Bridgewater Bancshares, Inc. (BWB) Earnings

Management highlights

- Profitability and Margin Improvement * Exceeded the full-year 2026 net interest margin target of 3% in Q2, reaching 3.07%, driven primarily by ongoing loan repricing of the bank's large fixed-rate portfolio * Net interest income grew at a 21% annualized pace, supporting ROA above 1% for the first time since early 2023 * Deposit costs stabilized in Q2 after pass-through rate cuts were fully priced in, following deposit cost-driven margin expansion in Q1 - Strategic Talent Acquisition * Leveraged recent M&A market disruption in the Twin Cities to make opportunistic, early hires of 15 experienced key production and operational employees from recently acquired competitor banks * This talent pull-forward elevated year-to-date personnel expenses, but management expects it to support long-term scaling, client service capacity, and market share growth * The bank maintained positive operating leverage in Q2: total revenue grew 20% annualized, while non-interest expense grew only 13% annualized - Balance Sheet Strategy and Disciplined Growth * Management prioritizes profitable, balanced growth over growth at any cost, tightening loan selection to avoid overly thin spreads that do not meet profitability requirements * Actively shifted the loan portfolio mix to increase rate neutrality: variable-rate loans now represent 25% of the portfolio, up from 18% one year prior, aligning the variable-rate loan book closer to the variable-rate deposit base * Core deposit growth is a long-term priority; Q2 core deposit decline was attributed to typical seasonality and commercial real estate clients deploying cash into new projects, and the bank has supplemented deposits with wholesale funding as needed * The new Lake Elmo branch has already exceeded its first-year deposit goals, demonstrating success in high-growth Twin Cities markets - Credit Quality * Asset quality remains strong, with minimal net charge-offs (4 basis points in Q2) and stable levels of watch, special mention, and substandard loans (all around 1% of total loans) * Non-performing assets increased modestly to 40 basis points, driven by one already substandard mixed-use property; management is working with the borrower on a sale and expects a near-term resolution * The bank increased specific reserves for the legacy central business district office loan (placed on non-accrual in Q1 2025) to $4 million, and is advancing toward a near-term disposition of the asset * Overall loan loss reserves declined 5 basis points year-over-year to 1.30% of total loans, reflecting conservative but improving credit outlooks - Capital Management * Continued to build capital through retained earnings; resumed common stock repurchases in Q2, purchasing ~$700,000 of common stock at a weighted average price of $18.12 per share * The bank launched an at-the-market offering in Q1 2026 for capital raising optionality, but has not issued any shares under the program to date - Growth Vertical Focus * Affordable housing is a key high-profit growth vertical, which now represents 16% of total loans with 22% year-over-year growth; new originations in this vertical carry higher yields than the broader loan portfolio

Guidance

- Net interest margin: Management expects additional modest net interest margin expansion in the second half of 2026, at a slower pace than the expansion experienced in Q2 2026, driven primarily by continued loan repricing as lower-yielding fixed-rate loans run off the books. - Loan growth: Management targets a mid to high single-digit pace of loan growth for the second half of 2026, with growth dependent on core deposit growth levels, competitive conditions, and ongoing elevated payoff activity. - Expenses: Most 2026 full-year expense growth was front-loaded to the first half due to opportunistic early hiring and annual merit increases; management expects total expenses to remain relatively flat from Q2 2026 levels through the end of the year, with positive operating leverage maintained. - Core deposits: Management expects historical core deposit momentum to resume in the second half of 2026, consistent with typical stronger seasonal deposit trends in the back half of the year. - Variable rate loan mix: Management expects a gradual shift toward higher variable rate loan share, targeting a long-term range of 30% to 40% of total loans to better align with variable rate deposits and increase portfolio rate neutrality.

Segment performance

Bridgewater Bancshares operates as a single business segment focused on commercial banking, with the following key 2026 Q2 financial performance: net interest income grew at a 21% annualized quarter-over-quarter pace, driven by an 8 basis points net interest margin expansion to 3.07%, exceeding the full-year 2026 target of 3.0% set at the end of 2025. Return on average assets surpassed 1% for the first time since early 2023. Tangible book value grew 17% annualized to $16.61, with cumulative growth of over 50% in the past four and a half years. The CET1 capital ratio increased 8 basis points quarter-over-quarter to 9.61%, up 58 basis points year-over-year. Total deposits increased $41 million (3.8% annualized) from Q1 2026, while core deposits declined 3.5% annualized (a typical seasonal trend for Q2). Loan growth came in at 5.4% annualized, matching the pace from Q1 2026. Key portfolio segments by share: fixed-rate loans make up 64% of total loans, variable-rate loans make up 25% (up from 18% one year prior), and affordable housing loans account for 16% of total loans, with 22% year-over-year growth in this vertical. Non-interest income is supported by growing contributions from swap fees, investment advisory fees, and rebounding letter of credit fees. Net charge-offs for Q2 came in at just 4 basis points of total loans.

Risks & headwinds

- Elevated payoff activity driven by asset sales and agency spread tightening that has increased refinancing activity is expected to remain a near-term headwind to net loan growth. - Strong competition for both loans and deposits remains elevated in the Twin Cities market, with competitors offering loan spreads as low as 150 basis points over SOFR that are too thin for Bridgewater to compete on, limiting near-term loan growth options. - Non-performing assets saw a modest uptick in Q2, and further reserve adjustments may be required for the legacy non-accrual office loan depending on market feedback and outcome of the planned disposition. - Q2 core deposit declines are typical, but sustained weaker-than-expected core deposit growth would require further discipline on loan growth to maintain balanced balance sheet growth.

Analyst Q&A

• Q: Jeff Roulis (DA Davidson) asks to characterize the elevated payoff activity the bank is seeing, what is driving it, and what payoff pace management expects for the back half of 2026. /

  A: Nick Place explains current elevated payoff levels are a catch-up from seasonally low activity one to one and a half years ago, not driven by concerning factors. The pace of payoffs seen over the last three quarters is now the consistent new baseline, which management is using for its back half of 2026 modeling.

• Q: Nathan Race (Piper Sandler) asks for an update on competitive deposit and loan pricing in the Twin Cities, and what the average rate on new loan production is today. /

  A: Nick Place notes deposit competition remains strong but steady, with opportunities to acquire low-cost core deposits from larger incumbent banks. On the loan side, competition for high-quality assets has pushed spreads to unreasonably tight levels that Bridgewater will not match. The bank remains disciplined, focusing on core relationships and the affordable housing vertical where it can achieve wider, profitable spreads, and prioritizes variable-rate loans over long-term fixed-rate assets to improve rate neutrality.

• Q: Matthew Braver (Stephens) asks what the expected repricing rate is for the $600 million of time and broker deposits scheduled to reprice. /

  A: Joe Chybowski responds these deposits are expected to reprice to between 4% and 4.5%, and the bank is actively evaluating new opportunities, including shorter-term and longer-duration options with embedded optionality, to supplement core deposit growth as these deposits roll off.

• Q: Brendan Nossel (Hobd Group) asks if the planned flat expenses from Q2 levels in the back half of 2026 is due to slower-than-expected loan growth, or just timing of opportunistic talent hires. /

  A: Joe Chybowski clarifies the front-loaded expense growth is purely timing: the bank capitalized on M&A disruption to hire available talent early rather than spreading hires out over the year, and the flat back half expense outlook reflects that all planned hires have already been made, not a reaction to slower loan growth.