Bridgewater Stock: Internal and External Factors to Boost Loan Portfolio (BWB)

Earnings of Bridgewater Bancshares, Inc. (NASDAQ: BWB) will most likely continue to rise, primarily due to a strong regional economy which will drive loan growth. Additionally, the expansion of the team and the recent launch of a new digital system will propel the loan portfolio. Overall, I expect Bridgewater Bancshares to report earnings of $1.69 per share for 2022, up 10% year-over-year. Compared to my last company report, I barely changed my revenue estimate. For 2023, I expect the company to report earnings of $1.94 per share, up 15% year-over-year. The year-end target price is quite close to the current market price. Accordingly, I am downgrading Bridgewater Bancshares to a holding rating.

Several internal and external factors to drive loan growth

Bridgewater Bancshares’ loan portfolio grew at a faster rate in the first half of 2022 than in any of the past five years. The portfolio grew by 14.5% during the first half, or 29% on an annualized basis. Going forward, loan growth will likely return to historical norm, as the outstanding second quarter performance is clearly unsustainable.

Nonetheless, loan growth is likely to remain strong thanks to a strong regional economy. Bridgewater Bancshares operates in Minnesota, which currently has the lowest unemployment rate in the country.

Additionally, the state’s coincident economic activity index is currently showing stronger growth than the pre-pandemic rate.

In addition, management has recently hired new bankers in the commercial (non-owner occupied) and commercial and industrial real estate segments, as mentioned in the presentation of the results. Due to these team additions, management is optimistic about loan growth in these segments.

In addition, the new commercial loan origination system launched in March 2022 has had its first success. I expect this digital system to continue to keep commercial loan growth high over the next year and a half.

Given these factors, I expect the loan portfolio to grow by 5% each quarter through the end of 2023. This will lead to loan growth of 26% for the year 2022. In my last report on Bridgewater Bancshares, I estimated loan growth at 15.9%. I increased my loan growth estimate due to second quarter performance. Also, Minnesota’s economy is doing even better than I expected; therefore, I have revised my growth estimate for the second half of 2022 upwards.

Meanwhile, I expect deposits to grow in line with loans. However, growth in other balance sheet items will lag slightly behind loan growth. The following table shows my balance sheet estimates.

	EX18	FY19	FY20	FY21	FY22E	FY23E
Financial situation
Net loans	1,640	1,884	2,282	2,770	3,497	4,250
Net loan growth	23.7%	14.9%	21.1%	21.4%	26.2%	21.6%
Other productive assets	257	293	393	441	499	509
Deposits	1,561	1,823	2,502	2,946	3,530	4,291
Loans and sub-debts	182	174	142	135	240	249
Common equity	221	245	265	313	334	390
Book value per share ($)	7.5	8.2	9.1	10.8	11.6	13.5
Tangible BVPS ($)	7.4	8.0	9.0	10.7	11.5	13.4
Source: SEC Filings, Author’s Estimates (In millions of dollars, unless otherwise indicated)

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Liability repricing to exceed current asset repricing

The average loan yield is moderately rate sensitive, as variable and adjustable rate loans accounted for 35% of total loans at the end of June 2022, according to details provided in the 10-Q filing. In addition, fixed rate loans totaling $275 million will mature within one year, representing 9% of total loans.

On the other side of the balance sheet, the deposit book is quite sensitive to rates. Interest-bearing transaction, savings and money market accounts accounted for 46% of total deposits, according to details provided in the 10-Q filing. These deposits are frequently reassessed; therefore, they will almost immediately squeeze the margin in a rising rate environment.

Based on the results of management’s interest rate sensitivity analysis presented in File 10-Q, net interest income will be slightly negatively impacted by rising short-term interest rates. A 200 basis point increase in interest rates could decrease net interest income by 0.66% over twelve months.

On the other hand, loan additions will support the net interest margin. Overall, I expect the margin to be mostly stable through the end of 2023.

Likely normalized provisioning until the end of 2023

Non-performing loans represented only 0.02% of total loans, while provisions represented 1.39% of total loans at the end of June 2022. As a result, provision coverage seems a bit excessive. In my view, management will want to keep their benefit coverage high as there are threats of recession. In addition, rising inflation can only increase borrowers’ financial stress. In addition, high interest rates will put pressure on borrowers who have variable rate loans.

