Bridgewater Bancshares, Inc. Announces Record First Quarter 2021 Net Income of $10.7 Million, $0.37 Diluted Earnings Per Share

Bridgewater Bancshares, Inc. (Nasdaq: BWB) (the Company), the parent company of Bridgewater Bank (the Bank), today announced net income of $10.7 million for the first quarter of 2021, a 43.4% increase over net income of $7.4 million for the first quarter of 2020. Net income per diluted common share for the first quarter of 2021 was $0.37, a 46.1% increase, compared to $0.25 per diluted common share for the same period in 2020.

“This team has done a phenomenal job driving record quarterly earnings to start 2021,” commented Chairman, Chief Executive Officer, and President, Jerry Baack. “Our results demonstrate our ability to drive strong organic loan growth and stabilize our net interest margin despite a challenging rate environment and unprecedented levels of liquidity in the system. In addition to our operating results, we have met some exciting new milestones in the first quarter of 2021, surpassing $3.0 billion in assets and 200 employees for the first time in Company history. We will work to continue our momentum into the rest of 2021 despite the ongoing uncertainty related to the impacts of the pandemic.”

First Quarter 2021 Financial Results

1. Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" for further details.

Linked-Quarter Highlights

• Diluted earnings per common share were $0.37 for the first quarter of 2021, compared to $0.17 per common share for the fourth quarter of 2020, or $0.32 per common share for the fourth quarter of 2020 when excluding tax-adjusted FHLB prepayment fees.

• Annualized return on average assets (ROA) and annualized return on average common equity (ROE) for the first quarter of 2021 were 1.47% and 15.87% compared to ROA and ROE of 1.31% and 13.86%, respectively, for the fourth quarter of 2020, when excluding the tax-adjusted FHLB prepayment fees incurred in the fourth quarter of 2020.

• Net interest margin was stable at 3.60% for the first quarter of 2021, compared to 3.61% in the fourth quarter of 2020.

• A loan loss provision of $1.1 million was recorded in the first quarter of 2021 to support strong organic loan growth. The allowance for loan losses to total loans was 1.48% at March 31, 2021, compared to 1.50% at December 31, 2020. The allowance for loan losses to total loans, excluding Paycheck Protection Program (PPP) loans, was 1.59% at March 31, 2021, compared to 1.59% at December 31, 2020.

• Gross loans, excluding PPP loans, increased $74.9 million in the first quarter of 2021, or 13.9% annualized.

• Deposits increased $137.0 million in the first quarter of 2021, which was net of a $96.1 million managed run-off in brokered deposits.

• Tangible book value per share, a non-GAAP financial measure, increased 5.2%, or $0.49, to $9.80 at March 31, 2021, compared to $9.31 at December 31, 2020.

• Annualized net loan charge-offs (recoveries) as a percentage of average loans were (0.01)% for the first quarter of 2021, compared to 0.08% for the fourth quarter of 2020.

• Loan modification balances as a percent of totals loans, excluding PPP loans, decreased from 3.0% at December 31, 2020 to 1.6% at March 31, 2021.

• Round two PPP loan originations as of March 31, 2021, totaled $70.1 million, generating net deferred fees of $3.0 million.

Year-Over-Year Highlights

• Net income was $10.7 million for the first quarter of 2021, compared to $7.4 million for the first quarter of 2020, an increase of $3.2 million, or 43.4%.

• Diluted earnings per common share for the first quarter of 2021 were $0.37, compared to $0.25 for the first quarter of 2020, an increase of 46.1%.

• Pre-provision net revenue (PPNR), a non-GAAP financial measure, was $15.6 million for the first quarter of 2021, an increase of 28.3%, compared to $12.2 million for the first quarter of 2020. PPNR ROA, a non-GAAP financial measure, was 2.15% for the first quarter of 2021, compared to 2.11% for the first quarter of 2020.

