Bridgewater Bancshares, Inc. Announces Third Quarter 2019 Earnings

BLOOMINGTON, Minn.--(BUSINESS WIRE)-- Bridgewater Bancshares, Inc. (Nasdaq: BWB) (the Company), the parent company of Bridgewater Bank (the Bank), today announced net income of $7.8 million for the third quarter of 2019, a 20.8% increase over net income of $6.5 million for the third quarter of 2018. Net income per diluted common share for the third quarter of 2019 was $0.27, a 24.8% increase, compared to $0.21 per diluted common share for the same period in 2018.

“We produced solid financial results in the third quarter as we continue to drive shareholder value,” commented Chairman, Chief Executive Officer, and President, Jerry Baack. “We could not be more pleased with our deposit growth of $103.0 million during the quarter, representing 24.0% annualized growth. This result reflects our ongoing investment in our deposit offering platform and brand awareness efforts. Profitable loan growth continues to be at the forefront of our business plan and we remain focused on disciplined loan pricing in this challenging rate environment. Our asset quality remains strong as demonstrated by our nonperforming assets to total assets ratio of 0.04%, which speaks to our diligent underwriting practices and the health of the diversified Twin Cities economy.”

Third Quarter 2019 Financial Results

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1. Ratio excludes the amortization of tax credit investments and represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" for further details.
2. Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" for further details.

Linked-Quarter Highlights

• Net income was $7.8 million for the third quarter of 2019, compared to $8.0 million for the second quarter of 2019.

• Diluted earnings per common share were $0.27 for the third quarter of 2019, compared to $0.26 for the second quarter of 2019.

• Tangible book value per share, a non-GAAP financial measure, was $8.08 at September 30, 2019, compared to $7.78 at June 30, 2019.

• Annualized return on average assets (ROA) and return on average common equity (ROE) for the third quarter of 2019 were 1.43% and 13.31%, respectively, compared to annualized ROA and ROE of 1.55% and 13.88%, respectively, for the second quarter of 2019.

• Gross loans increased $61.3 million, or 13.6% on an annualized basis, to $1.85 billion at September 30, 2019, compared to June 30, 2019.

• Deposits increased $103.0 million, or 24.0% on an annualized basis, to $1.80 billion at September 30, 2019, compared to June 30, 2019.

• The ratio of nonperforming assets to total assets was 0.04% at September 30, 2019, compared to 0.07% at June 30, 2019.

• The adjusted efficiency ratio, a non-GAAP financial measure which excludes the impact of the amortization of tax credit investments from noninterest expense, was 42.9% for the third quarter of 2019, compared to 42.7% for the second quarter of 2019.

Year-Over-Year Highlights

• Net income was $7.8 million for the third quarter of 2019, compared to $6.5 million for the third quarter of 2018, an increase of $1.3 million, or 20.8%.

• Diluted earnings per common share were $0.27 for the third quarter of 2019, compared to $0.21 for the third quarter of 2018, an increase of 24.8%.

• Tangible book value per share, a non-GAAP financial measure, increased 17.2%, or $1.19, to $8.08 at September 30, 2019, compared to $6.89 at September 30, 2018.

• Annualized ROA and ROE for the third quarter of 2019 were 1.43% and 13.31%, respectively, compared to annualized ROA and ROE of 1.41% and 12.28%, respectively, for the third quarter of 2018.

• Gross loans increased $246.3 million, or 15.4%, at September 30, 2019, compared to September 30, 2018.

• Deposits increased $323.1 million, or 21.8%, at September 30, 2019, compared to September 30, 2018.

• The ratio of nonperforming assets to total assets was 0.04% at September 30, 2019 and September 30, 2018.

• The adjusted efficiency ratio, a non-GAAP financial measure which excludes the impact of the amortization of tax credit investments from noninterest expense, was 42.9% for the third quarter of 2019, compared to 42.7% for the third quarter of 2018.

Key Financial Measures

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1. Includes shares of common stock and non-voting common stock. On October 25, 2018, the Company exchanged shares of common stock for all of the outstanding shares of non-voting common stock. Following the exchange, no shares of non-voting common stock were outstanding.
2. Represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" for further details.
3. Amounts calculated on a tax-equivalent basis using the statutory federal tax rate of 21%.
4. Ratio excludes the amortization of tax credit investments and represents a non-GAAP financial measure. See "Non-GAAP Financial Measures" for further details.

Selected Financial Data

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

Income Statement

Net Interest Income

Net interest income was $18.9 million for the third quarter of 2019, an increase of $797,000, or 4.4%, from $18.1 million in the second quarter of 2019, and an increase of $2.3 million, or 13.8%, from $16.6 million in the third quarter of 2018. The linked-quarter increase in net interest income was driven by growth in average interest earning assets. The year-over-year increase in net interest income was largely attributable to growth in average interest earning assets, which increased by $329.5 million, or 18.2%, to $2.13 billion for the third quarter of 2019, from $1.81 billion for the third quarter of 2018. This increase in average interest earning assets was primarily due to continued organic growth in the loan portfolio.

