Good morning. And welcome to the Bridgewater Bancshares 2024 Third Quarter Earnings Call. My name is Wyatt, and I will be your conference operator today. All participants have been placed in listen-only mode. After Bridgewater’s opening remarks, there’ll 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.

Thank you, Wyatt, 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 2024 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 our slide presentation and our 2024 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, 2024 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 2024 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 to everyone for joining us this morning. We’re pleased to report a solid quarter with earnings of $0.27 per share. Highlights included a second consecutive quarter of net interest income growth, ongoing net interest margin stability, strong core deposit growth, strong overall asset quality and our previously announced acquisition of First Minnetonka City Bank. Net interest margin held steady at 2.24% for the third straight quarter. With the Fed’s rate cut in September and potential for more later this year and into 2025, we’re poised to start seeing margin expansion given our liability-sensitive balance sheet. Strong core deposit growth helped enhance our overall deposit mix during the quarter as we were able to push out some brokered and timed deposits. We’ve really been pleased with the core deposit momentum we’ve seen going back to March of last year. On the asset side, elevated loan payoffs and competition in the market caused loan balances to decline. But higher yields and earning asset growth through cash and securities ultimately resulted in increased net interest income and total revenue growth. Asset quality continues to be one of our strengths. We didn’t see an uptick in net charge-offs and non-performing loans in the third quarter, both due to one central business district office loan that we had mentioned over the last few quarters. Jeff will provide more color on this in a few minutes. But overall, we feel good about our portfolio, especially given the improving multifamily trends in the Twin Cities, such as declining vacancy rates. Turning to slide four, as you know, back in August, we announced the acquisition of First Minnetonka City Bank. This is a deal that we believe checks a lot of boxes strategically as we look at M&A. First Minnetonka City Bank…

Thank you. Jerry. Turning to Slide 6 net interest margins has held steady at 2.24% throughout 2024. Couple this with annualized average earning asset growth of 4.3% and we saw a nice increase in net interest income in the third quarter. This came despite elevated loan payoffs and lower loan balances as we grew securities and kept more cash on the balance sheet, both that neutral to accretive earning asset yields. The elevated payoffs also had a favorable impact on the margin in the form of accelerating previously deferred loan fees, which increased 9% quarter-over-quarter. Diving a little deeper on Slide 7. Loan yields continue to reprice higher up 7 basis points to 5.57%. While we expect this to continue, even in a potential rates down environment, the pace of the increase may vary based on the loan yields coming on and off the balance sheet in a given quarter. During the third quarter, the weighted average yield on new loan originations was in the mid 7% range, while loans paying off were in the low-to-mid 6%’s. Our security yield also moved to over 5%. Well, average balances reach $700 million, as asset yields picked up the pace of rising funding costs slowed up just 5 basis points compared to double-digit increases each of the past several quarters. We are already seeing the impact of the Fed September rate cut as deposit costs have started to decline. We have $1.4 billion of adjustable rate funding tied to short-term rates, including over $1 billion of deposits, which we reprice lower late in the third quarter. We will continue to reprice other deposits lower as we move forward, but we will be thoughtful given competition. In addition, our deposit mix has improved with core deposit growth and reduced brokered and time deposits…

Thanks, Joe. Turning to Slide 10, the highlight of the third quarter for us was the improved deposit mix, including $93 million of core deposit growth or 14.4% annualized, an another quarter of non-interest-bearing deposit growth. Looking at the chart in the bottom left, core deposit balances have steadily trended higher since the first quarter of 2023, including 6.9% annualized growth year-to-date in 2024. This chart highlights the non-linear nature of our core deposit growth that we always talk about. We will have some quarters with bigger inflows or outflows, but the momentum is there as we continue to see growth over time. Given this core deposit growth and the elevated loan payoffs we have seen recently, we were able to call some higher-cost brokered deposits and let some time deposits run off. In total, brokered and time deposits declined by $158 million in the third quarter. Because we reduced our exposure to some of these higher-cost deposits, total deposits declined for the quarter, but the overall mix improved. As Joe mentioned, we would expect these deposit mix changes, along with the $1.4 billion of funding we have tied to short-term rates, to help lower our deposit costs going forward. Turning to Slide 11, loan balances were down $115 million in the third quarter due to elevated loan payoffs. We mentioned on last quarter’s call that we were seeing increased payoffs carryover from the second quarter into early July. This continued throughout the third quarter, resulting in $163 million of payoffs, up over $100 million from the first quarter. On a year-to-date basis, payoffs were up 42% compared to 2023. We are likely in a catch-up period as payoffs were well below average throughout much of 2023 and early 2024. While loan balances declined in the quarter, we were able…