• Net interest margin was stable at 3.60% for the first quarter of 2021, compared to 3.59% for the first quarter of 2020, despite extraordinary volatility in interest rates over the past year.

• The adjusted efficiency ratio, a non-GAAP financial measure which excludes the impact of certain non-routine income and expenses from noninterest expense, was 40.7% for the first quarter of 2021, compared to 44.1% for the first quarter of 2020.

• Gross loans increased $423.3 million at March 31, 2021, or 21.1%, compared to March 31, 2020. Excluding $163.3 million of PPP loans, gross loans increased 13.0%, at March 31, 2021, compared to March 31, 2020.

• Deposits increased $738.5 million at March 31, 2021, or 38.9%, compared to March 31, 2020. Excluding brokered deposits and remaining PPP loan funds, deposits increased 32.1% at March 31, 2021, compared to March 31, 2020.

• Tangible book value per share, a non-GAAP financial measure, increased 15.3%, or $1.31, to $9.80 at March 31, 2021, compared to $8.49 at March 31, 2020.

Recent Developments

The novel coronavirus (COVID-19) pandemic has continued to create uncertainty and extraordinary change for the Company, its clients, its communities and the country as a whole. Vaccines have been rolled out nationwide in the first quarter of 2021, however the situation remains fluid and management cannot estimate the duration and full impact of the COVID-19 pandemic on the economy, financial markets and the Company’s financial condition and results of operations.

The Company participated in both the first and second rounds of the Small Business Administration’s (SBA) PPP, which stemmed from the Coronavirus Aid, Relief and Economic Security, or CARES, Act that was signed into law on March 27, 2020, and reopened as authorized by the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act, which was signed into law on December 27, 2020, or Economic Aid Act. As of March 31, 2021, $93.1 million of round one PPP loans and $70.1 million of round two PPP loans remained outstanding for total outstanding PPP principal balances of $163.3 million.

The Company has developed programs for clients who are experiencing business and personal disruptions due to the COVID-19 pandemic by providing interest-only modifications, loan payment deferrals, and extended amortization modifications. In accordance with interagency regulatory guidance and the CARES Act, qualifying loans modified in response to the COVID-19 pandemic will not be considered troubled debt restructurings. There was no new modification activity in the first quarter of 2021. The Company had 19 modified loans totaling $37.1 million outstanding as of March 31, 2021, representing 1.6% of the total loan portfolio, excluding PPP loans.

The following table presents a rollforward of loan modification activity, by modification type, from December 31, 2020 to March 31, 2021:

Key Financial Measures

1. Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" for further details.
2. Amounts calculated on a tax-equivalent basis using the statutory federal tax rate of 21%.
3. Preliminary data. Current period subject to change prior to filings with applicable regulatory agencies.

Selected Financial Data

1. Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" for further details.

Income Statement

Net Interest Income

Net interest income was $25.4 million for the first quarter of 2021, an increase of $554,000, or 2.2%, from $24.8 million in the fourth quarter of 2020, and an increase of $5.3 million, or 26.3%, from $20.1 million in the first quarter of 2020. The linked-quarter and year-over-year increases in net interest income were primarily due to growth in average interest earning assets, lower rates paid on deposits, and the recognition of PPP loan origination fees, offset partially by declining yields on loans. Average interest earning assets were $2.88 billion for the first quarter of 2021, an increase of $123.5 million, or 4.5%, from $2.76 billion for the fourth quarter of 2020, and an increase of $605.5 million, or 26.6%, from $2.28 billion for the first quarter of 2020. The linked-quarter increase in average interest earning assets was primarily due to strong organic growth in the loan portfolio. The year-over-year increase in average interest earning assets was primarily due to increased on-balance sheet liquidity, continued strong organic growth in the loan portfolio, as well as the funding of PPP loans.

Net interest margin (on a fully tax-equivalent basis) for the first quarter of 2021 was 3.60%, a 1 basis point decline from 3.61% in the fourth quarter of 2020, and a 1 basis point increase from 3.59% in the first quarter of 2020.

