Q4 2023 Bridgewater Bancshares Inc Earnings Call
Good morning, and welcome to the Bridgewater Bancshares 2023 fourth quarter earnings.
Betsy: My name is Betsy and I'll be your conference operator today.
Betsy: All participants have been placed in a listen only mode.
Betsy: After Bridgewater opening remarks, there'll be a question and answer session.
Betsy: To ask a question. Please press Star then one on your Touchtone phone.
Betsy: If youre using a speakerphone please pick up your handset before pressing the keys.
Betsy: To withdraw your question. Please press Star then two.
Betsy: Please note that today's call is being recorded.
At this time I would like to introduce Justin Horstman, Vice President of Investor Relations.
Justin Horstman: To begin the conference call. Please go ahead.
Justin Horstman: Thank you Betsy and good morning, everyone. Joining me on today's call are Jerry Bach, Chairman, President and Chief Executive Officer, Joe Schabowski, Chief Financial Officer, Jeff Shell Berg, Chief Credit Officer, and Nick place Chief lending officer in just a few moments we will provide an overview of our 2023 fourth quarter financial results.
Justin Horstman: I'll be referencing a slide presentation that is available on the Investor Relations section of Bridgewater website investors Dot Bridgewater Bank M. N dotcom 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.
Justin Horstman: Statements are predictions and that actual results may differ materially.
Nick Place: Please see the forward looking statement disclosure in the slide presentation, and our 2023 fourth 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 fourth quarter and year ended December 31, 2023, and we undertake no duty to update the information we may also disclose.
Nick Place: 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.
Nick Place: Caution that these disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP. Please see our slide presentation and 2023 fourth quarter earnings release for reconciliations of the 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 back.
Jerry back: Thank you Justin and thank you to everyone joining us today as we wrap up 2023 I'm encouraged by the positive trends, we began seeing in the third and fourth quarters and how this momentum sets us up for what we anticipate to be a more favorable interest rates and macroeconomic environment in 2024.
Jerry back: Net interest margin stabilization trends continued in the fourth quarter as loan yields expanded and the pace of rising funding costs load Joe will talk more about the margin in a few minutes, but overall, we are pleased with the recent trends we have seen with.
Jerry back: With our liability sensitive balance sheet. We believe we are well positioned to benefit from potential rate cuts and a more normalized yield curve in 2024.
Joe: From a balance sheet perspective deposit growth continued dialogue pace or more muted pace of loan growth given.
Joe: Given the environment in 2023, we have been slowing loan growth building deposits and optimizing our funding base.
Joe: As a result, our loan deposit ratio declined to 100% in the fourth quarter from 108% just a few quarters ago.
Joe: As we head into 2020 for our core deposit pipeline remains strong and we are seeing signs of loan demand picking up in the twin cities.
Justin Horstman: Well manage expenses have always been a trademark of Bridgewater and that was no different in 2023.
Justin Horstman: As expected we saw expenses pick up in the back half of the year, but overall all your expense growth was just one 8% in 2023 lower than our six 1% piece of asset growth.
We're able to do this even with continued investments in our people and technology.
Justin Horstman: Asset quality continues to be superb with just one basis points of charge offs and two basis points of nonperforming assets.
Justin Horstman: I continue to be impressed by our client centric discipline in all of our lending and credit teams.
Justin Horstman: Our underwriting is consistent and our outreach in partnership with clients have been very productive.
In addition, our multifamily portfolio continues to perform well.
Nick Place: I know, we get lumped in with some of the more volatile coastal in high growth markets, but the data shows the twin cities market is stable and much more favorable for multifamily and after 18 years, we have extensive experience in this space.
Nick Place: Another true highlight continues to be our consistent tangible book value growth.
Nick Place: Tangible book value was up nearly 10% in 2023 and has increased each of the past 28 quarters.
Nick Place: Turning to slide four you can see our tangible book value is up 180% during those 28 quarters compared to a median of just 50% for banks with $3 billion to $10 billion in assets. We continue to feel that this is a true differentiator for Bridgewater in a way that we can provide.
Nick Place: Our holder value going forward.
Speaker Change: Before I turn it over to Joe I wanted to share updates on a few other initiatives that our teams have been working on.
