Bridgewater Bancshares, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Bridgewater is a Minnesota financial holding company operating Bridgewater Bank, focused primarily on commercial and real estate lending and deposits in the Minneapolis–St. Paul–Bloomington area. Financial amounts below are in U.S. dollars; monetary figures are shown in millions unless otherwise noted.
Financial performance and condition
| Metric | Q1 2019 / March 31, 2019 | Comparison |
|---|---|---|
| Net income | $7.0 million | Up 18.0% from $6.0 million in Q1 2018 |
| Diluted EPS | $0.23 | Unchanged from Q1 2018 |
| Net interest income | $17.1 million | Up 16.0% from $14.8 million |
| Net interest margin, tax-equivalent | 3.54% | Down 23 basis points from 3.77% |
| Noninterest income / expense | $0.6 million / $7.9 million | Income up $0.2 million; expense up 20.7% year over year |
| Assets | $2.05 billion | Up 3.8% from December 31, 2018; up 21.8% year over year |
| Gross loans / deposits | $1.72 billion / $1.64 billion | Loans up 22.6% year over year; deposits up 21.5% |
| Cash flows | Operating $9.7 million; investing $(53.6) million; financing $64.2 million | Cash increased $20.3 million to $48.8 million |
| Borrowings at period end | FHLB advances $124.0 million; notes payable $14.5 million; federal funds purchased $0 | Federal funds purchased were $18.0 million at year-end 2018 |
| Capital and liquidity | Bank total risk-based capital ratio 12.83%; primary liquidity $299.0 million; primary plus secondary liquidity $727.5 million | Primary plus secondary liquidity equaled 44.3% of deposits |
The efficiency ratio was 44.1%, versus 42.8% in Q1 2018; the company’s adjusted efficiency ratio was 43.1%, versus 42.8%. Allowance for loan losses was $20.6 million, or 1.20% of gross loans. Nonaccrual loans rose to $1.6 million from $0.6 million at year-end; no loans were 90 days past due and accruing, and there were no foreclosed assets. Book value per share was $7.70 and tangible book value per share was $7.58.
Material changes and drivers
- Loan growth drove higher interest income: average loans increased 26.2% year over year, while loan yield rose 16 basis points to 5.27%.
- Funding costs increased substantially. Average cost of interest-bearing liabilities rose to 2.06% from 1.37%; deposit interest expense increased 89.5% year over year. Management attributed margin compression to higher deposit and borrowing rates and lower loan fees.
- Noninterest expense rose $1.4 million, primarily reflecting higher salaries and staffing, technology, marketing, and other operating costs. Full-time equivalent employees increased to 143 from 118 a year earlier.
- Deposit growth included both core and wholesale funding. Brokered deposits were $277.9 million, or 16.9% of deposits; core deposits were 75.8% of total deposits.
- CRE loans represented 65.9% of gross loans and 475.4% of the Bank’s total risk-based capital. The portfolio is concentrated in real estate lending.
Outlook, risks, and notable items
- No formal earnings or financial guidance is provided. Management expects noninterest expenses to increase as it invests in staffing and infrastructure to support growth.
- The company’s interest-rate simulation estimated a 14.44% increase in 12-month net interest income under an immediate, sustained 300-basis-point rate increase and a 6.87% decrease under a 100-basis-point decline. Management cautions that these are hypothetical model results, not a forecast, and actual outcomes may differ.
- Key disclosed risks include loan and borrower concentrations, real estate market and credit risk, liquidity and reliance on non-core funding, cost of funds, interest-rate changes, securities valuation, cybersecurity and technology disruptions, competition, and regulatory changes. The filing reports no material change to previously disclosed risk factors and no material pending legal proceedings.
- The Bank’s new headquarters construction contract has a guaranteed maximum price of $23.0 million, with completion anticipated in 2020; $2.9 million had been paid by March 31, 2019.
- A $15 million share repurchase program was adopted for a 24-month period; no shares were repurchased in Q1. Shareholders also approved a 2019 equity incentive plan authorizing up to 1 million shares; no awards were outstanding under that plan as of the filing.
- Available-for-sale securities recorded $3.6 million of after-tax other comprehensive income in Q1, primarily reflecting market-value changes. Management attributed unrealized securities losses to interest-rate changes and reported no other-than-temporary impairments.
Important facts for investors to verify
- Whether loan growth and yields can continue to offset rising deposit and borrowing costs, and the resulting pressure on net interest margin.
- Trends in nonaccrual loans, criticized or classified credits, charge-offs, and whether the allowance remains adequate as the loan portfolio grows.
- Exposure to CRE concentrations and the company’s reliance on brokered deposits and other wholesale funding.
- Actual spending and completion costs for the headquarters project, and whether planned staffing and infrastructure investments affect expense growth.
- Realized performance versus the filing’s hypothetical interest-rate sensitivity scenarios and management’s liquidity assumptions.