While the origination volume of PPP loans earning 1.00% negatively impacted net interest margin, the recognition of fees associated with the originations has benefited net interest margin for each of the past two quarters. The SBA began forgiving PPP loans, which has accelerated the recognition of PPP fees starting in the fourth quarter of 2020 and continuing into the first quarter of 2021. The Company recognized $1.5 million of PPP origination fees during the first quarter of 2021, compared to $1.7 million during the fourth quarter of 2020. The elevated fee recognition is illustrated in the 5.08% PPP loan yield for the first quarter of 2021.

The following table summarizes PPP loan originations and net origination fees as of March 31, 2021:

Nevertheless, earning asset yields continue to be negatively impacted by the low interest rate environment, however given the volatility of the past year and competing dynamics on both sides of the balance sheet, the Company was encouraged by another quarter of meaningful deposit repricing that supported continued net interest margin stabilization.

Interest income was $30.4 million for the first quarter of 2021, a decrease of $259,000, or 0.8%, from $30.7 million in the fourth quarter of 2020, and an increase of $3.0 million, or 10.8%, from $27.5 million in the first quarter of 2020. The yield on interest earning assets (on a fully tax-equivalent basis) was 4.31% in the first quarter of 2021, compared to 4.46% in the fourth quarter of 2020, and 4.90% in the first quarter of 2020. The linked-quarter decrease in the yield on interest earning assets was due primarily to the historically low interest rate environment resulting in a lower loan yield, lower loan fees recognized, and an increase in cash balances due to extraordinary deposit inflows, offset partially by $1.5 million of PPP loan origination fees. The year-over-year decline in the yield on interest earning assets was primarily due to the historically low interest rate environment coupled with unprecedented liquidity resulting in lower loan and security yields and excess cash balances.

Loan interest income and loan fees remain the primary contributing factors to the changes in yield on interest earning assets. The aggregate loan yield, excluding PPP loans, decreased to 4.72% in the first quarter of 2021, which was 15 basis points lower than 4.87% in the fourth quarter of 2020, and 45 basis points lower than 5.17% in the first quarter of 2020. While loan fees have maintained a relatively stable contribution to the aggregate loan yield, the historically low yield curve has resulted in a declining core yield on loans in comparison to both prior periods.

A summary of interest and fees recognized on loans, excluding PPP loans, for the periods indicated is as follows:

Interest expense was $5.0 million for the first quarter of 2021, a decrease of $813,000, or 13.9%, from $5.9 million in the fourth quarter of 2020, and a decrease of $2.3 million, or 31.5%, from $7.4 million in the first quarter of 2020. The cost of interest bearing liabilities declined 20 basis points on a linked-quarter basis from 1.24% in the fourth quarter of 2020 to 1.04% in the first quarter of 2021, primarily due to lower rates paid on deposits. On a year-over-year basis, the cost of interest bearing liabilities decreased 80 basis points from 1.84% in the first quarter of 2020 to 1.04% in the first quarter of 2021, primarily due to lower rates paid on deposits, offset partially by strong growth of interest bearing deposits and additional subordinated debentures.

Interest expense on deposits was $3.7 million for the first quarter of 2021, a decrease of $408,000, or 10.0%, from $4.1 million in the fourth quarter of 2020, and a decrease of $2.1 million, or 35.9%, from $5.7 million in the first quarter of 2020. The cost of total deposits declined 10 basis points on a linked-quarter basis from 0.69% in the fourth quarter of 2020, and declined 68 basis points on a year-over-year basis from 1.27% in the first quarter of 2020, to 0.59% in the first quarter of 2021, primarily due to deposit rate cuts consistent with a lower rate environment and the downward repricing of time deposits. Given strong deposit inflows and ample time deposit maturities over the next 12 months, the Company anticipates continued deposit repricing opportunities in the future. Additionally, the significant FHLB de-leveraging strategy executed in the fourth quarter of 2020 has begun to manifest lower interest bearing liability costs in the current quarter.

