Twin Cities bank profits from urban building boom

There is a certifiable building boom in the Minneapolis-St. Paul housing market, especially on the multi-family side. In downtown Minneapolis alone, for instance, plans are afoot to add 1,400 apartments this year — double the amount of 2016 and 2017 combined.

This is good news to investors in Bridgewater Bancshares, Inc., whose Bridgewater Bank unit thrives off real estate loans. And well it should, as the bank was founded in late 2005 with the intent to serve the real estate sector and still notes that it is “dedicated to serving successful real estate investors, entrepreneurs and individuals.”

“We’ve always been known as a bank that does real estate really well,” said Jerry Baack, chairman, CEO and president of Bridgewater Bancshares. Well enough that nearly three quarters of its loan portfolio is tied to real estate, be it 1-4 family homes, multi-family or owner and non-owner occupied commercial real estate. Well enough that its net interest income year to date ending Sept. 30 rose 20 percent from 2017, which it attributed mainly to growth in average earning assets that in turn was mainly due to organic growth. (Net income year-to-date was $19.1 million, a 41 percent gain over 2017 results.)

As real estate lending at Bridgewater Bank chugs along, the company has recently added three lenders in its C&I space. (14.6 percent of its loans are in this category.) This bulking up takes advantage of what Baack sees as the disruption in its market and an increase in M&A activity. Importantly, it adds a dollop of diversity. “Given all of this, we do plan on growing our C&I book as a percentage of our loan portfolio over the next few years,” he said.

Bridgewater Bank remains solidly a business bank. That gives it some business characteristics not found with retail banks. Take its efficiency ratio, for instance. It’s at an enviable 41.5 percent as of Sept. 30.

“The best explanation is that we operate based on a simple business model,” Baack said. “Our focus has always been commercial real estate lending, and because of that, our employee overhead is low due to the increased loan portfolio sizes of our lenders compared to smaller loan portfolio sizes related to other types of commercial lending.”

The bank also utilizes the EOS operating system, which it adopted in 2010. Baack said EOS has resulted in a highly-productive team.

Another contributor is the bank’s model of serving clients through strategically positioned branches, as well as through online, mobile and direct banking channels that are not dependent on a traditional branch network with several physical locations. And the company also outsources much of its technology infrastructure — a different approach than most banks of similar size.

Ranked by assets, at $1.7 billion, Bridgewater Bank already is in the top 10 in Minnesota. Yet, its employee head count (138) is small by comparison. A bank with Bridgewater-sized assets typically employs roughly 400 people.

Taking advantage of this growth and business model, and perhaps a good climate for banks, Bridgewater Bancshares went public in March, at $11.75 per share. The company received proceeds from 4.37 million shares, while investors sold 2.32 million shares. In addition to that capital raise, the company placed a $25 million subordinated note in 2016 and also has a $20 million loan that is secured with bank stock. The subordinated note has been down-streamed from the holding company to the bank as Tier I Capital to support growth. The loan, granted by an out-of-market bank, gives Bridgewater debt but also cash to generate a return without diluting ownership.

Jerry Baack

“We borrowed money for five years at an all-in cost of 3.7 percent, to consistently produce a 12.5 percent return on equity and grow tangible book value to a compounded annual growth rate of 19 percent,” said Baack. “We believe there is a strategic level of debt if you can efficiently deploy it and ultimately enhance shareholder value.”

Bridgewater has always marketed aggressively to the niche commercial real estate market it serves. This has proven successful, Baack said, as much of its growth is attributed to this large, and what he considers loyal referral network. However, as the M&A trend continues to alter the Twin Cities’ banking landscape, he sees an opportunity to capitalize on consumer preference.

“We are on the cusp of launching a mass media campaign that we anticipate will heighten our brand recognition and bring the Bridgewater name to a new level,” Baack said. Stay tuned.