, 2020. The increase in total assets was primarily due to robust organic loan growth, as well as the continued purchases of investment securities. Total gross loans were $2.82 billion, an increase of $493.0 million, or 21.2%, compared to December 31, 2020.

Total liabilities at December 31, 2021 were $3.10 billion, an increase of $436.4 million, or 16.4%, compared to December 31, 2020. Total deposits were $2.95 billion, an increase of $444.6 million, or 17.8%, compared to December 31, 2020. Total borrowings were $134.7 million, a decrease of $7.5 million, or 5.3%, compared to December 31, 2020.

Investment Securities Portfolio

The investment securities portfolio is used to make various term investments and is intended to provide the Company with adequate liquidity, a source of stable income, and at times, serve as collateral for certain types of deposits. Investment balances in the investment securities portfolio are subject to change over time based on funding needs and interest rate risk management objectives. The liquidity levels take into account anticipated future cash flows and are maintained at levels management believes are appropriate to ensure future flexibility in meeting anticipated funding needs.

The investment securities portfolio consists primarily of municipal securities, U.S. government agency mortgage-backed securities, SBA securities, asset-backed securities, and corporate securities comprised primarily of subordinated debentures of banks and financial holding companies. In addition, the Company also holds U.S. treasury securities and other debt securities, all with varying contractual maturities. These maturities do not necessarily represent the expected life of the securities as the securities may be called or paid down without penalty prior to their stated maturities. All investment securities are held as available for sale.

​

Securities available for sale were $439.4 million at December 31, 2021, compared to $390.6 million at December 31, 2020, an increase of $48.7 million, or 12.5%. At December 31, 2021, municipal securities represented 36.0% of the investment securities portfolio, government agency mortgage-backed securities represented 26.1% of the portfolio, SBA securities represented 6.9% of the portfolio, corporate securities represented 19.2% of the portfolio, U.S.

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treasury securities represented 0.2% of the portfolio, asset-backed securities represented 9.3% of the portfolio, and other mortgage-backed securities represented 2.3% of the portfolio.

The following table presents the amortized cost and fair value of securities available for sale, by type, at December 31, 2021, 2020 and 2019.

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Amortized ​ Fair ​ Amortized ​ Fair ​ Amortized ​ Fair

​ Cost Value Cost Value Cost Value

U.S. Treasury Securities ​ $ 756 ​ $ 754 ​ $ — ​ $ — ​ $ 4,990 ​ $ 4,998

Residential Pass-Through: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

Loan Portfolio

The Company focuses on lending to borrowers located or investing in the Minneapolis-St. Paul-Bloomington, MN-WI Metropolitan Statistical Area across a diverse range of industries and property types. The Company lends primarily to commercial customers, consisting of loans secured by nonfarm, nonresidential properties, multifamily residential properties, land, and non-real estate business assets. Responsive service, local decision making, and an efficient turnaround time from application to closing have been significant factors in growing the loan portfolio.

The Company manages concentrations of credit exposure through a risk management program which implements formalized processes and procedures specifically for managing and mitigating risk within the loan portfolio. The processes and procedures include board and management oversight, commercial real estate exposure limits, portfolio monitoring tools, management information systems, market reports, underwriting standards, internal and external loan review, and stress testing.

Total gross loans increased $493.0 million, or 21.2%, to $2.82 billion at December 31, 2021, compared to $2.33 billion at December 31, 2020. Excluding the forgiveness of $112.3 million of PPP loans, gross loans increased 27.7% at December 31, 2021 compared to December 31, 2020. The construction and land development, multifamily and commercial real estate, or CRE, nonowner occupied categories contributed most significantly to the $605.3 million of net loan growth, excluding PPP loans. As of December 31, 2021, construction and land development loans increased $111.3 million, or 65.4%, multifamily loans increased $283.8 million, or 45.3%, and nonowner occupied CRE loans increased $109.3 million, or 15.4%, when compared to December 31, 2020. The Company’s continued strong loan growth has been driven by the expansion of the talented lending teams, the strong, growing brand of the Bank in the Twin Cities market, the M&A-related market disruption in the Twin Cities resulting in client and banker acquisition opportunities and the PPP-related new client acquisitions.

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The following table presents the dollar and percentage composition of the loan portfolio by category, at the dates indicated:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Real Estate Mortgage: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

The Company’s primary focus has been on real estate mortgage lending, which constituted 76.1% of the portfolio as of December 31, 2021. The composition of the portfolio has remained relatively consistent with prior periods and the Company does not expect any significant changes in the foreseeable future in the composition of the loan portfolio or in the emphasis on real estate lending.

As of December 31, 2021, investor CRE loans totaled $2.01 billion, consisting of $818.6 million of loans secured by nonowner occupied CRE, $910.2 million of loans secured by multifamily residential properties and $281.5 million of construction and land development loans. Investor CRE loans represented 72.0% of the total gross loan portfolio, excluding PPP loans, and 483.4% of the Bank’s total risk-based capital at December 31, 2021, compared to 455.8% at December 31, 2020.

