Bridgewater Bancshares Q3 2026 Earnings Call Transcript

Bridgewater Bancshares (NASDAQ:BWB) reported third-quarter financial results on Wednesday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Bridgewater Bancshares reported strong third-quarter performance with record total revenue and pre-provision net revenue, driven by disciplined execution and strategic balance sheet growth.

Loan growth accelerated to over 7% annualized, supported by strategic core deposit growth that increased nearly 20% annualized, new client relationships and market disruption.

Net interest margin expanded by two basis points to 3.09%, exceeding expectations due to loan repricing and stable deposit costs, positioning the balance sheet well for a higher rate environment.

The company maintained strong asset quality, with nonperforming assets well below peer levels, though it is working through two larger nonperforming loans that are impacting provisions and charge-offs.

Bridgewater Bancshares is focused on profitable growth, leveraging core deposits to align with loan growth, investing in affordable housing and utilizing AI to enhance operational efficiencies.

Full Transcript

Betsy (Operator)

Good morning and welcome to the Bridgewater Bancshares 2026 third quarter earnings call. My name is Betsy and I will be your conference operator today. All participants have been placed in the listen-only mode. After Bridgewater’s opening remarks, there will be a question and answer session. To ask a question, please press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys.

To withdraw your question, please press star then two. 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 (Vice President of Investor Relations)

Thank you, Betsy, and good morning, everyone. Joining me on today’s call are Jerry Baack, Chairman and Chief Executive Officer; Joe Chybowski, President and Chief Financial Officer; Nick Place, Chief Banking Officer; and Katie Morrell, Chief Credit Officer. In just a few moments we will provide an overview of our 2026 third quarter financial results. We will be referencing a slide presentation that is available on the Investor Relations section of Bridgewater’s website, investors.bridgewaterbankmn.com. Following our opening remarks, we will open the call for questions.

During today’s presentation we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution that such statements are predictions and that actual results may differ materially. Please see the forward-looking statement disclosure in the slide presentation and our 2026 third quarter earnings release for more information about risks and uncertainties which may affect us.

The information we will provide today is as of and for the quarter ended September 30, 2026, and we undertake no duty to update the information. We may also disclose non-GAAP financial measures during this call. We believe certain non-GAAP financial measures, in addition to the related GAAP measures, provide meaningful information to investors to help them understand the company’s operating performance and trends and to facilitate comparisons with the performance of our peers. We caution that these disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP.

Please see our slide presentation and 2026 third quarter earnings release for reconciliations of non-GAAP disclosures to the comparable GAAP measures. I would now like to turn the call over to Bridgewater’s Chairman and CEO, Jerry Baack.

Jerry Baack (Founder, President, Chief Executive Officer and Chairman of the Board)

Thank you, Justin, and thank you for joining us this morning. In the third quarter, disciplined execution of a thoughtful strategy resulted in an incredibly strong quarter. Growth and profitability were objectives and both proved to be highlights. While we have always had the ability to generate robust loan growth, we have become more focused on creating balance sheet growth that prioritizes optimizing profitability. This strategy has never been more evident than it is now.

Earlier in the year we saw loan competition increasing with silly pricing that we weren’t willing to stretch for. In addition, we knew that historically core deposit growth was seasonal and typically lower during the first half of the year. In response, we strategically slowed our pace of loan growth to the mid-single-digit range, accommodating for these trends. As we expected, core deposit growth returned in the back half of the year with annualized growth of nearly 20%.

This came not only from seasonality but from our new client relationships we have grown across the bank. This allowed us to accelerate loan growth during the past quarter to over 7% annualized, with loan and core deposit growth now in line on a year-to-date basis. This is a great example of how we are leveraging data, our market knowledge, balance sheet, and understanding of our client base to strategically and efficiently drive the growth and profitability of the bank.

Overall, this translated into a record total revenue and pre-provision net revenue in the third quarter. Combine this with a decline in noninterest expense and we were able to move our efficiency ratio below 50% for the first time since the first quarter of 2023. Another significant contributor to earnings was the continued growth in net interest income as ongoing loan repricing drove two more basis points of net interest margin expansion in the third quarter.

