Bridgewater Bancshares, Inc. Announces Fourth Quarter 2020 Financial Results

Bridgewater Bancshares, Inc. (Nasdaq: BWB) (the Company), the parent company of Bridgewater Bank (the Bank), today announced net income of $5.0 million, or $0.17 per diluted common share, for the fourth quarter of 2020, compared to net income of $7.2 million, or $0.25 per diluted common share, for the third quarter of 2020, and net income of $8.6 million, or $0.29 per diluted common share, for the fourth quarter of 2019. The net income decline in the fourth quarter of 2020 was primarily attributable to FHLB prepayment fees of $5.6 million.

“2020 has been an unprecedented year on many levels but despite the challenges faced, the Company excelled through adversity. With the team’s steadfast commitment, we grew BWB’s client base, fast tracked technology initiatives, meaningfully lowered our cost of funds, and delivered double-digit growth. We are extremely proud of the team’s unwavering dedication to serve our clients, our shareholders, and our communities in this volatile environment,” commented Chairman, Chief Executive Officer, and President, Jerry Baack. “This quarter’s results include a significant non-recurring charge of $5.6 million related to prepayment penalties on the early retirement of FHLB advances. Given the historically low interest rate environment and extraordinary deposit inflows during the year, the Company took the opportunity to remove inefficient, longer term FHLB advances from the balance sheet. While this non-recurring charge overshadows strong, near-term operating results, this strategic action better orients the balance sheet, improves the net interest margin outlook and future earnings power of the Company. As we look to 2021, we remain nimble and well positioned to perform in the current environment with strong core earnings, capital levels well in excess of regulatory thresholds, adequate loan loss reserves, and solid credit quality.”

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

Linked-Quarter Highlights

• The fourth quarter results included $5.6 million of prepayment fees related to the early extinguishment of $69.0 million of FHLB term advances, which had a weighted average rate of 2.85%.
• Net income for the fourth quarter of 2020 totaled $9.3 million, or $0.32 per diluted common share, when excluding the FHLB prepayment fees and tax-adjusting at an effective rate of 23.8%.
• Annualized return on average assets (ROA) and annualized return on average common equity (ROE) for the fourth quarter of 2020 were 1.31% and 13.86%, respectively, when excluding the FHLB prepayment fees and tax-adjusting at an effective rate of 23.8%.
• Annualized pre-provision net revenue return on average assets (PPNR ROA), a non-GAAP financial measure, was 2.30% for the fourth quarter of 2020, compared to 1.94% for the third quarter of 2020.
• Net interest margin increased 33 basis points from 3.28% for the third quarter of 2020 to 3.61% for the fourth quarter of 2020, primarily due to the accelerated recognition of Paycheck Protection Program (PPP) loan fees and continued reduction in the cost of interest bearing liabilities.
• Cost of interest bearing deposits declined 25 basis points to 0.96% in the fourth quarter of 2020, compared to 1.21% in the third 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 36.6% for the fourth quarter of 2020, compared to 41.7% for the third quarter of 2020.
• A loan loss provision of $3.9 million was recorded for the fourth quarter of 2020, primarily due to increased allocations for economic factors associated with the COVID-19 pandemic and strong organic loan growth. The allowance for loan losses to total loans was 1.50% at December 31, 2020, compared to 1.39% at September 30, 2020. The allowance for loan losses to total loans, excluding $138.5 million of PPP loans, was 1.59% at December 31, 2020, compared to 1.51% at September 30, 2020.
• Loan modification balances as a percent of totals loans, excluding PPP loans, decreased from 9.2% at the end of the third quarter of 2020 to 3.0% at the end of the fourth quarter of 2020.
• The Company repurchased 624,933 shares of common stock at a weighted average price of $11.18 for a total of $7.0 million during the fourth quarter of 2020.

