Bridgewater Bancshares, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing was signed March 14, 2019. Quarterly results are unaudited. Unless otherwise noted, financial amounts are in U.S. dollars.
Business context
Bridgewater Bancshares is a Minnesota-based financial holding company operating Bridgewater Bank and related subsidiaries. Its seven full-service offices serve the Minneapolis–St. Paul area. The bank focuses on commercial lending, particularly commercial real estate, and funds growth through customer deposits and borrowings. It completed its IPO in March 2018.
Financial performance and condition
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Total assets at year-end | $1.974 billion | $1.617 billion | Up 22.1% |
| Gross loans at year-end | $1.665 billion | $1.347 billion | Up 23.6% |
| Deposits at year-end | $1.561 billion | $1.339 billion | Up 16.5% |
| Net interest income | $64.7 million | $54.2 million | Up 19.5% |
| Net income | $26.9 million | $16.9 million | Up 59.4% |
| Diluted earnings per share | $0.91 | $0.68 | Up 35.5% |
| Return on average assets / equity | 1.51% / 13.87% | 1.16% / 13.18% | 2017 included a $2.0 million tax-law-related charge |
| Net interest margin, tax-equivalent | 3.72% | 3.92% | Down 20 basis points |
| Efficiency ratio | 46.5% | 44.4% | Adjusted ratio, excluding tax-credit amortization, was 41.7% vs. 41.1% |
- Profit drivers and costs: Interest income rose to $85.2 million, while interest expense increased to $20.5 million from $12.2 million, reflecting higher funding costs and larger balances. Loan yield improved to 5.23% from 5.10%; cost of interest-bearing liabilities rose to 1.65% from 1.19%.
- Credit: Provision for loan losses was $3.6 million, down from $4.2 million. Allowance was $20.0 million, or 1.20% of gross loans. Nonperforming loans were $581,000 (0.03% of loans), versus $1.139 million a year earlier; net charge-offs were $46,000.
- Cash flow: Operating cash flow was $29.4 million; investing cash flow was $(354.2) million, mainly reflecting loan growth and securities purchases; financing cash flow was $329.5 million, including deposit growth and IPO proceeds. Cash and cash equivalents increased $4.7 million to $28.4 million.
- Capital and equity: Shareholders’ equity was $221.0 million, up 61.1%, primarily due to $58.9 million of net IPO proceeds and earnings, partly offset by a decline in accumulated other comprehensive income. Tangible common equity to tangible assets was 11.03%, versus 8.26%.
- Debt and funding: Year-end borrowings included $18.0 million federal funds purchased, $15.0 million notes payable, $124.0 million FHLB advances, and $24.6 million net subordinated debentures. The loan-to-deposit ratio was 106.7%. Brokered deposits were $291.2 million, or 18.7% of deposits; core deposits were 74.2% of deposits.
- Liquidity: Primary liquidity was $281.8 million and reported secondary borrowing capacity was $326.2 million. The company reported compliance with its liquidity guidelines. Its 10 largest depositor relationships represented 18.1% of deposits.
Material changes versus prior period
- Loan growth was led by multifamily loans, up 28.3% to $407.9 million; construction and land development loans, up 60.8% to $210.0 million; and nonowner-occupied commercial real estate loans, up 18.2% to $490.6 million.
- Commercial real estate loans, as defined in the filing, were 66.6% of gross loans and 480.2% of bank risk-based capital. Approximately 84.1% of gross loans had real estate as a primary component of collateral.
- Interest expense rose faster than net interest income, contributing to the decline in net interest margin. Noninterest expense increased 23.8% to $31.6 million, driven mainly by staffing, tax-credit investment amortization, technology and marketing. Headcount increased to 140 from 114.
- The federal corporate tax rate fell to 21% in 2018. Income-tax provision declined to $5.2 million from $10.1 million; the 2018 effective combined tax rate was 16.3%, including recognized tax-credit benefits. The 2017 result included a $2.0 million deferred-tax-asset revaluation charge.
- The company raised $58.9 million net in its March 2018 IPO and contributed $25.0 million of proceeds to the Bank. In October, it exchanged all remaining non-voting common shares for voting common shares.
Outlook, commentary, risks and unusual items
- Management intends to pursue organic growth in its Twin Cities market, expand core deposits, continue commercial lending, and consider complementary acquisitions opportunistically. The filing provides no specific numeric earnings or growth guidance.
- Management expects expense growth as it invests in staffing, technology and risk controls, while stating it aims to contain costs. Construction of a new headquarters in St. Louis Park is subject to a guaranteed maximum price of $23.0 million, with completion expected in 2020; approximately $2.0 million had been paid by year-end.
- Key risks include concentrated commercial real estate exposure, large borrower and depositor relationships, reliance on brokered and other wholesale funding, local-market concentration, interest-rate and liquidity risk, and credit risk as a rapidly growing loan portfolio seasons.
- The interest-rate simulation estimated net interest income would rise 11.02% under an immediate, sustained 300-basis-point increase and fall 5.88% under a 100-basis-point decrease. These are hypothetical model results, not forecasts.
- The filing identifies uncertainty around IRS treatment of the captive insurance subsidiary and tax-credit structures. It also highlights cybersecurity, third-party service providers, regulatory compliance, and execution risks related to growth and the headquarters project.
- No material pending legal proceedings were reported beyond routine business litigation. The auditor issued an unqualified opinion on the financial statements; neither management nor the auditor provided an audit opinion on internal control over financial reporting under the company’s new-public-company transition relief. Disclosure controls were reported effective.
- After year-end, the board authorized a discretionary repurchase program of up to $15 million over 24 months. The company said it did not expect to pay common-stock dividends in the foreseeable future.
Most important facts for investors to verify
- Whether loan growth and credit quality remain sound as the portfolio seasons, particularly in construction and commercial real estate lending.
- Whether deposit growth can keep pace with lending without further margin pressure or increased reliance on brokered and wholesale funding.
- How deposit repricing, interest rates and asset-liability management affect net interest margin and the sensitivity shown in the filing’s simulation.
- The sustainability and accounting treatment of tax-credit benefits, related amortization expense, and the captive-insurance and municipal-investment structures.
- Actual total cost, timing and operational impact of the new headquarters project, and whether the share repurchase program is used.
- Future capital and liquidity levels, regulatory requirements, and internal-control disclosures as the company’s public-company reporting obligations evolve.