Overall, I expect net provision charges to be around 0.28% of total annualized lending each quarter through the end of 2023. This is the same as the average net charge ratio allowance on total loans for the last five years. In my last report on Bridgewater Bancshares, I estimated a net provision charge of $8 million for 2022. I have now revised it to $10 million, mainly because I revised my estimate of loan additions for the year.

Expect revenue to increase by 10%

Expected loan additions will likely be the main driver of earnings through the end of 2023. During this time, the margin will likely remain unchanged from the second quarter level. Additionally, the provisioning load will likely remain at a normal level. Overall, I expect Bridgewater Bancshares to report earnings of $1.69 per share for 2022, up 10% year-over-year. For 2023, I expect earnings to grow 15% to $1.94 per share. The following table shows my income statement estimates.

	EX18	FY19	FY20	FY21	FY22E	FY23E
income statement
Net interest income	65	74	88	110	133	161
Allowance for loan losses	4	3	13	5	ten	12
Non-interest income	3	4	6	5	6	6
Non-interest charges	32	37	45	48	58	74
Net income – Common Sh.	27	31	27	45	49	56
BPA – Diluted ($)	0.91	1.05	0.93	1.54	1.69	1.94
Source: SEC filings, earnings releases, author’s estimates (In millions of dollars, unless otherwise indicated)

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In my last report on Bridgewater Bancshares, I estimated earnings of $1.70 per share for 2022. I barely changed my earnings estimate as the upward revision to the loan growth estimate negates the upward revision of the estimate of provision charges.

Actual earnings may differ materially from estimates due to the risks and uncertainties associated with inflation and, therefore, the timing and magnitude of interest rate increases. Also, a deeper or longer than expected recession may increase the expected loan loss provisioning beyond my estimates.

The current market price is quite close to the year-end target price

I use historical price/accounting tangible (“P/TB”) and price/earnings (“P/E”) multiples to value Bridgewater Banc shares. The stock has traded at an average P/TB ratio of 1.46 in the past, as shown below.

	EX18	FY19	FY20	FY21	Medium
T. Book value per share ($)	7.4	8.0	9.0	10.7
Average market price ($)	12.5	11.5	10.7	16.4
Historical P/TB	1.69x	1.43x	1.20x	1.54x	1.46x
Source: Company Financials, Yahoo Finance, Author’s Estimates

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Multiplying the average P/TB multiple by the expected tangible book value per share of $11.5 yields a target price of $16.8 for the end of 2022. This price target implies a decline of 3.6% compared to the closing price on September 15. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB	1.26x	1.36x	1.46x	1.56x	1.66x
TBVPS – Dec 2022 ($)	11.5	11.5	11.5	11.5	11.5
Target price ($)	14.5	15.7	16.8	18.0	19.1
Market price ($)	17.5	17.5	17.5	17.5	17.5
Up/(down)	(16.8)%	(10.2)%	(3.6)%	3.0%	9.6%
Source: Author’s estimates

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The stock has traded at an average P/E ratio of around 11.7x in the past, as shown below.

	EX18	FY19	FY20	FY21	Medium
Earnings per share ($)	0.91	1.05	0.93	1.54
Average market price ($)	12.5	11.5	10.7	16.4
Historical PER	13.7x	11.0x	11.5x	10.7x	11.7x
Source: Company Financials, Yahoo Finance, Author’s Estimates

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Multiplying the average P/E multiple by the expected earnings per share of $1.69 yields a price target of $19.8 for the end of 2022. This price target implies a 13.4% upside from at the closing price on September 15. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E	9.7x	10.7x	11.7x	12.7x	13.7x
EPS 2022 ($)	1.69	1.69	1.69	1.69	1.69
Target price ($)	16.4	18.1	19.8	21.5	23.2
Market price ($)	17.5	17.5	17.5	17.5	17.5
Up/(down)	(6.0)%	3.7%	13.4%	23.1%	32.7%
Source: Author’s estimates

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Equal weighting of target prices from both valuation methods gives a combined result target price of $18.3, implying a 4.9% upside from the current market price. In my last report on Bridgewater Bancshares, I gave a target price of $18.70 and adopted a buy rating. Since then, the stock price has surged, leaving a small uptick. Accordingly, I am now downgrading Bridgewater Bancshares to a holding rating.