Participants

Justin Horstman; Director of Investor Relations; Bridgewater Bancshares Inc

Jerry Baack; Chairman of the Board, President, Chief Executive Officer; Bridgewater Bancshares Inc

Joseph Chybowski; Chief Financial Officer; Bridgewater Bancshares Inc

Nicholas Place; Chief Lending Officer; Bridgewater Bancshares Inc

Jeff Shellberg; Chief Credit Officer; Bridgewater Bancshares, Inc.

Jeff Rulis; Analyst; DA Davidson

Nathan Race; Analyst; Piper Sandler

Brendan Nosal; Analyst; Hovde Group

Presentation

Operator

Good morning and welcome to the Bridgewater Bancshares's 2025 FIRST quarter endings call. My name is Konstantinos and I will be your conference operator today. All participants have been placed in listen-only mode. After Bridgewater's opening remarks. There will be a question-and-answer session.
(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.

Justin Horstman

Thank you, Konstantinos, 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 first quarter financial results. We'll be referencing a slide presentation that is available on the Investor Relations section of Bridgewater's website, investors.ridgewaterbankmmen.com. Following our opening remarks, we will open the call for questions.
Joining 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 first 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 March 31, 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 first 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.

Jerry Baack

Thank you, Justin, and thank you everyone for joining us this morning. I am pleased to report on Bridgewater's strong first quarter with adjusted earnings per share of $0.32, excluding merger-related expenses. We saw a continuation of momentum and trends that began in 2024. Our strong quarter was highlighted by robust balance sheet growth and net interest margin expansion.
Generating strong loan growth has always been a strength of Bridgewater, but with our increased focus on core deposit growth over the past two years, including 8% annualized growth in this first quarter, we are well positioned to again be more offensive minded on the loan front.
In addition, we have seen increased loan demand in our market, driving our pipelines to the highest level since 2022. As a result, first quarter loan balances increased 16% on an annualized basis. We are thrilled with our team's commitment to our solid client base.
We saw net interest margin expansion accelerate during the quarter, climbing 19 basis points. This was driven by lower deposit pricing, the continued higher pricing of loan yields, as well as some accretion benefit.
With our strong balance sheet growth coupled with the higher margin, we were able to execute on driving continued net interest income growth during the quarter. The overall asset quality of our loan portfolio remained superb as we had no net charge-offs during the quarter while market trends in the twin cities remained favorable.
Our credit and lending teams partner together to ensure our credit quality remains a focus independent of market fluctuations. We did move one central business district office loan to nonaccrual, which increased non-performing assets to 0.20% of assets. This did not come as a surprise, as it was a loan we have been referencing in prior quarters.
Jeff will provide some more details in a few minutes. Overall, we believe the superb asset quality track record we have demonstrated over the years remains intact and we feel good about the portfolio. Finally, we continue to focus on creating shareholder value. One of the ways we do this is by consistently growing tangible book value, as you can see on slide 4.
I want to note we saw our first decline in eight years last quarter, all due to the first Minnetonka Citibank acquisition, but as expected, tangible book value bounced right back in the first quarter, up 12% annualized. In addition, given the valuation during the quarter, we opportunistically repurchased about [$600,000] of common stock.
I also want to take a moment to talk about the market volatility we have seen over the past several weeks. The concern over the effects of tariffs certainly create a more challenging operating environment by introducing uncertainty that can impact everything from the ability of our clients to do business to the path of interest rates.
It is still early in the process with nothing fully resolved, but we are actively reaching out to clients to understand any concerns or possible impacts. We also are reviewing our portfolio to identify potential areas of enhanced risk. We are continuing to operate a best-in-class organization with seasoned and emerging talent across the company.
We see real opportunities even as we operate business as usual to gain market share by supporting existing clients and bringing new ones on board. We're expanding our market reach with a good example of being the traction we continue to generate in our affordable housing vertical.
Which Nick will take a moment to talk about later.
With that, I'll turn over to Joe.