A summary of the Company’s average balances, interest yields and rates, and net interest margin for the three months ended March 31, 2021, December 31, 2020, and March 31, 2020 is as follows:

1. Interest income and average rates for tax-exempt investment securities and loans are presented on a tax-equivalent basis, assuming a statutory federal income tax rate of 21%.
2. Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.
3. Net interest margin includes the tax equivalent adjustment and represents the annualized results of: (i) the difference between interest income on interest earning assets and the interest expense on interest bearing liabilities, divided by (ii) average interest earning assets for the period.

Provision for Loan Losses

The provision for loan losses was $1.1 million for the first quarter of 2021, a decrease of $2.8 million from $3.9 million for the fourth quarter of 2020, and a decrease of $1.0 million from $2.1 million for the first quarter of 2020. The provision recorded in the first quarter of 2021 was primarily attributable to growth of the loan portfolio. The allowance for loan losses to total loans was 1.48% at March 31, 2021, compared to 1.50% at December 31, 2020, and 1.23% at March 31, 2020. The allowance for loan losses to total loans, excluding $163.3 million of PPP loans, was 1.59% at March 31, 2021.

As an emerging growth company, the Company is not subject to Accounting Standards Update No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments,“ or CECL, until January 1, 2023.

The following table presents the activity in the Company’s allowance for loan losses for the periods indicated:

Noninterest Income

Noninterest income was $1.0 million for the first quarter of 2021, an increase of $22,000 from $986,000 for the fourth quarter of 2020, and a decrease of $711,000 from $1.7 million for the first quarter of 2020. The linked-quarter increase was primarily due to increased other miscellaneous items, offset partially by lower gains on sales of securities and letter of credit fees. The year-over-year decrease was primarily due to lower swap fees, partially offset by increased letter of credit fees and other miscellaneous items.

The following table presents the major components of noninterest income for the periods indicated:

Noninterest Expense

Noninterest expense was $10.9 million for the first quarter of 2021, a decrease of $4.3 million from $15.3 million for the fourth quarter of 2020, and an increase of $1.2 million from $9.7 million for the first quarter of 2020. The linked-quarter decrease was primarily due to $5.6 million of prepayment fees associated with the extinguishment of $69.0 million of FHLB term advances incurred in the fourth quarter of 2020, partially offset by an increase in salaries and employee benefits. The year-over-year increase was primarily attributable to increased salaries and employee benefits, occupancy and equipment, and technology expenses, offset partially by decreased marketing and advertising expenses.

The following table presents the major components of noninterest expense for the periods indicated:

In the first quarter of 2021, the Company attracted 21 new hires in lending, deposit gathering, technology, risk management, and other supportive roles, which continued to demonstrate the Company’s status as a preferred employer amidst ongoing market disruption. The Company reached 200 full-time equivalent employees at March 31, 2021, compared to 183 employees at December 31, 2020, and 170 employees at March 31, 2020. The efficiency ratio, a non-GAAP financial measure, was 41.2% for the first quarter of 2021, compared to 59.0% for the fourth quarter of 2020, and 44.4% for the first quarter of 2020. Excluding the impact of certain non-routine income and expenses, the adjusted efficiency ratio, a non-GAAP financial measure, was 40.7% for the first quarter of 2021, 36.6% for the fourth quarter of 2020 and 44.1% for the first quarter of 2020. The efficiencies of the Company’s “branch-light” model have been evident throughout the pandemic, and going forward, have positioned the Company well to continue making investments in technology as the industry adapts to evolving client behavior.

Income Taxes

The effective combined federal and state income tax rate for the first quarter of 2021 was 25.8%, an increase from 25.3% for the fourth quarter of 2020, and an increase from 25.4% for the first quarter of 2020.

