Bridgewater Bank(US:BWB)2025-07-31 11:16PART I FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (unaudited) Presents unaudited consolidated financial statements for Bridgewater Bancshares, Inc., detailing balance sheets, income, comprehensive income, equity, and cash flows Consolidated Balance Sheets Consolidated Balance Sheets show increased total assets and liabilities from December 2024 to June 2025, driven by loans and deposits | ASSETS (dollars in thousands) | June 30, 2025 (Unaudited) | December 31, 2024 | | :---------------------------- | :------------------------ | :------------------ | | Cash and Cash Equivalents | $217,495 | $229,760 | | Securities Available for Sale | $743,889 | $768,247 | | Loans, Net | $4,082,405 | $3,809,436 | | Total Assets | $5,296,673 | $5,066,242 | | LIABILITIES (dollars in thousands) | June 30, 2025 (Unaudited) | December 31, 2024 | | :---------------------------- | :------------------------ | :------------------ | | Total Deposits | $4,236,742 | $4,086,767 | | FHLB Advances | $404,500 | $359,500 | | Subordinated Debentures, Net | $108,689 | $79,670 | | Total Liabilities | $4,820,391 | $4,608,307 | | SHAREHOLDERS' EQUITY (dollars in thousands) | June 30, 2025 (Unaudited) | December 31, 2024 | | :---------------------------- | :------------------------ | :------------------ | | Total Shareholders' Equity | $476,282 | $457,935 | | Total Liabilities and Equity | $5,296,673 | $5,066,242 | Consolidated Statements of Income Consolidated Statements of Income show increased net interest income and net income for Q2 and H1 2025, driven by higher interest income | (dollars in thousands, except per share data) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Interest Income | $69,198 | $60,878 | $134,906 | $119,547 | | Total Interest Expense | $36,746 | $35,882 | $72,246 | $69,920 | | NET INTEREST INCOME | $32,452 | $24,996 | $62,660 | $49,627 | | Provision for Credit Losses | $2,000 | $600 | $3,500 | $1,350 | | Total Noninterest Income | $3,627 | $1,763 | $5,706 | $3,313 | | Total Noninterest Expense | $18,941 | $15,539 | $37,077 | $30,728 | | NET INCOME | $11,520 | $8,115 | $21,153 | $15,946 | | NET INCOME AVAILABLE TO COMMON SHAREHOLDERS | $10,506 | $7,101 | $19,126 | $13,919 | | Basic Earnings Per Share | $0.38 | $0.26 | $0.70 | $0.51 | | Diluted Earnings Per Share | $0.38 | $0.26 | $0.68 | $0.50 | Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income show increased net income but decreased other comprehensive income for Q2 and H1 2025, due to unrealized losses | (dollars in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Income | $11,520 | $8,115 | $21,153 | $15,946 | | Other Comprehensive Income (Loss): | | | | | | Unrealized Gains (Losses) on Available for Sale Securities | (479) | 1,168 | 7,208 | 1,403 | | Unrealized Gains (Losses) on Cash Flow Hedges | (1,455) | 2,036 | (4,497) | 7,748 | | Reclassification Adjustment for Gains Realized in Income | (2,091) | (2,649) | (3,924) | (5,045) | | Income Tax Impact | 1,156 | (159) | 349 | (1,180) | | Total Other Comprehensive Income (Loss), Net of Tax | (2,869) | 396 | (864) | 2,926 | | Comprehensive Income | $8,651 | $8,511 | $20,289 | $18,872 | Consolidated Statements of Shareholders' Equity Consolidated Statements of Shareholders' Equity detail changes in equity components, showing an overall increase in total shareholders' equity from December 2024 to June 2025 | (dollars in thousands) | Preferred Stock | Common Stock Amount | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | | :--------------------- | :-------------- | :------------------ | :------------------------- | :---------------- | :-------------------------------------------- | :---- | | BALANCE December 31, 2024 | $66,514 | $276 | $95,088 | $309,421 | $(13,364) | $457,935 | | Stock-based Compensation | — | — | 2,039 | — | — | 2,039 | | Comprehensive Income (Loss) | — | — | — | 21,153 | (864) | 20,289 | | Stock Options Exercised | — | — | 395 | — | — | 395 | | Stock Repurchases | — | (1) | (2,190) | — | — | (2,191) | | Restricted Shares Withheld for Taxes | — | — | (158) | — | — | (158) | | Preferred Stock Dividend | — | — | — | (2,027) | — | (2,027) | | BALANCE June 30, 2025 | $66,514 | $275 | $95,174 | $328,547 | $(14,228) | $476,282 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows show a net decrease in cash and cash equivalents for H1 2025, primarily due to cash used in investing activities | (dollars in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------- | :----------------------------- | :----------------------------- | | Net Cash Provided by Operating Activities | $11,459 | $17,785 | | Net Cash Used in Investing Activities | $(243,566) | $(70,301) | | Net Cash Provided by Financing Activities | $219,842 | $58,047 | | NET CHANGE IN CASH AND CASH EQUIVALENTS | $(12,265) | $5,531 | | Cash and Cash Equivalents Ending | $217,495 | $134,093 | Notes to Consolidated Financial Statements These notes provide detailed explanations and disclosures for the consolidated financial statements, covering business, accounting policies, recent developments, and financial instruments Note 1: Description of the Business and Summary of Significant Accounting Policies This note outlines Bridgewater Bancshares, Inc.'s operations, subsidiary, recent developments (FMCB acquisition, note issuance), and accounting policies - Bridgewater Bancshares, Inc. is a financial holding company operating through its wholly-owned subsidiary, Bridgewater Bank, which provides