Bridgewater Bancshares, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited consolidated results. Bridgewater is a Minnesota-based bank holding company serving primarily the Minneapolis–St. Paul–Bloomington area. Dollar amounts below are in millions unless otherwise noted.
Key financial results and position
| Metric | Q1 2020 / March 31, 2020 | Comparable / prior period |
|---|---|---|
| Interest income | $27.5 | $24.3 in Q1 2019 |
| Net interest income | $20.1 | $17.1 in Q1 2019 |
| Provision for loan losses | $2.1 | $0.6 in Q1 2019 |
| Noninterest income | $1.7 | $0.6 in Q1 2019 |
| Noninterest expense | $9.7 | $7.9 in Q1 2019 |
| Net income | $7.4; diluted EPS $0.25 | $7.0; diluted EPS $0.23 in Q1 2019 |
| Net interest margin, tax-equivalent | 3.59% | 3.54% in Q1 2019 |
| Return on average assets / equity, annualized | 1.29% / 11.94% | 1.42% / 12.60% in Q1 2019 |
| Total assets | $2,418.7 | $2,268.8 at Dec. 31, 2019 |
| Gross loans / deposits | $2,002.8 / $1,900.1 | $1,912.0 / $1,823.3 at Dec. 31, 2019 |
| Allowance for loan losses | $24.6; 1.23% of gross loans | $22.5; 1.18% at Dec. 31, 2019 |
| Cash and cash equivalents | $61.5 | $31.9 at Dec. 31, 2019 |
| Borrowings | $207.5 FHLB advances; $12.5 notes payable; $24.8 subordinated debentures | $136.5; $13.0; $24.7, respectively, at Dec. 31, 2019 |
Net cash used in operating activities was $2.2 million, compared with $9.7 million provided in Q1 2019. Investing activities used $113.5 million, principally reflecting $91.1 million of net loan growth and $23.9 million of securities purchases. Financing activities provided $145.3 million, including deposit growth of $76.8 million and net FHLB advance proceeds of $71.0 million. Cash increased $29.6 million during the quarter.
At March 31, primary liquidity was $368.8 million, or 19.4% of deposits; total primary and secondary liquidity was $706.3 million, or 37.2% of deposits. The Bank’s regulatory capital ratios were 12.67% total risk-based capital, 11.53% Tier 1 risk-based capital, 11.53% common equity Tier 1, and 10.93% Tier 1 leverage; each exceeded the stated well-capitalized thresholds.
Material changes versus Q1 2019 and year-end 2019
- Net income rose 6.1% year over year, while diluted EPS increased 10.4%. Net interest income grew 17.3%, supported by 14.3% growth in average interest-earning assets, largely from loan growth.
- Higher credit provisioning and operating costs tempered earnings growth. The provision for loan losses increased by $1.5 million year over year; noninterest expense rose 23.6%, principally due to salaries and employee benefits, which increased $1.7 million. Noninterest income increased $1.1 million, including $0.9 million of swap fees.
- Gross loans increased 4.7% from year-end, and deposits increased 4.2%. Total assets were up 6.6% from year-end. FHLB advances rose $71.0 million net during the quarter.
- Watchlist loans increased to $45.8 million from $5.3 million at year-end, primarily reflecting exposures in vulnerable industries, including hospitality. Nonaccrual loans were $0.6 million versus $0.5 million at year-end; no loans were 90 days past due and accruing.
- Accumulated other comprehensive income declined $2.4 million during the quarter, principally reflecting interest-rate movements and cash-flow hedge valuation changes. The company repurchased 177,864 shares for $2.0 million and had made no repurchases after March 16.
Outlook, management commentary, risks, and unusual items
- Management said the pandemic’s duration and full financial impact could not be estimated and did not expect future-quarter results to track historical performance. It anticipated pressure on net interest margin from lower rates and expected loan growth to slow.
- Management expects credit quality to weaken and provision expense, delinquencies, and charge-offs to increase. No COVID-related charge-offs had been experienced as of the filing’s discussion, but the allowance estimate reflects heightened economic uncertainty.
- As of May 5, 2020, the company reported COVID-related modifications for 157 borrowers totaling $288.0 million, approximately 15% of the loan portfolio. It had received SBA approval to fund more than 1,000 PPP loans totaling approximately $181.8 million. These figures are subsequent to quarter-end.
- The company established Federal Reserve borrowing capacity related to PPP lending. It reported compliance with its liquidity guidelines and said capital ratios exceeded regulatory requirements. Management did not expect to resume share repurchases until the pandemic had subsided.
- Credit concentration is a key exposure: commercial real estate loans represented 67.5% of gross loans and 488.7% of Bank risk-based capital. Brokered deposits were $261.0 million, or 13.7% of deposits. The filing also identifies large borrowers and depositors, funding costs, local real estate conditions, and the pandemic as material risks.
- Goodwill was $2.6 million. A pandemic-related decline in the share price triggered interim impairment testing; management concluded goodwill was not impaired at March 31. Securities available for sale had $3.6 million in gross unrealized losses, which management attributed principally to interest-rate changes and did not deem other-than-temporary.
- The new headquarters project was expected to be completed in Q3 2020. The filing reported $19.2 million paid under the core-and-shell contract and $1.8 million under the separate $6.3 million interior build-out contract. Management considered the company able to meet contractual obligations.
- There were no material pending legal proceedings reported. PPP-related litigation, compliance, and SBA guarantee risks were specifically disclosed. LIBOR was an index for approximately 10.7% of loans and the company’s swaps; transition risks remained under evaluation.
- No formal earnings or financial guidance was provided. Interest-rate sensitivity modeling estimated net interest income would rise 11.73% under an immediate, sustained 400-basis-point increase and decline 2.82% under a 200-basis-point decrease; management cautioned that these are hypothetical estimates, not forecasts.
Most important facts for investors to verify
- Whether subsequent loan modifications and pandemic-related business stress lead to increased delinquencies, criticized assets, charge-offs, or further allowance builds.
- Realization and performance of the $288.0 million modified-loan pool and the $181.8 million of approved PPP lending, including SBA funding and guarantee compliance.
- Loan and funding concentration trends, including commercial real estate exposure, brokered deposits, large borrowers, and liquidity availability as conditions evolve.
- Net interest margin and funding-cost trends following the March rate cuts, and the effectiveness and valuation impact of cash-flow hedges.
- Progress and remaining cost of the headquarters project, and the timing of any resumption of share repurchases.