Looking ahead, we know we are entering a new rates-up environment which Joe will speak to shortly, but we believe our balance sheet is better positioned for this environment than it has been in the past as we have been proactively growing the variable-rate mix of the loan portfolio. Our strong asset quality trends also remained a positive part of the story. As we have shared in recent quarters, we are working through two loans that we hope to resolve in the near term.

Katie will provide more details on this later, but aside from those, we are very pleased with our loan portfolio as nonperforming assets remain well below peer levels and positive classified asset trends continue. On slide 5 we will show Bridgewater’s long track record of consistently growing tangible book value in excess of peers. This has been the case since before we went public in 2018 and even more recently since 2021. On a year-over-year basis we have grown tangible book value at a 9.4% pace. Delivering shareholder value is key at Bridgewater.

Overall, the third quarter was a very good quarter for Bridgewater. I’m thrilled with the momentum we have created and I’m optimistic of the outlook for the remainder of 2026 and beyond. The team is incredibly strong and knows how to execute on the strategies we have in place. With that, I’ll turn it over to Joe.

Joe Chybowski (President & Chief Financial Officer)

Thanks, Jerry. Slide 5 highlights one of the key themes of the quarter, our improving profitability. This included record pre-provision net revenue, which was up 36% year over year, as well as continued improvements in return on assets and return on average tangible common equity. Much of this profitability momentum continues to be driven by strong revenue growth, which was up 20% year over year. The revenue growth came from both net interest income, which I’ll talk more about on the next slide, as well as solid noninterest income growth driven by higher letter of credit fees.

Swap fees were a bit lighter in the third quarter as swap pricing dynamics are less favorable in the current rate environment. Turning to slide 6, net interest income growth of 22% annualized in the third quarter once again came from both higher average earning assets, up 16% annualized, and net interest margin expansion. As expected, the pace of net interest margin expansion slowed from the second quarter but was still up two basis points to 3.09% as the loan portfolio continued to reprice higher while deposit costs remained relatively stable. Overall, margin expansion has exceeded our expectations, as we originally didn’t expect to hit 3% until the fourth quarter of this year; essentially operating above 3% for the majority of the year has been a boost to our overall profitability.

Looking closer at the net interest margin drivers on slide 7, loan yields were up another five basis points to 5.96% as the portfolio continued to reprice higher with average new production yields in the third quarter in the mid-6s. While loan yields moved higher, deposit costs of 2.78% remained relatively stable for the third consecutive quarter. The question now is what happens to the net interest margin going forward. Given the recent rate hike and potential for more going forward, the most important thing to know is that we are better positioned today for a rates-up environment than we have been in the past.

Over the past couple years we have been proactively increasing the mix of variable-rate loans on the balance sheet to create additional repricing opportunities and be more rate neutral. Today, variable-rate loans make up 26% of the portfolio, up from 15% just two years ago. This means we now have $1.2 billion of variable-rate loans, which offsets much of the $1.6 billion of deposits directly tied to short-term rates. So while we expect Fed rate hikes to push deposit costs higher across the sector, we also expect our loans to continue to reprice higher, and not just from the higher variable-rate mix, but also because of the ongoing back-book repricing. We have $697 million of fixed-rate loans scheduled to mature over the next 12 months at a weighted average yield of 5.70% and another $105 million of adjustable-rate loans repricing or maturing at 4.23%. With these lower yields running off the books and new originations going on the books at higher yields, we have further repricing upside ahead of us.

Given this loan repricing, we expect our net interest margin to hold relatively stable over the near term despite the recent rate hike. This also assumes another rate hike in December and two more in the first half of 2027. This demonstrates how much better we are positioned today considering the margin compression we saw during the last rates-up cycle. With continued loan growth and margin stability, we are well positioned for ongoing net interest income growth in the quarters ahead.

