Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ________
Commission File Number 001-38412
BRIDGEWATER BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Minnesota(State or other jurisdiction ofincorporation or organization)
26‑0113412(I.R.S. EmployerIdentification No.)
3800 American Boulevard West, Suite 100Bloomington, Minnesota(Address of principal executive offices)
55431(Zip Code)
(952) 893‑6868
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
Non‑accelerated filer
☒ (Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the Common Stock outstanding as of May 8, 2018 was 27,235,832.
The number of shares of the Non-voting Common Stock outstanding as of May 8, 2018 was 2,832,542.
PART I FINANCIAL INFORMATION
3
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets
Consolidated Statements of Income
4
Consolidated Statements of Comprehensive Income
5
Consolidated Statements of Shareholders’ Equity
6
Consolidated Statements of Cash Flows
7
Notes to Consolidated Financial Statements
8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
Item 3. Quantitative and Qualitative Disclosures About Market Risk
48
Item 4. Controls and Procedures
50
PART II OTHER INFORMATION
51
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
52
2
PART 1 – FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Bridgewater Bancshares, Inc. and Subsidiaries
(dollars in thousands, except share data)
March 31,
December 31,
2018
2017
(Unaudited)
ASSETS
Cash and Cash Equivalents
$
20,125
23,725
Bank-owned Certificates of Deposits
3,803
3,072
Securities Available for Sale, at Fair Value
236,819
229,491
Loans, Net of Allowance for Loan Losses of $17,121 at March 31, 2018 and $16,502 at December 31, 2017
1,384,169
1,326,507
Federal Home Loan Bank (FHLB) Stock, at Cost
5,214
5,147
Premises and Equipment, Net
10,151
10,115
Foreclosed Assets
288
581
Accrued Interest
5,753
5,342
Goodwill
2,626
Other Intangible Assets, Net
1,195
1,243
Other Assets
11,454
8,763
Total Assets
1,681,597
1,616,612
LIABILITIES AND EQUITY
LIABILITIES
Deposits:
Noninterest Bearing
315,036
292,539
Interest Bearing
1,038,000
1,046,811
Total Deposits
1,353,036
1,339,350
Federal Funds Purchased
9,000
23,000
Notes Payable
16,500
17,000
FHLB Advances
73,000
68,000
Subordinated Debentures, Net of Issuance Costs
24,552
24,527
Accrued Interest Payable
1,085
1,408
Other Liabilities
5,385
6,165
Total Liabilities
1,482,558
1,479,450
SHAREHOLDERS' EQUITY
Preferred Stock- $0.01 par value
Authorized 10,000,000; None Issued and Outstanding at March 31, 2018 (unaudited) and December 31, 2017
—
Common Stock- $0.01 par value
Common Stock - Authorized 75,000,000; Issued and Outstanding 27,235,832 at March 31, 2018 (unaudited) and 20,834,001 at December 31, 2017
272
208
Non-voting Common Stock- Authorized 10,000,000; Issued and Outstanding 2,823,542 at March 31, 2018 (unaudited) and 3,845,860 at December 31, 2017
28
38
Additional Paid-In Capital
125,326
66,324
Retained Earnings
75,264
69,508
Accumulated Other Comprehensive Income (Loss)
(1,851)
1,084
Total Shareholders' Equity
199,039
137,162
Total Liabilities and Equity
See accompanying notes to consolidated financial statements.
(dollars in thousands, except per share data)
Three Months Ended
INTEREST INCOME
Loans, Including Fees
17,048
13,192
Investment Securities
1,567
1,359
Other
95
61
Total Interest Income
18,710
14,612
INTEREST EXPENSE
Deposits
3,009
2,018
152
167
299
187
Subordinated Debentures
369
118
49
Total Interest Expense
3,947
2,421
NET INTEREST INCOME
14,763
12,191
Provision for Loan Losses
600
950
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
14,163
11,241
NONINTEREST INCOME
Customer Service Fees
170
Net Gain on Sales of Available for Sale Securities
31
Net Gain on Sales of Foreclosed Assets
39
Other Income
213
258
Total Noninterest Income
387
480
NONINTEREST EXPENSE
Salaries and Employee Benefits
4,318
3,168
Occupancy and Equipment
574
549
Other Expense
1,640
1,537
Total Noninterest Expense
6,532
5,254
INCOME BEFORE INCOME TAXES
8,018
6,467
Provision for Income Taxes
2,068
2,384
NET INCOME
5,950
4,083
EARNINGS PER SHARE
Basic
0.23
0.17
Diluted
0.16
Dividends Paid Per Share
(dollars in thousands)
Net Income
Other Comprehensive Income (Loss):
Unrealized Gains (Losses) on Available for Sale Securities
(4,147)
1,890
Unrealized Gain on Cash Flow Hedge
119
Reclassification Adjustment for Gains Realized in Income
(31)
Income Tax Impact
899
(668)
Total Other Comprehensive Income (Loss), Net of Tax
(3,129)
1,240
Comprehensive Income
2,821
5,323
Three Months Ended March 31, 2018 and 2017
Accumulated
Additional
Shares
Common Stock
Paid-‑In
Retained
Comprehensive
Voting
Nonvoting
Capital
Earnings
Income (Loss)
Total
BALANCE December 31, 2016
20,744,001
3,845,860
207
65,777
52,619
(3,275)
115,366
Stock-based Compensation
53
BALANCE March 31, 2017
65,830
56,702
(2,035)
120,742
BALANCE December 31, 2017
20,834,001
199
Comprehensive Income (Loss)
Issuance of Common Stock, Net of Issuance Costs
5,379,513
54
58,803
58,857
Conversion of Non-voting Stock to Voting Stock
1,022,318
(1,022,318)
10
(10)
Reclassification of the Income Tax Effects of the Tax Cuts and Jobs Act to Retained Earnings
(194)
194
BALANCE March 31, 2018
27,235,832
2,823,542
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Net Amortization on Securities Available for Sale
699
738
Net Gain on Sales of Securities Available for Sale
Depreciation and Amortization of Premises and Equipment
184
175
Amortization of Other Intangible Assets
Amortization of Subordinated Debt Issuance Costs
25
Net Gain on Sale of Foreclosed Assets
(4)
(39)
Changes in Operating Assets and Liabilities:
Accrued Interest Receivable and Other Assets
(2,084)
732
Accrued Interest Payable and Other Liabilities
(1,103)
1,755
Net Cash Provided by Operating Activities
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in Bank-owned Certificates of Deposit
(731)
(831)
Proceeds from Sales of Securities Available for Sale
565
Proceeds from Maturities, Paydowns, Payups and Calls of Securities Available for Sale
5,345
6,907
Purchases of Securities Available for Sale
(17,519)
(18,932)
Net Increase in Loans
(58,262)
(84,540)
Net (Increase) Decrease in FHLB Stock
(67)
843
Purchases of Premises and Equipment
(220)
(714)
Proceeds from Sales of Foreclosed Assets
297
1,414
Net Cash Used in Investing Activities
(71,157)
(95,288)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in Deposits
13,686
118,329
Net Decrease in Federal Funds Purchased
(14,000)
(31,000)
Principal Payments on Notes Payable
(500)
Proceeds from FHLB Advances
5,000
Issuance of Common Stock
Net Cash Provided by Financing Activities
63,043
86,829
NET CHANGE IN CASH AND CASH EQUIVALENTS
(3,600)
Cash and Cash Equivalents Beginning
16,499
Cash and Cash Equivalents Ending
16,504
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash Paid for Interest
3,828
2,413
Cash Paid for Income Taxes
2,150
Loans Transferred to Foreclosed Assets
689
Note 1: Description of the Business and Summary of Significant Accounting Policies
Organization
Bridgewater Bancshares, Inc. (the “Company”) is a financial holding company whose operations are the ownership of its wholly-owned subsidiaries, Bridgewater Bank (the “Bank”) and Bridgewater Risk Management, Inc. The Bank commenced operations in 2005 and provides retail and commercial loan and deposit services, principally to customers within the Minneapolis-St. Paul-Bloomington, MN-WI Metropolitan Statistical Area. In 2008, the Bank formed BWB Holdings, LLC, a wholly owned subsidiary of the Bank, for the purpose of holding repossessed property.
Bridgewater Risk Management was incorporated on December 28, 2016, as a wholly-owned insurance company subsidiary of the Company. It insures the Company and its subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. Bridgewater Risk Management pools resources with several other insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.
Initial Public Offering
On March 16, 2018, the Company completed an initial public offering (“IPO”) and received net proceeds, after deducting underwriting discounts and offering expenses, of $58.9 million for the shares of common stock sold by the Company in the offering.
Basis of Presentation
The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10‑Q and, therefore, do not include all disclosures necessary for a complete presentation of the consolidated balance sheets, consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of shareholders’ equity and consolidated statements of cash flows in conformity with U.S. generally accepted accounting principles (GAAP). However, all normal recurring adjustments which are, in the opinion of management, necessary for the fair presentation of the interim financial statements have been included. The results of operations for the three-month period ended March 31, 2018 are not necessarily indicative of the results which may be expected for the entire year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s prospectus filed with the Securities and Exchange Commission (“SEC”) on March 14, 2018, pursuant to Rule 424(b)(4) under the Securities Act of 1933.
Principles of Consolidation
These consolidated financial statements include the amounts of the Company, the Bank and Bridgewater Risk Management. All significant intercompany balances and transactions have been eliminated in consolidation.
Emerging Growth Company
The Company qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act (the “JOBS Act”). Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. As an emerging growth company, the Company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. The Company elected to take advantage of the benefits of this extended transition period.
Impact of Recently Adopted Accounting Standards
In February 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018‑02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments of this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The Company elected to adopt ASU 2018-02 and, as a result, reclassified $194,000 from accumulated other comprehensive income to retained earnings as of January 1, 2018. The reclassification impacted the Consolidated Balance Sheet and the Consolidated Statement of Changes in Shareholders’ Equity as of and for the three months ended March 31, 2018.
Impact of Recently Issued Accounting Standards
The following ASUs have been issued by FASB and may impact the Company’s consolidated financial statements in future reporting periods.
In May 2014, the FASB issued ASU 2014‑09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014‑09”). ASU 2014‑09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014‑09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2015‑14, Revenue from Contracts with Customers (Topic 606) (“ASU 2015‑14”) was issued in August 2015 which defers adoption to annual reporting periods beginning after December 15, 2018 and interim reporting periods beginning after December 15, 2019. The timing of the Company’s revenue recognition is not expected to materially change. The Company’s largest portions of revenue, interest and fees on loans and gain on sales of loans, are specifically excluded from the scope of the guidance, and the Company currently recognizes the majority of the remaining revenue sources in a manner that management believes is consistent with the new guidance. Because of this, management believes that revenue recognized under the new guidance will generally approximate revenue recognized under current GAAP. These observations are subject to change as the evaluation is completed.
