Bridgewater Bank Annual Report

Company’s growth, a $1.3 million increase in professional and consulting expenses incurred in preparation of the Company’s IPO, and a $1.9 million expense related to the amortization of tax credit investments. Full-time equivalent employees increased from 97 as of December 31, 2016, to 114 as of December 31, 2017. The increase in staffing was due to the Company’s growing infrastructure, particularly in areas to support preparing to become and operate as a publicly traded company. Efficiency Ratio. The efficiency ratio was 44.4% for the year ended December 31, 2017, a marginal decrease over 45.8% for the year ended December 31, 2016, despite the amortization of tax credit investments elevating the level of operating expenses in 2017. The adjusted efficiency ratio, which excludes the impact of the amortization of tax credit investments, decreased more meaningfully to 41.1% for the year ended December 31, 2017, compared to 45.8% for the year ended December 31, 2016, due primarily to favorable operating leverage. The following table presents the major components of noninterest expense for the year ended December 31, 2018, compared to the year ended December 31, 2017, and the year ended December 31, 2017, compared to the year ended December 31, 2016: Noninterest Expense: Salaries and Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,620 $ 14,051 $ 4,569 $ 14,051 $ 12,087 $ 1,964 Occupancy and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,351 2,192 159 2,192 1,821 371 FDIC Insurance Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 915 770 145 770 838 (68) Data Processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470 592 (122) 592 667 (75) Professional and Consulting Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,125 2,198 (1,073) 2,198 904 1,294 Information Technology and Telecommunications . . . . . . . . . . . . . . . . 932 671 261 452 394 58 Marketing and Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,342 983 359 983 864 119 Acquisition Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — 323 (323) Intangible Asset Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 191 — 191 105 86 Amortization of Tax Credit Investments . . . . . . . . . . . . . . . . . . . . . . . . 3,293 1,916 1,377 1,916 — 1,916 Other Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,323 1,932 391 2,151 2,165 (14) Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,562 $ 25,496 $ 6,066 $ 25,496 $ 20,168 $ 5,328 The Company expects future increases in noninterest expense as the Company continues investing in infrastructure to support balance sheet 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, which is evident in the stable nature of the efficiency ratio. Income Tax Expense The provision for income taxes includes both federal and state taxes. Fluctuations in effective tax rates reflect the differences in the inclusion or deductibility of certain income and expenses for income tax purposes. Our future effective income tax rate will fluctuate based on the mix of taxable and tax-free investments and loans, the recognition and availability of tax credit investments, and overall taxable income. In both periods, comparability is impacted by the enactment of the Tax Cuts and Jobs Act on December 22, 2017. The legislation reduced the federal corporate tax rate from 35% in 2017 and periods prior to 21% starting in 2018 and required the Company to charge a one-time revaluation of the deferred tax asset of $2.0 million to the provision for income taxes. 2018 Compared to 2017 Income tax expense was $5.2 million for the year ended December 31, 2018, compared to $10.1 million for the year ended December 31, 2017. The effective combined federal and state income tax rate for the year ended December 31, 2018 was 16.3%, compared to 37.5% for the year ended December 31, 2017. The lower effective combined rate was primarily due to the recognition of $3.8 million of tax credit investments and reduction in the federal corporate tax rate. Year Ended Year Ended December 31, Increase/ December 31, Increase/ (dollars in thousands) 2018 2017 (Decrease) 2017 2016 (Decrease)

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