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Earnings of Bridgewater Bancshares, Inc. (NASDAQ:BWB) will most likely proceed to surge this yr on the again of sturdy steadiness sheet progress. The corporate’s mortgage portfolio has grown at an outstanding fee since its IPO, and the progress momentum is more likely to proceed via the center of 2022. Nonetheless, headwinds are more likely to decelerate mortgage progress within the final quarter of the yr. In the meantime, the online curiosity margin is more likely to considerably profit from a rising interest-rate atmosphere. General, I’m anticipating Bridgewater Bancshares to report earnings of $1.70 per share for 2022, up 11% year-over-year. The year-end goal value suggests a excessive upside from the present market value. Subsequently, I’m adopting a purchase score on Bridgewater Bancshares.

A number of Catalysts for Mortgage Development Forward

Bridgewater Bancshares reported outstanding mortgage progress of 6% within the first quarter of 2022. Mortgage progress has been phenomenal for the reason that IPO of the corporate in 2018. The mortgage portfolio has actually grown at a compounded annual progress fee of 20% from 2017 to 2021.

For full-year 2022, mortgage progress is more likely to be in not less than the mid-teen share vary because of the next catalysts.

  1. The current growth of lending groups. As talked about within the earnings presentation, merger and acquisition-related disruption in Bridgewater’s markets has resulted in consumer and banker acquisition alternatives. The corporate has just lately employed some lenders and intends to proceed to rent within the close to future.
  2. New mortgage origination system. Bridgewater Bancshares launched a brand new industrial mortgage origination system in March 2022, as talked about within the newest investor presentation. The affect of this digital platform shall be seen within the coming quarters.
  3. Energy within the regional economic system. Bridgewater Bancshares operates in Minnesota, which presently has a powerful job market. The state had an unemployment fee of solely 2.0% in Could 2022, which is without doubt one of the lowest unemployment charges within the nation.
  4. M&A exercise. Administration talked about within the earnings presentation that some M&A discussions with potential targets are ongoing. Nonetheless, the corporate is but to announce any merger settlement thus far this yr.
  5. Strong mortgage pipeline. Administration talked about within the earnings presentation that its mortgage pipeline was fairly sturdy and diversified amongst numerous asset lessons on the finish of March 2022.

As a result of above components, mortgage progress will most likely stay sturdy within the subsequent two quarters. Nonetheless, mortgage progress will most likely decelerate by the top of the yr as a result of rising fee atmosphere. The Federal Reserve initiatives the fed funds fee to nearly double from the present stage of 1.75% to round 3.50% later this yr. Additional, the fed funds fee is more likely to begin declining late subsequent yr. Subsequently, it’s cheap to anticipate debtors to both pre-empt the speed hike and borrow now or anticipate charges to fall once more subsequent yr earlier than borrowing. It will not be smart to borrow on the obvious peak of the speed cycle later this yr until it was completely obligatory.

Administration talked about within the earnings presentation that it expects annualized mortgage progress (ex-Paycheck Safety Program loans) to be within the mid-to-high teen-percentage vary for 2022. Given my expectation of a slowdown in mortgage progress later this yr, I’m anticipating the mortgage progress to be on the decrease finish of administration’s steering. I’m anticipating the mortgage portfolio to extend by 15.9% by the top of December 2022 from the top of 2021. In the meantime, I’m anticipating deposits to develop largely in keeping with loans for the rest of the yr. The next desk exhibits my steadiness sheet estimates.

FY18 FY19 FY20 FY21 FY22E
Monetary Place
Internet Loans 1,640 1,884 2,282 2,770 3,210
Development of Internet Loans 23.7% 14.9% 21.1% 21.4% 15.9%
Different Incomes Property 257 293 393 441 488
Deposits 1,561 1,823 2,502 2,946 3,317
Borrowings and Sub-Debt 182 174 142 135 168
Frequent fairness 221 245 265 313 351
E book Worth Per Share ($) 7.5 8.2 9.1 10.8 12.1
Tangible BVPS ($) 7.4 8.0 9.0 10.7 11.9

Supply: SEC Filings, Writer’s Estimates

(In USD million until in any other case specified)

Margin is Barely Delicate to Curiosity Price Hikes

As a result of mortgage portfolio’s focus in actual property loans, the portfolio is essentially mounted fee based mostly. Furthermore, the mortgage portfolio is most delicate to modifications within the five-to-ten-year portion of the yield curve, as talked about within the earnings presentation. This implies that solely a small a part of the mortgage portfolio will re-price this yr.

Bridgewater Bancshares Loan Mix

1Q 2022 Earnings Presentation

To high it off, the deposit ebook is kind of rate-sensitive. Solely 27.5% of the deposit ebook is non-interest bearing and subsequently won’t re-price after fee hikes. As a result of mixture of the mortgage and deposit mixes, the online curiosity revenue is barely delicate to rate of interest modifications. Administration’s interest-rate sensitivity evaluation given within the 10-Q submitting exhibits {that a} 200 foundation factors rise in rates of interest may increase the online curiosity revenue by solely 2.12% over twelve months.

Nonetheless, the margin will obtain some profit from the upcoming time deposit maturity. As talked about within the earnings presentation, $123 million of time deposits will mature over the subsequent 5 quarters at a blended price of 1.47%. At the moment, the common certificates of deposit price within the nation is simply 0.48%, based on FDIC. Subsequently, I imagine it’s protected to imagine that Bridgewater Bancshares can substitute the outgoing time deposits with new deposits carrying charges which can be not less than 50 to 75 foundation factors decrease. Such alternative can scale back the common deposit price by round two to a few foundation factors, based on my calculations.

Contemplating these components, I’m anticipating the margin to extend by ten foundation factors within the final 9 months of 2022 from 3.60% within the first quarter of the yr.

Provision Normalization on the Playing cards

The sharp rise in rates of interest this yr is more likely to take a toll on debtors’ means to service their debt. Nonetheless, I’m not too involved concerning the upcoming deterioration of the asset high quality as a result of the allowance stage is presently fairly excessive relative to the portfolio’s credit score danger. Allowances made up 1.4% of whole loans on the finish of March 2022. Compared, non-performing property had been simply 0.02% of whole property on the finish of March 2022, as talked about within the earnings presentation.

General, I’m anticipating the availability expense to stay at a standard stage this yr. I’m anticipating the online provision expense to make up 0.24% of whole loans in 2022. Compared, the availability expense averaged 0.23% of whole loans from 2017 to 2019.

Anticipating Earnings to Develop by 11% 12 months-Over-12 months

The anticipated mortgage progress will seemingly be the chief driver of earnings this yr. Additional, the slight margin growth will seemingly raise the underside line. Then again, provision normalization will prohibit earnings progress on a year-over-year foundation. General, I’m anticipating Bridgewater Bancshares to report earnings of $1.70 per share for 2022, up 11% year-over-year. The next desk exhibits my revenue assertion estimates.

FY18 FY19 FY20 FY21 FY22E
Revenue Assertion
Internet curiosity revenue 65 74 88 110 130
Provision for mortgage losses 4 3 13 5 8
Non-interest revenue 3 4 6 5 6
Non-interest expense 32 37 45 48 58
Internet revenue – Frequent Sh. 27 31 27 45 50
EPS – Diluted ($) 0.91 1.05 0.93 1.54 1.70

Supply: SEC Filings, Earnings Releases, Writer’s Estimates

(In USD million until in any other case specified)

Precise earnings might differ materially from estimates due to the dangers and uncertainties associated to inflation, and consequently the timing and magnitude of rate of interest hikes. Additional, the specter of a recession can enhance the provisioning for anticipated mortgage losses past my expectation.

Excessive Worth Upside Justifies a Purchase Ranking

I’m utilizing the historic price-to-tangible ebook (“P/TB”) and price-to-earnings (“P/E”) multiples to worth Bridgewater Bancshares. The inventory has traded at a mean P/TB ratio of 1.46 prior to now, as proven beneath.

FY18 FY19 FY20 FY21 Common
T. E book Worth per Share ($) 7.4 8.0 9.0 10.7
Common Market Worth ($) 12.5 11.5 10.7 16.4
Historic P/TB 1.69x 1.43x 1.20x 1.54x 1.46x
Supply: Firm Financials, Yahoo Finance, Writer’s Estimates

Multiplying the common P/TB a number of with the forecast tangible ebook worth per share of $11.9 provides a goal value of $17.50 for the top of 2022. This value goal implies a 9.5% upside from the June 30 closing value. The next desk exhibits the sensitivity of the goal value to the P/TB ratio.

P/TB A number of 1.26x 1.36x 1.46x 1.56x 1.66x
TBVPS – Dec 2022 ($) 11.9 11.9 11.9 11.9 11.9
Goal Worth ($) 15.1 16.3 17.5 18.7 19.9
Market Worth ($) 16.0 16.0 16.0 16.0 16.0
Upside/(Draw back) (5.4)% 2.1% 9.5% 17.0% 24.5%
Supply: Writer’s Estimates

The inventory has traded at a mean P/E ratio of round 11.7x prior to now, as proven beneath.

FY18 FY19 FY20 FY21 Common
Earnings per Share ($) 0.91 1.05 0.93 1.54
Common Market Worth ($) 12.5 11.5 10.7 16.4
Historic P/E 13.7x 11.0x 11.5x 10.7x 11.7x
Supply: Firm Financials, Yahoo Finance, Writer’s Estimates

Multiplying the common P/E a number of with the forecast earnings per share of $1.70 provides a goal value of $20.00 for the top of 2022. This value goal implies a 25.1% upside from the June 30 closing value. The next desk exhibits the sensitivity of the goal value to the P/E ratio.

P/E A number of 9.7x 10.7x 11.7x 12.7x 13.7x
EPS 2022 ($) 1.70 1.70 1.70 1.70 1.70
Goal Worth ($) 16.6 18.3 20.0 21.7 23.4
Market Worth ($) 16.0 16.0 16.0 16.0 16.0
Upside/(Draw back) 3.7% 14.4% 25.1% 35.7% 46.4%
Supply: Writer’s Estimates

Equally weighting the goal costs from the 2 valuation strategies provides a mixed goal value of $18.70, which means a large 17.3% upside from the present market value. In consequence, I’m adopting a purchase score on Bridgewater Bancshares.

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