Bridgewater Bancshares, Inc. Announces Fourth Quarter 2022 Net Income of $13.7 Million, $0.45 Diluted Earnings Per Common Share

Bridgewater Bancshares, Inc. (Nasdaq: BWB) (the Company), the parent company of Bridgewater Bank (the Bank), today announced net income of $13.7 million for the fourth quarter of 2022, a 5.4% decrease from net income of $14.5 million for the third quarter of 2022, and a 9.8% increase from net income of $12.5 million for the fourth quarter of 2021. Earnings per diluted common share for the fourth quarter of 2022 were $0.45, a 5.6% decrease compared to $0.47 per diluted common share for the third quarter of 2022, and a 14.2% increase compared to $0.39 per diluted common share for the same period in 2021.

“Bridgewater delivered another strong year of financial results in 2022 highlighted again by our robust balance sheet growth, highly efficient business model and superb asset quality, with all of these trends continuing in the fourth quarter,” said Chairman, Chief Executive Officer and President, Jerry Baack. “As expected, we also saw net interest margin compression during the quarter as the persistent rising interest rate environment created additional funding pressure given our strong loan growth. While we expect the operating environment to remain challenging as we head into 2023, we are taking steps to actively manage our balance sheet in the near-term, with a focus on profitable growth, to drive sustained success over the long-term.”

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Fourth Quarter 2022 Highlights

• Diluted earnings per common share were $0.45, compared to $0.47 per common share for the third quarter of 2022.
• Pre-provision net revenue (PPNR), a non-GAAP financial measure, of $19.5 million, compared to $21.4 million for the third quarter of 2022, a decrease of $1.9 million, or 9.0%. PPNR ROA, a non-GAAP financial measure, was 1.82%, compared to 2.15% for the third quarter of 2022.
• Annualized return on average assets (ROA) and annualized return on average shareholders’ equity (ROE) for the fourth quarter of 2022 were 1.28% and 14.06%, compared to ROA and ROE of 1.46% and 14.99%, respectively, for the third quarter of 2022. Annualized return on average tangible common equity, a non-GAAP financial measure, was 15.86% for the fourth quarter of 2022, compared to 17.03% for the third quarter of 2022.
• Gross loans increased $189.4 million, or 22.2% annualized, from the third quarter of 2022.
• Deposits increased $111.5 million, or 13.4% annualized, from the third quarter of 2022.
• Net interest margin (on a fully tax-equivalent basis) was 3.16%, compared to 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 3.05%, compared to 3.38% in the third quarter of 2022.
• Adjusted efficiency ratio, a non-GAAP financial measure which excludes the impact of certain non-routine income and expenses from noninterest expense, was 43.5%, compared to 39.4% for the third quarter of 2022.
• A loan loss provision of $1.5 million was recorded to support strong organic loan growth in the fourth quarter of 2022. The allowance for loan losses to total loans was 1.34% at December 31, 2022, compared to 1.38% at September 30, 2022.
• Annualized net loan charge-offs (recoveries) as a percentage of average loans were 0.00% for the fourth quarter of 2022, compared to (0.03)% for the third quarter of 2022.
• Tangible book value per share, a non-GAAP financial measure, increased $0.36, or 12.7% annualized, to $11.69 at December 31, 2022, compared to $11.33 at September 30, 2022.

Annual 2022 Highlights

• Diluted earnings per common share for the year ended December 31, 2022 were $1.72, a 12.0% increase, compared to $1.54 for the year ended December 31, 2021.
• PPNR, a non-GAAP financial measure, was $79.7 million for the year ended December 31, 2022, an increase of 18.8%, compared to $67.1 million for the year ended December 31, 2021. PPNR ROA, a non-GAAP financial measure, was 2.06% for the year ended December 31, 2022, compared to 2.10% for the year ended December 31, 2021.
• Gross loans increased $750.0 million at December 31, 2022, or 26.6%, compared to December 31, 2021.
• Deposits increased $470.3 million at December 31, 2022, or 16.0%, compared to December 31, 2021.
• Net interest margin (on a fully tax-equivalent basis) was 3.45% for the year ended December 31, 2022, compared to 3.54% for the year ended December 31, 2021. Core net interest margin (on a fully tax-equivalent basis), a non-GAAP financial measure, for the year ended December 31, 2022 was 3.27%, compared to 3.28% for the year ended December 31, 2021.
• Adjusted efficiency ratio, a non-GAAP financial measure, was 41.2% for the year ended December 31, 2022, compared to 41.0% for the year ended December 31, 2021.
• Net loan charge-offs (recoveries) as a percentage of average loans were (0.01)% for the year ended December 31, 2022, compared to 0.00% for the year ended December 31, 2021.
• The ratio of nonperforming assets to total assets was 0.01% at December 31, 2022, compared to 0.02% at December 31, 2021.
• Tangible book value per share, a non-GAAP financial measure, increased $0.71, or 6.5%, to $11.69 at December 31, 2022, compared to $10.98 at December 31, 2021, despite the market value depreciation of the securities portfolio due to rapidly rising interest rates, which continue to negatively impact accumulated other comprehensive income.