Turning to slide 8, we have always operated the business in a highly efficient manner given our branch-light model and CRE focus. With the recent revenue momentum I just talked about coupled with well-controlled expenses in the third quarter, our efficiency ratio once again dropped below 50% for the first time since the first quarter of 2023. After pulling forward some expense early in the year due to M&A-related talent acquisition opportunities, we expected to be able to hold third quarter expenses in line with second quarter.

However, we outperformed this as expenses came in even lower. Looking ahead to the fourth quarter, we would expect noninterest expense to return to that second quarter level. Overall, lower expenses in the third quarter translated to increased operating leverage. Given our strong revenue growth, we have a proven track record of being able to manage expenses effectively and we expect to be able to continue to do this going forward while still investing in the business with a focus on driving further positive operating leverage.

With that, I’ll turn it over to Nick.

Nicholas Place (Chief Banking Officer)

Thanks, Joe. Turning to slide 9, I think the biggest highlight of the quarter for us was the 165 million, or 20% annualized, core deposit growth we generated over the past couple of years. We’ve developed a much better understanding of our core deposit flows and seasonality. So while growth was more muted in the first half of the year, we expected it to return in the back half of the year, and that’s exactly what we saw. But the growth was not just seasonality.

We have made key hires within our treasury management team, taken advantage of marketplace disruption, and brought in deposits from new client relationships. This has also helped improve our overall deposit mix as non-interest-bearing deposits increased 63 million while higher-cost brokered deposits declined 96 million. A lot of credit goes out to our treasury team for providing such a high level of insight into our asset and liability management and making sure our bankers know what we need from a funding standpoint to support our growth.

We are seeing this translate to better relationship margins and increased profitability for the bank as we have demonstrated. We have the ability to grow loans as much as we want, but it’s really the core deposits that are the governor, and we were very pleased with what we saw in the third quarter. Given the core deposit growth, we generated stronger loan growth in the third quarter with balances up 7.2% annualized. As you can see on slide 10, we have made it clear that we want to grow the loan portfolio in line with core deposits over time. On a year-to-date basis, loan balances are up 6.1% annualized while core deposits are up 6.4%. This demonstrates disciplined execution from our teams as we focus on generating profitable growth across the bank.

As we think about the loan growth outlook from here, core deposits will continue to be a governor, but there are other factors as well, including the interest rate environment, which we expect to have an impact on both origination and payoff activity. Looking at slide 11, new loan production was stronger in the third quarter with increased loan originations and advances more than offsetting the elevated levels of payoffs. We are still seeing strong loan demand across our verticals, but with interest rates moving higher, we are starting to see fewer deals penciling out as we remain disciplined on pricing. We anticipate new origination activity could slow a bit from here. However, on the other side, higher rates mean that payoff activity could slow as well.

Overall, we expect near-term loan growth in the mid-single-digit range as we navigate this higher rate environment and continue to emphasize profitable growth. Turning to slide 12, the majority of the loan growth we saw in the third quarter came from the construction, non-owner occupied CRE, and C&I portfolios. Multifamily balances declined during the quarter due to some elevated payoff and refinance activity in that portfolio. Overall, our affordable housing vertical continues to play a big role in our growth story, accounting for about half of the growth we saw across the construction and C&I portfolios.

As you can see on slide 13, we remain focused on growing our presence in the affordable housing space, which has resulted in 20% year-over-year growth. Affordable housing made up over 25% of our loan growth in the third quarter and currently makes up 16% of the total loan book today. These loans tend to be higher yielding than traditional multifamily RCRE loans given their complexity and also tend to come with higher levels of compensating deposit balances.

This is a high-barrier-to-entry vertical where we have established a differentiated level of expertise within the various parts of the transactions we tend to support. Our growing client base is strong, as we work with several of the largest affordable housing developers across the country. As a result, we see a lot of growth runway both locally and nationally within this segment. With that, I’ll turn it over to Katie.

Katie Morrell (Chief Credit Officer)

Thanks, Nick. As Jerry mentioned earlier, our asset quality profile remains strong, starting on slide 14. Our watch and special mention loans continued to decline during the quarter and are now down approximately 50% from year end 2025 and represent just 0.5% of total loans. Substandard loan levels have also improved year over year and have remained stable over the last several quarters. We view these credit migration trends as an important leading indicator of overall portfolio health, and their continued improvement reflects both the strength of our underwriting discipline and our proactive approach to portfolio risk management.

Turning to slide 15, our nonperforming assets declined modestly from last quarter, ending the period at 37 basis points and remaining well below peer levels. As we have discussed over the past couple of quarters, our nonperforming assets remain concentrated in two larger relationships. The first is a $10 million mixed-use multifamily property that moved to nonaccrual last quarter. We previously had a $1 million specific reserve on this loan. However, as we advanced our workout strategy and moved towards a near-term sale of the asset, we ended up taking a $2.4 million charge-off during the third quarter.

This charge-off was the primary driver of the uptick in annualized net charge-offs this quarter to 0.21%. The second larger NPA is the $8.6 million Central Business District office loan that has been on nonaccrual since the first quarter of 2025. During the third quarter, we further increased the specific reserve on this loan to $5.3 million, reflecting our latest assessment of the underlying collateral value. We are still working toward a resolution of this asset as quickly as possible, and we would expect that some portion of the existing reserve ultimately migrate to charge-offs as we execute on this strategy.

Given the additional specific reserve and stronger loan growth, we booked a higher provision in the third quarter. However, our total allowance actually decreased a couple of basis points to 1.28%. We believe the allowance appropriately reflects the risk profile of the portfolio, including the specific reserves associated with these two larger relationships and our constructive outlook on the broader loan portfolio. Looking ahead, we expect provision expense to be a bit higher in the fourth quarter than it was in the third as we continue working toward resolution of these credits while supporting expected loan growth. We are also watching closely for signs of weakness related to economic uncertainty, inflationary pressures, and repricing risk related to the rise in interest rates. We implemented a very effective process during the last rates upcycle to proactively engage with clients well in advance of any repricing, and this process remains ongoing today.

So far, these conversations are going well, and we have not identified any systemic issues. Overall, we remain confident in the quality of our portfolio, the strength of our underwriting and our borrowers, and our ability to navigate the remaining problem assets. I’ll now turn it back over to Joe.

Joe Chybowski (President & Chief Financial Officer)

Thanks, Katie. Slide 16 highlights our stable capital position, which continues to be supported by our retained earnings. Notably, our CET1 ratio has increased 55 basis points year over year to 9.63%. We did not repurchase any shares in the third quarter. Turning to slide 17, I’ll recap our near-term expectations. On the loan side, we expect mid-single-digit growth. Of course, this will continue to be dependent on our core deposit momentum over time as well as the uncertainty around interest rates and the impact that has on our new originations and payoffs. We expect the net interest margin to hold relatively stable at current levels over the near term, even assuming an additional rate hike in December and two more in early 2027.

This is driven by our balance sheet being better positioned today than it was during the last cycle, with more loan repricing opportunities offsetting higher deposit costs. After a better-than-expected expense quarter, we look for fourth-quarter noninterest expense to be similar to second-quarter levels. We also expect provision expense in the fourth quarter to increase from what we saw in the third quarter, given our loan growth and continued progress on resolving our two larger nonperforming assets.

I’ll now turn it back over to Jerry.

Jerry Baack (Founder, President, Chief Executive Officer and Chairman of the Board)

Thanks, Joe. Before we open up for questions, I want to provide a quick update on our 2026 strategic priorities. Profitable growth is where we have been focused, and we believe it is having an impact. Aligning loan and core deposit growth has allowed us to drive net interest margin expansion while we continue to capture market share. Not only are we adding clients, but we also added 17 talented individuals to our team as a result of the M&A disruption. Nick spoke of the momentum we have seen in the affordable housing space with balances up 17% annualized year to date.

Finally, we have advanced to the execution phase of our AI strategy, focused on responsibly enabling our teams to achieve efficiencies across the organization. This includes establishing oversight, security, and risk frameworks, pushing out tools to our teams, and leveraging partnerships to help operationalize use cases and workflows. We’re still early in the process, but the benefits are becoming apparent. With that, we’ll open it up for questions.

Betsy (Operator)

As a reminder, to ask a question, please press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Jeff Rulis with D.A. Davidson. Please go ahead.

Jeff Rulis (Analyst at D.A. Davidson)

Thanks. Good morning. Just a question on the— I know Nick and Katie, you talked about the impact of higher rates on both demand and hoping to get a little more detail on that, if you could, particularly if we get, you know, one or two more hikes. Just if you could touch on the demand expectations as well as, Katie, I don’t know, walk through some of those maturity repricing schedules. Should we get another one or two hikes? Thanks.

Nicholas Place (Chief Banking Officer)

Hey, Jeff. Yeah, this is Nick. You know, I think in the real near term, the recent rates up move, you know, will impact our loan origination activity slightly. I think there’s always some sort of delayed momentum that will continue to push some transactions over the finish line here in the fourth quarter that were, you know, well underway in the third quarter. You know, long term, I think it’s really just dependent on what happens in the belly of the curve there.

I mean, you know, we’re up quite a bit since the beginning of the year and, you know, our borrowers are pretty resilient on working through what that does to their capital stacks, but over the course of time that will cause more and more transactions to not pencil out. I think what we saw in the last rates up move is that impact to loan origination activity was certainly offset by the refinance and payoff activity. So where there’s a headwind on the new origination side, there’s a bit of a tailwind on the payoff side.

So we still feel really good about our loan demand overall. Our affordable housing segment, as we talked about, you know, is contributing to a larger and larger percentage of the growth every quarter, and, you know, there’s seemingly more avenues to plug those holes in capital stacks on those transactions than there is maybe in market rate deals. So we expect to continue to see a lot of opportunity within that space even in this higher rate environment.

So we still feel good about it, you know, but we’re certainly watching what, you know, those rates are doing as it relates to deals sort of spinning

Katie Morrell (Chief Credit Officer)

Out of our pipeline and then as far as—yeah, Jeff, this is Katie. So as far as repricing, you know, credit risk is concerned, like I mentioned in the prepared remarks, we haven’t really stopped our repricing analysis process over the last couple of years. So, you know, feeling good about that, especially as we go through covenant testing and looking ahead, you know, 12 months out, if there’s a repricing event, how does that look for property performance?

So I think we do have a really good handle on any of the specific loans that would be affected and have action plans in place. So while these rate hikes are going to make performance more challenging in some instances, I don’t think we have any big surprises.

Jeff Rulis (Analyst at D.A. Davidson)

Appreciate it. Thanks. And maybe just one—back to the margin, Joe. We kind of got to this goal quicker than you thought and, I guess, the bigger picture, three or four years ago the margin was at 3.50%. Just want to kind of feel that out as sort of a terminal level. I know we’re about near term and then longer term, but the ability to grind higher on the margin—and you said the balance sheet has changed. Any more detail about expectations? Maybe a little more on the margin—kind of frame up how you maybe get back to the mid-3s or not would be helpful.

Joe Chybowski (President & Chief Financial Officer)

Yeah, Jeff, this is Joe. So I think we—I mean, high level, we’ve been really pleased with, you know, the margin, as you said, and you highlighted the performance this year and ultimately, you know, the conviction that we feel to have margin stability, you know, going into a potentially higher kind of rates upcycle. I think you’re always reminded of, you know, 90 days ago we had, you know, fed funds probabilities with a cut in December and a 4.30% 10-year.

And we fast forward 90 days and we not only got a hike, we have three more hikes anticipated and we have a 5.30% 10-year. So I think a lot has obviously changed over the last 90 days. But that being said, I mean, I think we’re—like I said, we’re really pleased and encouraged, you know, with the durability and stability of the margin and I think, to your point, you know, a lot of that’s been work over the last couple years of really reorienting the portfolio on the loan side to be more variable rate to really match with the variable-rate deposit book. And I also think just the duration of the loan portfolio has shortened as well, you know, almost 12 months from, you know, kind of the peak in 2022.