retail and commercial loan and deposit services primarily in the Minneapolis-St. Paul-Bloomington, MN-WI Metropolitan Statistical Area22 - On December 13, 2024, the Bank acquired First Minnetonka City Bank (FMCB), adding two branches, approximately $225.7 million of deposits, and $117.1 million of loans as of December 31, 202423 - On June 24, 2025, the Company issued $80.0 million in 7.625% Fixed-to-Floating Rate Subordinated Notes due 2035, using the proceeds to redeem $50 million of outstanding 5.25% Fixed-to-Floating Rate Subordinated Notes due 2030 and for general corporate purposes24 Note 2: Earnings Per Share This note details basic and diluted earnings per common share calculations, showing increases for Q2 and H1 2025 | (dollars in thousands, except per share data) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Income Available to Common Shareholders | $10,506 | $7,101 | $19,126 | $13,919 | | Weighted Average Common Stock Outstanding (Basic) | 27,460,982 | 27,386,713 | 27,514,579 | 27,539,057 | | Dilutive Effect of Stock Compensation | 537,026 | 361,471 | 508,013 | 382,544 | | Weighted Average Common Stock Outstanding (Dilutive) | 27,998,008 | 27,748,184 | 28,022,592 | 27,921,601 | | Basic Earnings per Common Share | $0.38 | $0.26 | $0.70 | $0.51 | | Diluted Earnings per Common Share | $0.38 | $0.26 | $0.68 | $0.50 | Note 3: Securities This note details the Company's available-for-sale securities portfolio, showing decreased total securities and reduced unrealized losses from December 2024 to June 2025 | (dollars in thousands) | June 30, 2025 Amortized Cost | June 30, 2025 Fair Value | December 31, 2024 Amortized Cost | December 31, 2024 Fair Value | | :--------------------- | :--------------------------- | :----------------------- | :------------------------------- | :----------------------------- | | U.S. Treasury Securities | $155,939 | $145,654 | $179,835 | $167,748 | | Municipal Bonds | $129,599 | $115,054 | $139,891 | $122,265 | | Mortgage-Backed Securities | $280,504 | $269,898 | $259,833 | $244,890 | | Corporate Securities | $133,931 | $130,097 | $139,161 | $134,186 | | Total Securities Available for Sale | $783,050 | $743,889 | $817,664 | $768,247 | - At June 30, 2025, 431 debt securities had unrealized losses with aggregate depreciation of approximately 7.2% from amortized cost, an improvement from 8.4% at December 31, 2024. Management does not intend to sell these securities and expects to recover the amortized cost41 | (dollars in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Proceeds From Sales of Securities | $58,503 | $38,049 | $59,595 | $50,833 | | Gross Gains on Sales | $480 | $320 | $484 | $1,106 | | Gross Losses on Sales | $(6) | $— | $(9) | $(693) | Note 4: Loans and Allowance for Credit Losses This note details loan portfolio composition, credit quality, and Allowance for Credit Losses (ACL) activity, showing significant growth in gross loans and ACL | (dollars in thousands) | June 30, 2025 | December 31, 2024 | | :--------------------- | :------------ | :---------------- | | Commercial | $549,259 | $497,662 | | Multifamily | $1,555,731 | $1,425,610 | | CRE Nonowner Occupied | $1,137,007 | $1,083,108 | | Total Loans, Gross | $4,145,799 | $3,868,514 | | Allowance for Credit Losses | $(55,765) | $(52,277) | | Total Loans, Net | $4,082,405 | $3,809,436 | - The Company classifies loans into six major credit quality categories: Pass, Watch, Special Mention, Substandard, Doubtful, and Loss. Loans classified as 'Watch/Special Mention' totaled $53.3 million at June 30, 2025, up from $46.6 million at December 31, 2024. 'Substandard' loans increased to $45.0 million from $21.8 million over the same period495059 | (dollars in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Beginning Balance ACL | $53,766 | $51,347 | $52,277 | $50,494 | | Provision for Credit Losses for Loans and Leases | $2,000 | $600 | $3,500 | $1,450 | | Loans and Leases Charged-off | $(6) | $(10) | $(18) | $(12) | | Recoveries of Loans and Leases | $5 | $12 | $6 | $17 | | Total Ending Allowance Balance | $55,765 | $51,949 | $55,765 | $51,949 | Note 5: Goodwill and Other Intangible Assets This note details the Company's goodwill and other intangible assets, showing stable goodwill and decreased intangible assets due to amortization - Goodwill remained at $12.0 million at June 30, 2025, and December 31, 2024, and is subject to annual impairment testing63 | (dollars in thousands) | June 30, 2025 | December 31, 2024 | | :--------------------- | :------------ | :---------------- | | Core Deposit Intangible | $8,833 | $8,833 | | Favorable Lease | $445 | $445 | | Subtotal | $9,278 | $9,278 | | Accumulated Amortization | $(1,888) | $(1,428) | | Totals | $7,390 | $7,850 | - Amortization expense for other intangible assets significantly increased to $230,000 for the three months ended June 30, 2025, from $8,000 in the prior year, and to $460,000 for the six months ended June 30, 2025, from $17,000 in the prior year63 Note 6: Deposits This note outlines the composition and maturities of the Company's deposits, showing increased total deposits, particularly in savings, money market, and brokered deposits | (dollars in thousands) | June 30, 2025 | December 31, 2024 | | :--------------------- | :------------ | :---------------- | | Transaction Deposits | $1,579,616 | $1,663,005 | | Savings and Money Market Deposits | $1,441,694 | $1,259,503 | | Time Deposits | $344,882 | $338,506 | | Brokered Deposits | $870,550 | $825,753 | | Totals | $4,236,742 | $4,086,767 | | (dollars in thousands) | June 30, 2025 | | :--------------------- | :------------ | | Less than 1 Year | $650,703 | | 1 to 2 Years | $150,684 | | 2 to 3 Years $96,429 | | 3 to 4 Years | $72,099 | | 4 to 5 Years | $97,654 | | Totals | $1,067,569 | - The aggregate amount of time deposits greater than $250,000 increased to approximately $179.7 million at June 30, 2025, from $155.0 million at December 31, 202468 Note 7: Derivative Instruments and Hedging Activities This note details the Company's use of derivative financial instruments for interest rate risk management, distinguishing between non-hedge and hedging derivatives - The Company uses interest rate swaps to facilitate client transactions, entering into offsetting positions to minimize risk. The notional amount for these non-hedge swaps increased to $330.75 million at June 30, 2025, from $231.154 million at December 31, 20247173 - For cash flow hedges, the notional amount of interest rate swaps increased to $183.0 million at June 30, 2025, from $178.0 million at December 31, 2024, with a net unrealized gain of $1.311 million at June 30, 202578 - Fair value hedges, used to mitigate interest rate risk on fixed-rate available-for-sale securities, had a notional amount of $194.987 million at June 30, 2025, up from $145.850 million at December 31, 202482 Note 8: Federal Home Loan Bank Advances and Other Borrowings This note details FHLB advances and other borrowing arrangements, including a revolving line of credit, showing increased FHLB advances and covenant compliance | (dollars in thousands) | June 30, 2025 Total Outstanding | December 31, 2024 Total Outstanding | | :--------------------- | :------------------------------ | :-------------------------------- | | Less than 1 Year | $320,500 | $288,000 | | 1 to 2 Years | $31,500 | $21,500 | | 2 to 3 Years | $30,000 | $27,500 | | 3 to 4 Years | $15,000 | $22,500 | | 4 to 5 Years | $7,500 | $— | | Totals | $404,500 | $359,500 | - The Company's total FHLB advances increased to $404.5 million at June 30, 2025, from $359.5 million at December 31, 2024. Remaining available capacity under the agreement was $490.7 million at June 30, 20258688 - The Company has a $40.0 million revolving line of credit, secured by 100% of the Bank's stock, with $13.8 million outstanding at both June 30, 2025, and December 31, 202489 Note 9: Subordinated Debentures This note details the Company's subordinated debentures, highlighting new note issuance in June 2025 and redemption of existing ones, increasing total outstanding debentures - On June 24, 2025, the Company issued $80.0 million in 7.625% Fixed-to-Floating Rate Subordinated Notes due 2035. Proceeds were used to redeem $50 million of 5.25% Fixed-to-Floating Rate Subordinated Notes due 2030 and for general corporate purposes90 | (dollars in thousands) | June 30, 2025 Total Debt Outstanding | December 31, 2024 Total Debt Outstanding | | :--------------------- | :----------------------------------- | :--------------------------------------- | | 2030 Notes | $— | $50,000 | | 2031 Notes | $30,000 | $30,000 | | 2035 Notes | $80,000 | $— | | Subordinated Debentures | $110,000 | $80,000 | | Debt Issuance Costs | $(1,311) | $(330) | | Subordinated Debentures, Net of Issuance Costs | $108,689 | $79,670 | Note 10: Commitments, Contingencies and Credit Risk This note outlines off-balance sheet financial instruments, including unfunded commitments and letters of credit, and credit loss exposure, noting no material legal proceedings | (dollars in thousands) | June 30, 2025 | December 31, 2024 | | :--------------------- | :------------ | :---------------- | | Unfunded Commitments Under Lines of Credit | $675,151 | $679,064 | | Letters of Credit | $118,002 | $124,397 | | Totals | $793,153 | $803,461 | - The Company had outstanding letters of credit with the FHLB of $134.8 million at June 30, 2025, up from $103.2 million at December 31, 202495 - The Allowance for Credit Losses (ACL) for off-balance sheet credit exposures remained stable at $3.6 million at both June 30, 2025, and December 31, 202496 Note 11: Stock Options and Restricted Stock This note details the Company's equity incentive plans, including stock options and restricted stock units, showing increased outstanding options and nonvested units - The Company has several equity incentive plans (2012, 2017, 2019, and 2023 EIPs) for directors, officers, and employees, with varying shares reserved for future grants100101102103 | (shares) | Six Months Ended June 30, 2025 | | :-------------------------- | :----------------------------- | | Outstanding at Beginning of Year | 1,860,609 | | Granted | 275,000 | | Exercised | (42,175) | | Forfeitures | (16,500) | | Outstanding at Period End | 2,076,934 | | Options Exercisable at Period End | 1,446,933 | - As of June 30, 2025, there was $2.7 million of total unrecognized compensation cost related to nonvested stock options, expected to be recognized over a weighted-average period of 2.6 years. For restricted stock units, unrecognized compensation cost was $4.8 million, expected over 2.5 years108114 Note 12: Regulatory Capital This note presents regulatory capital amounts and ratios for the Company and Bank, demonstrating compliance with all minimum capital adequacy requirements | (dollars in thousands) | June 30, 2025 Actual Amount | June 30, 2025 Actual Ratio | December 31, 2024 Actual Amount | December 31, 2024 Actual Ratio | | :--------------------- | :-------------------------- | :------------------------- | :------------------------------ | :----------------------------- | | Company (Consolidated): | | | | | | Total Risk-based Capital | $638,131 | 14.17% | $585,966 | 13.76% | | Tier 1 Risk-based Capital | $473,118 | 10.51% | $453,049 | 10.64% | | Common Equity Tier 1 Capital | $406,604 | 9.03% | $386,535 | 9.08% | | Tier 1 Leverage Ratio | $473,118 | 9.14% | $453,049 | 9.44% | | Bank: | | | | | | Total Risk-based Capital | $602,742 | 13.41% | $573,158 | 13.49% | | Tier 1 Risk-based Capital | $546,513 | 12.16% | $520,000 | 12.24% | | Common Equity Tier 1 Capital | $546,513 | 12.16% | $520,000 | 12.24% | | Tier 1 Leverage Ratio | $546,513 | 10.58% | $520,000 | 10.86% | - Both the Company and the Bank exceeded all minimum capital adequacy requirements and the capital conservation buffer as of June 30, 2025, and December 31, 2024118119 Note 13: Fair Value Measurement This note explains the Company's fair value measurement practices, categorizing assets and liabilities into a three-level hierarchy based on input observability - The Company categorizes fair value measurements into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)119120121 | (dollars in thousands) | June 30, 2025 Total Fair Value | December 31, 2024 Total Fair Value | | :--------------------- | :----------------------------- | :--------------------------------- | | Financial Assets: | | | | Securities Available for Sale | $743,889 | $768,247 | | Fair Value Swaps | $7,531 | $10,487 | | Interest Rate Caps | $14,808 | $19,319 | | Interest Rate Swaps | $11,080 | $13,349 | | Total Fair Value of Financial Assets | $777,308 | $811,402 | | Financial Liabilities: | | | | Fair Value Swaps | $576 | $— | | Interest Rate Swaps | $9,769 | $8,210 | | Risk Participation Agreement | $19 | $— | | Total Fair Value of Financial Liabilities | $10,364 | $8,210 | - Individually evaluated loans, measured at fair value on a non-recurring basis, are classified as Level 3 due to the significance of unobservable inputs, such as internally determined values based on cost adjusted for depreciation and customized discounting criteria on appraisals134 Note 14: Accumulated Other Comprehensive Income This note details components and changes in accumulated other comprehensive income (loss), net of tax, for Q2 and H1 2025 and 2024, showing a net loss due to unrealized losses | (dollars in thousands) | Three Months Ended June 30, 2025 Net of Tax | Three Months Ended June 30, 2024 Net of Tax | Six Months Ended June 30, 2025 Net of Tax | Six Months Ended June 30, 2024 Net of Tax | | :--------------------- | :------------------------------------------ | :------------------------------------------ | :---------------------------------------- | :---------------------------------------- | | Net Unrealized Loss on Available for Sale Securities | $(341) | $832 | $5,137 | $1,000 | | Less: Reclassification Adjustment for Net Gains Included in Net Income | $(338) | $(228) | $(338) | $(294) | | Total Unrealized Gain (Loss) | $(679) | $604 | $4,799 | $706 | | Net Unrealized Loss on Cash Flow Hedge | $(1,038) | $1,451 | $(3,205) | $5,521 | | Less: Reclassification Adjustment for Gains Included in Net Income | $(1,152) | $(1,659) | $(2,458) | $(3,301) | | Total Unrealized Loss (Gain) | $(2,190) | $(208) | $(5,663) | $2,220 | | Other Comprehensive Income (Loss) | $(2,869) | $396 | $(864) | $2,926 | | (dollars in thousands) | Available For Sale Securities | Cash Flow Hedge | Accumulated Other Comprehensive Income (Loss) | | :--------------------- | :---------------------------- | :-------------- | :-------------------------------------------- | | Balance at December 31, 2024 | $(27,743) | $14,379 | $(13,364) | | Net Other Comprehensive Income (Loss) During Period (Six Months Ended June 30, 2025) | $4,799 | $(5,663) | $(864) | | Balance at June 30, 2025 | $(22,944) | $8,716 | $(14,228) | Note 15: Subsequent Events This note discloses subsequent events, including the extension of the Company's stock repurchase program and a quarterly cash dividend on preferred stock - On July 22, 2025, the Board of Directors extended the Company's 2022 Stock Repurchase Program expiration date from August 20, 2025, to August 26, 2026, with $13.1 million remaining under authorization149 - On July 23, 2025, a quarterly cash dividend of $36.72 per share ($0.3672 per depositary share) was announced for the 5.875% Non-Cumulative Perpetual Preferred Stock, Series A, payable on September 2, 2025150 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations for Q2 and H1 2025, discussing key financial trends and performance metrics General This section introduces the Company's financial condition and results of operations for Q2 and H1 2025, noting interim results may not predict full-year performance - The discussion explains the Company's financial condition and results of operations for the three and six months ended June 30, 2025, noting that annualized interim results may not be indicative of full-year or future periods151 Forward-Looking Statements This section contains cautionary statements regarding forward-looking statements, highlighting inherent uncertainties, risks, and changes that could cause actual results to differ - Forward-looking statements are based on current beliefs, expectations, and assumptions, but are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict and outside of the Company's control152 - Key risk factors include interest rate risk, effects of changes in