Bridgewater Bancshares Inc Q1 FY2024 earnings call

• Business Activity: Business activity picked up in the Twin Cities, loan pipeline increased due to rising loan demand, leading to stronger loan growth. - Deposit Growth: Deposit growth outpaced loan growth, with core deposit growth strong, and initiatives in place to drive continued core deposit growth including hiring and new positions. - Business Development: Traction in business development initiatives like implementing the entrepreneurial operating system and network of women business leaders. - Interest Rate Environment: Interest rate environment remained challenging, causing net interest margin compression. - Expense Control: Noninterest expense declined 3.5% from Q4, with efforts to identify operational efficiencies. - Investments: Selected new online banking platform and on track for new CRM platform implementation. - Asset Quality: Asset quality superb, with no net charge-offs, low nonperforming assets, and关注写字楼和多家庭资产情况. - Tangible Book Value: Steady tangible book value per share growth, and continued share repurchases in Q1.

Loan Performance: Loan balances grew 6.5% annualized in the first quarter. Deposit Performance: Deposit growth outpaced loan growth, with annualized core deposit growth of 14.3%, and the loan-to-deposit ratio dropped below 100% for the first time since Q1 2022. Net Interest Margin: There was slight net interest margin compression as expanding loan yields were offset by slower rising funding costs. Noninterest Expense: Noninterest expense declined 3.5% from the fourth quarter. Asset Quality: Asset quality was superb with no net charge-offs, very low nonperforming assets, and increased provision due to stronger loan growth. Tangible Book Value: Tangible book value per share grew 11.8% in the first quarter, marking 29 consecutive quarters of growth. Revenue contribution: Loan growth, deposit growth, net interest margin, noninterest expense, and asset quality all play roles in the overall financial performance of the company.

• Loan growth is expected to continue in the low to mid-single-digit range over the next few quarters. - Expect modest net interest margin pressure in the near term due to uncertainty around the interest rate outlook, but see an inflection point on net interest income supported by stronger balance sheet growth. - Full year noninterest expense in 2024 is expected to track relatively in line with asset growth. - Provision expense likely tied to loan growth and portfolio asset quality. - Will continue to maintain strong capital ratios through earnings retention and disciplined growth.

• Interest Rate Uncertainty: The interest rate environment remains challenging, which could impact net interest margin. - Real Estate Market: Broader industry concerns around office and multifamily assets, though Twin Cities multifamily market has unique positive attributes but still subject to real estate cycles. - Market Competition: Competitive market leads to deposit cost pressures.

Q: Maybe start off here on kind of thoughts around the margin. Do you guys think that there's a path for NIM inflection without help from the Fed? And then kind of along those lines, if we don't get any cuts from the Fed, until like late in the fourth quarter, higher for longer, where do you see the margins settling as we get to the end of the year?

A: Yes, Brendan, this is Joe. So yes, to reiterate, I think we've said, and we've obviously seen it, we've messaged to it that we've seen a slowing pace of margin compression certainly over the last couple of quarters and have been pleased with that slowing compression. I just think just given the Fed more of a policy pivot here and the prospect for higher rates for longer is really where we see potential near-term margin pressure. And I think it's really 2 things, and we've talked about it in the prepared remarks, it's the mix shift from noninterest-bearing to interest-bearing. So again, we've been pleased with how resilient the noninterest-bearing book has been. But the longer we sit here, you certainly see clients more actively managing their money. And so we have seen some migration, which certainly puts some pressure on the margin itself. And the other piece is just client acquisition. I mean, the market continues to be very competitive, and we're really pleased with the core deposit growth we had in the quarter, but it's competitive from a cost standpoint. So I think you put those 2 together and that's where we see that you could see some near-term pressure just the longer that we sit here in this higher-for-longer environment. I think the other thing that I'll say, though, is we're more focused and less fixated on the NIM itself and more just on incrementally building NII. And I think as we've talked about, we see inflection to that just given the pickup in loan growth, especially in the back half of the first quarter. So that remains our focus on really growing the net interest income contribution rather than the margin as an output.

Q: Longer term, is there like a desire or even ability to alter the bank's rate risk positioning to bring the balance sheet closer to neutral should we find ourselves in a similar environment at some point in the future? Just wondering the thought process there given how spread dependent the revenue base is?

