Q3 2023 Bridgewater Bancshares Inc Earnings Call

October 26, 2023

Opening remarks, there will be a question and answer session to ask a question. Please press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

Note that today's call is being recorded at this time I would like to introduce Justin Horstman director of Investor Relations to begin the conference call. Please go ahead.

Thank you Debbie and good morning, everyone. Joining me on today's call are Jerry Bach, Chairman, President and Chief Executive Officer, Joseph <unk>, Chief Financial Officer, Jeff Shelburne, Chief Credit Officer, and Nick place Chief lending officer in just a few moments we will provide an overview of our 2023 third quarter financial results will be.

Referencing a slide presentation that is available on the Investor Relations section of Bridgewater as website investors that Bridgewater Bank ml Dot com following our opening remarks, we will open the call for questions.

During today's presentation, we may make projections or other forward looking statements regarding future events or the future financial performance of the company. We caution that such statements are predictions and that actual results may differ materially.

Please see the forward looking statement disclosure in our 2023 third quarter earnings release for more information about risks and uncertainties, which may affect us. The information. We will provide today is as of and for the period ended September 32023, and we undertake no duty to update the information.

We may also disclose non-GAAP financial measures. During this call. We believe certain 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 our peers. We caution that these disclosures should not be viewed as a substitute for <unk>.

Operating results determined in accordance with GAAP.

Please see our 2023 third quarter earnings release for reconciliations of non-GAAP disclosures to the comparable GAAP measures.

I would now like to turn the call over to Bridgewater, as chairman President and CEO Jerry Bock.

Thank you Justin and thank you everyone for joining us today.

I'll start with a quick overview of the third quarter, which had several encouraging trends.

After net interest margin compression began to slow in the last quarter. We were pleased to begin seeing the stability in the margin during the third quarter.

While the margin declined eight basis points quarter over quarter, we saw signs of stabilization on a month to month basis throughout the quarter.

Joe will talk more about the margin dynamics shortly.

Second given the prolonged higher interest rate environment, we've been focused on enhancing our balance sheet composition to set us apart for longer term profitability and success.

Concentrated efforts are being made to build our deposit base reduce our reliance on higher cost borrowings and slow our pace of loan growth in the near term.

For the second consecutive quarter, we saw improvements in our overall funding base as core deposits increased 11% on an annualized basis and total borrowings declined 30% from the second quarter with no overnight borrowings on quarter end.

While we have determined our long track record of generating.

Generated a robust and profitable loan growth over the years, we have intentionally slowed the pace of loan growth in 2023, and actually saw balances declined slightly in the third quarter.

While this was due in part to an uptick in payoffs and Paydowns during the quarter. We are also being more thoughtful about our growth in the current environment.

As a result, we expect more limited loan growth in the near term.

Combined with growing deposits and capital.

Reducing the loan to deposit ratio and stabilizing the net interest margin. This will give us the ability to generate profitable growth when the environment becomes more favorable.

Bridgewater has always been a growth engine and we certainly don't see that changing however.

However, we believe being more selective today will position us better for the long term.

Expenses remained very well controlled on a year to year basis.

However, as expected we saw an increase in noninterest expense in the third quarter, primarily related to ongoing investments, we're making in our people.

Lastly, asset quality remains superb with just one basis point of net charge offs.

Incidentally low levels of nonperforming assets and stable levels of watch and substandard loans.

While we continue to be very proactive and diligent on this front, we remain pleased with the performance and quality of our loan portfolio.

In addition to these encouraging trends.

Our overall focus remains on driving steady tangible book value growth for our shareholders, which we have done for 27 consecutive quarters.

In fact, only 12% of banks between three and $10 billion in assets have been able to grow tangible book value each of the past eight quarters.

Before I hand, it over to Joe I want to take a minute to share some additional insights into other activities happening across the bank.

The BW be culture remains a focus and.

Engaged team members.

Late to better service less turnover and ultimately a more committed workforce.

We see great engagement with our team members.

Participation in events, including health and wellness, Mentorship, DNI and voluntary remains high and turnover remains well below industry norms.

And we continue to receive recognition locally and nationally for our culture.

In addition, we are continuing to proactively engage with existing and potential clients, which includes expanded outreach to targeted verticals in C&I.

We indicated at the beginning of the year that C&I was a focus for us and we're making inroads in certain niche areas, where we have strong connections.

Women led businesses and entrepreneurs and companies running on the Eos operating system now.

Working is something we do better than anyone and we are using this strength to extend our reach into these opportunities.

While we are still in the early stages, we have had early success in creating new C&I opportunities.

Being efficient has always been important to BW B <unk>.

Investments in technology, specifically streamlining workflows R. R.

Creating efficiencies across the business.

Investments in our project management function are ensuring we execute effectively on large internal initiatives and reap the rewards as soon as possible.

While the overall environment remains challenging for many banks.

We remain very optimistic on how Bridgewater is positioned moving forward.

With that I'm going to turn it over to Joe.

Thank you Gerry turning to slide four the net interest margin declined just eight basis points to $2 32 for the third quarter. This compared to our September Standalone margin of $2 30, which was down just three basis points from the month of June Standalone margin of $2 33.

Even more encouraging is the margin showed signs of stabilization on a month to month basis during the quarter.

The chart in the bottom right shows the trend in monthly core margin compression, which excludes loan fees as they can be lumpy from month to month.

After seeing several months a mid teens margin compression in late 2022 in early 2023, we saw a gradual slowing began in the second quarter of 2023. This trend continued into the third quarter with the core margin remaining relatively stable throughout July August and September.

This was driven by a moderation in rising funding costs as core deposits grew and borrowings declined coupled with the continued slow but steady increase in earning asset yields.

We would expect the quarterly margin stabilized over the near term as the compression continues to slow keeping in mind that funding costs are and will remain under pressure given other market alternatives as we mentioned in the past the margin outlook is dependent on several factors, including future changes in interest rates the shape of the yield curve and the pace of <unk>.

Core deposit growth.

Slide five shows the various components of the margin portfolio.

Portfolio loan yields moved higher and should continue to do so for the foreseeable future.

As we look ahead, we have over $500 million of fixed and adjustable rate loans scheduled to reprice over the next year and nearly $600 million of variable rate loans efficiently floating.

Another factor here as loan fees.

<unk> had around a 10 basis point impact on the aggregate portfolio loan yields over the past few quarters. However, this is down meaningfully from our 30 basis point run rate in mid 2022, as payoffs have declined and subsequent deferred loan origination fee realization as well.

In addition to loan yields the yield on our securities portfolio has also continued to increase up.

Up 15 basis points from the second quarter to $4 39.

While loan growth has been more muted we have continued to grow the securities book with period period end balances up 11% annualized during the third quarter.

Keep in mind that we do not have any held to maturity securities.

While rising funding costs continue to outpace earning asset yields the rising cost of funds has slowed meaningfully.

This was largely due to strong core deposit growth and a decrease in our reliance on borrowings and overnight money and.

In fact, our overall funding cost increase just 19 basis points in the third quarter compared to a 50 basis point increase in the second quarter.

That said funding costs are still under pressure and we expect to see deposit costs continuing to move slowly higher given competition from other bank and nonbank alternatives and the fed's uncertain interest rate outlook.

Turning to slide six we have demonstrated a long track record of strong revenue and profitability.

While this has been a more challenging revenue environment due in part to our spread based model. We saw signs of stabilization in the third quarter. Both in terms of net interest income and total revenue.

Noninterest income increased in the third quarter, primarily due to 493000 of <unk> prepayment income similar to what we saw in the first quarter.

Turning to slide seven expenses have remained very well controlled year to date.

After a six 7% decline in the first quarter and an increase of just one 4% in the second quarter. We indicated that we would see an increased pace in the second half of the year.

This was the case as noninterest expense increased six 7% in the third quarter, the majority of which was related to incentives across the entire employee base.

As Purion period end balances up 11% annualized during the third quarter.

Historically, our noninterest expense growth has tracked closely with asset growth.

Keep in mind that we do not have any held to maturity securities.

While rising funding costs continue to outpace earning asset yields the rising cost of funds has slowed meaningfully. This was largely due to strong core deposit growth and a decrease in our reliance on borrowings and overnight money and.

On a year to date basis noninterest expense in 2023 is up just 6% from 2022 below our year over year asset growth of 10, 4%.

Even with our expense discipline, our efficiency ratio has increased into the mid 50% range due to the ongoing revenue headwinds, we still maintain our highly efficient operating model relative to other banks and expect that to remain the case.

In fact, our overall funding cost increase just 19 basis points in the third quarter compared to a 50 basis point increase in the second quarter.

Overall, we feel good about our ability to control expenses, while still making key investments in the business and our people.

With that I'll turn it over to Nick.

Turning to slide six we have demonstrated a long track record of strong revenue and profitability.

Thanks, Joe.

Turning to slide eight deposit growth was a highlight for the second consecutive quarter.

Total deposits increased 10, 8% annualized during the quarter, including $70 million of core deposit growth or 11% annualized.

To supplement our core deposit growth, we added $27 million of broker deposits consistent with the funding strategy. We've had in place since the bank was founded.

Noninterest income increased in the third quarter, primarily due to 493000 of <unk> prepayment income similar to what we saw in the first quarter.

When combined with core deposits helped to offset the liquidation of $195 million of higher cost overnight borrowings during the quarter.

Turning to slide seven expenses have remained very well controlled year to date.

In terms of our deposit growth outlook, it's important to remember that the nature of our deposit base results in.

After a six 7% decline in the first quarter and an increase of just one 4% in the second quarter. We indicated that we would see an increased pace in the second half of the year.

In longer term or longer client acquisition and Onboarding times.

We remain confident in our ability to continue deposit momentum over time as our pipelines remain strong.

This was the case as noninterest expense increased six 7% in the third quarter, the majority of which was related to incentives across the entire employee base.

However, deposit growth can fluctuate quite a bit from quarter to quarter with the growth often not being linear.

Historically, our noninterest expense growth has tracked closely with asset growth on.

That said over the past few quarters, we have added over $115 million of core deposits, which speaks to the strength of our bank our brand in the twin cities and the relationships we have developed with our clients.

On a year to date basis noninterest expense in 2023 is up just 6% from 2022 below our year over year asset growth of 10, 4%.

Turning to slide nine loan growth came in lower than we were expecting as balances declined one 5% annualized during the quarter.

Even with our expense discipline, our efficiency ratio has increased into the mid 50% range due to the ongoing revenue headwinds.

This was largely due to higher than expected payoffs and paydowns, which increased $67 million from the second quarter.

We still maintain our highly efficient operating model relative to other banks and expect that to remain the case.

Had payoffs and Paydowns remain consistent with second quarter levels loan growth would've been five 6% annualized much closer to our expectations.

Overall, we feel good about our ability to control expenses, while still making key investments in the business and our people.

However, as Jerry mentioned earlier, we are taking a more thoughtful approach to our near term growth strategy to optimize profitability over the longer term.

With that I'll turn it over to Nick.

Thanks, Joe.

This includes a continued focus on supporting our core clients in the current environment, while being more selective on new client relationships.

Turning to slide eight deposit growth was a highlight for the second consecutive quarter.

Total deposits increased 10, 8% annualized during the quarter, including $70 million of core deposit growth or 11% annualized.

We are still seeing loan demand in the market that would support a higher growth rate today, but to do so we would need to compromise on pricing and bring in more higher cost funding.

To supplement our core deposit growth, we added $27 million of broker deposits consistent with the funding strategy. We've had in place since the bank was founded.

Throw in where we're at in the credit cycle.

It just doesn't make sense from a profitability standpoint.

When combined with core deposits. This helped to offset the liquidation of $195 million of higher cost overnight borrowings during the quarter.

Ultimately this presents a good opportunity for us to continue building on our deposit momentum and improve our loan to deposit ratio in the near term.

In fact over the past two quarters, we have lowered our loan to deposit ratio from 108% to 101%.

In terms of our deposit growth outlook, it's important to remember that the nature of our deposit base results.

In longer term or longer client acquisition and Onboarding times, we remain confident in our ability to continue deposit momentum over time as our pipelines remain strong.

This ratio improves we will be better positioned to deploy capital into more robust loan growth when the environment is more favorable.

Turning to slide 10, you can see that while new loan originations and advances have declined.

However, deposit growth can fluctuate quite a bit from quarter to quarter with the growth often not being linear.

Year over year, they rebounded over 20% in the third quarter payoff.