Joseph Chybowski

Thank you, Jerry. Slide 5 shows the accelerated net interest margin expansion and net interest income growth we saw in the first quarter. The margin increased 19 basis points to 251 basis points, while the core margin, which excludes loan fees and purchase accounting accretion, increased 13 basis points to 237 basis points.
Margin expansion was primarily driven by the continued decline in deposit costs as we saw the full impact of the fourth quarter rate cuts. Purchase accounting accretion contributed 8 basis points to the first quarter margin. When we combine this with the robot's loan growth we had in the first quarter, we get a 12% increase in net interest income, which is what we are really focused on.
As we think about the margin outlook going forward, there is plenty of uncertainty given the market today. The margin will be dependent on future rate cuts in the shape of the Yo curve.
With no rate cuts in the first quarter, we would expect margin expansion to moderate in the second quarter as loan yields continue to re-price higher, but deposit costs start to stabilize. We would also expect to see less accretion impact over the remainder of the year.
Any future rate cuts in 2025 would likely provide a further benefit to the margin. Given our outlook for additional margin expansion and loan growth, we believe we are well positioned to see continued net interest income growth going forward.
Slide 6 provides a closer look at the margin drivers, the biggest of which was the lower cost of funds. With a large portion of our funding base tied to short-term rates, we saw the full quarter impact of the November and December rate cuts.
We also continue to reduce rates on other deposit accounts, resulting in deposit costs declining 22 basis points to 318 basis points. Loan yields also increased 6 basis points, despite the lower rate environment due to our larger fixed rate portfolio. We saw the full impact of the ramp up in loan originations in the fourth quarter.
New origination volume remained strong in the first quarter as well, with the weighted average yield in the mid to high [6s]. We'd expect to see the portfolio loan yield continue to re-price modestly higher even if short-term rates continue to fall. We still have over $700 million of fixed and adjustable-rate loans maturing or repricing over the next 12 months at yields below new origination levels.
Turning to slide 7, you can see that profitability trends, including total revenue and pre-provision net revenue, continued to increase, primarily due to the stronger net interest income. In fact, total revenue was up 23% on a year over year basis.
Non-interest income of $2.1 million remained elevated and included $325,000 of investment advisory fees from a new product we added through the first Minnetonka City bank acquisition. The first quarter included some catch up from the fourth quarter, so a more normalized run rate for this line is in the range of [200,000] per quarter.
On slide 8, expense growth to support the larger balance sheet continued to track in line with expectations as first quarter expenses included the full quarter run rate of the acquisition. The bar chart on the right of the slide breaks out the 565,000 of merger related expenses during the quarter.
Our efficiency ratio has also continued to decline with the adjusted efficiency ratio moving moving back into the low 50s. While our expenses have consistently been well controlled, we are now seeing the revenue momentum drive the efficiency ratio lower.
With that, I'll turn it over to Nick.