In January 2016, the FASB issued ASU 2016‑01, Financial Instruments—Overall (Subtopic 825‑10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016‑01”). This guidance changes how entities account for equity investments that do not result in consolidation and are not accounted for under the equity method of accounting. Entities will be required to measure these investments at fair value at the end of each reporting period and recognize changes in fair value in net income. A practicability exception will be available for equity investments that do not have readily determinable fair values; however, the exception requires the Company to adjust the carrying amount for impairment and observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This guidance also changes certain disclosure requirements and other aspects of current GAAP. This guidance is effective for fiscal years beginning after December 15, 2018 and for interim reporting periods beginning after December 15, 2019. Early adoption is permitted for only one of the six amendments. The Company is evaluating the impact this new standard will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016‑02, Leases (Topic 842) (“ASU 2016‑02”). The new guidance establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. Entities will be required to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. This guidance is effective for fiscal years beginning after December 15, 2019 and interim reporting periods beginning after December 15, 2020. The Company is currently evaluating the impact of the adoption of ASU 2016‑02 to determine the potential impact it will have on its consolidated financial statements. The Company’s assets and liabilities will increase based on the present value of the remaining lease payments for leases in place at the adoption date; however, this is not expected to be
9
material to the Company’s results of operations. The Company is evaluating the impact this new standard will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016‑05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (“ASU 2016‑05”). The new guidance clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance is effective for fiscal years beginning after December 15, 2017 and interim reporting periods beginning after December 15, 2018. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU 2016‑09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016‑09”). The new guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Entities will be required to recognize the income tax effects of awards in the income statement when the awards vest or are settled. This guidance is effective for fiscal years beginning after December 15, 2017 and interim reporting periods beginning after December 31, 2018. The adoption of this ASU is not expected to have a significant impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016‑13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU affect all entities that measure credit losses on financial instruments including loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial asset that has a contractual right to receive cash that is not specifically excluded. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this ASU replace the incurred loss impairment methodology required in current GAAP with a methodology that reflects expected credit losses that requires consideration of a broader range of reasonable and supportable information to estimate credit losses. The amendments in this ASU will affect entities to varying degrees depending on the credit quality of the assets held by the entity, the duration of the assets held, and how the entity applies the current incurred loss methodology. The amendments in this ASU are effective for fiscal years beginning after December 15, 2020 and interim reporting periods beginning after December 15, 2021.
All entities may adopt the amendments in the ASU early as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Amendments should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The Company is evaluating the impact this new standard will have on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017‑03, Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323). The amendments in the ASU add and amend SEC paragraphs pursuant to the SEC staff announcement at the September 22, 2016 and November 17, 2016, Emerging Issues Task Force (EITF) meetings. The September announcement is about the disclosure of the impact that recently issued accounting standards will have on the financial statements of a registrant when such standards are adopted in a future period. The announcement applies to ASU 2014‑09, Revenue from Contracts with Customers (Topic 606); ASU 2016‑02, Leases (Topic 842); and ASU 2016‑13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and to any subsequent amendments to these ASUs that are issued prior to their adoption. The November announcement made amendments to conform the SEC Observer comment on accounting for tax benefits resulting from investments in qualified affordable housing projects to the guidance issued in Accounting Standards Update No. 2014‑01, Investments-Equity Method and Joint Ventures (Topic 323); Accounting for Investments in Qualified Affordable Housing Projects. This ASU is intended to improve transparency and is effective upon issuance. The adoption of this ASU is not anticipated to have a material impact on the Company’s consolidated financial
statements other than to enhance the disclosures on the effects of new accounting pronouncements as they move closer to adoption in future periods.
In January 2017, the FASB issued ASU 2017‑04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU were issued to address concerns over the cost and complexity of the two-step goodwill impairment test and resulted in the removal of the second step of the test. The amendments require an entity to apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. This ASU is intended to reduce the cost and complexity of the two-step goodwill impairment test and is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2021, with early adoption permitted for testing performed after January 1, 2017. Upon adoption, the amendments should be applied on a prospective basis and the entity is required to disclose the nature of and reason for the change in accounting principle upon transition. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
In March 2017, the FASB issued ASU 2017‑08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310‑20): Premium Amortization on Purchased Callable Debt Securities. The amendments in this ASU shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount as discounts continue to be accreted to maturity. This ASU is intended to more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. In most cases, market participants price securities to the call date that produces the worst yield when the coupon is above current market rates and prices securities to maturity when the coupon is below market rates. As a result, the amendments more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. This ASU is intended to reduce diversity in practice and is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. Upon adoption, the amendments should be applied using a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principles. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017‑09, Compensation- Stock Compensation (Topic 718). The amendments in this ASU provide clarity about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The ASU is effective for all entities for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years with early adoption permitted. The Company is evaluating the impact this new standard will have on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017‑12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments of this ASU better align an entity’s accounting and financial reporting for hedging activities with the economic objectives of those activities. The ASU is effective for fiscal years beginning after December 15, 2019 and interim reporting periods beginning after December 15, 2020, with early adoption permitted. The Company is evaluating the impact this new standard with have on its consolidated financial statements.
11
Note 2: Earnings Per Share
Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per common share are calculated by dividing net income by the weighted average number of shares adjusted for the dilutive effect of stock options. The dilutive effect was computed using the treasury stock method, which assumes the stock options were exercised and the hypothetical proceeds from the exercise were used by the Company to purchase common stock at the average market price during the period.
The following table presents the numerators and denominators for basic and diluted earnings per share computations for the three months ended March 31, 2018 and 2017:
Net Income Available to Common Shareholders
Weighted Average Common Stock Outstanding:
Weighted Average Common Stock Outstanding (Basic)
25,755,764
24,589,861
Stock Options
415,669
208,892
Weighted Average Common Stock Outstanding (Dilutive)
26,171,433
24,798,753
Basic Earnings per Common Share
Diluted Earnings per Common Share
Note 3: Securities
The following tables present the amortized cost and estimated fair value of securities with gross unrealized gains and losses at March 31, 2018 and December 31, 2017:
March 31, 2018
Gross
Amortized
Unrealized
Cost
Gains
Losses
Fair Value
Securities Available for Sale:
Municipal Bonds
120,457
1,185
(1,705)
119,937
Mortgage-Backed Securities
63,073
(2,074)
61,026
Corporate Securities
7,019
74
(19)
7,074
SBA Securities
49,076
172
(466)
48,782
Total Securities Available for Sale
239,625
1,458
(4,264)
December 31, 2017
115,784
3,005
(469)
118,320
61,945
(1,275)
60,681
5,052
80
(25)
5,107
45,368
242
(227)
45,383
228,149
3,338
(1,996)
12
The following table shows the fair value and gross unrealized losses of securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:
Less Than 12 Months
12 Months or Greater
47,304
(884)
20,596
(821)
67,900
20,005
(395)
38,635
(1,679)
58,640
968
2,031
2,999
25,419
(405)
3,717
(61)
29,136
93,696
(1,684)
64,979
(2,580)
158,675
15,043
(89)
21,111
(380)
36,154
16,046
(105)
41,800
(1,170)
57,846
2,028
15,634
(189)
3,775
(38)
19,409
46,723
(383)
68,714
(1,613)
115,437
At March 31, 2018, 199 debt securities had unrealized losses with aggregate depreciation of approximately 2% from the Company’s amortized cost basis. At December 31, 2017, 133 debt securities had unrealized losses with aggregate depreciation of approximately 1% from the Company’s amortized cost basis. These unrealized losses relate principally to changes in interest rates and are not due to changes in the financial condition of the issuer, the quality of any underlying assets, or applicable credit enhancements. In analyzing whether unrealized losses on debt securities are other than temporary, management considers whether the securities are issued by a government body or agency, whether a rating agency has downgraded the securities, industry analysts’ reports, the financial condition and performance of the issuer, and the quality of any underlying assets or credit enhancements. Since management has the ability and intent to hold debt securities for the foreseeable future, no declines were deemed to be other than temporary as of March 31, 2018.
The following is a summary of amortized cost and estimated fair value of debt securities by the lesser of expected call date or contractual maturity as of March 31, 2018. Call date is used when a call of the debt security is expected, determined by the Company when the security has a market value above its amortized cost. Contractual maturities will differ from expected maturities for mortgage-backed and SBA securities because borrowers may have the right to call or prepay obligations without penalties.
Amortized Cost
Due in One Year or Less
2,030
2,033
Due After One Year Through Five Years
14,388
14,515
Due After Five Years Through 10 Years
50,242
50,399
Due After 10 Years
60,816
60,064
Subtotal
127,476
127,011
Totals
As of March 31, 2018, the amortized cost and fair value of securities pledged to secure public deposits and for other purposes required or permitted by law were $64,413 and $64,288, respectively. As of December 31, 2017, the amortized cost and fair value of securities pledged to secure public deposits and for other purposes required or permitted by law were $79,400 and $81,639, respectively.
13
The following is a summary of the proceeds from sales of securities available for sale, as well as gross gains and losses, for the three months ended March 31, 2018 and 2017:
Proceeds From Sales of Securities
Gross Gains on Sales
Gross Losses on Sales
Note 4: Loans
The following table presents the components of loans at March 31, 2018 and December 31, 2017:
Commercial
199,262
217,753
Construction and Land Development
147,842
130,586
Real Estate Mortgage:
1-4 Family Mortgage
200,573
195,707
Multifamily
332,770
317,872
CRE Owner Occupied
67,512
65,909
CRE Non-owner Occupied
453,498
415,034
Total Real Estate Mortgage Loans
1,054,353
994,522
Consumer and Other
3,963
4,252
Total Loans, Gross
1,405,420
1,347,113
Net Deferred Loan Fees
(4,130)
(4,104)
Allowance for Loan Losses
(17,121)
(16,502)
Total Loans, Net
The following table presents the activity in the allowance for loan losses, by segment, for the three months ended March 31, 2018 and 2017:
Construction
CRE
and Land
1-‑4 Family
Owner
Non‑owner
Consumer
Three Months Ended March 31, 2018
Development
Mortgage
Occupied
and Other
Unallocated
Allowance for Loan Losses:
Beginning Balance
2,435
1,892
2,317
3,170
956
5,087
60
585
16,502
(230)
(127)
91
306
(42)
320
1
281
Loans Charged-off
(12)
Recoveries of Loans
20
Total Ending Allowance Balance
2,225
1,765
2,418
3,476
914
5,407
866
17,121
Three Months Ended March 31, 2017
1,315
1,379
2,410
1,568
1,160
3,323
78
1,100
12,333
122
168
(13)
485
411
(277)
(1)
(74)
(5)
(80)
1,437
1,549
2,407
2,053
1,213
3,660
823
13,216
14
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by segment based on impairment method as of March 31, 2018 and December 31, 2017:
1‑4 Family
Allowance for Loan Losses at March 31, 2018
Individually Evaluated for Impairment
23
94
Collectively Evaluated for Impairment
2,211
2,369
3,468
891
17,027
Allowance for Loan Losses at December 31, 2017
57
24
109
2,260
3,156
932
16,393
Loans at March 31, 2018
575
1,920
65
674
70
3,318
199,248
147,267
198,653
332,705
66,838
3,893
1,402,102
Loans at December 31, 2017
583
1,693
66
2,165
75
4,596
217,739
130,003
194,014
317,806
63,744
4,177
1,342,517
The following tables present information regarding impaired loans by loan segment as of, and for the periods ended, March 31, 2018 and December 31, 2017:
Recorded
Principal
Related
Average
Interest
Investment
Balance
Allowance
Recognized
Loans With No Related Allowance for Loan Losses:
827
579
HELOC and 1-4 Family Junior Mortgage
494
506
508
1st REM - 1-4 Family
124
1st REM - Rentals
1,107
1,113
516
524
87
72
2,884
3,165
2,920
Loans With An Allowance for Loan Losses:
LOCs and 2nd REM - Rentals
64
46
133
134
158
159
434
436
Grand Totals
3,599
3,356
15
833
594
515
537
125
130
726
739
34
2,006
2,023
2,042
97
92
4,023
4,314
4,139
151
47
270
276
161
573
582
4,887
4,721
178
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The process of analyzing loans for changes in risk rating is ongoing through routine monitoring of the portfolio and annual internal credit reviews for credits meeting certain thresholds.