Balance Sheet

Total assets at March 31, 2021 were $3.07 billion, a 5.0% increase from $2.93 billion at December 31, 2020, and a 27.0% increase from $2.42 billion at March 31, 2020. The linked-quarter increase in total assets was primarily due to strong organic loan growth and excess cash balances linked to continued strong deposit inflows. The year-over-year increase in total assets was primarily due to organic loan growth, PPP loan growth, purchases of investment securities, and excess cash balances.

Total gross loans at March 31, 2021 were $2.43 billion, an increase of $99.7 million, or 4.3%, over total gross loans of $2.33 billion at December 31, 2020, and an increase of $423.3 million, or 21.1%, over total gross loans of $2.00 billion at March 31, 2020. When excluding the PPP loans altogether, gross loans grew $74.9 million during the first quarter of 2021, or 13.9% on an annualized basis.

The following table presents the dollar composition of the Company’s loan portfolio, by category, at the dates indicated:

Total deposits at March 31, 2021 were $2.64 billion, an increase of $137.0 million, or 5.5%, over total deposits of $2.50 billion at December 31, 2020, and an increase of $738.5 million, or 38.9%, over total deposits of $1.90 billion at March 31, 2020. Deposit growth in the first quarter of 2021 was primarily due to an increase in noninterest bearing and interest bearing transaction deposits and savings and money market deposits, offset partially by a decline in time deposits and brokered deposits. The growth in core, non-maturity deposits was a result of both successful new client acquisition initiatives and pandemic-related accumulation of liquidity by existing clients. Given the fluid environment, management believes deposits could experience fluctuations in future periods; however, in the interim, the strong deposit inflows have provided the flexibility to let higher cost deposits roll off and reduce reliance on brokered deposits.

The following table presents the dollar composition of the Company’s deposit portfolio, by category, at the dates indicated:

Total shareholders’ equity at March 31, 2021 was $279.2 million, an increase of $13.8 million, or 5.2%, over total shareholders’ equity of $265.4 million at December 31, 2020, and an increase of $31.0 million, or 12.5%, over total shareholders’ equity of $248.1 million at March 31, 2020. The linked-quarter and year-over-year increases were due to net income retained and an increase in unrealized gains in the securities and derivatives portfolios, partially offset by stock repurchases made under the Company’s stock repurchase program.

Strong earnings and capital growth coupled with better asset quality visibility as loan modifications expired supported management’s decision to resume repurchases under the Company’s stock repurchase program. The Company remains committed to maintaining strong capital levels while enhancing shareholder value as it strategically executes its stock repurchase program in this fluid economic environment. During the first quarter of 2021, the Company repurchased 16,618 shares of its common stock at a weighted average price of $12.50 for a total of $208,000.

Tangible book value per share, a non-GAAP financial measure, was $9.80 as of March 31, 2021, an increase of 5.2% from $9.31 as of December 31, 2020, and an increase of 15.3% from $8.49 as of March 31, 2020.

Asset Quality

Annualized net charge-offs (recoveries) as a percent of average loans for the first quarter of 2021 were (0.01)%, compared to 0.08% for the fourth quarter of 2020, and 0.01% for the first quarter of 2020. At March 31, 2021, the Company’s nonperforming assets, which include nonaccrual loans, loans past due 90 days and still accruing, and foreclosed assets, were $770,000, or 0.03% of total assets, as compared to $775,000, or 0.03% of total assets at December 31, 2020, and $606,000 or 0.03% of total assets at March 31, 2020.

The Company has increased oversight and analysis of all segments of the loan portfolio in response to the COVID-19 pandemic, especially in vulnerable industries such as hospitality and restaurants, to proactively monitor evolving credit risk. Loans that have potential weaknesses that warrant a watchlist risk rating at March 31, 2021, totaled $58.3 million, compared to $44.8 million at December 31, 2020. As the COVID-19 pandemic continues to evolve, the length and extent of the economic uncertainty may result in further watchlist or adverse classifications in the loan portfolio. Loans that warranted a substandard risk rating at March 31, 2021 totaled $6.7 million, compared to $15.2 million at December 31, 2020.

