Bridgewater Bancshares (NASDAQ:BWB), a growing community bank, reported its third-quarter earnings on October 30, 2024, with earnings of $0.27 per share. The bank showcased consistent net interest income growth and a stable net interest margin, alongside a significant increase in core deposits. The anticipated acquisition of First Minnetonka City Bank is expected to further enhance liquidity and reduce the bank's commercial real estate concentration. Bridgewater Bancshares maintained strong asset quality with no increase in net charge-offs or non-performing loans, and announced key leadership changes, positioning itself for modest margin expansion in the coming quarter.
Key Takeaways
- Bridgewater Bancshares reported earnings of $0.27 per share in Q3 2024.
- Net interest income growth remained consistent, with a stable net interest margin of 2.24%.
- Core deposit growth was strong, with a $93 million increase and a decrease in brokered deposits by $158 million.
- The acquisition of First Minnetonka City Bank is expected to close in Q4 2024.
- Loan balances declined by $115 million due to elevated loan payoffs, despite strong loan demand.
- Leadership changes include the appointment of Nick Place as Chief Banking Officer and Lisa Salazar as Chief Operating Officer.
- The bank anticipates modest margin expansion in Q4 2024, with a focus on conservative credit practices.
Company Outlook
- Bridgewater Bancshares expects modest margin expansion starting in Q4 2024, influenced by the acquisition of First Minnetonka City Bank and improved net interest income.
- The bank is committed to maintaining conservative credit practices and focusing on profitable growth.
- Loan-to-deposit ratio decreased from 99.8% to 98.3%, indicating a strong deposit base.
Bearish Highlights
- Loan balances experienced a $115 million decline due to high loan payoffs.
- Elevated loan payoffs are expected to continue, potentially keeping loan balances flat.
- The high-interest environment has impacted new loan originations.
Bullish Highlights
- Despite a decline in loan balances, there is a robust loan pipeline and strong loan demand.
- The bank's fixed-rate loan portfolio is poised to benefit from future Federal Reserve rate cuts.
- Strong capital ratios were reported, with CET1 increasing from 9.41% to 9.79%.
Misses
- The company did not plan any share repurchases in the third quarter due to the upcoming acquisition.
- Organic loan growth has been slower than anticipated.
Q&A Highlights
- Management noted that elevated payoffs are not tied to specific loan vintages but are a mix from 2021 and 2022.
- Spot deposit costs as of September 30 were approximately 3.40%.
- Asset growth and expenses are projected to align in the mid-single digits for 2024.
- Share repurchase plans will be evaluated post-acquisition, with a focus on maintaining a CET1 ratio above 9%.
Bridgewater Bancshares remains optimistic about its growth strategy, citing strong deposit competition in the Twin Cities and a favorable response from the Federal Reserve's recent rate cut. The company's relationship with regulators is positive, as reflected in the swift regulatory approval for the acquisition of First Minnetonka City Bank. Management concluded the call with enthusiasm for the bank's core deposit growth and the strategic acquisition that is set to close in the fourth quarter of 2024.
InvestingPro Insights
Bridgewater Bancshares (BWB) has demonstrated resilience in a challenging banking environment, as evidenced by its recent earnings report and strategic moves. To complement the article's analysis, InvestingPro data reveals some interesting financial metrics that provide additional context to the company's performance and outlook.
As of the latest data, Bridgewater Bancshares boasts a market capitalization of $416.6 million, reflecting its position as a growing community bank. The company's P/E ratio stands at 13.67, which is relatively modest and may suggest potential value for investors, especially considering the bank's growth initiatives and the anticipated acquisition of First Minnetonka City Bank.
InvestingPro Tips highlight that BWB has been profitable over the last twelve months, aligning with the article's discussion of consistent net interest income growth. This profitability is further supported by the company's impressive operating income margin of 45.49% for the last twelve months as of Q2 2024, indicating efficient operations despite the challenging interest rate environment.
Another relevant InvestingPro Tip notes that BWB has delivered a high return over the last year. This is corroborated by the InvestingPro Data showing a remarkable 65.59% one-year price total return, which underscores the market's positive reception of the bank's performance and strategic direction.
It's worth noting that while the article mentions the bank's focus on profitable growth, an InvestingPro Tip cautions that net income is expected to drop this year. This could be related to the anticipated expenses associated with the First Minnetonka City Bank acquisition and the current high-interest rate environment affecting loan originations.
