Bridgewater Bancshares, Inc. (Nasdaq: BWB) (the Company), the parent company of Bridgewater Bank (the Bank), today announced net income of $12.5 million for the fourth quarter of 2021, an 8.7% increase over net income of $11.5 million for the third quarter of 2021, and a 151.3% increase over net income of $5.0 million for the fourth quarter of 2020. Net income per diluted common share for the fourth quarter of 2021 was $0.39, a 1.2% decrease compared to $0.40 per diluted common share for the third quarter of 2021, and a 126.1% increase compared to $0.17 per diluted common share for the same period in 2020.

“Bridgewater reported a fourth consecutive quarter of record net income driven by the continuation of many of the same trends and momentum we created throughout 2021,” said Chairman, Chief Executive Officer, and President, Jerry Baack. “During the quarter, we continued to generate strong loan production and gather high-quality deposits across the Twin Cities market, leading to robust balance sheet growth. This level of consistent growth in today’s environment, along with a business model operating with a low 40% adjusted efficiency ratio, stable net interest margin and strong asset quality, remain key differentiators for us. As we look ahead to 2022, we expect to continue to leverage the ongoing M&A-related market disruption and our strengthening brand to drive additional balance sheet and revenue growth; make proactive investments in business scalability, automation and back-office functions; and maintain our highly efficient operating strategy. With a hard-working team of talented professionals supporting our clients every day and a strong capital and liquidity position, we are poised to build on our momentum into 2022 and beyond.”

The Company today also announced that its Board of Directors declared a quarterly cash dividend on its 5.875% Non-Cumulative Perpetual Preferred Stock, Series A ("Series A Preferred Stock"). The quarterly cash dividend of $36.72 per share, equivalent to $0.3672 per depositary share, each representing a 1/100th interest in a share of the Series A Preferred Stock (Nasdaq: BWBBP), is payable on March 1, 2022 to shareholders of record of the Series A Preferred Stock at the close of business on February 15, 2022.

Fourth Quarter 2021 Financial Results

Fourth Quarter 2021 Highlights

• Diluted earnings per common share were $0.39 for the fourth quarter of 2021, compared to $0.40 per common share for the third quarter of 2021.

• Payment of the Company’s first quarterly preferred stock dividend negatively impacted diluted earnings per common share by $0.04 in the fourth quarter of 2021, compared to no preferred stock dividend payment in the third quarter of 2021.

• Annualized return on average assets (ROA) and annualized return on average shareholders’ equity (ROE) for the fourth quarter of 2021 were 1.46% and 13.27%, compared to ROA and ROE of 1.37% and 13.81%, respectively, for the third quarter of 2021. Annualized return on average tangible common equity, a non-GAAP financial measure, was 14.78% for the fourth quarter of 2021, compared to 15.47% for the third quarter of 2021.

• Pre-provision net revenue (PPNR), a non-GAAP financial measure, was $18.1 million for the fourth quarter of 2021, compared to $17.5 million for the third quarter of 2021. PPNR ROA, a non-GAAP financial measure, was 2.11% for the fourth quarter of 2021, compared to 2.09% for the third quarter of 2021.

• Gross loans increased $107.5 million in the fourth quarter of 2021, or 15.7% annualized, compared to the third quarter of 2021. Gross loans, excluding Paycheck Protection Program (PPP) loans, increased $135.5 million in the fourth quarter of 2021, or 20.2% annualized, compared to the third quarter of 2021.

• Deposits increased $92.1 million in the fourth quarter of 2021, or 12.8% annualized, compared to the third quarter of 2021.

• Net interest margin (on a fully tax-equivalent basis) was 3.51% for the fourth quarter of 2021, compared to 3.54% in the third quarter of 2021. Core net interest margin (on a fully tax-equivalent basis), a non-GAAP financial measure which excludes the impact of loan fees and PPP balances, interest, and fees, expanded 3 basis points from 3.22% in the third quarter of 2021 to 3.25% in the fourth quarter of 2021.

• The adjusted efficiency ratio, a non-GAAP financial measure which excludes the impact of certain non-routine income and expenses from noninterest expense, was 40.3% for the fourth quarter of 2021, compared to 41.5% for the third quarter of 2021.

• A loan loss provision of $1.2 million was recorded in the fourth quarter of 2021 to support strong organic loan growth. The allowance for loan losses to total loans was 1.42% at December 31, 2021, compared to 1.43% at September 30, 2021. The allowance for loan losses to total loans, excluding PPP loans, was 1.43% at December 31, 2021, compared to 1.46% at September 30, 2021.

• Annualized net loan charge-offs as a percentage of average loans were 0.00% for both the fourth quarter of 2021, and the third quarter of 2021.

• Tangible book value per share, a non-GAAP financial measure, increased $0.36, or 13.6% annualized, to $10.98 at December 31, 2021, compared to $10.62 at September 30, 2021.

Annual 2021 Highlights

• Diluted earnings per common share for the year ended December 31, 2021 were $1.54, a 64.8% increase, compared to $0.93 for the year ended December 31, 2020.

• PPNR, a non-GAAP financial measure, was $67.1 million for the year ended December 31, 2021, an increase of 22.7%, compared to $54.7 million for the year ended December 31, 2020. PPNR ROA, a non-GAAP financial measure, was 2.10% for the year ended December 31, 2021, compared to 2.09% for the year ended December 31, 2020.

• Gross loans increased $493.0 million at December 31, 2021, or 21.2%, compared to December 31, 2020. Excluding PPP loans, gross loans increased 27.7%, at December 31, 2021, compared to December 31, 2020.

• Deposits increased $444.6 million at December 31, 2021, or 17.8%, compared to December 31, 2020.

• Net interest margin (on a fully tax-equivalent basis) was 3.54% for the year ended December 31, 2021, compared to 3.46% for the year ended December 31, 2020. Core net interest margin (on a fully tax-equivalent basis), a non-GAAP financial measure, for the year ended December 31, 2021 was 3.28%, compared to 3.25% for the year ended December 31, 2020.

• The adjusted efficiency ratio, a non-GAAP financial measure, was 41.0% for the year ended December 31, 2021, compared to 40.5% for the year ended December 31, 2020.

• Net loan charge-offs as a percentage of average loans were 0.00% for the year ended December 31, 2021, compared to 0.02% for the year ended December 31, 2020.

• The ratio of nonperforming assets to total assets was 0.02% at December 31, 2021, compared to 0.03% at December 31, 2020.

• Tangible book value per share, a non-GAAP financial measure, increased 17.9%, or $1.66, to $10.98 at December 31, 2021, compared to $9.31 at December 31, 2020.

Key Financial Measures

Selected Financial Data

Income Statement

Net Interest Income

Net interest income was $29.2 million for the fourth quarter of 2021, an increase of $480,000, or 1.7%, from $28.7 million in the third quarter of 2021, and an increase of $4.3 million, or 17.4%, from $24.8 million in the fourth 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 and lower rates paid on deposits, offset partially by declining yields on loans. Average interest earning assets were $3.32 billion for the fourth quarter of 2021, an increase of $86.3 million, or 2.7%, from $3.23 billion for the third quarter of 2021, and an increase of $561.1 million, or 20.3%, from $2.76 billion for the fourth quarter of 2020. The linked-quarter increase in average interest earning assets was primarily due to continued strong organic growth in the loan portfolio, offset partially by the payoff of PPP loans and the reduction of cash balances. The year-over-year increase in average interest earning assets was primarily due to increased cash balances, continued purchases of investment securities, and strong organic growth in the loan portfolio, offset partially by the payoff of PPP loans.

Net interest margin (on a fully tax-equivalent basis) for the fourth quarter of 2021 was 3.51%, a 3 basis point decrease from 3.54% in the third quarter of 2021, and a 10 basis point decrease from 3.61% in the fourth quarter of 2020. Core net interest margin (on a fully tax-equivalent basis), a non-GAAP financial measure which excludes the impact of loan fees and PPP balances, interest, and fees, for the fourth quarter of 2021 was 3.25%, a 3 basis point increase from 3.22% in the third quarter of 2021, and a 4 basis point decline from 3.29% in the fourth quarter of 2020.

As the PPP loan portfolio pays down, the recognition of fees associated with the originations has benefited net interest margin for each of the past four quarters. The SBA has been forgiving PPP loans, which has accelerated the recognition of PPP fees starting in the fourth quarter of 2020 and continuing through the fourth quarter of 2021. The Company recognized $958,000 of PPP origination fees during the fourth quarter of 2021, compared to $1.6 million during the third quarter of 2021. The elevated fee recognition is illustrated in the 10.51% PPP loan yield for the fourth quarter of 2021, compared to 9.15% for the third quarter of 2021. Remaining PPP origination fees to be recognized as of December 31, 2021 were $898,000.

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

Interest income was $33.8 million for the fourth quarter of 2021, an increase of $258,000, or 0.8%, from $33.5 million in the third quarter of 2021, and an increase of $3.1 million, or 10.0%, from $30.7 million in the fourth quarter of 2020. The yield on interest earning assets (on a fully tax-equivalent basis) was 4.06% in the fourth quarter of 2021, compared to 4.14% in the third quarter of 2021, and 4.46% in the fourth quarter of 2020. The linked-quarter decrease in the yield on interest earning assets was primarily due to the historically low interest rate environment resulting in a lower core loan yield, as well as lower PPP origination fees recognized during the period. The year-over-year decline in the yield on interest earning assets was primarily due to excess cash balances and the historically low interest rate environment resulting in lower loan and security yields.

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 4.41% in the fourth quarter of 2021, which was 10 basis points lower than 4.51% in the third quarter of 2021, and 46 basis points lower than 4.87% in the fourth 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 $4.6 million for the fourth quarter of 2021, a decrease of $222,000, or 4.6%, from $4.8 million in the third quarter of 2021, and a decrease of $1.2 million, or 21.1%, from $5.9 million in the fourth quarter of 2020. The cost of interest bearing liabilities declined 2 basis points on a linked-quarter basis from 0.88% in the third quarter of 2021 to 0.86% in the fourth quarter of 2021, primarily due to lower rates paid on deposits. On a year-over-year basis, the cost of interest bearing liabilities decreased 38 basis points from 1.24% in the fourth quarter of 2020 to 0.86% in the fourth quarter of 2021, primarily due to lower rates paid on deposits, the payoff of the Company’s notes payable, and the early extinguishment of $94.0 million of longer term FHLB advances, offset partially by strong growth of interest bearing deposits and additional subordinated debentures.

Interest expense on deposits was $3.2 million for the fourth quarter of 2021, a decrease of $176,000, or 5.2%, from $3.4 million in the third quarter of 2021, and a decrease of $838,000, or 20.5%, from $4.1 million in the fourth quarter of 2020. The cost of total deposits declined 3 basis points on a linked-quarter basis from 0.48% in the third quarter of 2021, and declined 24 basis points on a year-over-year basis from 0.69% in the fourth quarter of 2020, to 0.45% in the fourth quarter of 2021, primarily due to deposit rate cuts consistent with a lower rate environment and the continued downward repricing of time deposits.