The following table presents a summary of asset quality measurements at the dates indicated:

1. Nonperforming assets are defined as nonaccrual loans plus loans 90 days past due plus foreclosed assets.

About the Company

Bridgewater Bancshares, Inc. is a financial holding company headquartered in St. Louis Park, Minnesota. The Company has two wholly owned subsidiaries, Bridgewater Bank, a Minnesota-chartered commercial bank founded in November 2005, and Bridgewater Risk Management, Inc., a captive insurance company founded in December 2016. Bridgewater Bank has two wholly owned subsidiaries, Bridgewater Investment Management, Inc. and BWB Holdings, LLC. Bridgewater Bank currently operates through 7 branches in Bloomington, Greenwood, Minneapolis (2), St. Louis Park, Orono, and St. Paul, all located within the Minneapolis-St. Paul-Bloomington metropolitan statistical area.

Use of Non-GAAP financial measures

In addition to the results presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP), the Company routinely supplements its evaluation with an analysis of certain non-GAAP financial measures. The Company believes these 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 peers. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of non-GAAP disclosures used in this earnings release to the comparable GAAP measures are provided in the accompanying tables.

Forward-Looking Statements

This earnings release contains “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, statements concerning plans, estimates, calculations, forecasts and projections with respect to the anticipated future performance of the Company. These statements are often, but not always, identified by words such as “may”, “might”, “should”, “could”, “predict”, “potential”, “believe”, “expect”, “continue”, “will”, “anticipate”, “seek”, “estimate”, “intend”, “plan”, “projection”, “would”, “annualized”, “target” and “outlook”, or the negative version of those words or other comparable words of a future or forward-looking nature.

Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based only on our current beliefs, expectations and assumptions regarding our business, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of our control. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. Therefore, you should not rely on any of these forward-looking statements. Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following: the negative effects of the COVID-19 pandemic, including its effects on the economic environment, our clients and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic; loan concentrations in our portfolio; the overall health of the local and national real estate market; our ability to successfully manage credit risk; business and economic conditions generally and in the financial services industry, nationally and within our market area; our ability to maintain an adequate level of allowance for loan losses; new or revised accounting standards, including as a result of the future implementation of the Current Expected Credit Loss standard; the concentration of large loans to certain borrowers; the concentration of large deposits from certain clients; our ability to successfully manage liquidity risk; our dependence on non-core funding sources and our cost of funds; our ability to raise additional capital to implement our business plan; our ability to implement our growth strategy and manage costs effectively; developments and uncertainty related to the future use and availability of some reference rates, such as the London Interbank Offered Rate, as well as other alternative reference rates; the composition of our senior leadership team and our ability to attract and retain key personnel; the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents; interruptions involving our information technology and telecommunications systems or third-party servicers; competition in the financial services industry; the effectiveness of our risk management framework; the commencement and outcome of litigation and other legal proceedings and regulatory actions against us; the impact of recent and future legislative and regulatory changes; interest rate risk; fluctuations in the values of the securities held in our securities portfolio; the imposition of tariffs or other governmental policies impacting the value of products produced by our commercial borrowers; severe weather, natural disasters, wide spread disease or pandemics (including the COVID-19 pandemic), acts of war or terrorism or other adverse external events; potential impairment to the goodwill we recorded in connection with our past acquisition; changes to U.S. tax laws, regulations and guidance; and any other risks described in the “Risk Factors” sections of reports filed by the Company with the Securities and Exchange Commission.

Any forward-looking statement made by us in this press release is based only on information currently available to us and speaks only as of the date on which it is made. We undertake no obligation to publicly update any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise.