Bridgewater Bancshares, Inc._2023 Annual Report

Average interest earning assets produced a fully tax-equivalent yield of 4.35% for the year ended December 31, 2022, compared to 4.16% for the year ended December 31, 2021. The 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. The average rate paid on interest bearing liabilities was 1.34% for the year ended December 31, 2022, compared to 0.93% for the year ended December 31, 2021, primarily due to the rapid increase in market interest rates that occurred between the periods, which impacted all funding sources. Interest Income. Total interest income on a tax-equivalent basis was $164.9 million for the year ended December 31, 2022, compared to $129.7 million for the year ended December 31, 2021. The $35.2 million, or 27.1%, increase in total interest income on a tax-equivalent basis was primarily due to strong organic growth in the loan portfolio and purchases of investment securities, offset partially by a reduction in the recognition of PPP origination fees. Interest income on cash investments increased $398,000, or 199.9%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, despite a $66.1 million decrease in average balances, primarily due to the interest rate hikes during the year. Interest income on the investment securities portfolio, on a fully-tax equivalent basis, increased $6.8 million, or 66.3%, for the year ended December 31, 2022, compared to the year ended December 31, 2021, primarily due to a $127.6 million, or 32.4%, increase in average balances between the two periods and higher rates earned on securities. Interest income on loans, on a fully-tax equivalent basis, for the year ended December 31, 2022 was $146.8 million, compared to $119.0 million for the year ended December 31, 2021. The $27.8 million, or 23.4%, increase was primarily due to a $605.9 million, or 23.4%, increase in the average balance of loans outstanding from continued organic loan growth and a four basis point increase in the average yield on loans, excluding PPP, partially offset by a $5.5 million decline of interest and fees earned on PPP loans. The aggregate loan yield, excluding PPP loans increased to 4.58% for the year ended December 31, 2022, which was four basis points higher than 4.54% for the year ended December 31, 2021. Interest Expense. Interest expense on interest bearing liabilities was $34.0, an increase of $14.6 million, or 75.5%, for the year ended December 31, 2022, compared to $19.4 million for the year ended December 31, 2021. The increase was primarily due to the rapid increase in market interest rates that occurred between periods, which impacted all funding sources. Interest expense on deposits was $23.4 million for the year ended December 31, 2022, compared to $13.8 million for the year ended December 31, 2021. The $9.5 million, or 68.9%, increase in interest expense on deposits was primarily due to the upward repricing of the deposit portfolio consistent with the higher rate environment and the average balance of interest bearing deposits increasing by $276.2 million, or 14.2%. The cost of total deposits was 0.75% for the year ended December 31, 2022, a 24 basis point increase, compared to 0.51% for the year ended December 31, 2021. The increase was primarily due to the upward repricing of the deposit portfolio in the higher interest rate environment. Interest expense on borrowings was $10.6 million for the year ended December 31, 2022, an increase of $5.1 million, compared to $5.5 million for the year ended December 31, 2021. This increase was primarily due to the increased utilization of federal funds purchased and FHLB advances in the rising interest rate environment. Provision for Credit Losses 2023 Compared to 2022 On January 1, 2023, the Company adopted ASU No. 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments,” more commonly referred to as “CECL.” Upon adoption of CECL, the Company’s allowance for credit losses on loans increased $650,000 and the allowance for off-balance sheet credit exposures increased $4.9 million. The tax-effected impact of these two items totaled $3.9 million and was recorded as an adjustment to retained earnings as of January 1, 2023.

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