So I think there’s been a lot of work there to really be more balanced and then to be able to kind of weather both rates up and rates down. So I think the dynamics of just the incremental loans that come on relative to the incremental cost of funds—I think that also gives us optimism, to your point, on if loans come on the books today in the mid-6s, as we said, you know, with upside potential given where rates have gone, and incremental cost of funds, you know, come on in the mid-3s, I think, you know, the margin itself—we feel good about the stability that can take place, and ideally the back-book loan repricing that continues, you know, throughout ’27 gives us potential upside.

So I think those are the dynamics, the puts and takes, but generally I think we’re really pleased with where we’re at and especially in light of what’s transpired over the last 90 days.

Jeff Rulis (Analyst at D.A. Davidson)

I appreciate it, thanks. I’ll step back.

Betsy (Operator)

The next question comes from Brendan Noszel with Hovde Group. Please go ahead.

Brendan Noszel (Analyst at Hovde Group)

Hey, good morning everybody. Thanks for taking the questions. Starting off here on capital—you know, good quarter for growth, bit of, you know, AOCI drag, although not as much as most. If I look at your tangible capital ratio, you know, down from 8.60% to 8.15% or so—does that kind of change the likelihood of you tapping the ATM versus three months ago as you look forward towards mid-single-digit growth? Or do you think you can generate enough capital internally for the time being where you’re still kind of reserving optionality but not leaning one way or the other—ATM versus buyback?

Joe Chybowski (President & Chief Financial Officer)

The latter part of your question, Brendan, I think is the way to put it. I think, as we’ve said, optionality is always our goal. And so I think while TCE is down quarter over quarter, I do think when we think about the growth prospects of the company and, you know, how we think about the loan growth—to Nick’s comments—you know, we certainly feel like we can self-generate the capital to support the growth and then also have, you know, the optionality on both sides given the buyback and given the ATM.

So I think nothing changes from that perspective.

Brendan Noszel (Analyst at Hovde Group)

Okay, perfect. Maybe kind of circling to growth—you know, 6% annualized growth so far this year for core funding, and for loans calling for mid-single-digit growth in the near term. Does that kind of feel like the new steady state for you guys, just in terms of how fast you can grow core funding—which is a strong pace—and then that just happens to be the pace we should be on average looking for loan growth from here?

Nicholas Place (Chief Banking Officer)

Hey Brendan, this is Nick. Yeah, I feel like, especially in this current interest rate environment, that feels like the right run rate for us. I mean, to the extent that, you know, we get more accommodating fiscal policy, that could allow us to potentially grow at a faster pace. But, you know, with what we’re seeing today and, you know, what we’re seeing in the market for opportunities, you know, we’re trying not to grow just for the sake of growth.

I think we’re trying to be really disciplined about growing as profitably as we can. And, you know, that’s kind of where we’re landing—in that sort of mid-single-digit on both sides.

Brendan Noszel (Analyst at Hovde Group)

Makes sense. Okay, thanks for taking the questions.

Betsy (Operator)

The next question comes from Nathan Race with Piper Sandler. Please go ahead.

Nathan Race (Analyst at Piper Sandler)

Hey guys, good morning. Thanks for taking the questions. Going back to the last discussion topic around, you know, growth on the right side of the balance sheet—obviously, you know, really impressive core deposit gathering in the quarter. Just curious to what extent you guys have visibility into kind of the core deposit gathering pipeline, and to what extent, you know, continued success on that front can maybe help wind down some of the higher-cost funding that’s maturing over the next 12—or over the course of 4Q and into 2027.

Nicholas Place (Chief Banking Officer)

Hey, Nate, this is Nick. Yeah, I mean, we feel really good about what we saw in the third quarter and, frankly, how we’re positioned, you know, on a go-forward basis. We’ve been able to pick up really amazing talent in the market. On the treasury management side of things, we picked up great commercial bankers in market, our affordable housing vertical continues to build, you know, both loan opportunities and core deposit opportunities. We’ve been really pleased with what that team’s been able to do to gather core deposits, you know, outside of the Minneapolis–St. Paul market, through new relationships that are, you know, national affordable housing developers.

So, you know, we feel really good about our prospects to continue to grow core deposits. You know, we’ve—as we talked about earlier in the prepared remarks—I mean, we’ve done a lot of time to really evaluate and understand our deposit flows and our balance sheet. So we do tend to see more, you know, core deposits build in the back half of the year. So there’s always some tailwind for us there. But, you know, I don’t want to take away from the great work that the teams are doing to not only bring in new relationships, but expand existing ones and take advantage of the opportunity in front of us.

So, you know, the core deposits will continue to be the governor for us as we think about loan growth. But our teams are doing a phenomenal job to, you know, build a really strong pipeline of new relationships and new deposits. You know, you mentioned brokered and that sort of wholesale funding side—I mean, that’s always going to be a part of the equation for us as we think about, you know, managing our overall liabilities. You know, it’s a really stable funding source.

There’s optionality within that portfolio that we can’t get elsewhere. So, you know, we are trying to be disciplined about our growth and to allow us optionality to, you know, reduce those over time. But, you know, it’ll always be part of the story.

Nathan Race (Analyst at Piper Sandler)

Got it. That’s helpful. Nick, just curious on the payoff front—I mean, any sense in terms of kind of what inning you’re in in terms of, you know, maybe some of the lower-yielding commercial real estate loans originated four or five years ago, when rates were lower, kind of nearing the end and, you know, maybe payoffs are going to be kind of less of a headwind, as we can see, you know, in the chart on slide 11 in the deck?

Nicholas Place (Chief Banking Officer)

Yeah, I mean, it’s been a pretty dynamic environment over the last 90 days. I think conversations that we have with clients around what they were expecting to do with their property, you know, 90 days ago—there was maybe more certainty of them, you know, either refinancing to, you know, an agency-type debt on a piece of multifamily property or just selling the property just because interest rates were, you know, attractive enough for a new buyer.

Some of those clients are now sort of reevaluating, if that makes sense, just given pricing guidance that they’re getting from brokers on what they could get in the sale, given the rates that moved. You know, I think the nice thing—and Katie mentioned this—is that, you know, these clients have had a lot more time to think about and plan for this repricing than, you know, clients in 2023 that saw really rapid rates up-move and that they weren’t expecting. So, you know, we feel good about the ability to work through any of those credit issues. And I think our clients are much more prepared today even if they do have to sit on the—you know, and let the loan reprice or, you know, we provide extensions on those credits and the deal doesn’t pay off.

You know, they just feel better about that—you know, the prospects for that transaction—than some of the conversations we were having in 2023.

Nathan Race (Analyst at Piper Sandler)

Okay, got it. And if I could just sneak in one more confirmation for Joe—I think you alluded to kind of incremental costs of deposits coming in the door are 3.5% today. Just want to confirm that that’s kind of what you’re seeing here or at least what happened in 3Q, and then kind of where do you see that going over the next few quarters if we do get additional rate hikes, just based on some of the competitive dynamics in the Twin Cities?

Joe Chybowski (President & Chief Financial Officer)

Yeah, I mean, I think that’s a decent estimate, Nate. I think when we couple kind of commercial relationships with, you know, a noninterest-bearing deposit with a, you know, a more actively managed money market, I think that’s kind of how we think about the incremental cost of funds. You know, I do think that kind of the leading indicator of deposit competition locally is always, you know, the short-term CD market, primarily credit-union-driven. So I think we have seen some marketing related to that.

So I think that’s part of how we think about deposit-cost competition potentially picking up just on the short end of the curve. But to Nick’s point, you know, we feel really good about the ability to continue to grow kind of whole commercial relationships, you know, that are not just kind of chasing the highest rate.