Thanks, Nick. Slide 14 highlights our multifamily and office exposure, our $1.4 billion multifamily exposure that has experienced just $62,000 in net charge-offs since inception really highlights the strength of this asset class and our expertise in the market. We have continued to see positive trends in the Twin Cities as economic and interest rate environments have improved. After peaking in early 2024, CoStar data shows multifamily vacancy rates in the Twin Cities have steadily declined throughout the year due to robust demand and a slowdown in construction. In addition, a strong labor market and near nation leading affordability fueled the strongest absorption level on record during the second quarter. The Twin Cities continues to rank among the top markets in the country in multifamily absorption levels compared to existing inventory. These trends point forward to a favorable outlook for future occupancy levels and rent growth. We recently finalized our 2023 covenant testing across our multifamily and non-owner occupied CRE portfolios and we’re pleased to see that the results remain consistent with what we experienced last year. We have action plans in place for issues identified, including principal curtailments, pledges of additional collateral and other risk mitigants. We continue to closely monitor the portfolio and believe the lower interest rate environment bodes well for credit quality moving forward and we remain bullish on multifamily in the Twin Cities over the long-term. Looking at our non-owner occupied CRE office portfolio, our exposure remains quite limited at just over 5% of total loans. This includes just four loans located in central business districts, totaling $34 million. One of these loans is on our watch list and another was moved to non-accrual during the third quarter, both related to potential rollover risk. Regarding the loan moved to non-accrual, the borrower entered into a…

Thanks, Jeff. Slide 17 highlights our strong capital ratios, which have continued to build, including CET1, which increased from 9.41% to 9.79%. Given the announced acquisition, we did not repurchase any shares during the third quarter. We still have $15.3 million remaining under our current authorization. We will continue to evaluate future repurchases based on a variety of factors, including capital levels, growth opportunities and other uses of capital. Share repurchases are just one of our capital priorities. Our primary capital priority remains organic growth. Beyond that, we continue to review and monitor potential M&A opportunities. Turning to Slide 18, I’ll recap our near-term expectations. We expect loan growth in the fourth quarter to be primarily driven by the First Minnetonka City Bank acquisition, with organic loan growth remaining relatively flat due to continued payoff headwinds as we focus on profitable growth. We feel really good about the stability in the margin in 2024. With a 50-basis-point cut in September and additional rate cuts on the table, we expect to see modest margin expansion begin in the fourth quarter and continue into 2025, given our liability sensitive balance sheet. Keep in mind that the First Minnetonka City Bank deal should also be accretive to the margin, but we won’t see the full impact of that until the first quarter. Overall, the magnitude of margin expansion will depend on the pace of future rate cuts and slope of the curve moving forward. While the margin expansion is great, our real focus is on driving net interest income growth. We believe we can continue to do this given the margin expansion and earning asset growth, even if organic loan growth is more needed in the near-term. We have been pleased with the increase in our capital ratios over the past year. We don’t expect a meaningful impact to our overall capital dollars as a result of the First Minnetonka City Bank deal, but we would expect a modest decline in capital ratios given the larger balance sheet. I’ll now turn it back to Jerry.

Thanks, Joe. Finishing up on Slide 19, I’ll provide a quick update on our 2024 strategic priorities. First, as we look to optimize our balance sheet for longer-term growth, we have generated strong core deposit growth of 6.9% annualized year-to-date. Second, we announced our first M&A deal since 2016, which will help us continue to gain market share in the Twin Cities. Third, we have continued to invest in the business, including the launch of our new CRM tool, which is creating efficiencies in how we engage with our clients. Finally, our credit teams are working hard to monitor our loan portfolios, especially CRE and multifamily. This has been evident through our continued strong asset quality. With that, we will open it up for questions.

[Operator Instructions] And our first question comes from Jeff Rulis with D.A. Davidson. Please go ahead.

