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How Bridgewater Bank grows in a crowded field

Brian Martucci//June 11, 2018//

Jerry Baack, Bridgewater Bank’s founder, president and CEO, and Chief Operating Officer Mary Jayne Crocker take time out in the lobby of 3800 American Blvd. W. in Bloomington, where Bridgewater is currently headquartered. (Staff photo: Bill Klotz)

Jerry Baack, Bridgewater Bank’s founder, president and CEO, and Chief Operating Officer Mary Jayne Crocker take time out in the lobby of 3800 American Blvd. W. in Bloomington, where Bridgewater is currently headquartered. (Staff photo: Bill Klotz)

How Bridgewater Bank grows in a crowded field

Brian Martucci//June 11, 2018//

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Bridgewater Bank plans a new four-story, 84,000-square-foot headquarters at the northeast corner of Excelsior Boulevard and Monterey Drive in St. Louis Park. (Submitted image: Bridgewater Bank)
Bridgewater Bank plans a new four-story, 84,000-square-foot headquarters at the northeast corner of Excelsior Boulevard and Monterey Drive in St. Louis Park. (Submitted image: Bridgewater Bank)

It’s not every day that a six-branch community bank with less than $2 billion in assets and a low-key approach to lending floats an initial public offering on the Nasdaq stock exchange.

Most community banks under $10 billion in assets remain in private hands, said Jim Amundson, president and CEO of the Independent Community Bankers of Minnesota.

But, on March 14, that’s just what Bloomington-based Bridgewater Bancshares did. The IPO priced 6.7 million shares at $11.75 each, raising $79 million – about $2 million more than projected. Shares closed the first trading day at $12.62, a 7.4 percent premium to the IPO price. Since then, BWB shares have outperformed the widely watched Financial Select Sector by about 6 percent.

Bridgewater plans to use its IPO windfall to support continued organic and acquisitive growth amid a banking climate characterized by accelerating merger and acquisition activity in the financial sector, rising interest rates, and lingering uncertainty over Minnesota policymakers’ final response to federal tax cuts.

In January, Bridgewater submitted a proposal to the city of St. Louis Park for a new four-story, 84,000-square-foot headquarters at the northeast corner of Excelsior Boulevard and Monterey Drive. The 130-employee bank also plans to open a satellite branch in downtown St. Paul’s Osborn370 building at 370 Wabasha St. later this year. And, to accommodate loan portfolio growth at a 28.7 percent five-year compound annual growth rate, Bridgewater is expanding its lending team.

“We made the decision to get out in front of the significant market changes we saw coming, and to use the capital we expected to raise to fund acquisitions and attract talent,” said Jerry Baack, founder, president and CEO of Bridgewater Bank.

Bridgewater Bank in December 2015 acquired Orono-based First National Bank of the Lakes. A renamed branch is at 2445 Shadywood Road in Orono. (Staff photo: Bill Klotz)
Bridgewater Bank in December 2015 acquired Orono-based First National Bank of the Lakes. A renamed branch is at 2445 Shadywood Road in Orono. (Staff photo: Bill Klotz)

Bridgewater Bank also has found a low-risk niche in commercial real estate lending: More than a third of it is focused on multifamily, in particular older, smaller properties described as naturally occurring affordable housing.

By total assets, Bridgewater is the fourth-smallest of the 18 publicly traded peer institutions cited in its offering disclosure. Since the turn of the century, it’s also the Twin Cities’ fastest growing new bank – an anomaly in a competitive community banking industry marked by branch closures and consolidation. According to a study by the Federal Reserve Bank of Minneapolis, the number of U.S. community banks has decreased by an average of 2.6 percent annually since 2000.

“In the Midwest, the easiest way for banks to grow is to buy that growth,” said Kevin Reevey, senior vice president at Great Falls, Montana-based D.A. Davidson Companies and one of two analysts tracking Bridgewater’s stock.

Rampant consolidation created a “void” for a bank small enough to respond to small and midsize business owners’ needs, but large enough to provide sophisticated products and services, Reevey added.

“Bridgewater has been able to fill that void and grow mostly organically to this point,” he said.

Bridgewater’s main local competitors include St. Paul-based Bremer Bank and Chaska-based Klein Financial. Both are privately held, with “very different strategies,” said Reevey.

Baack and Bridgewater Chief Operating Officer Mary Jayne Crocker say the challenges facing smaller Minnesota banks concern them less than the threats over which they have little control. Baack cites the ballooning national debt, “which no one talks about anymore,” and a flattening yield curve that could invert as the current economic expansion loses steam.

“That would be bad for banks in general,” said Baack. Anticipating pressure on interest income, Bridgewater is exploring “non-interest income” partnership opportunities with “non-banks,” he added. Bridgewater is in early talks to lease floor space in its new headquarters, but no deals have been finalized.

Led by Baack and Crocker, both alums of Edina-based Commerce Bank, Bridgewater’s first initial private offering, in June 2005, raised $10 million. Fueled by subsequent capital raises, loan and deposit growth, and the December 2015 acquisition of Orono-based First National Bank of the Lakes, Bridgewater’s total adjusted capitalization was $226 million as of Dec. 31, 2017, per its offering prospectus.

Despite a loan portfolio heavy in apartments, Bridgewater weathered the late 2000s real estate downturn and subsequent recession. That two Bridgewater founders began their careers with the Federal Deposit Insurance Corp. likely didn’t hurt: Baack served seven years as an FDIC examiner in the 1990s; Chief Credit Officer Jeffrey D. Shellberg ended a 15-year examiner term in 2000.

“It helps to know what it’s like on the other side of the table,” said Baack.

That knowledge gives Baack and his team confidence to push back – respectfully – on examiners’ dicta. The federal “Joint Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” identifies banks with commercial real estate loans accounting for more than 300 percent of total institutional capital and rapid commercial real estate loan growth as candidates for “heightened risk management practices.”

Bridgewater’s commercial real estate portfolio is 452 percent of total capital.

Such a standard might be appropriate for small business loans backed by illiquid collateral, said Baack, but not for apartment loans with multiple potential repayment sources.

“We’re able to demonstrate that we manage risk in a way that often exceeds expectations,” said Crocker.

As commercial real estate goes, Bridgewater’s niche is relatively low-risk, said Reevey.

Nearly a quarter of the bank’s total loan portfolio and nearly 37 percent of its commercial real estate portfolio are devoted to multifamily housing, according to its IPO disclosure. Its wheelhouse is small, naturally occurring affordable apartment communities in the metropolitan core: 12- to 30-unit buildings dating to the 1960s or 1970s, with one-bedroom apartments renting for $850 per month, said Baack.

“Historically, this has been a strong asset class,” said Reevey, the analyst.

Bridgewater manages risk by keeping its average loan size down, requiring ample collateral and favoring borrowers with proven track records, he added.

“They are very conservative underwriters,” said Reevey.

Amid a gathering housing affordability crisis, policymakers, neighborhood groups and civic-minded landlords are pushing to preserve adequate supplies of workforce housing in desirable Twin Cities communities.

They face pushback from investors seeking to maximize returns by renovating older properties to market-rate standards, rather than leaving properties as-is and maintaining affordable rents.

Bridgewater underwrites loans on both types of properties, but low vacancy rates at both ends of the apartment market are incentives to landlords to preserve naturally occurring affordable housing, said Baack.

“The Twin Cities region is growing, and people moving here need a place to live,” he said.

If not unusual, Bridgewater’s low-key niche is atypical among local peers – and atypically profitable. Bridgewater first notched a profit in January 2006, its third month in business. The bank has been in the green ever since, said Baack.

“Many of Minnesota’s community banks favor more traditional commercial and industrial loans, but Bridgewater’s approach seems to work well,” said Amundson of the Independent Community Bankers of Minnesota.

Still, Bridgewater faced serious challenges during the downturn.

“When things went south [in 2008], we knew that every loan from the past two years was underwater,” said Baack.

Like practically every commercial real estate lender in the country, Bridgewater foreclosed on properties to cover nonperforming loan losses. But the bank rebuffed borrowers who tried to hand back their keys and walk away, a common scenario in those days. Short of borrower bankruptcy, Bridgewater worked hard to keep properties in clients’ hands, said Baack.

Some recession-era loans remain on Bridgewater’s books, restructured multiple times over. But its nonperforming loan share has declined sharply during the past five years, from 1.51 percent in 2013 to 0.11 percent in 2017. And the bank saw virtually no charge-offs in 2017.

Bridgewater’s atypical portfolio complements an atypical corporate culture – at least, compared with more traditional banks, said Amundson. The average employee age is 32; many junior associates and client service employees come straight from college, said Crocker.

Several have creative backgrounds, said Laura Espeseth, Bridgewater’s controller. One employee featured on the bank website’s Why Work for Us page is an aspiring performer and choreographer. Others hail from retail backgrounds, hired for their customer service prowess. Underpinning Bridgewater’s eclectic approach to recruiting is the belief that homegrown talent trumps pedigree.

“[Hires] with three to five years of banking experience – they don’t always work as hard or train as well,” said Baack.

Bridgewater runs on the Entrepreneurial Operating System, an immersive management model more common in manufacturing than finance. The Entrepreneurial Operating System standardizes internal processes and holds individual employees accountable for specific metrics and outcomes, from senior leadership on down. The “accountability piece” attracts high performers who thrive on healthy competition, said Espeseth.

Community involvement is important for purpose-driven team members, too. Bridgewater employees volunteer with local nonprofits like People Serving People and Junior Achievement of the Upper Midwest. And, for a bank of its size, Bridgewater has disproportionate visibility in the Twin Cities – hosting or participating in more than 60 events throughout the year, including a networking party that drew more than 1,000 people to Nicollet Island last fall.

Outsiders notice. Before moving to Bridgewater last year, Espeseth spent 13 years as a certified public accountant with CliftonLarsonAllen, auditing community banks around the country. She saw enough to conclude that Bridgewater was different.

“I decided that, were I ever to leave public accounting, a bank like Bridgewater was where I’d want to end up – and here I am,” said Espeseth.

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