Bridgewater Bancshares, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Financial amounts are in millions of dollars unless otherwise stated. Bridgewater is a Minnesota-based financial holding company whose bank primarily serves the Minneapolis–St. Paul area.
Financial results and key metrics
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Interest income | $18.7 | $14.6; up 28.0% |
| Net interest income | $14.8 | $12.2; up 21.1% |
| Provision for loan losses | $0.6 | $1.0 |
| Noninterest income | $0.4 | $0.5 |
| Noninterest expense | $6.5 | $5.3; up 24.3% |
| Net income | $6.0 | $4.1; up 45.7% |
| Basic / diluted EPS | $0.23 / $0.23 | $0.17 / $0.16 |
| Net interest margin, tax-equivalent | 3.77% | 3.97% |
| Efficiency ratio | 42.8% | 41.2% |
At March 31, total assets were $1.682 billion, gross loans $1.405 billion, deposits $1.353 billion, and shareholders’ equity $199.0 million. Compared with December 31, 2017, assets increased 4.0%, gross loans 4.3%, and deposits 1.0%. Gross loans were up 29.6% and deposits up 18.5% year over year.
Cash and cash equivalents were $20.1 million at quarter-end, down $3.6 million during the quarter. Operating cash flow was $4.5 million, investing cash flow was negative $71.2 million, and financing cash flow was positive $63.0 million, including $58.9 million in net IPO proceeds. Primary liquidity was $192.7 million, or 14.2% of deposits; including reported secondary borrowing capacity, liquidity was $479.6 million, or 35.4% of deposits.
Outstanding borrowings included $9.0 million of federal funds purchased, $16.5 million of notes payable, $73.0 million of FHLB advances, and $24.6 million of subordinated debentures net of issuance costs. Additional FHLB borrowing capacity was $192.2 million. The Bank’s actual capital ratios exceeded applicable minimums; its total risk-based capital ratio was 13.86% and leverage ratio 11.51%.
Material changes and operating drivers
- Net income growth reflected higher net interest income and a lower tax provision, partly offset by higher operating expenses. The effective tax rate fell to 25.8% from 36.9%, primarily following the federal corporate tax rate reduction.
- Loan growth, particularly in nonowner-occupied commercial real estate, multifamily, and construction and land development, drove higher interest income. Total gross loans were 66.5% commercial real estate, as defined by the company, and 75.0% real estate mortgage loans.
- Net interest margin declined 20 basis points year over year. Management attributed pressure to higher costs and balances of noncore deposits and borrowings, despite improved loan yields. The cost of interest-bearing liabilities rose to 1.37% from 1.08%.
- Noninterest expense increased mainly because salaries and benefits rose $1.15 million as the company added staff and supported growth. Management also noted a one-time data-processing credit reduced expenses.
- The March 16 IPO raised $58.9 million net for the company. It issued 5.38 million shares; selling shareholders separately sold 2.33 million shares. The company contributed $25.0 million of IPO proceeds to the Bank through quarter-end.
- Available-for-sale securities had $4.264 million of gross unrealized losses at quarter-end, versus $1.996 million at December 31. Management attributed losses principally to interest-rate changes and did not consider them other-than-temporary. Other comprehensive income was negative $3.129 million for the quarter.
Credit, risks, outlook, and contingencies
The allowance for loan losses was $17.1 million, or 1.22% of gross loans, unchanged as a percentage from December 31. Q1 net recoveries were $19,000, compared with $67,000 of net charge-offs in Q1 2017. Nonperforming loans were $1.128 million, or 0.08% of loans; nonperforming assets were $1.416 million. Nine troubled debt restructurings totaled $2.9 million, with no new restructurings during the quarter.
Funding and concentration risks merit attention: brokered deposits were $228.8 million, or 16.9% of deposits, and the loan-to-deposit ratio was 103.9%. Unfunded lines of credit and letters of credit totaled $413.5 million. Management reported compliance with its liquidity guidelines and expected to meet contractual obligations, but noted that brokered funding availability is uncertain.
Management expects expenses to rise as it invests in staff, technology, infrastructure, and risk controls; it provided no specific earnings or growth guidance. Interest-rate simulation indicated a 9.53% increase in projected 12-month net interest income under an immediate, sustained 300-basis-point increase, and a 4.11% decrease under a 100-basis-point decline. Management cautioned that these are hypothetical estimates subject to assumptions and actual results may differ. Key stated risks include real estate and large-borrower concentrations, credit and liquidity management, noncore funding costs, interest-rate and securities-value changes, competition, cybersecurity, and regulatory changes. No material pending litigation was reported; the filing stated no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth and the high commercial real estate concentration remain consistent with underwriting standards and asset-quality trends.
- Whether deposit pricing, brokered-deposit reliance, and the loan-to-deposit ratio pressure funding costs or liquidity.
- Whether the decline in net interest margin persists as rates and deposit costs change.
- Whether staffing and infrastructure spending moderates or continues to weigh on the efficiency ratio.
- How securities fair values and accumulated other comprehensive income respond to interest-rate movements.
- Future use of IPO proceeds and the effect of the share issuance on per-share results and capital.