U.S. economy and policies, fluctuations in securities values, credit risk, ability to manage liquidity, and impacts of legislative and regulatory changes152153 Overview This section provides an overview of Bridgewater Bancshares, Inc. as a financial holding company, detailing its primary sources of funds and income, and its core strategy - The Company's principal sources of funds are transaction, savings, time, and other deposits, and short-term and long-term borrowings155 - Primary income sources include interest and fees on loans, interest and dividends on investment securities, and service charges155 - The Company's strategy focuses on providing responsive support and unconventional experiences to clients, driving profitable growth155 Critical Accounting Policies and Estimates This section states no significant changes in critical accounting policies or assumptions since December 2024, emphasizing estimates could materially impact future financial results - No significant changes in critical accounting policies or assumptions have occurred since December 31, 2024156 - The preparation of financial statements involves numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation, potentially affecting reported results156 Recent Developments This section highlights key recent events, including the FMCB acquisition, $80.0 million subordinated note issuance, and the 'One Big Beautiful Bill Act', potentially impacting future tax deductibility - On December 13, 2024, Bridgewater Bank acquired First Minnetonka City Bank (FMCB), adding $245.0 million of assets, $225.7 million of deposits, $117.1 million of loans, and two branch locations. Merger-related expenses were $540,000 for Q2 2025 and $1.1 million for H1 2025157 - On June 24, 2025, the Company issued $80.0 million in 7.625% Fixed-to-Floating Rate Subordinated Notes due 2035, using proceeds to redeem $50 million of 5.25% notes and for general corporate purposes158 - On July 4, 2025, the 'One Big Beautiful Bill Act' was signed into law, potentially allowing more favorable deductibility of certain business expenses (R&D, bonus depreciation, business interest) starting in 2025. The Company is evaluating its future impact159160 Operating Results Overview This section summarizes key financial results and performance ratios for the Company, highlighting increases in net interest income, net income, and EPS for Q2 2025, with improved net interest margin and efficiency ratio | (dollars in thousands, except per share data) | June 30, 2025 | June 30, 2024 | | :-------------------------------------------- | :------------ | :------------ | | Net Interest Income | $32,452 | $24,996 | | Net Income | $11,520 | $8,115 | | Net Income Available to Common Shareholders | $10,506 | $7,101 | | Basic Earnings Per Share | $0.38 | $0.26 | | Diluted Earnings Per Share | $0.38 | $0.26 | | Book Value Per Share | $14.92 | $13.63 | | Tangible Book Value Per Share (1) | $14.21 | $13.53 | | Total Assets | $5,296,673 | $4,687,035 | | Total Loans, Gross | $4,145,799 | $3,800,385 | | Deposits | $4,236,742 | $3,807,712 | | Total Shareholders' Equity | $476,282 | $439,241 | | Net Interest Margin (3) | 2.62 % | 2.24 % | | Efficiency Ratio (1) | 52.6 % | 58.7 % | - Net income for Q2 2025 was $11.5 million, up from $8.1 million in Q2 2024. Diluted EPS increased to $0.38 from $0.26 YoY164 - The efficiency ratio improved to 52.6% for Q2 2025, down from 58.7% in Q2 2024, reflecting better operational performance161205 Discussion and Analysis of Results of Operations This section provides a detailed analysis of the Company's operating results, including net income, net interest income, provision for credit losses, noninterest income, noninterest expense, and income tax expense, comparing Q2 and H1 2025 with 2024 Net Income Net income for Q2 2025 increased significantly to $11.5 million, up from $8.1 million in Q2 2024, with diluted EPS rising to $0.38 - Net income for the second quarter of 2025 was $11.5 million, an increase from $8.1 million for the second quarter of 2024164 - Diluted earnings per common share for Q2 2025 were $0.38, compared to $0.26 for Q2 2024164 - Adjusted net income (non-GAAP) was $11.3 million for Q2 2025, up from $7.9 million for Q2 2024, with adjusted diluted EPS of $0.37 compared to $0.25164 Net Interest Income Net interest income saw substantial growth for Q2 and H1 2025, driven by increased loan portfolio yields and growth, with improved net interest margin - Net interest income for Q2 2025 was $32.5 million, an increase of $7.5 million (30%) from $25.0 million in Q2 2024, primarily due to growth and higher yields in the loan portfolio173 - Net interest margin (tax-equivalent) for Q2 2025 was 2.62%, a 38 basis point increase from 2.24% in Q2 2024, driven by higher core loan yields, purchase accounting accretion, and lower deposit costs174 - Total interest income (tax-equivalent) for Q2 2025 increased by $8.3 million (13.6%) to $69.5 million, mainly from loan portfolio growth and higher earning asset yields. Interest expense on interest-bearing liabilities increased by $864,000 to $36.7 million178182 | (dollars in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------- | :----------------------------- | :----------------------------- | | Net Interest Income | $62,660 | $49,627 | | Net Interest Margin (tax-equivalent) | 2.56% | 2.24% | | Total Interest Income (tax-equivalent) | $135,480 | $120,200 | | Total Interest Expense | $72,246 | $69,920 | Provision for Credit Losses The provision