Payoffs and Paydowns have been on a similar trajectory with steady declines over the past year, but as we've mentioned there was a notable increase in the third quarter as interest rates began to stabilize.

Turning to slide nine loan growth came in lower than we were expecting as balances declined one 5% annualized during the quarter. This was largely due to higher than expected payoffs and paydowns, which increased $67 million from the second quarter.

We also continue to use loan participation as a tool to manage our loan growth, including the sale of a $134 million year to date.

Okay.

On Slide 11, you can see there was not a lot of movement in the various loan portfolios given relatively stable loan balances during the quarter.

Payoffs and Paydowns remain consistent with second quarter levels phone growth would've been five 6% annualized much closer to our expectations.

The movement, we did see was primarily related to balance is migrating from construction to multifamily as these projects completed their construction phase.

However, as Jerry mentioned earlier, we are taking a more thoughtful approach to our near term growth strategy to optimize profitability over the longer term.

Overall, we remain comfortable with the diversity diversification, we have across our loan portfolio.

With that I'll turn it over to Jeff.

This includes a continued focus on supporting our core clients in the current environment, while being more selective on new client relationships.

Thanks, Nick.

Going to slide 12, we continue to feel good about our asset quality as nonperforming assets remained at very low levels, making up just zero point <unk>, 2% of total assets at the end of September net.

We are still seeing loan demand in the market that would support a higher growth rate today, but to do so we would need to compromise on pricing and bring in more higher cost funding.

Net charge offs were just one basis point with cumulative net charge offs of just $446000 since 2019, and we again had virtually no loans 30 to 89 days past due.

Throw in where we're at in the credit cycle.

It just doesn't make sense from a profitability standpoint.

Ultimately this presents a good opportunity for us to continue building on our deposit momentum and improve our loan to deposit ratio in the near term.

All of this is largely due to our measured risk selection consistent underwriting standards active credit oversight and experienced lending and credit teams.

In fact over the past two quarters, we have lowered our loan to deposit ratio from 108% to 101%.

But we are still not seeing early signs of credit weakness the higher for longer interest rate environment is putting pressure on businesses, which will likely result in credit normalization over time.

As this ratio improves we will be better positioned to deploy capital into more robust loan growth when the environment is more favorable.

Turning to slide 10, you can see that while new loan originations and advances have declined.

We also remain well reserved at 136% of gross loans, we had no provision for credit losses during the quarter given the stable loan balances, but we did have a negative $600000 provision for unfunded commitments, which are primarily construction loans.

Year over year, they rebounded over 20% in the third quarter payoff.

As we continue to fund these commitments and with our limited loan growth outlook, we would expect to continue to see lower provisions in the near term dependent on the economic conditions and our overall credit quality.

We also continue to use loan participation as a tool to manage our loan growth, including the sale of $134 million year to date.

Yeah.

On Slide 11, you can see there was not a lot of movement in the various loan portfolios given relatively stable loan balances during the quarter.

On Slide 13, you can see that our watch and substandard loans remained relatively stable during the quarter.

The movement, we did see was primarily related to balance is migrating from construction to multifamily as these projects completed their construction phase.

Overall, we feel good about the risk profile of the portfolio and feel it is well positioned moving forward.

Turning to slide 14, we provide some more information on our CRE and office portfolios. The majority of our non owner occupied CRE book is fixed rate, which helps from a repricing risk standpoint, we continue to actively engage with our clients that have maturing loans resetting rates over the next 12 months to identify possible.

Overall, we remain comfortable with the diversity diversification, we have across our loan portfolio.

With that I'll turn it over to Jeff.

Thanks, Nick.

Cash flow stream and recommend solutions early in the process if necessary. We have completed this process for loans maturing of our pricing in 2023 and are now focusing on our 2024 loans.

Net charge offs were just one basis point with cumulative net charge offs of just $446000 since 2019, and we again had virtually no loans 30 to 89 days past due.

As of quarter end, we had 195 million and non owner occupied CRE office exposure, which is about 5% of total loans. This includes only four loans located in the central business districts totaling $35 million.

All of this is largely due to our measured risk selection consistent underwriting standards active credit oversight and experienced lending and credit teams.

We continue to monitor this portfolio closely and we feel good about the outlook given the lower average loan amount diversified client base and primarily Midwestern suburban office exposure.