A summary of the Company’s average balances, interest yields and rates, and net interest margin for the three months ended December 31, 2021, September 30, 2021, and December 31, 2020 is as follows:

Provision for Loan Losses

The provision for loan losses was $1.2 million for the fourth quarter of 2021, a decrease of $150,000 from $1.3 million for the third quarter of 2021, and a decrease of $2.8 million from $3.9 million for the fourth quarter of 2020. The provision recorded in the fourth quarter of 2021 was primarily attributable to growth of the loan portfolio. The allowance for loan losses to total loans was 1.42% at December 31, 2021, compared to 1.43% at September 30, 2021, and 1.50% at December 31, 2020. The allowance for loan losses to total loans, excluding PPP loans, was 1.43% at December 31, 2021, compared to 1.46% at September 30, 2021, and 1.59% at December 31, 2020.

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 $1.3 million for the fourth quarter of 2021, a decrease of $122,000 from $1.4 million for the third quarter of 2021, and an increase of $302,000 from $986,000 for the fourth quarter of 2020. The linked-quarter decrease was primarily due to decreased gains on sales of securities and letter of credit fees. The year-over-year increase was primarily due to increased letter of credit fees and bank-owned life insurance income.

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

Noninterest Expense

Noninterest expense was $12.5 million for the fourth quarter of 2021, a decrease of $777,000 from $13.2 million for the third quarter of 2021, and a decrease of $2.8 million from $15.3 million for the fourth quarter of 2020. The linked-quarter decrease was primarily due to lower salaries and employee benefits related to higher bonus accruals in the third quarter of 2021, and $582,000 of debt prepayment fees associated with a partial early redemption of $11.3 million of subordinated debentures issued in July 2017 that occurred in the third quarter of 2021. The year-over-year decrease was primarily attributable to $5.6 million of debt prepayment fees associated with the early 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, and marketing and advertising expenses.

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

The Company continues to add key talent across the organization, reaching 220 full-time equivalent employees at December 31, 2021, compared to 219 employees at September 30, 2021, and 183 employees at December 31, 2020.

The efficiency ratio, a non-GAAP financial measure, was 40.8% for the fourth quarter of 2021, compared to 43.9% for the third quarter of 2021, and 59.0% for the fourth quarter of 2020. Excluding the impact of certain non-routine income and expenses, the adjusted efficiency ratio, a non-GAAP financial measure, was 40.3% for the fourth quarter of 2021, 41.5% for the third quarter of 2021 and 36.6% for the fourth quarter of 2020. The efficiencies of the Company’s “branch-light” model have positioned the Company well, and going forward, provide more flexibility for the Company to make significant 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 2021 was 25.7%, a decrease from 26.0% for the third quarter of 2021 and an increase from 25.3% for the fourth quarter of 2020. The effective combined federal and state income tax rate for the year ended December 31, 2021 was 25.8%, compared to 23.8% for the year ended December 31, 2020.

Balance Sheet

Total assets at December 31, 2021 were $3.48 billion, a 2.6% increase from $3.39 billion at September 30, 2021, and an 18.8% increase from $2.93 billion at December 31, 2020. The linked-quarter increase in total assets was primarily due to strong organic loan growth, offset partially by a decrease in cash and cash equivalents. The year-over-year increase in total assets was primarily due to robust organic loan growth, as well as the continued purchases of investment securities.

Total gross loans at December 31, 2021 were $2.82 billion, an increase of $107.5 million, or 4.0%, over total gross loans of $2.71 billion at September 30, 2021, and an increase of $493.0 million, or 21.2%, over total gross loans of $2.33 billion at December 31, 2020. The increase in the loan portfolio during the fourth quarter of 2021 was primarily due to growth in the construction and land development, multifamily and CRE nonowner occupied segments, offset partially by the payoff of PPP loans. When excluding PPP loans, gross loans grew $135.5 million during the fourth quarter of 2021, or 20.2% on an annualized basis. The Company's continued strong loan growth has been driven by the expansion of its talented lending teams, PPP-related new client acquisitions, the strong, growing brand of the Bank in the Twin Cities market and the M&A-related market disruption in the Twin Cities resulting in client and banker acquisition opportunities.

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