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The following table presents time to contractual maturity and sensitivity to interest rate changes for the loan portfolio at December 31, 2021:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Due in One Year More Than One More Than Five ​

Paycheck Protection Program ​ ​ 898 ​ ​ 25,264 ​ ​ — ​ ​ —

Real Estate Mortgage: ​ ​ ​ ​ ​ ​ ​ ​

Interest Rate Sensitivity: ​ ​ ​ ​

​

Asset Quality

The Company emphasizes credit quality in the originating and monitoring of the loan portfolio, and success in underwriting is measured by the levels of classified and nonperforming assets and net charge-offs. Federal regulations and internal policies require the use of an asset classification system as a means of managing and reporting problem and potential problem assets. The Company has incorporated an internal asset classification system, substantially consistent with federal banking regulations, as a part of the credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the financial institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated “watch.”

The following table presents information on loan classifications at December 31, 2021. The Company had no assets classified as doubtful or loss.

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Risk Category ​

(dollars in thousands) ​ Watch ​ Substandard ​ Total

Construction and Land Development ​ — ​ 130 ​ 130

Real Estate Mortgage: ​ ​ ​ ​ ​ ​ ​ ​

​

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The Company has increased oversight and analysis of all segments of the loan portfolio in response to the COVID-19 pandemic, especially in vulnerable industries such as hospitality and restaurants, to proactively monitor evolving credit risk. Loans that have potential weaknesses that warranted a watchlist risk rating at December 31, 2021, totaled $49.3 million, compared to $44.8 million at December 31, 2020. As the COVID-19 pandemic continues to evolve, the length and extent of the economic uncertainty may result in further watchlist or adverse classifications in the loan portfolio. Loans that warranted a substandard risk rating at December 31, 2021 totaled $22.6 million, compared to $15.2 million at December 31, 2020. Management continues to actively work with these borrowers and closely monitor substandard credits.

The Company developed programs for clients who experienced business and personal disruptions due to the COVID-19 pandemic by providing interest-only modifications, loan payment deferrals, and extended amortization modifications. In accordance with interagency regulatory guidance and the CARES Act, qualifying loans modified in response to the COVID-19 pandemic are not considered TDRs. Modifications under this guidance, which could only be applied to modifications made by January 1, 2022, have been granted on a case-by-case basis based on specific needs and circumstances affecting each borrower. As of December 31, 2021, the Company had 12 modified loans outstanding totaling $35.0 million, representing 1.3% of the loan portfolio, excluding PPP loans.

The following table presents a rollforward of loan modification activity, by modification type, from December 31, 2020 to December 31, 2021:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

New Modifications ​ ​ 11,091 ​ ​ — ​ ​ — ​ ​ 11,091

Net Principal Advances (Payments) ​ ​ 91 ​ ​ 5 ​ ​ (94) ​ ​ 2

​

The following table presents a summary of active loan modifications, by loan segment and modification type, at December 31, 2021:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Interest-Only ​ Extended Amortization ​ Total

(dollars in thousands) Amount # of Loans Amount # of Loans Amount # of Loans

Real Estate Mortgage: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

CRE Owner Occupied ​ ​ 592 ​ 3 ​ ​ — ​ — ​ ​ 592 ​ 3

CRE Nonowner Occupied ​ ​ 29,342 ​ 6 ​ ​ — ​ — ​ ​ 29,342 ​ 6

​

Nonperforming Assets

Nonperforming loans include loans accounted for on a nonaccrual basis and loans 90 days past due and still accruing. Nonperforming assets consist of nonperforming loans plus foreclosed assets (i.e., real or personal property acquired through foreclosure). Nonaccrual loans totaled $722,000 at December 31, 2021 and $775,000 at December 31, 2020, a decrease of $53,000. There were no loans 90 days past due and still accruing as of December 31, 2021 and 2020. There were no foreclosed assets as of December 31, 2021 and 2020.

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The following table presents a summary of nonperforming assets, by category, at the dates indicated:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ December 31, ​

Plus: Foreclosed Assets ​ — ​ — ​ — ​ — ​ 581 ​

The balance of nonperforming assets can fluctuate due to changes in economic conditions. The Company has established a policy to discontinue accruing interest on a loan (that is, place the loan on nonaccrual status) after it has become 90 days delinquent as to payment of principal or interest, unless the loan is considered to be well-collateralized and is actively in the process of collection. In addition, a loan will be placed on nonaccrual status before it becomes 90 days delinquent unless management believes that the collection of interest is expected. Interest previously accrued but uncollected on such loans is reversed and charged against current income when the receivable is determined to be uncollectible. If management believes that a loan will not be collected in full, an increase to the allowance for loan losses is recorded to reflect management’s estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal. There are not any loans, outside of those included in the tables above, that cause management to have serious doubts as to the ability of borrowers to comply with present repayment terms. Due to the low levels of nonaccrual loans, gross income that would have been recorded on nonaccrual loans during the years ended December 31, 2021 and December 31, 2020 was $20,000 and $27,000, respectively.

