Conference Transcript - BWB 2025-08-27

Operator

Up next, we have Bridgewater Bank Shares, Inc., traded on NASDAQ under symbol BWB. On behalf of the company, we have Jerry Bach, chairman and CEO, and Joe Chiebowski, president and CFO.

Gerald Baack, CEO

Welcome, everyone. Thanks for joining. Today, we're excited to be here at the Midwest Ideas Conference. Again, I'm Jerry Bach, the lead founder, chairman and CEO of Bridgewater Bank Shares. We're located in the Minneapolis area in Twin Cities, a suburb named St. Louis Park. We were founded in 2005. And our platform since the very beginning is really to focus on an entrepreneurial banking base and continue to grow in the Twin Cities area and take advantage of the disruption in the area. Today, we're about $5.3 billion in assets, primarily a commercial focus, focus on entrepreneurs. We have a great multifamily experience, affordable housing, and again, just taking market share in the area. We have nine branches currently. Five of those were de novo branches. Four of those were branches that we acquired through two very small in-market acquisitions we did over the years. our strategic leadership team has this has actually changed since this slide we've the six of us have been together for quite a while on this leadership team two of my founding leaders of the bank are retiring and I'm the old guy that's left so but with that said we've always been able to to take talent into our organization and have them become leaders over time So we're really excited about the three new additions to our leadership team, which is Jess Stetsko, Katie Morrell, and Laura Esposito. Things that really differentiate BWB, it's our culture, our growth, our efficiency, and risk management. I can talk about each one just briefly here. Our culture at Bridgewater Bank is probably unlike any other bank in the nation. we really have a solid culture people really get the work hard play hard mentality we've got a phenomenal group of people we've always tried to do things that we say is unconventional different than the uh a normal boring bank so with that said we've we have activities for clients or for our employees and just differentiates ourselves across the entire landscape. Balance sheet growth has really been one of our hallmarks. We've always had consistent growth. And what we really look at is consistent tangible book value growth. So if you look at the slide, we've really had a solid growth in book value. We did one small acquisition that it dipped down for a little bit, but this shows how we compared to peers on our book value growth. Risk management, we really take this seriously. Since day one, we've had less charge-offs, less not performing loans than all of our peers. And we just have a phenomenal risk management process. And then we talked about our highly efficient business model with having such a light branch footprint for the amount of assets we have has driven profitability for us and efficiency. And then my last slide, until I turn it over to Jill, is really just talking about the Twin Cities and what's happened in the industry. 10 years ago, we were the 14th largest locally led institution in the Twin Cities. Today, we're the second behind US Bank. We're the only publicly traded company in the Twin Cities other than US Bank. There's just a lot of market disruption within the Twin Cities that we've been able to take advantage of over the years. The biggest driver right now is really a national bank that's done a lot of consolidation over the years has purchased Brever Bank, which is about a $17 billion bank in the Twin Cities. So we continue to take advantage of that. And with that, I'm gonna turn it over to Joe. Thank you, Jerry.

