Bridgewater Bancshares (BWB) Q2 2026 earnings call transcript

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 Bach, Chairman and Chief Executive Officer, Joe Schabowski, President and Chief Financial Officer, Nick Place, Chief Banking Officer, and Katie Morrell, Chief Credit Officer. In just a few moments, we will provide an overview of our 2026 second 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 second 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 second 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 Bach.

Thank you, Justin, and thank you for joining us this morning. I'm thrilled to say that Bridgewater reported another strong quarter. We continued to take market share, saw improved profitability, and built tangible book value. We surpassed a 1% ROA for the first time since early 2023, 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. 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, We will now turn the call over to management for a long-term value for shareholders. During the second quarter, we remained 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 were 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 a quarter once again as we had minimal net charge offs. We saw a modest uptick in non-performing 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 eight basis points to 9.61% and is now 58 basis points year-over-year. During the past quarter, we purchased 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 four, you will know the tangible book value has grown over 50% in the last four and a half 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'm 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 five, 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've been pleased with the non-interest 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 years ago. And letter of credit fees bounced back in the second quarter.

Turning to slide six, 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. You'll remember that we entered 2026 with a 275 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 eight 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 $308, compared to $307 for the full quarter. With continued growth opportunities and margins 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 $562 million 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 sixes, we have further repricing upside ahead of us.

We have also been taking proactive steps over the past year or two 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 pass rate cuts being fully priced in, as well as seasonal deposit mix shifts. During the slide eight, 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 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 has been an influx of available talent, and we didn't want to miss an opportunity to secure people we felt would 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 non-interest 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 nine, 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 deposit competition remains elevated in the market, we expect to continue the historical core deposit momentum we have seen, I will now turn the call over to management for the Bridgewater Bancshares Inc, and I will now turn the call over to management for the Bridgewater Bancshares Inc. The final 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 and 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 invest 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 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 CNI 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 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 a 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. Non-performing assets did move modestly higher in the quarter to 40 basis points. This increase was driven by one 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 non-accrual back in the first quarter of 2025. While this has been a longer-term workout, we are now taking steps toward 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 toward resolving our two largest non-performing assets and remain confident in the overall credit quality of the portfolio. We have continued to slowly lower our conservative reserve level down five 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 four 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 953 to 961. We did resume share repurchases earlier 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 We will now turn the call 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 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 recap our near expectations As Nick mentioned with a focus on profitable growth we expect a mid to high single 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 a continued focus on our affordable housing vertical as balances are up 19% annualized year-to-date.

With that, we'll open it up for questions.

Hey, 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 I'm going to turn the call over to management for the Bridgewater Bancshares Inc earnings conference call. You know, a year to a year and a half ago. You know, on the go-forward payoff side, I think, you know, it can be real difficult to predict, but the levels that we've seen over the last three quarters, you know, 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.

Hi, Jeff. So, we are carrying a specific reserve against that loan. It's, you know, a little less than a million dollars, so that is part of what's making up the specific reserve. I will now turn the call over to management for the Bridgewater Bancshares Inc earnings conference call. I will now turn the call over to management for the Bridgewater Bancshares Inc earnings conference call. But I think we've showed that we've been able to move quickly through other assets, you know, similarly that have been on nonaccruals. So, certainly focusing on moving as quickly as possible while, you know, achieving the best outcome for the bank.

So the mixed-use multifamily is about 10.5 and then 8.6 on the office loan.

It is Nick. Yeah, on the deposit front, I mean, competition is still pretty strong out there as, you know, I think lenders are getting more aggressive on the asset side, and it's causing, you know, them to remain focused on growing deposits. So, you know, we feel like we're still getting in front of good opportunities. I think our market with just the makeup of the deposit market and being so heavily weighted to Wells and U. S. Bank, we still see a lot of opportunity to pick up deposits at, you know, relatively low costs from those folks. But on the commercial side, bringing in full deposit relationships, we're seeing money market balances and rates still in the threes.

Then we blend those sort of client costs down with operating accounts to get inside of that. So we feel like there's still deposit momentum that we can gather in the back half of the year as we tend to have more success seasonally in the back half. And those deposit costs continue to come down. But, you know, with where we've been at from a loan-to-deposit ratio perspective, we've been mindful about, you know, not cutting those costs too much.

The loan side, you know, that competition is, you know, for real quality assets is, in some cases, gotten a bit silly, frankly. You know, we've seen spreads on deals, you know, at 150 basis points over SOFR, and, you know, those are just levels that we're not going to, you know, we're not even going to try to compete at. We going to focus on you know our core client relationships or like our affordable housing vertical where we can get spreads you know meaningfully outside and wide of what we can do on the you know sort of core CRE front here locally So, you know, I think we've been trying to be disciplined on finding the right deals that we can put on the balance sheet that, you know, are good from a credit risk perspective but are also, you know, priced at a level that makes sense for us.

