Third Quarter 2023 Highlights

• Annualized return on average assets (ROA) of 0.85%, compared to 0.88% for the second quarter of 2023.
• Annualized return on average shareholders’ equity (ROE) of 9.23%, compared to 9.69% for the second quarter of 2023, and annualized return on average tangible common equity (ROATCE)⁽¹⁾ of 9.92%, compared to 10.48% for the second quarter of 2023.
• Deposits increased by $97.6 million, or 10.8% annualized, from the second quarter of 2023, including an increase of core deposits⁽²⁾ of $69.9 million, or 11.0% annualized.
• Core deposit growth exceeded loan growth for the second consecutive quarter as gross loans declined slightly by $13.9 million from the second quarter of 2023, lowering the loan-to-deposit ratio to 101.3%.
• Net interest margin (on a fully tax-equivalent basis) of 2.32%, compared to 2.40% in the second quarter of 2023.
• Efficiency ratio⁽¹⁾ of 56.5%, compared to 52.7% for the second quarter of 2023.
• No provision for credit losses on loans was recorded in the third quarter of 2023. The allowance for credit losses on loans to total loans was 1.36% at both September 30, 2023 and June 30, 2023.
• Annualized net loan charge-offs as a percentage of average loans of 0.01% for the third quarter of 2023, compared to 0.00% for the second quarter of 2023.
• Nonperforming assets to total assets of 0.02% at September 30, 2023 and June 30, 2023.
• Tangible book value per share⁽¹⁾ of $12.37 at September 30, 2023, an increase of $0.23, or 7.4% annualized, compared to $12.15 at June 30, 2023.

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

(2) Core deposits are defined as total deposits less brokered deposits and certificates of deposit greater than $250,000.

Bridgewater Bancshares, Inc. (Nasdaq: BWB) (the Company), the parent company of Bridgewater Bank (the Bank), today announced net income of $9.6 million for the third quarter of 2023, compared to $9.8 million for the second quarter of 2023, and $14.5 million for the third quarter of 2022. Earnings per diluted common share were $0.30 for the third quarter of 2023, compared to $0.31 for the second quarter of 2023, and $0.47 per diluted common share for the same period in 2022.

“Throughout the third quarter, Bridgewater saw the continuation of several encouraging trends, including signs of net interest margin stabilization, enhanced balance sheet composition, and superb asset quality,” said Chairman, Chief Executive Officer, and President, Jerry Baack. “A second consecutive quarter of strong core deposit growth and reduced borrowings aided our net interest margin. In addition, we are being very thoughtful in how we position the balance sheet for longer term success as this unique banking environment continues to evolve.

“The quality of our loan portfolio was evident again during the quarter due to our consistent underwriting standards, active credit oversight, and experienced lending and credit teams. We also remained focused on our ongoing client engagement efforts, investments in our people, and creating efficiencies across the organization, all with an eye toward continuing our track record of consistent tangible book value growth, which has increased each of the past 27 quarters.”

Key Financial Measures

Income Statement

Net Interest Income and Net Interest Margin

Net interest margin (on a fully tax-equivalent basis) for the third quarter of 2023 was 2.32%, an eight basis point decline from 2.40% in the second quarter of 2023 and a 121 basis point decline from 3.53% in the third quarter of 2022. 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 was 2.24% for the third quarter of 2023, a seven basis point decline from 2.31% in the second quarter of 2023, and a 114 basis point decline from 3.38% in the third quarter of 2022.

• The linked-quarter decline in the margin was primarily due to higher funding costs, offset partially by higher earning asset yields.
• The year-over-year decline in the margin was primarily due to higher funding costs and increased borrowings in the rising interest rate environment, offset partially by higher earning asset yields.

Net interest income was $25.4 million for the third quarter of 2023, a decrease of $451,000 from $25.9 million in the second quarter of 2023, and a decrease of $8.7 million from $34.1 million in the third quarter of 2022.

• The linked-quarter decrease in net interest income was primarily due to higher rates paid on deposits in the rising interest rate environment.
• The year-over-year decrease in net interest income was primarily due to higher rates paid on deposits and increased borrowings in the rising interest rate environment.
• Average interest earning assets were $4.42 billion for the third quarter of 2023, an increase of $21.4 million, or 0.5%, from $4.40 billion for the second quarter of 2023, and an increase of $544.5 million, or 14.1%, from $3.87 billion for the third quarter of 2022. The linked-quarter increase in average interest earning assets was primarily due to an increase in cash. The year-over-year increase in average interest earning assets was primarily due to strong growth in the loan portfolio and purchases of investment securities.