A: Yes, I can talk -- I mean, probably 2 sides to that, one on the net interest income perspective and then more from a noninterest income perspective. But yes. I mean the balance sheet and the positioning of that, I think, certainly, just given kind of the rate outlook over the last couple of quarters, I think we've really tried to balance out and neutralize but also not dramatically change the liability sensitivity profile potentially in the face of Fed cuts. So I think we're really cognizant of where the exposure is across the balance sheet. And I think we remain focused on maintaining options on both sides of the balance sheet. Composition is a key piece to the loan portfolio. So I think we've been really focused on the fixed rate composition. And to the extent we can broaden that by more variable rate funding, or variable rate lending, I should say, as well as can you get more creative from a swap standpoint, and just being really cognizant of the sensitivity on the asset side and then obviously maintaining optionality on the deposit side. So I think we consider across the balance sheet, various instruments. And I think the other piece to that, just you mentioned on the revenue side is, we continue to look at opportunities to incrementally increase noninterest income. And I think for us to really move the needle, as we've always said, that likely comes through M&A, I think we certainly don't want to build a mortgage company brick by brick. But to the extent that resides in an M&A transaction, that's certainly something that we would strongly consider.

Q: Just going back to the last line of question around the margin outlook. Just digging deeper into that, curious maybe, Joe, if you can provide us with the amount of loans that you have kind of maturing or repricing higher over the next year. And obviously, you guys had nice growth in the quarter, and I imagine new coupons are relatively above the portfolio yield. So just trying to kind of think about some of the additional earning asset tailwinds that you could have this year?

A: Yes. So on the loan side, we've got a slide in the appendix that talks about just the fixed rate portfolio and the adjustable rate portfolio. So just north of $500 million rolling off kind of in a blended 5%. So I think when we think about new money yields, like I said, I mean, it's coming on in the mid- to high 7s. So definitely, meaningful repricing opportunities there. That's just considering the roll-off and then obviously, any sort of net new growth. Does that answer your question, Nate?

Q: Just as you guys kind of look about the composition of the pipeline, which it sounds like it's fairly healthy thus far in the second quarter. Is it more C&I weighted? Obviously, you had a nice C&I growth in the quarter, but just trying to get a better sense in terms of the drivers, low to mid-single-digit growth outlook.

A: Nate, this is Nick. I mean our pipeline is pretty consistently spread across what our portfolio looks like. I think we have been pleased to see some growth within our C&I portfolio. I think some of that in Q1 was some line utilization, which we expect to sort of bounce around through the year. But across the pipeline, I think it's pretty consistent with our overall portfolio mix. We continue to see good opportunities in both multifamily and non-owner occupied CREs, we did have a pullback in rates sort of at the end of last year and throughout first quarter that did start driving some transactions to pencil. So we're pleased to see where the pipeline has been built to and how it's sort of maintained here through Q1.

Q: Just a question on maybe if we could, Jeff, on the multifamily book. Could you give us a sense for the percent of those that book that matures in '25 and beyond?

A: Yes, we'll have to get that for you after the call. I don't have it exactly off hand. I just think if you look at the fixed rate the [ 500 ] we show, obviously, multi-families within that.

Q: And Jeff, I think you mentioned, certainly, the dynamics of the Twin Cities market with supply and inventory pretty light and not a lot of new construction coming on. Anything else to kind of pitch in on the Twin City market relative to other kind of headline risk. What amount of kind of rent control or regulation, do you see just any other separating kind of characteristics of your market?

A: Yes. I think that we do feel good about the overall market, I had seen in an article recently that it ranks in the top 2 or 3 in the country just in terms of consistency of [ rent growth ] that may not be a high-growing market, but it's something that both from an absorption standpoint and from a rent growth standpoint, it's kind of a steady eddy. That being said, that you're always going to have some properties that exhibit some level of a stress due to potential vacancies in the pocket where the property is located at, could be expenses, could be interest rates. Fortunately, we know the market really good, we have really good sponsors, have always had a good strong client relationship and are able to work with them in terms of identifying solutions for those problems. The rent control that you mentioned the St. Paul rent control that was implemented, I think it was 2 years ago had been somewhat a nonevent. I think that it has, in part, reduced the amount of new development that's going on in St. Paul, which meant that it's been better for rent growth for the existing properties are there. And the jury is still out on the Minneapolis rent control. That was the city council for the voters have passed that a year ago, they still have a task force that they put together and they're trying to come up with what that would look like. I would say that the mayor has come out publicly and said that he is against any type of severe rent control, as he feels it would impact development in the city.