Allowance for Loan Losses

The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. The Company maintains an allowance for loan losses at a level management considers adequate to provide for known and probable incurred losses in the portfolio. The level of the allowance is based on management’s evaluation of estimated losses in the portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic conditions. Loan charge-offs (i.e., loans judged to be uncollectible) are charged against the reserve and any subsequent recovery is credited to the reserve. The Company analyzes risks within the loan portfolio on a continual basis. A risk system, consisting of multiple grading categories for each portfolio class, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated economic conditions, including the economic distress caused by the COVID-19 pandemic, and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors which management feels deserve recognition in establishing an appropriate reserve. These estimates are reviewed at least quarterly, and as adjustments become necessary, they are recognized in the periods in which they become known. Although management strives to maintain an allowance it deems adequate, future economic changes, deterioration of borrowers’ creditworthiness, and the impact of examinations by regulatory agencies all could cause changes to the allowance for loan losses.

At December 31, 2021, the allowance for loan losses was $40.0 million, an increase of $5.2 million from $34.8 million at December 31, 2020. Net charge-offs (recoveries) totaled ($29,000) during the year ended December 31, 2021 and $435,000 during the year ended December 31, 2020. The allowance for loan losses as a percentage of total loans was 1.42% at December 31, 2021, compared to 1.50% at December 31, 2020. The allowance for loan losses to total loans, excluding PPP loans, was 1.43% at December 31, 2021, compared to 1.59% at December 31, 2020.

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The following table presents a summary of the activity in the allowance for loan loss reserve for the periods indicated:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ As of and for the year ended December 31, ​

Net Charge-offs (Recoveries) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Commercial ​ $ (8) ​ $ 339 ​ $ 152 ​ $ (15) ​ $ (4) ​

Construction and Land Development ​ ​ — ​ ​ — ​ ​ (1) ​ ​ 73 ​ ​ (24) ​

Real Estate Mortgage: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

CRE Owner Occupied ​ ​ (32) ​ ​ (10) ​ ​ — ​ ​ — ​ ​ — ​

CRE Nonowner Occupied ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 111 ​

Total Real Estate Mortgage Loans ​ ​ (53) ​ ​ 80 ​ ​ 27 ​ ​ (38) ​ ​ (27) ​

Consumer and Other ​ ​ 32 ​ ​ 16 ​ ​ 27 ​ ​ 26 ​ ​ 61 ​

Total Net Charge-offs (Recoveries) ​ $ (29) ​ $ 435 ​ $ 205 ​ $ 46 ​ $ 6 ​

Net Charge-offs to Average Loans ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Real Estate Mortgage: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total Real Estate Mortgage Loans ​ ​ 0.00 ​ ​ 0.01 ​ ​ 0.00 ​ ​ 0.00 ​ ​ 0.00 ​

​

The following table presents a summary of the allocation of the allowance for loan losses by loan portfolio segment for the periods indicated:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ December 31, ​ December 31, ​ December 31, ​ December 31, ​ December 31, ​

Real Estate Mortgage: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

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Goodwill and Other Intangible Assets

Goodwill was $2.6 million at December 31, 2021 and 2020. Goodwill represents the excess of the consideration paid over the fair value of the net assets acquired, which originated from the acquisition of First National Bank of the Lakes in May of 2016. Goodwill is not amortized but is subject to, at a minimum, an annual test for impairment. Other intangible assets consist of core deposit relationships and favorable lease term intangibles. Total other intangible assets at December 31, 2021 and 2020 were $479,000 and $670,000, respectively. Other intangible assets are amortized over their estimated useful life.

Deposits

The principal sources of funds for the Company are deposits, consisting of demand deposits, money market accounts, savings accounts, and certificates of deposit. The following table presents the dollar and percentage composition of the deposit portfolio, by category, at the dates indicated:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ December 31, ​ December 31, ​ December 31, ​ December 31, ​ December 31, ​

​

Total deposits at December 31, 2021 were $2.95 billion, an increase of $444.6 million, or 17.8%, compared to total deposits of $2.50 billion at December 31, 2020. Noninterest bearing deposits were $875.1 million at December 31, 2021, an increase of $203.2 million, or 30.2%, compared to $671.9 million at December 31, 2020. Noninterest bearing deposits comprised 29.7% of total deposits at December 31, 2021, compared to 26.9% at December 31, 2020. Similar to the loan portfolio, the growth in core deposits has been a result of successful new client and banker acquisition initiatives and the strong, growing brand of the Bank in the Twin Cities market. However, given the prospect of higher interest rates, management believes deposits could experience fluctuations in future periods.