for credit losses on loans and leases increased for Q2 and H1 2025 compared to 2024, primarily due to loan portfolio growth and increased specific reserves - Provision for credit losses on loans and leases was $2.0 million for Q2 2025, up from $600,000 for Q2 2024. For the six months, it was $3.5 million, up from $1.5 million196 - The increase was primarily attributable to increased growth in the loan portfolio and an increase in specific reserves for loans individually evaluated196 - The allowance for credit losses on loans and leases to total loans was 1.35% at June 30, 2025, compared to 1.37% at June 30, 2024196 Noninterest Income Noninterest income significantly increased for Q2 and H1 2025, driven by higher swap fees, FHLB prepayment income, investment advisory fees, and gains on sales - Noninterest income for Q2 2025 was $3.6 million, an increase of $1.9 million from $1.8 million for Q2 2024199 - The increase was primarily due to higher swap fees ($938,000 vs. $0), FHLB prepayment income ($301,000 vs. $0), investment advisory fees ($213,000 vs. $0), and net gain on sales of securities ($474,000 vs. $320,000)199200 - For the six months ended June 30, 2025, noninterest income increased by $2.4 million to $5.7 million, compared to $3.3 million in 2024, driven by similar factors199 Noninterest Expense Noninterest expense increased for Q2 and H1 2025, primarily due to higher salaries and benefits, increased operating costs from the FMCB acquisition, and merger-related expenses - Noninterest expense for Q2 2025 was $18.9 million, an increase of $3.4 million from $15.5 million for Q2 2024201 - Key drivers of the increase include salaries and employee benefits (up $1.7 million), occupancy and equipment (up $182,000), data processing (up $153,000), and other expense (up $753,000)201207 - The Company had 308 full-time equivalent employees at June 30, 2025, up from 258 at June 30, 2024, largely due to the FMCB acquisition203 Income Tax Expense Income tax expense increased for Q2 and H1 2025 compared to 2024, with a stable effective combined federal and state income tax rate - Income tax expense for Q2 2025 was $3.6 million, up from $2.5 million for Q2 2024. For the six months, it was $6.6 million, up from $4.9 million209 - The effective combined federal and state income tax rate remained stable at 23.9% for Q2 2025 (vs. 23.6% for Q2 2024) and 23.9% for H1 2025 (vs. 23.6% for H1 2024)209 Financial Condition This section analyzes the Company's financial condition, detailing changes in assets, investment securities, loan portfolio, asset quality, deposits, borrowed funds, obligations, and capital Assets Total assets at June 30, 2025, increased by $230.4 million (4.5%) over December 2024, and by $609.6 million (13.0%) over June 2024, driven by loan growth and FMCB acquisition - Total assets at June 30, 2025, were $5.30 billion, an increase of $230.4 million (4.5%) from $5.07 billion at December 31, 2024210 - The year-over-year increase in total assets was $609.6 million (13.0%) from $4.69 billion at June 30, 2024, primarily due to loan portfolio growth and the FMCB acquisition210 Investment Securities Portfolio The investment securities portfolio, primarily available for sale, decreased by $24.4 million (3.2%) to $743.9 million at June 30, 2025, mainly due to the sale of FMCB-acquired securities - The investment securities portfolio is used for liquidity, stable income, and collateral, consisting primarily of U.S. treasury, mortgage-backed, municipal, corporate, and asset-backed securities211213 - Securities available for sale were $743.9 million at June 30, 2025, a decrease of $24.4 million (3.2%) from $768.2 million at December 31, 2024, primarily due to the sale of $58.5 million of securities from the FMCB acquisition214 | (dollars in thousands) | June 30, 2025 Fair Value | December 31, 2024 Fair Value | | :--------------------- | :----------------------- | :----------------------------- | | U.S. Treasury Securities | $145,654 | $167,748 | | Mortgage-Backed Securities | $269,898 | $244,890 | | Municipal Securities | $115,054 | $122,265 | | Corporate Securities | $130,097 | $134,186 | | Asset-Backed Securities | $72,030 | $77,076 | | Total | $743,889 | $768,247 | Loan Portfolio The Company's gross loan portfolio grew significantly to $4.15 billion at June 30, 2025, driven by increased originations and the FMCB acquisition, concentrated in real estate mortgage lending - Total gross loans at June 30, 2025, were $4.15 billion, an increase of $277.3 million (7.2%) from $3.87 billion at December 31, 2024, and $345.4 million (9.1%) from $3.80 billion at June 30, 2024217 - The loan portfolio is primarily focused on real estate mortgage lending, which constituted 81.1% of the portfolio at June 30, 2025219 - Investor CRE loans totaled $2.87 billion at June 30, 2025, representing 69.2% of the total gross loan portfolio and 475.9% of the Bank's total risk-based capital220 Asset Quality The Company's asset quality is managed through an internal classification system, with increased 'Watch/Special Mention' and 'Substandard' loans at June 2025 compared to December 2024 - Loans with 'Watch/Special Mention' risk ratings totaled $53.3 million at June 30, 2025, up from $46.6 million at December 31, 2024226 - Loans with 'Substandard' risk ratings totaled $45.0 million at June 30, 2025, up from $21.8 million at December 31, 2024226 | (dollars in thousands) | June 30, 2025 | December 31, 2024 | | :--------------------- | :------------ | :---------------- | | Watch/Special Mention | $53,282 | $46,581 | | Substandard | $44,986 | $21,791 | | Totals | $98,268 | $68,372 | Nonperforming Assets Nonperforming assets significantly increased at June 30, 2025, due to a rise in nonaccrual loans and the addition of foreclosed assets, compared to December 2024 - Nonaccrual loans totaled $10.1 million as of June 30, 2025, a substantial increase from $301,000 as of December 31, 2024227 - Foreclosed assets were $185,000 at June 30, 2025, compared to none at December 31, 2024227 | (dollars in thousands) | June 30, 2025 | December 31, 2024 | | :--------------------- | :------------ | :---------------- | | Total Nonaccrual Loans | $10,134 | $301 | | Total Nonperforming Loans | $10,134 | $301 | | Plus: Foreclosed Assets | $185 | $— | | Total Nonperforming Assets | $10,319 | $301 | | Nonperforming Assets to Total Loans Plus Foreclosed Assets | 0.25 % | 0.01 % | Allowance for Credit Losses The Allowance for Credit Losses (ACL) on loans and leases increased to $55.8 million at June 30, 2025, from $52.3 million at December 2024, reflecting expected lifetime losses, with low net charge-offs - The ACL on loans and leases was $55.8 million at June 30, 2025, an increase of $3.5 million from $52.3 million at December 31, 2024231 - Net charge-offs (recoveries) totaled $1,000 during Q2 2025 and $12,000 for the six months ended June 30, 2025231 - The ACL as a percentage of total loans was 1.35% at June 30, 2025, consistent with 1.35% at December 31, 2024231 Deposits Total deposits increased to $4.24 billion at June 30, 2025, driven by growth in core and brokered deposits, with brokered deposits as a supplemental funding source - Total deposits at June 30, 2025, were $4.24 billion, an increase of $150.0 million (3.7%) from $4.09 billion at December 31, 2024235 - Core deposits (excluding brokered and large time deposits) increased by $79.9 million (5.1% annualized) from December 31, 2024, due to existing client balances and new client acquisitions235 - Brokered deposits increased to $870.6 million at June 30, 2025, from $825.8 million at December 31, 2024, used as a supplemental funding source236 Borrowed Funds The Company's borrowed funds increased, with FHLB advances rising to $404.5 million at June 30, 2025, maintaining a revolving line of credit and Federal Reserve discount window access - Outstanding FHLB advances increased to $404.5 million at June 30, 2025, from $359.5 million at December 31, 2024239 - The Company had $490.7 million in additional borrowing capacity under its FHLB credit facility at June 30, 2025239 - The Bank's borrowing availability at the Federal Reserve discount window was approximately $1.02 billion at June 30, 2025, with no outstanding advances241 Contractual Obligations The Company's total contractual obligations amounted to $4.77 billion at June 30, 2025, with a significant portion due within one year, primarily deposits, expected to be met through various liquidity sources | (dollars in thousands) | Within One Year | One to Three Years | Three to Five Years | After Five Years | Total | | :--------------------- | :-------------- | :----------------- | :------------------ | :--------------- | :---- | | Deposits Without a Stated Maturity | $3,169,173 | $— | $— | $— | $3,169,173 | | Time Deposits | $650,703 | $247,113 | $169,753 | $— | $1,067,569 | | Notes Payable | $— | $13,750 | $— | $— | $13,750 | | FHLB Advances | $320,500 | $61,500 | $22,500 | $— | $404,500 | | Subordinated Debentures | $— | $— | $— | $110,000 | $110,000 | | Total | $4,143,202 | $323,153 | $192,623 | $110,045 | $4,769,023 | - The Company expects to meet all contractual obligations through earnings, loan and securities repayments, maturity activity, continued deposit gathering, and various short-term and long-term borrowing mechanisms244 Capital Total shareholders' equity increased to $476.3 million at June 30, 2025, driven by retained net income and decreased unrealized losses, partially offset by derivative changes, preferred stock dividends, and stock repurchases - Total shareholders' equity at June 30, 2025, was $476.3 million, an increase of $18.3 million (4.0%) from $457.9 million at December 31, 2024245 - The increase was primarily due to net income retained and a decrease in unrealized losses in the securities portfolio, partially offset by a decrease in unrealized gains in the derivatives portfolio, preferred stock dividends, and stock repurchases245 - Tangible book value per share (non-GAAP) increased by 5.4% to $14.21 at June 30, 2025, from $13.49 at December 31, 2024246 Regulatory Capital The Company and Bank continued to meet all regulatory capital requirements, including the capital conservation buffer, as of June 2025 and December 2024 | (dollars in thousands) | June 30, 2025 Actual Ratio | December 31, 2024 Actual Ratio | | :--------------------- | :------------------------- | :----------------------------- | | Company (Consolidated): | | | | Total Risk-based Capital | 14.17 % | 13.76 % | | Tier 1 Risk-based Capital | 10.51 % | 10.64 % | | Common Equity Tier 1 Capital | 9.03 % | 9.08 % | | Tier 1 Leverage Ratio | 9.14 % | 9.44 % | | Bank: | | | | Total Risk-based Capital | 13.41 % | 13.49 % | | Tier 1 Risk-based Capital | 12.16 % | 12.24 % | | Common Equity Tier 1 Capital | 12.16 % | 12.24 % | | Tier 1 Leverage Ratio | 10.58 % | 10.86 % | - Both the Company and the Bank maintained capital ratios sufficient to meet the capital conservation buffer of 2.5% at June 30, 