Net interest margin (on a fully tax-equivalent basis) for the third quarter of 2019 was 3.56%, a 4 basis point decrease from 3.60% in the second quarter of 2019, and a 15 basis point decrease from 3.71% in the third quarter of 2018. While yield curve dynamics and lower market rates have weighed on earning asset yields, and subsequently the Company’s net interest margin, funding costs have benefitted as evidenced by the 3 basis point decline over the linked-quarter. On a year-over-year basis, net interest margin benefitted from repricing of variable-rate loans and the origination of new loans at higher rates; however, it compressed due to elevated cash balances, lower loan fees recognized, and increased rates paid on deposits and borrowings.

Interest income was $26.6 million for the third quarter of 2019, an increase of $1.1 million, or 4.1%, from $25.5 million in the second quarter of 2019, and an increase of $4.4 million, or 20.0%, from $22.1 million in the third quarter of 2018. The yield on interest earning assets (on a fully tax-equivalent basis) was 4.98% in the third quarter of 2019, compared to 5.05% in the second quarter of 2019 and 4.92% in the third quarter of 2018.

Loan interest income and loan fees remain the primary contributing factors to the year-over-year increase in yield on interest earning assets, driving the aggregate loan yield 7 basis points higher from 5.25% in the third quarter of 2018 to 5.32% in the third quarter of 2019. The linked-quarter decrease of the aggregate loan yield of 1 basis point was primarily due to competitive market pressures and lower interest rates. On a year-over-year basis, as the composition of the aggregate loan yield has shifted, solid loan growth at yields accretive to the existing portfolio yield has enabled the Company to offset the decrease in loan fee income. While deferred loan fees are regularly amortized into income, fluctuations in the level of loan fees recognized can vary based on prepayments and other factors.

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

Interest expense was $7.6 million for the third quarter of 2019, an increase of $255,000, or 3.5%, from $7.4 million in the second quarter of 2019, and an increase of $2.1 million, or 38.8%, from $5.5 million in the third quarter of 2018. The cost of interest bearing liabilities decreased to 2.04% in the third quarter of 2019 from 2.07% in the second quarter of 2019, primarily due to the Company exercising embedded optionality in the brokered deposit portfolio and supplementing the portfolio with strong core deposit growth at lower rates. On a year-over-year basis, the cost of interest bearing liabilities was up 31 basis points from 1.73% in the third quarter of 2018 to 2.04% in the third quarter of 2019 due to higher costs and repricing of deposits and borrowings during the period. Despite the Federal Open Market Committee cutting rates by 25 basis points twice during the period, local market competition for deposits remains fierce.

A summary of the Company’s average balances, interest yields and rates, and net interest margin for the three months ended September 30, 2019, June 30, 2019 and September 30, 2018 is as follows:

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1. Interest income and average rates for tax-exempt investment securities are presented on a tax-equivalent basis, assuming a statutory federal income tax rate of 21%.
2. Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.
3. Net interest margin includes the tax equivalent adjustment and represents the annualized results of: (i) the difference between interest income on interest earning assets and the interest expense on interest bearing liabilities, divided by (ii) average interest earning assets for the period.

Provision for Loan Losses

The provision for loan losses was $900,000 for the third quarter of 2019, an increase of $300,000 from $600,000 for the second quarter of 2019, and a decrease of $375,000 from $1.3 million for the third quarter of 2018. The provision for loan losses increased in the third quarter of 2019 due to an increase in charge-offs and decrease in recoveries, compared to the second quarter of 2019. The year-over-year decrease was attributable to the strong asset quality and consistent performance of the loan portfolio within the diversified Twin Cities economy.

The following table presents a reconciliation of the Company’s allowance for loan losses for the periods indicated:

Noninterest Income

Noninterest income was $946,000 for the third quarter of 2019, a decrease of $188,000 from $1.1 million for the second quarter of 2019, and an increase of $132,000 from $814,000 for the third quarter of 2018. The linked-quarter decrease was primarily due to decreased gains on sales of securities. The year-over-year increase was primarily due to increased gains on sales of securities and foreclosed assets, 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 $9.1 million for the third quarter of 2019, a decrease of $390,000 from $9.5 million for the second quarter of 2019, and an increase of $1.6 million from $7.5 million for the third quarter of 2018. The linked-quarter decrease was primarily due to decreased amortization of tax credit investments and an FDIC insurance assessment credit applied in the current period, offset partially by increased salaries and employee benefits expense. The year-over-year increase was attributed to the amortization of tax credit investments and continued investments in employees, technology, marketing, and other operating costs to meet the needs of the Company’s growth and brand awareness efforts.