Nicholas Place

Thanks, Joe. Turning to slide 9, we've really been pleased with the momentum on the core deposit front as balances were up 8.3% annualized in the first quarter.
We have now generated $368 million of core deposit growth over the past three quarters, and that excludes the core deposits from the first Minnetonka City bank acquisition in the fourth quarter.
The growth we have seen in recent quarters comes from expanding relationships with existing clients as well as onboarding new client relationships. This has really been a function of the focus our teams have on service and networking.
While we feel good about our deposit pipeline going forward, the second quarter is typically a seasonally low quarter for us given tax season and industry typicality. As a reminder, our core deposit growth is not always linear quarter to quarter due to the nature of our deposit base, so we could see some quarters with larger inflows or outflows.
Driven by this deposit growth momentum, we were able to return to a more offensive-minded approach on the loan side, resulting in 15.9% annualized loan growth in the first quarter, as shown on slide 10.
We were pleased to see the increased demand and pipelines we've been talking about over the past couple of quarters translate into higher loan originations and in turn higher balances. As we look ahead, we remain confident in our ability to grow in the mid to high single digit range for the full year 2025.
Given the head start we have from the 1st quarter, there is potential we could even outperform this range. However, near term loan growth will depend on a variety of factors. In terms of potential tailwinds, our loan pipeline remains at the highest level since 2022. We are also continuing to see opportunities to bring on new clients as a result of market disruption in the Twin Cities.
But there are potential headwinds as well, most notably the economic uncertainty and market volatility regarding tariffs. While we haven't seen significant impacts on the clients to date, we are expecting clients to become a bit more cautious on projects during this period of uncertainty. Overall, we feel we are in a good position to continue growing the loan portfolio, especially with our loan to deposit ratio of 96.6% remaining near the low end of our target range.
Slide 11 provides a closer look at our origination and payoff trends. After bottoming in the third quarter of 2024, we have seen two consecutive quarters of strong originations, including 17% growth in the first quarter.
Loan payoffs, on the other hand, declined 45% during the quarter. The pace of payoffs can be difficult to predict, but we expect the decline in rates we have seen so far in the second quarter could translate into higher payoffs as refinance options become more attractive for clients. Pass will continue to be a factor in our growth over the remainder of the year.
Turning to slide 12, the majority of the loan growth in the first quarter was driven by multi-family, much of which came from our affordable housing vertical. As we have talked about recently, affordable housing has been a longer-term expertise which we have been investing in more heavily over the last two years.
This is an asset class that generally has a higher barrier to entry given the more complex nature of the transactions. We have developed a deep expertise in the space and with our strong networking base we have expanded this vertical to high quality affordable housing sponsors throughout the country.
Affordable housing is now nearly a $600 million portfolio for us, including 13% growth over the past year. An added benefit is that this also has become a great source of core deposit growth. Beyond our affordable housing activity, we saw a return to growth in our construction portfolio.
Which have been seeing an increase. We have been seeing an increase in new construction projects in the back cap of 2024, and these commitments have now started funding, translating into growth on the balance sheet. Overall, we remain very comfortable with the mix of the loan portfolio.
With that, I'll turn it over to Jeff.

Jeff Shellberg

Thanks, Nick. Slide 13 provides a closer look at our multi-family and office exposure. We continue to see positive multi-family market trends in the Twin Cities as a strong labor market and near nation leading affordability has led to improved absorption levels, all of which suggest a favorable outlook for future occupancy and rent growth.
We are seeing this play out as rent growth, lower vacancy rates, and fewer concessions are resulting in higher levels of net operating income for clients. While higher rates continue to be a headwind, we remain bullish on multi-family given the improved overall market trends and our track record and expertise in this space.
Nick also mentioned our focus on affordable housing. About 24% of this portfolio is located outside of Minnesota. The out of market component results from us following strong local affordable housing borrowers to new markets, as well as our increased comfort working with a wider range of seasoned national affordable housing sponsors.
Our non-owner-occupied Siri office exposure remains limited at just 5% of total loans. Over the past few quarters, we have mentioned two central business district office loans that we have had some concerns about due to lease rollover risk. One was moved to non-accrual in the third quarter of 2024, and the property was sold in the fourth quarter. The other was moved from special mention to substandard and non-accrual in the first quarter of 2025.
We have been closely monitoring the risk of this property for some time. The borrower has remained engaged but has not been able to backfill the space being vacated in the second quarter. While central business district office remains a challenging asset class, we don't have any significant concerns regarding our remaining three loans in this portfolio, two of which are in the early stages of being converted to multi-family.
Turning to slide 14, our overall credit profile remains strong. We recorded a $1.5 million dollar provision in the quarter, which was primarily growth driven. We remain well reserved at 1.34% of loans. Non-performing assets increased to 0.2% of loans due to the central business district office loan I mentioned. However, our non-performing assets continue to remain well below peer levels. We also had virtually no net charge-offs in the 1st quarter.
Slide 15 highlights our watch, special mention, and substandard loans, which have remained relatively stable overall. Watch and special mention declined in the first quarter while substandard increased, primarily due to the migration of the one central business district office loan.
We continue to be very pleased with our overall asset quality. However, with a loan portfolio of now over $4 billion there will always be the potential for occasional one-off issues here and there. We remain diligent in our risk management and covenant testing practices to identify potential issues early in the process. I'll now turn it back over to Joe.

