Bridgewater Bancshares, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited consolidated results; dollar amounts below are in millions unless otherwise noted. Comparisons are with the corresponding 2017 period or, for balance-sheet items, the stated prior date.
Business context and financial performance
Bridgewater is a Minnesota-based financial holding company whose bank focuses on commercial and retail lending and deposits, principally in the Minneapolis–St. Paul–Bloomington area. Net interest income is its primary revenue source.
- Q2 revenue and earnings: Net interest income was $15.9 million, up 21.6% year over year; net income was $6.75 million, up 40.6%. Diluted EPS was $0.22 versus $0.19.
- First-half results: Net interest income was $30.7 million, up 21.4%; net income was $12.7 million, up 43.0%. Diluted EPS was $0.45 versus $0.36.
- Margins and costs: Tax-equivalent net interest margin was 3.82% in Q2 and 3.80% for the first half, down from 3.94% and 3.95%, respectively. The Q2 yield on interest-earning assets rose to 4.88% from 4.72%, while the cost of interest-bearing liabilities increased to 1.52% from 1.12%. Efficiency ratio was 39.0% for Q2 and 40.8% for the first half, compared with 38.3% and 39.7%.
- Noninterest items and taxes: Q2 noninterest income was $0.49 million, essentially flat; first-half income declined 9.7% to $0.87 million, mainly reflecting lower gains on foreclosed-asset sales. Q2 noninterest expense rose 22.6% to $6.46 million, driven primarily by compensation and staffing. The effective tax rate fell to 25.2% in Q2 and 25.5% for the first half, from 35.7% and 36.2%, following the federal corporate tax-rate reduction.
Financial position, cash flow and credit
- Assets and lending: Total assets were $1.753 billion at June 30, up 8.4% from year-end 2017 and 21.1% from June 2017. Gross loans were $1.463 billion, up 8.6% from year-end and 24.8% year over year. Growth was concentrated in nonowner-occupied commercial real estate (CRE), construction and land development, and multifamily lending.
- Concentration and credit quality: CRE, including construction and land development, totaled $975.8 million, or 66.7% of gross loans, and 461.8% of the Bank’s capital. Nonaccrual loans were $0.75 million, down from $1.14 million at year-end; nonperforming assets were $0.89 million versus $1.72 million. The allowance was $17.7 million, or 1.21% of gross loans. First-half net charge-offs were $0.34 million, including a $0.36 million construction and land development charge-off in Q2. Watch and substandard loans totaled $20.1 million. Troubled debt restructurings were four loans totaling $0.58 million, versus nine loans totaling $3.0 million at year-end.
- Funding, debt and liquidity: Deposits were $1.415 billion, up 5.6% from year-end. Brokered deposits were $230.7 million, or 16.3% of deposits; the loan-to-deposit ratio was 103.4%. At quarter-end, borrowings included $84.0 million of FHLB advances, $16.0 million of notes payable and $24.6 million of subordinated debentures; federal funds purchased were zero. Primary liquidity was $268.0 million, and disclosed primary plus secondary liquidity was $676.4 million, equal to 47.8% of deposits. Available FHLB borrowing capacity was $240.1 million.
- Cash flow, first half: Operating cash flow was $12.4 million, investing cash outflow was $140.4 million, and financing cash inflow was $126.2 million. Cash and cash equivalents declined $1.8 million to $21.9 million. Financing included $58.9 million of IPO proceeds.
- Capital and securities: Shareholders’ equity rose to $205.9 million, primarily reflecting IPO proceeds and earnings, partly offset by a $3.0 million decline in accumulated other comprehensive income. The Bank reported a 12.44% common equity Tier 1 ratio and an 11.32% leverage ratio and exceeded the stated well-capitalized thresholds. Available-for-sale securities were $246.1 million; unrealized losses were $4.26 million, principally attributed to interest-rate movements, and management reported no other-than-temporary impairment.
Changes, outlook, risks and unusual items
- Loan growth drove higher interest income, but deposit and borrowing costs rose faster than asset yields, compressing net interest margin. Management attributed this partly to higher rates and increased use of non-core funding.
- The March 2018 IPO generated $58.9 million of net proceeds for the Company; $25.0 million had been contributed to the Bank by June 30. The filing reports no material change in the planned use of proceeds.
- Management expects noninterest expense to increase as it invests in staff, technology, infrastructure and risk controls. No specific earnings or balance-sheet guidance is provided.
- The Company said it intended to sign a near-term construction contract of approximately $24 million for a new headquarters in St. Louis Park, with additional interior build-out contracts anticipated.
- Interest-rate simulation estimated that an immediate, sustained +300 basis-point shift would increase 12-month net interest income 10.66%, while a −100 basis-point shift would reduce it 4.25%. The filing cautions that actual results may differ materially from this static-balance-sheet model.
- Principal disclosed risks include CRE and other loan concentrations, borrower and real-estate credit quality, liquidity and reliance on non-core funding, funding costs, interest-rate and securities valuation changes, growth and expense management, cybersecurity and technology risks, and regulatory changes. The filing reports no material pending legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Track margin and funding-cost trends, especially brokered deposits, deposit repricing and the 103.4% loan-to-deposit ratio.
- Review CRE concentration, construction lending, watch/substandard classifications, charge-offs and allowance adequacy as the loan book expands.
- Assess the effect of securities valuation changes on accumulated other comprehensive income and capital.
- Confirm the final headquarters project commitment and expected total cost, including planned interior work.
- Reconcile reported share counts: the June 30 balance sheet lists 2,823,542 non-voting shares, while the cover page lists 2,832,542 as of August 7, 2018.