Bridgewater's Rates-Up Dress Rehearsal Pays Off — Until the Credits Come Due

A small Minnesota bank that spent two years hedging for rate cuts just got the opposite world and still printed a record quarter. The catch: two legacy problem loans are finally being marked.

BWB · Earnings Call · 2026-10-21

Bridgewater's Rates-Up Dress Rehearsal Pays Off — Until the Credits Come Due

The regime flipped, and the hedge is real

For two years, Bridgewater Bancshares built its story around falling rates. On the Q3 2025 call, CFO Joe Chybowski laid out a path to a 3% net interest margin by early 2027, assuming “roughly $750 million of fixed and adjustable rolling off kind of in the mid-5s” — Joseph M. Chybowski, President and Chief Financial Officer · 2025-10-22 and two Fed cuts. By January 2026 he was telling analysts “we're assuming no rate cuts the rest of the year” — Joseph Chybowski, President and Chief Financial Officer · 2026-04-22 — but the 3% target still leaned on deposit relief. Then the world turned. The Fed hiked, and management now expects another in December and two more in the first half of 2027. That makes rate hike the new top-ranked phrase in Bridgewater's transcript, a stark contrast to prior quarters where additional rate cuts sat near the top of the company's keyword board. The company is riding a global hiking cycle narrative that is now consensus across regional banks — BKU, HWC, KEY, SMBK, UCB and RF all fielded rate-hike questions this week — but Bridgewater's answer is more specific than most. “We are better positioned today for a rates-up environment than we have been in the past” — Joe Chybowski, President and Chief Financial Officer · 2026-10-21, Chybowski said.

90 days ago we had Fed Funds probabilities with a cut in December and a 430 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 530 10-year.
Joe Chybowski, President and Chief Financial Officer · 2026-10-21

The evidence is in the mix. Variable rate loans are now 26% of the portfolio, up from 15% two years ago, or $1.2 billion against $1.6 billion of deposits directly tied to short-term rates. And loan repricing is not finished: $697 million of fixed-rate loans mature over the next 12 months at a 5.70% weighted average yield, with another $105 million of adjustable-rate loans repricing at 4.23%. New production is coming on in the mid-6s. That is why management thinks NIM can hold near 3.09% — up two basis points in Q3 — even through three more hikes.

Core deposits are the governor

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.
Jerry Baack, Chairman and Chief Executive Officer · 2026-10-21

That strategy showed up in the deposit line. Core deposits grew $165 million, or 20% annualized, with non-interest-bearing balances up $63 million and higher-cost brokered deposits down $96 million. Deposit costs held at 2.78% for a third straight quarter. “It's really the core deposits that are the governor” — Nick Place, Chief Banking Officer · 2026-10-21, said Chief Banking Officer Nick Place. The core deposit build let loan growth re-accelerate to 7.2% annualized in Q3 after management deliberately slowed it in the first half; year-to-date, loans and core deposits are now growing at roughly the same pace, 6.1% and 6.4% respectively. The differentiated engine is affordable housing, now 16% of the loan book and growing 20% year over year. It accounted for over a quarter of Q3 loan growth and roughly half of the growth in construction and C&I. These credits are more complex, higher-yielding, and come with compensating deposit balances — a rare combination that helps explain why the bank's incremental cost of funds is in the mid-3s while loan yields are in the mid-6s. The P&L bears it out. Net interest income reached $39 million in the June quarter, up 19% year over year, and management said it grew another 22% annualized in Q3. Deposits stood at $4.3 billion, funding $3.6 billion of net loans. Capital remains organic: CET1 rose 55 basis points year over year to 9.63%, and the bank did not repurchase shares in the quarter. Record revenue pushed the efficiency ratio below 50% for the first time since early 2023 — though Chybowski cautioned that Q4 non-interest expense should return to Q2 levels, so the ratio may tick back up.

The credit tail is finally being marked

The clean headline — 37 basis points of nonperforming assets, well below peers, and net charge-offs of 0.21% — obscures a three-year workout that is now crystallizing. The $10 million mixed-use multifamily property moved to non-accrual last quarter and was charged down by $2.4 million in Q3. The $8.6 million central-business-district office loan, on non-accrual since early 2025, saw its specific reserve rise to $5.3 million. “We would expect that some portion of the existing reserve could ultimately migrate to charge-offs” — Katie Morrell, Chief Credit Officer · 2026-10-21, Chief Credit Officer Katie Morrell said. Provision expense, just $550,000 in the June quarter, will be higher in Q4. This is the honest tension in the quarter: nonperforming assets look pristine in ratio terms, but only because the bank has been building reserves against two known credits. The market will want to see those resolved before it awards the stock a higher multiple.

What the tape says

The stock is not celebrating. BWB peaked at $22.49 in mid-July and is 10.5% below that level, though it is still up 3.6% over the past 90 days. At 1.22x price to book, it has recovered from the 0.8x lows of 2023 but remains well below its 2018 IPO-era multiple near 1.8x. The derived annualized ROE of roughly 11.6% on $14 million of quarterly net income and $481 million of common equity is respectable, not spectacular. And the tape's momentum is elsewhere. The market's biggest 360-day movers are AI infrastructure names — hard disk drive, high bandwidth memory, co-packaged optics — not regional banks. The rate-hike theme is building in earnings-call transcripts, not yet in regional-bank prices. That is the setup: a sector narrative forming before the tape confirms it, and a small-cap bank whose own story is more about execution than multiple expansion.

Bottom line

Bridgewater executed a genuine pivot: it slowed loan growth to match core deposits, built a variable-rate hedge, and hit its 3% NIM target early. The record quarter is real. But the next two quarters are about proof: can NIM actually hold stable through three more hikes, and can the two legacy credits be resolved without a broader credit cost? Management says yes. The stock is not yet voting.