KBRA Affirms Ratings for Bridgewater Bancshares, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, the preferred shares rating of BB+, and the short-term debt rating of K3 for St. Louis Park, Minnesota-based Bridgewater Bancshares, Inc. (NASDAQ: BWB) (“Bridgewater” or “the company”). KBRA also affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating BBB, and the short-term deposit and debt ratings of K2 for Bridgewater Bank, the main subsidiary. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by BWB’s lengthy track record of pristine asset quality driven by a credit-focused management team with prudent and disciplined underwriting standards as well as broad-based knowledge of local operating markets. BWB’s five-year NCO average of 0.01% is well below the majority of its peers, with this trend continuing in 1H25. Additionally, despite the negligible historical loan losses, BWB has conservatively built reserves to 1.35% of loans. While profitability remains somewhat constrained due to the company’s spread-reliant earnings, NIM appears to have troughed in 1Q24 with incremental expansion throughout 2024 and 1H25 benefiting from solid asset repricing opportunities and organic loan growth. Moreover, the rate cuts in late 2024 somewhat eased funding pressures with ~35% of the funding base tied to short-term rates. Nonetheless, BWB maintains a higher utilization of noncore funding sources (currently ~30% of total funding), contributing to a higher cost funding base. However, in 4Q24, the company completed the acquisition with First Minnetonka City Bank (FMCB), which added $226 million of low cost, granular deposits, combined with strong organic deposit growth (7% through 1H25) supported a slight reduction in brokered deposit utilization to 18% as of 2Q25 compared to 25% in 2Q24. Going forward, we expect earnings and margins to continue to trend positively supported by management’s target of mid-to-high loan growth as BWB is well positioned to benefit from recent market disruption from in-footprint M&A activity. Capital metrics remain a credit constraint historically tracking well below similarly rated peers with CET1 ratio at 9.0% as of 2Q25. That said, risk-based capital measures are negatively impacted by its multifamily loans, with ~75% of the portfolio being 100% risk-weighted. This asset class can typically be eligible for a 50% risk-weighting under certain circumstances, though the majority of the portfolio is ineligible due to the utilization of interest only structures. That said, we believe that is fairly punitive given the portfolio’s conservative underwriting criteria and a favorable loss history. The below average risk-based measures have generally been offset by a comfortable TCE ratio, though this has dipped below peers in recent quarters due to the recent merger of FMCB. Nonetheless, we view capital management as adequate for the company’s risk profile with the expectation of continued outperformance of credit quality, strong loan loss reserves, and improving earnings profile. Additionally, BWB’s investor CRE concentration is elevated compared to peers at 476% of total RBC; however, when excluding multifamily, the concentration is comfortably below 300%. We note that multifamily loans represent the largest related exposure, which has historically performed very well with virtually no losses. Additionally, multifamily properties are generally located in desirable locations throughout the Twin Cities metro area.

Rating Sensitivities

A rating upgrade is not expected over the near-to-medium term; however, risk-based capital metrics more in line with the higher rating category and less dependence on noncore funding, while maintaining strong credit quality and sound profitability may support positive rating momentum over time. Maintenance of capital ratios, specifically CET1 below 9%, deterioration in credit quality, or increased reliance on noncore funding sources that materially impact earnings over multiple quarters limiting internal capital generation could pressure ratings.

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