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

The Company had 158 full-time equivalent employees at September 30, 2019, compared to 150 employees at June 30, 2019, and 139 employees at September 30, 2018. The increases include strategic hires in deposit gathering, lending, technology, and other supportive roles. While the recognition of tax credit investments creates volatility in the level of total noninterest expense and concurrently the efficiency ratio, it directly reduces income tax expense and the effective tax rate. The efficiency ratio, a non-GAAP financial measure, was 45.6% for the third quarter of 2019, compared to 50.1% for the second quarter of 2019, and 42.7% for the third quarter of 2018. Excluding the impact of the amortization of tax credit investments, the adjusted efficiency ratio, a non-GAAP financial measure, was 42.9% for the third quarter of 2019, and 42.7% for the second quarter of 2019 and third quarter of 2018.

Income Taxes

The effective combined federal and state income tax rate for the third quarter of 2019 was 21.1%, an increase from 12.9% for the second quarter of 2019, and a decrease from 25.3% for the third quarter of 2018. The lower effective combined rates in 2019 compared to 2018 was due to the recognition of tax credits that became eligible to be applied in 2019. The effective combined federal and state income tax rate for the nine months ended September 30, 2019 was 19.5%.

Balance Sheet

Total assets at September 30, 2019 were $2.23 billion, a 5.1% increase from $2.12 billion at June 30, 2019, and a 18.4% increase from $1.89 billion at September 30, 2018. The increase in total assets was primarily due to organic loan growth.

Total gross loans at September 30, 2019 were $1.85 billion, a net increase of $61.3 million, or 3.4%, over total gross loans of $1.78 billion at June 30, 2019, and an increase of $246.3 million, or 15.4%, over total gross loans of $1.60 billion at September 30, 2018.

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

Total deposits at September 30, 2019 were $1.80 billion, an increase of $103.0 million, or 6.1%, over total deposits of $1.70 billion at June 30, 2019, and an increase of $323.1 million, or 21.8%, over total deposits of $1.48 billion at September 30, 2018.

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

Total shareholders’ equity at September 30, 2019 was $236.1 million, an increase of $6.9 million, or 3.0%, over total shareholders’ equity of $229.1 million at June 30, 2019, and an increase of $25.2 million, or 12.0%, over total shareholders’ equity of $210.9 million at September 30, 2018. The increase compared to both periods is due to net income retained and increased unrealized gains, partially offset by stock repurchases made under the Company’s stock buyback program.

During the third quarter of 2019, the Company repurchased 205,567 shares of its common stock, representing less than 1% of the Company’s outstanding shares. Shares were repurchased at a weighted average price of $11.41 for a total of $2.3 million. Strong profitability and capital growth allowed the Company to strategically execute its stock buyback program to enhance shareholder value while maintaining adequate capital levels.

Tangible book value per share, a non-GAAP financial measure, was $8.08 as of September 30, 2019, an increase of 3.8% from $7.78 as of June 30, 2019, and an increase of 17.2% from $6.89 as of September 30, 2018.

Asset Quality

Asset quality metrics for the Company remained strong at September 30, 2019. Annualized net charge-offs (recoveries) as a percent of average loans for the third quarter of 2019 were 0.03%, compared to (0.04)% for the second quarter of 2019, and 0.00% for the third quarter of 2018. At September 30, 2019, the Company’s nonperforming assets, which include nonaccrual loans, loans past due 90 days and still accruing, and foreclosed assets, were $828,000, or 0.04% of total assets, as compared to $1.6 million, or 0.07% of total assets at June 30, 2019, and $718,000, or 0.04% of total assets at September 30, 2018. Notably, the Company had zero loans 30-89 days past due at September 30, 2019.

About the Company

Bridgewater Bancshares, Inc. is a financial holding company headquartered in Bloomington, Minnesota. The Company has two wholly owned subsidiaries, Bridgewater Bank, a Minnesota-chartered commercial bank founded in November 2005, and Bridgewater Risk Management, Inc., a captive insurance company founded in December 2016. Bridgewater Bank has two wholly owned subsidiaries, Bridgewater Investment Management, Inc. and BWB Holdings, LLC. Bridgewater Bank currently operates through 7 branches in Bloomington, Greenwood, Minneapolis (2), St. Louis Park, Orono, and St. Paul, all located within the Minneapolis-St. Paul-Bloomington metropolitan statistical area.

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: 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; the concentration of large loans to certain borrowers; the concentration of large deposits from certain customers; 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; 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; 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; and any other risks described in the “Risk Factors” sections of other 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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1. Nonperforming assets are defined as nonaccrual loans plus loans 90 days past due plus foreclosed assets.

Non-GAAP Financial Measures

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1. Interest income and average rates for tax-exempt investment securities are presented on a tax-equivalent basis, assuming a statutory federal income tax rate of 21%.
2. Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.
3. Net interest margin includes the tax equivalent adjustment and represents the annualized results of: (i) the difference between interest income on interest earning assets and the interest expense on interest bearing liabilities, divided by (ii) average interest earning assets for the period.

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Investor Relations Contact: Jerry Baack Chief Executive Officer investorrelations@bwbmn.com 952-893-6866

Source: Bridgewater Bancshares, Inc.