Bridgewater Bancshares, Inc. (BWB) Earnings Call Transcript

Good morning, and welcome to the Bridgewater Bancshares 2026 Second Quarter Earnings Call. My name is Nick, and I will be your conference operator today. [Operator Instructions]. Please note that today's call is being recorded. At this time, I would like to introduce Justin Horstman, Vice President of Investor Relations to begin the conference call. Please go ahead.

Thank you, Nick, and good morning, everyone. Joining me on today's call are Jerry Baack, Chairman and Chief Executive Officer; Joe Chybowski, President and Chief Financial Officer; Nick Place, Chief Banking Officer; and Katie Morrel, Chief Credit Officer. In just a few moments, we will provide an overview of our 2026, 2nd quarter financial results. We will be referencing a slide presentation that is available on the Investor Relations section of Bridgewater's website, investors.bridgewaterbankmn.com. Following our opening remarks, we will open the call for questions. During today's presentation, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution that such statements are predictions and that actual results may differ materially. Please see the forward-looking statement disclosure in the slide presentation and our 2026, 2nd quarter earnings release for more information about risks and uncertainties, which may affect us. The information we will provide today is as of and for the quarter ended June 30, 2026, and we undertake no duty to update the information. We may also disclose non-GAAP financial measures during this call. We believe that certain non-GAAP financial measures in addition to the related GAAP measures provide meaningful information to investors to help them understand the company's operating performance and trends and to facilitate comparisons with the performance of our peers. We caution that these disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP. Please see our slide presentation and 2026, 2nd quarter earnings release for reconciliations of non-GAAP disclosures to the comparable GAAP measures. I would now like to turn the call over to Bridgewater's Chairman and CEO, Jerry Baack.

Thank you, Justin, and thank you for joining us this morning. I'm thrilled to say that Bridgewater reported another strong quarter. We continue to take market share, saw improved profitability and build tangible book value. We surpassed the 1% ROA for the first time since early 2023. And which was largely driven by continued net interest margin expansion and net interest income growth. We reported a second quarter margin of 3.07%, which exceeds the 3% goal we set at the end of 2026. We -- most importantly, net interest income continued to grow, up an impressive 21% annualized in the second quarter. We have been very pleased with the overall revenue growth momentum, which helped improve our efficiency ratio. With a strong reputation for being the employer of choice, we added to our talent base. We made several opportunistic hires, adding top talent and taking full advantage of the continued market disruption in the Twin Cities. This resulted in some elevated personnel expenses as talent became available earlier than expected. Year-to-date, we have added 15 key hires from competitor banks that have recently been acquired. These additions, including both production and office talent will support the future scaling of the bank, strengthen our ability to serve clients and create long-term value for shareholders. During the second quarter, we remain disciplined to not only grow the balance sheet but ensure we were growing it profitably. We grew loan balances at an annualized pace of 5.4% as core deposits were seasonally low. Nick will talk more about how we're thinking about growth in a few minutes, but we are continuing to get in front of new and existing clients and are feeling good about the momentum on both sides of the balance sheet. Asset quality was a strength of the quarter once again as we had minimal net charge-offs. We saw a modest uptick in nonperforming assets but have seen stabilization across our watch, special mention and substandard loans. Katie will provide more thoughts shortly. As a team, we continue to feel good about the overall asset quality of our loan portfolio. We continue to build capital through retained earnings during the second quarter as our CET1 ratio increased 8 basis points to 9.61% and is now 58 basis points year-over-year. During the past quarter, we repurchased approximately $700,000 of common stock, taking advantage of a weighted average price of just $18.12 per share. As you know, tangible book value has always been the highlight for Bridgewater, and that was the case again in the second quarter as tangible book value increased 17% annualized to $16.61. On Slide 4, you will note that tangible book value has grown over 50% in the last 4.5 years. This remains an important differentiation for us. Before I turn it over to Joe, I want to take a moment to thank our team members for all their efforts. We added a lot of talent this year, and I believe our unique culture is a real asset in the market. It's been exciting to onboard these individuals and welcome them to the BWB team. We have a group that's motivated to serve our clients and keep strengthening Bridgewater's foothold in the market. I am confident that we have the right team in place and grateful for all the efforts of our team members, both new and old. With that, I'll turn it over to Joe.