Interest income was $56.8 million for the third quarter of 2023, an increase of $1.8 million from $55.0 million in the second quarter of 2023, and an increase of $14.5 million from $42.4 million in the third quarter of 2022.

• The yield on interest earning assets (on a fully tax-equivalent basis) was 5.14% in the third quarter of 2023, compared to 5.06% in the second quarter of 2023 and 4.37% in the third quarter of 2022.
• The linked-quarter increase in the yield on interest earning assets was primarily due to the increase in market interest rates resulting in new loan originations and loans repricing at yields accretive to the existing portfolio.
• The year-over-year increase in the yield on interest earning assets was primarily due to growth and repricing of the loan and securities portfolios in the rising interest rate environment.
• Loan interest income and loan fees remain the primary contributing factors to the changes in the yield on interest earning assets. The aggregate loan yield, excluding PPP loans, increased to 5.26% in the third quarter of 2023, which was seven basis points higher than 5.19% in the second quarter of 2023, and 67 basis points higher than 4.59% in the third quarter of 2022.
• While loan fees have historically maintained a relatively stable contribution to the aggregate loan yield, the recent periods saw fewer loan prepayments, which historically has accelerated the recognition of loan fees. Despite the overall decrease in fee recognition, the Company is encouraged that the core loan yield continues to rise as new loan originations and the existing portfolio reprice in the higher rate environment.

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

Interest expense was $31.4 million for the third quarter of 2023, an increase of $2.3 million from $29.1 million in the second quarter of 2023, and an increase of $23.1 million from $8.3 million in the third quarter of 2022.

• The cost of interest bearing liabilities increased 22 basis points on a linked-quarter basis from 3.59% in the second quarter of 2023 to 3.81% in the third quarter of 2023, primarily due to higher rates paid on deposits in the rising interest rate environment.
• On a year-over-year basis, the cost of interest bearing liabilities increased 251 basis points from 1.30% in the third quarter of 2022 to 3.81% in the third quarter of 2023, primarily due to the rapid increase in market interest rates that occurred between the periods, which impacted all funding sources.

Interest expense on deposits was $27.2 million for the third quarter of 2023, an increase of $4.2 million from $23.0 million in the second quarter of 2023, and an increase of $21.2 million from $6.0 million in the third quarter of 2022.

• The cost of total deposits increased 33 basis points on a linked-quarter basis from 2.66% in the second quarter of 2023, to 2.99% in the third quarter of 2023, primarily due to the rising interest rate environment and increased competition from other market alternatives.
• On a year-over-year basis, the cost of total deposits increased 226 basis points from 0.73% in the third quarter of 2022, to 2.99% in the third quarter of 2023, primarily due to upward repricing of the deposit portfolio in the higher interest rate environment.

Provision for Credit Losses

The provision for credit losses on loans was zero for the third quarter of 2023, compared to $550,000 for the second quarter of 2023 and $1.5 million for the third quarter of 2022.

• No provision for credit losses on loans was recorded in the third quarter of 2023 due to a more managed pace of loan growth.
• The allowance for credit losses on loans to total loans was 1.36% at September 30, 2023, compared to 1.36% at June 30, 2023, and 1.38% at September 30, 2022.

The provision for credit losses for off-balance sheet credit exposures was a negative provision of $600,000 for the third quarter of 2023, compared to a negative $500,000 for the second quarter of 2023 and zero for the third quarter of 2022.

• The negative provision during the quarter was due to a reduction in outstanding unfunded commitments primarily attributable to the migration to funded loans, as well as a moderation in volume of newly originated projects with unfunded commitments.

Noninterest Income

Noninterest income was $1.7 million for the third quarter of 2023, an increase of $311,000 from $1.4 million for the second quarter of 2023 and an increase of $339,000 from $1.4 million for the third quarter of 2022.

• The linked-quarter increase was primarily due to $0.5 million of FHLB prepayment income, offset partially by lower other income.
• The year-over-year increase was primarily due to $0.5 million of FHLB prepayment income, offset partially by decreased letter of credit fees and other income.