Overall, we haven't noticed any material changes in these portfolios since the last quarter and they continue to perform well.

I'll now turn it back over to Joe.

Thanks, Jeff turning to slide 15, you can see that our liquidity profile has continued to improve throughout the year at the end of the third quarter, we had $2 2 billion of on and off balance sheet liquidity, a robust two seven times the level of our uninsured deposits.

On Slide 13, you can see that our watch and substandard loans remained relatively stable during the quarter.

Slide 16 highlights our tangible book value growth and strong capital ratios.

Overall, we feel good about the risk profile of the portfolio and feel it is well positioned moving forward.

Tangible book value per share increased another one 8% to 12, 37% in the third quarter.

We continue to demonstrate an ability to consistently grow tangible book value through various market ups and downs.

From a capital standpoint, we saw an increase in all of our capital ratios for the second consecutive quarter, including tangible common equity, which increased from 739% to 761% and CET, one which increased to over 9%.

Cash flow stream and recommend solutions early in the process if necessary. We have completed this process for loans maturing and repricing in 2023 and are now focusing on our 2024 loans.

We are focused on continuing to build these ratios over time, given our more moderated pace of loan growth and continued earnings retention.

From a capital priority standpoint organic growth remains our primary focus beyond that we continue to review and monitor potential M&A opportunities.

We also have a $25 million stock repurchase program that was approved by the board in 2022, which we will continue to evaluate going forward.

We continue to monitor this portfolio closely and we feel good about the outlook given the lower average loan amount diversified client base and primarily Midwestern suburban office exposure.

Turning to slide 17, I will summarize our thoughts on our near term outlook.

I mean ended the year, we expected high single digit loan growth in 2023 were relatively in line running on a year to date annualized basis at around 6%. However, given the persistent high interest rate environment, We expect limited loan growth in the near term as we focus on building our funding base to be able to deploy in a more favorable lending environment.

Overall, we haven't noticed any material changes in these portfolios since the last quarter and they continue to perform well I'll now turn it back over to Joe.

As Nick mentioned we.

Expect core deposit growth to continue to trending up over time, but I'll reiterate it's not linear on a linked quarter basis, given the nature of our deposit base.

Slide 16 highlights our tangible book value growth and strong capital ratios.

Our current loan to deposit ratio of 101% has declined back into our target range of 95 to 105.

Tangible book value per share increased another one 8% to 12 37 in the third quarter.

As we moderate loan growth, we'd like to see that ratio continue to trend toward the bottom end of that range in the near term.

We continue to demonstrate an ability to consistently grow tangible book value through various market ups and downs.

We would expect margin stabilization over the near term as the quarterly compression continues to slow.

Obviously, there are still a lot of moving pieces, including ongoing funding pressures.

We are pleased with the progress and where we are from a margin standpoint on.

On the expense front, we expect to see ongoing noninterest expense growth as we feel it is important to continue investing in the business and our people to support future growth opportunities.

We are focused on continuing to build these ratios over time, given our more moderated pace of loan growth and continued earnings retention.

Expense growth has typically aligned with asset growth, but we would expect that to be the case for the full year of 2023.

From a capital priority standpoint organic growth remains our primary focus beyond that we continue to review and monitor potential M&A opportunities.

We also expect lower levels of provision expense given the slower pace of loan growth.

We also have a $25 million stock repurchase program that was approved by the board in 2022, which we will continue to evaluate going forward.

Unfunded commitments continuing to fund and a moderation in the volume of newly originated projects with unfunded commitments I'll now I will turn it back over to Gerry.

Turning to slide 17, I will summarize our thoughts on our near term outlook.

Thanks, Joe finishing up on slide 18, despite the challenging.

Macro economic environment.

The strategic priorities, we identified at the beginning of the year are still in place and we have shared those with you today.

We have made good progress on each of them I would also reiterate our continued ability to grow tangible book value. The current banking environment has presented several challenges, including meaningful margin compression and a slower pace of loan growth than we had been used to but despite all of that we've been able to continue compounding tangible book value.

As Nick mentioned we.

Expect core deposit growth to continue to trending up over time, but I'll reiterate it's not linear on a linked quarter basis, given the nature of our deposit base.

Our current loan to deposit ratio of 101% has declined back into our target range of 95 to 105.

