Acquisition Of First Minnetonka City Bank Will Strengthen Liquidity And Expand Market Reach In 2025

Key Takeaways

• The acquisition and deposit growth are expected to enhance liquidity, drive aggressive loan growth, and positively impact revenue and margins.
  
• Expansion into new markets and targeted verticals, along with operational efficiencies, are projected to improve market share, revenue, and earnings growth.
  
• Challenges such as declining tangible book value, tighter spreads, high expense growth, and interest rate risks could compress margins and impact earnings growth potential.

Catalysts

Operates as the bank holding company for Bridgewater Bank that provides banking products and services to commercial real estate investors, entrepreneurs, business clients, and individuals in the United States.

• The acquisition of First Minnetonka City Bank is expected to enhance Bridgewater’s liquidity profile, enabling more aggressive loan growth in 2025, which could positively impact revenue and net interest income.
  
• Strong core deposit growth, driven by new client relationships and a new high-yield savings product, is anticipated to support future loan growth, contributing to revenue growth and net interest margin improvement.
  
• Expansion into new markets, such as the East Metro area, along with leveraging expertise in targeted verticals like affordable housing, is expected to drive market share gains and loan growth, thereby enhancing revenue.
  
• Focus on cost savings from the First Minnetonka City Bank acquisition and continued investments in technology are projected to improve operational efficiencies, which could positively influence net margins.
  
• The expected continuation of net interest margin expansion, driven by lower deposit costs and stable loan yields, along with the strategic replacement of higher-cost brokered deposits, is likely to bolster net interest income and overall earnings growth.

Bridgewater Bancshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bridgewater Bancshares's revenue will grow by 15.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 27.1% today to 31.6% in 3 years time.
• Analysts expect earnings to reach $52.0 million (and earnings per share of $1.82) by about March 2028, up from $28.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.6x on those 2028 earnings, down from 13.5x today. This future PE is greater than the current PE for the US Banks industry at 11.2x.
• Analysts expect the number of shares outstanding to grow by 0.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.2%, as per the Simply Wall St company report.

Bridgewater Bancshares Future Earnings Per Share Growth

Risks

• Despite the acquisition of First Minnetonka City Bank, Bridgewater Bancshares experienced a 3% decline in tangible book value in the fourth quarter, which can impact investor sentiment and future valuation prospects.
  
• Increased competition is resulting in tighter spreads, and potential higher long-term interest rates might reduce demand, which could hinder the company's ability to grow its loan portfolio as anticipated, affecting revenue growth.
  
• The company anticipates high-teens noninterest expense growth, excluding merger-related expenses, which may compress net margins if revenue does not grow at a similar pace.
  
• Possible headwinds in the interest rate environment and reliance on short-term rate cuts for margin expansion could result in limited net interest margin improvement, impacting net interest income growth.
  
• Office property loan exposure, though limited, and elevated levels of payoffs continue to pose risks to asset quality and net loan growth, potentially affecting the company's earnings if issues arise.

Valuation

• The analysts have a consensus price target of $17.5 for Bridgewater Bancshares based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $164.7 million, earnings will come to $52.0 million, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 7.2%.
• Given the current share price of $14.03, the analyst price target of $17.5 is 19.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.