The following tables present the risk category of loans by loan segment as of March 31, 2018 and December 31, 2017, based on the most recent analysis performed by management:
Pass
Watch
Substandard
197,401
1,840
21
145,538
1,729
24,915
500
335
25,750
34,287
34,420
13,564
223
13,787
125,376
126,616
59,814
5,124
2,574
450,218
3,280
1,387,711
12,473
5,236
16
28,238
347
28,585
33,219
33,344
13,409
225
13,634
118,891
1,253
120,144
63,290
2,619
409,533
5,501
1,336,305
5,307
The following tables present the aging of the recorded investment in past due loans by loan segment as of March 31, 2018 and December 31, 2017:
Accruing Interest
30-89 Days
90 Days or
Current
Past Due
More Past Due
Nonaccrual
199,233
25,415
3,888
1,404,273
19
1,128
217,734
13,474
160
119,876
268
65,686
4,174
1,345,310
664
1,139
17
At March 31, 2018, there were nine loans classified as troubled debt restructurings with a current outstanding balance of $2.9 million. In comparison, at December 31, 2017, there were nine loans classified as troubled debt restructurings with an outstanding balance of $3.0 million. There were no new loans classified as troubled debt restructurings during the three month period ended March 31, 2018 and no loans classified as troubled debt restructurings during the previous twelve months that subsequently defaulted during the three months ended March 31, 2018.
Note 5: Deposits
The following table presents the composition of deposits at March 31, 2018 and December 31, 2017:
Transaction Deposits
479,935
469,831
Savings and Money Market Deposits
339,541
369,942
Brokered Deposits
228,817
207,481
Time Deposits
304,743
292,096
Note 6: Subordinated Debentures
On July 12, 2017, the Company entered into a Subordinated Note Purchase Agreement with certain institutional accredited investors (the “Purchasers”) whereby the Company sold and issued $25,000 in aggregate principal amount of fixed-to-floating subordinated notes due 2027 (the “Notes”). The Notes were issued by the Company to the Purchasers at a price equal to 100% of their face amount. Issuance costs were $516 and have been netted against Subordinated Debt on the consolidated balance sheets. These costs are being amortized over five years, which represents the period from issuance to the first redemption date of July 15, 2022. Total amortization expense for the three months ended March 31, 2018 was $25, with $448 remaining to be amortized as of March 31, 2018.
The Notes mature on July 15, 2027, with a fixed interest rate of 5.875% payable semiannually in arrears for five years until July 15, 2022. Thereafter, the Company will be obligated to pay interest at a rate equal to 3‑month LIBOR plus 388 basis points quarterly in arrears until either the early redemption date or the maturity date. The Notes are not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries. The Notes are redeemable by the Company, in whole or in part, on or after July 15, 2022, and at any time upon the occurrence of certain events. Any redemption by the Company would be at a redemption price equal to 100% of the outstanding principal amount of the Notes being redeemed, including any accrued and unpaid interest thereon.
Note 7: Commitments, Contingencies and Credit Risk
Financial Instruments with Off-Balance Sheet Credit Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss is represented by the contractual, or notional, amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance sheet instruments. Since some of the commitments are expected to expire without being drawn upon and some of the commitments may not be drawn upon to the total extent of the commitment, the notional amount of these commitments does not necessarily represent future cash requirements.
18
The following commitments were outstanding at March 31, 2018 and December 31, 2017:
Unfunded Commitments Under Lines of Credit
344,424
309,513
Letters of Credit
69,082
64,546
413,506
374,059
Legal Contingencies
Neither the Company nor any of its subsidiaries is a party, and no property of these entities is subject, to any material pending legal proceedings, other than ordinary routine litigation incidental to the Bank’s business. The Company does not know of any proceeding contemplated by a governmental authority against the Company or any of its subsidiaries.
Note 8: Stock Options
In 2017, the Company approved the Bridgewater Bancshares, Inc. 2017 Combined Incentive and Non-Statutory Stock Option Plan (the “2017 Plan”). Under the 2017 Plan, the Company may grant options to its directors, officers, and employees for up to 1,500,000 shares of common stock. Both incentive stock options and nonqualified stock options may be granted under the Plan. The exercise price of each option equals the estimated market value of the Company’s stock on the date of grant and an option’s maximum term is ten years and a vesting period of five years. As of March 31, 2018, there were 659,000 of unissued shares of the Company’s common stock authorized for option grants under the 2017 Plan. Subsequent to March 31, 2018, the Company granted 25,000 stock options.
The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on an industry index as described below. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Historically, the Company has not paid a dividend on its common share and does not expect to do so in the near future.
The Company used the S&P 600 CM Bank Index as its historical volatility index. The S&P 600 CM Bank Index is an index of publicly traded small capitalization, regional, commercial banks located throughout the United States. There were 36 banks in the index ranging in market capitalization from $395 million up to $3.5 billion.
Dividend Yield
%
Expected Life
Years
Expected Volatility
21.86
Risk-Free Interest Rate
2.72
The following table presents a summary of the status of the Company’s stock option plans for the three months ended March 31, 2018:
Weighted
Exercise Price
Outstanding at Beginning of Year
1,721,000
5.68
Granted
7.78
Exercised
Forfeitures
Outstanding at Period End
1,726,000
Options Exercisable at Period End
533,000
2.88
Weighted-Average Value of Options Granted During the Period
2.91
The Company recognized $199 and $53 in compensation expense for stock options for the three months ended March 31, 2018 and 2017, respectively.
The following table presents information pertaining to options outstanding at March 31, 2018:
Options Outstanding
Options Exercisable
Number
Remaining
Outstanding
Contractual Life
1.65
15,000
3.6
2.13
90,000
5.0
72,000
3.00
520,000
5.8
416,000
3.58
50,000
6.8
30,000
7.47
1,046,000
9.5
9.8
8.0
As of March 31, 2018, there was $2,801 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan and is expected to be recognized over a period of five years.
The following is an analysis of nonvested options to purchase shares of the Company’s stock issued and outstanding for the three months ended March 31, 2018:
Number of
Average Grant
Date Fair Value
Nonvested Options at December 31, 2017
1,302,000
2.55
Vested
(114,000)
1.57
Forfeited
Nonvested Options at March 31, 2018
1,193,000
2.65
Note 9: Regulatory Capital
Effective January 1, 2015, the capital requirements of the Company and the Bank were changed to implement the regulatory requirements of the Basel III capital reforms. The Basel III requirements, among other things, (i) apply a strengthened set of capital requirements to the Company and Bank, including requirements related to common equity as a component of core capital, (ii) implement a “capital conservation buffer” against risk and higher minimum tier capital requirement, and (iii) revise the rules for calculating risk-weighted assets for purposes of such requirements. The rules made corresponding revisions to the prompt corrective action framework and include the new capital ratios and buffer requirements which will be phased in incrementally, with full implementation scheduled for January 1, 2019. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve qualitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the table and defined in the regulation) of Total Capital to Risk Weighted Assets, Tier 1 Capital to Risk Weighted Assets, Common Equity Tier 1 to Risk Weighted Assets, and Tier 1 Capital to average assets.
The following tables present the Company and the Bank’s capital amounts and ratios as of March 31, 2018 and December 31, 2017:
To be Well Capitalized
For Capital Adequacy
Under Prompt Corrective
Actual
Purposes
Action Regulations
Amount
Ratio
Company (Consolidated):
Total Risk-Based Capital
239,102
16.22
117,960
8.00
N/A
Tier 1 Risk-Based Capital
197,069
13.37
88,470
6.00
Common Equity Tier 1 Capital
66,353
4.50
Leverage Ratio
12.15
64,891
4.00
Bank:
203,526
13.86
117,451
146,813
10.00
186,045
12.67
88,088
66,066
95,429
6.50
11.51
64,630
80,788
5.00
173,848
12.46
111,638
132,459
9.49
83,729
62,797
8.38
63,264
171,805
12.37
111,134
138,918
154,943
11.15
83,351
62,513
90,297
9.83
63,060
78,825
The Bank must maintain a capital conservation buffer as defined by Basel III regulatory capital guidelines, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. For 2018 and 2017, the capital conservation buffer is 1.875% and 1.25%, respectively. The buffer will increase incrementally each year until 2019 when the entire 2.5% capital conservation buffer will be fully phrased-in.
Note 10: Fair Value Measurement
The Company categorizes its assets and liabilities measured at fair value into a three-level hierarchy based on the priority of the inputs to the valuation technique used to determine fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used in the determination of the fair value measurement fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement. Assets and liabilities valued at fair value are categorized based on the inputs to the valuation techniques as follows:
Level 1 – Inputs that utilized quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2 – Inputs that include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments. Fair values for these instruments are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.
Level 3 – Inputs that are unobservable for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity.
Subsequent to initial recognition, the Company may re-measure the carrying value of assets and liabilities measured on a nonrecurring basis to fair value. Adjustments to fair value usually result when certain assets are impaired. Such assets are written down from their carrying amounts to their fair value.
Professional standards allow entities the irrevocable option to elect to measure certain financial instruments and other items at fair value for the initial and subsequent measurement on an instrument-by-instrument basis. The Company adopted the policy to value certain financial instruments at fair value. The Company has not elected to measure any existing financial instruments at fair value; however, it may elect to measure newly acquired financial instruments at fair value in the future.