And then also, I think, you know, Joe touched on the progress we made on the variable rate nature of the book. I think that's another structural thing that we're trying to focus on, too. I mean, we could put growth on for long-term fixed rate assets, and, you know, that's also, you know, not something we're as interested in doing as we were in 2021 as we felt the pain of that as rates moved up. So, you know, I think, you know, the growth engine's there, and we're optimistic about, you know, putting on loans at good yields, and that's really our focus.

No, I don't think it's changed much. I think it's, you know, quality opportunities and relationships that are kind of falling out of some of the M&A disruption or, you know, competitions been pretty fierce on those for a handful of quarters. So I don't think it's really changed too much on the deposit front. You know, I think for us, it's just a focus, you know, the front half of the year being a little seasonally lower for deposits, you know, that's where we tend to get a little bit more aggressive on the opportunities that we have.

Yeah, I mean, I don't think we're anywhere near our max capacity on the loan production side as it relates to talent. I think, you know, the folks that we have here are phenomenal, and the client relationships that we have are great, and the new folks that we picked up are, you know, expanding that client base for us. So, you know, I think we've got room to go on our loan production compared to what we've seen, you know, through the first few quarters this year. I think a lot of that, you know, loan growth isn't necessarily that we're not getting in front of transactions. You know, like I said, sometimes just pricing doesn't make sense. Structure doesn't make sense.

And then, you know, we're mindful about, you know, aligning our loan growth with core deposits. So, you know, the opportunities in our pipeline is big. I think we're being sort of disciplined on putting on growth that makes sense. So I think our folks are doing a great job, and there's certainly capacity there to expand our loan production, you know, as some of the other, you know, metrics make sense.

At what rate are those expected to reprice? Yeah, so they're just over 4%, you know, kind of between 4 and 4.5. So we're constantly, you know, looking at new opportunities, you know, complementing the rest of the balance sheet, whether it's, you know, shorter term or in a lot of cases, you know, further out the curve, you know, with embedded optionality. So if some of that's roll off, as we said, and we continue to look for those opportunities to supplement core deposit growth.

And then maybe one on the loan portfolio. I noticed the variable rate loan mix has been trending higher the last few quarters. Is there a target level you'd like that mix to reach? Hey, Matt, it's Nick. Yeah, I mean, I think our near-term goal is we're really trying to align our variable rate loan book with our variable rate deposit portfolio. So, you know, we've got a little bit of room to go to get to that level. I mean, long-term, you know, we'd like to see the variable rate part of our book, you know, be a bit more balanced with our fixed rate portfolio. So, you know, getting into that 30-40% of the portfolio long-term would be an ideal range, but, you know, that's a slow shift to turn.

So, you know, we think that'll be – it'll take some time for us to get to that level.

Morning, Brendan. Let me start off here on the expense base, you know, totally get the call out of flat expenses from the second quarter level through the end of the year.

You kind of alluded to it in your prep remarks, but was this more of a timing discrepancy, Or was there some intentionality to how you're going to manage expenses in the back half as loan growth came in slower than you were thinking earlier in the year?

Hey, Brendan, it's Joe. I mean, as you know, I mean, we continue to invest in people and technology. I mean, that's been a theme, you know, since we went public. And obviously, we've been fortunate with continued market disruption here in the Twin Cities. So we're always looking for opportunities to add talent. I think, obviously, a lot of disruption came in the tail end of 25 into 26, and so we're not going to peanut butter spread those hires throughout the year. I think we're going to take advantage where we see opportunities, in some cases pull those forward. So I think that's certainly nothing new, and as we think about it, we feel comfortable with both the production and non-production staff, and that's part of where we said some of it's front-loaded, certainly.

And as we think about the back half of the year, we feel like it can be relatively flat from an expense standpoint. But certainly nothing new, and we'll continue to be opportunistic if opportunities arise. I think we always want to invest in the business and the scalability of the company.

Thanks, Joe. Maybe on a kind of related note here, if I look at kind of your expense to asset ratio over the past, I don't know, six quarters, like it's been moving higher up to 165 this quarter. You know, Joe, as you mentioned on those opportunistic hires, as those team eds start to kind of produce and generate assets, is there kind of a medium-term opportunity to leverage those team eds and bring that expense-to-asset ratio, you know, back down to where it had been running?

Yeah, I certainly think it's possible. I think when we look at, you know, whether it's that ratio or we look at just pure operating leverage, I mean, this quarter is a great example where you see revenue growth at a 20% clip and expenses, you know, at 13%. So, I mean, that's an, you know, an ideal kind of ratio between those two.

So, yeah, I think they're, you know, as we invest in the business and the growth translates and production folks, you know, continue to migrate their relationships over. I mean, certainly, you know, we're optimistic about the growth prospects of the company, but we're also not going to be short-sighted to not continue to invest in our people and technology. So I think, you know, that ratio, while it has glided higher, I think by no means are we concerned that it's out of whack.

Thanks for joining the call today. Bridgewater is really excited about the growth and profitability outlook in the second half of 26. And I also just want to do a shout out to our Bridgewater team members that have done a phenomenal job this year and the years to come. So have a great day. Thanks.