Bridgewater Bancshares, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. Bridgewater Bancshares is a Minnesota financial holding company operating Bridgewater Bank, primarily serving the Minneapolis–St. Paul–Bloomington area. This unaudited report covers the quarter and six months ended June 30, 2019; balance-sheet comparisons are to December 31, 2018 unless otherwise noted. Amounts are in millions of dollars unless stated otherwise.
Financial performance and condition
| Metric | Q2 2019 | Comparison |
|---|---|---|
| Net interest income | $18.1 | Up 14.1% from Q2 2018 |
| Provision for loan losses | $0.6 | Down from $0.9 in Q2 2018 |
| Noninterest income | $1.1 | Up from $0.5 in Q2 2018 |
| Noninterest expense | $9.5 | Up 46.6% from $6.5 in Q2 2018 |
| Income before taxes | $9.2 | Compared with $9.0 in Q2 2018 |
| Net income | $8.0 | Up 18.7% from $6.7 in Q2 2018 |
| Diluted earnings per share | $0.26 | Compared with $0.22 in Q2 2018 |
- For the first six months, net income was $15.0, up 18.4% year over year; diluted EPS was $0.49 versus $0.45. Net interest income increased 15.0% to $35.3.
- Q2 net interest margin was 3.60%, down 22 basis points from Q2 2018; first-half margin was 3.57%, down 23 basis points. Loan growth and higher asset yields were offset by higher deposit and borrowing costs and lower recognized loan fees.
- Q2 return on average assets was 1.55%; return on average common equity was 13.88%. The reported efficiency ratio was 50.1%; excluding tax-credit investment amortization, the company reported an adjusted ratio of 42.7% (non-GAAP).
- Six-month operating cash flow was $20.3, investing cash outflow was $107.6, and financing cash inflow was $125.3. Cash and cash equivalents rose $37.9 to $66.4.
- Total assets were $2.124 billion, up 7.6%; gross loans were $1.785 billion, up 7.2%; and deposits were $1.699 billion, up 8.9%. Shareholders’ equity was $229.1.
- Loans were funded primarily by deposits, with $142.5 of FHLB advances, $14.0 of notes payable and $24.7 of subordinated debentures outstanding. No federal funds were outstanding at quarter-end.
- Primary liquidity was $308.3, or 18.1% of deposits; total primary and secondary liquidity was $691.1, or 40.7% of deposits. Core deposits were 78.3% of total deposits; brokered deposits were $243.0.
- Regulatory capital ratios exceeded stated requirements: the Bank’s total risk-based capital ratio was 12.67%, common equity Tier 1 was 11.73%, and Tier 1 leverage was 10.99%. The company reported compliance with its liquidity guidelines and capital requirements.
Material changes and unusual items
- Gross loans grew $120.0 in the first half, led by commercial, multifamily and non-owner-occupied commercial real estate lending. Real estate mortgage loans were 72.7% of gross loans; total CRE-related loans were 66.0% of the portfolio and 481.7% of Bank risk-based capital.
- Interest expense rose 64.3% in Q2, driven by higher deposit and borrowing balances and rates. Average cost of interest-bearing liabilities increased to 2.07% from 1.52% a year earlier.
- Noninterest expense rose $3.0 in Q2. Tax-credit investment amortization accounted for $1.4 of the increase; salaries and benefits rose $0.8. Management also cited spending on staff, technology, marketing and growth infrastructure. Employees increased to 150 from 125 a year earlier.
- Tax-credit benefits reduced the effective tax rate to 12.9% in Q2 from 25.2% a year earlier, and to 18.7% for the first half from 25.5%. Management said tax credits became eligible to be applied in 2019.
- The company recorded a $0.5 Q2 gain on securities sales, versus a $0.1 loss in Q2 2018. Securities available for sale were $241.9; unrealized losses were attributed principally to interest-rate changes, and management did not consider them other-than-temporary.
- The allowance for loan losses was $21.4, or 1.20% of gross loans. First-half net recoveries were $0.1, compared with net charge-offs of $0.3 in the prior-year period.
- The filing’s asset-quality disclosures are inconsistent: the narrative states nonaccrual loans were $1.6 at June 30, while the detailed aging table reports $0.555 and the nonperforming-asset table reports $0.555 of nonaccrual loans plus $1.033 of foreclosed assets. Investors should verify the correct nonaccrual figure.
- The company repurchased 1,125,945 shares, about 4% of outstanding shares, for $12.6 at a weighted average $11.20 per share under its original $15 million authorization. On July 23, 2019, the board increased total authorization to $25 million, through January 22, 2021.
Outlook, risks and contingencies
- No specific earnings or balance-sheet guidance is provided. Management expects further noninterest expense increases as it invests in infrastructure and personnel to support growth, while emphasizing expense management and risk controls.
- Management describes continued organic loan and deposit growth as central to its strategy. It expects the loan portfolio’s composition and emphasis on real estate lending to remain broadly consistent in the foreseeable future.
- Interest-rate sensitivity modeling estimates net interest income would increase 11.92% under an immediate, sustained 400-basis-point rate rise and decrease 7.68% under a 200-basis-point decline. These are hypothetical static-balance-sheet simulations, not forecasts; actual results depend on rates, deposit repricing, loan prepayments, growth and funding mix.
- Key stated risks include concentrated commercial real estate and large borrower exposures, local and national real estate and economic conditions, credit and liquidity management, reliance on non-core funding and funding costs, interest-rate and securities-value changes, competition, cybersecurity and technology disruptions, regulatory changes, and ability to execute growth while controlling costs.
- Unfunded lines of credit and letters of credit totaled $535.0. The Bank also has a headquarters construction contract capped at $23.0, with $6.9 paid by June 30 and completion anticipated in 2020. The company said it expected to meet obligations using cash, portfolio cash flows, deposits and borrowing facilities.
- No material pending legal proceedings or material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Reconcile the conflicting nonaccrual-loan disclosures and review subsequent loan performance, classifications and allowance adequacy.
- Assess whether loan growth and real estate concentration remain consistent with underwriting standards, and track changes in CRE exposure and criticized loans.
- Monitor net interest margin and funding costs, including brokered deposits, FHLB borrowing and sensitivity to deposit repricing.
- Separate recurring operating trends from the effects of securities gains, tax-credit amortization and tax benefits when assessing earnings and efficiency.
- Review liquidity and capital after share repurchases, the expanded repurchase authorization and ongoing headquarters construction spending.