The Company relies on increasing the deposit base to fund loan and other asset growth. The Company is in a highly competitive market and competes for local deposits by offering attractive products with competitive rates. The Company expects to have a higher average cost of funds for local deposits compared to competitor banks due to the lack of an extensive branch network. The Company’s strategy is to offset the higher cost of funding with a lower level of operating expense. When appropriate, the Company utilizes alternative funding sources such as brokered deposits. The brokered deposit market provides flexibility in structure, optionality and efficiency not afforded in traditional retail deposit channels. At December 31, 2021, total brokered deposits were $369.3 million or 12.5% of total deposits, compared to total brokered deposits of $452.3 million, or 18.1% of total deposits at December 31, 2020. Brokered deposits decreased as a result of core deposit inflows, and the Company was able to alleviate excess liquidity by reducing brokered deposit levels as funds matured.

​

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The following table presents the average balance and average rate paid on each of the following deposit categories for the years ended December 31, 2021, 2020, and 2019:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ As of and for the ​ As of and for the ​ As of and for the ​

​ ​ Year Ended ​ Year Ended ​ Year Ended ​

​ ​ Average ​ Average ​ Average ​ Average ​ Average ​ Average ​

(dollars in thousands) Balance Rate Balance Rate Balance Rate

​

The following table presents time deposits, including brokered time deposits, that are in excess of the FDIC insurance limit, currently $250,000, by time remaining until maturity:

​ ​ ​ ​

​ ​ December 31,

(dollars in thousands) ​ 2021

Three Months or Less ​ $ 8,353

Over Three Months through Six Months ​ ​ 3,255

Over Six Months through 12 Months ​ ​ 11,607

​

The Company’s total uninsured deposits, which are the amounts of deposit accounts that exceed the FDIC insurance limit, currently $250,000, were approximately $1.21 billion and $1.08 billion at December 31, 2021 and 2020, respectively. These amounts were estimated based on the same methodologies and assumptions used for regulatory reporting purposes.

Borrowed Funds

Other Borrowings

At December 31, 2021, other borrowings outstanding consisted of FHLB advances of $42.5 million. The Company’s $11.0 million note payable matured during the first quarter of 2021 and was paid off in full at maturity. On March 1, 2021, the Company entered into a Loan and Security Agreement and revolving note which has made a $25.0 million revolving line of credit available to the Company, secured by 100% of the issued and outstanding stock of the Bank. The maturity date of the line of credit is February 28, 2023. As of December 31, 2021, there were no outstanding balances under the revolving line of credit.

The Company’s borrowing capacity at the FHLB is determined based on collateral pledged, generally consisting of loans. The Company had additional borrowing capacity under this credit facility of $550.8 million and $361.2 million at December 31, 2021 and December 31, 2020, respectively.

Additionally, the Company has borrowing capacity from other sources. As of December 31, 2021, the Bank was eligible to use the Federal Reserve discount window for borrowings. Based on assets pledged as collateral as of the applicable date, the Bank’s borrowing availability was approximately $126.0 million and $76.8 million at December 31, 2021 and December 31, 2020, respectively. As of December 31, 2021 and December 31, 2020, the Company had no outstanding advances from the discount window.

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Subordinated Debentures

On July 8, 2021, the Company issued $30.0 million of subordinated debentures at an initial fixed interest rate of 3.25%, which is payable semi-annually. Beginning on July 15, 2026, the interest rate converts to a variable interest rate, reset quarterly, equal to the three-month SOFR plus 2.52%, which is payable quarterly. The subordinated debentures mature on July 15, 2031. The subordinated debentures, net of issuance costs, were $29.4 million at December 31, 2021. On November 5, 2021, the Company completed an exchange of all of the subordinated debentures for substantially identical subordinated debentures registered under the Securities Act of 1933, in satisfaction of the Company’s obligations under a registration rights agreement entered into with the initial purchasers of the subordinated debentures. The subordinated debentures qualify for Tier 2 regulatory capital treatment at the Company level under applicable regulatory guidelines.

For additional information, see “Note 11 – Subordinated Debentures” of the Company’s Consolidated Financial Statements included as part of this report.

Contractual Obligations

The following table presents supplemental information regarding total contractual obligations at December 31, 2021:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Within One to Three to After ​

Deposits Without a Stated Maturity ​ $ 2,414,652 ​ $ — ​ $ — ​ $ — ​ $ 2,414,652

Subordinated Debentures ​ — ​ ​ — ​ ​ — ​ ​ 93,750 ​ ​ 93,750

Commitment to Fund Tax Credit Investments ​ ​ 407 ​ ​ — ​ ​ — ​ ​ — ​ ​ 407

​

Operating lease obligations are in place for facilities and land on which banking branches are located. See Note 6 of the Company’s Consolidated Financial Statements included as part of this report for additional information.