For investors seeking more comprehensive insights, InvestingPro offers additional tips and data points that could provide a fuller picture of Bridgewater Bancshares' financial health and prospects. Currently, there are 6 additional InvestingPro Tips available for BWB, which could offer valuable perspectives for those considering an investment in this growing community bank.
Full transcript - Bridgewater Bancshares Inc (BWB) Q3 2024:
Operator: Good morning. And welcome to the Bridgewater Bancshares 2024 Third Quarter Earnings Call. My name is Wyatt, and I will be your conference operator today. All participants have been placed in listen-only mode. After Bridgewater’s opening remarks, there’ll be a question-and-answer session. [Operator Instructions] 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.
Justin Horstman: Thank you, Wyatt, and good morning, everyone. Joining me on today’s call are Jerry Baack, Chairman and Chief Executive Officer; Joe Chybowski, President and Chief Financial Officer; Nick Place, Chief Banking Officer; and Jeff Shellberg, Chief Credit Officer. In just a few moments, we will provide an overview of our 2024 third 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 will open the call for questions. During today’s presentation, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution that such statements are predictions and that actual results may differ materially. Please see the forward-looking statement disclosure in our slide presentation and our 2024 third quarter earnings release for more information about risks and uncertainties which may affect us. The information we will provide today is as of and for the quarter ended September 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 third quarter earnings release for reconciliations of non-GAAP disclosures to the comparable GAAP measures. I would now like to turn the call over to Bridgewater’s Chairman and CEO, Jerry Baack.
Jerry Baack: Thank you, Justin, and thank you to everyone for joining us this morning. We’re pleased to report a solid quarter with earnings of $0.27 per share. Highlights included a second consecutive quarter of net interest income growth, ongoing net interest margin stability, strong core deposit growth, strong overall asset quality and our previously announced acquisition of First Minnetonka City Bank. Net interest margin held steady at 2.24% for the third straight quarter. With the Fed’s rate cut in September and potential for more later this year and into 2025, we’re poised to start seeing margin expansion given our liability-sensitive balance sheet. Strong core deposit growth helped enhance our overall deposit mix during the quarter as we were able to push out some brokered and timed deposits. We’ve really been pleased with the core deposit momentum we’ve seen going back to March of last year. On the asset side, elevated loan payoffs and competition in the market caused loan balances to decline. But higher yields and earning asset growth through cash and securities ultimately resulted in increased net interest income and total revenue growth. Asset quality continues to be one of our strengths. We didn’t see an uptick in net charge-offs and non-performing loans in the third quarter, both due to one central business district office loan that we had mentioned over the last few quarters. Jeff will provide more color on this in a few minutes. But overall, we feel good about our portfolio, especially given the improving multifamily trends in the Twin Cities, such as declining vacancy rates. Turning to slide four, as you know, back in August, we announced the acquisition of First Minnetonka City Bank. This is a deal that we believe checks a lot of boxes strategically as we look at M&A. First Minnetonka City Bank brings a low cost, granular core deposit base. Their loan-to-deposit ratio will provide additional liquidity and balance sheet optionality. The transaction will also reduce our CRE concentration while adding a new income stream through the investment advisory platform. In addition, this is a small in-market transaction with low integration risk. Since the announcement, we’ve had really good conversations with all of the team members of First Minnetonka City Bank. Everyone is really excited about the benefits of the combination for all parties involved. We have received all required regulatory approvals and expect acquisition to close during the fourth quarter of this year. We also have integration teams in place that are collaborating regularly to actively prepare to bring the banks together. When you consider Bridgewater’s recent funding trends, including strong core deposit growth and combine it with the deposit based and liquidity that First Minnetonka City Bank brands, we feel really good about our outlook as we look to 2025. Turning to Slide 5, one of the parts of the Bridgewater story I’m most proud of has been our ability to consistently grow tangible book value. Which was up another 3% in the third quarter, the 31st consecutive quarter of growth. We expect this streak to come to an end in the fourth quarter as we complete the acquisition. A generating consistent tangible book value growth will remain a focus for us as we move into 2025. Before I turn it over to Joe, I want to highlight a few recent enhancements we have made to our leadership structure, earlier this month Nick Place, our former Chief Lending Officer moved into the role of Chief Banking Officer, where he will oversee lending, deposits and all things revenue. In addition, Lisa Salazar has moved from her previous role of Chief Deposit Officer to Chief Operating Officer, where she will oversee operations, technology and initiatives related to the organizational efficiency and client experience. We believe that these changes will propel us forward with an increased level of agility and focus. With that, I’ll turn it over to Joe.