Thanks, Jerry. Starting on Slide 5. We continue to see strong profitability and revenue growth trends as our return on average assets topped 1%. This improved profitability has been a function of strong revenue growth as net interest margin expansion and balance sheet growth have driven meaningfully higher net interest income. I'll talk more about this on the next slide. In addition, we have been pleased with the noninterest income contribution to total revenue. Swap fees and investment advisory fees continue to be meaningful sources of fee income that we didn't have a couple of years ago and letter of credit fees bounced back in the second quarter. Turning to Slide 6. Our ability to drive revenue growth through net interest income continues to be a consistent part of the Bridgewater story. During the second quarter, net interest income grew at a 21% annualized pace, driven by both net interest margin expansion and earning asset growth. We are very pleased with the margin expansion we have seen so far in 2026. And -- you'll remember that we entered 2026 with a 2.75% margin in the fourth quarter of 25% and a goal to achieve a 3% margin by the end of the year. After nearly getting there in the first quarter, we saw another 8 basis points of expansion in the second quarter, already putting us over our target at 307 -- with deposit costs stabilizing, the margin expansion during the quarter was primarily due to the ongoing loan repricing we have seen across our portfolio. In addition, loan fees have continued to increase as payoffs remained elevated. Looking ahead, we do expect to see some additional net interest margin expansion in the back half of 2026, albeit at a slower pace than we saw in the second quarter. For reference, our net interest margin for the month of June 2026 was $3.08 compared to $3.07 for the full quarter. With continued growth opportunities and margin slowly ticking higher, we're well positioned for ongoing net interest income growth in the quarters ahead. Slide 7 provides more details on the net interest margin drivers. Loan yields expanded 10 basis points during the second quarter and are now up 13 basis points year-to-date, given the repricing of our larger fixed rate portfolio which makes up 64% of the loan book. The expansion of our loan yields has been very strong relative to the rest of the banking space. We would expect to see some additional loan repricing to support the future margin as our loan portfolio includes $629 million of fixed rate loans scheduled to mature over the next 12 months at a weighted average yield of $5.62 and another $114 million of adjusted rate loans repricing or maturing at 399 -- with these lower yields running off the books and new originations in the second quarter going on the books in the low 6s, we have further repricing upside ahead of us. We have also been taking proactive steps over the past year or 2 to make our portfolio more rate neutral by originating more variable rate loans and ultimately aligning our variable rate loan book with our variable rate deposit book. Variable rate loans now make up 25% of the loan portfolio, up from 18% a year ago. While lower deposit costs were a significant driver of margin expansion in the first quarter, we saw deposit costs remain relatively stable in the second quarter given past rate cuts being fully priced in as well as seasonal deposit mix shifts. Turning to Slide 8. We continue to operate a highly efficient business model with an efficiency ratio consistently below peers. Not only do we have a strong revenue growth story, we also have a track record of a well-controlled expense base. In the first half of 2026, we proactively took advantage of unique opportunities in our market to invest in the business and our people. Given the recent M&A disruption in the Twin Cities, there's been an influx of available talent, and we didn't want to miss an opportunity to secure people felt it will be great long-term fits for Bridgewater. Thanks to our culture and our prominence in the local banking space, we have been able to add 15 talented and experienced individuals from recently acquired competitor banks in 2026 alone. Given the additional hiring, we have seen a pull forward of expenses year-to-date. However, we believe this will support the future growth and scaling of the bank as we move through 2026 and beyond. Overall, we generated positive operating leverage in the second quarter as total revenue increased at a 20% annualized pace, while noninterest expense increased at only 13%. Given the higher pace of expense growth in the first half of the year, -- we expect to be able to hold expenses relatively flat from second quarter levels over the remainder of 2026, with positive operating leverage momentum continuing. With that, I'll turn it over to Nick.