​

The Company believes that it will be able to meet all contractual obligations as they come due through the maintenance of adequate cash levels. The Company expects to maintain adequate cash levels through earnings, loan and securities repayments and maturity activity and continued deposit gathering activities. As described above, the Company has in place various borrowing mechanisms for both short-term and long-term liquidity needs.

Capital

On August 17, 2021, the Company announced the closing of its underwritten public offering of 2,400,000 depositary shares, each representing a 1/100th interest in a share of the Company’s Series A Preferred Stock. On August 20, 2021, the underwriters of the offering exercised in full their option to purchase 360,000 additional depositary shares to cover over-allotments. As a result, the gross proceeds from the offering totaled $69.0 million. On January 27, 2022, the Company’s board of directors declared a quarterly cash dividend of $36.72 per share ($0.3672 per depositary share) on the Series A Preferred Stock, payable on March 1, 2022, to shareholders of record on the Series A Preferred Stock at the close of business on February 15, 2022.

Shareholders’ equity at December 31, 2021, was $379.3 million, an increase of $113.9 million, or 42.9%, over shareholders’ equity of $265.4 million at December 31, 2020, primarily due to $44.5 million of net income retained, the net issuance of $66.5 million of preferred stock, and a $2.4 million increase in accumulated other comprehensive income. The increase in accumulated other comprehensive income primarily resulted from interest rate fluctuations between periods that impacted the fair values of the investment securities and derivatives portfolios.

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Stock Repurchase Program. On January 22, 2019, the Company adopted a stock repurchase program. Under the stock repurchase program, the Company was initially authorized to repurchase up to $15.0 million of its common stock in open market transactions or through privately negotiated transactions at the Company’s discretion. On July 23, 2019 and October 27, 2020, the Company's board of directors approved $10.0 million and $15.0 million increases, respectively, to the program for a total authorization of $40.0 million. Additionally, on October 27, 2020, the program duration was extended to run through October 27, 2022.

During the year ended December 31, 2021, the Company repurchased 146,445 shares of its common stock, representing less than 1% of the Company’s outstanding shares. Shares were repurchased during this period at a weighted average price of $15.71 for a total of $2.3 million. All shares repurchased under the stock repurchase program were converted to authorized but unissued shares. At December 31, 2021, the remaining amount that could be used to repurchase shares under the stock repurchase program was $12.4 million. The Company remains committed to maintaining strong capital levels while enhancing shareholder value as it strategically executes its stock repurchase program in this fluid economic environment.

Regulatory Capital. The Company and the Bank are subject to various regulatory capital requirements administered by federal banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by federal banking regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s business.

Management believes the Company and the Bank met all capital adequacy requirements to which they were subject as of December 31, 2021. The regulatory capital ratios for the Company and the Bank to meet the minimum capital adequacy standards and for the Bank to be considered well capitalized under the prompt corrective action framework are set forth in the following tables. The Company’s and the Bank’s actual capital amounts and ratios are as of the dates indicated.

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ Minimum Required ​ For Capital Adequacy ​ To be Well Capitalized ​

​ ​ Actual ​ Purposes ​ Conservation Buffer ​ Action Regulations ​

December 31, 2021 Amount Ratio Amount Ratio Amount Ratio Amount Ratio ​

(dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Company (Consolidated): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Bank: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ Minimum Required ​ For Capital Adequacy ​ To be Well Capitalized ​

​ ​ Actual ​ Purposes ​ Conservation Buffer ​ Action Regulations ​

December 31, 2020 Amount Ratio Amount Ratio Amount Ratio Amount Ratio ​

(dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Company (Consolidated): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Bank: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

The Company and the Bank are subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act. The rules require a capital conservation buffer of 2.5% that was added to the minimum requirements for capital adequacy purposes. A banking organization with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary bonus payments to executive officers. At December 31, 2021, the ratios for the Company and the Bank were sufficient to meet the conservation buffer.

Off-Balance Sheet Arrangements

In the normal course of business, the Company enters into various transactions to meet the financing needs of clients, which, in accordance with GAAP, are not included in the consolidated balance sheets. These transactions include commitments to extend credit, standby letters of credit, and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. Most of these commitments mature within two years and the standby letters of credit are expected to expire without being drawn upon. All off-balance sheet commitments are included in the determination of the amount of risk-based capital that the Company and the Bank are required to hold.

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, and commercial letters of credit is represented by the contractual or notional amount of those instruments. The Company decreases its exposure to losses under these commitments by subjecting them to credit approval and monitoring procedures. The Company assesses the credit risk associated with certain commitments to extend credit and establishes a liability for probable credit losses.