Joseph M. Chybowski, CFO

Yeah, so as Jerry mentioned, I mean, robust organic asset growth, you know, really going back to the founding in 2005, but the chart here we show is the last 10 years, 20% compounded growth, primarily organic. We've done two small acquisitions, one in 16 and we just closed one in 2024. But otherwise, I mean, the organic growth, to Jerry's point, there's been a ton of consolidation, which has really been kind of our bread and butter, picking off teams, picking off business. And to Jerry's point, the mention of Bremer Bank continues to be an opportunity for us to grow. So we feel like we have a phenomenal runway to continue to grow in the Twin Cities. If you think about US Bank and Wells Fargo, they still control over 60% of the deposit market share. So for us, if we just get the scraps, it's a tremendous opportunity. So core deposits, I mean, this is the lifeblood of any banking institution. You know, we feel like we do it very well. If you look over the last five quarters or even over the last five years, we've grown at an 11% clip. It's certainly not easy. We feel like we have phenomenal teams that get in front of relationships. To my point earlier, US Bank, Wells Fargo continue to provide opportunities to bring over deposits. I think we feel like we have the full suite of products to serve a lot of these clients, the technology stack in place, and ultimately we differentiate with the service. So feel good about the runway. Core deposits will always be, you know, for us somewhat of the governor of growth. You know, we feel like since the founding, we've definitely supplemented core deposit growth with more wholesale funding, but truly the value of the franchise is driven here. So feel good about the runway as well, considering the continued disruption in the Twin Cities. So loan growth, I mean, we have a phenomenal team that, you know, really gets in front of high quality paper. and so there's no trouble of people wanting debt, and so I think we've tried to be really methodical about the loan growth, especially over the last five quarters, really focused on core deposits and then ultimately profitable loan growth. So you think over the last couple of years, it's been a difficult rate environment, and it's been harder for deals to pencil, but we've tried to be really disciplined about pricing. We feel really good about the runway the pipeline that we have here over the coming quarters and we feel like we're getting in front of a lot of high-quality both existing clients and prospective clients so loan growth is a hallmark and as always has been the portfolio you know it's been an intentional effort over the last you know ten years you can see here just the diversification we've always felt like the portfolio is well diversified but an intentional shift truly to originate more multi-family and so you've seen the portfolio grow from 21% in 2015 to close to 40% today to Jerry's point that's that is our bread and butter multi-family lending within the Twin Cities and then I'll talk about more of an opportunity we see more nationally this asset class has performed very well and I'll you know I'll show you on the next slide so in banking I mean they the regulators would consider it a CRE concert concentration they measure that relative to our risk-based capital they have some you know thresholds and guidance guidelines related to exposure so I'd say on the face you know we are over that limit but I also think we feel really good about multifamily and feel like it's a different asset class when those CRE guidelines were written in 2006 we felt like it didn't fully consider multifamily and the performance of that portfolio and that asset class you can see going back you know really last 30 years this is FDIC net charge-off history multifamily has been the best performer if you consider it relative to other asset classes and we've seen that in our portfolio we've only experienced sixty two thousand dollars of charge in our 20-year history. So it's definitely performed very well. As Jerry said, I mean, that all starts with the principles and the relationships, and we feel like we have a phenomenal network within the Twin Cities and growing that really supports these projects. A lot of diversification you can see, whether you look at it based on class type, primarily within the Twin Cities, and then based on unit type. So we feel like it's a well-diversified portfolio, very granular, average loan size of 3.4 million, and it continues to perform very well despite a lot of the national headlines. Affordable housing would be now a sub-segment of the multifamily. This is an expertise we've had for a long time. I think we've really seen this as an opportunity to grow more outside of the market. So we've always done kind of naturally affordable housing and now this is more intentional involving low income housing tax credits. And really, I think the advent of this, I mean, we banked a lot of high quality developers within the Twin Cities and we would follow them to other markets. But we would always kind of base it on their location and we'd use kind of ring fence around the Twin Cities. Now I think this expertise and we see this opportunity gives us the ability to work with developers out of the market that are originating within the Twin Cities. And also we see an opportunity to follow out of market developers out of market. So tremendous opportunity here. There's a shortage of housing, you know, really in every major MSA. We feel really good about kind of this space and where we can stack up within the capital stack. The loss history on the affordable housing space is even better than the multifamily space. And so we see this as a growth opportunity, more on a national basis. So it's grown at a 15% clip over the last year, and we continue to get in front of kind of the best in breed developers across the country. So a spread-based business model, I mean, pretty simple. You know, we make loans, we bring in deposits, we clip a spread. And so, obviously, that was a slog from, you know, really mid-23 until really the Fed started cutting at the tail end of last year. You know, with an inverted yield curve, it's been challenging, and you can see that from a revenue standpoint. You know, really two years of kind of just kind of stagnant revenue growth. Since the Fed started cutting in the tail end of 24, we see a real opportunity both for margins to expand and then growth to really continue and translate. We've also spent a lot of time over the last, you know, couple of years trying to diversify the income stream. And so we've a lot of focus on fee income. And you can see that really starting to translate the tail end of 24 and then really in second quarter of 2025 was a record quarter for us from a non-interest income perspective. I think we really try to be disciplined about non-interest income as that a lot of times, you know, comes with a expansive overhead. But we do see opportunities to continue to grow that and diversify our revenue stream. And obviously we also feel good about, you know, the growth going forward. From a margin standpoint, so I touched on it a little bit in the previous slide, but net interest margin, you know, that's the primary driver of earnings for us. Really seen expansion here over the last couple of quarters and continue to see runway. As the loan book continues to reprice, a lot of 2020 and 2021 vintages are rolling off and repricing in some cases, high threes, low fours, are now repricing in the mid sixes to low sevens. And so that's really provided a pickup in terms of the earning asset yields. And then deposits, as the Fed has cut rates and potentially will cut rates if Trump becomes a voting member, you know, we see an opportunity for deposit costs to continue to fall as well and margin to expand. So this is the loan portfolio really broken out based on fixed variable and adjustable. So primarily a fixed rate book, obviously in a plus 500 rate environment has been challenging. However, like I said, as debt continues to roll off or reprice, you can see here over the next 12 months, You know, we got just inside of 600 million repricing in the mid fives. We'll put on new debt today in the mid sixes. Similar on the adjustable portfolio, you can see at 443, that'll again reprice in the mid sixes. So there's a real repricing opportunity here. Also slope and the curve has helped as we've gotten some steepening here. The Fed cuts short rates and the belly of the curve stays the same. I mean, that's a Nirvana environment for us. And so we really feel good about the margin trajectory and really the growth of net interest income over the coming quarters. Highly efficient business model. Jerry touched on this a little bit. Extremely branch-light footprint, commercial focus, nine branches compared to our peers. Typically have, you know, just about 40 branches. This is intentional strategically throughout the Twin Cities. We look at it as the overhead that comes with the branch network. the larger the branch network can translate to a lower deposit cost and so we really look at this breakdown here this if you look at our overhead relative to our earning assets and you add our cost of funds you know our goal is to always be well inside of our peers who have larger branch networks but a lower cost of funds and you can see that play out here on a total cost basis we're well inside of our peers so this is an intentional effort obviously efficiency ratio is driven both by revenue and expenses we feel like we continue to well control expenses and as the revenue growth has picked up as I talked about you can see the efficiency ratio continue to grind lower our target range is really 45 to 50 so we still have some some room to grow but we definitely see that continuing to trend lower as revenue is picked back up. Strong credit culture, Jerry touched on this a little bit. This has been a hallmark. He didn't mention, so Jerry was a previous FDIC regulator. We have seven regulators and staff. Our other principal founder, Jeff Shellberg, was at the FDIC for 15 years. So we definitely have a background of regulatory compliance, and I think that drives our high quality credit culture, and you can see that through the numbers. Us relative to peers, both on charge-offs and in non-performing assets, continue to outperform peers over the years. This is more just a deeper dive into substandard assets, NPAs themselves, so been extremely well controlled. The pickup there in NPAs in the second quarter is primarily one project. It's a CBD office loan in St. Paul. As you know, that's definitely been a challenged environment for us. That is our only CBD office loan that's still on the books. So we'll certainly be a longer term workout, but feel really good about the broader portfolio. From an allowance perspective, our allowance is healthy, well-reserved relative to peers, at a 135 relative to loans. And then charge off history, as I talked about, extremely low not only over the last you know five years but really going back to inception this has always been a hallmark of ours and capital you know to support all of it so you know we we highlight our capital priorities here as i touched on earlier organic growth is our primary use of capital so earnings retention to support growth has always been important M&A we've only done two deals and really that dipped down there really in the third quarter of 24 is when we closed our deal and so previous to that we were accreting capital and now as growth has picked back up we really feel like the earnings retention should support growth on a go-forward basis so whether it's a TCE tangible common equity or common equity tier one both kind regulatory ratios we feel really good about the runway and the ability to support growth we do support this you know depending on valuation share repurchases we're not afraid to support the stock and we've seen opportunities over the last couple years to do that we do not pay a dividend today I believe you said if we do pay a dividend the day we do that we will sell so but no that's the growth itself is supported we feel like it's a better use of capital than to pay out to shareholders on a dividend basis. And then strategic priorities. So, you know, I think we set these, you know, obviously every year. And, you know, really they haven't changed over the last couple years in terms of, you know, can we get back to more profitable levels of growth? Can we continue to grow the deposit base, both loan and deposit market share? We've really invested in technology over the last five years. You know, starting with kind of loan workflow solutions, back office workflow solutions, how can we digitize any sort of process. You're really built out a data warehouse. We spent a lot of time, you know, partnering with ServiceNow, and so I think as the growth really kind of was more controlled over the last couple of years, we spent a lot of time investing internally, and we really feel like those investments will start to pay off as the growth picks back up. And then finally, just from an M&A perspective, you know, we close that deal in the third quarter of last year. Our conversion is here in September 8th. Integration has been well on track. Client retention has been awesome. You know, we've only seen two to three percent deposit attrition. So we feel like it's gone really well. And ultimately, I think there are more opportunities within the twin cities and throughout minnesota to do more m a we're going to be really disciplined about that make sure that the the companies that we consider are definitely

Operator

complementary to our business model and with that we'll open it up for questions yes yeah good

Joseph M. Chybowski, CFO

questions so on the efficiency ratio comment i think when we look at you know the environment in 2020 and 2021 it was you know a zero rate environment um so when we think about on a go forward basis again i don't like to call rates but we don't anticipate we get back to that environment um so i do think we're trying to think about you know what's a more normalized rate environment and what's kind of our go forward efficiency ratio from that perspective so the 45 to 50 is our goal i think there's potential as we've invested a lot in technology and really starting to see the payoff that you know you could break through get back to the low 40s but I think our goal is to get you know 45 to 50 to start and certainly with a upward sloping normalized yield curve we definitely see that as as potential and impossible and then on the rent control question now if you want to take that

Gerald Baack, CEO

one yeah we're definitely not New York but sometimes there's uh there's some ideas that come through our City Council that are very similar so St. Paul had a to rent control, they still have rent control. They scaled it back significantly. That really changed all the building in that community. Minneapolis did try, also try to do rent control. Do I think it's an issue long-term? Yeah, I think it's an issue across the nation. I think every municipality do things differently, but we're certainly, I mean, we're not concentrated in just the Minneapolis and St. Paul city areas. I mean, we're in all the other suburbs, et cetera, but we do underwrite St. Paul and Minneapolis differently than we would the first or second round suburbs. But to date, there has not been anything significant that's happened, but that doesn't mean it's not going to. Did that answer your question? That's based on within two years of either an appraisal or an internal evaluation, we go back through the entire portfolio. So it's a weighted average over with the most or the oldest one would be two years. So 18 months to two years, but generally if you look at it on a overall average basis, they're either appraisals or internal evaluations

Operator

within 12 to 14 months.

Gerald Baack, CEO

Trust or insurance you were saying? Yeah, I don't, unless that came through an acquisition through an M&A transaction, I really don't think that's something that we've really thought hard about. I don't think we'd want to build that internally, but would we consider buying it or diversifying into that space would consider it's probably not on our top five list of non-interest income sources that we're looking at though. You know, you want to go on this one?

Joseph M. Chybowski, CFO

Yeah, I can take that one, yeah. Yeah, I think when we look at non-interest income, like I said earlier, a lot of it is these, You know, it's a big overhead build-out. To Jerry's point, if we don't want to build it, it would be more buying it. Now, insurance, you know, the premiums and the valuations on insurance, banks peeling that off has gotten, you know, pretty silly, to be totally honest. So a lot of insurance that live within banks is selling. So that's a space that, you know, we don't see on our list. Where we see real opportunity is through swap fee income. so not to get really in the weeds, but on a loan transaction today, we have the ability to swap with our clients from a fixed to a floating rate, and a lot of that generates swap fee income up front. And so really, it's kind of our core business being commercial banking, you add swap fee income, we don't deviate far from our core business, and so the overhead already exists today, but the upside of the swap fee income is is can be tremendous and so ultimately I think we see those avenues where we don't deviate far from the core business but we can generate the income so that's been the biggest driver I'd say of growth thus far you know through one of the M&A deals we did acquire a small investment advisory firm so they have about 250 million in assets under management to advisors I mean we see some potential to plug that into our kind high net worth client base but outside of that it's kind of core kind of deposit service charges and and really core banking transaction fees I think the the thought of building mortgage you know mortgage is really obviously struggle over the last couple years you know that's not appealing either so try to be really disciplined on you know those non-interest income sources and and and really the the build-out that it would take to put it in place yeah I'd say maybe not explicitly the cost yet, but I'd say their approach has changed pretty dramatically. So we actually just kicked off an FDIC exam on Monday. You can see a wholesale change in kind of their interactions. Not that it was combative before. We've always had a good regulatory relationship. But it's almost like, I mean, they really want to be your partner. They're really trying to streamline, you know, the exam process, trying to streamline the reporting process our relationship manager with the FDIC is also I mean I'd say really been a partner and then you're seeing it through just a more friendly regulatory environment from the M&A perspective transactions are getting approved much quicker so there's been a distinct change certainly you know I think we're 80-ish percent in the twin cities

Gerald Baack, CEO

but in st paul minneapolis 20 yeah we tried to like we're more in the seven county metro

Joseph M. Chybowski, CFO

outside of just minneapolis st paul proper exactly that's the give and take exactly yep no great question yeah so our core deposit costs are kind of in the mid twos but if you look at our total deposit costs are in the low threes so i think the fact that we have you know we supplement with wholesale funding definitely brings you know that cost higher but on the core book has performed you know really well so yeah it's a great question they only had a million dollars of multifamily so they had a hundred million dollar loan portfolio only a million bucks so I think that was a big add to I mean it was core deposits were first and foremost that franchise had a phenomenal granular deposit base but the loan portfolio, you know, it was only $100 million on a $250 million bank and no CRE that came with it. So we really, really like that. I mean, it's well, I always joke, it's usually a couple of things.

Gerald Baack, CEO

It's either drugs or alcohol. So it's just a couple of clients that kind of hit the skids. And then outside of that, there's another multifamily that we downgraded that just that service isn't there they're in in a part of the Twin Cities that just hasn't recovered since the riots and it's been tough we saw you