Joe Chybowski: Thank you. Jerry. Turning to Slide 6 net interest margins has held steady at 2.24% throughout 2024. Couple this with annualized average earning asset growth of 4.3% and we saw a nice increase in net interest income in the third quarter. This came despite elevated loan payoffs and lower loan balances as we grew securities and kept more cash on the balance sheet, both that neutral to accretive earning asset yields. The elevated payoffs also had a favorable impact on the margin in the form of accelerating previously deferred loan fees, which increased 9% quarter-over-quarter. Diving a little deeper on Slide 7. Loan yields continue to reprice higher up 7 basis points to 5.57%. While we expect this to continue, even in a potential rates down 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 third quarter, the weighted average yield on new loan originations was in the mid 7% range, while loans paying off were in the low-to-mid 6%’s. Our security yield also moved to over 5%. Well, average balances reach $700 million, as asset yields picked up the pace of rising funding costs slowed up just 5 basis points compared to double-digit increases each of the past several quarters. We are already seeing the impact of the Fed September rate cut as deposit costs have started to decline. We have $1.4 billion of adjustable rate funding tied to short-term rates, including over $1 billion of deposits, which we reprice lower late in the third quarter. We will continue to reprice other deposits lower as we move forward, but we will be thoughtful given competition. In addition, our deposit mix has improved with core deposit growth and reduced brokered and time deposits and don’t forget about First Minnetonka City Bank’s low cost deposit base. All of these factors should help alleviate the pressure on deposit costs starting in the fourth quarter and certainly into 2025. We are now in a position where we should start to see modest margin expansion beginning in the fourth quarter with the magnitude dependent on the pace of additional rate cuts over the remainder of the year and a more normalized upward sloping yield curve. Turning to Slide 8, you can see that the margin stability has translated into two consecutive quarters of revenue growth and rising profitability, including an increase in pre-provision net revenue. On Slide 9, our ability to manage expenses while making investments in the business continues to be a real strength of the organization. Expenses in 2024 have been very well controlled and have tracked in line with what we expected. After a decrease in expenses in the first quarter, which is typically our low point, we saw expenses ramp up in the second and third quarters, similar to last year. Looking ahead to the fourth quarter, we would expect expenses to continue to move modestly higher, excluding merger related expenses and any potential stub period expenses from First Minnetonka City Bank. Overall, we still expect expenses to generally track in line with asset growth over time. While asset growth has been a bit more muted than expected in 2024, we are continuing to invest in the business and our people. With that, I’ll turn it over to Nick.
Nick Place: Thanks, Joe. Turning to Slide 10, the highlight of the third quarter for us was the improved deposit mix, including $93 million of core deposit growth or 14.4% annualized, an another quarter of non-interest-bearing deposit growth. Looking at the chart in the bottom left, core deposit balances have steadily trended higher since the first quarter of 2023, including 6.9% annualized growth year-to-date in 2024. This chart highlights the non-linear nature of our core deposit growth that we always talk about. We will have some quarters with bigger inflows or outflows, but the momentum is there as we continue to see growth over time. Given this core deposit growth and the elevated loan payoffs we have seen recently, we were able to call some higher-cost brokered deposits and let some time deposits run off. In total, brokered and time deposits declined by $158 million in the third quarter. Because we reduced our exposure to some of these higher-cost deposits, total deposits declined for the quarter, but the overall mix improved. As Joe mentioned, we would expect these deposit mix changes, along with the $1.4 billion of funding we have tied to short-term rates, to help lower our deposit costs going forward. Turning to Slide 11, loan balances were down $115 million in the third quarter due to elevated loan payoffs. We mentioned on last quarter’s call that we were seeing increased payoffs carryover from the second quarter into early July. This continued throughout the third quarter, resulting in $163 million of payoffs, up over $100 million from the first quarter. On a year-to-date basis, payoffs were up 42% compared to 2023. We are likely in a catch-up period as payoffs were well below average throughout much of 2023 and early 2024. While loan balances declined in the quarter, we were able to lower our loan-to-deposit ratio to 98.3% from 99.8% last quarter. Slide 12 provides more detail on payoff and origination activity. While the increased payoffs impacted our overall loan growth, they show there is continued liquidity in our lending spaces as clients are able to refinance or sell their properties. We can redeploy this liquidity into higher-yielding loans and generate additional loan fees, which support net interest income. New originations declined as the higher interest rate environment early in the quarter and the challenged equity market continued to cause some borrowers to delay projects, while other deals just didn’t pencil out. Competition has also increased, especially from agencies, that resulted in tighter pricing than we were willing to offer. However, loan demand remains strong and we continue to get in front of good deals. Borrowers have shown a renewed interest in starting projects following the Fed cut in September. Our current loan pipeline is the strongest it has been all year. We started seeing the pipeline build off low levels late in 2023 and early 2024 and then dipped in the second quarter, likely affecting originations in the third quarter. But the pipeline has rebounded nicely as we head into the fourth quarter. Keep in mind that it does take time for loans in the pipeline to translate into loan growth on the balance sheet. In addition, we have been actively generating new loan commitments, some of which won’t fund right away, but will provide balance sheet growth in future quarters. Looking ahead to the fourth quarter, loan payoffs are likely to remain elevated. As a result, we expect loan balances to remain relatively flat, excluding the acquisition. Overall, we are focused on generating profitable growth with strong borrowers while adhering to our conservative credit culture. We aren’t going to compromise on pricing or structure or expand our credit box just to drive near-term loan growth. If loan growth is a bit slower, we are happy to optimize our funding mix and build liquidity that we can deploy into the right deals at the right time. We can also supplement loan growth with other earning assets, such as securities that yield around 5%. In addition, we are preparing to onboard First Minnetonka City Bank’s loan portfolio and deposit base, which will provide growth and liquidity, positioning us well heading into 2025. Slide 13 highlights the repricing of our loan portfolio, which we expect to benefit in rates-down environments. This is driven by our large fixed-rate portfolio, which makes up nearly 70% of total loans and relatively small variable-rate portfolio. We have $620 million of fixed and adjustable-rate loans maturing or repricing over the next 12 months at yields below their new originations or new originations are going on the books. This means we should see our portfolio loan yields continue to reprice higher as we redeploy funds from maturing loans to new originations. While our variable-rate portfolio will reprice lower if we see future rate cuts, we have been diligent in increasing loan floors with nearly 80% now being above 5%. This provides loan yield support if interest rates continue to decline. Because of our ability to continue repricing loans higher in a lower rate environment, loan growth isn’t the only lever we have to pull to support net interest income growth. I’ll now turn it over to Jeff.
Jeff Shellberg: Thanks, Nick. Slide 14 highlights our multifamily and office exposure, our $1.4 billion multifamily exposure that has experienced just $62,000 in net charge-offs since inception really highlights the strength of this asset class and our expertise in the market. We have continued to see positive trends in the Twin Cities as economic and interest rate environments have improved. After peaking in early 2024, CoStar data shows multifamily vacancy rates in the Twin Cities have steadily declined throughout the year due to robust demand and a slowdown in construction. In addition, a strong labor market and near nation leading affordability fueled the strongest absorption level on record during the second quarter. The Twin Cities continues to rank among the top markets in the country in multifamily absorption levels compared to existing inventory. These trends point forward to a favorable outlook for future occupancy levels and rent growth. We recently finalized our 2023 covenant testing across our multifamily and non-owner occupied CRE portfolios and we’re pleased to see that the results remain consistent with what we experienced last year. We have action plans in place for issues identified, including principal curtailments, pledges of additional collateral and other risk mitigants. We continue to closely monitor the portfolio and believe the lower interest rate environment bodes well for credit quality moving forward and we remain bullish on multifamily in the Twin Cities over the long-term. Looking at our non-owner occupied CRE office portfolio, our exposure remains quite limited at just over 5% of total loans. This includes just four loans located in central business districts, totaling $34 million. One of these loans is on our watch list and another was moved to non-accrual during the third quarter, both related to potential rollover risk. Regarding the loan moved to non-accrual, the borrower entered into a purchase agreement to sell the property, resulting in a $935,000 charge-off. We feel this is an appropriate course of action, given the central business district office environment and to avoid future risk in the event maturing leases are not extended. The sale is currently scheduled to close in the fourth quarter. This is the same substandard loan that we have mentioned in prior quarters. The two other central business district office loans continue to perform well, given their specific property characteristics. We feel good about the office portfolio as a whole, given the lower average loan amount, diversified client base and primarily Midwestern suburban office exposure. Turning to Slide 15, we have demonstrated a strong credit culture with a long track record of superb asset quality and that has continued throughout 2024. That said, we may experience an occasional one-off credit issue, like the one central business district office loan we mentioned. Despite this loan, our credit metrics remain very strong, with annualized year-to-date net charge-offs of just 0.03% and non-performing assets of just 0.19%. In addition, we have virtually no loans over 30 days past due. We also remain well-reserved at 1.38% gross loans, which is well in excess of peer levels. In fact, the central business district office loan charge-off was reserved for, and did not impact earnings, as we had no provision for the quarter. Looking ahead, we do expect a CECL double-count provision of approximately $1 million when the First Minnetonka City Bank acquisition closes. On Slide 16, you can see a summary of our watch and substandard loans, both of which remain steady and at very low levels. We feel good about the risk profile of the portfolio and believe it is well-positioned moving forward. I’ll now turn it back over to Joe.
Joe Chybowski: Thanks, Jeff. Slide 17 highlights our strong capital ratios, which have continued to build, including CET1, which increased from 9.41% to 9.79%. Given the announced acquisition, we did not repurchase any shares during the third quarter. 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 other uses of capital. 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 18, I’ll recap our near-term expectations. We expect loan growth in the fourth quarter to be primarily driven by the First Minnetonka City Bank acquisition, with organic loan growth remaining relatively flat due to continued payoff headwinds as we focus on profitable growth. We feel really good about the stability in the margin in 2024. With a 50-basis-point cut in September and additional rate cuts on the table, we expect to see modest margin expansion begin in the fourth quarter and continue into 2025, given our liability sensitive balance sheet. Keep in mind that the First Minnetonka City Bank deal should also be accretive to the margin, but we won’t see the full impact of that until the first quarter. Overall, the magnitude of margin expansion will depend on the pace of future rate cuts and slope of the curve moving forward. While the margin expansion is great, our real focus is on driving net interest income growth. We believe we can continue to do this given the margin expansion and earning asset growth, even if organic loan growth is more needed in the near-term. We have been pleased with the increase in our capital ratios over the past year. We don’t expect a meaningful impact to our overall capital dollars as a result of the First Minnetonka City Bank deal, but we would expect a modest decline in capital ratios given the larger balance sheet. I’ll now turn it back to Jerry.
Jerry Baack: Thanks, Joe. Finishing up on Slide 19, I’ll provide a quick update on our 2024 strategic priorities. First, as we look to optimize our balance sheet for longer-term growth, we have generated strong core deposit growth of 6.9% annualized year-to-date. Second, we announced our first M&A deal since 2016, which will help us continue to gain market share in the Twin Cities. 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 will open it up for questions.
Operator: [Operator Instructions] And our first question comes from Jeff Rulis with D.A. Davidson. Please go ahead.
Jeff Rulis: Thanks. Good morning. A question on the payoffs. I’m trying to get a little more detail. If a lot of that or some of it is encouraged on your side for credit purposes or is it largely customer driven?
Nick Place: Hey, Jeff. This is Nick. I’d say it’s a mix of both. I mean, there’s certainly some payoffs that we saw in the quarter that we were not sad to see go. But some of them is just the lifecycle of that transaction and payoffs that we would have expected to see throughout 2023 or 2024, which didn’t make sense at the time given the rate environment or the equity markets. The borrower was able to pivot a bit, and equity markets changed, and it just made sense for the asset to move. So some were transactions we’d had on the books for quite some time. Some were relatively new vintage deals. So there isn’t a theme to it necessarily, other than I think it’s a pickup of payoffs that we would have probably been more evenly spread out over the last 18 months.
Jeff Rulis: Nick, that was sort of my next question on it. Is it -- there is not a vintage or particular timeframe that is driving sort of a higher bump. And maybe a second related to that is, do you think this is the high water mark from kind of what you’ve seen or what you’ve got upcoming?