The following table presents credit arrangements and financial instruments whose contract amounts represent credit risk as of December 31, 2021 and 2020:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Fixed Variable Fixed Variable

(dollars in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

Commitments to extend credit beyond current funding are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Such commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by us upon

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extension of credit, is based on our management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

​

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. Commercial letters of credit are issued specifically to facilitate trade or commerce and are paid directly when the underlying transaction is consummated. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

​

The Company had outstanding letters of credit with the FHLB in the amount of $36.5 million and $60.1 million at December 31, 2021 and 2020, respectively, on behalf of customers and to secure public deposits.

​

Liquidity

Liquidity is the Company’s capacity to meet cash and collateral obligations at a reasonable cost. Maintaining an adequate level of liquidity depends on the Company’s ability to efficiently meet both expected and unexpected cash flows and collateral needs without adversely affecting either daily operations or financial condition. The Bank’s ALM Committee, is responsible for managing commitments to meet the needs of customers while achieving the Company’s financial objectives. The ALM Committee meets regularly to review balance sheet composition, funding capacities, and current and forecasted loan demand.

The Company manages liquidity by maintaining adequate levels of cash and other assets from on- and off-balance sheet arrangements. Specifically, on-balance sheet liquidity consists of cash and due from banks and unpledged investment securities available for sale, which are referred to as primary liquidity. In regards to off-balance sheet capacity, the Company maintains available borrowing capacity under secured borrowing lines with the FHLB, the Federal Reserve Bank of Minneapolis, and a correspondent lender, as well as unsecured lines of credit for the purpose of overnight funds with various correspondent banks, which the Company refers to as secondary liquidity.

In addition, the Bank is a member of the American Financial Exchange, or AFX, through which it may either borrow or lend funds on an overnight or short-term basis with a group of approved commercial banks. The availability of funds changes daily. As of December 31, 2021, the Company had no borrowings outstanding through the AFX.

The following tables present a summary of primary and secondary liquidity levels as of the dates indicated:

​ ​ ​ ​ ​ ​ ​ ​

Primary Liquidity—On-Balance Sheet December 31, 2021 December 31, 2020

(Dollars in thousands) ​ ​ ​ ​ ​ ​

Ratio of Primary Liquidity to Total Deposits ​ 19.4 % 21.4 %

​

​ ​ ​ ​ ​ ​ ​ ​

Secondary Liquidity—Off-Balance Sheet ​ ​ ​ ​ ​ ​

(Dollars in thousands) ​ ​ ​ ​ ​ ​

Net Secured Borrowing Capacity with the FHLB ​ $ 550,807 ​ $ 361,236 ​

Unsecured Borrowing Capacity with Correspondent Lenders ​ 208,000 ​ 143,000 ​

Secured Borrowing Capacity with Correspondent Lender ​ ​ 25,000 ​ ​ — ​

Ratio of Primary and Secondary Liquidity to Total Deposits ​ 50.2 % 44.7 %

​

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During the year ended December 31, 2021, primary liquidity increased $34.3 million due to a $48.7 million increase in securities available for sale, offset partially by a $14.5 million decrease in cash and cash equivalents, when compared to December 31, 2020. Secondary liquidity increased $328.8 million as of December 31, 2021 when compared to December 31, 2020, due to a $189.6 million increase in the borrowing capacity on the secured borrowing line with the FHLB, a $49.2 million increase in the borrowing capacity on the secured credit line with the Federal Reserve Bank, a $65.0 increase in unsecured borrowing capacity with correspondent lenders, and a $25.0 million increase from the addition of a secured revolving line of credit with a correspondent lender.

In addition to primary liquidity, the Company generates liquidity from cash flows from the loan and securities portfolios and from the large base of core customer deposits, defined as noninterest bearing transaction, interest bearing transaction, savings, non-brokered money market accounts and non-brokered time deposits less than $250,000. At December 31, 2021, core deposits totaled approximately $2.52 billion and represented 85.4% of total deposits. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company, which promote long-standing relationships and stable funding sources.

The Company uses brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulation, for liquidity and interest rate risk management purposes. At December 31, 2021, brokered deposits totaled $369.3 million, consisting of $238.1 million of brokered time deposits and $131.2 million of non-maturity brokered money market and transaction accounts. At December 31, 2020, brokered deposits totaled $452.3 million, consisting of $292.6 million of brokered time deposits and $159.7 million of non-maturity brokered money market and transaction accounts.

The Company’s liquidity policy includes guidelines for On-Balance Sheet Liquidity (a measurement of primary liquidity to total deposits plus borrowings), Total On-Balance Sheet Liquidity with Borrowing Capacity (a measurement of primary and secondary liquidity to total deposits plus borrowings), Wholesale Funding Ratio (a measurement of total wholesale funding to total deposits plus borrowings), and other guidelines developed for measuring and maintaining liquidity. As of December 31, 2021, the Company was in compliance with all established liquidity guidelines in the policy.