Annual 2020 Highlights

• Diluted earnings per common share for the year ended December 31, 2020 were $0.93, compared to $1.05 for the year ended December 31, 2019. Diluted earnings per common share for the year ended December 31, 2020 were $1.12, when excluding the $7.0 million of FHLB prepayment fees and tax-adjusting at an effective tax rate of 23.8%.
• Pre-provision net revenue, a non-GAAP financial measure, was $54.7 million for the year ended December 31, 2020, an increase of 25.1%, compared to $43.7 million for the year ended December 31, 2019. PPNR ROA, a non-GAAP financial measure, was 2.09% for the year ended December 31, 2020, compared to 2.07% for the year ended December 31, 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 40.5% for the year ended December 31, 2020, compared to 43.3% for the year ended December 31, 2019.
• Extinguished $94.0 million of FHLB term advances with a weighted average rate of 2.83%, incurring $7.0 million of prepayment fees.
• Gross loans increased $414.4 million at December 31, 2020, or 21.7%, compared to December 31, 2019. Excluding $138.5 million of PPP loans, gross loans increased 14.4%, at December 31, 2020, compared to December 31, 2019.
• Deposits increased $678.3 million at December 31, 2020, or 37.2%, compared to December 31, 2019. Excluding brokered deposits and remaining PPP loan funds, deposits increased 27.8% at December 31, 2020, compared to December 31, 2019.
• Tangible book value per share, a non-GAAP financial measure, increased 11.8%, or $0.98, to $9.31 at December 31, 2020, compared to $8.33 at December 31, 2019.
• Net loan charge-offs as a percentage of average loans were 0.02% for the year ended December 31, 2020, compared to 0.01% for the year ended December 31, 2019.
• The ratio of nonperforming assets to total assets was 0.03% at December 31, 2020, compared to 0.02% at December 31, 2019.

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. 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.

The Company’s primary banking market area is in the Minneapolis-St.Paul-Bloomington, MN-WI Metropolitan Statistical Area. In November 2020, Minnesota’s Governor issued a number of new restrictions impacting business and gatherings due to a significant increase in positive COVID-19 cases within the state. The new restrictions closed gyms and entertainment spaces and limited restaurants to take-out operations only. In January 2021, the November restrictions were eased on restaurants, gyms and entertainment spaces to allow the businesses to operate with limited capacity. The Company’s branch operations, including openings and any restrictions, continue to operate in compliance with fluid statewide mandates, maintaining the safety of employees and clients as the utmost priority, all the while attempting to ensure clients' diverse banking needs are met.

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 December 31, 2020, PPP principal loan balances totaled $138.5 million, compared to $181.6 million at September 30, 2020. Beginning in October 2020, the SBA began forgiving PPP loans. During the fourth quarter of 2020, the Company recognized $1.7 million in PPP deferred origination fees, including approximately $1.1 million from the forgiveness of $43.1 million of loans.

The SBA reopened the PPP loan program 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 (Economic Aid Act). The Company intends to participate in originating additional PPP loans under the Economic Aid Act through the new application deadline of March 31, 2021. As of January 25, 2021, the Company has submitted 203 loans totaling $29.8 million to the SBA under the reopened program.

The Company continues to monitor the loan portfolio and work 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, interest-only, 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. New modification activity was limited in the fourth quarter of 2020. The Company had 26 modified loans totaling $66.6 million outstanding as of December 31, 2020, representing 3.0% of the total loan portfolio, excluding PPP loans.

The following table presents a rollforward of loan modification activity, by modification type, from September 30, 2020 to December 31, 2020:

The following table presents a summary of active loan modifications, by loan segment and modification type, at December 31, 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.

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.

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

Income Statement

Net Interest Income

Net interest income was $24.8 million for the fourth quarter of 2020, an increase of $3.2 million, or 14.6%, from $21.7 million in the third quarter of 2020, and an increase of $4.9 million, or 24.7%, from $19.9 million in the fourth quarter of 2019. 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 $2.76 billion for the fourth quarter of 2020, an increase of $103.7 million, or 3.9%, from $2.66 billion for the third quarter of 2020, and an increase of $570.5 million, or 26.1%, from $2.19 billion for the fourth quarter of 2019. This increase in average interest earning assets during both periods was primarily due to continued 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 fourth quarter of 2020 was 3.61%, a 33 basis point increase from 3.28% in the third quarter of 2020, and a 4 basis point decrease from 3.65% in the fourth quarter of 2019.

While the origination volume of PPP loans earning 1.00% negatively impacted net interest margin, the recognition of fees associated with the originations benefited net interest margin in the fourth quarter. The SBA began forgiving PPP loans in October of 2020, which accelerated the recognition of PPP fees in the fourth quarter of 2020. The Company recognized $1.7 million of PPP origination fees during the fourth quarter of 2020, compared to $716,000 during the third quarter of 2020. The elevated fee recognition is illustrated in the 5.05% PPP loan yield for the fourth quarter of 2020 compared to 2.57% for the third quarter of 2020. Even with headwinds surrounding earning asset yields, the Company was encouraged by another quarter of meaningful deposit repricing that ultimately translated to net interest margin expansion. The cost of total deposits declined 18 basis points to 0.69% in the fourth quarter of 2020, compared to 0.87% in the third quarter of 2020.