Thanks, Joe. Turning to Slide 9. Core deposits continue to be a key priority for us as we have seen strong momentum over the past couple of years. During the second quarter, total deposits increased $41 million or 3.8% annualized from the first quarter while core deposits declined 3.5%. As a reminder, the occasional decline in core deposits is not unusual for us as growth is not always linear given the nature of our primarily commercial deposit base. The second quarter is also typically our seasonal low. In addition, we've seen real estate clients having new opportunities and beginning to invest cash into new projects, ultimately resulting in some deposit outflows. In the meantime, we supplemented core deposits with wholesale funding, similar to what we have done in the past. Looking ahead, we remain focused on aligning loan growth with core deposit growth over time. While the positive competition remains elevated in the market, we expect to continue the historical core deposit momentum we have seen, especially given stronger seasonality trends we tend to experience in the back half of the year. Our core deposit pipeline remains strong, including the more deposit-rich affordable housing vertical as well as additional opportunities we are seeing from the M&A disruption in the Twin Cities. In addition, we have already exceeded the our first year deposit goals for our new branch in Lake Omo, highlighting the attractiveness of that high-growth community in the Twin Cities. Turning to Slide 10. The pace of loan growth in the second quarter was consistent with what we saw in the first quarter at 5.4% annualized. Given the slower pace of core deposit growth in the first half of the year, we have been more disciplined on the loan side, as we focus on generating balanced profitable growth across the balance sheet. Loan competition remains elevated as credit unions in some of the larger regionals are being more aggressive on pricing. So to us, being disciplined means knowing we don't need to grow at any cost. During the first half of the year, we've been more selective on pricing and structure, emphasize deals with the right clients and invested in core verticals where profitability is highest. And this strategy has paid off. Loan growth has been a bit more moderated than expected, but we have seen substantial margin expansion and ultimately very strong net interest income growth. Loan growth over the back half of the year will be dependent on levels of core deposit growth, competition and payoffs. We have always had a strong growth engine, demand is still high, and we are getting in front of an abundance of deals including opportunities related to the M&A disruption. But some of the spreads we are seeing today are just too tight for our liking. As we look to optimize overall profitability, we are targeting a mid- to high single-digit pace of loan growth over the rest of 2026. Turning to Slide 7 -- or sorry, 11, you can see the discipline we've had on the loan side as originations have moderated a bit. Payoff activity also remains elevated, similar to what other banks are seeing. This has been due to the natural selling of assets as well as the tightening of agency spreads driving refinance activity. We would expect payoffs to continue to be a growth headwind for us over the near term. Turning to Slide 12. You can see the majority of our loan growth in the second quarter came in multifamily, an area where we have immense experience and expertise. Construction and development saw the largest decrease as some of our commercial construction projects completed and migrated into multifamily or other CRE portfolios. We have continued to add key production folks and verticals we are focused on, including C&I and CRE. There are real opportunities for us to continue taking market share in these areas and the Minneapolis market continues to be strong. Finishing up on Slide 13, I wanted to give an update on what we are seeing in the national affordable housing space, a key growth vertical that it currently makes up about 16% of our loan portfolio. Overall, we have seen 22% year-over-year growth in affordable housing loans, which, as a reminder, are spread across multifamily C&I and construction. Balances remained relatively flat in the second quarter due to a larger payoff in the C&I credit, However, the multifamily portion of the portfolio continued to grow, now making up 75% of our affordable housing balances. As I mentioned earlier about focusing on our most profitable verticals, new affordable housing originations tend to have higher yields than the rest of the loan portfolio. This is an added benefit to our overall profitability given that we expect continued growth in this vertical. With that, I'll turn it over to Katie.

Thanks, Nick. Turning to Slide 14. The overall credit profile of our portfolio continues to be strong. Nonperforming assets did move modestly higher in the quarter to 40 basis points. This increase was driven by 1 mixed-use property that was already rated substandard. We are working with the borrower as they pursue a sale of the property and remain optimistic about achieving a near-term resolution. I also wanted to provide a quick update on the Central Business District office loan that was moved to nonaccrual back in the first quarter of 2025. While this has been a longer-term workout, we are now taking steps towards a near-term disposition of this asset. In connection with that process and given the limited leasing progress over the past year, we've increased the specific reserve for this loan, up to a total of $4 million. As we continue to advance the disposition process, additional reserve adjustments may be necessary depending on market feedback and transaction developments. Overall, we are pleased with the progress being made towards resolving our 2 largest nonperforming assets and remain confident in the overall credit quality of the portfolio. We have continued to slowly lower our conservative reserve level, down 5 basis points from a year ago to 1.30% of loans. We expect to reduce this down even further as we continue to execute on problem loan action plans and resolve remaining credit issues. And for the second quarter, net charge-offs were very low once again at just 4 basis points. Now looking at Slide 15, our watch and special mention as well as substandard loans have remained relatively stable, both sitting right around 1% of total loans. These stable levels reflect the conservative underwriting and strong asset quality that continue to characterize the Bridgewater portfolio. I'll now turn it back over to Joe.

Thanks, Katie. Slide 16 highlights our growing capital position, which continues to build through retained earnings. Notably, our CET1 ratio increased from $9.53 to $961 -- we did resume share repurchases early in the quarter given where the stock was trading. We repurchased about $700,000 of common stock at a weighted average price of $18. 12 -- you'll recall that we also launched an at-the-market offering in the first quarter to give us the optionality to raise additional capital if we needed and if market conditions were favorable. To date, we have not issued any shares into the market as part of the ATM. We have built ourselves optionality regarding capital today. And as we've demonstrated over the years, we will continue to be strong capital stewards as we evaluate capital levels and deployment going forward. Turning to Slide 17. I'll recap our near-term expectations. As Nick mentioned, with a focus on profitable growth, we expect the mid- to high single-digit pace of loan growth in the back half of the year given a variety of factors, including competition, loan payoffs and our ability to continue generating strong core deposit growth. From a net interest margin standpoint, we have already surpassed our 3% target that we had for the end of the year. However, we still feel there is more room to go, but we would expect the pace of margin expansion to continue slowing in the third quarter. More importantly, with our continued loan growth, we can continue to drive increased net interest income. As I mentioned earlier, year-to-date expenses have been higher than expected due to opportunistic hiring and annual merit increases in the first quarter. As a result, we believe most of the expense growth for the year was front-loaded and that expenses in the third and fourth quarters should be relatively stable with second quarter levels. I'll now turn it back to Jerry.

Thanks, Joe. Before we open up for questions, I want to provide a quick progress report on our 2026 strategic priorities. We remain focused on taking market share in a profitable way. We have been disciplined in growing our loan portfolio given the seasonally lower deposits so far this year. This has resulted in improved profitability with a much higher net interest margin and strong net interest income growth. We have also continued to make impressive progress with the continued focus on our affordable housing vertical as balances were up 19% annualized year-to-date. With that, we'll open it up for questions.

[Operator Instructions]. The first question will come from Jeff Rulis with D.A. Davidson.

Maybe a question on the loan growth side and particularly the payoffs -- it seems like that's more of a -- well, 2 part on the payoffs is one, just kind of characterizing. It sounds like it's more event-driven less about rate. I mean you talked about sale of assets and competition. Just wanted to kind of unpack the type of payoffs that you're seeing? And then the second thing is any visibility, it sounds like you're still expecting more to come. But -- is there anything that -- what you can see the pace of payoffs ahead?

Jeff, this is Nick. No, I think the payoff activity is really what we've been talking about over the last handful of quarters, which is a bit of a catch-up of the natural sort of life cycle of some of the transactions for our clients, where they're a lot of times buying, improving and then ultimately stabilizing and either refinancing to permanent debt or selling the assets. So given where rates have been in the last couple of years, I think some of that is just the natural evolution of those transactions coming to conclusion for us. So nothing concerning on that front, but I just think it's a catch-up from where we were at from a seasonally low or a typically low perspective a year to 1.5 years ago. On the go-forward payoff side, I think it can be really difficult to predict, but the levels that we've seen over the last 3 quarters, that seems to be kind of the consistent pace for us now. So that's kind of the level that we're modeling as we're thinking about what we're expecting over the back half of the year.

Nick. And maybe 1 on the margin. I guess, is it not to oversimplify, but safe to say that further margin expansion, a little more earning asset dependent at this point. I mean the funding costs are stabilizing and maybe less help that way and just trying to unpack the components of that sounds like it's still up on the margin, but less so because it's maybe just 1 side of the balance sheet in terms of earning asset yield gains. Is that fair to say?

Yes, Jeff, this is Joe. I think that's the right way to think about it. I think we've -- last year, as we said, was definitely a deposit cost story, especially with Fed rate cuts. But yes, this year, it's certainly been -- the loan portfolio has been driving that, whether it's through growth or through just continued repricing of that portfolio. So I mean, we definitely still focus on the deposit side and certainly looking for opportunities to rationalize deposit costs lower. But yes, to your point, we expect that margin expansion to come from the earning asset side.

Got it. And maybe 1 last one, if I could squeeze it in. Maybe for Katie, on the maybe that multifamily loan that was added to nonaccrual, it sounds maybe just any specific reserves against that and maybe a time line for resolution that you see for that one.

Sure. Jeff, so we are carrying a specific reserve against that loan. It's a little less than $1 million. So that is part of what's making up the specific reserves in our allowance currently. So as far as the time line, we're -- moving quickly, we've shared that it's a near-term resolution is our goal on this one. But ultimately, there's some parts of that, that are out of our control, but I think we've shown that we've been able to move quickly through other assets similarly that have been on nonaccrual. So certainly, focusing on moving as quickly as possible while achieving the best outcome for the bank.

And Katie, just remind us the balance of the 2 largest credits that you mentioned, the office loan and I assume this 1 here, just the total balances of those.

Yes. I mean together, those 2 are making up about 90% of that NPA balances. So the mixed-use multifamily is about 10.5% and then 8.6% on the office.

The next question will come from Nathan Race with Piper Sandler.

Right again on the margin topic, Curious if you guys can comment just what you're seeing from a competitive deposit pricing perspective in the Twin Cities these days. And conversely, on the other side of the balance sheet, what you're seeing from a loan pricing perspective as well and just in terms of the weighted average rate on new loan production these days.