Speaker Change: Our risk team continues to enhance our all encompassing risk management framework to be scalable to support our longer term growth plans.
Speaker Change: Our technology team has worked to implement enhancements to improve organization wide efficiencies and installed new data technology to create insights our teams can use to better serve our clients.
Speaker Change: For example, an upgrade to our commercial client facing platform was completed in November providing state of the art technology for our business clients.
Joe: And at Bridgewater people are key with our low turnover, we have worked hard to cultivate a growth mindset with our leadership and development program.
Joe: Many of these are behind the scenes efforts, but they are all significant in executing our long term strategy.
Joe: With that I'll turn it over to Joe.
Joe: Thank you Gerry turning to slide five net interest margin compression slowed in the fourth quarter down five basis points from third quarter to 227 as stabilization trends continued.
Joe: The compression was primarily due to ongoing industry wide deposit cost pressures and the timing of loan fees, which were stronger in the third quarter due to higher payoff activity.
Joe: However, overall margin stabilization continued as our December Standalone margin was 230, which was flat compared to September stand alone.
Joe: The stabilization in the margin has also driven stability in our net interest income as loan growth has moderated.
Justin Horstman: In fact, net interest income excluding loan fees, which have been impacted by fewer payoffs in the current environment increased quarter over quarter for the first time since the third quarter of 2022.
Justin Horstman: As Jerry mentioned, our balance sheet is well positioned to benefit from potential rate cuts, but more specifically a more normalized yield curve.
Justin Horstman: We have over $1 billion of adjustable funding explicitly tied to short term interest rates, which should reprice lower when there is a potential rate cut.
Justin Horstman: This includes immediately adjustable deposits as well as derivative cash flow hedges.
Justin Horstman: In addition, our loan portfolio, which is 70% fixed rate should continue to reprice higher even when interest rates come down given the blended roll off rate relative to new origination yields.
Justin Horstman: Turning to slide six you can see the portfolio loan yield steadily moving higher.
Justin Horstman: One fees had just an eight basis point impact on the portfolio yield in the fourth quarter. This.
Justin Horstman: This is down from roughly a 30 basis point impact in mid 2022 as payoffs have declined in new loan originations have moderated.
Justin Horstman: The yield on our Securities portfolio has also continued to increase up 24 basis points from the third quarter to $4 six 3%.
Justin Horstman: This is up 72 basis points year over year.
Justin Horstman: While loan growth has moderated we have continued to grow our <unk> portfolio as opportunities present themselves.
Justin Horstman: Deposit cost increased just 20 basis points in the fourth quarter down from 33 basis points in the third quarter and 65 basis points in the second quarter.
Justin Horstman: At this pace continues to slow competition for deposits remains and is still driving deposit costs higher across the industry.
Justin Horstman: Meanwhile, reduce levels of borrowings in the second half of the year have helped to slow overall funding costs.
Justin Horstman: In addition to the $1 billion of adjustable funding tied to short term interest rates, which I mentioned earlier, we have an additional $479 million of funding, including time deposit maturities over the next year in callable brokered deposits that while less immediate can be a benefit to funding costs over time as rates start to come down.
Justin Horstman: Turning to slide seven total revenue has continued to stabilize with the margin and net interest income as well you'll notice that noninterest income declined 317000 in the fourth quarter, primarily due to 493000 of FH Ob prepayment income in the third quarter not reoccurring in the fourth quarter.
Justin Horstman: Turning to slide eight expenses remained very well controlled in 2023.
Justin Horstman: As we've said in the past our goal is to generally grow expenses in line with asset growth over time.
Justin Horstman: Full year noninterest noninterest expense in 2023 increased four 8% below the pace of asset growth, which was six 3% in 2023.
Justin Horstman: In fact, the majority of the expense to increase from 2022 to 2023 was due to higher FDIC insurance assessment costs, while salaries and benefits actually decreased from last year.
Justin Horstman: As expected we saw higher expenses in the second half of the year, primarily due to the accrual for bonuses paid to all of our team members as well as continued investments in technology.
Justin Horstman: I would also mention that we early adopted a tax accounting rule that retroactively moves our amortization of tax credit investment and expense from N E down to the income tax line.