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

Some of the financial data included in this report are not measures of financial performance recognized by GAAP. Management uses these non-GAAP financial measures in the analysis of performance:

​

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The Company believes these non-GAAP financial measures provide useful information to management and investors that is supplementary to the financial condition, results of operations and cash flows computed in accordance with GAAP; however, the Company acknowledges that these non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies use. The following reconciliation table provides a more detailed analysis of these non-GAAP financial measures:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ As of and for the year ended December 31, ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Pre-Provision Net Revenue ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Less: Debt Prepayment Fees ​ ​ (582) ​ ​ (7,043) ​ ​ — ​ ​ — ​ ​ — ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Plus: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Less: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ As of and for the year ended December 31, ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Core Net Interest Margin ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Less: PPP Interest and Fees ​ ​ (6,441) ​ ​ (4,143) ​ ​ — ​ ​ — ​ ​ — ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Less: Average PPP Loans ​ ​ (103,151) ​ ​ (122,240) ​ ​ — ​ ​ — ​ ​ — ​

​

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ As of and for the year ended December 31, ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Efficiency Ratio ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Adjusted Efficiency Ratio ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Less: Debt Prepayment Fees ​ ​ (582) ​ ​ (7,043) ​ ​ — ​ ​ — ​ ​ — ​

​

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ As of and for the year ended December 31, ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Adjusted Noninterest Expense to Average Assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Less: Debt Prepayment Fees ​ ​ (582) ​ ​ (7,043) ​ ​ — ​ ​ — ​ ​ — ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ As of and for the year ended December 31, ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Less: Preferred Stock ​ ​ (66,514) ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Tangible Book Value Per Share ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Return on Average Tangible Common Equity ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Less: Average Preferred Stock ​ ​ (24,915) ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ As of and for the year ended December 31, ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Adjusted Diluted Earnings Per Common Share ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Add: Debt Prepayment Fees ​ ​ 582 ​ ​ 7,043 ​ ​ — ​ ​ — ​ ​ — ​

Less: Tax Impact ​ (151) ​ ​ (1,676) ​ ​ — ​ ​ — ​ ​ — ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

​

​

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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

As a financial institution, the Company’s primary market risk is interest rate risk, which is defined as the risk of loss of net interest income or net interest margin because of changes in interest rates. The Company continually seeks to measure and manage the potential impact of interest rate risk. Interest rate risk occurs when interest earning assets and interest bearing liabilities mature or re-price at different times, on a different basis or in unequal amounts. Interest rate risk also arises when assets and liabilities each respond differently to changes in interest rates.

The Company’s management of interest rate risk is overseen by its ALM Committee, based on a risk management infrastructure approved by the board of directors that outlines reporting and measurement requirements. In particular, this infrastructure sets limits and management targets for various metrics, including net interest income simulation involving parallel shifts in interest rate curves, steepening and flattening yield curves, and various prepayment and deposit duration assumptions. The Company’s risk management infrastructure also requires a periodic review of all key assumptions used, such as identifying appropriate interest rate scenarios, setting loan prepayment rates based on historical analysis and noninterest bearing and interest bearing transaction deposit durations based on historical analysis. The Company does not engage in speculative trading activities relating to interest rates, foreign exchange rates, commodity prices, equities or credit.

The Company manages the interest rate risk associated with interest earning assets by managing the interest rates and terms associated with the investment securities portfolio by purchasing and selling investment securities from time to time. The Company manages the interest rate risk associated with interest bearing liabilities by managing the interest rates and terms associated with wholesale borrowings and deposits from customers which the Company relies on for funding. For example, the Company occasionally uses special offers on deposits to alter the interest rates and terms associated with interest bearing liabilities.

The Company has entered into certain hedging transactions including interest rate swaps and caps, which are designed to lessen elements of the Company’s interest rate exposure. Cash flow hedge relationships mitigate exposure to the variability of future cash flows or other forecasted transactions. The Company utilizes cash flow hedges to manage interest rate exposure for the brokered deposit and wholesale borrowing portfolios. At December 31, 2021 and December 31, 2020, these cash flow hedges had a total notional amount of $235.0 million and $161.0 million, respectively. In the event that interest rates do not change in the manner anticipated, such transactions may adversely affect the Company’s results of operations.

Net Interest Income Simulation

The Company uses a net interest income simulation model to measure and evaluate potential changes in net interest income that would result over the next 12 months from immediate and sustained changes in interest rates as of the measurement date. This model has inherent limitations and the results are based on a given set of rate changes and assumptions as of a certain point in time. For purposes of the simulation, the Company assumes no growth in either interest-sensitive assets or liabilities over the next 12 months; therefore, the model’s results reflect an interest rate shock to a static balance sheet. The simulation model also incorporates various other assumptions, which the Company believes are reasonable but which may have a significant impact on results, such as: (1) the timing of changes in interest rates, (2) shifts or rotations in the yield curve, (3) re-pricing characteristics for market-rate-sensitive instruments, (4) differing sensitivities of financial instruments due to differing underlying rate indices, (5) varying loan prepayment speeds for different interest rate scenarios, (6) the effect of interest rate limitations in assets, such as floors and caps, and (7) overall growth and repayment rates and product mix of assets and liabilities. Because of the limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on the results, but rather as a means to better plan and execute appropriate asset-liability management strategies and to manage interest rate risk.