Recurring Basis
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The following table presents the balances of the assets and liabilities measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017:
Level 1
Level 2
Level 3
Interest Rate Swap
463
237,282
22
344
229,835
When available, the Company uses quoted market prices to determine the fair value of investment securities; such items are classified in Level 1 of the fair value hierarchy.
For the Company’s investments, when quoted prices are not available for identical securities in an active market, the Company determines fair value utilizing vendors who apply matrix pricing for similar bonds where no price is observable or may compile prices from various sources. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility factors, prepayment speeds, default rates, loss severity, current market, and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially, all of these assumptions are observable in the marketplace and can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Fair values from these models are verified, where possible, against quoted market prices for recent trading activity of assets with similar characteristics to the security being valued. Such methods are generally classified as Level 2. However, when prices from independent sources vary, or cannot be obtained or corroborated, a security is generally classified as Level 3.
Interest rate swaps are traded in over-the-counter markets where quoted market prices are not readily available. For those interest rate swaps, fair value is determined using internally developed models of a third party that uses primarily market observable inputs, such as yield curves and option volatilities and, accordingly are valued using Level 2 inputs.
Nonrecurring Basis
Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment or a change in the amount of previously recognized impairment.
The following tables present net impairment losses related to nonrecurring fair value measurements of certain assets for the periods ended March 31, 2018 and December 31, 2017:
Loss
Impaired Loans
340
464
In accordance with the provisions of the loan impairment guidance, impairment was measured for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, or discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceeds the recorded investments in such loans. Impaired loans for which an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. Collateral values are estimated using Level 2 inputs based on customized discounting criteria.
Impairment amounts on impaired loans represent specific valuation allowance and write-downs during the period presented on impaired loans that were individually evaluated for impairment based on the estimated fair value of the collateral less estimated selling costs, excluding impaired loans fully charged-off.
Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the consolidated balance sheets. In cases where quoted market prices are not available, fair values are based on estimates using present value of cashflow or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases could not be realized in immediate settlement of the instruments. Certain financial instruments with a fair value that is not practicable to estimate and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Company.
Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters that could affect the estimates. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business. Deposits with no stated maturities are defined as having a fair value equivalent to the amount payable on demand. This prohibits adjusting fair value derived from retaining those deposits for an expected future period of time. This component, commonly referred to as a deposit base intangible, is neither considered in the above amounts nor is it recorded as an intangible asset on the balance sheet. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.
The following tables present the carrying amount and estimated fair values of financial instruments at March 31, 2018 and December 31, 2017:
Fair Value Hierarchy
Carrying
Estimated
Financial Assets:
Cash and Due From Banks
Bank-Owned Certificates of Deposit
Securities Available for Sale
FHLB Stock, at Cost
Loans, Net
1,374,676
Accrued Interest Receivable
Financial Liabilities:
1,352,094
16,523
71,807
24,433
3,075
1,323,495
1,340,109
17,024
67,282
25,090
The following methods and assumptions were used by the Company to estimate fair value of consolidated financial statements not previously discussed.
Cash and cash equivalents – The carrying amount of cash and cash equivalents approximates their fair value.
Bank-owned certificates of deposit – Fair values of bank-owned certificates of deposit are estimated using the discounted cash flow analysis based on current rates for similar types of deposits.
FHLB stock – The carrying amount of FHLB stock approximates its fair value.
Loans, Net –Fair values for loans are estimated based on discounted cash flows, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality.
Accrued interest receivable – The carrying amount of accrued interest receivable approximates its fair value since it is short term in nature and does not present anticipated credit concerns.
Deposits – The fair values disclosed for demand deposits without stated maturities (interest and noninterest transaction, savings, and money market accounts) are equal to the amount payable on demand at the reporting date (their carrying amounts). Fair values for the fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Federal funds purchased – The carrying amount of federal funds purchased approximates the fair value.
Notes payable and subordinated debt – The fair value of the Company’s notes payable and subordinated debt are estimated using a discounted cash flow analysis, based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements.
FHLB advances – The fair values of the Company’s FHLB Advances are estimated using discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of borrowing agreements.
Accrued interest payable – The carrying amount of accrued interest payable approximates its fair value since it is short term in nature.
Off-balance-sheet instruments – Fair values of the Company’s off-balance-sheet instruments (lending commitments and unused lines of credit) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the counterparties’ credit standing and discounted cash flow analysis. The fair value of these off-balance-sheet items approximates the recorded amounts of the related fees and is not material at March 31, 2018 and December 31, 2017.
Limitations – The fair value of a financial instrument is the current amount that would be exchanged between market participants, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
26
General
The following discussion explains the Company’s financial condition and results of operations as of and for the three and months ended March 31, 2018. Annualized results for this interim period may not be indicative of results for the full year or future periods. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and the Company’s prospectus filed with the SEC on March 14, 2018, pursuant to Rule 424(b)(4) under the Securities Act of 1933.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements concerning plans, estimates, calculations, forecasts and projections with respect to the anticipated future performance of the Company. These statements are often, but not always, identified by words such as “may”, “might”, “should”, “could”, “predict”, “potential”, “believe”, “expect”, “continue”, “will”, “anticipate”, “seek”, “estimate”, “intend”, “plan”, “projection”, “would”, “annualized”, “target” and “outlook”, or the negative version of those words or other comparable words of a future or forward-looking nature. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:
·
loan concentrations in our portfolio;
the overall health of the local and national real estate market;
our ability to successfully manage credit risk;
business and economic conditions generally and in the financial services industry, nationally and within our market area;
our ability to maintain an adequate level of allowance for loan losses;
our high concentration of large loans to certain borrowers;
our ability to successfully manage liquidity risk;
our dependence on non-core funding sources and our cost of funds;
our ability to raise additional capital to implement our business plan;
our ability to implement our growth strategy and manage costs effectively;
the composition of our senior leadership team and our ability to attract and retain key personnel;
the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents;
interruptions involving our information technology and telecommunications systems or third-party servicers;
competition in the financial services industry;
the effectiveness of our risk management framework;
the commencement and outcome of litigation and other legal proceedings and regulatory actions against us;
the impact of recent and future legislative and regulatory changes;
interest rate risk;
fluctuations in the values of the securities held in our securities portfolio;
and any other risks described in the “Risk Factors” section of this report and in the prospectus filed with the SEC on March 14, 2018, pursuant to Rule 424(b)(4) under the Securities Act of 1933, as well as those set forth in other reports filed by the Company with the SEC.
Any forward-looking statement made by us in this report is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.
Overview
Bridgewater Bancshares, Inc. (the “Company”) is a financial holding company headquartered in Bloomington, Minnesota with two wholly-owned subsidiaries, Bridgewater Bank (the “Bank”) and Bridgewater Risk Management, Inc., a captive insurance entity. The Bank has six full-service offices located in Bloomington, St. Louis Park, Greenwood, Minneapolis (2), and Orono, Minnesota. The principal source of funds for loans and investments are transaction, savings, time, and other deposits, and short-term and long-term borrowings. The Company’s principal sources of income are interest and fees collected on loans, interest and dividends earned on investment securities and service charges. The Company’s principal expenses are interest paid on deposit accounts and borrowings, employee compensation and other overhead expenses. The Company’s simple, efficient business model of providing responsive support and unconventional experiences to clients, continues to be the underlying principle that drives the Company’s profitable growth.
Critical Accounting Policies and Estimates
The consolidated financial statements of the Company are prepared based on the application of certain accounting policies, the most significant of which are described in Note 1 of the notes to the consolidated financial statements included in the Company’s prospectus that was filed with the SEC on March 14, 2018, pursuant to Rule 424(b)(4) under the Securities Act of 1933. Certain of these policies require numerous estimates and strategic or economic assumptions that may prove inaccurate or subject to variation and may significantly affect the reported results and financial position for the current period or in future periods. The use of estimates, assumptions, and judgments are necessary when financial assets and liabilities are required to be recorded or adjusted to reflect fair value. Assets carried at fair value inherently result in more financial statement volatility. Fair values and information used to record valuation adjustments for certain assets and liabilities are based on either quoted market prices or are provided by other independent third-party sources, when available. When such information is not available, management estimates valuation adjustments. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on the future financial condition and results of operations.
The allowance for loan losses, sometimes referred to as the “allowance,” is established through a provision for loan losses which is charged to expense. Loan losses are charged against the allowance when management determines all or a portion of the loan balance to be uncollectible. Subsequent recoveries, if any, are credited to the allowance for cash received on previously charged-off amounts. If the allowance is considered inadequate to absorb future loan losses on existing loans for any reason, including but not limited to, increases in the size of the loan portfolio, increases in charge-offs or changes in the risk characteristics of the loan portfolio, then the provision for loan losses is increased.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the original contractual terms of the loan agreement. The collection of all amounts due according to contractual terms means that both the contractual interest and principal payments of a loan will be collected as scheduled in the loan agreement. An impaired loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or, as a practical expedient, at the loan’s observable market price, or the fair value of the underlying collateral, reduced by costs to sell on a discounted basis, is used if a loan is collateral dependent.
Investment Securities Impairment
Periodically, the Company may need to assess whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other than temporary basis. In any such instance, the Company would consider many factors, including the length of time and the extent to which the fair value has been less than the amortized cost basis, the market liquidity for the security, the financial condition and the near-term prospects of the issuer, expected cash flows, and the intent and ability to hold the investment for a period of time sufficient to recover the temporary loss. Securities on which there is an unrealized loss that is deemed to be other than temporary are written down to fair value, with the write-down recorded as a realized loss in securities gains (losses).
The fair values of investment securities are generally determined by various pricing models. The Company evaluates the methodologies used to develop the resulting fair values. The Company performs a semi-annual analysis on the pricing of investment securities to ensure that the prices represent a reasonable estimate of the fair value. The procedures include initial and ongoing review of pricing methodologies and trends. The Company seeks to ensure prices represent a reasonable estimate of fair value through the use of broker quotes, current sales transactions from the portfolio and pricing techniques, which are based on the net present value of future expected cash flows discounted at a rate of return market participants would require. As a result of this analysis, if the Company determines there is a more appropriate fair value, the price is adjusted accordingly.
Deferred Tax Asset
The Company uses the asset and liability method of accounting for income taxes as prescribed by GAAP. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If currently available information indicates it is “more likely than not” that the deferred tax asset will not be realized, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Accounting for deferred income taxes is a critical accounting estimate because the Company exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. Management’s determination of the realization of deferred tax assets is based upon management’s judgment of various future events and uncertainties, including the timing and amount of future income, reversing temporary differences which may offset, and the implementation of various tax plans to maximize realization of the deferred tax asset. These judgments and estimates are inherently subjective and reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against the deferred tax assets. A valuation allowance would result in additional income tax expense in such period, which would negatively affect earnings.
