Bridgewater Bancshares, Inc. Annual Report

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. The Company’s 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. 2019 Compared to 2018 Income tax expense was $6.9 million for the year ended December 31, 2019, compared to $5.2 million for the year ended December 31, 2018. The effective combined federal and state income tax rate for the year ended December 31, 2019 was 18.1%, compared to 16.3% for the year ended December 31, 2018. The higher effective combined rate was primarily due to fewer tax credits being recognized during 2019. 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, 2019 was 24.8%. 2018 Compared to 2017 In the prior period, 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. 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. 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%. Financial Condition Overview Total assets at December 31, 2019 were $2.27 billion, an increase of $295.1 million, or 15.0%, from December 31, 2018. Total gross loans were $1.91 billion, an increase of $247.1 million, or 14.8%, from December 31, 2018. Securities available for sale were $289.9 million at December 31, 2019, an increase of $36.5 million, or 14.4%, from December 31, 2018. Total liabilities at December 31, 2019 were $2.02 billion, an increase of $271.3 million, or 15.5%, from December 31, 2018. Total deposits increased $262.4 million, or 16.8%, from December 31, 2018. Total borrowings were $174.2 million, a decrease of $7.4 million, or 4.1%, from December 31, 2018. 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.

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