2025, avoiding limitations on capital distributions250 Off-Balance Sheet Arrangements The Company engages in off-balance sheet arrangements, including unfunded commitments and letters of credit, to meet client financing needs, managing associated credit and interest rate risks | (dollars in thousands) | June 30, 2025 Fixed | June 30, 2025 Variable | December 31, 2024 Fixed | December 31, 2024 Variable | | :--------------------- | :------------------ | :--------------------- | :---------------------- | :------------------------- | | Unfunded Commitments Under Lines of Credit | $152,414 | $522,737 | $174,273 | $504,791 | | Letters of Credit | $7,314 | $110,688 | $9,012 | $115,385 | | Totals | $159,728 | $633,425 | $183,285 | $620,176 | - The Company had outstanding letters of credit with the FHLB of $134.8 million at June 30, 2025, up from $103.2 million at December 31, 2024253 - Most off-balance sheet commitments mature within two years, and standby letters of credit are expected to expire without being drawn upon251 Liquidity The Company maintains adequate liquidity through primary and secondary sources to meet obligations. Total liquidity increased to $2.38 billion at June 30, 2025, supported by core deposits and borrowing capacities - Total on- and off-balance sheet liquidity was $2.38 billion as of June 30, 2025, up from $2.30 billion at December 31, 2024257 | (dollars in thousands) | June 30, 2025 | December 31, 2024 | | :--------------------- | :------------ | :---------------- | | Primary Liquidity—On-Balance Sheet: | | | | Cash and Cash Equivalents | $192,709 | $188,884 | | Securities Available for Sale | $743,889 | $768,247 | | Less: Pledged Securities | $(282,025) | $(289,903) | | Total Primary Liquidity | $654,573 | $667,228 | | Secondary Liquidity—Off-Balance Sheet: | | | | Net Secured Borrowing Capacity with the FHLB | $490,748 | $483,245 | | Net Secured Borrowing Capacity with the Federal Reserve Bank | $1,019,087 | $925,798 | | Unsecured Borrowing Capacity with Correspondent Lenders | $200,000 | $200,000 | | Secured Borrowing Capacity with Correspondent Lender | $19,855 | $19,855 | | Total Secondary Liquidity | $1,729,690 | $1,628,898 | | Total Primary and Secondary Liquidity | $2,384,263 | $2,296,126 | - Core deposits totaled approximately $3.19 billion at June 30, 2025, representing 75.2% of total deposits, providing a stable funding source258 Non-GAAP Financial Measures This section provides reconciliations of non-GAAP financial measures like Pre-Provision Net Revenue, Core Net Interest Margin, and Tangible Common Equity to GAAP, offering investors additional insights - The Company uses non-GAAP financial measures to supplement GAAP, believing they provide meaningful information for investors to understand operating performance and trends, and to facilitate peer comparisons262 - Non-GAAP measures include Pre-Provision Net Revenue, Core Net Interest Margin, Core Loan Yield, Efficiency Ratio, Tangible Common Equity, and Adjusted Diluted Earnings Per Common Share262 | (dollars in thousands) | June 30, 2025 | June 30, 2024 | | :--------------------- | :------------ | :------------ | | Pre-Provision Net Revenue | $16,363 | $10,900 | | Adjusted Pre-Provision Net Revenue | $16,903 | $10,900 | | Core Net Interest Margin | 2.49 % | 2.17 % | | Core Loan Yield | 5.59 % | 5.42 % | | Efficiency Ratio | 52.6 % | 58.7 % | | Adjusted Efficiency Ratio | 51.5 % | 58.7 % | | Tangible Common Equity | $390,396 | $369,930 | | Tangible Common Equity/Tangible Assets | 7.40 % | 7.90 % | | Tangible Book Value Per Common Share | $14.21 | $13.53 | | Adjusted Diluted Earnings Per Common Share | $0.37 | $0.25 | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the Company's primary market risk, interest rate risk, and its management through the ALM Committee, detailing derivative use for hedging and net interest income simulation Interest Rate Risk Interest rate risk, the Company's primary market risk, arises from asset/liability mismatches and is managed by the ALM Committee using derivative instruments to mitigate exposure - Interest rate risk is the Company's primary market risk, managed by the ALM Committee through a board-approved risk management infrastructure266267 - The Company uses cash flow hedges (notional amount $308.0 million at June 30, 2025) for brokered deposits and wholesale borrowings, and fair value hedges (notional amount $195.0 million at June 30, 2025) for U.S. treasury and mortgage-backed securities269 Net Interest Income Simulation The Company uses a net interest income simulation model to forecast the impact of hypothetical interest rate changes over 12 months on a static balance sheet, showing a 5.10% decrease for a +400 bps rate increase and a 17.01% increase for a -400 bps rate decrease - The net interest income simulation model measures potential changes in net interest income over 12 months from immediate and sustained interest rate shifts, assuming a static balance sheet270 | Change (basis points) in Interest Rates (12-Month Projection) | June 30, 2025 Forecasted Net Interest Income | June 30, 2025 Percentage Change from Base | | :------------------------------------------------------------ | :------------------------------------------- | :---------------------------------------- | | +400 | $135,489 | (5.10)% | | +300 | $137,646 | (3.59) | | +200 | $139,348 | (2.40) | | +100 | $140,839 | (1.35) | | 0 | $142,771 | — | | −100 | $147,243 | 3.13 | | −200 | $153,065 | 7.21 | | −300 | $160,037 | 12.09 | | −400