29
Operating Results Overview
The following table summarizes certain key financial results for the periods indicated:
As of and for the Three Months Ended
Mar 31,
Per Common Share Data (1)
Basic Earnings Per Share
Diluted Earnings Per Share
Book Value Per Share
6.62
4.91
Tangible Book Value Per Share (2)
6.49
4.75
Basic Weighted Average Shares Outstanding
Diluted Weighted Average Shares Outstanding
Shares Outstanding at Period End
30,059,374
Selected Performance Ratios
Return on Average Assets (Annualized)
1.48
1.26
Return on Average Common Equity (Annualized)
16.16
13.93
Return on Average Tangible Common Equity (Annualized) (2)
16.59
14.42
Yield on Interest Earning Assets
4.76
4.72
Yield on Total Loans, Gross
5.11
5.09
Cost of Interest Bearing Liabilities
1.37
1.08
Cost of Total Deposits
0.92
0.75
Net Interest Spread
3.39
3.64
Net Interest Margin (3)
3.77
3.97
Efficiency Ratio (2)
42.8
41.2
Noninterest Expense to Average Assets
1.61
1.60
Loan to Deposit Ratio
103.9
95.0
Core Deposits to Total Deposits
74.5
76.4
Tangible Common Equity to Tangible Assets (2)
11.64
8.64
Includes shares of our common stock and our non-voting common stock.
(2)
Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" for further details.
(3)
Amounts calculated on a tax-equivalent basis using the statutory federal tax rate of 21% for 2018 and 35% for 2017.
30
Selected Financial Data
The following table summarizes certain selected financial data as of and for the periods indicated:
% Change
Selected Balance Sheet Data
1,354,354
24.2
1,084,752
29.6
29.5
Goodwill and Other Intangibles
3,821
4,012
(4.8)
1,141,837
18.5
Tangible Common Equity (1)
195,218
116,730
67.2
64.8
Average Total Assets
1,625,749
1,312,058
23.9
Average Common Equity
149,318
118,870
25.6
Selected Income Statement Data
Interest Income
28.0
Interest Expense
63.0
Net Interest Income
21.1
(36.8)
Net Interest Income after Provision for Loan Losses
26.0
Noninterest Income
(19.4)
Noninterest Expense
24.3
Income Before Income Taxes
24.0
(13.3)
45.7
Represents a non-GAAP financial measure. See “Non-GAAP Financial Measures” for further details.
Discussion and Analysis of Results of Operations
The primary source of revenue is net interest income, which is impacted by the level of interest earning assets and related funding sources, as well as changes in the levels of interest rates. The difference between the average yield on earning assets and the average rate paid for interest bearing liabilities is the net interest spread. Noninterest bearing sources of funds, such as demand deposits and shareholders’ equity, also support earning assets. The impact of the noninterest bearing sources of funds is captured in the net interest margin, which is calculated as net interest income divided by average earning assets. Both the net interest margin and net interest spread are presented on a tax-equivalent basis, which means that tax-free interest income has been adjusted to pretax-equivalent income, assuming a 21% federal tax rate beginning in 2018. A 35% federal tax rate has been applied to periods prior to 2018. Management’s ability to respond to changes in interest rates by effective asset-liability management techniques is critical to maintaining the stability of the net interest margin and the momentum of the Company’s primary source of earnings.
Average Balances and Yields
The following table shows, for the three months ended March 31, 2018 and 2017, the average balances of each principal category of assets, liabilities and shareholders’ equity, and an analysis of net interest income. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of net deferred loan origination costs accounted for as yield adjustments. This table is presented on a tax-equivalent basis, if applicable.
For the three-month period ended
March 31, 2017
Yield/
& Fees
Rate
Interest Earning Assets:
Cash Investments
21,693
19,014
33
0.70
Investment Securities:
Taxable Investment Securities
119,218
633
2.15
96,587
374
Tax-Exempt Investment Securities (1)
114,828
1,183
4.18
130,230
1,516
Total Investment Securities
234,046
1,816
3.15
226,817
3.38
Loans (2)
1,353,031
1,051,058
Federal Home Loan Bank Stock
5,393
45
4,170
Total Interest Earning Assets
1,614,163
18,958
1,301,059
15,143
Noninterest Earning Assets
11,586
10,999
Interest Bearing Liabilities:
Interest Bearing Transaction Deposits
168,509
113
0.27
127,346
77
0.25
354,009
756
0.87
251,027
418
0.68
298,333
1,223
1.66
278,864
1,017
211,058
917
1.76
153,412
1.34
28,511
1.68
22,956
3.74
18,500
3.66
68,278
1.78
53,000
1.43
24,544
6.10
Total Interest Bearing Liabilities
1,169,742
905,105
Noninterest Bearing Liabilities:
Noninterest Bearing Transaction Deposits
295,587
286,833
Other Noninterest Bearing Liabilities
11,102
1,250
Total Noninterest Bearing Liabilities
306,689
288,083
Shareholders' Equity
Total Liabilities and Shareholders' Equity
Net Interest Income/ Interest Rate Spread
15,011
12,722
Taxable Equivalent Adjustment:
Tax-Exempt Investment Securities
(248)
(531)
Interest income and average rates for tax-exempt securities are presented on a tax-equivalent basis, assuming a federal income tax rate of 21% in 2018 and 35% in 2017.
Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.
Net tax-equivalent interest margin during the periods presented represents: (i) the difference between interest income on interest earning assets and the interest expense on interest bearing liabilities, divided by (ii) average interest earning assets for the period.
32
Interest Rates and Operating Interest Differential
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest earning assets and interest bearing liabilities, as well as changes in average interest rates. The following tables show the effect that these factors had on the interest earned on interest earning assets and the interest incurred on interest bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. Changes which are not due solely to volume or rate have been allocated to these categories based on the respective percentage changes in average volume and average rate as they compare to each other. The following tables present the changes in the volume and rate of interest bearing assets and liabilities for the three months ended March 31, 2018, compared to the three months ended March 31, 2017.
Compared with
Change Due To:
Volume
Variance
88
171
259
Tax Exempt Investment Securities
(179)
(154)
(333)
Total Securities
(91)
Loans
3,790
3,856
3,712
103
3,815
36
338
71
135
206
190
221
69
(18)
(15)
58
112
505
1,021
1,526
3,207
(918)
2,289
Comparison of Net Interest Income for the three months ended March 31, 2018 and 2017
Net interest income was $14.8 million for the first quarter of 2018, an increase of $2.6 million, or 21.1%, compared to $12.2 million for the first quarter of 2017. The increase in net interest income was largely attributable to growth in average interest earning assets, due to continued organic growth in the loan portfolio.
Net interest spread and net interest margin were 3.39% and 3.77%, respectively, for the first quarter of 2018, compared to 3.64% and 3.97%, respectively, for the first quarter of 2017. While net interest margin has benefitted from the repricing of variable-rate loans and the origination of new loans at higher rates, this was offset by increased balances and rates on non-core deposits and borrowings. Furthermore, the lower statutory federal tax rate reduced the tax equivalent adjustment by seven basis points.
Average interest earning assets for the first quarter of 2018 increased $313.1 million, or 24.1%, to $1.61 billion from $1.30 billion for the first quarter of 2017. This increase in average interest earning assets was due to continued organic growth in the loan portfolio as a result of increased loan production. Average interest bearing liabilities
increased $264.6 million, or 29.2%, to $1.17 billion for the first quarter of 2018, from $905.1 million for the first quarter of 2017. The increase in average interest bearing liabilities was primarily due to an increase in interest bearing deposits and the issuance of $25.0 million of subordinated debentures in July of 2017. The ratio of average interest earning assets to average interest bearing liabilities was 138.0% and 143.7% for the first quarter of 2018 and 2017, respectively.
Average interest earning assets produced a tax-equivalent yield of 4.76% for the first quarter of 2018, compared to 4.72% for the first quarter of 2017. The average rate paid on interest bearing liabilities was 1.37% for the first quarter of 2018, compared to 1.08% for the first quarter of 2017.
Interest Income. Total interest income on a tax-equivalent basis was $19.0 million for the first quarter of 2018, compared to $15.1 million for the first quarter of 2017. The $3.8 million, or 25.2%, increase in total interest income on a tax-equivalent basis was primarily due to organic growth in the loan portfolio.
Interest income on loans for the first quarter of 2018 was $17.0 million, compared to $13.2 million for the first quarter of 2017. The $3.9 million, or 29.2%, increase was primarily due to a 28.7% increase in the average balance of loans outstanding and a two basis point increase in the average yield on loans. The increase in the average balance of loans outstanding was primarily due to organic loan growth in commercial real estate loans. The increase in yield on the loan portfolio resulted primarily from increases in offering rates. Interest income on the investment securities portfolio on a fully-tax equivalent basis decreased $74,000, or 3.9%, during the first quarter of 2018 compared to the first quarter of 2017 despite a $7.2 million increase in average balances between the periods. The lower statutory federal tax rate reduced the fully-tax equivalent adjustment by $255,000 and decreased the yield seven basis points.
Interest Expense. Interest expense on interest bearing liabilities increased $1.5 million, or 63.0%, to $3.9 million for the first quarter of 2018, as compared to $2.4 million for the first quarter of 2017, primarily due to increased balances and rates on non-core deposits and borrowings.
Interest expense on deposits increased to $3.0 million for the first quarter of 2018, as compared to $2.0 million for the first quarter of 2017. The $1.0 million, or 49.1%, increase in interest expense on deposits was primarily due to the average balance of deposits increasing 27.3% combined with a 17 basis point increase in the average rate paid. The increase in the average balance of deposits resulted primarily from increases in transaction deposits, savings and money market deposits, and brokered deposits. The increase in the average rate paid was primarily due to the impact of higher market interest rates demanded on deposits.
Interest expense on borrowings increased $535,000 to $938,000 for the first quarter of 2018, as compared to $403,000 for the first quarter of 2017. This increase was primarily due to the issuance of $25.0 million in subordinated debentures in July 2017, as well as an increased average balance of federal funds purchased and FHLB Advances, offset in part by a reduction in interest expense on notes payable as a result of decreased principal balance.
The provision for loan losses was $600,000 for the first quarter of 2018, a decrease of $350,000, compared to the provision for loan losses of $950,000 for the first quarter of 2017. The provision decreased in the first quarter of 2018 due largely to lower net charge-offs and overall improvement in asset quality, coupled with moderate loan growth in comparison to the first quarter of 2017. The allowance for loan losses to total gross loans ratio was 1.22% as of March 31, 2018 and 2017.
Noninterest income was $387,000 and $480,000 for the first quarter of 2018 and 2017, respectively. The decrease of $93,000 was primarily due to lower gains on sales of investments and foreclosed assets and decreased letter of credit fees. These decreases were offset in part by increased fees related to customer deposit accounts due to an overall increase in the number of deposit clients. The following table presents the major components of noninterest income for the first quarter of 2018, compared to the first quarter of 2017:
Increase/
(Decrease)
Noninterest Income:
Net Gain on Sales of Securities
(35)
Letter of Credit Fees
126
(56)
Debit Card Interchange Fees
93
(93)
Noninterest expense was $6.5 million for the first quarter of 2018, an increase of $1.3 million, or 24.3%, from $5.3 million for the first quarter of 2017. The increase was primarily driven by a $1.2 million increase in salaries and employee benefits as a result of merit increases and increased staff to meet the needs of the Company’s growing infrastructure. The increase was partially offset by a decrease in data processing expenses primarily due to one-time credits provided by the data processor. The following table presents the major components of noninterest expense for the first quarter of 2018, compared to the first quarter of 2017:
Noninterest Expense:
1,150
FDIC Insurance Assessment
255
Data Processing
(162)
Professional and Consulting Fees
301
228
73
Information Technology and Telecommunications
183
Marketing and Advertising
284
254
Intangible Asset Amortization
522
391
131
1,278
The Company expects future increases in noninterest expense as the Company continues investment in infrastructure to support strong asset growth. Management remains focused on supporting growth primarily by adding to staff, investing in technology, and by enhancing risk controls. At the same time, management seeks to contain costs whenever prudent. The Company’s success in this regard is evident in the stable nature of the efficiency ratio, a non-GAAP financial measure which measures operating expenses as a percentage of net revenue. The efficiency ratio was 42.8% for the first quarter of 2018, compared to 41.2% for the first quarter of 2017.
Income Tax Expense
The provision for income taxes includes both federal and state taxes. Fluctuations in effective tax rates reflect the effect of the differences in the inclusion or deductibility of certain income and expenses for income tax purposes.
35
Income tax expense was $2.1 million for the first quarter of 2018, compared to $2.4 million for the first quarter of 2017. The effective combined federal and state income tax rate for the first quarter of 2018 was 25.8%, compared to 36.9% for the first quarter of 2017. The decrease in tax expense, despite the increase in pre-tax net income, was the result of enactment of the Tax Cuts and Jobs Act on December 22, 2017. This legislation reduced the federal corporate tax rate from 35% in periods prior to 2018 to 21% starting in 2018.
Financial Condition
Assets
Total assets at March 31, 2018 were $1.68 billion, an increase of $65.0 million, or 4.0%, over total assets of $1.62 billion at December 31, 2017 and an increase of $327.2 million, or 24.2%, over total assets of $1.35 billion at March 31, 2017.
Investment Securities Portfolio
The investment securities portfolio is used to make various term investments, maintain a source of liquidity and serve as collateral for certain types of deposits. Investment balances in the investment securities portfolio are subject to change over time based on funding needs and interest rate risk management objectives. The liquidity levels take into account anticipated future cash flows and all available sources of credits and are maintained at levels management believes are appropriate to assure future flexibility in meeting anticipated funding needs.
The investment securities portfolio consists primarily of municipal securities, U.S. government agency mortgage backed securities, and Small Business Administration, or SBA, securities, although the Company also holds corporate securities and other debt securities, all with varying contractual maturities. However, these maturities do not necessarily represent the expected life of the securities as the securities may be called or paid down without penalty prior to their stated maturities. All investment securities are held as available for sale.
Securities available for sale were $236.8 million at March 31, 2018, compared to $229.5 million at December 31, 2017, an increase of $7.3 million or 3.2%. At March 31, 2018, municipal securities represented 50.6% of the investment securities portfolio, government agency mortgage-backed securities represented 25.1% of the investment securities portfolio, SBA securities represented 20.6% of the investment securities portfolio, corporate securities represented 3.0% of the investment securities portfolio, and other mortgage-backed securities represented 0.7% of the investment securities portfolio. The following table presents the amortized cost and fair value of securities available for sale, by type, at March 31, 2018 and December 31, 2017:
Fair
Value
Mortgage-Backed Securities Issued or Guaranteed by U.S. Agencies (MBS):
Residential Pass-Through:
Guaranteed by GNMA
6,916
6,693
7,080
6,940
Issued by FNMA and FHLMC
10,591
10,505
11,340
11,272
Other Residential Mortgage-Backed Securities
29,703
28,681
29,516
28,834
Commercial Mortgage-Backed Securities
14,088
13,372
12,121
11,748
All Other Commercial MBS
1,775
1,888
1,887
Total MBS
Municipal Securities
Loan Portfolio
The Company focuses on lending to borrowers located or investing in the Minneapolis-St. Paul-Bloomington, MN-WI Metropolitan Statistical Area across a diverse range of industries and property types. The Company lends primarily to commercial customers, consisting of loans secured by nonfarm, nonresidential properties, loans secured by multifamily residential properties, construction loans, land development loans, and commercial and industrial loans. The Company manages concentrations of credit exposure through a comprehensive program which implements formalized processes and procedures specifically for managing and mitigating risk within the loan portfolio. The processes and procedures include board and management oversight, commercial real estate exposure limits, portfolio monitoring tools, management information systems, market reports, underwriting standards, a credit risk review function and periodic stress testing to evaluate potential credit risk and the subsequent impact on capital and earnings.
Total gross loans increased $58.3 million, or 4.3%, to $1.41 billion at March 31, 2018, compared to $1.35 billion at December 31, 2017 and increased $320.7 million, or 29.6%, from $1.08 billion at March 31, 2017. The Company’s annualized loan growth for the first quarter of 2018 was 17.3%. The multifamily, construction and land development, and commercial real estate (“CRE”) nonowner occupied categories contributed most significantly to the $58.3 million growth in the first quarter of 2018. As of March 31, 2018, multifamily loans increased $14.9 million, or 4.7%, nonowner occupied commercial real estate loans increased $38.5, or 9.3%, and construction and land development loans increased $17.3 million, or 13.2%, when compared to December 31, 2017.
The following table details the dollar composition and percentage composition of the loan portfolio, by category, at the dates indicated:
Percent
Commercial and Industrial
14.2
16.2
140,753
13.0
10.5
9.7
113,381
1 - 4 Family Mortgage
14.3
14.5
181,920
16.8
23.7
23.6
253,665
23.4
4.8
4.9
62,867
CRE Nonowner Occupied
32.3
30.8
327,903
30.2
75.0
73.8
826,355
76.2
0.3
4,263
0.4
100
(13,216)
(3,494)
1,068,042
The Company’s primary focus has been on real estate mortgage lending, which constituted 75.0% of the portfolio as of March 31, 2018. The composition of the portfolio remained consistent with prior periods and although the Company expects continued growth, it does not expect any significant changes in the foreseeable future in the composition of the loan portfolio or in the emphasis on real estate lending.
As of March 31, 2018, commercial real estate, or CRE, loans totaled $934.1 million, consisting of $453.5 million of loans secured by nonowner occupied commercial real estate, $332.8 million of loans secured by multifamily residential properties and $147.8 million of construction and land development loans. Commercial real estate loans represented 66.5% of the total gross loan portfolio and 459.0% of the Bank’s Total Capital at March 31, 2018.
37
The following table details maturities and sensitivity to interest rate changes for the loan portfolio at March 31, 2018 and December 31, 2017:
As of March 31, 2018
Due in One Year
More Than One
or Less
Year to Five Years
After Five Years
99,066
70,665
29,531
100,323
40,000
7,519
49,385
128,553
22,635
11,822
101,970
218,978
6,603
31,851
29,058
76,633
224,779
152,086
144,443
487,153
422,757
1,464
345,296
600,239
459,885
Interest Rate Sensitivity:
Fixed Interest Rates
137,598
476,306
117,006
Floating or Adjustable Rates
207,698
123,933
342,879
As of December 31, 2017
119,225
73,093
25,435
97,183
29,074
4,329
47,587
125,890
22,230
11,869
91,778
214,225
7,252
29,363
29,294
71,330
206,873
136,831
138,038
453,904
402,580
764
3,426
62
355,210
559,497
432,406
144,115
430,496
111,939
211,095
129,001
320,467
Asset Quality
The Company emphasizes credit quality in the originating and monitoring of the loan portfolio, and success in underwriting is measured by the levels of classified and nonperforming assets and net charge-offs.
Federal regulations and internal policies require the use of an asset classification system as a means of managing and reporting problem and potential problem assets. The Company has incorporated an internal asset classification system, substantially consistent with federal banking regulations, as a part of the credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered
“uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are required to be designated “watch.”
The following table presents information on loan classifications at March 31, 2018. The Company had no assets classified as doubtful or loss.
Risk Category
1,861
2,304
1,931
2,431
7,698
8,904
4,570
17,709
Nonperforming Assets
Nonperforming loans include loans accounted for on a nonaccrual basis and loans 90 days past due and still accruing. Nonperforming assets consist of nonperforming loans plus foreclosed assets (i.e., real estate acquired through foreclosure). Nonaccrual loans as of March 31, 2018 and December 31, 2017 totaled $1.1 million. There were no loans 90 days past due and still accruing as of March 31, 2018 or December 31, 2017.
The following table summarizes nonperforming assets, by category, at the dates indicated:
Nonaccrual Loans:
468
472
Total Nonaccrual Loans
Total Nonperforming Loans
Plus: Foreclosed Assets
Total Nonperforming Assets (1)
1,416
1,720
Total Restructured Accruing Loans
2,161
2,178
Total Nonperforming Assets and Restructured Accruing Loans
3,577
3,898
Nonaccrual Loans to Total Loans
0.08
Nonperforming Loans to Total Loans
Nonperforming Assets to Total Loans Plus Foreclosed Assets (1)
0.10
0.13
Nonperforming Assets and Restructured Accruing Loans to Total Loans Plus Foreclosed Assets
0.29
Nonperforming assets are defined as nonaccrual loans and loans greater than 90 days past due still accruing plus foreclosed assets.
The balance of nonperforming assets can fluctuate due to changes in economic conditions. The Company has established a policy to discontinue accruing interest on a loan (that is, place the loan on nonaccrual status) after it has become 90 days delinquent as to payment of principal or interest, unless the loan is considered to be well-collateralized and is actively in the process of collection. In addition, a loan will be placed on nonaccrual status before it becomes 90 days delinquent unless management believes that the collection of interest is expected. Interest previously accrued but uncollected on such loans is reversed and charged against current income when the receivable is determined to be uncollectible. If management believes that a loan will not be collected in full, an increase to the allowance for loan losses is recorded to reflect management’s estimate of any potential exposure or loss. Generally, payments received on nonaccrual loans are applied directly to principal. There are not any loans, outside of those included in the table above, that cause management to have serious doubts as to the ability of borrowers to comply with present repayment terms.
