Bridgewater Bancshares, Inc. Announces Third Quarter 2020 Net Income of $7.2 Million, $0.25 Diluted Earnings Per Share

Bridgewater Bancshares, Inc. (Nasdaq: BWB) (the Company), the parent company of Bridgewater Bank (the Bank), today announced net income of $7.2 million, or $0.25 per diluted common share, for the third quarter of 2020, compared to net income of $7.6 million, or $0.26 per diluted common share, for the second quarter of 2020, and net income of $7.8 million, or $0.27 per diluted common share, for the third quarter of 2019.

“The third quarter marked the unveiling of our long awaited new corporate headquarters, and we could not be more excited to complete our relocation to this unconventional space in the heart of our market area,” commented Chairman, Chief Executive Officer, and President, Jerry Baack. “Not only does our new headquarters create an opportunity for us to safely return to the office, the campus-like atmosphere complements our unique culture. Our third quarter results remained strong, demonstrating our ability to adjust quickly to this historically low interest rate environment and other operating challenges introduced by the pandemic. We remain diligent in the monitoring of our loan portfolio and given the uncertainty of the credit outlook and the current economic environment, we continued to build reserves in the third quarter. The duration of this challenging operating environment is unknown, but we believe our incredibly deep and talented team is ready and capable of handling any challenges that come our way.”

Linked-Quarter Highlights

• Annualized pre-provision net revenue return on average assets, a non-GAAP financial measure, was 1.94% for the third quarter of 2020, compared to 2.00% for the second quarter of 2020.

• The adjusted efficiency ratio, a non-GAAP financial measure which excludes the impact of certain non-routine income and expenses from noninterest expense, was 41.7% for the third quarter of 2020, compared to 40.4% for the second quarter of 2020.
  
• Cost of total deposits declined 12 basis points to 0.87% in the third quarter of 2020, compared to 0.99% in the second quarter of 2020.
  
• Loans increased $65.5 million, or 11.9% on an annualized basis, to $2.26 billion at September 30, 2020, compared to June 30, 2020.

• Deposits increased $31.0 million, or 5.5% on an annualized basis, to $2.27 billion at September 30, 2020, compared to June 30, 2020.
  
• Annualized net loan charge-offs (recoveries) as a percent of average loans were 0.00% for the third quarter of 2020, compared to (0.01)% for the second quarter of 2020.

• A loan loss provision of $3.8 million was recorded for the third quarter of 2020, primarily due to increased allocations for economic factors associated with the COVID-19 pandemic. The allowance for loan losses to total loans was 1.39% at September 30, 2020, compared to 1.26% at June 30, 2020. The allowance for loan losses to total loans, excluding $181.6 million of Paycheck Protection Program (PPP) loans, was 1.51% at September 30, 2020, compared to 1.37% at June 30, 2020.

• 75 loan modifications totaling $113.7 million, or 38.8% of total loan modifications, returned to regular payment status during the third quarter of 2020. Loan modification balances as a percent of totals loans, excluding PPP loans, decreased from 14.6% at the end of the second quarter of 2020 to 9.2% at the end of the third quarter of 2020.

Year-Over-Year Highlights

• Diluted earnings per common share for the third quarter of 2020 were $0.25, compared to $0.27 for the third quarter of 2019.

• Cost of total deposits declined 55 basis points to 0.87% in the third quarter of 2020, compared to 1.42% in the third quarter of 2019.

• Tangible book value per share, a non-GAAP financial measure, increased 13.0%, or $1.05, to $9.13 at September 30, 2020, compared to $8.08 at September 30, 2019.

• Gross loans increased $413.0 million at September 30, 2020, or 22.4%, compared to September 30, 2019. Year-over-year loan growth was $231.4 million, or 12.5%, excluding $181.6 million of PPP loans.

• Deposits increased $470.8 million at September 30, 2020, or 26.1%, compared to September 30, 2019. Year-over-year growth consisted of $284.1 million in organic deposits, excluding an estimated $30.0 million in growth attributable to remaining PPP loan funds.

• The ratio of nonperforming assets to total assets was 0.02% at September 30, 2020, compared to 0.04% at September 30, 2019.

Year-To-Date Highlights

• Diluted earnings per common share for the nine months ended September 30, 2020 were $0.76, compared to $0.76 for the nine months ended September 30, 2019.

• Year-to-date pre-provision net revenue, a non-GAAP financial measure, was $38.4 million for the nine months ended September 30, 2020, an increase of 19.8%, compared to $32.1 million for the nine months ended September 30, 2019. Year-to-date annualized pre-provision net revenue return on average assets, a non-GAAP financial measure, was 2.01% for the nine months ended September 30, 2020, compared to 2.06% for the nine months ended September 30, 2019.

• The adjusted efficiency ratio, a non-GAAP financial measure which excludes the impact of certain non-routine income and expenses from noninterest expense, was 42.0% for the nine months ended September 30, 2020, compared to 42.9% for the nine months ended September 30, 2019.

• Year-to-date annualized loan growth for 2020, excluding PPP loans, was 11.6% as of September 30, 2020.

• Year-to-date annualized organic deposit growth for 2020, excluding brokered deposits and remaining PPP loan funds, was 21.1% as of September 30, 2020.

Recent Developments

The outbreak of the novel coronavirus, or COVID-19, which was declared a pandemic by the World Health Organization on March 11, 2020, has continued to create uncertainty and extraordinary change for the Company, its clients, its communities and the country as a whole. In response to this pandemic, the Company rapidly deployed its business continuity plan and continues to take steps to protect the health and safety of its employees and clients. During the third quarter of 2020, the Company began returning employees to the office pursuant to new health and safety procedures, including increasing physical space between employees, using face coverings, alternating schedules for employees in the workspace and requiring employees with COVID-19 symptoms or exposure to quarantine away from the office. Given the fluidity of the situation, 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. At this point, management does not expect that the Company’s financial results in future quarters will track with the Company’s historical performance.

During the third quarter of 2020, the Company opened its newly constructed office complex in St. Louis Park, Minnesota. The Company relocated its headquarters from Bloomington, Minnesota and relocated its current branch location in St. Louis Park to the new office complex. Management expects that occupancy and equipment expense will increase in future periods related to the operations and depreciation of the building.

The Company participated in 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. As of September 30, 2020, PPP principal loan balances totaled $181.6 million, compared to $180.2 million at June 30, 2020. In the third quarter of 2020, the Company began to shift its efforts to principal forgiveness processing; however, there was no forgiveness granted to any borrowers during the third quarter of 2020.

The Company continues to monitor the loan portfolio, working with clients to provide relief when appropriate. The Company has developed programs for clients who are experiencing business and personal disruptions due to the COVID-19 pandemic by providing loan payment deferrals and interest-only 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. New modification activity has been limited in the third quarter of 2020.

The following table presents a rollforward of loan modification activity, by modification type, from June 30, 2020 to September 30, 2020:

The following table presents a summary of active loan modifications, by loan segment and modification type, at September 30, 2020:

Modifications have been granted on a case-by-case basis based on the specific needs and circumstances affecting each borrower. Interest-only modifications have been primarily granted for three to six month periods, but range up to twelve months. Payment deferral modifications have been granted for three to six month periods. The Company has 52 modified loans totaling $99.8 million set to expire in October 2020. As of October 22, 2020, based on lender and client surveys, the Company estimates that $73.6 million will return to regular payment status, bringing loan modification balances as a percent of total loans, excluding PPP loans, to 5.6%.

Income Statement

Net Interest Income

Net interest income was $21.7 million for the third quarter of 2020, an increase of $337,000, or 1.6%, from $21.3 million in the second quarter of 2020, and an increase of $2.7 million, or 14.5%, from $18.9 million in the third quarter of 2019. The linked-quarter increase in net interest income was primarily due to growth in average interest earning assets and lower rates paid on deposits, offset partially by lower rates on interest earning assets. The year-over-year increase in net interest income was largely attributed to growth in average interest earning assets, which increased by $521.0 million, or 24.4%, to $2.66 billion for the third quarter of 2020, from $2.13 billion for the third quarter of 2019. This increase in average interest earning assets was primarily due to continued organic growth in the loan portfolio and most recently, the funding of PPP loans.

Net interest margin (on a fully tax-equivalent basis) for the third quarter of 2020 was 3.28%, a 10 basis point decrease from 3.38% in the second quarter of 2020, and a 28 basis point decrease from 3.56% in the third quarter of 2019.

While the Company is encouraged by the continued reduction in the cost of interest bearing liabilities during the third quarter of 2020, the linked-quarter decrease in net interest margin was primarily attributed to the historically low and flat yield curve weighing on earning asset yields. Furthermore, the Company’s participation in the PPP generated strong loan origination volume during the second quarter of 2020; however, the interest rate of 1.00% earned on these loans is significantly lower than the aggregate loan yield, thus impacting the net interest margin during the quarter. It is worth noting that the core net interest margin, excluding PPP loans and corresponding deposit balances, was 3.33% for the third quarter of 2020. The year-over-year decline in net interest margin largely followed the same themes as the quarter. Despite a significant reduction in interest bearing deposit costs over the year, the historically low interest rate environment coupled with a more liquid balance sheet mix pressured earning asset yields lower and ultimately continued to compress the net interest margin.

Interest income was $28.5 million for the third quarter of 2020, an increase of $327,000, or 1.2%, from $28.2 million in the second quarter of 2020, and an increase of $1.9 million, or 7.2%, from $26.6 million in the third quarter of 2019. The yield on interest earning assets (on a fully tax-equivalent basis) was 4.30% in the third quarter of 2020, compared to 4.45% in the second quarter of 2020, and 4.98% in the third quarter of 2019. The linked-quarter decrease in the yield on interest earning assets was due primarily to lower market rates resulting in lower loan and security yields. The year-over-year decrease in the yield on interest earning assets was due to the falling interest rate environment resulting in lower loan and security yields, the impact of PPP loans originated at a meaningfully lower rate than the aggregate loan portfolio yield, and an increase in cash balances held by the Company due to the uncertain impacts of the COVID-19 pandemic.

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 4.93% in the third quarter of 2020, which was 8 basis points lower than 5.01% in the second quarter of 2020, and 39 basis points lower than 5.32% in the third quarter of 2019. While loan fees have maintained a stable contribution to the aggregate loan yield, the historically low and flat 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 $6.8 million for the third quarter of 2020, a decrease of $10,000, or 0.1%, from $6.8 million in the second quarter of 2020, and a decrease of $823,000, or 10.8%, from $7.6 million in the third quarter of 2019. The cost of interest bearing liabilities declined 8 basis points on a linked-quarter basis from 1.58% in the second quarter of 2020 to 1.50% in the third quarter of 2020, primarily due to lower rates paid on deposits. On a year-over-year basis, the cost of interest bearing liabilities decreased 54 basis points from 2.04% in the third quarter of 2019 to 1.50% in the third quarter of 2020.

Interest expense on deposits was $4.8 million for the third quarter of 2020, a decrease of $330,000, or 6.4%, from $5.2 million in the second quarter of 2020, and a decrease of $1.4 million, or 22.0%, from $6.2 million in the third quarter of 2019. The average cost of total deposits declined 12 basis points on a linked-quarter basis from 0.99% in the second quarter of 2020, and declined 55 basis points on a year-over-year basis from 1.42% in the third quarter of 2019, to 0.87% in the third quarter of 2020, primarily due to deposit rate cuts consistent with a lower rate environment and the repricing of time deposits.

Given strong deposit growth and ample time deposit maturities over the next 12 months, the Company anticipates meaningful deposit repricing opportunities in future quarters.

A summary of the Company’s average balances, interest yields and rates, and net interest margin for the three months ended September 30, 2020, June 30, 2020, and September 30, 2019 is as follows:

Provision for Loan Losses

The provision for loan losses was $3.8 million for the third quarter of 2020, an increase of $750,000 from $3.0 million for the second quarter of 2020, and an increase of $2.9 million from $900,000 for the third quarter of 2019. The allowance for loan losses to total loans was 1.39% at September 30, 2020, compared to 1.26% at June 30, 2020, and 1.20% at September 30, 2019. The allowance for loan losses to total loans, excluding $181.6 million of PPP loans, was 1.51% at September 30, 2020. The continued reserve build in the third quarter of 2020 was primarily attributable to growth of the loan portfolio, economic uncertainties and evolving risks driven by the impact of the COVID-19 pandemic.

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 $1.2 million for the third quarter of 2020, a decrease of $820,000 from $2.0 million for the second quarter of 2020, and an increase of $211,000 from $946,000 for the third quarter of 2019. The linked-quarter decrease was primarily due to decreased gains on sales of securities, offset partially by increased letter of credit fees and customer service fees. The year-over-year increase was primarily due to increased letter of credit fees.

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

Noninterest Expense

Noninterest expense was $9.7 million for the third quarter of 2020, a decrease of $1.0 million from $10.7 million for the second quarter of 2020, and an increase of $588,000 from $9.1 million for the third quarter of 2019. The linked-quarter decrease was primarily due to $1.4 million of FHLB advance prepayment fees incurred in the second quarter of 2020, as well as lower amortization of tax credit investments. The decrease was partially offset by increased salaries and employee benefits and occupancy and equipment expenses related to the new corporate headquarters. The year-over-year increase was attributed to increased salaries and employee benefits and FDIC insurance assessment, offset partially by decreased marketing and advertising and amortization of tax credit investments.

