This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk09: Good morning and welcome to the Bridgewater Bank Shares 2023 First Quarter Earnings Call. My name is Jordan and I will be your conference operator today. All participants have been placed in a listen-only mode. After Bridgewater's opening remarks, there will be a question and answer session. To ask a question, please press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To answer your question, please press star then 2. Please note 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.
spk07: Thank you, Jordan, 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 Shelberg, Chief Credit Officer, and Nick Place, Chief Lending Officer. In just a few moments, we will provide an overview of our 2023 first quarter financial results. We'll be referencing a slide presentation that is available on the investor relations section of Bridgewater's website, investors.bridgewaterbankmn.com. Following our opening remarks, we'll open it up 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 first quarter earnings release for more information about risks and uncertainties which may affect us. The information we will provide today is as of March 31st, 2023, 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 operating results determined in accordance with GAAP. Please see our 2023 first 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's Chairman, President, and CEO, Jerry Bach.
spk08: Thank you, Justin, and thank you, everyone, for joining us today. Before we dive into our financial results for the quarter, I want to take a moment to share our perspective on the current banking environment. There's no question that the bank failures in March have had an adverse impact on the banking sector that are likely to continue for some time. However, we believe the best way forward is to simply continue doing the things that have made us successful for the last 18 years, including providing a differentiated level of service to our clients, growing the bank in a highly efficient manner, and effectively managing and mitigating our risks. We have confidence in this strategy for a variety of reasons. It all starts with our simple business model serving local clients in the Twin Cities that we have known well and have longstanding relationships with. This became even more apparent as we had proactive conversations with clients in March to remind them of our support and offer solutions to put their minds at ease. This included educating them on ways to ensure larger deposit balances, such as leveraging the IntraFi network, which we have had in place for many years. Only 24% of our deposits were uninsured as of March 31st. We also have a strong capital and liquidity position and high-quality securities portfolio with no held-to-maturity securities. We have taken several actions to increase our borrowing capacity without using the new bank term funding programs. and now have available liquidity of $1.9 billion, more than twice the level of uninsured deposits. Finally, we have been proactive in managing our interest rate risk in recent years, including adding derivatives to mitigate the unrealized losses on the securities portfolio. This was evident through 2022 as we were able to continue growing tangible book value even as interest rates continued to rise and our peers experienced material negative impacts to AOCI. Despite the unpredictability in the current environment, I remain confident that BWB can meet the challenges and take full advantage of the opportunity to gain market share. The BWB team is incredibly talented, strong, solution-oriented, and resilient. Our low efficiency ratio is only possible because of the commitment and effort of the hardworking internal team. I'm grateful for the skill and the work ethic of each and every one of our team members. At BWB, the client relationship remains priority number one. This is what has differentiated us in the past, and I strongly believe it is what will lead us to succeed in the future. Turning to slide four, given all the noise in the banking sector and challenging rate environment, we're pleased with our 2023 first quarter results as we earned 37 cents per share. As we indicated on our 2022 fourth quarter earnings call, we expected to see more moderated levels of balance sheet growth and additional margin pressure in the first quarter, both of which we experienced. Loan balances grew at a 13% annualized pace as the loan pipeline slowed and we remained more selective on deals. Deposit balances declined slightly as we saw typical seasonal outflows in March and as we turned much of our attention toward deposit retention initiatives later in the quarter. As expected, this funding pressure resulted in additional margin pressure. Joe will provide more details on the margin in just a minute. Expenses were very well controlled in the first quarter and helped offset some of the near-term revenue headwinds. We maintained a very strong efficiency ratio in the mid-40% range as we execute on opportunities to better manage discretionary spend in the current environment. Asset quality also remained superb with low non-performing assets and our ninth consecutive quarter of no net charge-offs. We adopted CECL during the first quarter and had an impact on our lower net provision due to reduction in unfunded commitments. With that, I'll turn it over to Joe Chbosky.