This remains a focus for us and a key way in which we drive shareholder value through economic cycles.

As we moderate loan growth, we'd like to see that ratio continue to trend toward the bottom end of that range in the near term.

With that we will open this up for questions.

We will now begin the question and answer session.

We would expect margin stabilization over the near term as the quarterly compression continues to slow.

As a reminder to ask a question. Please press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

Obviously, there are still a lot of moving pieces, including ongoing funding pressures.

We are pleased with the progress and where we are from a margin standpoint on.

On the expense front, we expect to see ongoing noninterest expense growth as we feel it is important to continue investing in the business and our people to support future growth opportunities.

Expense growth has typically aligned with asset growth, but we would expect that to be the case for the full year of 2023.

The first question comes from.

Jeff Lewis with D. A davidson.

We also expect lower levels of provision expense given the slower pace of loan growth.

Please go ahead.

Thanks, Good morning.

Looking at.

Unfunded commitments continuing to fund and a moderation in the volume of newly originated projects with unfunded commitments I'll now I'll turn it back over to Gerry.

The.

At the limited growth I, just wanted to kind of poke through that a little bit you guys are pretty pretty clear on it.

One is.

Thanks, Joe finishing up on slide 18, despite the challenging.

Gauge the level of participations.

You have any visibility on paydowns or amortization schedule ahead to try to figure out sort of where we are how long got it.

Macro economic environment.

The strategic priorities, we identified at the beginning of the year are still in place and we have shared those with you today.

Maybe limited net growth or or.

With that turn maybe if possible.

Good morning, Jeff This is Nick.

Yes.

A lot of that participation.

That we would fund it through the quarter were related to prior originated loans that included construction transactions that had a participant on them.

This remains a focus for us and a key way in which we drive shareholder value through economic cycles.

We have.

Pulled back a bit on our.

With that we will open this up for questions.

Selling a lot of participations on new transactions as an effort to.

We will now begin the question and answer session.

Continue to supplement the growth.

We're looking for long term so we do feel good about the quarter, although we balances were down slightly.

That actual advances in originations were up quarter over quarter. So it was a bit lumpy with some with some increased payoffs debt some of which were delayed from second quarter and pushed into third quarter and some of which were moved up from from fourth to third so.

The first question comes from.

As we look out at our pipeline of payoffs.

Jeff Lewis with D. A davidson.

It looks to be a bit more.

Please go ahead.

Like it had been earlier in the year.

Thanks, Good morning.

Looking ahead.

As we sort of project forward. It felt like it was just a bit.

The.

At the limited growth I, just wanted to kind of poke through that a little bit you guys are pretty pretty clear on it.

Acerbate it lumpy there in Q3.

Okay.

Nick.

And if you could hazard a guess for for <unk>.

One is.

24 expectations on net growth we'd be in the mid.

Gauge the level of participations.

Mid to high single digit or do you think we revert to kind of historical Bridgewater.

You have any visibility on paydowns or amortization schedule ahead to try to figure out sort of where we are how long got it.

Over.

A couple of quarters.

Okay.

Maybe limited net growth or or.

No I think your first out there is right I think.

With that turn maybe if possible.

As we look farther out.

Throughout 2024 that feels like that mid single digits is kind of where we're looking at it I mean like we've always mentioned, though.

Good morning Jefferson Nick.

Yes.

A lot of that participation.

That we would fund it through the quarter were related to prior originated loans that included construction transactions that had a participant on them.

Our growth isn't always perfectly smooth and linear it may sort of.

Be lumpy at times and in all likelihood just given where were adequate.

We have.

It would be more heavily weighted toward the back half of the year as we're thinking through it.

Pulled back a bit on our.

Selling a lot of participations on new transactions as an effort to.

Got it maybe switching gears Joe appreciate the comments on kind of that historical coupling of asset growth and expense growth.

Continue to supplement the growth.

We're looking for long term so we do feel good about the quarter, although we balances were down slightly.

Assets were down in the quarter and expenses up 7% linked.

That's kind of a near term.

That actual advances in originations were up quarter over quarter. So it was a bit lumpy with some with some increased pay off debt some of which were delayed from second quarter and pushed into third quarter and some of which were moved up from from fourth to third so.

But I'm trying to kind of rationalize where expenses had in the next couple of quarters relative to.