Given the volatility of 2020 and competing dynamics on both sides of the balance sheet, the Company was pleased to report only a 4 basis point decline in the net interest margin on a year-over-year basis. 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 compressed the net interest margin. Furthermore, the Company’s subordinated debenture issuance and the PPP loan origination volumes, both occurring during the second quarter of 2020, had a negative impact on the net interest margin during the year.

Interest income was $30.7 million for the fourth quarter of 2020, an increase of $2.2 million, or 7.7%, from $28.5 million in the third quarter of 2020, and an increase of $3.3 million, or 12.0%, from $27.4 million in the fourth quarter of 2019. The yield on interest earning assets (on a fully tax-equivalent basis) was 4.46% in the fourth quarter of 2020, compared to 4.30% in the third quarter of 2020, and 5.01% in the fourth quarter of 2019. The linked-quarter increase in the yield on interest earning assets was due primarily to the recognition of $1.7 million of PPP loan origination fees, offset partially by lower market rates resulting in lower loan and security yields. The year-over-year decrease in the yield on interest earning assets was primarily 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 due to extraordinary deposit inflows.

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 4.87% in the fourth quarter of 2020, which was 6 basis points lower than 4.93% in the third quarter of 2020, and 46 basis points lower than 5.33% in the fourth quarter of 2019. While loan fees have maintained a 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 $5.9 million for the fourth quarter of 2020, a decrease of $956,000, or 14.0%, from $6.8 million in the third quarter of 2020, and a decrease of $1.6 million, or 21.8%, from $7.5 million in the fourth quarter of 2019. The cost of interest bearing liabilities declined 26 basis points on a linked-quarter basis from 1.50% in the third quarter of 2020 to 1.24% in the fourth quarter of 2020, primarily due to lower rates paid on deposits. On a year-over-year basis, the cost of interest bearing liabilities decreased 72 basis points from 1.96% in the fourth quarter of 2019 to 1.24% in the fourth quarter of 2020 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 $4.1 million for the fourth quarter of 2020, a decrease of $761,000, or 15.7%, from $4.8 million in the third quarter of 2020, and a decrease of $2.0 million, or 32.7%, from $6.1 million in the fourth quarter of 2019. The cost of total deposits declined 18 basis points on a linked-quarter basis from 0.87% in the third quarter of 2020, and declined 65 basis points on a year-over-year basis from 1.34% in the fourth quarter of 2019, to 0.69% in the fourth 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 continued deposit repricing opportunities in the future. Moreover, the significant FHLB de-leveraging strategy executed in the fourth quarter of 2020 will begin to manifest lower interest bearing liability costs in subsequent quarters.

A summary of the Company’s average balances, interest yields and rates, and net interest margin for the three months ended December 31, 2020, September 30, 2020, and December 31, 2019 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 $3.9 million for the fourth quarter of 2020, an increase of $150,000 from $3.8 million for the third quarter of 2020, and an increase of $3.3 million from $600,000 for the fourth quarter of 2019. The allowance for loan losses to total loans was 1.50% at December 31, 2020, compared to 1.39% at September 30, 2020, and 1.18% at December 31, 2019. The allowance for loan losses to total loans, excluding $138.5 million of PPP loans, was 1.59% at December 31, 2020. The continued reserve build in the fourth quarter of 2020 was primarily attributable to growth of the loan portfolio, economic uncertainties, and evolving risks driven by the impacts 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 $986,000 for the fourth quarter of 2020, a decrease of $171,000 from $1.2 million for the third quarter of 2020, and a decrease of $126,000 from $1.1 million for the fourth quarter of 2019. The linked-quarter decrease was primarily due to decreased gains on sales of securities, offset partially by increased customer service fees. The year-over-year decrease was primarily due to decreased swap fees, partially offset by increased letter of credit fees and customer service fees.

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

Noninterest Expense

Noninterest expense was $15.3 million for the fourth quarter of 2020, an increase of $5.6 million from $9.7 million for the third quarter of 2020, and an increase of $4.8 million from $10.5 million for the fourth quarter of 2019. The linked-quarter increase was primarily due to $5.6 million of prepayment fees associated with the extinguishment of $69.0 million of FHLB term advances, as well as increases in FDIC insurance assessment and occupancy and equipment expenses, partially offset by a decrease in salaries and employee benefits. The year-over-year increase was primarily attributable to increased data processing, professional and consulting fees and FHLB advance prepayment fees, offset partially by decreased marketing and advertising expenses and lower amortization of tax credit investments.