spk03: Thank you, Jerry. Turning to slide five, I'll provide some additional details on the net interest margin, which saw expected further compression in the first quarter. The margin declined 44 basis points to 272 as funding costs continued to increase at a pace faster than earning asset yields in this higher rate environment. As the Fed continued to raise rates, we have seen a deposit mix shift from non-interest bearing to interest bearing, similar to other banks. We also saw some upward pressure on deposit costs later in the quarter as we worked to retain balances given the banking disruption in mid-March. In addition, while the overall pace of loan growth moderated during the quarter, we did leverage some additional wholesale deposits and borrowings to supplement loan funding, which impacted funding costs as well. Net interest income declined on a linked quarter basis due to the lower margin and more moderated pace of loan growth. NII was also impacted by reduced loan fees as the pace of payoffs continued to slow. On slide six, you can see the various components of the margin. Portfolio loan yields should continue to grind higher for the foreseeable future, especially with yields on new originations typically coming on at 6.5% to 7%, many of which are being structured with strong prepayment penalties, which will help cement these higher yields for longer. In addition, we have over $400 million of fixed and adjustable rate loans scheduled to reprice over the next year, and over $600 million of variable rate loans efficiently floating today. Funding costs are also likely to trend higher due to elevated competition on both core deposits and rates given Treasuries and other market alternatives. With the evolving banking industry and interest rate dynamics over the past couple of months, margin outlook is becoming more difficult to predict. We will likely see some additional margin pressure in the second quarter, although we expect it to be at a more modest pace than we saw in the first quarter. Ultimately, the margin going forward will be impacted by the path of interest rates, the shape of the yield curve, and our pace of core deposit growth. Our current assumption is that Fed funds peaks at 5% and remains there throughout 2023. Turning to slide seven, we continue to demonstrate a long track record of strong revenue and profitability. We have seen pressure on the revenue side over the past couple quarters, given the vast majority of our revenue is spread-based. However, on the fee side, non-interest income increased 11.8% from the fourth quarter, primarily due to higher letter of credit fees and nearly $300,000 of FHLB prepayment income, which we don't expect to reoccur. Overall, we've been pleased with enhancements across the business that will incrementally benefit non-interest income over the long run. Turning to slide eight, we continue to operate with a strong efficiency ratio of 46.2% due to our ability to manage the expense base in an environment where revenue growth is more challenging. In fact, we saw non-interest expense decline 6.7% from the fourth quarter as we reduced some discretionary expenses, including marketing spend. As we've shared in the past, we have historically grown expenses in line with asset growth. While this remains our target over the long term, we will continue to look for opportunities to operate more efficiently, especially in the current environment. With that, I'll turn it over to Nick Place.
spk05: Thanks, Joe. On slide nine, overall deposit growth was relatively flat during the first quarter as we turned our focus toward deposit retention given the market dynamics in March. team did an amazing job of engaging with our existing clients to provide comfort and solutions around their deposits the strong ongoing relationships we have with our clients really helped with these conversations that said there were some deposit modest deposit outflows but overall balance is held strong although like most banks we did see a shift from non-interest bearing into interest bearing accounts as we mentioned last quarter our focus remains on better aligning loan growth with core deposit growth over the course of 2023. We expect this to be a bit more challenging in the near term given the unprecedented market dynamics and longer client acquisition and onboarding lead times. We are still