Thanks. Good morning. A question on the payoffs. I’m trying to get a little more detail. If a lot of that or some of it is encouraged on your side for credit purposes or is it largely customer driven?

Hey, Jeff. This is Nick. I’d say it’s a mix of both. I mean, there’s certainly some payoffs that we saw in the quarter that we were not sad to see go. But some of them is just the lifecycle of that transaction and payoffs that we would have expected to see throughout 2023 or 2024, which didn’t make sense at the time given the rate environment or the equity markets. The borrower was able to pivot a bit, and equity markets changed, and it just made sense for the asset to move. So some were transactions we’d had on the books for quite some time. Some were relatively new vintage deals. So there isn’t a theme to it necessarily, other than I think it’s a pickup of payoffs that we would have probably been more evenly spread out over the last 18 months.

Nick, that was sort of my next question on it. Is it -- there is not a vintage or particular timeframe that is driving sort of a higher bump. And maybe a second related to that is, do you think this is the high water mark from kind of what you’ve seen or what you’ve got upcoming?

Yeah. I don’t think there’s a theme to the payoff structure from a vintage perspective. I think it’s really a mixed bag, some of which is stuff that was originated in 2021 and 2022 that maybe had variable rates and floated up, and those clients obviously had been more incentivized to refinance or sell the assets than others. Predicting payoffs is hard. I think, we expect to continue to see payoffs at a relatively higher level than what we’d experienced over the last 12 months to 18 months here in Q4. As -- I don’t think we fully caught up on all the payoffs. But in credit or margins on transactions have tightened a bit. It feels like, some of the liquidity concerns from last year in the banking environment have largely subsided and players that were on the sidelines are back. So it does feel like borrowers have some more options, which overall, I think, it’s just good for the ecosystem. So, I would expect payoffs -- what we’re going to -- we’ve always thought the payoff battle and I think as we continue to build our loan pipeline, which is really increased a lot here that allows us to sort of weather that storm, which again is good to see that there’s liquidity out there.

Thanks, Nick. Hopping over to the margin side of things just. What was the timing of some of that brokered or time deposit runoff and any kind of idea on sort of the average rate of those rolling off relative to cost of funds in the mid-3s?

Yeah. Jeff, this is Joe. So the brokerage that we had called, we’re really the kind of mid-August to early September. I just think, given the strong core deposit growth and we’ve always talked about the optionality that we have in that brokered portfolio, especially when they’re at higher rates. So, yeah, that was kind of a mid-quarter. Really, when we saw kind of a pullback and rates kind of coming out of July economic numbers, we felt strong about the core deposit growth that had translated and so that gave us the option to call those brokered deposits and also let some retail time deposits roll off. On a cost basis. Yeah, those were all kind of north of 5%, even mid-5%, 5.5%. So, it was definitely margin beneficial to recycle that with core deposit growth and that’s certainly something that we continue to have, we highlight the brokered CDs that are certainly callable still on the balance sheet today and that’s a structure that, we’ve always kind of utilized for times like this where we feel really good about the deposit momentum and the optionality we have.

Got it. And one last one if I could, you’ve long held the expenses tracking asset growth and I guess year-to-date to be asset growth has been a little lighter. Trying to track the tail of that as we go into 2025 and now sort of excluding the acquisition a little bit more on the legacy or core. It sounds like growth is maybe perking up or the pipelines are better. Trying to get a sense for if there’s a on expense growth if that more closely matches kind of the slowdown in growth, and I guess, is that relates into 2025?

Yeah. No. It’s a good question. I think with the way that we look at it, just with the legacy Bridgewater, we still see that relationship holding up in 2025 and so it should in line with asset growth we expense to -- we expect to continue to invest in the business and grow expenses at a similar pace. I think if you get to the end of 2024, obviously we’ll have a fully merged balance sheet. If you look at the high level kind of asset growth in the mid-single digits, expenses will again be in mid-single digits. So I think, even with the small deal, and to your point, expenses are maybe a little head of asset growth pace we still, as you look at 2024 as a whole, that relationship will continue to be maintained. So that’s how we think about it going forward as well.

Thanks, Joe.

Yeah.

And our next question comes from Brendan Nosal with Hovde Group. Please go ahead.

Hey. Good morning guys. Hope you are doing well.

Good morning, Brendan.

Jeff, I think you probably tackled all the questions I would have asked on the office credit. So I guess I’ll move elsewhere. I’m kind of thinking about loan growth for next year. Don’t want to get too far ahead of myself here, but just given the cross currents of wanting to align with core funding and the payoffs that you are kind of battling through countered with better pipelines that you’re starting to see, just kind of curious any early thoughts on kind of the pace of longer if you’re thinking about for next year.

Hey, Brendan. This is Nick. Yeah. I mean, we’re certainly seeing our pipeline build here, which we’re pleased to see, I think, it’s a testament to the market and our clients and our staff. As we think about the rest of 2024, I think, we’re -- we’ve guided that we’re expecting loan balances to remain relatively flat and but as we’ve always said, our pipelines building now, doesn’t always translate into sort of immediate growth. So there’s always been a bit of a lag there. Thinking into 2025, I mean, we continue to feel like that sort of mid-single digits number is a very attainable number for us and really allows us to continue the momentum that we’ve had on really improving the balance of our loans and deposit mix, and how we think about growth on a go forward basis, continuing to change the mix on the deposit side that mid-single-digit growth rate feels like the right sort of target for us. Now, there’s going to be quarters where we’ll may be below or exceed that, but over the course of the year, that’s really how we’re thinking about it.

Okay. Great. That’s helpful, Nick. Thank you. Moving on to deposit pricing. I’m just kind of curious how responsive pricing was in your own book, as well as the market more broadly to that initial 50 basis points of cuts that we got. And then, if you happen to have it, what were spot deposit costs at 9/30? Thanks.

Hey, Brendan. This is Joe. Yeah. I think, we -- as we’ve said, I mean, we spent a lot of time over the last couple of quarters really posturing for kind of the seizing cycle. And so a lot of that, was conversations with clients to educating them, they -- a lot of them got to see the benefit on the way up, and certainly, now as we see rates pull back. So there was -- there’s an education piece certainly. I mean, we talked to a lot of our bankers and just really arm them with talking points. I think, obviously, it was very well telegraphed that it was coming. I think some of us were surprised maybe that it was 50 basis points. But we saw eight days of that certainly in the third quarter. And to this point, I think, it’s been relatively well received. I mean, I think, we’ve -- it was just a lot of proactive movement there and then we continue to do that. You saw us uptick from a $1 billion in Q2 to now a $1.4 billion, moving clients into those Fed Funds linked to short-term rates accounts. So, I think, it’s the -- again, it’s a really proactive piece to it. I think the other piece too, is just, we’re trying to be cognizant, obviously, of the growth and certainly the market. So, while there’s -- while those are explicitly linked, I think, obviously, we certainly have growth plans and so we want to be mindful of that on a go forward basis, and the market itself still continues to be competitive from a deposit pricing standpoint. On the spot rates, as of 3Q.

Yeah. It’s in the low 3.40%s…

Yeah.

… relative to the 3.58%, I think, for the quarter. So, come down.

All right. That’s super helpful. I’m just going to sneak in one last modeling question here. Just given the outlook for flat end-of-period loan growth, it’s fair to say that average loans outside of the deal would perhaps take down a little bit just to align those numbers. Is that fair?

Outside of the transaction, yeah, I’d expect our loan balances absent First Minnetonka City Bank to be relatively flat on the quarter.

Yeah. Yeah. Okay. Thank you for taking the questions.

[Operator Instructions] Our next question comes from Nathan Race with Piper Sandler. Please go ahead.

Hi, guys. Good morning. Thanks for taking the questions.

Hi.

I apologize I hopped on a little late, but just in terms of the margin outlook for the fourth quarter, the guidance for moderate expansion. Does that contemplate just the slightly higher margin profile at the acquisition and there’s just the opportunity to kind of deliver the balance sheet?

Hey, Nate. This is Joe. Yeah. I mean, I think that’s part of it. Just the optionality that their balance sheet provides for us similar to kind of this last quarter where there’s loan growth. The pace is slowed and such that we’ve been able to somewhat deliver the balance sheet and push out higher cost funding. I think the deal obviously gives us that flexibility to. I think just from the margin standpoint, the modest outlook is more kind of my comments earlier that, we’ve always said kind of the magnitude and the speed of cuts, the faster that happens, the quicker we can pass that on. I think a slower kind of easing cycle makes it harder to do that. And so I think that’s more of the modest kind of outlook is just Fed Funds futures have been very volatile, as you know, and so I think we want to be mindful of while we have deposits that are certainly linked to Fed Funds, it really depends on the path of really Fed Funds cuts. And so I think we want to be mindful of really trying to grow certainly even after the deal and deposit competition still is -- it still is strong here in the Twin Cities. We’ve had some banks that haven’t lowered rates at all. So I think that’s more the modest guide itself.

Okay. Great. And then just thinking about payoffs, curious if you guys have kind of the way average rate on payoffs that came off in the quarter relative to kind of the yield on new production and just based on kind of what you see in terms of yields on the current loan pipeline?

Yeah. I can touch on the first part and I’ll let Nick talk in a second. The first part, so it’s low-to-mid 6s were payoffs and then originations were coming on in the low-to-mid 7s.

That was for Q3. I think as we look at new transactions today, they’re probably coming a little bit from what we saw in Q3 on an average basis. There’s certainly more competition in the market. As some of the liquidity pressures I mentioned before seem to have eased. So, I think as we think about a blended average going forward, it’s probably right around 7%.

Okay. Great. And then it was great to see the regulatory approval for the acquisition come through in relatively quick order. And I imagine that reflects well just in terms of your relationship with regulators as it relates to your commercial real estate concentration and the like. So we’ll just be curious to hear any feedback you’re hearing from regulators on that front and just kind of overall comfort levels, because I believe you guys just recently went through a regulatory exam more recently. So just any additional insights on that front I think would be helpful?

Yeah. Nate, it’s Jerry. Yeah. It’s really kind of not any different than what we’ve said in the past. We have a joint exam every 12 months at the end of summer with the Commerce Department and the FDIC, and this last exam we had went as well as any have. So we’re pleased with that and it’s more of the same, and we’ve been managing commercial real estate concentration since the very beginning. So I do feel comfortable with their underwriting and how we manage our risk and our overall enterprise risk management system here. So it’s no issues.

Okay. Great. And then maybe just last one, I imagine, you guys made on the sidelines from a share repurchase standpoint, just as you rebuild CET1 post the acquisition closing in the fourth quarter. So you get that back up to 9%. Is that kind of still the right way to think about kind of the share repurchase appetite, depending on how the stock trade is going forward?

Yeah. I think it’s -- like we say, it’s a confluence of things and we certainly outline our priorities. And I think to your point exactly, I mean, first quarter, I think we felt like we were building capital well, we hit our targets from a CET1 standpoint and we had took opportunities to buy back some stock, obviously, Q2 and Q3 with the deal and certainly going forward and we’re certainly going to be more cognizant of that and just really building back to and maintaining CET1 north of 9%. So, yeah, it’s constantly evaluating and shifting and balancing those priorities.

Okay. Great. And then, again, I apologize if you touched on earlier, but just to describe the size of the office CRE loan that was problematic in the quarter.

Yeah. I mentioned, we have our sponsor has the property under contract. There’s a significant amount of non-refundable money that was provided as part of the purchase agreement. So, we have a high level of confidence that it’s going to close. There may be some small true-up of the actual charge-off amount in the fourth quarter, but we don’t expect that it’ll have any impact on earnings.

Okay. Got it. And I apologize actually one last one. Can you remind us just on the margin benefit from each 25-basis-point Fed rate cut under a static balance sheet scenario?

Yeah. I think like we’ve always said, I think, it’s staying away from those types of guides and more just around, we’re certainly well-positioned should rates continue to get cut from here, especially continued movement towards explicitly Fed Funds linked deposit accounts. So I think I would say more that the general comment that the magnitude and the speed of cuts, you know, will allow us to pass on more than a more slow gradual cycle. At the end of the day, we are focused on net interest income growth and we certainly feel like a stable to growing balance sheet with a stable to modestly expanding NIM will certainly do that.

Okay. Great. I appreciate all the color. Thanks, guys.

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

Thanks, everyone, for joining the call today. We continue to be very encouraged by our core deposit growth, our margin stabilization and just the overall outlook in the Twin Cities. And obviously very excited about the closing with First Minnetonka City Bank later this quarter. We’re really excited about bringing that team on and we’re continuing to be very impressed with our team here and how we feel about the future. So have a great day, everybody.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.