If loan growth is going to be pretty muted just wanted to get a sense for.

And some of that expense base, you cant control with sort of the FDIC side, but.

As we look out at our pipeline of pay offs.

It looks to be a bit more.

Just.

Kind of near term and then even a similar question that was asked Nick just kind of expense growth and 24 <unk>.

Like it had been earlier in the year.

As we sort of project forward. It felt like it was just a bit.

Do you think we'd revert back to kind of historical kind of pairing of of asset growth and cost growth.

Acerbate it lumpy there in Q3.

Okay.

Nick.

And if you could hazard a guess for for <unk>.

Yes, I think youre thinking about it the right way, Jeff I think we look at it more over the year and over the long haul and as we've always said.

24 expectations on net growth we'd be in the.

Mid to high single digit or do you think we revert to kind of historical Bridgewater.

That relationship has held up.

Over.

Whether it's on a growth rate basis, or if you look at noninterest expense to average assets that ratio.

A couple of quarters.

Okay.

No I think your first out there is right I think.

You take a step back and you look at it on a full year.

As we look farther out.

That's relatively in line so to Nick's point mid single digit loan growth next year and I would also expect expenses to run in line with that so I think it's hard.

Throughout 2024, it feels like that mid single digits is kind of where we're looking at it I mean like we've always mentioned, though.

Our growth isn't always perfectly smooth and linear it may sort of.

From a quarter over quarter basis, we don't we don't think about it that way. We just we think about more over the long haul and.

Be lumpy at times and in all likelihood just given where were adequate.

As we guided last quarter, we expected a step up in.

It would be more heavily weighted toward the back half of the year as we're thinking through it.

In the third quarter.

On a linked quarter basis, but again looking looking back on a year to date basis, it's only 6% and if you think of asset growth over the last year, it's 10% so that relationship remains intact.

Got it maybe switching gears Joe appreciate the comments on kind of that historical coupling of asset growth and expense growth.

Assets were down in the quarter and expenses up 7% linked that's kind of a near term.

Got it.

And maybe a credit related question just done.

Job, but I'm trying to kind of rationalize where expenses had in the next couple of quarters relative to.

So I'm curious second guessing of multifamily loans of late just in the kind of.

Listening to some other calls.

If loan growth is going to be pretty muted just wanted to get a sense for.

At 37% of the portfolio maybe.

Some of that expense base, you cant control with sort of the FDIC side, but.

Maybe Jeff just a question on kind of the long term viability of that sector, what's been very historically very clean.

Just.

Kind of near term and then even a similar question that was asked Nick just kind of expense growth and 24.

Just wanted to kind of.

Kind of revisit.

Do you think we'd revert back to kind of historical kind of pairing of asset growth and cost growth.

From year end.

How you feel about your comfort level with the multifamily segment in general.

Yes, I think youre thinking about it the right way, Jeff I think we look at it more over the year and over the long haul and as we've always said.

Great question and like you said there has been a lot of press out there on the overall national multifamily market recently.

We feel good about the portfolio, we feel good about the twin cities market.

That relationship has held up.

Whether it's on a growth rate basis, or if you look at.

We've talked to you about this before but.

Noninterest expense to average assets that ratio.

The market in the twin cities has always been has never really been a boon robust market and much more stable characteristics in terms of rent growth in.

You take a step back and you look at it on a full year.

That's relatively in line so to Nick's point mid single digit loan growth next year and I would also expect expenses to run in line with that so I think it's hard.

With occupancy levels.

There was a recent report just nationally on multifamily that we're trying to gauge overbuilt market by looking at the number of units under construction.

From a quarter over quarter basis, we don't we don't think about it that way, we think about more over the long haul and.

Well a bit that the total inventory in the market in the twin cities came in at 5%, which was lower than the national average. So I think that tells you that there's just.

As we guided last quarter, we expected a step up.

In the third quarter.

On a linked quarter basis, but again looking looking back on a year to date basis, it's only 6% and if you think of asset growth over the last year, it's 10% so that relationship remains intact.

It's not being overbuilt also with some of the pressures on the single family market with a lack of inventory on the market.

Interest rate environment floating up that bodes well for the multifamily market as well in terms of the need for housing.

Got it.

And maybe a credit related question just done.

With that said with with our covenant testing.