getting in front of numerous new loan and deposit opportunities and remain confident that our local and responsive service model will drive future growth. Slide 10 provides some additional detail on our deposit base. As we look at core deposit flows, we saw net outflows during the middle of March with balances stabilizing and beginning to grow at the end of the month. The majority of these outflows were due to normal seasonality, including tax season and industry cyclicality, as well as continued moves toward higher rate alternatives. In fact, as you can see on the slide, the trajectory of deposit flows in March of 2023 tracks very closely with the deposit flows we saw in March 2022. As we've said before, our deposit growth typically isn't linear, and this is an example of that. Levels of uninsured deposits have also been in the spotlight, and this is an area where we feel very comfortable. At year end, 38% of our deposits were uninsured, which was in line with industry median. We took steps over the past few months to educate our clients on the traditional ways to increase FDIC insurance on their accounts, while also discussing the Intrify product, which allows them to fully insure larger balances. In fact, our intrafi balances increased $266 million during the first quarter, lowering our uninsured deposit level to 24% of total deposits. Finally, our cycle-to-date deposit beta as of the end of the first quarter was 40%, in line with our expectations. The largest increase we've seen in the beta was from the third quarter of 2022 to the fourth quarter, with the pace slowing in the first quarter. Turning to slide 11, we saw the pace of loan growth in the first quarter moderate to 13.1% annualized. This slower pace of growth was expected due to slower loan demand and our own efforts to be more selective on opportunities as we better align loan growth with our funding outlook. While we expect full-year loan growth in the high single-digit to low double-digit range in 2023, we will continue to support our clients and communities with new loan originations in line with our core verticals. Turning to slide 12, With the reduced loan demand in the market, we continue to see a slower pace of originations, which totaled $75 million in the first quarter, down 69% year over year. In fact, the primary driver of our loan growth in the first quarter was advances on existing loans. Offsetting the reduced originations are slower payoffs and paydowns, which declined 39% year over year. Overall loan growth going forward will be somewhat dependent on advances on existing loans, which will continue to create loan portfolio growth throughout the year, AS WELL AS THE PACE OF PAYOFFS, WHICH CAN BE DIFFICULT TO PREDICT IN THE CURRENT ENVIRONMENT. WE HAVE ALSO BEEN MANAGING OUR LOAN GROWTH BY SELLING PARTICIPATIONS ON NEW ORIGINATIONS, INCLUDING 80 MILLION IN PARTICIPATIONS IN THE FIRST QUARTER. THE PORTFOLIO PARTICIPATION SOLD HAS INCREASED EACH QUARTER OVER THE PAST YEAR, NOW TOTALING OVER 500 MILLION AND OVER 640 MILLION INCLUDING UNFUNDED COMMITMENTS. IN ADDITION TO HELPING MANAGE OUR GROWTH, THIS SERVICING PROVIDES AN ADDED REVENUE BENEFIT AS WELL. On slide 13, you can see we had strong first quarter loan growth across all loan types, led by construction and development, driven by draws on existing loans, most of which are multifamily related. As these projects complete their construction phase, many of these balances will migrate into other loan portfolios. Overall, we feel very comfortable with our non-owner occupied CRE portfolio. The majority of the book is fixed rate, which helps from a repricing risk standpoint. WE HAVE BEEN ACTIVELY ENGAGING WITH CLIENTS THAT HAVE MATURING OR RESETTING RATES OVER THE NEXT 12 MONTHS AND IDENTIFYING SITUATIONS OF POSSIBLE CASH FLOW STRAIN WHILE RECOMMENDING SOLUTIONS EARLIER IN THE PROCESS, IF NECESSARY. AS A QUARTER END, WE HAD 195 MILLION OF NON-OWNER-OCCUPIED CRE OFFICE EXPOSURE, WHICH IS JUST 5% OF TOTAL LOANS. THIS INCLUDES ONLY THREE LOANS IN THE CENTRAL BUSINESS DISTRICTS OF MINNEAPOLIS AND ST. PAUL, TOTALING 26 MILLION. THIS IS OBVIOUSLY A PORTFOLIO WE ARE MONITORING CLOSELY, but we feel good about the outlook given the lower average loan amount, which demonstrates a diversified loan base and our primarily Midwestern suburban exposure. I'll now turn it over to Jeff Schellberg.
spk06: Thanks, Nick. Turning to slide 14, our asset quality continues to be superb. Non-performing assets remained at very low levels, making up just 0.02% of total assets at the end of March. In addition, we essentially had no net charge costs for the ninth consecutive quarter, In fact, we have had cumulative net charge-offs of just 379,000 over the past six plus years. This is largely due to our measured risk selection, consistent underwriting standards, active credit oversight, and experienced lending and credit teams. While we have seen an extended period without any credit issues, we do expect normalization at some point given the higher interest rate environment and potential recession on the horizon. Therefore, we continue to take proactive steps to address potential credit concerns. As Nick mentioned, we are paying special attention to our CRE portfolio, including evaluating loan repricing risk by assessing our clients' ability to meet loan covenants in the current interest rate environment. We have also taken a deeper look in our non-owner occupied office portfolio to identify potential underperforming properties impacted by the remote work environment. In addition, we adopted CESAW on January 1st, 2023, The day one impact included a $650,000 increase to the allowance for credit losses and a $4.9 million increase to the allowance for unfunded commitments. The tax-affected impact totaled $3.9 million and was recorded as an adjustment to retained earnings. Overall, our total reserve stands at 1.36% of gross loans at the end of the first quarter, up two basis points from the last quarter. In terms of classified assets, we saw an increase of 8.3 million in the first quarter due to the downgrade of one CRE office loan. Slide 15 provides some more detail on our classified assets, which made up less than 1% of total loans and less than 7% of total capital. Classified assets are pretty evenly split between C&I and CRE loans. Watch list balance has declined by 4.7 million, primarily due to one C&I loan being upgraded. Overall, we feel good about the risk profile of the portfolio and feel it is well positioned as we move through 2023. I'll now turn it back over to Joe.
spk03: Thanks, Jeff. Slide 16 highlights our high-quality available-for-sale securities portfolio, which is up 21.9% over the past year. The portfolio is well diversified with a strong mix of mortgage-backed securities, municipal bonds, and corporate securities. The portfolio is highly rated with over 80% rated investment grade or better. It's also important to note that we do not have any held to maturity securities. In addition, the in-the-money derivatives portfolio we have in place is helping to offset some of the unrealized losses in the securities portfolio, resulting in AOCI to capital of just 3.4% compared to the peer bank median of 10.5% in the fourth quarter. We feel very comfortable with our securities portfolio in the current environment. Turning to slide 17, we took several actions in March to reinforce our already strong liquidity position as we increased our on and off balance sheet liquidity by $544 million to $1.9 billion, more than twice the level of our uninsured deposits. These actions included pledging loans and securities to create $833 million of additional borrowing capacity at the Federal Reserve and adding $129 million of cash on the balance sheet. It is worth noting that the securities we pledged were generally those with higher unrealized losses, effectively optimizing liquidity certainty. We did not utilize any borrowings from the FRB discount window or the new bank term funding program during the quarter. When you look collectively at our insured deposits, capital, and liquidity position and securities portfolio, We feel very comfortable with where we stand moving forward. Slide 18 highlights our strong capital ratios and tangible book value growth. We remain comfortable with our current capital levels as CT1 remains stable at 8.48%, while tangible common equity drops slightly to 7.23%, primarily due to the day one impact of CECL, which went through retained earnings. We will look to build our tangible common equity and CET1 ratios back up throughout 2023 with a slower 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 evaluate potential M&A opportunities. We also have a $25 million stock repurchase program that was approved by the board in 2022. However, it is unlikely we will repurchase shares in the near term. as we look to be conservative with our capital in the current environment. We continue to consistently grow tangible book value through various market ups and downs. This includes recent challenges such as COVID, an unprecedented Fed hiking cycle, and a series of recent bank failures. Tangible book value per share increased another 2.2% to $1,195 in the first quarter. Turning to slide 19, I'll summarize our thoughts on near-term expectations. We continue to expect loan growth in the high single to low double digit range for the full year of 2023. We remain focused on aligning this more closely with core deposit growth over the course of the year, keeping in mind that our core deposit growth will likely be more challenging in the near term due to recent industry developments. Our loan to deposit ratio target remains 95 to 105, but we may sit slightly above this in the near term given the current environment. As I mentioned earlier, we will likely see additional net interest margin compression in the second quarter given the changing industry dynamics. However, we expect this pressure to be less than what we have seen in recent quarters. Overall, the margin outlook will likely depend on the path of interest rates, the shape of the yield curve, and our pace of core deposit growth. Given the margin outlook, we could see the efficiency ratio move to the mid to high 40% range in the near term. as we continue to manage expenses in the current environment. And as I mentioned, from a capital standpoint, we will look to build our tangible common equity and CET1 ratios throughout 2023. I'll now turn it back to Jerry.
