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spk07: Good morning and welcome to the Bridgewater Bank Share's 2024 Second Quarter Earnings Call. My name is Cole and I'll 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 one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Please note that today's call is being recorded. At this time, I would like to introduce Justin Horstman, Vice President of Investor Relations, to begin the conference call. Please go ahead, sir.
spk05: Thank you, Cole, and good morning, everyone. Joining me on today's call are Jerry Box, Chairman and Chief Executive Officer, Joe Chabowski, President and Chief Financial Officer, and Nick Place, Chief Lending Officer. In just a few moments, we will provide an overview of our 2024 second quarter financial results. We will 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 the slide presentation and our 2024 second 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 quarter ended June 30, 2024, 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 slide presentation and 2024 second 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 and CEO, Jerry Bach.
spk03: Thank you, Justin, and thank you, everyone, for joining us today. I'm pleased to share our second quarter results, which showed a stabilized net interest margin, a return to revenue growth, and continued superb asset quality. After seeing the pace of margin compression steadily slow over the past few quarters, we saw it hold steady in the second quarter. When coupled with average earning asset growth, we were able to drive net interest income and overall revenue growth for the first time since the third quarter of 2022. resulting in stabilization across our profitability metrics. As we have said in the past, Bridgewater is well-positioned to benefit from future interest rate cuts and a normalizing yield curve. Reaching a point of margin and overall profitability stabilization bodes well for us, especially as we witness more encouraging macro data, including the continued slowing of inflation. After strong balance sheet growth in the first quarter, loan and deposit growth were more muted in the second quarter. Loan growth was impacted by higher levels of payoffs, while deposit growth continued to be chunky given the nature of the deposit base. As expected, on a year-to-date basis, loan and deposit growth were still in the low to mid single-digit range. The team continues to participate in good conversations with new and existing clients, keeping us abreast of market opportunities. Asset quality continued to be very strong in the second quarter with no net charge-offs and very low levels of non-performing assets. Our consistent underwriting standards, active credit oversight, and experienced lending and credit teams have always been differentiators for us, and we are seeing the discipline pay off in the current environment. While CRE and multifamily continue to be a focus across the industry, And for us, given our high concentrations, we've been pleased with how these portfolios have performed. Nick will provide more insight into these portfolios and what we are seeing across the Twin Cities later in the presentation. In the meantime, I think it is worth reminding everyone that our teams are exceptionally talented at making CRE and multifamily loans. We have a lot of experience and expertise in the Twin Cities, which is why we are so comfortable with our current loan mix. Finally, this marks the 30th consecutive quarter of tangible book value per share growth, up 9.8% annualized from the first quarter. On slide four, you can see our tangible book value is up nearly 200% during those 30 quarters, compared to sub-70% median for banks with $3 to $10 billion in assets. We continue to believe this is a true differentiator for Bridgewater, and how we will provide shareholder value going forward. Before I turn it over to Joe, I wanted to highlight a few other things we've been working on. On the client front, as part of our commitment to win, retain, and grow our network, we launched a new CRM platform. This will be a game changer for us in terms of how we interact with clients while also enhancing efficiencies across the bank. Our product team is also working diligently on a new online banking solution for our retail and small business clients, ultimately enhancing the overall user experience. More to come in future updates on this client-centric initiative. Finally, our culture has always been something we take very seriously, and so we are thrilled to be recognized as a top workplace by the Star Tribune for the fifth year in a row. This further demonstrates how our unconventional corporate culture is appreciated by our diverse employee base and ultimately allowing us to attract and retain top talent. We aim to be unconventional with an inclusive and empowering culture. Just a few weeks ago, we hosted an all-team happy hour capped off with a meat raffle. All proceeds went to support local charity. It's activities like this that bring our team together and encourage collaboration at every junction. We truly have a great team. And I'll turn it over to Joe, who in addition to being our chief financial officer, we recently elevated to the role of president. Joe is well-suited for this role, and we are excited about what Joe can bring in this capacity. Joe? Thank you, Jerry.
