BWB - Bridgewater Bancshares: Expect The Move Higher To Continue

2023-12-20 14:52:28 ET

Summary

• Bridgewater Bancshares, Inc. has shown growth in deposits and a decrease in uninsured deposits, indicating positive financial performance.
• The company's loan portfolio has slightly decreased, but it is not a cause for concern.
• Revenue and profit have weakened, but this is likely due to a decline in net interest margin and high interest rates.
• In all, Bridgewater Bancshares shares are still very cheap and the bank deserves an attractive upside from here.

This year has been a very interesting time for the banking industry. Back in March of this year, the share prices of pretty much every company in the sector plummeted in response to a very real but short-lived crisis. Some institutions went under, but most survived. This opened up an opportunity for investors to find some really attractive prospects that could go on to generate market-beating returns.

I have been very selective during this process, rating only a select few banks as 'strong buy' candidates. But one of those companies was none other than Bridgewater Bancshares, Inc. ( BWB ), a small bank based out of Minnesota that has only seven branches in operation and a market capitalization of $315.6 million as of this writing.

In that article , I lauded the company for its continued growth during difficult times. Even though financial performance was showing some signs of weakening, the value of assets and deposits was growing for the most part. Add on top of this just how cheap shares were, and I could not help but be bullish. Since then, the stock has not performed exactly as well as I would have hoped given the rating. However, shares have seen an upside of 15.3%, which comfortably exceeds the 4.2% seen by the S&P 500 Index (SP500). You might think, given the time that has passed, that the market has fully accounted for the quality of the operation. Having said that, I do still think that the firm offers additional upside, enough at least to keep it rated a "strong buy" for now.

The picture keeps getting better

Back when I initially wrote about Bridgewater Bancshares in August of this year, we had financial data covering through the second quarter of the company's 2023 fiscal year. Fast-forward to today, and data now covers through the third quarter . During that time, the value of deposits on the company's books has grown nicely, hitting $3.68 billion. Initially, in the first quarter of this year, deposits came in slightly lower than they were at the end of 2022. But from the first quarter to the second, they managed to grow from $3.41 billion to $3.58 billion. In the third quarter, the increase to the aforementioned $3.68 billion translates to an extra $97.6 million in deposits on its books.

Unfortunately, the increase did bring with it a higher amount of uninsured deposits. These totaled $814.7 million as of the end of the third quarter. That's up from the $792.7 million reported one year earlier. Although disappointing, this still keeps it at 22.2% of total deposits being classified as uninsured. This is still significantly lower than the 38.6% that the company had at the end of 2022. So long as this figure remains at or below 30%, I consider it a bullish indicator for investors.

You would think that an increase in deposits would result in a higher value of loans on the company's books. But that's not exactly the case here. The company's loan portfolio actually dropped by about $13.3 million from $3.68 billion in the second quarter to $3.66 billion in the third quarter. That's not a significant drop by any means. And it's nicely higher than the $3.51 billion that the company had as of the end of last year.

So, in the grand scheme of things, I don't see anything worrisome on this front. When it comes to the value of securities, we have seen a slight decline over the past few quarters. After popping from $548.6 million at the end of last year to $559.4 million in the first quarter, the value of securities ended up dropping, eventually hitting $553.1 million in the third quarter. I wouldn't call this a statistically significant move.

Right after the banking crisis began, some institutions decided to increase the amount of cash that they had on hand. Bridgewater Bancshares was no exception. At the end of last year, the company had $88.2 million on its books. By the end of the first quarter, this had more than doubled to $210.4 million. But since then, we have started to see a nice decline. Cash on hand as of the end of the most recent quarter was $125.6 million. This seems to have corresponded nicely with a reduction in debt. After peaking at $726.8 million in the first quarter, debt has dropped rather nicely, hitting $387.5 million more recently.

For the most part, these data points are positive. But this doesn't mean that everything is great. There has been a bit of weakness from a revenue and profit perspective. As an example, take the third quarter of the 2023 fiscal year. During that time, net interest income at the institution totaled $26 million. That's down from the $32.6 million reported one year earlier. Even though non-interest income managed to grow from $1.4 million last year to $1.7 million this year, net profits still managed to drop from $13.5 million to $8.6 million. Even though the value of assets at the institution has grown, the company has been negatively impacted on this front by a decline in its net interest margin from 3.53% to 2.32%.

Although total interest earning assets reported a rise in the effective yield from 4.37% to 5.14%, total interest-bearing liabilities saw a spike in interest charges from 1.30% to 3.81%. This was the result of pain across the board, including from $13.8 million of notes payable that did not exist at the same time last year that have an 8.58% interest rate on them. But a lot of pain also came from the fact that the company had to nearly quadruple the interest rate it's paying depositors in order to keep them coming and putting capital into the institution. This might worry some investors. But the fact of the matter is that this is just the way things are in a high interest rate environment. Every bank that I have looked at over the past several months has seen its net interest margin contract. Once interest rates start dropping, likely next year, we should see a reversal of sorts.

We don't know what kind of earnings to expect for this year in its entirety. But based on my own estimates, net profits should come in at around $37.7 million. This would be down from the $49.3 million reported for 2022. Even so, this would value the company at 9 times forward earnings compared to 6.9 times using data from last year. The company has also seen an increase in both its book value per share and tangible book value per share from one quarter to the next. This, combined with the firm's low share price, has been helpful in keeping the company trading at a discount to book value. It's currently trading at 97% of book value and 97.8% of tangible book value.

Takeaway

Based on the data currently available, I must say that I am content with the share price performance of Bridgewater Bancshares so far. I do think that it should have seen further upside since I wrote about it.

Having said that, the data that's available suggests to me that the institution is quite healthy and growing. Shares are still cheap and, absent something significant coming out of the woodwork, I would argue that Bridgewater Bancshares, Inc. still warrants a "strong buy" rating at this time.

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