So curious second guessing of multifamily loans of late just in the kind of.

And interest rates holding up we have seen some compression and debt service coverage ratios are projects.

Listening to some other calls.

We expect that will be somewhat short term and then over the long term that will come back to a more normalized ratio and.

At 37% of the portfolio maybe.

Maybe Jeff just a question on kind of the long term viability of that sector, what's been very historically very clean.

And I guess the last thing I wanted to add is just that.

Affordable housing units represent a significant portion of our market then.

Just wanted to kind of.

Kind of revisit.

The twin cities like everywhere is lacking and affordable units. So I think that that is another.

From year end.

How you feel about your comfort level with the multifamily segment in general.

This data point that reflects stabilization in the portfolio.

Well great question and like you said there has been a lot of press out there on the overall national multifamily market recently.

And if I could Jeff just overall outside of multifamily just look at our credit in general your thoughts watch list.

We feel good about the portfolio, we feel good about the twin cities market.

Balances down a bit sub standard up a bit but.

NPA and net charge offs continued to be pretty great, but overall kind of body language on credit.

We've talked to you about this before but.

The market in the twin cities has always been has never really been a boom or bust market been much more stable characteristics in terms of rent growth.

No just.

Great.

Good.

With occupancy levels.

We're probably more dialed in to the portfolio between between covenant testing between looking at repricing of loans I think that that's probably the a lot of banks are looking at that the same way as one of the bigger risk factors out there as I mentioned in the in the deck shows that we have a lot of fixed rate product because of our commercial real estate focused so that helps from.

There was a recent report just nationally on multifamily.

<unk> will build market by looking at the number of units under construction.

With that the total inventory in the market in the twin cities came in at 5%, which was lower than the national average. So I think that tells you that there's just.

<unk> is not being overbuilt also with some of the pressures on the single family market with a lack of inventory on the market.

<unk> <unk>.

From a pricing standpoint, but we're just continuing to dive in wherever we can in order to try to identify potential risk factors.

Interest rate environment floating up that bodes well for the multifamily market as well in terms of the need for housing.

That would impact the portfolio, but right now we're not we're not seeing too much.

With that said with with our covenant testing.

Great I appreciate it I'll step back.

And interest rates holding up we have seen some compression and debt service coverage ratios are projects.

This concludes our question and answer session I would like to turn the call back over to Gerry Mark for any closing remarks.

We expect that will be somewhat short term and then over the long term that will come back to a more normalized ratio.

Thanks for joining the call today.

And I guess the last thing I wanted to add is just that.

We at <unk> remain optimistic about the future and we are seeing encouraging trends and continue to push our strong culture.

Affordable housing units represent a significant portion of our market then.

The twin cities like everywhere is lacking and affordable units. So I think that's another date.

Our brand our network and events, we are some of the best clients I think in the nation and our obviously our employees too. So thanks for your time today, and we'll talk to you next quarter Bye.

Data points reflect stabilization of the portfolio.

And if I could Jeff just overall outside of multifamily just look at our credit in general your thoughts watch list.

This concludes the presentation. Thank you for attending today's conference.

Balances down a bit sub standard up a bit but.

NPA and net charge offs continued to be pretty great, but overall kind of body language on credit.

You may now disconnect.

No just.

Great.

Good were probably more dialed in to the portfolio between between covenant testing between looking at repricing of loans I think that thats, probably the a lot of banks are looking at that the same way as one of the bigger risk factors out there as I mentioned in the deck shows that we have a lot of fixed rate product because of our commercial real estate.

Focus so that helps from a repricing standpoint, but we're just continuing to.

To dive in.

We can in order to try to identify potential risk factors.

That would impact the portfolio, but right now we're not we're not seeing too much.

Great I appreciate it I'll step back.

This concludes our question and answer session I would like to turn the call back over to Gerry Mark for any closing remarks.

Thanks for joining the call today.

We had beat all we remain optimistic about the future and we are seeing encouraging trends on continue to push our strong culture.

Our brand our network and events, we have some of the best clients I think in the nation and our obviously our employees too. So thanks for your time today, and we'll talk to you next quarter.

This concludes the presentation. Thank you for attending today's conference.

You may now disconnect.

Q3 2023 Bridgewater Bancshares Inc Earnings Call

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