Bridgewater Bank Annual Report

The following table presents the major components of noninterest income for the year ended December, 2018, compared to the year ended December 31, 2017, and for the year ended December 31, 2017, compared to the year ended December 31, 2016:

Year Ended December 31,

Year Ended December 31,

Increase/

Increase/

(dollars in thousands)

2018 2017 (Decrease) 2017 2016 (Decrease)

Noninterest Income: Customer Service Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 745 $ 660 $ 85 $ 660 $ 490 $ 170 Net Gain (Loss) on Sales of Securities . . . . . . . . . . . . . . (125) (250) 125 (250) 830 (1,080) Net Gain (Loss) on Sales of Foreclosed Assets . . . . . . . (225) 356 (581) 356 (30) 386 Letter of Credit Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,296 1,072 224 1,072 842 230 Debit Card Interchange Fees . . . . . . . . . . . . . . . . . . . . . . 391 390 1 390 265 125 Other Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461 308 153 308 170 138 Totals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,543 $ 2,536 $ 7 $ 2,536 $ 2,567 $ (31) Noninterest Expense 2018 Compared to 2017 Noninterest expense totaled $31.6 million for the year ended December 31, 2018, a $6.1 million, or 23.8% increase from $25.5 million for the year ended December 31, 2017. The increase was primarily driven by a $4.6 million increase in salaries and employee benefits as the result of increased staff to meet the needs of the Company’s growth and merit increases, a $1.4 million increase in amortization of tax credit investments, a $261,000 increase in information technology and telecommunication expenses to support the Company’s growing infrastructure, and a $359,000 increase in marketing expenses to increase brand recognition in its market area. The increases were partially offset by a decrease of $1.1 million in professional and consulting fees due to higher expenses incurred during 2017 for preparation of the Company’s initial public offering, in comparison to 2018. Full-time equivalent employees increased from 114 as of December 31, 2017, to 140 as of December 31, 2018. The increase includes key strategic hires, particularly in deposit gathering roles, as the Company continues to capitalize on M&A disruption in its market area. Efficiency Ratio. The efficiency ratio, a non-GAAP financial measure, reports total noninterest expense, less amortization of intangible assets, as a percentage of net interest income plus total noninterest income less gains (losses) on sales of securities. Management believes this non-GAAP financial measure provides a meaningful comparison of operational performance and facilitates investors’ assessments of business performance and trends in comparison to peers in the banking industry. The Company’s efficiency ratio, and its comparability to some peers, is negatively impacted by the amortization of tax credit investments within noninterest expense. The efficiency ratio was 46.5% for the year ended December 31, 2018, a marginal increase over 44.4% for the year ended December 31, 2017. The amortization of tax credit investments elevated the level of operating expenses in both years, and while the recognition of the tax credits increases operating expenses, and concurrently the efficiency ratio, it directly reduces income tax expense and the effective tax rate. The adjusted efficiency ratio, which excludes the impact of the amortization of tax credit investments, remained generally consistent at 41.7% for the year ended December 31, 2018, compared to 41.1% for the year ended December 31, 2017. 2017 Compared to 2016 Noninterest expense totaled $25.5 million for the year ended December 31, 2017, a $5.3 million, or 26.4%, increase from $20.2 million for the year ended December 31, 2016. The increase was primarily driven by a $2.0 million increase in salaries and employee benefits as the result of merit increases and increased staff to meet the needs of the

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