Nathan Race (Analyst at Piper Sandler)

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

Betsy (Operator)

As a reminder, if you would like to ask a question, please press star then one to join the question queue. The next question comes from Brandon Root with Stephens. Please go ahead.

Brandon Root (Analyst at Stephens)

Thanks for taking my questions. If I could start just one on the expenses in the third quarter and expectations for the fourth, for the fourth quarter, I guess what drove the outperformance here in 3Q and then what’s going to contribute to the step up as we look towards the fourth quarter here.

Joe Chybowski (President & Chief Financial Officer)

Hey Brandon, it’s Joe. Yeah, I think like when we talk about expenses, you know, on a quarter over quarter basis, you know, we never try to get too in the weeds on one category versus the other, but more just think about generally a full year. And so I think, you know, our priorities continue to be investing in people and technology. And as Jerry mentioned, Nick mentioned, we’ve, we felt like we’ve had tremendous success attracting top talent in the market and we’re always going to prioritize that.

But I also think the technology investments we’ve made certainly continue to bear fruit and pay off and allow our people to be more efficient. So I think those are the priorities. I think when we think about expense growth on a go-forward basis, not quarter over quarter, but over a long term, the range of NI average assets is always a decent way to think about it. But ultimately I think we’re most focused on, you know, the continued positive operating leverage that we saw here quarter over quarter to see 20% year over year revenue growth, 10% year over year expense growth. I mean that’s, that’s certainly a dynamic that we, you know, continue to prioritize and are confident, you know, we’ll continue to see as we head into 27.

Brandon Root (Analyst at Stephens)

Got it. Okay, thank you for that. And then I think maybe I heard this wrong. Katie, did you say that the provision here in the fourth quarter may be a bit higher than 3Q and if so should we interpret that as maybe incremental charge-offs in 4Q or would that be to fill the reserve and kind of see a step up in the ACL ratio?

Katie Morrell (Chief Credit Officer)

Yeah, Brandon, that was the comment in the prepared remarks that we expect fourth quarter to be a bit higher than we saw in the third. Obviously this is an elevated level from our historical run rate, but we’re actively working through these non-performing assets. So we’re just, you know, working through them as quickly as possible and we do anticipate that some of those reserves that we’re holding on those loans could migrate to charge-offs and then couple that with the expected loan growth in the fourth quarter.

We see that the provision would be slightly elevated.

Brandon Root (Analyst at Stephens)

Got it. Okay, thank you. If I could squeeze one more in, I think the security yield this last quarter was just over 5% I guess. Thanks for the comments on the loan repricings, that loan repricing side of things. I guess how much left, or sorry, how much opportunity is left on the securities repricing side as well that could maybe help the NIM over the medium term.

Joe Chybowski (President & Chief Financial Officer)

Yeah, Brandon, this is Joe. I think ultimately the increase in the securities yield is less about kind of portfolio roll-off and repricing and more about just incremental purchases. So I think with the move up in rates, we certainly saw real opportunities to add to the portfolio, specifically in the tax-exempt municipal space. So that certainly drove higher interest income. It also drove a lower tax rate here in 3Q relative to 2Q. So I think we’ll continue to be opportunistic in the investment portfolio as we kind of balance loan growth, core deposit growth, and then ultimately, you know, securities purchases. But I will say the environment, with the move in rates up, you know, securities can be a real alternative, just given levels that you can add today in really high-quality credits.

Brandon Root (Analyst at Stephens)

Okay, thank you for taking my questions.

Betsy (Operator)

This concludes our question and answer session. I would now like to turn the call back over to Jerry Baack for any closing remarks.

Jerry Baack (Founder, President, Chief Executive Officer and Chairman of the Board)

Thanks, everyone, for joining our call today. We’re very excited here at Bridgewater Bancshares about our profitability outlook and our growth outlook and very well positioned to finish 2026 strong and optimistic about 2027. I want to say thanks again to our phenomenal team members here at Bridgewater Bancshares. Everybody have a great day.

Betsy (Operator)

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

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