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Income Statement

Net Interest Income

Net interest income was $32.9 million for the fourth quarter of 2022, a decrease of $1.2 million, or 3.5%, from $34.1 million in the third quarter of 2022, and an increase of $3.7 million, or 12.8%, from $29.2 million in the fourth quarter of 2021. The linked-quarter decrease in net interest income was due to higher rates paid on deposits and increased borrowings in the rising interest rate environment. The year-over-year increase in net interest income was primarily due to growth in average interest earning assets and higher yields on investment securities and core loans, offset partially by higher rates paid on deposits and borrowings. Average interest earning assets were $4.18 billion for the fourth quarter of 2022, an increase of $305.7 million, or 7.9%, from $3.87 billion for the third quarter of 2022, and an increase of $857.0 million, or 25.8%, from $3.32 billion for the fourth quarter of 2021. The linked-quarter increase in average interest earning assets was primarily due to strong organic growth in the loan portfolio and purchases of investment securities. The year-over-year increase in average interest earning assets was primarily due to strong organic growth in the loan portfolio and purchases of investment securities, offset partially by the forgiveness of PPP loans and the reduction of cash balances.

Net interest margin (on a fully tax-equivalent basis) for the fourth quarter of 2022 was 3.16%, a 37 basis point decrease from 3.53% in the third quarter of 2022, and a 35 basis point decrease from 3.51% in the fourth 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, for the fourth quarter of 2022 was 3.05%, a 33 basis point decrease from 3.38% in the third quarter of 2022, and a 20 basis point decrease from 3.25% in the fourth quarter of 2021. The Company remains focused on managing the impact of continued interest rate hikes and the evolving shape of the yield curve during this unique interest rate environment.

As the PPP loan portfolio has almost fully paid off, the recognition of fees associated with the originations has decreased significantly, which impacts comparability between periods. The Company recognized $45,000 of PPP origination fees during the fourth quarter of 2022, compared to $90,000 during the third quarter of 2022, and $958,000 during the fourth quarter of 2021. There were no remaining PPP origination fees to be recognized as of December 31, 2022.

Interest income was $48.9 million for the fourth quarter of 2022, an increase of $6.5 million, or 15.3%, from $42.4 million in the third quarter of 2022, and an increase of $15.1 million, or 44.7%, from $33.8 million in the fourth quarter of 2021. The yield on interest earning assets (on a fully tax-equivalent basis) was 4.67% in the fourth quarter of 2022, compared to 4.37% in the third quarter of 2022, and 4.06% in the fourth quarter of 2021. The linked-quarter increase in the yield on interest earning assets was primarily due to the rapid increase in market interest rates resulting in new loan originations, loans repricing, and investment purchases at yields accretive to the existing portfolios. 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, offset partially by the lower recognition of PPP origination fees.

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 4.86% in the fourth quarter of 2022, which was 27 basis points higher than 4.59% in the third quarter of 2022, and 45 basis points higher than 4.41% in the fourth quarter of 2021. While loan fees have historically maintained a relatively stable contribution to the aggregate loan yield, the recent periods were impacted by fewer loan prepayments, which historically has accelerated the recognition of loan fees. Despite the decrease in fee recognition, the Company is encouraged that the core loan yield continues to rise as new loan originations and the existing portfolio loans 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 $16.0 million for the fourth quarter of 2022, an increase of $7.7 million, or 93.2%, from $8.3 million in the third quarter of 2022, and an increase of $11.3 million, or 245.4%, from $4.6 million in the fourth quarter of 2021. The cost of interest bearing liabilities increased 92 basis points on a linked-quarter basis from 1.30% in the third quarter of 2022 to 2.22% in the fourth quarter of 2022, primarily due to higher rates paid on deposits, drawing on the Company’s revolving line of credit, and the increased utilization of federal funds purchased and FHLB advances in the rising interest rate environment. On a year-over-year basis, the cost of interest bearing liabilities increased 136 basis points from 0.86% in the fourth quarter of 2021 to 2.22% in the fourth quarter of 2022, 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 $10.8 million for the fourth quarter of 2022, an increase of $4.8 million, or 80.2%, from $6.0 million in the third quarter of 2022, and an increase of $7.5 million, or 232.6%, from $3.2 million in the fourth quarter of 2021. The cost of total deposits increased 58 basis points on a linked-quarter basis from 0.73% in the third quarter of 2022, to 1.31% in the fourth quarter of 2022. On a year-over-year basis, the cost of total deposits increased 86 basis points from 0.45% in the fourth quarter of 2021, to 1.31% in the fourth quarter of 2022. The linked-quarter and year-over-year increases were primarily due to the upward repricing of the deposit portfolio in the higher interest rate environment.

A summary of the Company’s average balances, interest yields and rates, and net interest margin for the three months ended December 31, 2022, September 30, 2022, and December 31, 2021 is as follows:

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Provision for Loan Losses

The provision for loan losses was $1.5 million for both the third and fourth quarter of 2022 and $350,000 higher than the $1.2 million provided in the fourth quarter of 2021. The provision recorded in the fourth quarter of 2022 was primarily attributable to the growth of the loan portfolio. The allowance for loan losses to total loans was 1.34% at December 31, 2022, compared to 1.38% at September 30, 2022, and 1.42% at December 31, 2021.

As an emerging growth company, the Company anticipates adopting Accounting Standards Update No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments,” as of January 1, 2023 and does not expect a material adjustment upon adoption. The current estimate and future calculations are highly dependent on loan composition, macroeconomic conditions and forecasts, and other management assumptions and judgements.

The following table presents the activity in the Company’s allowance for loan losses for the periods indicated:

Noninterest Income

Noninterest income was $1.7 million for the fourth quarter of 2022, an increase of $351,000 from $1.4 million for the third quarter of 2022, and an increase of $450,000 from $1.3 million for the fourth quarter of 2021. The linked-quarter increase was primarily due to an increase in other income, which included $306,000 of rate lock fees, offset partially by a decrease in letter of credit fees. The year-over-year increase was primarily due to increased customer service fees, an increase in bank-owned life insurance income and an increase in other income, offset partially by decreased letter of credit fees.

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

Noninterest Expense

Noninterest expense was $15.2 million for the fourth quarter of 2022, an increase of $1.0 million from $14.2 million for the third quarter of 2022, and an increase of $2.7 million from $12.5 million for the fourth quarter of 2021. The linked-quarter increase was primarily due to increases in salaries and employee benefits, derivative collateral fees, and other expense. The year-over-year increase was primarily attributable to increases in salaries and employee benefits, occupancy and equipment, and derivative collateral fees.

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

The Company continues to invest in its people across the organization, with 246 full-time equivalent employees at December 31, 2022, and September 30, 2022, and 220 employees at December 31, 2021.

The efficiency ratio, a non-GAAP financial measure, was 43.8% for the fourth quarter of 2022, compared to 39.8% for the third quarter of 2022, and 40.8% for the fourth quarter of 2021. Excluding the impact of certain non-routine income and expenses, the adjusted efficiency ratio, a non-GAAP financial measure, was 43.5% for the fourth quarter of 2022, 39.4% for the third quarter of 2022, and 40.3% for the fourth quarter of 2021.

Income Taxes

The effective combined federal and state income tax rate for the fourth quarter of 2022 was 23.4%, a decrease from 26.8% for the third quarter of 2022 and 25.7% for the fourth quarter of 2021.

Balance Sheet

Total assets at December 31, 2022 were $4.35 billion, a 5.2% increase from $4.13 billion at September 30, 2022, and a 25.0% increase from $3.48 billion at December 31, 2021. The linked-quarter increase in total assets was primarily due to strong organic loan growth and continued purchases of investment securities. The year-over-year increase in total assets was primarily due to strong organic loan growth, purchases of investment securities and an increase of other assets, offset partially by a decrease in cash and cash equivalents.

Total gross loans at December 31, 2022 were $3.57 billion, an increase of $189.4 million, or 5.6%, over total gross loans of $3.38 billion at September 30, 2022, and an increase of $750.0 million, or 26.6%, over total gross loans of $2.82 billion at December 31, 2021. The increase in the loan portfolio during the fourth quarter of 2022 was primarily due to growth in the construction and land development, multifamily, and CRE nonowner occupied segments.

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

Total deposits at December 31, 2022 were $3.42 billion, an increase of $111.5 million, or 3.4%, over total deposits of $3.31 billion at September 30, 2022, and an increase of $470.3 million, or 16.0%, over total deposits of $2.95 billion at December 31, 2021. Deposit growth in the fourth quarter of 2022 was primarily due to an increase in brokered deposits, offset partially by a decline in all other deposit portfolios. Brokered deposits were being used as a supplemental funding source, as needed, to support the loan portfolio growth.

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