Bridgewater Bancshares, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company is a Minnesota-based financial holding company serving primarily the Minneapolis–St. Paul area through Bridgewater Bank and subsidiaries. Unless otherwise noted, dollar amounts are in millions.
Financial results and key metrics
- Q3 earnings: Net income was $7.8 million, up 20.8% from $6.5 million a year earlier. Diluted EPS was $0.27 versus $0.21.
- Nine-month earnings: Net income was $22.8 million, up 19.2% from $19.2 million. Diluted EPS was $0.76 versus $0.66.
- Interest income and margin: Q3 net interest income was $18.9 million, up 13.8%; nine-month net interest income was $54.2 million, up 14.6%. Tax-equivalent net interest margin declined to 3.56% for Q3 from 3.71%, and to 3.57% for nine months from 3.76%. Management attributed compression to elevated cash, lower loan fees, and higher deposit and borrowing costs.
- Credit costs: Provision for loan losses was $0.9 million in Q3 versus $1.3 million, and $2.1 million for nine months versus $2.8 million. The allowance was $22.1 million, or 1.20% of gross loans. Nonaccrual loans were $0.8 million, 0.04% of loans; no loans were 90 days past due and accruing, and there were no foreclosed assets.
- Expenses and taxes: Q3 noninterest expense rose 20.7% to $9.1 million; nine-month expense rose 28.9% to $26.4 million. Nine-month expense included $2.1 million of tax-credit investment amortization. The effective tax rate was 21.1% in Q3 and 19.5% for nine months, with tax credits contributing to lower rates.
- Balance-sheet growth: Assets were $2.23 billion, up 13.1% from year-end 2018. Gross loans rose 10.9% to $1.85 billion; deposits rose 15.5% to $1.80 billion. Real estate mortgage loans represented 72.3% of gross loans; CRE, multifamily, and construction/land development together represented 66.3%.
- Funding, debt and liquidity: Noninterest-bearing deposits were $478.5 million. Brokered deposits declined to $246.0 million, or 13.7% of deposits. Borrowings included $141.5 million of FHLB advances, $13.5 million of notes payable, and $24.7 million of subordinated debentures; no federal funds were purchased at quarter-end. Cash and cash equivalents were $89.6 million. Primary liquidity was $353.4 million and total primary and secondary liquidity was $768.5 million, equal to 42.6% of deposits.
- Cash flow and capital: For nine months, operating cash flow was $31.9 million, investing cash outflow was $195.1 million, and financing cash inflow was $224.4 million; cash increased $61.2 million. Shareholders’ equity was $236.1 million. The Bank’s total risk-based capital ratio was 12.44% and Tier 1 leverage ratio was 10.88%; it met applicable capital requirements.
Changes versus comparable periods
- Loan growth drove higher interest income and net interest income, but funding costs rose faster: Q3 interest expense increased 38.8% and nine-month interest expense increased 58.9%.
- Operating performance benefited from higher securities-sale gains and improved results on foreclosed-asset sales. The nine-month noninterest-income increase was $1.0 million.
- Higher staffing and growth-related investment raised costs. Full-time equivalent employees increased to 158 from 139 a year earlier. Q3 adjusted efficiency ratio was 42.9%, versus 42.7%; the nine-month ratio was 42.9%, versus 41.5%.
- Allowance coverage remained 1.20% of gross loans, while nonaccrual loans rose to $0.8 million from $0.6 million at year-end 2018. Substandard loans totaled $5.9 million; there were three troubled debt restructurings with $0.5 million outstanding.
- The company repurchased 1.33 million shares for $15.0 million during the nine months. Its authorization was increased to $25.0 million, with $10.0 million remaining at quarter-end.
Outlook, risks and notable items
- No specific earnings or balance-sheet guidance was provided. Management expects further noninterest expense increases as it invests in staffing, technology, infrastructure, and risk controls to support growth.
- Management said the loan portfolio performed consistently and cited the diversified local economy in explaining lower provision expense. The company expects continued growth but no significant near-term change in its loan-portfolio mix or emphasis on real estate lending.
- Interest-rate simulation estimated a 12.98% increase in 12-month net interest income under an immediate, sustained 400-basis-point increase, and a 6.35% decrease under a 200-basis-point decline. These are hypothetical model results, not forecasts; actual outcomes depend on deposit repricing, balance-sheet mix, prepayments, and other assumptions.
- Key risks include CRE and borrower concentrations, local real estate and economic conditions, credit and liquidity management, reliance on non-core funding and funding costs, interest-rate and securities-market changes, competition, cybersecurity and technology disruption, and regulatory or legal developments. Management reported no material change to previously disclosed risk factors and no material pending legal proceedings.
- The bank’s new headquarters construction had a guaranteed maximum price of $23.0 million; $12.4 million had been paid by September 30, with completion anticipated in 2020. Unfunded credit commitments and letters of credit totaled $571.8 million. Management stated it expected to meet contractual obligations through available cash, operating cash generation, deposit gathering, and borrowing capacity.
- Available-for-sale securities had $8.3 million of gross unrealized gains and $0.9 million of gross unrealized losses. Management attributed losses principally to interest rates and reported no other-than-temporary impairment.
Important facts for investors to verify
- Whether loan growth and deposit gathering can continue without further margin pressure or increased reliance on higher-cost funding.
- Trends in CRE concentration, criticized/classified loans, nonaccrual balances, charge-offs, and the adequacy of the allowance as the portfolio expands.
- How much of expense growth is recurring, including tax-credit amortization and planned investment in staff, systems, and the headquarters project.
- Whether core-deposit growth continues to reduce brokered funding and whether reported liquidity and borrowing capacity remain available under stress.
- Actual interest-rate sensitivity compared with the filing’s static-balance-sheet simulation, and the effect of future deposit repricing on net interest margin.
- Remaining share-repurchase authorization, capital levels after repurchases, and the timing and cost of the headquarters construction commitment.