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Stock Options and Restricted Stock

9 Months Ended

Sep. 30, 2023

Stock Options and Restricted Stock

Stock Options and Restricted Stock

Note 10: Stock Options and Restricted Stock

In 2012, the Company adopted the Bridgewater Bancshares, Inc. 2012 Combined Incentive and Non-Statutory Stock Option Plan (the “2012 Plan”) under which the Company was able to grant options to its directors, officers, and employees for up to 750,000 shares of common stock. Both incentive stock options and nonqualified stock options were granted under the 2012 Plan. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant, and the maximum term of each outstanding option is ten years. All outstanding options have been granted with vesting periods of four or five years. The 2012 Plan expired in March 2022, and awards are no longer able to be granted under the 2012 Plan.

In 2017, the Company adopted the Bridgewater Bancshares, Inc. 2017 Combined Incentive and Non-Statutory Stock Option Plan (the “2017 Plan”). Under the 2017 Plan, the Company may grant options to its directors, officers, employees and consultants for up to 1,500,000 shares of common stock. Both incentive stock options and nonqualified stock options may be granted under the 2017 Plan. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each outstanding option is ten years. All outstanding options have been granted with vesting periods of four or five years. As of September 30, 2023 and December 31, 2022, there were -0- and 44,700 shares, respectively, of the Company’s common stock reserved for future option grants under the 2017 Plan.

In 2019, the Company adopted the Bridgewater Bancshares, Inc. 2019 Equity Incentive Plan (the “2019 EIP”). Under the 2019 EIP, the Company may grant incentive and nonqualified stock options, stock appreciation rights, stock awards, restricted stock units, restricted stock and cash incentive awards. The Company may grant these awards to its directors, officers, employees and certain other service providers for up to 1,000,000 shares of common stock. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each award is ten years. All outstanding awards have been granted with a vesting period of four years. As of September 30, 2023 and December 31, 2022, there were -0- and 231,363 shares, respectively, of the Company’s common stock reserved for future grants under the 2019 EIP.

At the 2023 Annual Meeting of Shareholders (the "Annual Meeting") of the Company, which was held on April 25, 2023, the Company's shareholders approved the Bridgewater Bancshares, Inc. 2023 Equity Incentive Plan (the "2023 EIP"), which the Company's board of directors adopted on February 28, 2023, subject to shareholder approval at the Annual Meeting. Under the 2023 EIP, the Company may grant incentive and nonqualified stock options, stock appreciation rights, stock awards, restricted stock units, restricted stock and cash incentive awards. The Company may

grant these awards to its directors, officers, employees and certain other service providers for up to 1,500,000 shares of common stock. The exercise price of each option equals the fair market value of the Company’s stock on the date of grant and the maximum term of each award is ten years. All outstanding awards have been granted with a vesting period of four years. As of September 30, 2023, there were 1,438,137 shares of the Company’s common stock reserved for future grants under the 2023 EIP.

Stock Options

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on an industry

index as described below. The expected term of options granted is based on historical data and represents the period of

time that options granted are expected to be outstanding, which takes into account that the options are not transferable.

The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the

time of grant. Historically, the Company has not paid a dividend on its common stock and does not expect to do so in the

near future.

The Company used the S&P 600 CM Bank Index as its historical volatility index. The S&P 600 CM Bank

Index is an index of publicly traded small capitalization, regional, commercial banks located throughout the United

States. There were 51 banks in the index ranging in market capitalization from $500 million up to $4.0 billion.

The weighted average assumptions used in the model of valuing stock option grants for the nine months ended September 30, 2023, are as follows:


		September 30,
		2023
Dividend Yield		—	%
Expected Life		7	Years
Expected Volatility		42.25	%
Risk-Free Interest Rate		4.15	%

The following table presents a summary of the status of the Company’s outstanding stock options for the nine months ended September 30, 2023:


		September 30, 2023
				Weighted
				Average
		Shares		Exercise Price
Outstanding at Beginning of Year		1,913,444		$	9.35
Granted		239,000			10.65
Exercised		(226,000)			3.17
Forfeitures		(9,000)			13.04
Outstanding at Period End		1,917,444		$	10.22

Options Exercisable at Period End		1,378,194		$	8.88

For the three months ended September 30, 2023 and 2022, the Company recognized compensation expense for stock options of $230,000 and $326,000, respectively. For the nine months ended September 30, 2023 and 2022, the Company recognized compensation expense for stock options of $601,000 and $926,000, respectively.

