Bridgewater Bancshares, Inc. (NASDAQ:BWB) has demonstrated its ability to navigate the challenging interest rate environment with aplomb, delivering solid financial results and maintaining a strong balance sheet. The company's focus on prudent risk management, diversified revenue streams, and strategic investments have positioned it well for continued success.

Financials

For the full year 2023, Bridgewater Bancshares reported net income of $39.96 million, with annual revenue reaching $228.06 million. The company's operating cash flow for the year was $30.02 million, while free cash flow came in at $27.05 million. These robust financial metrics underscore the company's ability to generate consistent earnings and cash flow, even in the face of macroeconomic headwinds.

In the second quarter of 2024, Bridgewater Bancshares reported a stabilized net interest margin of 2.24%, a return to revenue growth, and continued strong asset quality. Net interest income increased 1.5% quarter-over-quarter, driven by a 12 basis point expansion in the portfolio loan yield to 5.50%. This was partially offset by a 14 basis point increase in deposit costs, as the company continues to navigate the rising rate environment.

Business Overview

Bridgewater Bancshares is a financial holding company headquartered in St. Louis Park, Minnesota, with a focus on serving the Minneapolis-St. Paul-Bloomington, MN-WI Metropolitan Statistical Area. The company's principal sources of income are interest and fees collected on loans, interest and dividends earned on investment securities, and service charges.

The company's simple, efficient business model of providing responsive support and unconventional experiences to clients continues to be the underlying principle that drives its profitable growth. Bridgewater Bancshares' loan portfolio is primarily composed of commercial real estate (CRE) and multifamily loans, which account for over 70% of the total loan book. The company's expertise in these sectors, particularly in the Twin Cities market, has been a key differentiator and driver of its success.

Margin Stabilization and Revenue Growth

After experiencing steady margin compression in recent quarters, Bridgewater Bancshares reported a stabilized net interest margin of 2.24% in the second quarter of 2024. This was driven by a more meaningful increase in the portfolio loan yield, which offset continued deposit pricing pressures. The company's ability to reprice its loan portfolio higher, even in a lower rate environment, is a testament to its prudent risk management and disciplined underwriting practices.

The stabilization of the net interest margin, coupled with higher loan fees from increased payoff activity, resulted in a 1.5% quarter-over-quarter increase in net interest income - the first time the company has reported revenue growth since the third quarter of 2022. This bodes well for the company's profitability going forward, as it navigates the evolving interest rate landscape.

Robust Asset Quality and Capital Position

Bridgewater Bancshares' asset quality remains pristine, with no net charge-offs in the second quarter and nonperforming assets at just 0.01% of total assets. The company's allowance for credit losses stands at a robust 1.37% of gross loans, well in excess of peer levels. This strong credit profile is a reflection of the company's disciplined underwriting standards and active credit oversight.

The company's capital position also remains solid, with a Common Equity Tier 1 (CET1) ratio of 9.41% as of the end of the second quarter. Bridgewater Bancshares has been actively repurchasing shares, having bought back nearly 253,000 shares during the quarter at a weighted average price of $11.48 per share. The company still has $15.3 million remaining under its current share repurchase authorization, which it will continue to evaluate based on a variety of factors, including capital levels, growth opportunities, and market conditions.

Loan and Deposit Growth

Loan growth moderated to 1.7% on an annualized basis in the second quarter, primarily due to elevated payoffs, which increased nearly $50 million from the prior quarter. However, on a year-to-date basis, loan balances are up 4.1% annualized, in line with the company's expectations. Bridgewater Bancshares continues to see good loan demand in the Twin Cities market, but the high interest rate environment and challenged equity market have caused some borrowers to delay projects or reconsider deals.

Deposit growth was more muted in the second quarter, with core deposits declining $53 million. This is not unusual for the company, as its core deposit growth tends to be uneven due to the nature of its client base. On a year-to-date basis, total deposits are up 5.3% annualized, while core deposits are up 3%, both in line with the loan growth. Bridgewater Bancshares remains focused on driving core deposit growth and moderating deposit costs over time.

Multifamily and CRE Portfolios

Bridgewater Bancshares' multifamily and commercial real estate (CRE) portfolios continue to be areas of strength. Over 90% of the company's multifamily loans are in the Twin Cities market, which has historically been a stable market with less volatility than some coastal and high-growth markets. The company has been proactively testing covenants across its multifamily portfolio and has been pleased with the results, with only minor issues that have been addressed through risk mitigants.

The company's non-owner occupied CRE office portfolio remains limited, accounting for just 5% of total loans. This includes only four loans located in central business districts, with two previously placed on watch or substandard due to potential lease rollover risk. Bridgewater Bancshares continues to closely monitor these transactions, but remains confident in the overall quality of its CRE portfolio.

Outlook

Looking ahead, Bridgewater Bancshares expects full-year 2024 loan growth to remain in the low to mid single-digit range, although elevated payoff levels are anticipated to be a headwind over the remainder of the year. The company expects its net interest margin to remain relatively stable near current levels in the near term, with potential for expansion after any interest rate cuts take effect.

The company's strategic priorities for 2024 include optimizing its balance sheet for longer-term growth, expanding its client base through affordable housing efforts and networking events, continuing to invest in the business (including the launch of a new CRM tool), and closely monitoring its loan portfolios, especially CRE and multifamily.

Conclusion

Bridgewater Bancshares has demonstrated its ability to navigate the challenging interest rate environment through prudent risk management, diversified revenue streams, and strategic investments. The company's stabilized net interest margin, return to revenue growth, and continued strong asset quality position it well for future success. With a focus on serving the Minneapolis-St. Paul-Bloomington market, Bridgewater Bancshares' expertise in commercial real estate and multifamily lending has been a key differentiator, and the company remains well-positioned to capitalize on opportunities in its core markets.