Noninterest Expense

Noninterest expense was $15.4 million for the third quarter of 2023, an increase of $962,000 from $14.4 million for the second quarter of 2023 and an increase of $1.2 million from $14.2 million for the third quarter of 2022. It is worth noting, on a year-to-date basis through the third quarter, noninterest expense increased $2.5 million, or 6.0%, compared to year-to-date in 2022.

• The linked-quarter increase was primarily due to increases in salaries and employee benefits and industry-wide increases in the FDIC insurance assessment, offset partially by a decrease in professional and consulting fees.
• The year-over-year increase was primarily attributable to increases in the FDIC insurance assessment and derivative collateral fees, offset partially by decreases in marketing and advertising.
• The efficiency ratio, a non-GAAP financial measure, was 56.5% for the third quarter of 2023, compared to 52.7% for the second quarter of 2023, and 39.8% for the third quarter of 2022.
• The Company had 255 full-time equivalent employees at September 30, 2023, compared to 253 employees at June 30, 2023, and 246 employees at September 30, 2022.

Income Taxes

The effective combined federal and state income tax rate for the third quarter of 2023 was 22.3%, a decrease from 23.6% for the second quarter of 2023 and 26.8% for the third quarter of 2022. The effective combined federal and state rate for the nine months ended September 30, 2023 and 2022 was 24.1% and 26.3%, respectively.

Balance Sheet

Loans

Total gross loans at September 30, 2023 were $3.72 billion, a slight decrease of $13.9 million, or 1.5% annualized, over total gross loans of $3.74 billion at June 30, 2023, and an increase of $342.2 million, or 10.1%, over total gross loans of $3.38 billion at September 30, 2022.

• The decrease in the loan portfolio during the third quarter of 2023 was primarily due to moderating loan originations and elevated payoffs and paydowns.

Deposits

Total deposits at September 30, 2023 were $3.68 billion, an increase of $97.6 million, or 10.8% annualized, over total deposits of $3.58 billion at June 30, 2023, and an increase of $370.4 million, or 11.2%, over total deposits of $3.31 billion at September 30, 2022.

• Core deposits, defined as total deposits excluding brokered deposits and time deposits greater than $250,000, increased $69.9 million, or 11.0% annualized, from the second quarter 2023.
• Brokered deposits continue to be used as a supplemental funding source, as needed.
• Uninsured deposits were 22% of total deposits as of September 30, 2023 and June 30, 2023.

Liquidity

Total on- and off-balance sheet liquidity was $2.18 billion as of September 30, 2023, compared to $1.96 billion at June 30, 2023 and $1.41 billion at September 30, 2022. The Company did not utilize the Bank Term Funding Program (BTFP) or Federal Reserve Discount Window during the third quarter of 2023.

Asset Quality

Overall asset quality remained superb due to the Company’s measured risk selection, consistent underwriting standards, active credit oversight, and experienced lending and credit teams.

• Annualized net charge-offs (recoveries) as a percentage of average loans were 0.01% for the third quarter of 2023, compared to 0.00% for the second quarter of 2023, and (0.03)% for the third quarter of 2022.
• At September 30, 2023, the Company’s nonperforming assets, which include nonaccrual loans, loans past due 90 days and still accruing, and foreclosed assets, were $749,000, or 0.02% of total assets, as compared to $778,000, or 0.02% of total assets at June 30, 2023, and $663,000, or 0.02% of total assets at September 30, 2022.
• Loans with potential weaknesses that warrant a watchlist risk rating at September 30, 2023 totaled $26.9 million, compared to $27.2 million at June 30, 2023, and $22.8 million at September 30, 2022.
• Loans that warranted a substandard risk rating at September 30, 2023 totaled $35.6 million, compared to $33.8 million at June 30, 2023, and $30.8 million at September 30, 2022. Increased uncertainty in the economic environment may result in future watchlist or adverse classifications in the loan portfolio.

Capital

Total shareholders’ equity at September 30, 2023 was $416.0 million, an increase of $6.8 million, or 1.7%, compared to total shareholders’ equity of $409.1 million at June 30, 2023, and an increase of $34.0 million, or 8.9%, over total shareholders’ equity of $382.0 million at September 30, 2022.

