Bridgewater Bancshares, Inc. Announces Record Third Quarter 2021 Net Income of $11.5 Million, $0.40 Diluted Earnings Per Common Share - Form 8-K

Bridgewater Bancshares, Inc. Announces Record Third Quarter 2021 Net Income of $11.5 Million, $0.40 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 $11.5 million for the third quarter of 2021, a 4.7% increase over net income of $11.0 million for the second quarter of 2021, and a 60.4% increase over net income of $7.2 million for the third quarter of 2020. Net income per diluted common share for the third quarter of 2021 was $0.40, a 4.8% increase compared to $0.38 per diluted common share for the second quarter of 2021, and a 60.8% increase, compared to $0.25 per diluted common share for the same period in 2020.

"Bridgewater's third consecutive quarter of record net income was highlighted by a continuation of our robust organic loan growth, as well as two capital raising transactions to support our ongoing growth plans," said Chairman, Chief Executive Officer, and President, Jerry Baack. "Driven by expanded lending teams, strong brand penetration and M&A-related market disruption, we are generating consistent loan growth by providing our clients with our signature high-touch and responsive level of service. As a result, we have been able to drive continued revenue growth and maintain an adjusted efficiency ratio in the low 40% range, even as we make incremental investments in the business to support our broader growth strategy. With superb asset quality trends and successful subordinated debt and preferred stock issuances during the third quarter, we are well positioned to continue our unique growth story and drive shareholder value going forward."

Third Quarter 2021 Financial Results

Third Quarter 2021 Highlights

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Key Financial Measures

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Selected Financial Data

Income Statement

Net Interest Income

Net interest income was $28.7 million for the third quarter of 2021, an increase of $2.4 million, or 9.1%, from $26.3 million in the second quarter of 2021, and an increase of $7.0 million, or 32.3%, from $21.7 million in the third quarter of 2020. The linked-quarter and year-over-year increases in net interest income were primarily due to robust 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 $3.23 billion for the third quarter of 2021, an increase of $214.9 million, or 7.1%, from $3.02 billion for the second quarter of 2021, and an increase of $578.4 million, or 21.8%, from $2.66 billion for the third quarter of 2020. The linked-quarter increase in average interest earning assets was primarily due to increased cash balances and continued strong organic growth in the loan portfolio, offset partially by the payoff of PPP loans. 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 third quarter of 2021 was 3.54%, a 2 basis point increase from 3.52% in the second quarter of 2021, and a 26 basis point increase from 3.28% in the third 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 third quarter of 2021 was 3.22%, a 9 basis point decline from 3.31% in the second quarter of 2021, and an 8 basis point increase from 3.14% in the third quarter of 2020. Even though the capital raises during the quarter increased capital levels to support future growth, it is worth noting the net proceeds in the near-term compounded excess liquidity and negatively affected the net interest margin by 6 basis points.

While the origination volume of PPP loans earning 1.00% has negatively impacted net interest margin, 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 into the third quarter of 2021. The Company recognized $1.6 million of PPP origination fees during the third quarter of 2021, compared to $1.4 million during the second

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quarter of 2021. The elevated fee recognition is illustrated in the 9.15% PPP loan yield for the third quarter of 2021, compared to 4.75% for the second quarter of 2021.

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

Interest income was $33.5 million for the third quarter of 2021, an increase of $2.4 million, or 7.6%, from $31.1 million in the second quarter of 2021, and an increase of $5.0 million, or 17.6%, from $28.5 million in the third quarter of 2020. The yield on interest earning assets (on a fully tax-equivalent basis) was 4.14% in the third quarter of 2021, compared to 4.17% in the second quarter of 2021, and 4.30% in the third quarter of 2020. The linked-quarter decrease in the yield on interest earning assets was primarily due to excess cash balances and the historically low interest rate environment resulting in a lower core loan yield, offset partially by $1.6 million of PPP loan origination fees. 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 4.51% in the third quarter of 2021, which was 3 basis points lower than 4.54% in the second quarter of 2021, and 42 basis points lower than 4.93% in the third 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 $4.8 million for the third quarter of 2021, a decrease of $15,000, or 0.3%, from $4.9 million in the second quarter of 2021, and a decrease of $2.0 million, or 28.9%, from $6.8 million in the third quarter of 2020. The cost of interest bearing liabilities declined 8 basis points on a linked-quarter basis from 0.96% in the second quarter of 2021 to 0.88% in the third quarter of 2021, primarily due to lower rates paid on deposits, offset partially by additional subordinated debentures. On a year-over-year basis, the cost of interest bearing liabilities decreased 62 basis points from 1.50% in the third quarter of 2020 to 0.88% in the third 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 $3.4 million for the third quarter of 2021, a decrease of $96,000, or 2.7%, from $3.5 million in the second quarter of 2021, and a decrease of $1.4 million, or 29.4%, from $4.8 million in the third quarter of 2020. The cost of total deposits declined 6 basis points on a linked-quarter basis from 0.54% in the second quarter of 2021, and declined 39 basis points on a year-over-year basis from 0.87% in the third quarter of 2020, to 0.48% in the third quarter of 2021, primarily due to deposit rate cuts consistent with a lower rate environment and the continued downward repricing of time deposits.

