Bridgewater Bancshares, Inc. (Nasdaq: BWB) (the Company), the parent company of Bridgewater Bank (the Bank), today announced net income of $11.0 million for the second quarter of 2021, a 3.0% increase over net income of $10.7 million for the first quarter of 2021, and a 44.7% increase over net income of $7.6 million for the second quarter of 2020. Net income per diluted common share for the second quarter of 2021 was $0.38, a 2.4% increase compared to $0.37 per diluted common share for the first quarter of 2021, and a 44.9% increase, compared to $0.26 per diluted common share for the same period in 2020.

“Bridgewater reported another quarter of record net income driven by robust organic loan growth, superb asset quality and a highly efficient business model,” said Chairman, Chief Executive Officer, and President, Jerry Baack. “Our unique ability to generate profitable loan growth in the current market has been the result of client acquisition opportunities from M&A-related market disruption, the expansion of our lending teams through opportunistic hires, and our strong brand and service model in the Twin Cities. This loan growth, along with a stabilizing core net interest margin, has led to continued revenue growth, all while maintaining consistently low levels of net charge-offs and nonperforming assets. With our proven growth engine and an efficiency ratio among the lowest in the industry, we believe we are well-positioned to continue gaining market share in the attractive Twin Cities market.”

Second Quarter 2021 Financial Results

Second Quarter 2021 Highlights

• Diluted earnings per common share were $0.38 for the second quarter of 2021, compared to $0.37 per common share for the first quarter of 2021.

• Annualized return on average assets (ROA) and annualized return on average common equity (ROE) for the second quarter of 2021 were 1.43% and 15.40%, compared to ROA and ROE of 1.47% and 15.87%, respectively, for the first quarter of 2021.

• Pre-provision net revenue (PPNR), a non-GAAP financial measure, was $15.9 million for the second quarter of 2021, an increase of 1.6%, compared to $15.6 million from the first quarter of 2021. PPNR ROA, a non-GAAP financial measure, was 2.07% for the second quarter of 2021, compared to 2.15% for the first quarter of 2021.

• Gross loans increased $168.1 million in the second quarter of 2021, or 27.8% annualized, compared to the first quarter of 2021. Gross loans, excluding Paycheck Protection Program (PPP) loans, increased $232.2 million in the second quarter of 2021, or 41.2% annualized, compared to the first quarter of 2021.

• Deposits increased $82.3 million in the second quarter of 2021, or 12.5% annualized, compared to the first quarter of 2021.

• Net interest margin was 3.52% for the second quarter of 2021, compared to 3.60% in the first 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 41.5% for the second quarter of 2021, compared to 40.7% for the first quarter of 2021.

• A loan loss provision of $1.6 million was recorded in the second quarter of 2021 to support strong organic loan growth. The allowance for loan losses to total loans was 1.45% at June 30, 2021, compared to 1.48% at March 31, 2021. The allowance for loan losses to total loans, excluding PPP loans, was 1.50% at June 30, 2021, compared to 1.59% at March 31, 2021.

• Annualized net loan charge-offs (recoveries) as a percentage of average loans were 0.00% for the second quarter of 2021, compared to (0.01)% for the first quarter of 2021.

• Tangible book value per share, a non-GAAP financial measure, increased 4.3%, or $0.42, to $10.22 at June 30, 2021, compared to $9.80 at March 31, 2021.

• The Company purchased $25.0 million of bank owned life insurance policies on certain officers.

Recent Developments

On July 8, 2021, the Company announced the completion of a private placement of $30.0 million in aggregate principal amount of 3.25% fixed-to-floating rate subordinated notes due 2031. The Company intends to use the net proceeds of the private placement for general corporate purposes, including support for organic growth plans, support for bank level capital ratios and possible redemption or repurchase of currently outstanding indebtedness.

Key Financial Measures

Selected Financial Data

Income Statement

Net Interest Income

Net interest income was $26.3 million for the second quarter of 2021, an increase of $893,000, or 3.5%, from $25.4 million in the first quarter of 2021, and an increase of $4.9 million, or 23.2%, from $21.3 million in the second 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 $3.02 billion for the second quarter of 2021, an increase of $136.4 million, or 4.7%, from $2.88 billion for the first quarter of 2021, and an increase of $452.1 million, or 17.6%, from $2.57 billion for the second quarter of 2020. The linked-quarter increase in average interest earning assets was primarily due to robust organic growth in the loan portfolio. The year-over-year increase in average interest earning assets was primarily due to strong organic growth in the loan portfolio, as well as continued purchases of investment securities.

Net interest margin (on a fully tax-equivalent basis) for the second quarter of 2021 was 3.52%, an 8 basis point decline from 3.60% in the first quarter of 2021, and a 14 basis point increase from 3.38% in the second 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 second quarter of 2021 was 3.31%, a 3 basis point decline from 3.34% in the first quarter of 2021, and a 9 basis point increase from 3.22% in the second 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 three 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 second quarter of 2021. The Company recognized $1.4 million of PPP origination fees during the second quarter of 2021, compared to $1.5 million during the first quarter of 2021. The elevated fee recognition is illustrated in the 4.75% PPP loan yield for the second quarter of 2021.

The following table summarizes PPP loan originations and net origination fees as of June 30, 2021:

Interest income was $31.1 million for the second quarter of 2021, an increase of $707,000, or 2.3%, from $30.4 million in the first quarter of 2021, and an increase of $3.0 million, or 10.6%, from $28.2 million in the second quarter of 2020. The yield on interest earning assets (on a fully tax-equivalent basis) was 4.17% in the second quarter of 2021, compared to 4.31% in the first quarter of 2021, and 4.45% in the second 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 loan yield and lower loan fees recognized, offset partially by $1.4 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 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 4.54% in the second quarter of 2021, which was 18 basis points lower than 4.72% in the first quarter of 2021, and 47 basis points lower than 5.01% in the second 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 $4.9 million for the second quarter of 2021, a decrease of $186,000, or 3.7%, from $5.0 million in the first quarter of 2021, and a decrease of $2.0 million, or 28.8%, from $6.8 million in the second quarter of 2020. The cost of interest bearing liabilities declined 8 basis points on a linked-quarter basis from 1.04% in the first quarter of 2021 to 0.96% in the second quarter of 2021, primarily due to lower rates paid on deposits. On a year-over-year basis, the cost of interest bearing liabilities decreased 62 basis points from 1.58% in the second quarter of 2020 to 0.96% in the second 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 $3.5 million for the second quarter of 2021, a decrease of $159,000, or 4.3%, from $3.7 million in the first quarter of 2021, and a decrease of $1.7 million, or 32.1%, from $5.2 million in the second quarter of 2020. The cost of total deposits declined 5 basis points on a linked-quarter basis from 0.59% in the first quarter of 2021, and declined 45 basis points on a year-over-year basis from 0.99% in the second quarter of 2020, to 0.54% in the second quarter of 2021, primarily due to deposit rate cuts consistent with a lower rate environment and the downward repricing of time deposits. The Company anticipates more opportunities to lower the cost of total deposits due to continued deposit repricing as time deposits mature and the recent success of adding efficient, low-cost brokered deposits.

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

Provision for Loan Losses

The provision for loan losses was $1.6 million for the second quarter of 2021, an increase of $500,000 from $1.1 million for the first quarter of 2021, and a decrease of $1.4 million from $3.0 million for the second quarter of 2020. The provision recorded in the second quarter of 2021 was primarily attributable to growth of the loan portfolio. The allowance for loan losses to total loans was 1.45% at June 30, 2021, compared to 1.48% at March 31, 2021, and 1.26% at June 30, 2020. The allowance for loan losses to total loans, excluding PPP loans, was 1.50% at June 30, 2021, compared to 1.59% at March 31, 2021, and 1.37% at June 30, 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 $1.6 million for the second quarter of 2021, an increase of $595,000 from $1.0 million for the first quarter of 2021, and a decrease of $374,000 from $2.0 million for the second quarter of 2020. The linked-quarter increase was primarily due to increased gains on sales of securities, offset partially by a decrease in letter of credit fees. The year-over-year decrease was primarily due to lower gains on sales of securities, offset partially by increased customer service fees and other income.

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

Noninterest Expense

Noninterest expense was $11.5 million for the second quarter of 2021, an increase of $554,000 from $10.9 million for the first quarter of 2021, and an increase of $766,000 from $10.7 million for the second quarter of 2020. The linked-quarter increase was primarily due to an increase in salaries and employee benefits and technology expenses. The year-over-year increase was primarily attributable to increased salaries and employee benefits, occupancy and equipment, technology, and marketing and advertising expenses, offset partially by a $1.4 million decrease in FHLB advance prepayment fees incurred in the second quarter of 2020, as well as lower amortization of tax credit investments.

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

In the second quarter of 2021, the Company attracted 18 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 214 full-time equivalent employees at June 30, 2021, compared to 200 employees at March 31, 2021, and 173 employees at June 30, 2020.