spk06: I'm really excited about the new role, and it's been great to collaborate with the team so far. Turning to slide five, you can see the net interest margin held flat at 224. The stabilization during the quarter was driven by a more meaningful increase in the portfolio loan yield, which offset continued deposit pricing pressures. As we mentioned last quarter, we felt like we were reaching an inflection point on net interest income, given the stronger balance sheet growth, even if the margin compressed a bit further. As it turned out, balance sheet growth was a bit weaker than expected in the second quarter, but the margin was stronger. ultimately still driving that net interest income inflection up 1.5%. This was also supported by higher loan fees, as we saw an uptick in loan payoffs. Slide 6 provides more visibility into the trends of the margin components. The portfolio loan yield increased 12 basis points in the second quarter to 550. While we expect the loan portfolio to continue repricing higher, even a lower rate environment, the pace of the increase may vary based on the loan yields coming on and off the balance sheet in a given quarter. During the second quarter, the weighted average yield on new loan originations was in the low sevens, while loans paying off were in the low sixes. The securities portfolio is also supporting our overall asset yields, as securities yields increased another 14 basis points to 494. Note that our period end securities balances declined in the second quarter following a security sale. While asset yields have picked up, deposit costs have continued to increase, up 14 basis points in the second quarter. This continues to be due to elevated competition and overall mixed shifts within the portfolio. We would expect to see additional deposit pricing pressures, albeit at a slower pace, until we start to see some relief on rates. As Jerry mentioned, our balance sheet remains well-positioned for a rates-down environment and a more normalized yield curve. We have over $1 billion of adjustable funding tied to short-term rates and a loan portfolio that is positioned to continue repricing higher, even in a lower-rate environment. While the potential for rate cuts appears more likely today than it did three months ago, we would still expect net interest margin to remain relatively stable near current levels in the near term. with expansion coming after we see potential rate cuts take effect. Turning to slide seven, we saw quarter-over-quarter revenue growth for the first time in nearly two years, driven by higher net interest income. As a result, ROA and pre-provisioned ROA both stabilized, while ROTCE increased by 16 basis points. Non-interest income grew during the second quarter, primarily due to a $320,000 gain on the sale of securities. However, total revenue would have grown even when excluding the securities gain. Turning to slide eight, our ability to manage expenses while making investments in the business continues to be a real strength of the organization. Expenses so far in 2024 have tracked in line with what we expected. After a 3.5% decrease in expenses in the first quarter, which is typically our low point, we saw a 2% increase in the second quarter. The increase was primarily due to higher salary and employee benefits technology, and occupancy expenses, partially offset by lower FDIC expense. The trajectory is similar to what we saw in 2023, and we would expect that to continue with expenses increasing throughout the back half of the year. Overall, we would expect full-year expense growth to remain relatively in line with asset growth in 2024. With that, I'll turn it over to Nick.