spk08: Thanks, Joe. Finishing up on slide 20, we want to remind everyone of our strategic priorities for 2023, which include managing our high-quality balance sheet growth, continuing to operate in a highly efficient manner while investing in the business, CONTINUED SCALABILITY OF THE ERM FUNCTION, INCLUDING PROACTIVELY ASSESSING ASSET QUALITY RISKS AND IMPLEMENTING LONGER-TERM READINESS STRATEGIES. AS PART OF OUR LONGER-TERM STRATEGIC READINESS PRIORITY, WE RECENTLY PURCHASED A PIECE OF LAND IN LAKE ELMO, MINNESOTA FOR A FUTURE DENOBLE BRANCH. THIS WILL HELP US FILL OUT OUR FOOTPRINT IN A HIGHER GROWTH EAST METRO AREA. IT'S ALSO AN OPPORTUNITY TO HELP SUPPLEMENT CORE DEPOSIT GROWTH DOWN THE ROAD. With that, we'll open this up for questions.
spk09: As a reminder, to ask a question, please press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. First question comes from Brendan Nozzle with Piper Sandler. Please go ahead.
spk04: Hey, good morning, guys. Hope you're doing well. Hey, Brendan. Just to start off here on funding costs, can you maybe walk us through kind of the evolution in deposit pricing kind of month to month throughout the first quarter and give us a sense of where stock funding costs were at the end of March?
spk03: Hey, Brendan. This is Joe. Yeah, so I think, you know, when we last quarter, when we guided to margin and obviously talked about, you know, the components that drive the margin, you know, we certainly talked about a competitive deposit environment. You know, I think there's certainly competition for deposits and there's certainly plenty of alternatives, you know, amongst treasuries and other money market alternatives. So, I mean, we were experiencing competition you know, elevated funding costs, you know, really, you know, at the beginning of the quarter. And then I think, you know, as the quarter translated and really the events that transpired in March, you know, I think as we were really proactive with a lot of our clients reaching out to them, you know, to really talk to them about the situation, you know, inevitably that, you know, resulted in some great conversations that ultimately resulted in repricing events. You know, so you kind of put that all together. You know, the pressures, I'd say the deposit costs accelerated at the back half of the quarter. And I think, you know, you'll see that translate here in the next quarter. You know, I'd say just generally, I think something that'll help if we just talk more broader about margin. You know, as we talked, you know, last quarter, you know, I think a helpful data point that we provided is you know, was December net interest margin standalone, which was 3%. And so, you know, as you couple some of these comments that I've talked about, along with, you know, interactions with clients and really just the challenges to grow core deposits, as well as just some migration, you know, from non-interest bearing to interest bearing, I think another helpful data point to start with is really March standalone margin, which was at right around 2.6%. So I think, you know, if you couple all that and you add that together, you know, I think that's a helpful data point to think about margin on a go-forward basis. But, you know, the environment remains challenging. I think there's a lot of, you know, the market itself, there's a lot of dynamics if you think about, you know, what's really the Fed going to do on a go-forward basis, the shape of the yield curve itself. the ability for us to continue to grow core deposits, I think all of those certainly make margin on a go-forward basis harder to predict. So that's probably more than you bargained for, but I think it's helpful to just really get it out there and talk about those dynamics.
spk04: Yeah, no, that's great, Joe. Thanks for the color. And the March NIM spot is definitely helpful. Maybe one more from me before I step back. Just on expenses, you guys did a really, really nice job kind of working to control the cost base. It looks like it was mostly on comp accruals. So, you know, I guess transitorily bringing down that expense to average assets ratio as you're combating revenue pressure. Just kind of curious what insight you have into kind of comp accrual line and overall expenses as we move through the year fighting revenues. And at what point does that kind of reset to its typical run rate?
spk03: Yeah, I think you're right that it definitely reset lower. And so really, as you think about building on that, high level start, we've always said that expense growth will run in lockstep or at least alongside asset growth and also in terms of revenue. So If we saw some revenue challenges here with NII and non-interest margin, we obviously also were able to pull back on expenses and that relationship was maintained. On a go-forward basis, as we talk about high single-digit asset growth really driven through the loan side, I think from this starting point moving forward, I think that's a fair assumption when you think about non-interest expense on a go-forward basis. And I think for us, the comp line, in total salaries has always kind of run, you know, in that low 60% of the expense composition. So I think that's also a fair assumption. And so I think, you know, as we look at throughout the year, you know, we're certainly going to look to, you know, other opportunities to continue to manage discretionary spend. We obviously talked about, you know, some pullback in marketing. But I think we're also cognizant of, you know, a growth company that invests in our people and certainly invests in technology. And we've definitely done that, you know, over the last couple years. And we certainly don't want to shy away from, you know, continuing the efficiency of the company. So that, you know, that will involve some investment. But overall, I think, you know, the expense line, as always, will hold up in line with asset growth. Got it. All right, great.
spk04: Thank you for taking the questions.
spk09: Our next question comes from Jeff Rollis.
spk02: Thanks. Good morning. First off, on the deposit side, love the March deposit graph. I think that's pretty telling year over year. And just to kind of walk through, you know, interested in flows so far in April, you probably got some tax activity, but wanted to kind of just track how that's gone and then narrowed down those expectations for deposit balance expectations kind of a little further out, kind of in the balance of 2Q and the second half.
spk05: Hey, Jeff. This is Nick. I'll take that one. You know, the momentum that we saw at the tail end of March with balances rebuilding, you know, that trend continued through the first two weeks of April. you know, and then is what is expected and is typical seasonality with tax season. We saw some of those balances then, you know, drift back down, you know, right around tax time. So, you know, we feel good about that, you know, momentum that we had that carried through the first part of April and that if we look back similar to what we did in March comparing 23 to 22, you know, that layers right on top of what we saw in April of 2022 as well. So, Um, you know, the, the balances that have held in and that, you know, sort of cyclicality has continued. Um, you know, looking further out, we feel really good about the, you know, the brand and our staff and our ability to continue to get in front of good, uh, you know, good client relationships. We just had a, um, sort of a town hall meeting with our, our lending and deposit staff last night. And, um, we probably spent an hour talking about some really amazing wins that the team has had having with, um, with great new core customers that really span the spectrum of size, from small deposit relationships to large ones. So we feel really good about the momentum that we have going forward, and the challenges that we experience in March is just another thing that we'll have to sell through, and I feel confident in our team's ability to do that. And ultimately, what has served us well in taking market share over our 18 years in the sense of our phenomenal people and our responsive service model will continue to win out and will continue to allow us to take market share. So we feel good about our ability to continue to grow the deposit base.
spk02: And Nick, you alluded to the cycle to date, beta at 40% and that pace is slowing. Have you updated kind of through the cycle
spk03: expectation for for ultimate peak beta you know jeff i think this is joe you know i think we're pleased with with the experience we've had thus far i think you know it's we kind of go back to prior cycles you know and it's it's tough because we talk about this cycle is is certainly unlike any other um and you couple the events that happened in march and i think some of that you know uh makes beta assumptions on a go-for basis challenging. I think when we look at the core deposit beta, you know, of 38%, I think, you know, we feel good, you know, from a modeling perspective that's in line with expectations of prior rate cycles when you kind of look back to 18 and 19. But again, you know, we're up 500 basis points over 12 months. So I think, you know, it's hard to anticipate, you know, where that goes or where that peaks. But thus far, we're pleased with the experience.