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

The Company had 183 full-time equivalent employees at December 31, 2020, compared to 180 employees at September 30, 2020, and 160 employees at December 31, 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 59.0% for the fourth quarter of 2020, compared to 42.3% for the third quarter of 2020, and 49.6% for the fourth quarter of 2019. Excluding the impact of certain non-routine income and expenses, the adjusted efficiency ratio, a non-GAAP financial measure, was 36.6% for the fourth quarter of 2020, 41.7% for the third quarter of 2020 and 44.3% for the fourth 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 fourth quarter of 2020 was 25.3%, an increase from 23.8% for the third quarter of 2020, and an increase from 13.9% for the fourth quarter of 2019. The higher effective combined rate in the fourth quarter of 2020 compared to the fourth quarter of 2019 was primarily due to fewer tax credits being recognized. The effective combined federal and state income tax rate was 23.8% for the year ended December 31, 2020, compared to 18.1% for the year ended December 31, 2019.

Balance Sheet

Total assets at December 31, 2020 were $2.93 billion, a 5.5% increase from $2.77 billion at September 30, 2020, and a 29.0% increase from $2.27 billion at December 31, 2019. The linked-quarter increase in total assets was primarily due to organic loan growth, purchases of investment securities, and excess cash balances linked to extraordinary deposit growth at year-end. 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 December 31, 2020 were $2.33 billion, an increase of $67.2 million, or 3.0%, over total gross loans of $2.26 billion at September 30, 2020, and an increase of $414.4 million, or 21.7%, over total gross loans of $1.91 billion at December 31, 2019. The linked-quarter increase of $67.2 million was net of $43.1 million in PPP forgiven loans during the quarter. When excluding the PPP loans altogether, gross loans grew $110.3 million, or 21.2% 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 December 31, 2020 were $2.50 billion, an increase of $228.6 million, or 10.1%, over total deposits of $2.27 billion at September 30, 2020, and an increase of $678.3 million, or 37.2%, over total deposits of $1.82 billion at December 31, 2019. Deposit growth in the fourth quarter of 2020 was primarily due to an increase in savings and money market deposits, offset partially by a decline in noninterest bearing and time deposits. The growth in savings and money market 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 December 31, 2020 and September 30, 2020 was $265.4 million, an increase of $20.6 million, or 8.4%, over total shareholders’ equity of $244.8 million at December 31, 2019. The linked-quarter balances remained the same due to stock repurchases made under the Company’s stock repurchase program offset by net income retained and an increase in unrealized gains in the securities portfolio. The year-over-year increase was due to net income retained, partially offset by stock repurchases made throughout 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 repurchase program late in the third quarter of 2020. On October 27, 2020, the Company’s Board of Directors approved a $15.0 million increase to the Company’s previously announced stock repurchase program, increasing the amount of common stock that may be repurchased from $25.0 million to up to $40.0 million for the duration of the program, which is approved to run through October 27, 2022. 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 fourth quarter of 2020, the Company repurchased 624,933 shares of its common stock, or approximately 2% of the basic weighted average shares outstanding during the quarter. Shares were repurchased at a weighted average price of $11.18 for a total of $7.0 million. At December 31, 2020, the remaining amount that could be used to repurchase shares under the stock repurchase program was $14.7 million.

Tangible book value per share, a non-GAAP financial measure, was $9.31 as of December 31, 2020, an increase of 2.0% from $9.13 as of September 30, 2020, and an increase of 11.8% from $8.33 as of December 31, 2019.

Asset Quality

Annualized net charge-offs as a percent of average loans for the fourth quarter of 2020 were 0.08%, compared to 0.00% for the third quarter of 2020, and 0.04% for the fourth quarter of 2019. At December 31, 2020, the Company’s nonperforming assets, which include nonaccrual loans, loans past due 90 days and still accruing, and foreclosed assets, were $775,000, or 0.03% of total assets, as compared to $433,000, or 0.02% of total assets at September 30, 2020, and $461,000 or 0.02% of total assets at December 31, 2019.

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. 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 December 31, 2020, were $44.8 million, compared to $50.9 million at September 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 warranted a substandard risk rating at December 31, 2020 were $15.2 million, compared to $16.1 million at September 30, 2020.

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