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

The Company had 180 full-time equivalent employees at September 30, 2020, compared to 173 employees at June 30, 2020, and 158 employees at September 30, 2019. Despite the uncertainty surrounding the COVID-19 pandemic, the Company continues to attract strategic hires in lending, deposit gathering, technology and risk management roles. The efficiency ratio, a non-GAAP financial measure, was 42.3% for the third quarter of 2020, compared to 48.6% for the second quarter of 2020, and 45.6% for the third quarter of 2019. Excluding the impact of certain non-routine income and expenses, the adjusted efficiency ratio, a non-GAAP financial measure, was 41.7% for the third quarter of 2020, 40.4% for the second quarter of 2020 and 42.9% for the third quarter of 2019. 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 third quarter of 2020 was 23.8%, an increase from 20.9% for the second quarter of 2020 and an increase from 21.1% for the third quarter of 2019. The effective combined federal and state income tax rate for the nine months ended September 30, 2020 was 23.4%.

Balance Sheet

Total assets at September 30, 2020 were $2.77 billion, a 0.7% increase from $2.75 billion at June 30, 2020, and a 24.3% increase from $2.23 billion at September 30, 2019. While the linked-quarter increase was nominal, restored organic loan growth and purchases of investment securities deployed excess liquidity build from the previous quarter. The year-over-year increase in total assets was primarily due to organic loan growth, PPP loan growth and purchases of investment securities.

Total gross loans at September 30, 2020 were $2.26 billion, an increase of $65.5 million, or 3.0%, over total gross loans of $2.19 billion at June 30, 2020, and an increase of $413.0 million, or 22.4%, over total gross loans of $1.85 billion at September 30, 2019. Year-to-date annualized loan growth, excluding $181.6 million of PPP loans, was 11.6% as of September 30, 2020.

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

Total deposits at September 30, 2020 were $2.27 billion, an increase of $31.0 million, or 1.4%, over total deposits of $2.24 billion at June 30, 2020, and an increase of $470.8 million, or 26.1%, over total deposits of $1.80 billion at September 30, 2019. Deposit growth in the third quarter of 2020 was primarily due to an increase in noninterest bearing and interest bearing transaction deposits, offset partially by a decline in savings and money market and time deposits. The growth in noninterest bearing and interest bearing transaction deposits is 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.

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

Total shareholders’ equity at September 30, 2020 was $265.4 million, an increase of $8.2 million, or 3.2%, over total shareholders’ equity of $257.2 million at June 30, 2020, and an increase of $29.4 million, or 12.4%, over total shareholders’ equity of $236.1 million at September 30, 2019. The linked-quarter increase was due to net income retained and an increase in unrealized gains in the securities portfolio, partially offset by stock repurchases made under the Company’s stock repurchase program. The year-over-year increase was due to net income retained, partially offset by stock repurchases made in the first and third quarters of 2020 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 buyback program late in the third quarter of 2020. The Company remains committed to maintaining strong capital levels while enhancing shareholder value as it strategically executes its stock buyback program in this fluid economic environment. During the third quarter of 2020, the Company repurchased 137,984 shares of its common stock. Shares were repurchased at a weighted average price of $9.39 for a total of $1.3 million.

Tangible book value per share, a non-GAAP financial measure, was $9.13 as of September 30, 2020, an increase of 3.7% from $8.80 as of June 30, 2020, and an increase of 13.0% from $8.08 as of September 30, 2019.

Asset Quality

The Company has not yet witnessed direct impacts of the COVID-19 pandemic in the Company’s asset quality metrics; however, management believes that the economic uncertainty that exists may begin to negatively impact the portfolio in future quarters. Annualized net charge-offs (recoveries) as a percent of average loans for the third quarter of 2020 were 0.00%, compared to (0.01)% for the second quarter of 2020, and 0.03% for the third quarter of 2019. At September 30, 2020, the Company’s nonperforming assets, which include nonaccrual loans, loans past due 90 days and still accruing, and foreclosed assets, were $433,000, or 0.02% of total assets, as compared to $602,000, or 0.02% of total assets at June 30, 2020, and $828,000 or 0.04% of total assets at September 30, 2019.

The Company has increased oversight and analysis of all segments within 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. With the change in economic conditions and the uncertain duration of the COVID-19 pandemic, the Company’s portfolio is expected to be negatively impacted and management anticipates that delinquencies and charge-offs could rise in future periods. Loans that have potential weaknesses that warrant a watchlist risk rating at September 30, 2020, were $50.9 million, compared to $45.7 million at June 30, 2020. As the COVID-19 pandemic continues to evolve, the length and extent of the economic contraction may result in further watchlist or adverse classifications in the loan portfolio. Loans that warrant a substandard risk rating at September 30, 2020 were $16.1 million, compared to $3.7 million at June 30, 2020.

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

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; 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.