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

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Provision for Loan Losses

The provision for loan losses was $1.3 million for the third quarter of 2021, a decrease of $300,000 from $1.6 million for the second quarter of 2021, and a decrease of $2.5 million from $3.8 million for the third quarter of 2020. The provision recorded in the third quarter of 2021 was attributable to growth of the loan portfolio. The allowance for loan losses to total loans was 1.43% at September 30, 2021, compared to 1.45% at June 30, 2021, and 1.39% at September 30, 2020. The allowance for loan losses to total loans, excluding PPP loans, was 1.46% at September 30, 2021, compared to 1.50% at June 30, 2021, and 1.51% at September 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 $1.4 million for the third quarter of 2021, a decrease of $193,000 from $1.6 million for the second quarter of 2021, and an increase of $253,000 from $1.2 million for the third quarter of 2020. The linked-quarter decrease was primarily due to decreased gains on sales of securities, offset partially by an increase in 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 $13.2 million for the third quarter of 2021, an increase of $1.8 million from $11.5 million for the second quarter of 2021, and an increase of $3.6 million from $9.7 million for the third quarter of 2020. The increase in both periods was primarily due to increases in salaries and employee benefits, professional and consulting fees, marketing and advertising, and $582,000 of prepayment fees associated with a partial early redemption of $11.3 million of subordinated debentures issued in July 2017. The linked-quarter increase in salaries and employee benefits reflects both annual merit increases and a full quarter of salaries expense related to the significant net FTE growth experienced during the second quarter of 2021.

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

The Company continues to make hires, reaching 219 full-time equivalent employees at September 30, 2021, compared to 214 employees at June 30, 2021, and 180 employees at September 30, 2020.

The efficiency ratio, a non-GAAP financial measure, was 43.9% for the third quarter of 2021, compared to 42.0% for the second quarter of 2021, and 42.3% for the third 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 third quarter of 2021, 41.5% for the second quarter of 2021 and 41.7% for the third 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 third quarter of 2021 was 26.0%, an increase from 25.8% for the second quarter of 2021 and an increase from 23.8% for the third quarter of 2020. The effective combined federal and state income tax rate for the

nine months ended September 30, 2021 was 25.9%, compared to 23.4% for the nine months ended September 30, 2020.

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Balance Sheet

Total assets at September 30, 2021 were $3.39 billion, a 7.2% increase from $3.16 billion at June 30, 2021, and a 22.1% increase from $2.77 billion at September 30, 2020. The linked-quarter increase in total assets was primarily due to strong organic loan growth and increased on-balance sheet liquidity. The year-over-year increase in total assets was primarily due to increased cash balances, robust organic loan growth, as well as continued purchases of investment securities.

Total gross loans at September 30, 2021 were $2.71 billion, an increase of $117.8 million, or 4.5%, over total gross loans of $2.59 billion at June 30, 2021, and an increase of $452.8 million, or 20.0%, over total gross loans of $2.26 billion at September 30, 2020. The increase in the loan portfolio during the third quarter of 2021 was primarily due to growth in the commercial, multifamily and CRE nonowner occupied segments, offset partially by the payoff of PPP loans. When excluding the PPP loans altogether, gross loans grew $162.7 million during the third quarter of 2021, or 25.9% on an annualized basis. The Company's continued strong loan growth has been driven by the expansion of the talented lending teams, PPP-related client acquisition opportunities, the strong and 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.

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

Total deposits at September 30, 2021 were $2.85 billion, an increase of $133.3 million, or 4.9%, over total deposits of $2.72 billion at June 30, 2021, and an increase of $581.1 million, or 25.6%, over total deposits of $2.27 billion at September 30, 2020. Deposit growth in the third quarter of 2021 was primarily due to an increase in noninterest bearing and interest bearing transaction deposits and savings and money market deposits, offset partially by a decline in time deposits and brokered 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 of the Bank in the Twin Cities market.

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

Capital

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 debentures 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 outstanding indebtedness.

In July of 2021, the Company redeemed $11.3 million of the $25.0 million outstanding of its fixed-to-floating rate subordinated debentures due in 2027. The early redemption of the subordinated debentures was recorded as a loss on the extinguishment of subordinated debt, included in noninterest expense, in the amount of $582,000, consisting of $532,000 in prepayment penalties and $50,000 in unamortized issuance costs.

