Bridgewater Bancshares, Inc. Common Stock 2026 Q3 Earnings Call

Please go ahead. Thank you, Betsy, 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 Morrell, Chief Credit Officer. In just a few moments, we will provide an overview of our 2026 third 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 third 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 September 30, 2026, 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 2026 third 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. In the third quarter, disciplined execution of a thoughtful strategy resulted in an incredibly strong quarter. Growth and profitability were objectives, and both proved to be highlights. While we have always had the ability to generate robust loan growth, we have become more focused on creating balance sheet growth that prioritizes optimizing profitability. This strategy has never been more evident than it is now. Earlier in the year, we saw loan competition increasing with silly pricing that we weren't willing to stretch for. In addition, we knew that historically, core deposit growth was seasonal and typically slower during the first half of the year. In response, we strategically slowed our pace of loan growth to the mid-single digit range, accommodating for these trends.

As we expected, core deposit growth returned in the back half of the year with annualized growth of nearly 20%. This came not only from seasonality but from our new client relationships we have grown across the bank. This allowed us to accelerate loan growth during the past quarter to over 7% annualized, with loan and core deposit growth now in line on a year-to-date basis. This is a great example of how we are leveraging data, our market knowledge, balance sheet, and understanding of our client base to strategically and efficiently drive the growth and profitability of the bank. Overall, this translated into a record total revenue and pre-provision net revenue in the third quarter. Combine this with a decline in non-interest expense, and we are able to move our efficiency ratio below 50% for the first time since the first quarter of 2023.

Another significant contributor to earnings was the continued growth in net interest income, as ongoing loan repricing drove 2 more basis points of net interest margin expansion of the third quarter. Looking ahead, we know we are entering a new rates up environment, which Joe will speak to shortly. But we believe our balance sheet is better positioned for this environment than it has been in the past, as we have been proactively growing the variable rate mix of the loan portfolio. Our strong asset quality trends also remained a positive part of the story. As we have shared in recent quarters, we are working through 2 loans that we hope to resolve in the near term. Katie will provide more details on this later. But aside from those, we are very pleased with our loan portfolio as nonperforming assets remain well below peer levels and positive classified asset trends continue.

On slide 5, we will show Bridgewater's long track record of consistently growing tangible book value in excess of peers. This has been the case since before we went public in 2018, and even more recently since 2021. On a year-over-year basis, we have grown tangible book value at a 9.4% pace. Delivering shareholder value is key at Bridgewater. Overall, the third quarter was a very good quarter for Bridgewater. I am thrilled with the momentum we have created, and I am optimistic of the outlook for the remainder of 2026 and beyond. The team is incredibly strong and knows how to execute on the strategies we have in place. With that, I will turn it over to Joe.

Thanks, Jerry. Slide 5 highlights one of the key themes of the quarter, our improving profitability. This included record pre-provision net revenue, which was up 36% year-over-year, as well as continued improvements in return on assets and return on average tangible common equity. Much of this profitability momentum continues to be driven by strong revenue growth, which was up 20% year-over-year. The revenue growth came from both net interest income, which I will talk more about on the next slide, as well as solid non-interest income growth driven by higher letter of credit fees. Swap fees were a bit lighter in the third quarter as swap pricing dynamics are less favorable in the current rate environment. Turning to slide 6, net interest income growth of 22% annualized in the third quarter once again came from both higher average earning assets, up 16% annualized, and net interest margin expansion.

As expected, the pace of net interest margin expansion slowed from the second quarter, but was still up 2 basis points to 3.09% as the loan portfolio continued to reprice higher while deposit costs remained relatively stable. Overall, margin expansion has exceeded our expectations as we originally didn't expect to hit 3% until the fourth quarter of this year. Operating above 3% for the majority of the year has been a boost to our overall profitability. Looking closer at the net interest margin drivers on slide seven, loan yields were up another 5 basis points to 5.96% as the portfolio continued to reprice higher, with average new production yields in the third quarter in the mid-sixes. While loan yields moved higher, deposit costs of 2.78% remained relatively stable for the third consecutive quarter.

The question now is what happens to the net interest margin going forward given the recent rate hike and potential for more going forward. The most important thing to know is that we are better positioned today for a rates up environment than we have been in the past. Over the past couple of years, we have been proactively increasing the mix of variable rate loans on the balance sheet to create additional repricing opportunities and be more rates neutral. Today, variable rate loans make up 26% of the portfolio, up from 15% just two years ago. This means we now have $1.2 billion of variable rate loans which offsets much of the $1.6 billion of deposits directly tied to short-term rates.

While we expect Fed rate hikes to push deposit costs higher across the sector, we also expect our loans to continue to reprice higher and not just from the higher variable rate mix, but also because of the ongoing back book repricing. We have $697 million of fixed rate loans scheduled to mature over the next 12 months at a weighted average yield of 5.70% and another $105 million of adjustable rate loans repricing or maturing at 4.23%. With these lower yields running off the books and new originations going on the books at higher yields, we have further repricing upside ahead of us. Given this loan repricing, we expect our net interest margin to hold relatively stable over the near term despite the recent rate hike. This also assumes another rate hike in December and two more in the first half of 2027.

This demonstrates how much better we are positioned today considering the margin compression we saw during the last rates up cycle. With continued loan growth and margin stability, we are well-positioned for ongoing net interest income growth in the quarters ahead. Turning to slide eight, we have always operated the business in a highly efficient manner given our branch-light model and CRE focus. With the recent revenue momentum I just talked about, coupled with well controlled expenses in the third quarter, our efficiency ratio once again dropped below 50% for the first time since the first quarter of 2023. After pulling forward some expense early in the year due to M&A related talent acquisition opportunities, we expected to be able to hold third quarter expenses in line with second quarter. However, we outperformed this as expenses came in even lower.

Looking ahead to the fourth quarter, we would expect non-interest expense to return to that second quarter level. Overall, lower expenses in the third quarter translated to increased operating leverage given our strong revenue growth. We have a proven track record of being able to manage expenses effectively, and we expect to be able to continue to do this going forward while still investing in the business with a focus on driving further positive operating leverage. With that, I'll turn it over to Nick.