Joseph Chybowski

Thanks Jeff. Slide 16 highlights our stable capital position as capital ratios leveled off following the acquisition in the fourth quarter. This included CET1 which remained above 9%.
During the quarter, we repurchased approximately 600,000 of common stock. 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 [$14.7 million] remaining under our current share repurchase authorization. In the near term, we expect capital levels to hold relatively stable given our stronger growth outlook.
Turning to slide 17, I'll recap our near term expectations. Keep in mind that these are all dependent on market conditions given the recent volatility. As Nick mentioned, we feel good about our loan growth outlook while understanding there is uncertainty that could impact the pace going forward. We remain confident that we can achieve full year loan growth in the mid to high single digits.
Given our head start in the first quarter, there is potential to outperform these expectations. We have been pleased with the level of margin expansion over the past two quarters and believe there is still more to come. However, the magnitude will be largely dependent on additional rate cuts and the shape of the yd curve.
For the 2nd quarter, we would expect the pace of expansion to slow from what we saw in the first quarter, primarily due to stabilizing deposit costs and less accretion benefit. If we do see additional rate cuts in 2025, we could see the margin expand a bit more quickly. Regardless, our focus is really on growing net interest income. We believe we are well positioned given our outlook for margin expansion and balance sheet growth.
From an expense standpoint, we are right on track for full year 2025 non-interest expense growth in the high 10s, excluding merger-related expenses. As a reminder, this is 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.
We 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 to Jerry.

Jerry Baack

Thanks, Joe. Finishing up on slide 18, I want to provide a quick update on our 2025 strategic priorities. In the first quarter, we demonstrated our ability to get back to more normalized levels of profitable growth, both on the loan and deposit side.
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 acquisition standpoint.
We are seeing traction in the affordable housing and CNI spaces. Finally, our teams remain on track for two significant technology initiatives this year, including an upgraded retail and small business online banking platform and a systems conversion of a recent acquisition.
With that said, we will open up for questions.

Question and Answer Session

Operator

(Operator Instructions)
Jeff Rulis, DA Davidson.

Jeff Rulis

Thanks. Good morning. Just a question on the CRE front from your perspective, I guess, are you seeing any change in in competition? It seems that more banks kind of signaling a subtle shift in the CRE away from CNI from a from a preferred asset class, your franchise certainly knows the merits and health of Siri, long term. I just wonder if you're seeing peers act any differently in the. In the last few quarters.

Nicholas Place

Hey Jeff, this is Nick. Yeah, I think we've, we mentioned that on prior calls. I think as a lot of the liquidity constraints in the market have subsided over the last, three quarters. We've seen some players that have been on the sidelines get more active again. So, that has tightened spreads a bit as there's been a bit more competition.
I think we're actively monitoring what's going to happen with the Bremmer and ONB, merger to understand, you know what that means for, their ability to. Originate the same volume of loans that the previous two organizations did once the merger is complete.
So we think that should unlock a little bit more potential for us. But yeah, some of the smaller players that historically, over the last year or so had been on the sidelines do seem to be a bit more active and it's tightened spread a little bit, I think we still feel really good about our ability to get looks at transactions and our, deep relationships with clients in a lot of cases kind of gives us a last look at deals too where we can be competitive on transactions that we really like.

Jeff Rulis

Thanks Nick. Joe, maybe a question for you on the on the margin, certainly a little accretion help, but the core margin encouraging do you have the march average on margin and then certainly looks like the ability to further lower costs and hold loan yields up. Looks positive but just hoping for a little detail there.

Joseph Chybowski

Yeah, thanks, yeah, full year or sorry, month of March, margin was [253]. So, I think if you compare that relative to the [$251] for the quarter and then deposit costs were [318] for the quarter for March standalone was [317].
So, I think that's really when we think about the guide on a go forward basis, still really encouraged by the progress of our teams. Especially on the deposit cost front, and there's definitely still opportunity there, especially if we see, rate cuts in the back half of the year.
But we're going to continue to be disciplined on both sides of the balance sheet, pricing loans at levels that we think make sense and given the flow that we see of transactions, we can be selective and be disciplined on pricing and then obviously continue to rationalize deposit costs lower. So feel good and optimistic about. Continued margin expansion. I think what we're saying though is just the pace that we saw in the first quarter, we'd expect that to moderate in the back half.

Jeff Rulis

Got it. Thanks. And I just as a follow up, the loan growth in the quarter was that pretty steady, I'm kind of thinking about if that were a little more back end loaded, you didn't see the full margin benefit, but just trying to, I guess the question, how is that growth spread over the course of the first quarter?

Nicholas Place

Yeah, it was pretty even across the quarter, maybe a little loaded to the back half, but it wasn't, heavy in any one month.

Jeff Rulis

Okay. And maybe one last one for Jeff on the one loan put on nonaccrual, you did identify that the prior central business loan that was sold. Any thoughts on the workout timeline with this one on no accrual and is this a little more detail, is this a longer-term customer just the comfort level around that loan, appreciate it.

Jeff Shellberg

Sure, yeah, I think it, I mean, just given the, that challenging, central business district asset class, I think it's going to be a little bit longer term to work out.
We, the borrower is engaged. We're working with them on some type of a workout plan that would allow them just to, they'd stay in the property, continue to manage the property, and hope to stabilize it over a period of time, but that's going to be dependent a little bit on economic conditions.

Jeff Rulis

Okay, thanks, I'll step back.

Operator

Nathan Race, Piper Sandler.

Nathan Race

Hey everyone, good morning. I appreciate you taking the questions. Joe, just curious how you're thinking about kind of the, exit point for the margin come out of this year, to the extent we maybe get a couple of Fed cuts in the back half of the year, absolutely provide great disclosures in that in terms of some of the asset pricing and some of the index funding on the balance sheet, but just wondering if you can kind of put that all together within the context of maybe a couple of rate cuts within the back half of the year.

Joseph Chybowski

Yeah, well, I think, as we've said in the past, I mean, we spent a lot of time last year positioning the deposit and funding portfolio to benefit from rate cuts, and obviously, we saw that in the fourth quarter, and we really saw it in the first quarter.
So, I mean we got 16 of the funding base is explicitly linked to short term rates and so you know if you see [one cut, three cuts, five cuts]. It's obviously going to be beneficial for us, the more the better from the deposit standpoint.
So, I think we've obviously shied away in the past of explicitly linking each 25 basis points cut, but I will say, yeah, that will certainly be beneficial. I think shaping the curve is also, is a big thing for us, given, the type of lending that we do.
So, I just think the first quarter, we spent a lot of time going through the deposit portfolio beyond those accounts that were linked to Fed funds, and you know we saw opportunity there and continue to rationalize and we will do that, going throughout the year. So, I think all in all, I mean, from our standpoint we still feel like there's expansion.
Just given those dynamics, I mean, the loan portfolio continues to reprice. I think the pickup and growth obviously accelerates some of that repricing, which is great. I also say, with this, increase in originations over the last couple of quarters, we've been really focused on diversifying.
The structure of fixed to floating to adjustable, and so, almost 50% of the originations in the first quarter were linked to more floating rates and so I think it's been an approach to be more balanced throughout and so I think you kind of put that all together. I mean we're confident with expansion. I just think what we're trying to say is, we're really pleased with the first quarter. We wouldn't expect that type of expansion. On a linked quarter basis, but I think overall directionally, we feel better and feel good about the trajectory.
And I think the last thing I would say is just At the end of the day we're focused on net interest income growth, and I think when you have a stabilizing to expanding margin with a pickup in growth, that obviously is the output and so we feel really good about that over the last quarter and certainly over the last year.

Nathan Race

Got it, really helpful. Thanks for that, Joe. And then maybe a question for Nick, as you look at the loan pipeline today, just curious, what you've seen in terms of, pricing on new production lately, curious within that context if you've seen any kind of notable shifts from a competitive pricing perspective within the last 90 days or so.

Nicholas Place

Yeah, I mean, like I mentioned before, we've seen spreads tightening a little bit, but our new originations are still coming on, right around, 6.5% plus or minus, so it's still well above current portfolio yields and we've been, we talked about the affordable housing vertical.
I mean we've been really pleased with not only the volume that we've been able to drive through that initiative, but, a lot of those transactions, given the complexity, do tend to come on with a bit higher pricing than what we'd see in sort of a competitive local sponsor CRE deal, so you know overall that's a business line that is a bit less. Susceptible to sort of local market competition, which is great.

Nathan Race

Okay, got it. I hopped out late, so I apologize if you already touched on this, but were there any specific allocations on the credit, the office credit that, migrated in the quarter, either going in the quarter that were allocated during one queue.

Jeff Shellberg

Yeah, we have a, we have established a specific reserve for that credit.

Nathan Race

And Jeff, was that already there going in the quarter or was that allocated in the first quarter?

Jeff Shellberg

That was allocated to the 1st quarter.

Nathan Race

Okay got it. Maybe one last one for Jerry, just, curious what you're hearing and seeing on the M&A front these days, just curious if there's, similar deals to the one you guys closed on, late last year that, could be additive to the franchise going forward.

Jerry Baack

Oh, as I mentioned in previous calls, I mean we're consistently getting in front of other owners that own.
Smaller franchises in the Twin Cities, so continue to be in in in discussions, but certainly nothing eminent.

Nathan Race

Okay, I appreciate all the color. Congrats on a great quarter, guys.

Operator

(Operator Instructions)
Brendan Nosal, Hovde Group.

Brendan Nosal

Hey, good morning, guys, hope you're doing well.

Joseph Chybowski

Morning Brennan.

Brendan Nosal

Most of mine have been asked and answered so far, but maybe one more, just on the buyback, Joe, you spoke to this a little bit in your pre remarks, we're just kind of curious on the decision process over the next few quarters on additional share purchases you balance buying back at a pretty attractive price versus the capital needs to fund, the return of on growth. Thanks.

Joseph Chybowski

Yeah, I think, our messaging hasn't changed there either. I think it's not one thing that's driving that. I think we're constantly evaluating, valuations, needs, opportunities to Jerry's point on the M&A front.
So I think right now we feel really good about the growth prospects and we certainly want to have, capital to continue the growth and the trajectory that we see. So, I think we're going to weigh that, obviously periods of volatility, I mean, we support the stock and so, but I think there's no one thing that's driving it, and we're constantly evaluating every day.

Brendan Nosal

Okay, yeah, understood, all right. Thank you for taking my questions. I appreciate it.

Operator

This concludes our question-and-answer session. I will now turn the call back over to Jerry Baack for any closing remarks. Thank you.

Jerry Baack

Thanks for joining the call today. We're really excited about the strong start to 2025 we've had. And really feel great about the remainder of the year. I think the disruption with Bremmer being sold and then Wings being announced for doing a merger too that was announced last night, just all of that creates opportunity for us and both of those.
Companies have been very aggressive on rates over the last few years, and we feel that that disruption will continue to benefit us in the years ahead. So, I just want one more time thank our incredible team here and everybody enjoy their day. Thanks.