Justin Horstman: Overall, our efficiency ratio has continued to increase throughout the year to 58, 8% in the fourth quarter due primarily to revenue headwinds, we still maintain a highly efficient operating model relative to other banks and expect that to remain the case we.
Nick Place: We feel good about our ability to control expenses, while still making key investments in the business technology and our people with that I'll turn it over to Nick.
Nick: Thanks, Joe turning to slide nine deposit growth continues to be a primary focus as balances increased 3.7% annualized and outpaced loan growth for the third consecutive quarter, reducing our loan deposit ratio to 100%.
Nick: Since March we have seen good deposit momentum with noninterest bearing balances up each of the past three quarters and solid core deposit growth.
Nick: After two consecutive quarters of core deposit growth core balances declined five 8% annualized in the fourth quarter.
Nick: This was not unexpected as our core deposit growth tends not to be linear due to the higher balance client relationships longer acquisition, and Onboarding times and timing of larger inflows and outflows.
Joe: As we head into 'twenty 'twenty four we look to continue growing core deposits over time.
Joe: Keeping in mind that quarterly balances may have some ups and downs along the way.
Joe: This includes the first quarter, which is typically a seasonally lower quarter for core deposits due to the tax season and industry cyclicality.
Joe: As has been the case throughout our history, we will continue to supplement core deposit growth with wholesale funding as needed to support loan growth.
Joe: Overall, we continue to steadily onboard new deposit client relationships.
Joe: And with several key hires to our Treasury management team in 2023, we feel good about our deposit pipeline and the opportunities we continue to get in front of US we enter 2024.
Joe: From a broader funding perspective, as Joe mentioned earlier, we have ample repricing opportunities if rates move lower.
Joe: Turning to slide 10 loan balances remained relatively flat during the fourth quarter.
Joe: As we indicated last quarter, we expected more limited near term loan growth given the reduced demand and fewer deals penciling out due to the interest rate environment as well as elevated levels of pay offs. Overall, we saw loan growth of four 3% in 2023.
Joe: For 2024, we expect loan growth in the low to mid single digit range for the full year with growth being more heavily weighted toward the back half of the year.
Joe: Keep in mind that new loan yields are coming on around 7%, which is accretive to our overall portfolio yield of 533%.
Joe: Market loan demand will be the biggest driver of growth in 2024, and we are starting to see signs of this picking up in the twin cities. In fact, our loan pipeline has increased to levels on par with year end 2022.
Joe: The rate environment and levels of payoffs and pay downs will also affect our pace of loan growth in 2024.
Joe: Slide 11 highlights the repricing of our loan portfolio, which we expect to continue to move higher even if interest rates decline.
Joe: This is primarily due to our large fixed rate portfolio, which makes up 70% of total loans and our small variable rate portfolio, which makes up just 15% of total loans.
Joe: We have $575 million of fixed and adjustable rate loans maturing or repricing over the next 12 months at weighted average yields of 5.11% and five or 4.15% respectively.
We would be able to redeploy these funds into with.
With meaningfully higher yields.
Joe: Even if we see rate cuts in 2024.
The reprice repricing impact of our larger fixed and adjustable rate portfolios should outweigh the repricing of our smaller variable rate portfolio as rates come down.
Joe: On Slide 12, you can see there was not a lot of movement in the various loan portfolios given relatively stable loan balances during the fourth quarter.
Joe: The movement, we saw was primarily related to balances migrating out of construction as these deals complete their construction phase.
Joe: Our multifamily portfolio generated the most growth in 2023 up $82 million or 6%.
Jeff: I'll now turn it over to Jeff.
Jeff Bezos: On slide 13, we wanted to provide some more detail on our multifamily portfolio.
Jeff Bezos: First our total CRE concentrations as a percent of capital have always been elevated.
Jeff Bezos: However, we think it's important to note that over half of this concentration is in multifamily and asset class, we view as lower risk due to our proven track record substantial experience and expertise and favorable market conditions.
Jeff Bezos: The twin cities market is more stable than the more volatile coastal in high growth markets with trough and dominate the headlines simply put there are less booms and busts.
Jeff Bezos: In fact, the twin cities market ranked second among top markets of multifamily demand due in part to the shortage of single family housing and ranked second in affordability is rent to income levels are at all time lows.