spk04: Thanks, Joe. Turning to slide nine. Total deposit balances were relatively flat in the second quarter, with core deposits down 53 million. As we've always said, our core deposit growth tends not to be linear due to the nature of our client base, which includes higher balance client relationships, longer acquisition and onboarding times, and timing of larger inflows and outflows. In addition, the second quarter tends to be seasonally lower for deposits due to tax season and industry cyclicality. It's not unusual for us to see larger inflows and outflows from quarter to quarter. For example, we generated $90 million of core deposit growth in the first quarter. On a year-to-date basis, total deposits are up 5.3% annualized, while core deposits are up 3%, both in line with the 4.1% loan growth we have generated so far this year. We also continue to see various deposit mix changes, specifically as we leverage more broker deposits to supplement core deposit growth during the second quarter. On the other hand, we are pleased to see non-interest-bearing deposits grow at a nearly 4% annualized pace. These deposit mix changes have contributed to funding costs continuing to slowly move higher. However, from a broader funding perspective, we have ample repricing opportunities even if rates move lower. Overall, we feel good about our ability to drive core deposit growth and moderate deposit costs over time. Turning to slide 10, similar to deposit balances, annualized loan growth moderated a bit in the second quarter to 1.7% after stronger growth of 6.5% in the first quarter. Elevated payoffs, which increased nearly $50 million from last quarter, contributed to the slower growth. On a year-to-date basis, loan balances were up 4.1% annualized, which is in line with our expectations. Also, our loan-to-deposit ratio remains just under 100%, which is in the middle of our target range. We are continuing to see good loan demand in the Twin Cities and are getting in front of strong deals. However, the continued high interest rate environment and challenged equity market has caused some borrowers to delay projects while others' deals just haven't penciled out. We still expect full-year loan growth to be in the low to mid single-digit range. However, we are expecting more robust payoff levels to continue into the back half of the year, which will continue to be a headwind, while other factors, including overall demand, economic conditions, and core deposit growth will influence the pace of loan growth. Overall, we feel like we have the ability to turn on our loan growth engine when appropriate, but we are continuing to take a disciplined approach. That said, we've been active in adding new talent to our lending teams to support our long-term growth initiatives. You can see the increase in loan payoffs on slide 11. While higher payoffs may limit our overall loan growth, there are potential benefits as well. For example, payoffs create liquidity, that we can redeploy into higher yielding loans as the payoffs are generally rolling off below new production yields, as Joe mentioned earlier. In addition, payoffs can generate loan fees, which support net interest income, which we saw here in the second quarter. New loan originations also continue to be strong, exceeding loan advances for the second consecutive quarter. We do not see any meaningful changes to the loan mix during the quarter. Construction and development balances continue to decline as deals completed their construction phase. while growth came primarily in our C&I, CRE, and multifamily portfolios. Slide 12 shows how our loan portfolio is positioned to reprice higher, even if rates decline. This is primarily due to our large fixed rate portfolio, which makes up 69% of total loans, and our smaller variable rate portfolio, which makes up just 15% of loans. We have $633 million of fixed and adjustable rate loans maturing or repricing over the next 12 months with weighted average yields of 5.29% and 4.75% respectively. We would be able to redeploy these funds into loans with meaningfully higher yields even if we see rate cuts over the coming months. The repricing impact of our larger fixed and adjustable rate portfolios should outweigh the repricing of our smaller variable rate portfolios as rates come down. We have been diligent in increasing loan floors on variable rate transactions, with over 70% of our floors now being above 5%. This should provide loan yield support if we see a meaningful drop in rates. We are confident that our overall portfolio yields should only continue to rise even as rates come down. Slide 13 highlights our multifamily and office portfolios. Over 90% of our multifamily loans are in the Twin Cities, and we have only experienced 62,000 of net charge-offs in the portfolio since we started the bank in 2005. The Twin Cities multifamily market has historically been a stable market with less volatility than some of the coastal and high-growth markets. While vacancies increased throughout 2023, we have seen signs of vacancy rates stabilizing and even starting to tick down a bit over the past few months. Couple this with absorption levels exceeding deliveries as new construction remains slow and you have a more favorable outlook for occupancy levels and rent growth in the Twin Cities. We have been proactively testing covenants across our multifamily portfolio and have been very pleased with the results. For any issues that we have found, we have action plans in place, including principal curtailments, pledges of additional collateral, or other risk mitigants. We continue to closely monitor the portfolio as the economic and interest rate environments remain challenging. However, we have been pleased with the performance to date and remained bullish on multifamily over the long term. Looking at our non-owner-occupied CRE office portfolio, our exposure remains quite limited at just 5% of loans. This includes only four loans located in central business districts, totaling $35 million. As a reminder, in previous quarters, we placed one of these central business district office loans on watch and moved another to substandard, both due to potential lease rollover risk. We will continue to monitor these transactions closely given the headwinds facing this sector. That said, we feel good about the office portfolio as a whole given the lower average loan amount, diversified client base, and primarily Midwest suburban office exposure. Turning to slide 14, we continue to see strong performance across our entire loan portfolio, as we had no net charge-off again in the second quarter, and non-performing assets were just 0.01% of assets. We remain well-reserved at 1.37% of gross loans, which is well in excess of peer levels. Reserves included $600,000 of provision during the quarter, which has generally been tied to loan growth. Overall, we continue to feel good about our loan portfolio, That said, as this higher interest rate environment continues to put pressure on businesses, we still expect to see some credit normalization over time. On slide 15, you can see our watch and substandard loans, both of which remained at very low levels. We are pleased with the risk profile of the portfolio and believe it is well positioned moving forward. I'll now turn it back over to Joe. Thanks, Nick.
spk06: Slide 16 highlights our strong capital ratios, which have continued to build, including CET1, which increased from 921 to 941. In addition, we repurchased nearly 253,000 shares during the second quarter at a weighted average price of 1148 per share, for a total of 2.9 million. We still have 15.3 million remaining under our current authorization. We will continue to evaluate future repurchases based on a variety of factors, including capital levels, growth opportunities, and market conditions. Share repurchases are just one of our capital priorities. Our primary capital priority remains organic growth. Beyond that, we continue to review and monitor potential M&A opportunities. Turning to slide 17, I'll recap our near-term expectations. We expect full-year loan growth to remain in the low to mid-single-digit range, although, as Nick mentioned, anticipated higher levels of loan payoffs will likely be a headwind over the remainder of the year. We are pleased to see the margin stabilize in second quarter. We'd expect that stability to continue in the near term until we see some interest rate cuts and a normalized yield curve. While the loan book is repricing higher, there's still pressure on deposit costs. As we have mentioned, we are well positioned to benefit as rates come down. On the expense side, we expect full-year non-interest expense in 2024 to track relatively in line with asset growth, similar to prior years. This includes a similar trajectory throughout the year, as we saw in 2023, with expenses starting out low in the first quarter and building in subsequent quarters. The provision expense will likely be tied to our pace of loan growth and the overall asset quality of the portfolio.
spk03: I'll now turn it over to Jerry. Thanks, Joe. Finishing up on slide 18, I'll provide a quick update on our 2024 strategic priorities. First, as we look to optimize our balance sheet for longer-term growth, both loan and deposit growth are tracking as expected on a year-to-date basis. Second, we continue to focus on expanding our client base through additional affordable housing efforts as well as hosting successful networking events at our corporate office for local women business leaders and entrepreneurs. Third, we have continued to invest in the business, including the launch of our new CRM tool, which is creating efficiencies in how we engage with our clients. Finally, our credit teams are working hard to monitor our loan portfolios, especially CRE and multifamily. This has been evident through our continued strong asset quality. With that, we'll open it up for questions.
spk07: And as a reminder, to ask a question, please press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And our first question today will come from Brendan Nosal with Hovde Group. Please go ahead.
spk01: Hey, good morning, guys. How are you doing? Let me just start off here on credit. I mean, your ads and quality remains completely pristine, but we've been hearing rumblings that regulators are increasingly using tools at their disposal to increase individual capital requirements for Cree heavy banks. So let me just take us through your relationship with your regulators and their understanding of your business model, especially considering how clean credit's been for you historically. Okay.
spk03: We've had basically the same platform since we started in 2005. We continue to have conversations with our regulators. They have continued to be comfortable with what our overall enterprise risk management system is and how we monitor our concentrations. Although our concentrations have come down, that is certainly not something that they've asked us to do. So we continue to feel comfortable. We have another exam here in August, and at our last exam, it was kind of business as usual, so I don't expect anything different.
spk01: All right, that's great, Collin. Thank you. And then maybe can you update us on your appetite to continue repurchasing shares, just given the pricing's firmed up above tangible value?
spk06: Hey, Brandon, this is Joe. Yeah, I think, you know, it's like we always say. I mean, there's a variety of factors that we consider. You know, obviously the share price being one of them, but I think in the context of everything else, whether it's, you know, future growth opportunities, you know, the environment itself, you know, we consider all that. So I think, you know, we're really pleased and happy that we're as active as we were over the last you know, three quarters, um, just given the blended costs that we were able to buy back shares at, and then considering where the stock is today. Um, but again, we'll, we'll continue to evaluate that going forward. Um, and that's, that's kind of a fluid, um, analysis.
spk01: Yeah. Yeah. Excellent. Um, all right. Maybe one more for me before I step back. Um, Really great to see the margins finally level out. Do you happen to have spot rates for both deposit costs and the margin at quarter end, just to give us a sense of how trends played out across the quarter?
spk06: Yeah, so June was 220, and then spot rates for deposits were 350. Perfect.
spk01: Thank you for taking the questions.
spk07: And our next question will come from Jeff Rulis with DA Davidson. Please go ahead.
spk02: Thanks. Good morning. Just on the, you know, I think you were cautious on the acceleration of loan yields, you know, an encouraging stat. I wanted to kind of see if, is that more timing than anything in terms of 12 basis points versus five or kind of expectations for, do you expect that to jump around or do you think we could see further acceleration?
spk06: Hey, Jeff, this is Joe. Yeah, so I think, you know, we had really strong growth in the back half of the first quarter, really in March, which I think, you know, really propelled, you know, the loan yield in the second quarter. You know, so I think as we think about growth in the overall, you know, loan yield, it's obviously linked together. You know, I think as Nick mentioned, on the payoff front, I mean, I think it's – The payoff piece is certainly beneficial on one hand. It obviously allows us to recycle debt and really kind of roll off yields are certainly less than where new money yields are coming on at. So it's definitely not only margin accretive, but certainly beneficial to the overall loan yield. So that's helpful. So I think it's going to be growth driven. And I think in prior quarters where the growth was was not as strong as it was in first quarter. You know, you saw, you know, five to seven basis points on a lean quarter basis. And so I think, you know, given the strong growth in the first quarter, we do feel like that really propelled the loan yield in the second quarter.
spk02: Got it. And then Nick sort of mentioned Q2 more of a headwind from business cyclicality from a deposit gathering. now kind of through that, and I know you're kind of hugging that low single-digit balance sheet growth, but do you feel better about deposit gathering in the second half of the year? Is that typically seasonality becomes a tailwind?
spk04: Yeah, hey, this is Nick. Yeah, we've seen deposit balances sort of rebuild back up here, and it's not uncommon for us in Q2. It tends to be a low, uh, sort of low watermark for, uh, for us in, in the deposit front, just as, um, you know, taxes and other, um, you know, typical cyclicality of our business clients, uh, you know, tends to, we tend to see that in the second quarter. Um, you know, we feel really good about our, um, traction that we've had on new client acquisitions. Um, and really what we've seen in, in, um, in new hires this year and we've had some great treasury management hires, um, and, uh, feel really good about the bankers that we brought on board. So, you know, that will pay dividends over the longterm and, and, uh, we're starting to see that, you know, drive some of our pipeline growth now, but, um, yeah, Q2 was, uh, was a bit down for us and that's just not uncommon for us. We tend to have, um, uh, some chunky quarters, first quarter we saw, you know, really great, um, both core and overall deposit growth. And then Q2, as we expected, was a bit more muted. So we expect those sort of inflows and outflows to continue, you know, over the long term.
spk02: Thanks. And last one for me, I think you touched the buyback area pretty well. I guess just might as well check in on M&A and thoughts about the share prices as you run up here. and conversations on that side, interested in the recent updates.
spk03: I can talk a bit about M&A, Jeff. Similar to last quarter, last, you know, previous years, actually, I mean, we continue to have conversations with other local banks, and those conversations have always went well, so it's really just staying in front of potential targets along the way, and I know across the country things are heating up a little bit on the M&A front, at least that's what I hear from the investment bankers, but I'd say in the Twin Cities it's still a little slow, but we'll see. Got it.
spk02: Thank you.
spk07: And once again, if you would like to ask a question, please press star then 1. Our next question will come from Nathan Race with Piper Sandler. Please go ahead.
spk00: Hey, guys. Good morning. Thanks for taking the questions. Hi, Nate. Just as we think about, you know, the potential increase in deposit costs in the third quarter, curious just in terms of the CDs that you have maturing in 3Q and 4Q, how that stacks up to kind of your replacement rates today?
spk06: Hey, Nate. This is Joe. Yeah, I definitely think we've seen an inflection point you know, I'd say over the last couple of quarters, we've really been mindful to kind of shortening up, you know, the ultimate maturity of those CDs in anticipation for potential rate cuts. So I think really we've seen inflection where, you know, the 12-month CD at five and a quarter is now, you know, pricing in the low fives. And so I think that, you know, know while we had maybe a longer duration cd portfolio a couple years ago you know as that stuff rolls off and shortens up you know it certainly provides a lot of repricing opportunities and there's definitely inflection um from that perspective i'd say the other thing too is just on the on the broker front um you know we've really been able to put on longer term cds that have optionality in in our ability to call those cds so i think while it might feel like a longer term and certainly gets disclosed that way, there's definitely a lot of optionality from our perspective that allows us to call and reissue or supplement with core growth. So feel good about that time deposit portfolio and really hitting an inflection point in terms of cost.
spk00: Okay, great. And then I think we touched on it earlier, but just in terms of the elevated payoffs in the quarter, I'm curious if these are kind of as expected and if you have any kind of visibility into potential payoff levels over the course of 3Q and 4Q.
spk05: Hey, Nick.
spk04: Yeah, I mean, we anticipated payoffs picking up a little bit. I mean, we did see a, you know, drop in rates back end of last year, you know, which allowed some – some transactions to, you know, work toward a closing to refinance, and those do take time, and we saw some of that stuff come together in the second quarter. You know, we've seen some of those, you know, pullback in rates happen again here, so we're seeing our payoff pipeline rebuild again. And, you know, a lot of it's stuff that we had originated in 21 and 20, that it was the intention of those transactions to pay off. A lot of that came within our construction book that had rolled to our multifamily book. So it's sort of right within the life cycle of those transactions that we expected to see it. And we've actually seen even quarter to date payoffs that really, you know, that payoff trend has continued. We've seen, you know, almost two-thirds of the level of payoffs that we experienced in all of Q2 already here through July. So we're working to dig back out of that, and we expect that to continue to be a headwind here. But overall, we feel good about what that allows us to do. It allows us to recycle that cash back into new transactions, which is really our primary driver of both new loan yields and increased loan yields and fees. and in some cases it's allowing some of those, you know, older vintage transactions in 2021 that have felt a little bit more pain as these rate environments have come up, as they were underwritten into a different rate environment, to find the right home with an agency takeout or something like that. So ultimately it helps us with some of our credit risk metrics too. So, you know, not something that we're concerned with, but it is something that is – a headwind to loan growth as it offsets some of that new origination activity that we have.
spk00: Got it. Very helpful, Nick. Thank you. And then maybe just one last housekeeping question. The securities yields on the taxable portfolio increased nicely over the last quarter. Any repositioning there of note or any other items to keep in mind there?
spk06: Yeah, this is Joe. No, nothing out of the ordinary, more of the same, just from a composition standpoint. We're definitely in active portfolio management. From our perspective, we did sell some securities this last quarter, which is more of a floating rate nature and kind of reorienting in conjunction with the rest of the balance sheet. So nothing out of the ordinary there, just really ordinary course and similar composition as we've as we've had over the last couple of quarters.
spk00: Okay, great. I appreciate all the color.
spk07: And this will conclude our question and answer session. I would like to turn the conference back over to Jerry Bach for any closing remarks.
spk03: Thanks for joining the call today. We continue to be encouraged by our margin stabilization, overall revenue growth, our superb asset quality and continued growth and tangible book value. And I guess I'd just close by wanting to thank our team members. We have a phenomenal team here. We've brought on some more real key hires in this last quarter on the treasury and banking side. So we're excited for that. Everybody have a great day. The conference is now concluded.
spk07: Thank you for attending today's presentation. You may now disconnect your lines at this time.
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