spk02: Sure. A tough one to peg. I wanted to just hop to credit Jeff. I thought I heard you say that the increase in classifieds was largely off the CRE. One, could you confirm or just clarify that? And then two, Any thoughts on the provision obviously impacted by CECL this quarter trying to track, you know, low single-digit or, excuse me, low double-digit, high single-digit loan growth pace? Just wanted to check in on expectations for the provision line.
spk06: Sure. I'll start off on the CRE and then let Joe talk about the provision. Yeah, the downgrade was it was a long-term client or is a long-term client of the institution. It was the acquisition and reposition of existing property. Loan's been on the books for about five years, but they hit the pandemic and had some traction with the property, but it just hasn't reached stabilization. So we just made the determination that we felt that we needed to downgrade the credit.
spk03: And then, Jeff, I'll talk to the CECL line. I mean, so, you know, just kind of what transpired in the first quarter and then really from a go-forward basis. So as we talked about, you know, day one, the allowance for credit losses, you know, we saw an increase of $650,000. And then the allowance for unfunded commitments, the ACL for unfunded commitments, you know, we saw a, you know, roughly a, I want to say it was a $4.5 million increase. increase to the allowance for unfundeds. So overall, the net effect, as we talked about, you know, to retained earnings on a tax-affected basis was $3.9 million. So then as we translate, you know, we move throughout the quarter, you know, loan growth itself, we provided for the ACL for, you know, $1.5 million. And as a lot of those unfunded commitments funded and moved to funded loans, you know, we actually experienced a reverse provision on unfunded commitments. So ultimately, the P&L impact in the first quarter was $625,000. And then, you know, we're comfortable with that $136,000 on a go-forward basis, you know, obviously barring the environment changing, but we feel good about that level.
spk02: Okay. We should kind of look at that. Preserved loans is a good, you kind of hold that steady-ish, is a good mark.
spk03: Yeah, assuming things don't change in the environment, certainly.
spk02: Understood. Okay, last one. Maybe Jerry, just on capital, that sounds a touch more cautious, understandable, given the environment. More on the M&A side, you're not a big M&A shop, but you've always held conversations. I'm interested in your thoughts about you know, the current kind of environment is a little choppy, but thinking about opportunities on potentially the other side of this, any thoughts on M&A from your perspective?
spk08: Yeah, I mean, my overall thoughts on that, it's clearly, you know, this year is going to be a real tough environment for M&A. I don't think there's really sellers out there at this point. But I do feel that long term after we go through this current cycle that there will be more opportunities than there have been in the past, frankly, just due to fatigue for some of these bankers. And we continue to do as we've done in the past. And we've only done one deal, but we certainly talked to a lot of owners of banks locally and some outside of the Twin Cities also. And just continue to have those talks and make sure that they know would like an opportunity to meet with them if they decide at some point to sell. And I've certainly had some conversations with some that are really leaning toward that in the next two to five years. But we'll see what happens in the market. So I'm not sure I really answered your question. Probably the same as I always do.
spk02: Thanks, Jerry, and thank you all. Appreciate it.
spk09: Our next question comes from Ben Gerlinger with Havid Group. Please go ahead.
spk01: Hey, good morning, guys.
spk02: Hi, Ben.
spk01: I was curious, if we could, I mean, when you think about deposits here, it's obviously been a tough environment, and by no means am I picking on you guys, but if loan growth continues kind of working against your goal with the loan-to-deposit ratio? Is there any kind of red line where you're like, you will not exceed it if deposits continue to kind of underwhelm the overall loan growth?
