Bridgewater Bank Annual Report

was due to continued organic growth in the loan portfolio as a result of increased loan production. Average interest bearing liabilities increased $242.1 million, or 31.1%, to $1.0 billion for the year ended December 31, 2017, from $777.7 million for the year ended December 31, 2016. The increase in average interest bearing liabilities was primarily due to an increase in interest bearing deposits, federal funds purchased, and the issuance of $25.0 million of subordinated debentures in July of 2017. Average interest earning assets produced a tax-equivalent yield of 4.76% for the year ended December 31, 2017, compared to 4.78% for the year ended December 31, 2016. The average rate paid on interest bearing liabilities was 1.19% for the year ended December 31, 2017, compared to 1.09% for the year ended December 31, 2016. Interest Income. Total interest income on a tax-equivalent basis was $68.5 million for the year ended December 31, 2017, compared to $52.0 million for the year ended December 31, 2016. The $16.5 million, or 31.7%, increase in total interest income on a tax-equivalent basis was primarily due to growth in our loan and investment securities portfolios. Interest income on loans for the year ended December 31, 2017 was $60.0 million, compared to $46.6 million for the year ended December 31, 2016. The $13.4 million, or 28.7%, increase was primarily due to a 31.3% increase in the average balance of loans outstanding, offset in part by a 10 basis point decrease in the average yield on loans. The increase in the average balance of loans outstanding was primarily due to loan growth in commercial real estate loans. The decrease in yield on the loan portfolio resulted primarily from the lagging of repricing from the historic low interest rate environment and competitive pricing pressure in the market. Interest income on our investment securities portfolio on a fully-tax equivalent basis increased $3.1 million, or 61.9% to $8.2 million in the year ended December 31, 2017, compared to the year ended December 31, 2016. Such growth in investment securities was intended to address our rising loan-to-deposit ratio and further diversify our earning asset composition. Furthermore, meaningful growth in the investment securities portfolio added necessary on-balance sheet liquidity, as investment securities were more actively utilized for pledging to public entities. Interest Expense. Interest expense on interest bearing liabilities increased $3.7 million, or 43.0%, to $12.2 million for the year ended December 31, 2017, compared to $8.5 million for the year ended December 31, 2016, primarily due to increases in average balances of both deposits and borrowings. Interest expense on deposits increased to $9.7 million for the year ended December 31, 2017, compared to $7.0 million for the year ended December 31, 2016. The $2.8 million, or 39.7%, increase in interest expense on deposits was primarily due to the average balance of deposits increasing 32.2% combined with a 4 basis point increase in the average rate paid. Interest expense on borrowings increased $895,000 to $2.5 million for the year ended December 31, 2017, compared to $1.6 million for the year ended December 31, 2016. 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, offset in part by a reduction in interest expense on notes payable as a result of decreased principal balance. Provision for Loan Losses 2018 Compared to 2017 The allowance for loan losses increased $3.5 million as of December 31, 2018, compared to December 31, 2017, reflecting a provision for loan losses of $3.6 million and net charge-offs of $46,000 during 2018. The provision for loan losses was $3.6 million for the year ended December 31, 2018, a decrease of $600,000, compared to the provision for loan losses of $4.2 million for the year ended December 31, 2017, due primarily to continued strength in credit quality. The allowance for loan losses at December 31, 2018 represented 1.20% of loans outstanding, compared to 1.22% at December 31, 2017.

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