The following table presents information pertaining to options outstanding at September 30, 2023:


			Options Outstanding							Options Exercisable
								Weighted Average
			Number of		Weighted Average			Remaining Contractual		Number of		Weighted Average
Range of Exercise Prices			Options		Exercise Price			Life in Years		Options		Exercise Price
$	3.00 - 3.99		88,500		$	3.07		0.4		88,500		$	3.07
	7.00 - 7.99		893,416			7.47		4.0		893,416			7.47
	8.00 - 8.99		17,500			8.76		6.5		11,250			8.76
	10.00 - 10.99		249,000			10.63		9.7		7,500			10.08
	11.00 - 11.99		85,000			11.27		5.6		68,000			11.27
	12.00 - 12.99		263,528			12.90		5.9		206,778			12.90
	13.00 - 13.99		25,000			13.22		4.6		25,000			13.22
	17.00 - 17.99		295,500			17.50		8.3		77,750			17.50
	Totals		1,917,444		$	10.22		5.6		1,378,194		$	8.88

As of September 30, 2023, there was $2.2 million of total unrecognized compensation cost related to nonvested stock options granted under the 2012 Plan, 2017 Plan, 2019 EIP, and 2023 EIP that is expected to be recognized over a weighted-average period of 2.7 years.

The following table presents an analysis of nonvested options to purchase shares of the Company’s stock issued and outstanding for the nine months ended September 30, 2023:


				Weighted
		Number of		Average Grant
		Shares		Date Fair Value
Nonvested Options at December 31, 2022		421,375		$	4.87
Granted		239,000			5.39
Vested		(116,125)			4.78
Forfeited		(5,000)			5.74
Nonvested Options at September 30, 2023		539,250		$	5.11

Restricted Stock Awards

In 2019 and 2020, the Company granted restricted stock awards out of the 2019 EIP. These awards vest in equal annual installments on the first four anniversaries of the date of the grant. Nonvested restricted stock awards are classified as outstanding shares with forfeitable voting and dividend rights.

The following table presents an analysis of nonvested restricted stock awards outstanding for the nine months ended September 30, 2023:


				Weighted
		Number of		Average Grant
		Shares		Date Fair Value
Nonvested Awards at December 31, 2022		38,762		$	12.50
Granted		—			—
Vested		(2,785)			10.32
Forfeited		(250)			12.92
Nonvested Awards at September 30, 2023		35,727		$	12.67

Compensation expense associated with the restricted stock awards is recognized on a straight-line basis over the period that the restrictions associated with the awards lapse based on the total cost of the award at the grant date. For the three months ended September 30, 2023 and 2022, the Company recognized compensation expense for restricted stock

awards of $112,000 and $113,000, respectively. For the nine months ended September 30, 2023 and 2022, the Company recognized compensation expense for restricted stock awards of $333,000 and $335,000, respectively.

As of September 30, 2023, there was $97,000 of total unrecognized compensation cost related to nonvested restricted stock awards granted under the 2019 EIP that is expected to be recognized over a weighted-average period of 0.2 years.

In addition, during the nine months ended September 30, 2023, the Company issued 35,460 shares of unrestricted common stock to non-employee directors, as a part of their compensation for their annual services on the Company’s board of directors. The aggregate value of the shares issued to non-employee directors of $355,000 was included in stock based compensation expense in the accompanying consolidated statements of shareholders’ equity.

Restricted Stock Units

In 2020, the Company began granting restricted stock units out of the 2019 EIP. Restricted stock units granted out of the 2019 EIP represent the right to receive one share of Company stock upon vesting and vest in equal annual installments on the first four anniversaries of the date of the grant. Nonvested restricted stock units have no voting or dividend rights and are not considered outstanding until vesting.

The following table presents an analysis of nonvested restricted stock units outstanding for the nine months ended September 30, 2023:


				Weighted
		Number of		Average Grant
		Units		Date Fair Value
Nonvested Units at December 31, 2022		351,310		$	16.30
Granted		82,969			15.59
Vested		(5,225)			16.20
Forfeited		(10,253)			17.79
Nonvested Units at September 30, 2023		418,801		$	16.13

Compensation expense associated with the restricted stock units is recognized on a straight-line basis over the period that the restrictions associated with the units lapse based on the total cost of the unit at the grant date. For the three months ended September 30, 2023 and 2022, the Company recognized compensation expense for restricted stock units of $535,000 and $358,000, respectively. For the nine months ended September 30, 2023 and 2022, the Company recognized compensation expense for the restricted stock of $1.6 million and $1.1 million, respectively.

As of September 30, 2023, there was $5.0 million of total unrecognized compensation cost related to nonvested restricted stock units granted under the 2019 EIP that is expected to be recognized over a weighted-average period of 2.4 years.