The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. The Company maintains an allowance for loan losses at a level management considers adequate to provide for known and probable incurred losses in the portfolio. The level of the allowance is based on management’s evaluation of estimated losses in the portfolio, after consideration of risk characteristics of the loans and prevailing and anticipated economic conditions. Loan charge-offs (i.e., loans judged to be uncollectible) are charged against the reserve and any subsequent recovery is credited. The Company analyzes risks within the loan portfolio on a continuous basis. A risk system, consisting of multiple grading categories for each portfolio class, is utilized as an analytical tool to assess risk and appropriate reserves. In addition to the risk system, management further evaluates risk characteristics of the loan portfolio under current and anticipated economic conditions and considers such factors as the financial condition of the borrower, past and expected loss experience, and other factors which management feels deserve recognition in establishing an appropriate reserve. These estimates are reviewed at least quarterly, and, as adjustments become necessary, they are recognized in the periods in which they become known. Although management strives to maintain an allowance it deems adequate, future economic changes, deterioration of borrowers’ creditworthiness, and the impact of examinations by regulatory agencies all could cause changes to the allowance for loan losses.
At March 31, 2018, the allowance for loan losses was $17.1 million, an increase of $619,000 from $16.5 million at December 31, 2017. Net charge-offs totaled ($19,000) (net recoveries) during the first quarter of 2018 and $67,000 during the first quarter of 2017. The allowance for loan losses as a percentage of total loans was 1.22% at March 31, 2018 and December 31, 2017.
40
The following is a summary of the activity in the allowance for loan loss reserve for the periods indicated:
Balance, Beginning of Period
Charge-offs:
Total Charge-offs
Recoveries:
Total Recoveries
Net Charge-offs
67
Balance at End of Period
Gross Loans, End of Period
Average Loans
Net Charge-offs (Recoveries) (Annualized) to Average Loans
(0.01)
0.03
Allowance to Total Loans
1.22
The following table presents a summary of the allocation of the allowance for loan losses by loan portfolio segment for the periods indicated:
14.7
10.3
11.5
14.1
14.0
20.3
19.2
5.3
31.6
12,215
71.3
11,530
69.9
5.1
Total Allowance for Loan Losses
100.0
41
The following table details the dollar composition and percentage composition of the deposit portfolio, by category, at the dates indicated:
23.3
21.9
322,563
28.2
164,899
12.2
177,292
13.2
123,151
10.8
25.1
27.6
251,478
22.5
21.8
286,051
16.9
15.5
158,594
13.9
Total deposits at March 31, 2018 were $1.35 billion, an increase of $13.7 million, or 1.0%, compared to total deposits of $1.34 billion at December 31, 2017, and an increase of $211.2 million, or 18.5%, over total deposits of $1.14 billion at March 31, 2017. Noninterest bearing deposits were $315.0 million at March 31, 2018, compared to $292.5 million at December 31, 2017, and $322.6 million at March 31, 2017. Noninterest bearing deposits comprised 23.3% of total deposits at March 31, 2018, compared to 21.9% at December 31, 2017, and 28.2% at March 31, 2017.
The Company relies on increasing the deposit base to fund loans and other asset growth. When appropriate, the Company utilizes alternative funding sources such as brokered deposits. Additionally, the Company participates in the Certificates of Deposit Account Registry Service (“CDARS”) and the Insured Cash Sweep product (“ICS”), which provide for reciprocal transactions among banks facilitated by Promontory for the purpose of maximizing FDIC insurance for clients. These reciprocal CDARS and ICS funds are classified as brokered deposits. At March 31, 2018, total brokered deposits were $228.8 million or 16.9% of total deposits.
The following table presents the average balance and average rate paid on each of the following deposit categories for the first quarter of 2018, year ended December 31, 2017, and first quarter of 2017:
As of and for the
296,018
176,067
0.26
337,028
0.88
Time Deposits < $250,000
188,250
1.73
184,728
183,114
Time Deposits > $250,000
110,083
1.54
105,788
95,750
1.16
216,044
1.55
1,327,496
1,315,673
0.86
1,097,482
42
Borrowed Funds
In addition to deposits, the Company utilizes overnight borrowings to meet the daily liquidity needs of clients and fund loan growth. The following table summarizes overnight borrowings, which consist of federal funds purchased from correspondent banks on an overnight basis at the prevailing overnight market rates and the weighted average interest rates paid for the periods presented:
Outstanding at Period-End
13,000
Average Amount Outstanding
14,391
Maximum Amount Outstanding at any Month-End
34,000
39,000
Weighted Average Interest Rate:
During Period
1.41
End of Period
1.91
1.63
1.06
Other Borrowings
At March 31, 2018, other borrowings outstanding consisted of FHLB advances of $73.0 million, notes payable of $16.5 million, and subordinated debentures of $25.0 million. The Company’s borrowing capacity at the FHLB is determined based on collateral pledged, generally consisting of loans. The Company had additional borrowing capacity under this credit facility of $192.2 million and $180.9 million at March 31, 2018 and December 31, 2017, respectively, based on collateral amounts pledged.
Additionally, the Company has borrowing capacity from other sources. As of March 31, 2018, the Bank was eligible to use the Federal Reserve discount window for borrowings. Based on assets available for collateral as of the applicable date, the Bank’s borrowing availability was approximately $34.7 million and $37.5 million at March 31, 2018 and December 31, 2017, respectively. As of March 31, 2018 and December 31, 2017, the Company had no outstanding advances.
The Company has entered into a swap agreement with an unaffiliated third party in order to hedge interest rate risk associated with the notes payable. This agreement provides for the Company to make payments at a fixed rate in exchange for receiving payments at a variable rate determined by one-month LIBOR.
Contractual Obligations
The following table contains supplemental information regarding total contractual obligations at March 31, 2018:
Within
One to
Three to
After
One Year
Three Years
Five Years
Deposits Without a Stated Maturity
838,863
159,557
257,463
97,153
1,500
4,000
7,000
14,000
25,000
Operating Lease Obligations
948
1,654
1,066
1,014,868
288,117
135,659
33,066
43
Operating lease obligations are in place for facilities and land on which banking branches are located. Included in operating lease obligations are lease commitments to occupy space for a de novo branch in St. Paul, Minnesota which is expected to open during the summer of 2018.
The Company believes that it will be able to meet all contractual obligations as they come due through the maintenance of adequate cash levels. The Company expects to maintain adequate cash levels through earnings, loan and securities repayments and maturity activity and continued deposit gathering activities. As described above, the Company has in place various borrowing mechanisms for both short-term and long-term liquidity needs.
Shareholders’ Equity
Shareholders’ equity at March 31, 2018 was $199.0 million, an increase of $61.9 million, or 45.1% over shareholders’ equity of $137.2 million at December 31, 2017, primarily due to $58.9 million of net proceeds from the issuance of common stock in an initial public offering and $6.0 million of net income, offset partially by a $2.9 million decrease in accumulated other comprehensive income. The decrease in accumulated other comprehensive income primarily resulted from interest rate fluctuations between periods.
The Company and the Bank are subject to various regulatory capital requirements administered by federal banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by federal banking regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s business.
Under applicable regulatory capital rules, the Company and Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank must also meet certain specific capital guidelines under the prompt corrective action framework. The capital amounts and classification are subject to qualitative judgments by the federal banking regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of common equity Tier 1 capital, Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets (referred to as the “leverage ratio”), as defined under the applicable regulatory capital rules.
Management believes the Company and the Bank met all capital adequacy requirements to which they were subject as of March 31, 2018. The regulatory capital ratios for the Company and the Bank to meet the minimum capital adequacy standards and for the Bank to be considered well capitalized under the prompt corrective action framework are set forth in the following tables. The Company’s and the Bank’s actual capital amounts and ratios as of the dates indicated.
44
The Company and the Bank are subject to the rules of the Basel III regulatory capital framework and related Dodd-Frank Act. The rules include the implementation of a capital conservation buffer that is added to the minimum requirements for capital adequacy purposes. The capital conservation buffer is subject to a three year phase-in period that began on January 1, 2016, and will be fully phased-in on January 1, 2019, at 2.5%. The required phase-in capital conservation buffer during 2018 is 1.875%. A banking organization with a conservation buffer of less than the required amount will be subject to limitations on capital distributions, including dividend payments, and certain discretionary bonus payments to executive officers. At March 31, 2018, the ratios for the Company and the Bank were sufficient to meet the fully phased-in conservation buffer.
Off-Balance Sheet Arrangements
In the normal course of business, the Company enters into various transactions to meet the financing needs of clients, which, in accordance with GAAP, are not included in the consolidated balance sheets. These transactions include commitments to extend credit, standby letters of credit, and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. Most of these commitments mature within two years and the standby letters of credit are expected to expire without being drawn upon. All off-balance sheet commitments are included in the determination of the amount of risk-based capital that the Company and the Bank are required to hold.
The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, standby letters of credit, and commercial letters of credit is represented by the contractual or notional amount of those instruments. The Company decreases its exposure to losses under these commitments by subjecting them to credit approval and monitoring procedures. The Company assesses the credit risk associated with certain commitments to extend credit and establishes a liability for probable credit losses.
The following table sets forth credit arrangements and financial instruments whose contract amounts represent credit risk as of March 31, 2018 and December 31, 2017:
Fixed
Variable
117,314
227,110
112,555
196,958
19,787
49,295
12,334
52,212
137,101
276,405
124,889
249,170
Liquidity
Liquidity Management
Liquidity is the Company’s capacity to meet cash and collateral obligations at a reasonable cost. The essence of having cash when the Company needs it and having the appropriate amount of cash and other assets that are quickly convertible into cash without incurring significant loss. Maintaining an adequate level of liquidity depends on the Company’s ability to efficiently meet both expected and unexpected cash flows and collateral needs without adversely affecting either daily operations or financial condition. The Company’s Asset Liability Management (“ALM”) Committee, which is comprised of members of senior management, is responsible for managing commitments to meet the needs of customers while achieving the Company’s financial objectives. The ALM Committee meets regularly to review balance sheet composition, funding capacities, and current and forecasted loan demand.
The Company manages liquidity by maintaining adequate levels of cash and other assets from on and off-balance sheet arrangements. Specifically on-balance sheet liquidity consists of cash and due from banks and unpledged investment securities available for sale, which are referred to as primary liquidity. Furthermore, these unencumbered liquid assets are comprised of primarily U.S. government agency mortgage backed securities and other agency securities, which the regulatory bodies consider the most marketable and liquid, especially in a stress scenario. In regards to off-balance sheet capacity, the Company maintains available borrowing capacity under secured borrowing lines with the FHLB and the Federal Reserve Bank of Minneapolis, as well as unsecured lines of credit for the purpose of overnight funds with various correspondent banks, which the Company refers to as secondary liquidity. In addition, the Bank is a member of the American Financial Exchange (“AFX”), through which it may either borrow or lend funds on an overnight or short-term basis with a group of approved commercial banks. The availability of funds changes daily. As of March 31, 2018, the Company had no borrowings outstanding through the AFX.
The following tables provide a summary of primary and secondary liquidity levels as of the dates indicated:
Primary Liquidity—On-Balance Sheet
(Dollars in thousands)
Less: pledged securities
64,288
81,639
Total primary liquidity
192,656
171,577
Ratio of primary liquidity to total deposits
12.8
Secondary Liquidity—Off-Balance Sheet
Borrowing Capacity
Net secured borrowing capacity with the FHLB
192,237
180,942
Net secured borrowing capacity with the Federal Reserve Bank
34,675
37,530
Unsecured borrowing capacity with correspondent lenders
60,000
Total secondary liquidity
286,912
278,472
Ratio of primary and secondary liquidity to total deposits
35.4
33.6
During the first quarter of 2018, primary liquidity increased by $21.1 million due to a $7.3 million increase in securities available for sale and $17.4 decrease in pledged securities, offset partially by a $3.6 million decrease in cash and cash equivalents, when compared to December 31, 2017. Secondary liquidity increased by $8.4 million as of March 31, 2018 when compared to December 31, 2017, due mainly to a $11.3 million increase in the borrowing capacity on the secured borrowing line with the FHLB, offset partially by a $2.9 million decrease in the borrowing capacity on the secured credit line with the Federal Reserve Bank.
In addition to primary liquidity, the Company generates liquidity from cash flows from the loan and securities portfolios and from the large base of core customer deposits, defined as noninterest bearing transaction, interest bearing
transaction, savings, non-brokered money market accounts and non-brokered time deposits less than $250,000. At March 31, 2018, core deposits totaled approximately $1.0 billion and represented 74.5% of total deposits. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company, which promote long-standing relationships and stable funding sources.
The Company uses brokered deposits, the availability of which is uncertain and subject to competitive market forces and regulation, for liquidity management purposes. At March 31, 2018, brokered deposits totaled $228.8 million, consisting of $209.4 million of brokered time deposits and $19.4 million of non-maturity brokered money market accounts. At December 31, 2017, brokered deposits totaled $207.5 million, consisting of $183.4 million of brokered time deposits and $24.1 million of non-maturity brokered money market accounts. The Company has increased the amount of brokered deposits in recent quarters because of the efficiency in obtaining such deposits, as well as the cost savings relative to comparable core deposit offerings.
The Company’s liquidity policy includes guidelines for On-Balance Sheet Liquidity (a measurement of primary liquidity to total deposits plus borrowings), Total On-Balance Sheet Liquidity with Borrowing Capacity (a measurement of primary and secondary liquidity to total deposits plus borrowings), Wholesale Funding Ratio (a measurement of total wholesale funding to total deposits plus borrowings), and other guidelines developed for measuring and maintaining liquidity. As of March 31, 2018, the Company was in compliance with all established liquidity guidelines.
Non-GAAP Financial Measures
In addition to the results presented in accordance with GAAP, the Company routinely supplements its evaluation with an analysis of certain non-GAAP financial measures. The Company believes these non-GAAP financial measures, in addition to the related GAAP measures, provide meaningful information to investors to help them understand the Company’s operating performance and trends, and to facilitate comparisons with the performance of peers. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of non-GAAP disclosures used in this report to the comparable GAAP measures are provided in the following tables.
Efficiency Ratio
Less: Amortization of Intangible Assets
(48)
Adjusted Noninterest Expense
6,484
5,206
Less: (Gain) Loss on Sales of Securities
Adjusted Operating Revenue
15,150
12,640
Tangible Common Equity and Tangible Common Equity/Tangible Assets
Common Equity
Less: Intangible Assets
(3,821)
(4,012)
Tangible Common Equity
Tangible Assets
1,677,776
1,350,342
Tangible Common Equity/Tangible Assets
Tangible Book Value Per Share
Book Value Per Common Share
Less: Effects of Intangible Assets
(0.13)
(0.16)
Tangible Book Value Per Common Share
Average Tangible Common Equity
Less: Effects of Average Intangible Assets
(3,844)
(4,028)
145,474
114,842
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
As a financial institution, the Company’s primary market risk is interest rate risk, which is defined as the risk of loss of net interest income or net interest margin because of changes in interest rates. The Company continually seeks to measure and manage the potential impact of interest rate risk. Interest rate risk occurs when interest earning assets and interest bearing liabilities mature or re-price at different times, on a different basis or in unequal amounts. Interest rate risk also arises when assets and liabilities each respond differently to changes in interest rates.
The Company’s management of interest rate risk is overseen by its ALM Committee, based on a risk management infrastructure approved by the board of directors that outlines reporting and measurement requirements. In particular, this infrastructure sets limits and management targets for various metrics, including net interest income simulation involving parallel shifts in interest rate curves, steepening and flattening yield curves, and various prepayment and deposit duration assumptions. The Company’s risk management infrastructure also requires a periodic review of all key assumptions used, such as identifying appropriate interest rate scenarios, setting loan prepayment rates based on historical analysis and noninterest bearing and interest bearing transaction deposit durations based on historical analysis.
The Company does not engage in speculative trading activities relating to interest rates, foreign exchange rates, commodity prices, equities or credit.
The Company manages the interest rate risk associated with interest bearing liabilities by managing the interest rates and terms associated with wholesale borrowings and deposits from customers which the Company relies on for funding. For instance, the Company occasionally uses special offers on deposits to alter the interest rates and terms associated with interest bearing liabilities. The Company manages the interest rate risk associated with interest earning assets by managing the interest rates and terms associated with investment securities portfolio by purchasing and selling investment securities from time to time.
Net Interest Income Simulation
The Company uses a net interest income simulation model to measure and evaluate potential changes in net interest income that would result over the next 12 months from immediate and sustained changes in interest rates as of the measurement date. This model has inherent limitations and the results are based on a given set of rate changes and assumptions as of a certain point in time. For purpose of the simulation, the Company assumes no growth in either interest-sensitive assets or liabilities over the next 12 months; therefore, the model’s results reflect an interest rate shock to a static balance sheet. The simulation model also incorporates various other assumptions, which the Company believes are reasonable but which may have a significant impact on results, such as: (1) the timing of changes in interest rates, (2) shifts or rotations in the yield curve, (3) re-pricing characteristics for market-rate-sensitive instruments, (4) differing sensitivities of financial instruments due to differing underlying rate indices, (5) varying loan prepayment speeds for different interest rate scenarios, (6) the effect of interest rate limitations in assets, such as floors and caps, and (7) overall growth and repayment rates and product mix of assets and liabilities. Because of the limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on the results, but rather as a means to better plan and execute appropriate asset-liability management strategies and to manage interest rate risk.
Potential changes to our net interest income in hypothetical rising and declining rate scenarios calculated as of March 31, 2018 are presented in the table below. The projections assume immediate, parallel shifts downward of the yield curve of 100 basis points and immediate, parallel shifts upward of the yield curve of 100, 200, 300 and 400 basis points. In the current interest rate environment, a downward shift of the yield curve of 200, 300 and 400 basis points does not provide us with meaningful results and thus is not presented.
Change (basis points) in Interest Rates
Forecasted Net
Percentage Change
(12-Month Projection)
from Base
+400
67,321
12.62
+300
65,473
9.53
+200
63,622
6.43
+100
61,738
3.28
0
59,777
−100
57,317
(4.11)
The table above indicates that as of March 31, 2018, in the event of an immediate and sustained 300 basis point increase in interest rates, we would experience an 9.53% increase in net interest income. In the event of an immediate 100 basis point decrease in interest rates, we would experience a 4.11% decrease in net interest income.
The results of this simulation analysis are hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted. For example, if the timing and magnitude of interest rate changes differ from those projected, our net interest income might vary significantly. Non-parallel yield curve shifts such as a flattening or steepening of the yield curve or changes in interest rate spreads would also cause our net interest income to be different from that depicted. An increasing interest rate environment could reduce projected net interest income if deposits and other short-term liabilities re-price faster than expected or re-price faster than our assets. Actual results could differ from those projected if we grow assets and liabilities faster or slower than estimated, if we experience a net outflow of deposit liabilities or if our mix of assets and liabilities otherwise changes. Actual results could also differ from those projected if
we experience substantially different repayment speeds in our loan portfolio than those assumed in the simulation model. Finally, these simulation results do not contemplate all the actions that we may undertake in response to potential or actual changes in interest rates, such as changes to our loan, investment, deposit, or funding strategies.
Evaluation of Disclosure Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as that term is defined in Rule 13a‑15(e) under the Securities Exchange Act of 1934, or the Exchange Act) as of March 31, 2018, the end of the fiscal quarter covered by this Quarterly Report on Form 10‑Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2018, the Company’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10‑Q that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1.A. Risk Factors
There have been no material changes to the risk factors disclosed in the Company’s prospectus filed with the SEC on March 14, 2018, pursuant to Rule 424(b)(4) under the Securities Act of 1933.
Unregistered Sales of Equity Securities
None.
Use of Proceeds from Registered Securities
On March 16, 2018, the Company sold 5,379,513 shares of common stock in its initial public offering, including 1,005,000 shares of common stock sold pursuant to the exercise in full by the underwriters of their option to purchase additional shares to cover over-allotments. The aggregate offering price for the shares sold by the Company was $63.2 million, and after deducting $4.3 million of underwriting discounts and offering expenses paid to third parties, the Company received total net proceeds of $58.9 million. In addition, certain selling shareholders participated in the offering and sold an aggregate of 2,325,487 shares of common stock at an aggregate offering price of $27.3 million. All of the shares were sold pursuant to the Company’s Registration Statement on Form S-1, as amended (File No. 333-223019), which was declared effective by the SEC on March 13, 2018, and registered shares of the Company’s common stock with a maximum aggregate offering price of $96.3 million. Sandler O’Neill + Partners, L.P. and D.A. Davidson & Co. acted as joint book-running managers for the offering. The Company’s common stock is currently traded on the Nasdaq Capital Market under the symbol “BWB”.
There has been no material change in the planned use of proceeds from the initial public offering as described in the Company’s prospectus filed with the SEC on March 14, 2018 pursuant to Rule 424(b)(4) under the Securities Act of 1933. From the effective date of the registration statement through March 31, 2018, the Company contributed $25.0 million of the net proceeds of the initial public offering to the Bank.
Not applicable.
Exhibit Number
Description
31.1
Certification of the Chief Executive Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of the Chief Financial Officer required by Rule 13a-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.1
Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018, formatted in XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Bridgewater Bancshares, Inc.
Date: May 10, 2018
By:
/s/ Jerry Baack
Name:
Jerry Baack
Title:
Chairman, Chief Executive Officer and President(Principal Executive Officer)
/s/ Joe Chybowski
Joe Chybowski
Senior Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)