• The linked-quarter increase was due to net income retained and unrealized gains in the derivatives portfolio, offset partially by an increase in unrealized losses in the securities portfolio and preferred stock dividends.
• The year-over-year increase was due to net income retained and unrealized gains in the derivatives portfolio, offset partially by an increase in unrealized losses in the securities portfolio, the adoption of the Current Expected Credit Losses (CECL) accounting methodology and preferred stock dividends.
• The common equity Tier 1 risk-based capital ratio was 9.07% at September 30, 2023, compared to 8.72% at June 30, 2023 and 8.47% at September 30, 2022.
• Tangible common equity as a percentage of tangible assets, a non-GAAP financial measure, was 7.61% at September 30, 2023, compared to 7.39% at June 30, 2023, and 7.57% at September 30, 2022.

Tangible book value per share, a non-GAAP financial measure, was $12.37 as of September 30, 2023, an increase of 1.9% from $12.15 as of June 30, 2023, and an increase of 9.2% from $11.33 as of September 30, 2022.

• The linked-quarter and year-over-year increases occurred despite the market value depreciation of the securities portfolio driven by the rising interest rate environment.

The Company did not purchase any shares of its common stock during the third quarter of 2023.

• The Company has $25.0 million remaining under its current share repurchase authorization.

Today, the Company also announced that its Board of Directors has 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 December 1, 2023 to shareholders of record of the Series A Preferred Stock at the close of business on November 15, 2023.

Conference Call and Webcast

The Company will host a conference call to discuss its third quarter 2023 financial results on Thursday, October 26, 2023 at 8:00 a.m. Central Time. The conference call can be accessed by dialing 844-481-2913 and requesting to join the Bridgewater Bancshares earnings call. To listen to a replay of the conference call via phone, please dial 877-344-7529 and enter access code 1859973. The replay will be available through November 2, 2023. The conference call will also be available via a live webcast on the Investor Relations section of the Company’s website, investors.bridgewaterbankmn.com, and archived for replay.

About the Company

Bridgewater Bancshares, Inc. (Nasdaq: BWB) is a St. Louis Park, Minnesota-based financial holding company. Bridgewater's banking subsidiary, Bridgewater Bank, is a premier, full-service Twin Cities bank dedicated to serving the diverse needs of commercial real estate investors, entrepreneurs, business clients and successful individuals. By pairing a range of deposit, lending, and business services solutions with a responsive service model, Bridgewater has seen continuous growth and profitability. With total assets of $4.6 billion and seven branches as of September 30, 2023, Bridgewater is considered one of the largest locally led banks in the State of Minnesota, and has received numerous awards for its growth, banking services, and esteemed corporate culture.

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: interest rate risk, including the effects of recent and potential additional rate increases by the Federal Reserve; fluctuations in the values of the securities held in our securities portfolio, including as the result of changes in interest rates; business and economic conditions generally and in the financial services industry, nationally and within our market area, including rising rates of inflation and possible recession; the effects of recent developments and events in the financial services industry, including the large-scale deposit withdrawals over a short period of time at Silicon Valley Bank, Signature Bank and First Republic Bank that resulted in the failure of those institutions; loan concentrations in our portfolio; the overall health of the local and national real estate market; our ability to successfully manage credit risk; our ability to maintain an adequate level of allowance for loan losses; new or revised accounting standards, including as a result of the implementation of the Current Expected Credit Loss standard; the concentration of large loans to certain borrowers; the concentration of large deposits from certain clients, who have balances above current FDIC insurance limits; our ability to successfully manage liquidity risk, which may increase our dependence on non-core funding sources such as brokered deposits, and negatively impact 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; the composition of our senior leadership team and our ability to attract and retain key personnel; talent and labor shortages and high rates of employee turnover; the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents, including as a result of sophisticated attacks using artificial intelligence and similar tools; interruptions involving our information technology and telecommunications systems or third-party servicers; competition in the financial services industry, including from nonbank competitors such as credit unions and “fintech” companies; 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, including in response to the recent failures of Silicon Valley Bank, Signature Bank and First Republic Bank; risks related to climate change and the negative impact it may have on our customers and their businesses; the imposition of 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, including the Israeli-Palestinian conflict and the Russian invasion of Ukraine; potential impairment to the goodwill the Company recorded in connection with our past acquisition; changes to U.S. or state tax laws, regulations and guidance, including the new 1% excise tax on stock buybacks by publicly traded companies; 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. The Company undertakes 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.