Thanks to our deep relationships with local multifamily owners and developers and her strong lending and credit teams, we have been able to generate strong growth in this portfolio, while experiencing only 62000 and net charge offs since inception in 2005.
Justin Horstman: We remain comfortable about our multifamily exposure and we'll look to continue growing the book in the future.
Justin Horstman: Slide 14 provides some more additional information on our CRE and office portfolios.
Justin Horstman: Not much has changed here over the past couple of quarters.
Justin Horstman: The majority of our non owner occupied CRE book is fixed rate, which helps from a repricing risk standpoint.
Justin Horstman: We continue to engage with our clients that have maturing loans resetting rates over the next 12 months to identify possible cash flow stream and recommend solutions early in the process if necessary.
Justin Horstman: We have limited non owner occupied CRE office exposure, making up about 5% of total loans.
Justin Horstman: This includes only four loans located in the central business districts totaling $35 million. 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.
Justin Horstman: Turning to slide 15, we continue to see strong performance across our entire portfolio as nonperforming assets and net charge offs. Both remained consistently low levels. This is a result of our measured risk selection consistent underwriting standards active credit oversight and experienced lending and credit teams we.
Justin Horstman: We 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 $250000 negative provision for unfunded commitments, which are primarily construction loans. This is similar to what we have seen over the past few quarters.
Justin Horstman: One item to call out is the addition of $15 million to our 30 to 89 days past due loans. This.
Justin Horstman: This was just an administrative delinquency due to the timing of the closing on one matured loan the loan closed after year end and continues to perform as a pass rated credit.
Justin Horstman: Overall, we are still not seeing early signs of credit weakness and we feel good about our book that said.
Justin Horstman: The interest rate the higher interest rate environment continues to put pressure on businesses, we do expect to see some credit loss normalization over time.
Justin Horstman: On slide 16, you can see that our watch and substandard loans again to remained relatively stable during the quarter.
Justin Horstman: We feel good about the risk profile of the portfolio and believe it is well positioned moving forward.
Justin Horstman: I'll now turn it back over to Joel.
Joel Smith: Thanks, Jeff Slide 17 highlights the continued building of our capital ratios, including tangible common equity, which increased from 761 to 773 and C. T. One which increased from 907 to 916 in.
Joel Smith: In addition, we took advantage of lower valuations during the fourth quarter to resume share repurchases.
Joel Smith: During the quarter, we bought back over 423000 shares at a weighted average price of $10 72 per share for a total of $4 $5 million.
Joel Smith: We still have $25 million remaining under our current repurchase plan, we will continue to evaluate future repurchases based on a variety of factors, including capital levels growth opportunities and market conditions.
Jeff: Share repurchases are just one of our capital priorities, our primary capital priority remains organic growth.
Jeff: And that we continue to review and monitor potential M&A opportunities.
Jeff: Turning to slide 18, I'll summarize our thoughts on our outlook for 2024.
Jeff: We expect loan growth in the low to mid single digit range with drivers, including loan demand market conditions, the pace of pay offs and core deposit growth.
Jeff: While we are seeing signs of increased demand and a larger pipeline. It takes time for those opportunities to work their way through the process and to get to closing.
Jeff: As a result, we would expect the slower pace of loan growth. We saw in the second half of 2023 to continue into early 2024 with more of our growth likely weighted toward the back half of the year.
Jeff: We expect the net interest margin to remain relatively stable near current levels in this rate environment.
Jeff: There are still several variables that may causes to fluctuate from quarter to quarter, but we expect to continue seeing stability from here on.
Jeff: Our margin is well positioned to benefit when we see when we see rate cuts and an upward sloping yield curve.
Jeff: We look for full year expense growth to again track in line with asset growth in 2024.
Jeff: Similar to 2023, this will likely be weighted more towards the back half of the year with expenses remaining relatively flat early in 2024.
Jeff: Our quarterly provision expense has been very low through much of 2023. However, the provision in 2024 will likely be tied to a pace of loan growth.
Jeff: The overall asset quality of the portfolio and the broader macroeconomic picture.
Gerry Turning: Finally, we believe we can continue to build capital ratios in 2024 with earnings retention and a more moderated pace of loan growth than prior years I'll now turn it back over to Gerry.
Gerry: Thanks, Joe finishing up on slide 19, I'll cover our strategic priorities for 2024.
First as we've discussed already we want to optimize our balance sheet for longer term profitable growth to be ready to deploy capital into growth opportunities as interest rate environment normalizes and the market becomes more favorable.
Gerry: Second we want to continue taking market share in the twin cities. This includes several initiatives such as expanding our niche and affordable housing, which has high demand in the twin cities given the lack of single family housing.
Gerry Turning: Also continue to execute further owner C&I initiatives, specifically in certain verticals, such as our network of women business leaders and Implementers of badge pretty real operating system. In addition, we will continue to monitor and evaluate potential M&A opportunities that could enhance our business.
Joe: Third is to generate new efficiencies across the business, while continuing to invest.
Joe: Each department is tasked with identifying ways, they can incrementally improve operational efficiencies within their groups in.
Joe: In addition, we will be making ongoing investments in technology, including leveraging our new CRM platform for the organization and launching an upgraded retail and small business online banking solution.
Joe: Finally, continuing to scale, our risk management function and monitor asset quality risks will be top of mind again in 2024.
With that we will open it up for questions.
Joe: As a reminder to ask a question. Please press Star then one on your Touchtone phone.
Joe: If you are using a speakerphone please pick up your handset before pressing the keys.
Joe: Let's try your question. Please press Star then two.
Joe: At this time, we will pause momentarily to assemble our roster.
Joe: The first question today comes from Jeff Lewis with <unk>.
Jeff Lewis: D. A davidson. Please go ahead.
Jeff Lewis: Thanks, Good morning.
Joe: Maybe Joe.
Joe: If you could.
Joe: You've kind of mentioned kind of well positioned for for rate cuts.
Joe: Do you have specifics or quantify what the margin or NII benefit per.
Joe: 25 basis point rate cut would be.
Jeff: Yeah, Jeff.
Jeff: So I think that the way that we're thinking about it is the.
Jeff: Further the cuts happened so the first couple of cuts right I mean, it's it's.
Jeff: It's not going to be reactive one for one and I think.
Jeff: As we think about the evolving.
Jeff: You know as the picture evolves in the curve normalizes I think you could see an acceleration, but I think early on I mean, our base case.
Jeff: These three rate cuts in the back half of 'twenty four and so I just think when we.
Jeff: Think about the position of the balance sheet.
Jeff: And really the drivers I mean, we are well positioned for a normalized yield curve and certainly rate cuts, especially impacting the front end of the curve.
Jeff: Most impactful the deposit base and we've highlighted a $1 billion of liabilities that would reprice.
Jeff: You know about half of those are explicitly tied to fed funds. So I think it's.
Jeff: It's one of those environments environments, where similar to the way upwards you lagged betas I think that's an environment where.
Jeff: Should rates get cut that we had evolved but certainly an environment that we do well.
Okay.
Jeff: So early on first couple is that possibly a headwind.
Or kind of neutral to that.
Jeff: Margin or NII.
Jeff: No I wouldn't say a headwind I think you know when you consider the.
The liability side, you know the $1 billion that we've highlighted obviously you will win.
Jeff: Benefit should short rates come down.
I think the other thing we've highlighted on the earning asset side is obviously the loan portfolio continues to turnover and reprice.
Jeff: As Nick said, you know in the in the low to mid Sevens.
Jeff: So even if rates come down the belly of the curve depending on what happens there.
Nick: We will still reprice higher given the roll off rate of loans itself. So I think if you consider those factors together I mean, we will definitely benefit any in a in a rate cut environment, certainly and even more should the curve itself normalized with more upward sloping shape.
Nick: I just think it's.
Nick: Early on obviously, you're trying to balance growth too.
Nick: We certainly are confident with our ability to grow core deposits, but I think that you know that first cut let's say its 25 basis points.
Nick: Still trying to ban it you're still trying to manage the ability to grow in that environment and so I don't think we want to say you slash the deposit base and you at the expense of growth. So I think it's a it's slower to start because deposit competition pressures are still real in the twin cities and across the nation.
Nick: So I think we're just trying to be mindful of that but obviously the further you go along you know depending on how many cuts we see the more beneficial it will be too to the liability side, and obviously more beneficial and more time for the the earning asset side to reprice.