The efficiency ratio, a non-GAAP financial measure, was 42.0% for the second quarter of 2021, compared to 41.2% for the first quarter of 2021, and 48.6% for the second quarter of 2020. Excluding the impact of certain non-routine income and expenses, the adjusted efficiency ratio, a non-GAAP financial measure, was 41.5% for the second quarter of 2021, 40.7% for the first quarter of 2021 and 40.4% for the second quarter of 2020. The efficiencies of the Company’s “branch-light” model have positioned the Company well for when the pandemic ends, and going forward, providing 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 first and second quarters of 2021 was 25.8%, an increase from 20.9% for the second quarter of 2020.

Balance Sheet

Total assets at June 30, 2021 were $3.16 billion, a 2.9% increase from $3.07 billion at March 31, 2021, and a 14.8% increase from $2.75 billion at June 30, 2020. The linked-quarter increase in total assets was primarily due to robust organic loan growth, offset partially by a corresponding 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 deploying excess liquidity into investment securities.

Total gross loans at June 30, 2021 were $2.59 billion, an increase of $168.1 million, or 6.9%, over total gross loans of $2.43 billion at March 31, 2021, and an increase of $400.4 million, or 18.3%, over total gross loans of $2.19 billion at June 30, 2020. The increase in the loan portfolio during the second quarter of 2021 was primarily due to growth in the multifamily and construction and land development segments, offset partially by declining PPP loan balances. When excluding the PPP loans altogether, gross loans grew $232.2 million during the second quarter of 2021, or 41.2% on an annualized basis. The Company's continued strong loan growth has been driven by M&A-related market disruption in the Twin Cities resulting in client and banker acquisition opportunities, PPP-related client acquisition opportunities, the expansion of the talented lending teams, and the strong and growing brand in the Twin Cities market.

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

Total deposits at June 30, 2021 were $2.72 billion, an increase of $82.3 million, or 3.1%, over total deposits of $2.64 billion at March 31, 2021, and an increase of $478.9 million, or 21.4%, over total deposits of $2.24 billion at June 30, 2020. Deposit growth in the second quarter of 2021 was primarily due to an increase in noninterest bearing transaction deposits and brokered deposits, offset partially by a decline in savings and money market deposits and time deposits. Similar to the loan portfolio, the growth in core deposits has been a result of successful new client and banker acquisition initiatives and the strong, growing brand in the Twin Cities market. Brokered deposits increased back to levels last seen in the fourth quarter of 2020 due to the opportunity to obtain $75.0 million in funding at 1 basis point at various short-term maturities ranging from 3-12 months. As illustrated, the brokered deposit market provides flexibility in structure, optionality and efficiency not provided in traditional, retail deposit channels. 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 June 30, 2021 was $290.8 million, an increase of $11.7 million, or 4.2%, over total shareholders’ equity of $279.2 million at March 31, 2021, and an increase of $33.6 million, or 13.1%, over total shareholders’ equity of $257.2 million at June 30, 2020. The linked-quarter increase was due to net income retained. The year-over-year increase was due to net income retained and an increase in unrealized gains in the securities and derivatives portfolios, offset partially by stock repurchases made under the Company’s stock repurchase program. The Company did not repurchase any shares of its common stock during the second quarter of 2021.

Tangible book value per share, a non-GAAP financial measure, was $10.22 as of June 30, 2021, an increase of 4.3% from $9.80 as of March 31, 2021, and an increase of 16.2% from $8.80 as of June 30, 2020.

Subsequent to the end of the quarter, on July 8, 2021 the Company issued $30.0 million of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 in a private placement transaction. These notes are callable starting on July 15, 2026 and qualify for tier 2 capital treatment at the holding company level. The Company intends to use the net proceeds of the private placement for general corporate purposes, including support for organic growth plans, support for bank level capital ratios and possible redemption or repurchase of currently outstanding indebtedness.

Asset Quality

Annualized net charge-offs (recoveries) as a percent of average loans for the second quarter of 2021 were 0.00%, compared to (0.01)% for the first quarter of 2021, and (0.01)% for the second quarter of 2020. At June 30, 2021, the Company’s nonperforming assets, which include nonaccrual loans, loans past due 90 days and still accruing, and foreclosed assets, were $761,000, or 0.02% of total assets, as compared to $770,000, or 0.03% of total assets at March 31, 2021, and $602,000 or 0.02% of total assets at June 30, 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 June 30, 2021 totaled $56.7 million, compared to $58.3 million at March 31, 2021. 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 June 30, 2021 totaled $7.2 million, compared to $6.7 million at March 31, 2021.

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

The Company developed programs for clients who experienced 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 are not considered troubled debt restructurings. The Company had 19 modified loans totaling $33.9 million outstanding as of June 30, 2021, representing 1.4% of the total loan portfolio, excluding PPP loans.

The following table presents a rollforward of loan modification activity, by modification type, from March 31, 2021 to June 30, 2021: