BWB Q2 2025: NIM to expand despite 7bp subordinated debt drag
- Margin expansion potential: Despite a noted short‑term headwind from subordinated debt issuance, management’s Q&A responses underscore that underlying dynamics—driven by ongoing loan repricing and stabilized deposit costs—support sustained net interest margin expansion over time .
- Recurring swap fee income: The call highlighted that swap fees, now a recurring element thanks to a strategic focus and broad banker engagement, are diversifying revenues and bolstering non‑interest income .
- CRE and market disruption opportunities: Executives emphasized robust CRE growth along with favorable market disruptions and M&A activity, positioning the bank to capture additional loan growth across CRE and multifamily verticals .
- Margin Drag from Subordinated Debt: The Q&A discussion pointed out that the recent issuance of subordinated debt is expected to create a 7 basis point drag on net interest margin in the upcoming quarter, suggesting potential near‐term margin pressure.
- Lumpy Swap Fee Income: Executives noted that the swap fee income is inherently lumpy and unpredictable, implying that relying on this as a consistent source of noninterest revenue poses uncertainty.
- Increased Competitive Pressure: Participants highlighted that local banks re-entering the market are intensifying competition, which could compress spreads and narrow margins across key revenue streams.
Metric | YoY Change | Reason |
---|---|---|
Loan Growth | +$152 million (15.9% annualized) | **Robust loan originations rose 17% vs Q4 2024 and loan payoffs decreased by 45% compared to Q4 2024, building a record pipeline that drove this strong growth over previous periods. ** |
Deposit Growth | +$75.7 million (7.5% annualized) | **Deposits grew steadily with core deposits increasing by 8.3% annualized versus Q4 2024, reflecting both existing and new client acquisitions, improving on prior period performance. ** |
Revenue Growth | +23% YoY to $32.3 million | **Revenue increased significantly as net interest income rose by 12% from Q4 2024, driven by an expanding net interest margin and higher average earning assets when compared to previous results. ** |
Efficiency Improvement | Improved from 56.8% to 55.5% | **Enhanced revenue performance combined with controlled expense growth led to a better efficiency ratio in Q1 2025 compared to Q4 2024, showing operational improvements over time. ** |
Asset Quality | Nonperforming assets at $10.3 million (0.20%) | **The rise in nonperforming assets is primarily due to one central business district office loan with a special mention risk rating, indicating a shift in asset quality relative to earlier periods. ** |
FMCB Acquisition | Full-quarter impact observed in Q1 2025 | **The integration of the FMCB acquisition contributed additional investment advisory fees while also incurring merger-related expenses, marking a notable change from the pre-acquisition period. ** |
Metric | Period | Previous Guidance | Current Guidance | Change |
---|---|---|---|---|
Loan Growth | Q3 2025 | no prior guidance | Mid- to high single-digit growth expected in the back half of 2025 | no prior guidance |
Net Interest Margin | Q3 2025 | no prior guidance | Slight margin expansion expected in Q3 2025, with additional expansion in future quarters. Rate cuts later in 2025 could further expand margins | no prior guidance |
Non-Interest Expense | FY 2025 | Full-year 2025 noninterest expense growth is expected to be in the high teens, excluding merger-related expenses | Full-year 2025 growth expected in the high teens, excluding merger-related expenses, due to supporting a larger asset base and redundant expenses until systems conversion in Q3 2025 | no change |
Provision for Loan Losses | FY 2025 | The provision is expected to remain dependent on the pace of loan growth and the overall asset quality of the portfolio | Dependent on loan growth pace and asset quality | no change |
Capital Levels | FY 2025 | Capital levels are expected to remain relatively stable in the near term, given the stronger growth outlook | Expected to remain stable due to earnings retention and growth outlook | no change |
Technology Initiatives | FY 2025 | Two significant technology initiatives are planned for 2025: – An upgraded retail and small business online banking platform. – Systems conversion of the recent acquisition | Completion of two significant initiatives in Q3 2025: – Enhanced retail and small business online banking platform rollout. – Systems conversion of the First Minnetonka Citibank acquisition | no change |
Market Disruption Opportunities | FY 2025 | no prior guidance | Growth opportunities expected from market disruption in the Twin Cities due to Old National's acquisition of Bremer Bank | no prior guidance |
Topic | Previous Mentions | Current Period | Trend |
---|---|---|---|
Net Interest Margin Expansion | In Q3 2024, management discussed stable margins with modest expansion forecasts driven by deposit cost declines and loan repricing ( ). In Q4 2024, they expressed optimism with continued modest expansion supported by lower deposit costs ( ). In Q1 2025, they reported a 19 basis point increase and highlighted factors such as declining deposit costs and improved loan yields ( ). | In Q2 2025, they reported an 11 basis point expansion despite headwinds from the subordinated debt issuance which is expected to cause a 7 bps drag in Q3; they remain confident in long‐term expansion via proactive loan repricing ( ). | Consistent upward expansion with evolving short‐term headwinds and sustained long‐term optimism. |
Loan Growth | In Q3 2024, loan growth was expected to be flat with a robust pipeline yet cautious outlook ( ). In Q4 2024, they observed a 7% annualized increase with a healthy pipeline ( ). In Q1 2025, they reported strong annualized growth rates (16% and 15.9%) with record pipeline levels ( ). | In Q2 2025, loan balances grew at a 12.5% annualized rate with the pipeline near a three‐year high and double the new originations compared to the prior year ( ). | A shift from cautious or flat expectations to robust and record growth signals, indicating improving confidence in loan origination. |
Deposit Growth and Funding Cost Management | In Q3 2024, they highlighted strong core deposit growth and an improved deposit mix through reduction of higher-cost deposits ( ). In Q4 2024, core deposits surged with strategic deposit mix enhancements, while funding costs were actively managed ( ). In Q1 2025, strong organic core deposit growth continued alongside efforts to lower deposit costs through rate cut benefits ( ). | In Q2 2025, they reported continued strong deposit growth (e.g., $74 million increase) with stabilization of deposit costs and proactive management through relationship adjustments and wholesale funding strategies ( ). | Consistently positive deposit growth with ongoing improvements in funding cost management and stabilization amid seasonal headwinds. |
CRE Lending and Asset Quality | In Q3 2024, the focus was on multifamily strength, limited office exposure, and modest growth expectations amid a conservative credit approach ( ). In Q4 2024, they noted construction commitments and market disruption opportunities while monitoring office risks ( ). In Q1 2025, opportunities from market disruption and a focus on affordable housing were emphasized alongside caution on office loan risks ( ). | In Q2 2025, CRE lending showed robust growth driven by non-owner-occupied CRE and affordable housing, with strong asset quality indicated by minimal charge-offs and only a minor uptick in classified loans ( ). | An evolution from cautious selective growth to robust expansion leveraging market disruption, while maintaining sound asset quality and managing specific credit risks. |
Competitive Pressure in Lending | In Q3 2024, competitive pressures were noted with increasing competition leading to tighter yields on new loans ( ). In Q4 2024, competition was described as stiff with noticeably tighter spreads ( ). In Q1 2025, increased competition emerged from previously sidelined players tightening spreads further ( ). | In Q2 2025, re-emerging competition continues to drive tighter spreads, prompting the strategic use of swap products and opportunistic positioning amid market disruption ( ). | Persistent and intensifying competition across periods, with strategic adjustments emerging to mitigate pricing and spread challenges. |
Recurring Swap Fee Income Dynamics | In Q3 2024 there was no mention of swap fee income dynamics. In Q4 2024, swap fees were reported at over $500,000 but were characterized as transaction-specific and sporadic ( ). In Q1 2025, there was no discussion on this topic. | In Q2 2025, a new strategic focus on driving recurring swap fee income was introduced, with initiatives to train staff and market the benefits, though the income remains lumpy quarter-to-quarter ( ). | An emerging focus in the current period aiming for increased consistency, though income remains volatile and transaction-dependent. |
Subordinated Debt Impact on Margins | There was no discussion of subordinated debt in Q3 2024, Q4 2024, or Q1 2025. | In Q2 2025, the issuance of $80 million of subordinated debt at 7% replacing $50 million at 5.25% was introduced as a new short-term headwind, anticipated to create a 7 basis point net drag on margins in Q3 ( ). | A new topic in Q2 2025, identified as a short-term drag on margins despite its potential to improve the capital position in the future. |
Integration Synergies and Expense Rationalization | In Q3 2024, integration of the acquisition was mentioned as strategically beneficial with low integration risk ( ). In Q4 2024, detailed cost savings (up to 30%) and expense rationalization efforts were outlined, including planned systems conversion and expense rationalization spending ( ). In Q1 2025, merger-related expenses were noted with efficiency improvements and an emphasis on technology initiatives for conversion ( ). | In Q2 2025, integration synergies continue with the systems conversion on track for third-quarter completion and strong deposit retention noted, though noninterest expense growth is expected to remain in the high teens until full rationalization is achieved ( ). | A consistently positive narrative on integration, evolving from initial strategic benefits to detailed expense rationalization and ongoing synergy realization. |
Dependence on Fed Rate Cuts and Macroeconomic Uncertainty | In Q3 2024, the discussion centered on modest margin expansion driven by rate cuts, with uncertainties regarding the pace of future cuts and competitive pricing challenges ( ). In Q4 2024, reliance on rate cuts was highlighted as key to reducing deposit costs amid an uncertain rate outlook ( ). In Q1 2025, a significant portion of the funding base was noted to be tied to short-term rates, positioning the bank to benefit from potential rate cuts despite macroeconomic concerns ( ). | In Q2 2025, the strategy remains similar with deposit cost stabilization tied to potential rate cuts and acknowledgment of macroeconomic uncertainties affecting margins, even as short-term headwinds like the subordinated debt emerge ( ). | A consistent reliance on Fed rate cuts remains, with persistent macroeconomic uncertainties affecting future margin prospects, though the bank adapts its funding strategy over time. |
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Margin Performance
Q: What was June’s margin average?
A: Management reported a $265M standalone margin in June, providing a strong baseline despite anticipated Q3 headwinds. -
NIM Outlook
Q: How will margin trend post sub debt?
A: They expect continued modest NIM expansion driven by ongoing loan repricing and stable deposit costs, even with a slight Q3 drag from sub debt issuance. -
Funding Costs
Q: Can further funding cost reductions be achieved?
A: The team is actively reviewing deposit and wholesale funding relationships to lower funding costs further, independent of rate cuts. -
Sec Sale Rate
Q: What yield did the securities sale achieve?
A: The securities sale was executed on treasuries and MBS yielding in the low 4%, which is below the overall portfolio’s blended yield, enabling redeployment into loans earning mid-to-high 6% levels. -
CRE Growth
Q: Is CRE the main growth driver?
A: While CRE was strong in Q2, management envisions balanced growth across all verticals—including CRE, affordable housing, and multifamily—throughout the remainder of the year. -
M&A Activity
Q: Any new M&A opportunities on the horizon?
A: Conversations continue at a preliminary stage, with a strategic focus on organic growth while selectively exploring M&A opportunities.
Research analysts covering Bridgewater Bancshares.