spk05: Hey Ben, this is Nick. Maybe I'll start with just sort of what we're seeing on the loan growth side of things and then I'll maybe pass it over to Joe and he can add some color on the loan-to-deposit ratio. You know, I think, you know, we've done a lot to manage the loan growth. I think if we look at Q1, you know, the bulk of the funding is coming from existing loan advances and really just that construction book. So loans that were closed, 12 to 18 months ago that are funding their construction balances. We've done a lot of work to model that forward to try to get some visibility into how much that will continue to provide for loan growth in overcoming quarters. And then we're certainly moderating the pace of new loan originations down to a level that we feel like we can better fund with core deposit growth and You know, if you look at our loan growth in Q1 at 13% annualized, I think it was a bit elevated with some fundings on some loans that came in toward the end of the quarter. But, you know, that's really in line with what our five-quarter deposit growth pace was. So we're making progress on that front. We will continue to support our client relationships, though. I mean, we've got great long-term client relationships that – that we will continue to be there for them as they need us. And then as we think about opportunities to bring on great new core long-term client relationships, in a lot of cases, those come with the need on the loan side as much as it does on providing opportunity for us to bring their deposits over to the bank. You know, those dynamics we're well aware of. We'll continue to, you know, moderate that as best we can. And we have a lot of initiatives in place to manage our loan growth, like the participations that we're selling and that we'll continue to sell to manage through that. But like I said, we will continue to support our core customers as we always have.
spk03: Yeah, and Ben, I just piggyback on Nick. I think what Nick said is exactly right. And I think when we just think purely from the ratio standpoint, I mean, Our long-term target is always 95 to 105. And so, you know, being slightly over that, I think everything that Nick mentioned that we're doing, I mean, we feel comfortable we can get back within that range. And certainly not a hard and fast, you know, if we go over that, we're going to completely, you know, shut down the pipeline. But we're cognizant of it, and we're certainly even more cognizant of it given the environment. I think there's obviously, you know, more attention to that line item. And to the extent, you know, the core deposit is, growth doesn't keep pace or at least it's less linear. I mean, we've certainly demonstrated we're willing to put on broker deposits to supplement being cognizant of that ratio.
spk01: Gotcha. That's fair. When you think, I don't know, bigger picture or longer term, are there any sort of new strategies or peripheral deposit gathering sources that might be entertaining? I'm not necessarily asking you to It tells every ingredient to the secret sauce here, but when you just think your CRE growth and your growth overall has been pretty phenomenal, but the clients you have typically don't have high cash balances relative to loans. I'm just kind of curious when you just think multi-year going forward, we've seen some diversification within the deposit base or just how you're approaching that from just a long-term thesis perspective.
spk05: Yeah, Benz. Nick, that's a great question. You know, we've set forth a strategic priority to, you know, not only from a loan diversification perspective, but also on the deposit front to grow our sort of C&I book, you know, to levels beyond where it is today. We've made a lot of progress on those, you know, identifying those verticals, staff internally that's going to push into that space, and then, you know, external staff that we could potentially hire that'll help us in those verticals. You know, obviously those types of clientele tend to carry, you know, larger deposit balances on average, you know, and also comes with, you know, treasury management fees and other things that'll help on the non-interest income side of things. So, but, you know, I wish there was a silver bullet on deposit, you know, finding core deposit strategies that make tons of progress in the short term, but You're right. These are long-term strategies that take time to play themselves out. We're putting a lot of effort internally on those today, and we'll continue to make progress on them over the course of time.
spk01: Gotcha. I appreciate the call. Thanks, guys.
spk09: This concludes our question and answer session. I would like to turn the call back over to Jerry Bach for any closing remarks.
spk08: I just want to thank everybody for their time today. Obviously, we're pleased with our results and our team's phenomenal here. Clearly, it's a more challenging environment than last year was, but we continue to be very optimistic. very positive about our place in the market here and the market share that we're taking and what our brand is. So I appreciate it and have a great day.
spk09: Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer