Bridgewater Bancshares, Inc. Annual Report

Interest expense on borrowings increased $1.1 million to $5.7 million for the year ended December 31, 2019, compared to $4.5 million for the year ended December 31, 2018. This increase was primarily due to increased rates and average balances of FHLB advances, offset in part by a reduction in interest expense on federal funds purchased and notes payable as a result of a decrease in the average balances of these types of borrowings. 2018 Compared to 2017 Net interest income was $64.7 million for the year ended December 31, 2018, an increase of $10.6 million, or 19.5%, compared to $54.2 million for the year ended December 31, 2017. The increase in net interest income was largely attributable to growth in average interest earning assets, particularly strong organic growth in the loan portfolio. Net interest margin (on a fully tax-equivalent basis) for the year ended December 31, 2018 was 3.72%, compared to 3.92% for the year ended December 31, 2017, a decrease of 20 basis points. While net interest margin benefitted from the repricing of variable rate loans and the origination of new loans at higher rates, this was outpaced by increased balances and rates on deposits and borrowings. Furthermore, the lower statutory federal tax rate reduced the net interest income tax equivalent adjustment by six basis points. Average interest earning assets for the year ended December 31, 2018 increased $327.0 million, or 22.7%, to $1.77 billion from $1.44 billion for the year ended December 31, 2017. This increase in average interest earning assets was due to continued organic growth in the loan portfolio as a result of increased loan production. Average interest bearing liabilities increased $223.5 million, or 21.9%, to $1.24 billion for the year ended December 31, 2018, from $1.02 billion for the year ended December 31, 2017. The increase in average interest bearing liabilities was due to an increase in interest bearing deposits, federal funds purchased, FHLB advances, and the issuance of $25.0 million of subordinated debentures in July of 2017. Average interest earning assets produced a tax-equivalent yield of 4.88% for year ended December 31, 2018, compared to 4.76% for the year ended December 31, 2017. The average rate paid on interest bearing liabilities was 1.65% for the year ended December 31, 2018, compared to 1.19% for the year ended December 31, 2017. Interest Income. Total interest income on a tax-equivalent basis was $86.2 million for the year ended December 31, 2018, compared to $68.5 million for the year ended December 31, 2017. The $17.7 million, or 25.8%, increase in total interest income on a tax-equivalent basis was primarily due to organic growth in the loan portfolio. Interest income on loans for the year ended December 31, 2018 was $78.0 million, compared to $60.0 million for the year ended December 31, 2017. The $18.0 million, or 30.0%, increase was due to a 26.6% increase in the average balance of loans outstanding and a 13 basis point increase in the average yield on loans. The increase in the average balance of loans outstanding was due to organic loan growth. The increase in yield on the loan portfolio resulted primarily from repricing of variable rate loans and new loan production at yields accretive to the existing portfolio yield. Interest income on the investment securities portfolio on a fully-tax equivalent basis decreased $473,000, or 5.8%, during the year ended December 31, 2018 compared to the year ended December 31, 2017, despite a $13.6 million increase in average balances between the periods. Interest Expense. Interest expense on interest bearing liabilities increased $8.3 million, or 68.3%, to $20.5 million for the year ended December 31, 2018, compared to $12.2 million for the year ended December 31, 2017, due to increases in interest rates and average balances of both deposits and borrowings. Interest expense on deposits increased to $16.0 million for the year ended December 31, 2018, compared to $9.7 million for the year ended December 31, 2017. The $6.3 million, or 64.3%, increase in interest expense on deposits was primarily due to the average balance of deposits increasing 18.8% combined with a 40 basis point increase in the average rate paid. The increase in the average balance of deposits resulted primarily from increases in savings and money market deposits, time deposits, and brokered deposits. The increase in the average rate paid was primarily due to the impact of higher market interest rates demanded on deposits in the local and wholesale markets.

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