Bridgewater Bank Annual Report

The recognition of tax credit investments significantly impacts the Company’s effective tax rate. Excluding the impact of tax credit investments, the effective combined federal and state income tax rate for the year ended December 31, 2018 was 25.5%. 2017 Compared to 2016 Income tax expense was $10.1 million for the year ended December 31, 2017, compared to $8.1 million for the year ended December 31, 2016. The increase in tax expenses was due to the increase of taxable earnings and a $2.0 million expense related to the revaluation of the deferred tax asset in 2017, offset in part by a historic tax credit benefit of $1.6 million. The effective tax rate for the years ended December 31, 2017 and 2016 was 37.5% and 37.9%, respectively. Financial Condition Overview Total assets at December 31, 2018 were $1.97 billion, an increase of $357.1 million, or 22.1%, from December 31, 2017. Total gross loans increased $317.8 million, or 23.6%, from December 31, 2017. Securities available for sale were $253.4 million at December 31, 2018, an increase of $23.4 million, or 10.4%, from December 31, 2017. Total liabilities at December 31, 2018 were $1.75 billion, an increase of $273.3 million, or 18.5%, from December 31, 2017. Total deposits increased $221.6 million, or 16.5%, from December 31, 2017. Total borrowings were $181.6 million, an increase of $49.1 million, or 37.1%, from December 31, 2017. Investment Securities Portfolio The investment securities portfolio is used to make various term investments and is intended to provide the Company with adequate liquidity, a source of stable income, and at times, 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 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 U.S. treasury securities, corporate securities and other debt securities, all with varying contractual maturities. 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 $253.4 million at December 31, 2018, compared to $229.5 million at December 31, 2017, an increase of $23.9 million or 10.4%. At December 31, 2018, municipal securities represented 46.6% of the investment securities portfolio, government agency mortgage-backed securities represented 18.0% of the portfolio, SBA securities represented 19.4% of the portfolio, corporate securities represented 8.3% of the portfolio, U.S. treasury securities represented 7.1% of the portfolio, and other mortgage-backed securities represented 0.6% of the

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