Nick: And then obviously maintain those yields on a go forward basis, just given the the more heavy fixed rate nature.
Nick: Got it yeah, just asking about the path is as we get into the cuts.
Nick: Kind of near term medium term.
Nick: And I guess the other piece of that is should loan growth pick up another piece of that is loan fees should.
Nick: It also inflect a bit too is that the expectation if loan growth is better you get a better boost on the margin.
Justin Horstman: Yeah, I think the you know the the fees will pick up as growth picks up I do think you know one of the things we talked about two is on the flip side. You know if there are payoffs that we experience more or higher in 24, there's an acceleration of fees as well. So it's kind of you know.
Justin Horstman: Puts and takes to that to the story.
Justin Horstman: The other thing I'd say is just given the growth outlook.
Justin Horstman: And as we highlighted this quarter I mean, the first quarter of net interest income growth since 2022, the back half of 'twenty two so.
Nick: I think as Nick said the pipeline itself as it picks up in loan growth picks up obviously it drives noninterest income growth.
Nick: And so you know margin is more more of the output from that perspective, but I think as that growth as we anticipate picks up in the back half of the year Youll see net interest income growth as well and.
Nick: And margin itself certainly feel good about stabilization.
Nick: And ultimately expansion should should rates get cut.
Got it.
Nick: If I could ask a question on on slide nine just that kind.
Nick: Other repricing opportunities bucket do you have kind of a weighted average of those that bucket of Cds and callable brokered.
Nick: The total either combined or individually.
Nick: $479 million.
Nick: I can get that number for you Jeff after I mean, the callable brokered as we've highlighted the $185 million is the callable that are over 5%. So I know that number off hand from the Cds standpoint, I don't have that number off hand, but I want to say, it's probably in the low fours.
Nick: Our CD portfolio as you know has a weighted average maturity of less than 11 months, so really trying to highlight that.
Nick: On the way up that portfolio shortened and then ultimately you know us.
Gerry Turning: It is certainly a repricing opportunity should should rates fall.
Gerry Turning: Okay.
Gerry Turning: Got it and then maybe last one.
Nick Place: Nick do you have the.
Nick: Interested in the pay.
Nick Place: Pay downs pay offs linked quarter.
Nick: That was in the third quarter to the fourth as well as maybe the jump off point of the loan.
Nick: <unk> pipeline number.
Nick: You exited the third quarter and as you entered the first here.
Nick: Sure.
Nick: Do have a slide in the appendix I believe that kind of highlights by 'twenty two there you go.
Gerry Turning: So that I mean, that'll just show Q4 information.
Gerry Turning: So it does break out all the components of of you know.
Gerry Turning: Both new originations and advances the volume of pay Downs and then our payoffs and then amortization to get to get to that number. So are you looking for.
Gerry Turning: Yeah, it looks like okay. So.
Gerry Turning: Almost $150 million in payoffs paydowns in the fourth quarter is that.
Gerry Turning: Up down sideways from the third quarter.
Gerry Turning: Yeah payoffs were elevated in the third quarter.
Gerry Turning: I think August was our high watermark for payoffs on the year. So you know.
Gerry Turning: That we did have higher originations and payoffs both in Q3, but.
Gerry Turning: Feel good about where our pipeline is today, we mentioned in the prepared remarks that.
Gerry Turning: Our year end pipeline is on par with where we ended 2022 and that's that's been building in each of the last two quarters. So.
Gerry Turning: We feel really good about our ability to continue to get in front of quality transactions and and rebuild that pipeline.
Joel Smith: Okay. So yeah. It was looking at that relative linked quarter pipeline increase so it's up over three Q I don't know what that percent is but.
Joel Smith: Something something of an increase is that fair.
Joel Smith: Yeah.
Joel Smith: The pipeline.
Joel Smith: What was the balance with the pipeline.
Joel Smith: And entering that.
Fourth quarter two.
Today basically yeah the pipe.
Joel Smith: On a percentage basis, the pipelines up probably 35% from where it ended Q3.
Joel Smith: Great.
Joel Smith: Thanks, I'll step back.
Joel Smith: Once again, thank you would like to ask a question. Please press star one to enter the question queue.
