2020 Annual Report

Bridgewater Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements (dollars in thousands, except share data)

In 2019, the Company adopted the Bridgewater Bancshares, Inc. 2019 Equity Incentive Plan (the “2019 EIP”). The types of awards which may be granted under the 2019 EIP include 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 December 31, 2020, and 2019, there were 561,883 and 867,040 of remaining shares of the Company’s common stock reserved for future grants under the 2019 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 the 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 61 banks in the index ranging in market capitalization from $300 million up to $3.5 billion.

The weighted average assumptions used in the model for valuing stock option grants in 2020 is as follows:

December 31, 2020

Dividend Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-Free Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—%

7 Years

44.14 % 0.68 %

The following table presents a summary of the status of the Company’s outstanding stock options for the years ended December 31, 2020 and 2019:

December 31, 2020

December 31, 2019

Weighted Average

Weighted Average

Shares Exercise Price

Shares Exercise Price

Outstanding at Beginning of Year . . . . . . 1,961,650 $

7.08 1,807,100 $ 10.61 238,000 4.26 (74,850)

6.24

Granted . . . . . . . . . . . . . . . . . . . . . . . . . . .

60,000

12.47

Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . (74,400) Forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . (33,000) Outstanding at End of Year . . . . . . . . . . . 1,914,250 $

3.45

7.47

(8,600)

10.65

7.29 1,961,650 $

7.08

Options Exercisable at End of Year. . . . . 1,205,350 $

5.96 992,050 $

5.01

For the years ended December 31, 2020, 2019 and 2018, the Company recognized compensation expense for stock options of $881, $721 and $799, respectively.

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