Potential changes to the Company’s net interest income in hypothetical rising and declining rate scenarios calculated as of December 31, 2021 are presented in the table below. The projections assume an immediate, parallel shift

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downward of the yield curve of 100 basis points and immediate, parallel shifts upward of the yield curve of 100, 200, 300 and 400 basis points. In the current interest rate environment, a downward shift of the yield curve of 200, 300 and 400 basis points does not provide us with meaningful results and thus is not presented.

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

The table above indicates that as of December 31, 2021, in the event of an immediate and sustained 400 basis point increase in interest rates, the Company would experience a 5.75% increase in net interest income. In the event of an immediate 100 basis point decrease in interest rates, the Company would experience a 2.71% decrease in net interest income.

The results of this simulation analysis are hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted. For example, if the timing and magnitude of interest rate changes differ from those projected, net interest income might vary significantly. Non-parallel yield curve shifts such as a flattening or steepening of the yield curve or changes in interest rate spreads would also cause net interest income to be different from that depicted. An increasing interest rate environment could reduce projected net interest income if deposits and other short-term liabilities re-price faster than expected or re-price faster than the Company’s assets. Actual results could differ from those projected if the Company grows assets and liabilities faster or slower than estimated, if the Company experienced a net outflow of deposit liabilities, or if the mix of assets and liabilities otherwise changes. Actual results could also differ from those projected if the Company experienced substantially different repayment speeds in the loan portfolio than those assumed in the simulation model. Finally, these simulation results do not contemplate all the actions that the Company may undertake in response to potential or actual changes in interest rates, such as changes to the Company’s loan, investment, deposit, or funding strategies.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

​ ​

​​​​​ ​​ ​ ​ ​

​

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

​

​

Board of Directors and Shareholders

Bridgewater Bancshares, Inc.

​

​

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Bridgewater Bancshares, Inc. and Subsidiaries (the Company) as of December 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021 and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and their cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reportingin accordance with the standards of the PCAOB. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

​

​

/s/ CliftonLarsonAllen LLP

​

CliftonLarsonAllen LLP

​

Minneapolis, Minnesota

March 7, 2022

​

We have served as the Company’s auditor since 2005.

​

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Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands, except share data)

​ ​ ​ ​ ​ ​ ​

​ ​ December 31, ​ December 31,

ASSETS ​ ​ ​ ​ ​ ​

Bank-Owned Certificates of Deposit ​ 1,876 ​ 2,860

Securities Available for Sale, at Fair Value ​ 439,362 ​ 390,629

Federal Home Loan Bank (FHLB) Stock, at Cost ​ 5,242 ​ 5,027

Other Intangible Assets, Net ​ 479 ​ 670

​ ​ ​ ​ ​ ​ ​

LIABILITIES AND EQUITY ​ ​

LIABILITIES ​ ​

Deposits: ​ ​

Notes Payable ​ — ​ 11,000

Subordinated Debentures, Net of Issuance Costs ​ 92,239 ​ 73,739

​ ​ ​ ​ ​ ​ ​

SHAREHOLDERS' EQUITY ​ ​

Preferred Stock- $0.01 par value; Authorized 10,000,000 ​ ​ ​ ​ ​ ​

Common Stock- $0.01 par value; Authorized 75,000,000 ​ ​ ​ ​

Accumulated Other Comprehensive Income ​ 9,006 ​ 6,579

​

See accompanying notes to consolidated financial statements.

​

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Bridgewater Bancshares, Inc. and Subsidiaries

Consolidated Statements of Income

(dollars in thousands, except per share data)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended

​ ​ December 31, ​ December 31, ​ December 31,

INTEREST INCOME ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

INTEREST EXPENSE ​ ​ ​ ​ ​ ​

Federal Funds Purchased ​ 6 ​ 111 ​ 186

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

NET INTEREST INCOME AFTER ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

NONINTEREST INCOME ​ ​ ​

Net Gain on Sales of Available for Sale Securities ​ 750 ​ ​ 1,503 ​ ​ 516

Net Gain on Sales of Foreclosed Assets ​ — ​ ​ — ​ ​ 69

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

NONINTEREST EXPENSE ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Preferred Stock Dividends ​ ​ 1,171 ​ ​ — ​ ​ —

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

EARNINGS PER SHARE ​ ​ ​

Dividends Paid Per Common Share ​ ​ — ​ ​ — ​ ​ —

​

See accompanying notes to consolidated financial statements.

​

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