Business context and reporting period
Bridgewater Bancshares, Inc. is a Minnesota-based financial holding company operating Bridgewater Bank, principally serving the Minneapolis–St. Paul–Bloomington area. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2018. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Interest income | $22.1 | $17.4 | $61.2 | $47.8 |
| Net interest income | $16.6 | $14.1 | $47.3 | $39.3 |
| Provision for loan losses | $1.3 | $1.2 | $2.8 | $3.0 |
| Noninterest income | $0.8 | $1.0 | $1.7 | $2.0 |
| Noninterest expense | $7.5 | $6.1 | $20.5 | $16.6 |
| Net income | $6.5 | $4.7 | $19.2 | $13.6 |
| Diluted earnings per share | $0.21 | $0.19 | $0.66 | $0.55 |
- Q3 net income rose 38.2%; nine-month net income rose 41.3%. The lower 2018 federal corporate tax rate contributed to lower effective tax rates: 25.3% in Q3 and 25.4% year to date, versus 39.6% and 37.4%, respectively.
- Net interest margin, on a tax-equivalent basis, was 3.71% in Q3 and 3.76% year to date, down 18 and 17 basis points year over year. Loan growth supported income, while higher funding costs and the lower tax-equivalent adjustment weighed on margin.
- At September 30, total assets were $1.886 billion; gross loans were $1.600 billion; deposits were $1.479 billion; and shareholders’ equity was $210.9 million. Versus September 30, 2017, assets grew 21.1%, gross loans 25.8%, and deposits 14.2%.
- Gross loans increased 18.8% from December 31, 2017. Growth was concentrated in nonowner-occupied commercial real estate (CRE), multifamily, and construction and land development. CRE represented 66.9% of gross loans and 483.1% of Bank capital.
- The allowance for loan losses was $18.9 million, or 1.18% of gross loans. Nonaccrual loans were $718,000 (0.04% of loans); there were no foreclosed assets or loans 90 days past due and still accruing. Troubled debt restructurings totaled $569,000, down from $3.0 million at year-end 2017.
- Average interest-bearing liability cost rose to 1.73% in Q3 from 1.24% a year earlier; total deposit cost rose to 1.19% from 0.81%. The efficiency ratio increased to 42.7% from 40.3% in Q3 and to 41.5% from 39.9% year to date.
- Nine-month cash flows were $22.2 million provided by operating activities, $277.5 million used in investing activities, and $253.1 million provided by financing activities. Ending cash and cash equivalents were $21.5 million, down $2.2 million from year-end 2017.
- Borrowings at quarter-end included $53.0 million federal funds purchased, $94.0 million FHLB advances, $15.5 million notes payable, and $24.6 million subordinated debentures. Primary liquidity was $262.3 million (17.7% of deposits); primary plus secondary liquidity was $541.5 million (36.6% of deposits). Brokered deposits were $254.3 million, or 17.2% of deposits; the loan-to-deposit ratio was 108.2%.
- The Bank’s actual capital ratios exceeded applicable minimums and “well capitalized” thresholds. Its total risk-based capital ratio was 12.95%, common equity Tier 1 ratio 11.82%, and leverage ratio 11.16%.
Material changes, outlook and risks
- The March 2018 IPO generated $58.9 million in net proceeds for the Company. The increase in equity also reflected $19.2 million of nine-month net income, partly offset by a $4.7 million decline in accumulated other comprehensive income, principally from interest-rate-related securities valuation changes.
- Management attributed earnings growth primarily to loan production and asset growth. Higher deposit and borrowing costs, increased staffing, and other growth-related expenses were offsets. The filing states that future noninterest expense is expected to increase as the Company invests in staff, technology, infrastructure, and risk controls; it gives no earnings or revenue guidance.
- The Company reported $5.7 million of gross unrealized losses on available-for-sale securities at September 30, 2018, principally attributed to interest-rate changes. Management said it intended and was able to hold the securities and deemed no decline other-than-temporary.
- Interest-rate simulation estimated a 10.66% increase in 12-month net interest income under an immediate, sustained 300-basis-point rate increase and a 4.25% decrease under a 100-basis-point decline. Management cautioned that results are hypothetical and sensitive to assumptions, deposit repricing, loan prepayments, and balance-sheet changes.
- Unfunded credit-line commitments and letters of credit totaled $523.8 million. The Bank also entered a construction contract for a new headquarters, with a guaranteed maximum price of $23.0 million and completion anticipated in 2020.
- The filing identifies credit and real-estate concentration, liquidity and funding costs, interest-rate exposure, growth execution, cybersecurity, competition, regulatory change, and local and national economic conditions among key risks. No material change to previously disclosed risk factors or material pending litigation was reported. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
- After quarter-end, the Company agreed to exchange 2,823,542 shares of non-voting common stock for the same number of voting common shares. The filing also notes a director’s relationship with one participating investor.
Important facts for investors to verify
- Whether rapid loan growth—especially in CRE, multifamily, and construction—continues without deterioration in credit quality or requiring a materially higher loan-loss provision.
- Whether funding costs, brokered-deposit reliance, and the 108.2% loan-to-deposit ratio remain manageable as the balance sheet grows.
- Whether margin pressure, staffing and infrastructure expense growth, and efficiency trends affect future profitability.
- How interest-rate moves affect net interest income and the securities portfolio; the simulation is scenario-based and not a forecast.
- The timing and funding of the headquarters project, and the completed effects of the post-quarter share exchange and IPO proceeds.