BWB - NASDAQ

Good morning, and welcome to the Bridgewater Bancshares 2025 Second Quarter Earnings Call. My name is Chad, 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, Chad, 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 Jeff Shellberg, Chief Credit Officer. In just a few moments, we will provide an overview of our 2025 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 2025 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, 2025, and we undertake no duty to update the information. We may also disclose non-GAAP financial measures during this call. We believe 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 2025 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 Baack.

Thank you, Justin, and thank you, everyone, for joining us this morning. Bridgewater reported another strong quarter, highlighted by impressive revenue and balance sheet growth trends, well-controlled expenses and strong asset quality, all driving the consistent tangible book value growth that we are known for. We have been very pleased with the revenue growth trends we have seen over the past several quarters and especially here in the second quarter. As expected, our loan portfolio continues to reprice higher in the current rate environment, which helped net interest margin expand by 11 basis points. Meanwhile, the momentum we have seen in core deposit growth over the past year has allowed us to ramp up loan growth to more normalized levels, including a 12.5% annualized rate in the second quarter. We continue to see opportunities across CRE, multifamily, C&I and construction. As a result, net interest income grew $2.2 million during the quarter. But it wasn't just net interest income that drove total revenue growth. In fact, we generated record fee income even when excluding gain on sale of securities and FHLB prepayment income, both of which were onetime in nature. We brought in nearly $1 million of swap fee income during the quarter and saw over $200,000 of investment advisory fees related to the platform we acquired from First Minnetonka City Bank. This growth in fee income has allowed us to enhance our overall revenue diversification. Asset quality remains strong as we saw another quarter with no net charge-offs. While nonperforming assets remained steady at 0.19%, about half of peer levels. We did see a modest uptick in classified loans, which Jeff will talk more about in a few minutes. But we remain very pleased with the overall quality of our loan portfolio, which has a long track record of being among the best in the industry. When we pull all of these results together, we produced another quarter of tangible book value per share growth, as you can see on Slide 4. After a rare quarterly decline in the fourth quarter of '24 due to our acquisition of e First Minnetonka City Bank, tangible book value per share has resumed its consistent growth trend in 2025, up nearly 11% annualized year-to-date. In addition, we opportunistically repurchased $1.6 million of common stock early in the second quarter. Before I turn it over to Joe, I want to take a moment to talk about a few other initiatives we have going on. First, market disruption in the Twin Cities has returned following Old National's recent acquisition of Bremer Bank. Historically, this type of M&A disruption has been a significant contributor to Bridgewater's growth, both through talent and client acquisition. We don't expect this wave to be any different. We are actively having conversations and marketing the bank to ensure we are viewed as a bank of choice for those looking to continue banking local. We have already seen solid traction in this area. We have 2 other long-term initiatives that we expect to complete in the third quarter. The first is the rollout of our enhanced retail and small business online banking platform. The second is the systems conversion of our First Minnetonka City Bank acquisition, which is right on track. It's also worth mentioning the strong deposit retention we have seen as part of the acquisition as current balances remain within 3% of acquired balances. I'm so appreciative to the various teams across the bank that have been working diligently to get these projects to the finish line. Lastly, one of our biggest differentiators for Bridgewater is our unconventional culture. While I often don't feel like our culture gets enough credit for the impact it has on the overall success of our business, we were pleased to be again recognized as a 2025 Top Workplace by the Star Tribune. With that, I'll turn it over to Joe.

Thank you, Jerry. Slide 5 highlights the strong net interest income growth and net interest margin expansion trends we have seen over the past several quarters. This includes 38 basis points of margin expansion since the third quarter of 2024. After net interest margin increased by 19 basis points in the first quarter, our expectation was that the pace of expansion would begin to slow as we got further away from the rate cuts late in 2024. This is exactly what we saw as the second quarter margin expanded 11 basis points to 2.62%. Not surprisingly, we saw our predominantly fixed rate loan portfolio continue to reprice higher in the current environment, while our deposit costs began to stabilize. In addition, loan fees increased this quarter as payoffs ticked up. We also saw -- we also continue to have some benefit from accretion, which contributed 5 basis points to the margin in the second quarter, down from 8 basis points last quarter. Looking ahead, our portfolio is positioned to see ongoing net interest margin expansion in future quarters due to continued loan portfolio repricing. However, we expect only slight margin expansion in the third quarter due to a couple of specific headwinds. First is the $80 million of subordinated debt at 7.625% we issued in June, which we used to redeem $50 million of outstanding sub debt at 5.25%. We expect this trade-off to create a 7 basis point net drag on margin in the third quarter. Keep in mind that if we had let the outstanding sub debt roll, it would have repriced to well over 9% in July. So we feel good about the earnings impact of new issuance and the enhanced capital position. The second headwind is that we expect the accretion benefit to continue to diminish going forward. As a result, we could see net interest margin up slightly in the third quarter with more expansion resuming in the fourth quarter dependent on the interest rate environment. Any future rate cuts would certainly be a net benefit to margin. Overall, we have been pleased with the net interest income growth we have seen in recent quarters. With our margin outlook and strong loan pipelines, we believe we can continue this momentum going forward. Turning to Slide 6. You could see the impact of the loan repricing, I mentioned as the portfolio loan yield increased 13 basis points to 5.74% in the second quarter. With $590 million of fixed rate loans scheduled to mature over the next 12 months at a weighted average yield of 5.65% and another $141 million of adjustable rate loans repricing or maturing at 4.43%, we still have more loan repricing upside ahead of us as new originations in the second quarter were in the mid- to upper 6s. Deposit costs, on the other hand, are stabilizing, down just 2 basis points in the second quarter. We would expect to see continued stabilization absent additional rate cuts. If we do get rate cuts later this year, we have $1.6 billion of funding tied to short-term rates, including $1.3 billion of immediately adjustable deposits that should allow deposit costs to decline further. I also wanted to mention that the size of our securities portfolio decreased in the second quarter as we sold $58.5 million of securities from the First Minnetonka City Bank portfolio we acquired last year, taking a gain of $474,000. When we announced the acquisition last August, we mentioned the balance sheet optionality it created. Selling a portion of the securities portfolio was one of our options, and we are pleased with the execution. Turning to Slide 7. You can see that profitability trends continue to increase, primarily due to strong revenue growth. In addition to net interest income, we have also seen meaningful growth in noninterest income, which has historically made up only about 5% of our revenue. Even when backing out the $474,000 securities gain and $301,000 of FHLB prepayment income, noninterest income increased $773,000 or 37% during the quarter. This was primarily driven by $938,000 of swap fee income as our bankers have begun to more actively offer the swap product to clients. We have now generated swap fee income each of the past 4 quarters. While these fees have been lumpy, we expect to see additional swap fees going forward. We also saw investment advisory fees, which came over in the First Minnetonka City Bank acquisition, settle in around $200,000 per quarter. On Slide 8, noninterest expense remained well controlled and continued to track in line with our expectations. Salaries, occupancy and technology expenses all remained relatively flat in the second quarter. The majority of the linked-quarter increase came from higher FDIC insurance costs, charitable contributions and marketing expense. FDIC insurance costs returned to a more normalized level of $750,000, which should be a good run rate in the near term. We also had about $200,000 of charitable contributions related to our partnership with the Federal Home Loan Bank of Des Moines to support affordable housing and community development efforts. Finally, we would expect marketing expenses to remain elevated as we have initiatives in place to take advantage of the M&A disruption in the Twin Cities. Overall, with well-controlled expenses and strong revenue growth, we have been able to steadily drive our adjusted efficiency ratio back into the low 50s at 51.5%. With that, I'll turn it over to Nick.

Thanks, Joe. Slide 9 highlights the continued strong run of core organic deposit growth we have seen over the past year. During the second quarter, total deposits increased $74 million or 7% annualized, while core deposits increased $16 million or 2% annualized. We were pleased with the continued growth in the second quarter, which is typically seasonally low due to tax season and industry cyclicality. While we always remind you that our core deposit growth is not always linear from quarter-to-quarter given the nature of our deposit base, we have seen a nice extended period of relatively linear growth, which is a credit to the hard work of our teams and the strong Bridgewater brand in the market. We are encouraged by our strong deposit pipeline, especially with the additional opportunities related to the M&A disruption in the Twin Cities. Turning to the loan portfolio on Slide 10. We saw another quarter of robust growth with balances up 12.5% annualized and 14.5% year-to-date, a pace that has exceeded our expectations for the mid- to high single digits for 2025. This has really been a function of the strong and consistent run of core deposit growth I just mentioned, which has simply allowed us to be more offensive minded on the loan front. In fact, even with this level of loan growth, our loan-to-deposit ratio remains in the lower half of our target range at 97.9% One thing that has always been a differentiator for Bridgewater is our ability to generate robust loan growth when we want it. Historically, periods of slower loan growth, such as 2023 and 2024 were more a result of slower funding growth than a lack of lending opportunities. With strong core deposit trends and a loan pipeline that remains near a 3-year high, we are optimistic about our ability to continue to produce strong loan growth in the near term. The ongoing market disruption from Old National's acquisition of Bremer Bank continues to create additional growth opportunities for us. In addition, we have not seen a material impact from tariffs on loan demand so far, something we were more cautious about a few months ago. On the other hand, the market has become more competitive since last quarter with spreads getting tighter. Given our growth engine, we will likely be more selective going forward as we don't need to stretch on price in order to grow. Looking ahead, while we were able to outperform our growth expectations in the first half of the year, we believe mid- to high single- digit growth remains a good target for us in the back half of the year. This will, of course, be dependent on the pace of core deposit growth as well as loan payoffs, which can be difficult to predict. Slide 11 shows how our strong loan pipeline has translated into elevated levels of new originations over the past few quarters, including second quarter originations more than doubling from a year ago. Loan payoff activity, on the other hand, has fluctuated quite a bit over the past year. We expect payoffs to have an impact one way or the other on the overall pace of loan growth going forward. Turning to Slide 12. The majority of the loan growth in the second quarter was driven by nonowner-occupied CRE, which is spread across various property types, including senior housing, industrial and retail. We also saw continued growth in multifamily and C&I. Last quarter, we mentioned our increased focus on the affordable housing vertical. We continue to expect this to be a driver of growth going forward. Construction is another area where we could have additional balance sheet growth in future quarters. We started seeing an increase in new construction projects in the back half of 2024, and these projects are now starting to fund. Overall, we remain very comfortable with the mix of the loan portfolio, especially given our expertise in the multifamily space. With that, I'll turn it over to Jeff.

Thanks, Nick. Slide 13 provides a closer look at our multifamily and office exposure. The positive multifamily trends that we have talked about over the past several quarters have continued throughout 2025. These trends include lower vacancy rates, which recently dropped under 6.5%, strong absorption and fewer deliveries, all of which suggest a favorable outlook for higher levels of net operating income. In addition, we have a strong track record in this space with only $62,000 of net charge-offs in multifamily since the bank was formed in 2005. As Nick mentioned, we continue to expand our affordable housing, both locally and on a national basis. The portfolio has grown 15% over the past year to $581 million with 24% being located outside of Minnesota. Our nonowner-occupied CRE office exposure remains limited at just 5% of total loans. This includes 4 central business district office loans, only one of which we have any concern about. This is a loan that we moved to substandard and nonaccrual in the first quarter due to vacancy issues caused by a major tenant not renewing its lease. We continue -- we continue -- we expect this to be a longer-term workout, and we have agreed to give the borrower more time to stabilize this property. Overall, we feel good about our office portfolio. Turning to Slide 14. Our overall credit profile remains very strong. The provision for the quarter increased to $2 million, which was primarily growth driven, but also included an additional specific reserve for the Central Business District office loan I previously mentioned. We remain well reserved at 1.35% of loans. Nonperforming assets declined slightly to just 0.19% of total assets, well below peer levels. But we also had another quarter of no net charge-offs. While overall asset quality remains strong, we did have some modest credit migration into watch, special mention and substandard during the quarter, as you can see on Slide 15. The increase in special mention was due to a multifamily property that is now under a letter of intent and moving towards a purchase agreement. We expect this to be off the books by the end of the year with no loss to the bank. The increase in substandard was due to one relationship consisting of a multifamily property and other smaller loans across various asset classes. Credit weaknesses in these relationships were identified through our risk management processes, and we are actively working with our clients on resolutions. Importantly, we do not see these migrations as systemic credit issues as our overall portfolio was performing well and the multifamily sector continues to show favorable trends. I'll now turn it back over to Joe.

Thanks, Jeff. Slide 16 highlights our capital ratios, which held steady in the second quarter, including our CET1 ratio, which remained at 9.03%. You can also see the impact of the refinance and upsize of our subordinated debt as total risk-based capital increased 55 basis points. During the quarter, we repurchased $1.6 million of common stock in April at an average price of $12.80. We will continue to evaluate future repurchases based on a variety of factors, including valuation, capital levels, growth opportunities and other uses of capital. As of quarter end, we still had $13.1 million remaining under our current share repurchase authorization. Our Board has also extended the expiration date of our current share repurchase authorization from August 20, 2025 to August 26, 2026. In the near term, we expect capital levels to hold relatively stable given earnings retention and our stronger growth outlook. Turning to Slide 17. I'll recap our near-term expectations. While we saw stronger-than-expected loan growth in the first half of the year, we feel that mid- to high single-digit growth in the back half of the year remains a good run rate. This is a function of our strong pipelines and opportunities we are seeing in the market. However, it will also be dependent on the pace of core deposit growth and our ability to remain within our target loan-to-deposit ratio range of 95% to 105%. We expect to see additional net interest margin expansion in future quarters due to the ongoing repricing of the loan portfolio, but likely only slight expansion in the third quarter due to the 7 basis point net headwind related to the subordinated debt issuance. If we do get any rate cuts later this year, we would likely see additional margin expansion. Overall, we feel good about our ability to continue driving net interest income growth. From an expense standpoint, we remain on track for full year 2025, noninterest expense growth in the high teens, excluding merger-related expenses. As a reminder, this higher-than-normal pace in 2025 is to help support the larger asset base following the acquisition as well as some redundant expenses until we reach systems conversion in the third quarter. We also feel we are well reserved at current levels and would expect provision to remain dependent on the pace of loan growth and the overall asset quality of the portfolio. I'll now turn it back over to Jerry.

Thanks, Joe. Finishing up on Slide 18, I want to provide a quick update of our 2025 strategic priorities. During the first half of the year, we have certainly returned to a more normalized level of loan growth as we put some of the strong core deposit growth to work, including the deposits from our recent acquisition. Gaining market share remains a focus and continued market disruption in the Twin Cities is an opportunity for us, both from a client and talent standpoint. We have already started seeing some early wins on both fronts. We also continue to gain traction in the affordable housing and C&I spaces. Finally, our teams remain on track for 2 significant technology initiatives in the third quarter, including an upgraded retail and small business online banking platform and the systems conversion of our recent acquisition. With that, we'll open it up for questions.

[Operator Instructions] And the first question will be from Jeff Rulis from D.A. Davidson.

Just a question on the margin. Do you guys have a June average for the margin? I know that we've got some headwinds in the third quarter, but it's always a good jump-off point.

Yes, Jeff, it was 2.65% stand-alone in June.

And Joe, just on the securities sale, could you remind us of the kind of the rate that, that was at relative to the securities portfolio total rate?

Yes. So it was primarily treasuries and mortgage-backed securities in the low 4s. So obviously, we had marked that upon acquisition. So it's below the blended securities portfolio yield. So I think we felt not only that, but also just given to redeploy that into any sort of loan growth in the mid- to high 6s, definitely was a good trade. And I think we had always planned on doing that if the opportunity arose. And certainly, that did in early April with all the rate volatility.

Got you. And then on the swap fees, I know these seem like they're going to be lumpy, but it does feel like more of a recurring lumpiness. And I guess, is there -- first, any seasonality that you expect by quarter with these? And then I don't know if there's any kind of range-bound expectation for going forward other than maybe these might be more recurring than not?

Jeff, this is Nick. Yes. I mean, we've had a strategic focus internally to drive swaps as a tool that we're leveraging more as we originate loans to the balance sheet. We've trained staff. We've put sort of incentive plans in place. We've educated clients about it. So it's really difficult to predict when those transactions will actually close with swaps on them. We had some that closed right at the end of the quarter, which could have easily slid into Q3. So I think it should be a more consistent part of the business, long term. Quarter-over-quarter, though, it's really hard to predict what that level should be. But we feel good about the continued momentum that we're having. It isn't just one of our bankers that's doing it. I think it's really spread across a big chunk of our bankers. So as we continue to have a pipeline, that's strong, I'd expect that we're going to continue to use that as a tool, not only from a noninterest income perspective, but from a margin sort of defensive perspective on increasing the volume of variable rate transactions on our balance sheet long term. So there's a lot of positives to us doing it. And I think we're, as a team, really committed to using that tool more going forward.

And Nick, maybe just the last one. Just the competitiveness in that line item, when you reach out to customers, you push it more? Are you facing competition, kind of what's that landscape like?

Yes. I mean, we've talked in prior quarters, I mean, as a lot of the liquidity concerns in the banking space have somewhat subsided over the last 6 to 12 months, we've seen more banks that were on the sideline kind of get back in the market. So that has driven spreads to tighten a bit here. I think we mentioned it in the prepared remarks, our pipeline is really at a 3-year high. We feel really good about the opportunities that we're getting in front of. So we're trying to be selective on the opportunities that we're moving forward on and trying to find ones where we can garner a little bit of a wider margin to them. I think the swap -- I mean, these two things are related to. I mean, we are leveraging the swap product as an opportunity to win the good business that we want to have because the client is able to trade into a more competitive fixed rate than what we would predominantly hold on balance sheet. So I think these two things work well together in the sense of the increased competition does sort of incentivize our client and our bankers to think more about that swap product as a way to get the client to the lower fixed rate that they're looking for.

And the next question will be from Adam Kroll from Piper Sandler.

This is Adam Kroll on for Nate Race. So you guys obviously had really strong loan growth during the quarter and especially within CRE. So I was just curious, you expect CRE to be the primary driver of growth in the back half. And just wondering if you could expand on what you're seeing in terms of competition and if spreads have compressed at all?

Yes. This is Nick. I would say that in the back half of the year, we expect our growth to just be in line with all of our typical verticals. So Q2 saw a little bit of a higher increase in our CRE balances versus our multifamily portfolio. Quarter-over-quarter, I think those 2 buckets, there isn't any real seasonality or direction as to why one would increase more than the other. It's really just sort of opportunity dependent. So as we think about where we're going to grow in the back half of the year, I think it's sort of commensurate with all of our legacy business lines. We did touch on we're seeing a lot more opportunities within the affordable housing space. Those transactions do land in various buckets in our portfolio from multifamily to C&I. So that vertical continues to grow as we expand our client base nationally in that footprint or in that vertical. So we're pleased that we're seeing opportunities there and expect that to continue to drive balance sheet growth for us. On the competitive side, I touched on it briefly with Jeff's comments, but we continue to see competition from local players in the market that are back from being on the sidelines in past quarters. The M&A or the acquisition of Bremer Bank from Old National, I mean, I think that those are 2 very active players in our market. So we're keenly watching what will happen as those 2 institutions merge together. I mean we do think that should shake loose more opportunities for us as I don't think that the combined production of those 2 legacy businesses will equate to what the ongoing production will be for the combined organization. So we do think that with the client overlap of those 2 banks and that should drive some additional opportunities for us in the long term, too. So that's certainly something we're keeping an eye on.

Got it. That's super helpful. So I guess another one for me is just as you convert FMCB over to your systems. Just curious what you're hearing and seeing on the M&A front these days and if you're seeing any similar opportunities?

This is Jerry. Similar to what I've said in past quarters, we're always talking to other bankers out there, other CEOs and owners of banks and continue to have conversations, certainly nothing that's imminent, but I always say that organic growth is, first and foremost, what we're looking for. And with the opportunities out there right now, that's what we're focusing on, but it doesn't mean that we haven't had conversations.

[Operator Instructions] The next question will be from Brendan Nosal from Hovde Group.

This is Ynyra Bohan on for Brendan. I just had 2 questions. looping back on the NIM. I understand in your prepared remarks, you talked about the impact of taking out sub debt, but we were wondering how we should think about NIM thereafter and if there's any benefit that will be seen from the loan repricing.

Yes, this is Joe. So yes, I think as we called out in prepared remarks, we really wanted to highlight just the sub debt dynamic in the third quarter. But I think generally, as we think about the NIM expansion dynamics, which have translated over the last couple of quarters, we still think those are well underway. The loan repricing, as we've highlighted, continues to translate. We feel really good about that. And the deposit portfolio, albeit stabilized, we still see opportunities to grind deposit costs lower even without a rate cut. So I think the underlying dynamics, we feel really good about continued margin expansion, but we just wanted to highlight kind of the dynamics in the third quarter, just given the upside of the sub debt and just the impact that, that has specifically to NIM. But I think over the long haul, we're bullish on continued margin expansion.

And the other question is just to do with your funding side. Is there any downward repricing you can still squeeze out of funding costs? Or is it really dependent on further rate cuts? I know you said you could do it most likely without the rate cuts, but is there any other color that you can add?

Yes. I think we continue to look at opportunities across our deposit portfolios. All of our bankers, our asset liability committee goes relationship by relationship, looking at opportunities where we could rationalize costs lower. So it's an ongoing effort. I think it's relationship by relationship. And so we still see opportunities there. I'd also say in the second quarter, just given the volatility kind of early on around April, we found a lot of opportunities to call some more wholesale funding on the brokered CD side and reissue lower. So I think we're always looking for those opportunities on the wholesale side, just given the efficiency in those markets to continue to push funding costs lower.

Thank you, and ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the conference back over to Jerry Baack for any closing remarks.

Thank you, everyone, for joining the call today. I just want to reiterate how excited we are about the recent trends and opportunities we're seeing in the marketplace. I'd also like to thank all of our team members and the energy they provide each day. And I will leave it at that. Thanks, everyone. Bye.