Bridgewater Bancshares, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Bridgewater Bancshares is a Minnesota financial holding company operating Bridgewater Bank, focused primarily on commercial banking and lending in the Minneapolis–St. Paul area.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Total assets at year-end | $2.269 billion | $1.974 billion |
| Gross loans at year-end | $1.912 billion | $1.665 billion |
| Deposits at year-end | $1.823 billion | $1.561 billion |
| Shareholders’ equity at year-end | $244.8 million | $221.0 million |
| Net interest income | $74.1 million | $64.7 million |
| Net income | $31.4 million | $26.9 million |
| Diluted earnings per share | $1.05 | $0.91 |
| Net interest margin, tax-equivalent | 3.59% | 3.72% |
| Return on average assets / equity | 1.49% / 13.50% | 1.51% / 13.87% |
| Efficiency ratio | 47.4% | 46.5% |
- Revenue and earnings: Interest income rose to $103.8 million from $85.2 million, while interest expense increased to $29.6 million from $20.5 million. Provision for loan losses declined to $2.7 million from $3.6 million. Noninterest income was $3.8 million, up from $2.5 million; noninterest expense increased to $36.9 million from $31.6 million.
- Cash flow: Cash from operating activities was $39.5 million. Investing activities used $276.2 million, principally reflecting $247.6 million of net loan growth and $15.6 million of premises and equipment purchases. Financing activities provided $240.2 million, mainly from deposit growth. Cash and cash equivalents ended the year at $31.9 million.
- Debt and liquidity: Year-end borrowings included $136.5 million of FHLB advances, $13.0 million of notes payable and $24.7 million of subordinated debentures, net of issuance costs; no federal funds were outstanding. Primary liquidity was $321.8 million, and reported primary plus secondary liquidity was $749.8 million, or 41.1% of deposits and borrowings. The company said it complied with its liquidity guidelines.
- Capital and credit quality: The Bank’s total risk-based capital ratio was 12.16%, above the 10.0% well-capitalized threshold. Nonperforming loans were $461,000, or 0.02% of gross loans; the allowance for loan losses was $22.5 million, or 1.18% of gross loans. Net charge-offs were $205,000.
Material changes versus 2018
- Assets, loans and deposits grew 15.0%, 14.8% and 16.8%, respectively. Loan growth was concentrated in multifamily and nonowner-occupied commercial real estate.
- Net income increased 16.7%; diluted EPS rose 14.5%. Net interest income grew 14.5%, largely from higher average earning assets, but margin declined 13 basis points as deposit and borrowing costs rose faster than asset yields.
- Core deposit growth helped reduce brokered deposits to $234.4 million, or 12.9% of deposits, from $291.2 million, or 18.7%. The ten largest depositor relationships still represented 22.2% of deposits.
- Noninterest expense increased 17.0%, including higher salaries, occupancy and professional fees. The adjusted efficiency ratio, a non-GAAP measure excluding tax-credit investment amortization, increased to 43.3% from 41.7%.
- The company repurchased 1.33 million shares for approximately $15.0 million under its $25.0 million authorization. No shares were repurchased in the fourth quarter.
Outlook, commentary and key risks
- Management intends to pursue organic growth in the Twin Cities, increase core deposits, and consider complementary acquisitions selectively. It expects continued expense increases as it adds staff and invests in technology, infrastructure and risk controls. No specific earnings or growth guidance is provided.
- A new headquarters in St. Louis Park was under construction, with completion expected in 2020. The core-and-shell contract had a $23.0 million guaranteed maximum price; $15.2 million had been paid by year-end. A separate interior build-out contract totaled $6.32 million.
- Commercial real estate loans were 68.2% of gross loans and 516.6% of Bank risk-based capital; about 85.3% of gross loans had real estate as a primary component of collateral. Management identifies real estate conditions, borrower and loan concentrations, portfolio seasoning and credit risk as important exposures.
- Interest-rate and funding risks include margin pressure, reliance on wholesale funding, and concentration among large depositors. The company also disclosed cybersecurity and third-party technology risks, regulatory and capital requirements, and uncertainty from the planned LIBOR transition.
- The filing specifically cited the emerging coronavirus outbreak as a possible adverse external event that could affect borrowers, collateral, deposits, operations and expenses; it did not quantify an impact or provide a pandemic-specific forecast.
- CECL adoption was delayed for the company, as an emerging growth company, until fiscal years beginning after December 15, 2022. Management was developing its implementation model and had not quantified the financial effect.
- The independent auditor gave an unqualified opinion on the financial statements. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor did not attest to internal control effectiveness. No material pending legal proceedings were reported beyond routine litigation.
Important facts for investors to verify
- Whether loan growth and asset quality remain sustainable as the relatively young loan portfolio seasons, particularly in CRE and concentrated borrower relationships.
- Whether deposit growth continues to reduce brokered funding and large-depositor concentration without further material increases in funding costs or margin compression.
- How interest-rate changes, including lower rates and the LIBOR transition, affect net interest income, hedges and funding costs; disclosed rate simulations are hypothetical, not forecasts.
- The ultimate cost and completion of the new headquarters project, and whether ongoing hiring and technology spending produces operating leverage.
- The effect of CECL adoption on the allowance, earnings and capital, and the realization and ongoing tax treatment of tax-credit investments and the captive insurer.
- Capital and liquidity headroom after growth, share repurchases and any adverse credit or economic developments; common dividends were not expected in the foreseeable future.