Joel Smith: The next question comes from Nathan race with Piper Sandler. Please go ahead.
Nathan Race: Yeah, Hi, guys. Good morning, Thanks for taking the questions.
Nathan Race: Alright, and then going back to <unk>.
Nathan Race: The margin discussion I appreciate the guidance in terms of how to think about the cadence and the margin was fed rate cuts.
Nathan Race: That are expected in the back half of this year, but just kind of think about the outlook for next couple of quarters.
Nathan Race: That's on hold.
Nathan Race: I noticed that the cash balances were a little higher quarter over quarter on the average balance sheet. So not sure. The plan just given that loan growth maybe a little slower in the first half of the year versus second half is maybe pay down some wholesale funding, which may support some margin expansion.
Nathan Race: Over the next quarter or two and within that context would be curious to hear what maybe the spot rate on deposit costs was at the end of December.
Nathan Race: Yeah, Nate I think that's always an option I think were constantly trying to balance that with obviously a growing loan pipeline. So we certainly evaluate that we've also supplemented some of that loan growth with securities purchases that.
Nathan Race: I have been at fairly attractive yields.
Nate: But obviously at the end of the day. It's loan growth is is the drivers. So I mean, while balances might have been a bit higher.
Nate: <unk>.
Nate: I think ultimately.
Nate: We look at the entire balance sheet and really try to optimize it as much as we can.
Nate: From the spot rate standpoint, so spot rates December was 318 on deposits its actually the first quarter, it's been down relative to the the average deposit rate. So I think that's another point that we.
Nate: I want to highlight is when you think about from stability and potential inflection on the deposit cost standpoint.
Nate: Mhm gotcha, so putting all the pieces together it sounds like it's fair to assume that the margin likely trusts first quarter or I'm sorry in <unk>.
Nate: Relative to yeah, I think as we've been saying yeah as we've been saying I think it's.
Nate: We've seen stability in our path to stability for the last couple of quarters and I think.
Nate: Ultimately loan fees, which obviously are really tied to pay offs.
Nate: We will cause it to bounce around here or there, but I think long term. It's as we think about it I mean, we feel like it's hit stability and I think.
Nate: The key point there is September NIM as I said in prepared remarks was 230 in December NIM Standalone was $2 30, as well so I think that's that.
That I think are certainly highlights.
Jeff Lewis: The stable nature of it.
Nick: Yeah, definitely and just kind of thinking about the composition of loan growth expectations for this year any thoughts, perhaps Nick in terms of how youre thinking about the.
Nick: Composition of C&I growth.
Nick: Versus multifamily and CRE and just kind of what that.
Nick: Makeup looks like.
Nick: It looks like in the.
Nick: Pipeline coming out of December.
Nick: Yeah sure.
Nick: I don't expect our portfolio to shift meaningfully throughout 2024, I mean, we certainly have a lot of initiatives around.
Nick: Growing our.
Nick: Growing our C&I base in our C&I clientele, you know those transactions the debt.
Nick: That onboarding times of those are much longer and given.
Nick: Uh huh.
Nick: The low interest rate environment that we're in for so long it does make a lot of those are more difficult to try to refinance over so if we think about near term opportunities for pipeline and those tend to be more.
CRE driven through some transactions that our clients are getting in front of us so theres, probably more opportunity in the near term.
Nick: And our typical multifamily and CRE book to build the pipelines in a faster nature in the C&I initiatives are really more.
Nick: Longer term in nature, and we've made good progress there. It's just those it tends to be a slower build.
Nick: Yep.
Nick: Got it.
Nick: And just maybe turning to expenses I think the expectation there pretty clear kind of follow asset growth expenses were up 5%. In 2023, you grew assets, 6%. So you know assuming kind of similar low to mid single digit loan growth outlook for this year is it fair to expect.
Jerry: Expenses to follow a similar kind of growth trajectory. This year, even with some of the technology stack upgrades that were described by Jerry.
Jerry: Yeah, I think that's a good way to think about it I think.
Jerry: We continue to optimize the technology stack.
Gerry Turning: And continue to see benefits too I think it's three years ago, we put a loan origination platform in place and we've really seen.
Gerry Turning: A ton of efficiencies from that I think thats part of the reason we can grow to the pace we are in.
Jeff Lewis: Net ftes were only up nine so on a year over year basis. So I think yes, we look at those at the technology efficiencies, whether it's the small business platform that we look to.
To implement at the back half of 'twenty, four or it's even just generic workflow solutions I think all of those are helping us become more efficient and then obviously we continue to invest in our people is that's obviously our greatest asset so yes.
Jeff Lewis: The expense growth as it as it always has its on a year over year basis should run in line with asset growth.
Jeff Lewis: As we highlighted quarter over quarter similar to deposits, it's not linear.
Jeff Lewis: But generally if you look over the long haul it's a it's in line with asset growth.
Jeff Lewis: Got you.
Jeff Lewis: A couple more for me just in terms of fee income.
Jeff Lewis: The C&I.
Jeff Lewis: Initiatives that you guys have in place I imagine that's generally a longer sales cycle in terms of kind of onboarding clients and give them the.
Justin Horstman: Surgery suites set up but just kind of any thoughts on just kind of the fee income run rate as some of those.
Justin Horstman: Initiatives take hold.
Justin Horstman: This year.
Justin Horstman: Yeah. This is Nick I think.
Nick: There's more opportunity to build some.
Nick: T M related fees associated with those.
Nick: Treasury.
Nick: Clients.
Nick: You're right that that's a longer on Onboarding cycle, I think we have been diligent about.
Nick: Providing our clients with all.
Nick: All of the tools and resources that they need and then also diligently doing digging through and looking at the market to determine are we charging the appropriate amounts for those so I think that's been a big initiative here over the last couple of years.
Nick: You know that that will be something that will continue.
Continue to focus on but as you know.
Nick: <unk> tends not to be a really large component of our of our income.
Nick: Right.
Nick: And then just on share repurchases going forward.
Jeff Lewis: Nice to see the buyback step up in the fourth quarter or was that more of a kind of idiosyncratic situation, where there was like a share block that came up that you guys. Just wanted to be proactive on or do you kind of anticipate share repurchases remaining a more continual components of the capital.
Jeff Lewis: Management approach over the at least the next quarter or two just given where the stock trades well just tangible book.
Joe: Yeah, Hey, this is Joe I mean, we're always looking at it I think we always try to balance the priorities, we certainly outline those and how we think about it organic growth, obviously being our top priority and so as we sat in fourth quarter and with the <unk>.
Joe: Moderation in the loan growth.
Joe: I think the other piece to it too was we had a goal to get C. T. One back above 9%, which we achieved in the third quarter and so you know I think if we look at it constantly.
Joe: Ross the realm of things that we can do in and felt like it was appropriate to be more active.
Joe: Like you said given.
Joe: Given valuations in the fourth quarter. So it's something we'll continue to always evaluate.
Joe: You know in the spectrum of priorities and.
Joe: And we will we will.
Joe: Well certainly be opportunistic as we've always said.
Joe: Okay sounds good and then just on the tax rate I think you mentioned in the release that there was.
Tax credits that occurred in the fourth quarter does that can be more kind of episodic going forward or do you kind of just thinking back to the 23% to 25% range at least over the next quarter or two.
Joe: Yes, I think that's a good range I think the.
Joe: The noise too I think will help with that we've mentioned this the change.
Joe: In policy that we've made going forward, where there used to be this above the line below the line on tax credits.
Joe: That's all going to be concentrated below the line now so it'll be a lot cleaner.
Well, yes tax credits are always we will continue to do that I think that's a it's definitely an expertise of ours to invest and also finance and I think.
Joe: That will be cleaner from a presentation standpoint, but your tax rate is range that you mentioned is right in line with how we're thinking about it.
Joe: Okay great.
Joe: I appreciate all the color.
Joe: Thank you everyone.
Joe: This concludes our question and answer session I would like to turn the call back over to Jerry box for any closing remarks.
Speaker Change: Well, thanks, everybody for joining our call today, we feel well positioned.
Jerry Box: <unk> for 2024, and going forward and continue to see encouraging trends in.
Jerry Box: Our brand and our culture and our team has never been stronger so.
Jerry Box: We're looking forward to Oh.
Jerry Box: Welcome to you in about three months. Thank you bye.
Jerry Box: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Jerry Box: Okay.
Jerry Box: [music].