On August 17, 2021, the Company announced the closing of its underwritten public offering of 2,400,000 depositary shares, each representing a 1/100^th interest in a share of the Company's 5.875% Non-Cumulative Perpetual Preferred Stock, Series A ("Series A Preferred Stock"). On August 20, 2021, the underwriters of the offering exercised in full their option to purchase 360,000 additional depositary shares to cover over-allotments. As a result, the gross proceeds from the offering totaled $69.0 million. The Company intends to use the net proceeds from the offering for general corporate purposes, including support for organic growth plans, support for bank level capital ratios and possible redemption or repurchase of outstanding indebtedness. On October 26, 2021, the Company's Board of Directors declared a quarterly cash dividend on the Series A Preferred Stock, payable on December 1, 2021 to shareholders of record on the Series A Preferred Stock at the close of business on November 15, 2021.

Total shareholders' equity at September 30, 2021 was $367.8 million, an increase of $77.0 million, or 26.5%, over total shareholders' equity of $290.8 million at June 30, 2021, and an increase of $102.4 million, or 38.6%, over total shareholders' equity of $265.4 million

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at September 30, 2020. The linked-quarter increase was due to net income retained and the issuance of preferred stock, offset partially by stock repurchases made under the Company's stock repurchase program. The year-over-year increase was due to net income retained, the issuance of preferred stock 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 consolidated tier 1 leverage ratio increased to 10.70% at September 30, 2021, compared to 9.08% at June 30, 2021, primarily due to the preferred stock issuance.

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. 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 third quarter of 2021, the Company repurchased 126,507 shares of its common stock. Shares were repurchased at a weighted average price of $16.11 for a total of $2.0 million.

Tangible book value per share, a non-GAAP financial measure, was $10.62 as of September 30, 2021, an increase of 3.9% from $10.22 as of June 30, 2021, and an increase of 16.4% from $9.13 as of September 30, 2020. Tangible common equity as a percentage of tangible assets, a non-GAAP financial measure, was 8.81% at September 30, 2021, compared to 9.10% at June 30, 2021.

Asset Quality

Annualized net charge-offs as a percent of average loans for the third quarter of 2021 were 0.00%, consistent with 0.00% for the second quarter of 2021 and the third quarter of 2020. At September 30, 2021, the Company's nonperforming assets, which include nonaccrual loans, loans past due 90 days and still accruing, and foreclosed assets, were $734,000, or 0.02% of total assets, as compared to $761,000, or 0.02% of total assets at June 30, 2021, and $433,000 or 0.02% of total assets at September 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 September 30, 2021 totaled $67.4 million, compared to $56.7 million at June 30, 2021, and $50.9 million at September 30, 2020. 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 September 30, 2021 totaled $7.7 million, compared to $7.2 million at June 30, 2021, and $16.1 million at September 30, 2020.

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 13 modified loans totaling $35.4 million outstanding as of September 30, 2021, representing 1.3% of the total loan portfolio, excluding PPP loans, which is down slightly from 1.4% at June 30, 2021.

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

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 high-net-worth 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 $3.4 billion and seven branches as of September 30, 2021, 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.

Investor Relations Contact:

Justin Horstman

Director of Investor Relations

[email protected]

952-542-5169

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: the negative effects of the COVID-19 pandemic, including its effects on the economic environment, our clients and our operations, including due to supply chain disruptions, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic; loan concentrations in our portfolio; the overall health of the local and national real estate market; our ability to successfully manage credit risk; business and economic conditions generally and in the financial services industry, nationally and within our market area; our ability to maintain an adequate level of allowance for loan losses; new or revised accounting standards, including as a result of the future implementation of the Current Expected Credit Loss standard; the concentration of large loans to certain borrowers; the concentration of large deposits from certain clients; our ability to successfully manage liquidity risk; our dependence on non-core funding sources and 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; developments and uncertainty related to the future use and availability of some reference rates, such as the London Interbank

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Offered Rate, as well as other alternative reference rates; the composition of our senior leadership team and our ability to attract and retain key personnel; the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents; interruptions involving our information technology and telecommunications systems or third-party servicers; competition in the financial services industry; 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 changes to federal and state corporate tax rates; interest rate risk; fluctuations in the values of the securities held in our securities portfolio; the imposition of tariffs or 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; potential impairment to the goodwill we recorded in connection with our past acquisition; changes to U.S. or state tax laws, regulations and guidance, including recent proposals to increase the federal corporate tax rate; 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. We undertake 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.

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Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets

(dollars in thousands, except share data)

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Bridgewater Bancshares, Inc. and Subsidiaries
Consolidated Statements of Income

(dollars in thousands, except per share data)

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Non-GAAP Financial Measures

(dollars in thousands) (unaudited)

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Non-GAAP Financial Measures

(dollars in thousands) (unaudited)

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Non-GAAP Financial Measures

(dollars in thousands) (unaudited)

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