Bridgewater Bancshares Inc Q3 FY2024 earnings call

• Solid quarter with earnings of $0.27 per share, second consecutive quarter of net interest income growth, and net interest margin stability at 2.24%.
• Strong core deposit growth, pushing out higher-cost brokered and timed deposits. Asset quality remains strong with no uptick in net charge-offs or non-performing loans.
• Announced acquisition of First Minnetonka City Bank in August, which is expected to close in Q4, bringing a low-cost core deposit base, additional liquidity, reducing CRE concentration, and adding an income stream from an investment advisory platform.
• Tangible book value was up 3% in Q3, 31st consecutive quarter of growth, but expected to end in Q4 due to the acquisition. Leadership structure changes: Nick Place moved to Chief Banking Officer, Lisa Salazar to Chief Operating Officer.
• Net interest margin stability led to two consecutive quarters of revenue growth and rising profitability, with expenses well controlled in 2024, expected to track with asset growth over time.

Net interest margin held steady at 2.24% for the third straight quarter. Net interest income grew for the second consecutive quarter. Core deposits saw $93 million of growth, a 14.4% annualized increase, with non-interest-bearing deposits also growing. Loan balances decreased by $115 million in the third quarter due to elevated loan payoffs, but earning assets grew through cash and securities. The acquisition of First Minnetonka City Bank brings a low-cost core deposit base, additional liquidity, reduces CRE concentration, and adds an income stream from an investment advisory platform. Core deposit balances have steadily trended higher since Q1 2023, with 6.9% annualized growth YTD 2024.

• Expect margin expansion to begin in Q4 due to the Fed's rate cut in September and potential further cuts, leveraging a liability-sensitive balance sheet. The First Minnetonka City Bank deal should be accretive to the margin but full impact won't be seen until Q1.
• Loan growth in Q4 to be primarily from the First Minnetonka City Bank acquisition, with organic loan growth remaining relatively flat due to payoff headwinds.
• Expenses expected to continue moving modestly higher in Q4, excluding merger-related expenses, and generally track with asset growth over time.

• Potential impact of interest rate changes on margin expansion and deposit costs.
• Credit risks in commercial real estate, particularly in the office segment with one loan moved to non-accrual.
• Competition in deposit pricing which could affect deposit costs and margin expansion.

Q: Good morning. A question on the payoffs. I’m trying to get a little more detail. If a lot of that or some of it is encouraged on your side for credit purposes or is it largely customer driven?

A: Hey, Jeff. This is Nick. I’d say it’s a mix of both. There’s some payoffs we were not sad to see go, but some are just the lifecycle of transactions. Predicting payoffs is hard, expect to continue to see payoffs at a relatively higher level in Q4.

Q: Hopping over to the margin side of things just. What was the timing of some of that brokered or time deposit runoff and any kind of idea on sort of the average rate of those rolling off relative to cost of funds in the mid-3s?

A: Yeah. Jeff, this is Joe. So the brokerage that we had called, we’re really the kind of mid-August to early September. Those were all kind of north of 5%, even mid-5%, 5.5%. So, it was definitely margin beneficial to recycle that with core deposit growth.

Q: Hey. Good morning guys. Hope you are doing well. I’m kind of thinking about loan growth for next year. Don’t want to get too far ahead of myself here, but just given the cross currents of wanting to align with core funding and the payoffs that you are kind of battling through countered with better pipelines that you’re starting to see, just kind of curious any early thoughts on kind of the pace of longer if you’re thinking about for next year?

A: Hey, Brendan. This is Nick. Yeah. I mean, we’re certainly seeing our pipeline build here. Thinking into 2025, we continue to feel like that sort of mid-single digits number is a very attainable number for us.

Q: Hi, guys. Good morning. Thanks for taking the questions. In terms of the margin outlook for the fourth quarter, the guidance for moderate expansion. Does that contemplate just the slightly higher margin profile at the acquisition and there’s just the opportunity to kind of deliver the balance sheet?

A: Hey, Nate. This is Joe. Yeah. I think that’s part of it. Just the optionality that their balance sheet provides for us. The modest outlook is more about the path of Fed Funds cuts and deposit competition.

Q: I apologize I hopped on a little late, but just in terms of the size of the office CRE loan that was problematic in the quarter?

A: Yeah. I mentioned, we have our sponsor has the property under contract. There’s a significant amount of non-refundable money that was provided as part of the purchase agreement. So, we have a high level of confidence that it’s going to close. There may be some small true-up of the actual charge-off amount in the fourth quarter, but we don’t expect that it’ll have any impact on earnings.