KBRA Affirms Ratings for Bridgewater Bancshares, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, the preferred shares rating of BB+, and the short-term debt rating of K3 for St. Louis Park, Minnesota-based Bridgewater Bancshares, Inc. (NASDAQ: BWB) (“Bridgewater” or “the company”). KBRA also affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating BBB, and the short-term deposit and debt ratings of K2 for Bridgewater Bank, the main subsidiary. The Outlook for all long-term ratings is revised to Stable from Negative.

Key Credit Considerations

The revision of the Outlook to Stable from Negative is largely predicated on the company’s ability to rebuild capital metrics, reflected by the 100-bp increase in CET1 since YE22 to 9.4% at 2Q24. With that said, while we recognize that risk-based capital measures still track below peer averages, we view capital management as adequate for the company’s risk profile when combined with the lengthy track record of pristine asset quality and strong loan loss reserves. Additionally, we take comfort in Bridgewater's solid TCE ratio, which was approaching 8% as of 2Q24. BWB's historical outperformance on credit quality is a key driver of the ratings and Stable Outlook, which KBRA expects to continue prospectively, in part, due to its credit-focused management team with prudent and disciplined underwriting standards as well as their broad-based knowledge of local operating markets. BWB’s five-year NCO average of 0.01% is well below the majority of its peers, continuing in 1H24. Additionally, despite the negligible historical loan losses, BWB has conservatively built loan loss reserves to 1.37% of loans. Sound credit quality is expected to persist given the stable/strong Twin Cities economy in which the company operates. While Bridgewater’s investor CRE concentration is elevated compared to peers at 466% of total RBC, when excluding multifamily, the concentration is comfortably below 300%. We note that multifamily loans represent the largest related exposure, which have historically performed very well with virtually no losses. Additionally, multifamily properties are generally located in desirable locations throughout the Twin Cities metro area. The multifamily portfolio has reflected stabilizing vacancy rates and strong absorption, which, combined with reduced construction levels in footprint, should be a tailwind for occupancy and rent growth moving forward. BWB has historically relied on a relatively higher level of noncore funding to support loan growth, with core deposits to total funding averaging ~65% since 2019, which, combined with deposit migration into higher-yielding products, has resulted in a higher cost deposit base with the cost of deposits at 3.46% for 2Q24. As such, the higher rate environment has undoubtably pressured earnings, though, as the company continues to originate higher yielding loans, combined with strong loan repricing opportunities within the fixed/adjustable rate portfolio, NIM has largely stabilized during 2Q24. Furthermore, BWB is well positioned to benefit from a Fed rate cut with ~$1 billion of adjustable funding sources tied to short-term interest rates, with NIM likely to remain stable/expand going forward. The stabilization of NIM and earnings has also been a catalyst for the revision to a Stable Outlook.

Rating Sensitivities

An upgrade is not expected over the near-to-medium term; however, risk-based capital metrics more in line with the higher rating category, and less dependence on noncore funding, while maintaining strong credit quality and sound profitability may support positive rating momentum over time. A downgrade is not expected, though maintenance of capital ratios, specially CET1, well below 9%, significant deterioration in credit quality, or increasing funding costs that materially impact earnings over multiple quarters limiting internal capital generation could pressure ratings.

To access rating and relevant documents, click here.

Methodologies