Joseph M. Chybowski, CFO

know definitely some oversupply really in 21 and 22 as deals came online you know over 23 and 24 just given rates there wasn't a lot of new projects so we've really seen a lot of you know definitely absorption vacancy rates across the twin cities continue to come down concessions burn off so we uh you know i think while the reprice was somewhat challenging on 20 and 21 vintages you know we feel really good about the go forward and i think also just transactions have also picked up within the twin cities so for some projects that haven't penciled out and haven't worked you know our clients have been willing to kind of blow through their equity and sell projects and there's been buyers and sellers So I think it's been a healthy functioning market too. If there wasn't somebody stepping in on the other side, we'd start to be concerned. So I think that's helped support values as well. Pretty much nothing, yeah. Yeah, we have a pretty small SBA portfolio, but it's an opportunity that we do see potential growth. One of the banks that we mentioned, Bremer Bank that was purchased by Old National, you know, they had a decent SBA platform. you know, we are talking to some of their folks, potentially looking at building that out. So we do see an opportunity to expand SBA, certainly. You know, I think it's one of those that, so we actually have a de novo branch that we're coming online in the first quarter of next year on the east side of the Twin Cities. So we still see opportunities to plant de novo branches, barring any sort of M&A activity. But as we look at M&A, you know, we're certainly looking at their footprints relative to ours, and you know is there complement is a complementary or is there overlap so you know the deal that we just did had two branches i mean they do fit within our footprint we continue to evaluate i mean do we need both of those branches or not i think they've performed very well um and the fact that we only have nine you know it's it's not you know a huge drag but i think there's still a place for de novos throughout the twin cities um and you know we continue to evaluate that i don't know if if you have any other comments on that oh yeah yeah so our goal is 100 million in the first five years um so i think if you look at our branches are we're well above that just given you know we only have nine of them but i mean that's always kind of been our model is in order for it to actually make sense you know we got to grow to at least that in the first five years their customers that took us out of market so purchase loans can count on one hand i think we don't do purchasing of loans it's i think there was saw a lot of banks get burned through the gfc on that um so i think for us out of market loans you know as the affordable housing space is really where we're starting to follow now out of market developers but primarily it's always started with the twin cities roots to it and we'll follow a client out of market yeah yeah i mean it's it's really like The Twin Cities, I think a lot of it, like we talked about, given U.S. Bank and Wells Fargo have over 60% of the share. I mean, a lot of it's just coming from legacy relationships there. There's been a lot of consolidation. That one slide really highlights kind of the amount of banks, kind of $2 to $5 billion that have been gobbled up over the last 10 years. So you kind of look at these. You think about TCF, right? I mean, Twin Cities Financial was a, you know, was a staple within the Twin Cities. Huntington bought them. Bremer Bank got acquired. Klein Bank got bought by Old National. Anchor Bank, Central Bank, both got bought by Old National and Midwest One. So a lot of it is us, through the disruption of these deals merging together, you know, we're attracting a lot of their clients. The market itself, I mean, also there's been growth, obviously, in the Twin Cities deposit market, and we continue to grow faster than that. So I'd say for us, we try to be really focused on who we go after, but I think ultimately it's the high net worth individual within the Twin Cities, the real estate entrepreneur. I mean, it's a myriad of opportunities. And more and more as we stand alone now outside of U.S. Bank, you know, we've seen a lot more clients that have been disrupted that are coming to us. So I think the C&I piece, you know, that continues to obviously be a great deposit source. The Affordable Housing Initiative I talked about has also been a great deposit source for us as well. if you think about a lot of those a lot of those clients you know really they they don't have any tie to the the loan itself is being financed by you know Fannie or Freddie or HUD and so there's no requirement to where the deposits end up and so for us we've seen that as an opportunity to kind of lead with the loan we show our service level and how we operate and ultimately we've been translated to deposits and so you know I think that's been a huge part of that growth initiative is not just the asset but really the funding opportunity yeah we don't but that's an area that that Bremer did a lot of municipal had a lot of municipal deposits and so I think the hard part with municipalities is you know a lot of times they outsource to a broker dealer and investment advisor and so it's kind of a it's becomes a zero-sum game in terms of you know the the deposit costs that come with municipalities the infrastructure you have to have is we haven't seen it be extremely profitable however with Bremer exiting we do see an opportunity to potentially grow that business getting a blinking red light I don't know what the time keeps resetting that good or bad

Gerald Baack, CEO

Oh, shoot.

Joseph M. Chybowski, CFO

Okay.

Gerald Baack, CEO

Sorry about that.

Joseph M. Chybowski, CFO

Yeah. Well, thank you, everyone. Appreciate it.