Nick Place: Yeah. I don’t think there’s a theme to the payoff structure from a vintage perspective. I think it’s really a mixed bag, some of which is stuff that was originated in 2021 and 2022 that maybe had variable rates and floated up, and those clients obviously had been more incentivized to refinance or sell the assets than others. Predicting payoffs is hard. I think, we expect to continue to see payoffs at a relatively higher level than what we’d experienced over the last 12 months to 18 months here in Q4. As -- I don’t think we fully caught up on all the payoffs. But in credit or margins on transactions have tightened a bit. It feels like, some of the liquidity concerns from last year in the banking environment have largely subsided and players that were on the sidelines are back. So it does feel like borrowers have some more options, which overall, I think, it’s just good for the ecosystem. So, I would expect payoffs -- what we’re going to -- we’ve always thought the payoff battle and I think as we continue to build our loan pipeline, which is really increased a lot here that allows us to sort of weather that storm, which again is good to see that there’s liquidity out there.
Jeff Rulis: Thanks, Nick. Hopping over to the margin side of things just. What was the timing of some of that brokered or time deposit runoff and any kind of idea on sort of the average rate of those rolling off relative to cost of funds in the mid-3s?
Joe Chybowski: Yeah. Jeff, this is Joe. So the brokerage that we had called, we’re really the kind of mid-August to early September. I just think, given the strong core deposit growth and we’ve always talked about the optionality that we have in that brokered portfolio, especially when they’re at higher rates. So, yeah, that was kind of a mid-quarter. Really, when we saw kind of a pullback and rates kind of coming out of July economic numbers, we felt strong about the core deposit growth that had translated and so that gave us the option to call those brokered deposits and also let some retail time deposits roll off. On a cost basis. Yeah, those were all kind of north of 5%, even mid-5%, 5.5%. So, it was definitely margin beneficial to recycle that with core deposit growth and that’s certainly something that we continue to have, we highlight the brokered CDs that are certainly callable still on the balance sheet today and that’s a structure that, we’ve always kind of utilized for times like this where we feel really good about the deposit momentum and the optionality we have.
Jeff Rulis: Got it. And one last one if I could, you’ve long held the expenses tracking asset growth and I guess year-to-date to be asset growth has been a little lighter. Trying to track the tail of that as we go into 2025 and now sort of excluding the acquisition a little bit more on the legacy or core. It sounds like growth is maybe perking up or the pipelines are better. Trying to get a sense for if there’s a on expense growth if that more closely matches kind of the slowdown in growth, and I guess, is that relates into 2025?
Joe Chybowski: Yeah. No. It’s a good question. I think with the way that we look at it, just with the legacy Bridgewater, we still see that relationship holding up in 2025 and so it should in line with asset growth we expense to -- we expect to continue to invest in the business and grow expenses at a similar pace. I think if you get to the end of 2024, obviously we’ll have a fully merged balance sheet. If you look at the high level kind of asset growth in the mid-single digits, expenses will again be in mid-single digits. So I think, even with the small deal, and to your point, expenses are maybe a little head of asset growth pace we still, as you look at 2024 as a whole, that relationship will continue to be maintained. So that’s how we think about it going forward as well.
Jeff Rulis: Thanks, Joe.
Joe Chybowski: Yeah.
Operator: And our next question comes from Brendan Nosal with Hovde Group. Please go ahead.
Brendan Nosal: Hey. Good morning guys. Hope you are doing well.
Jerry Baack: Good morning, Brendan.
Brendan Nosal: Jeff, I think you probably tackled all the questions I would have asked on the office credit. So I guess I’ll move elsewhere. I’m kind of thinking about loan growth for next year. Don’t want to get too far ahead of myself here, but just given the cross currents of wanting to align with core funding and the payoffs that you are kind of battling through countered with better pipelines that you’re starting to see, just kind of curious any early thoughts on kind of the pace of longer if you’re thinking about for next year.
Nick Place: Hey, Brendan. This is Nick. Yeah. I mean, we’re certainly seeing our pipeline build here, which we’re pleased to see, I think, it’s a testament to the market and our clients and our staff. As we think about the rest of 2024, I think, we’re -- we’ve guided that we’re expecting loan balances to remain relatively flat and but as we’ve always said, our pipelines building now, doesn’t always translate into sort of immediate growth. So there’s always been a bit of a lag there. Thinking into 2025, I mean, we continue to feel like that sort of mid-single digits number is a very attainable number for us and really allows us to continue the momentum that we’ve had on really improving the balance of our loans and deposit mix, and how we think about growth on a go forward basis, continuing to change the mix on the deposit side that mid-single-digit growth rate feels like the right sort of target for us. Now, there’s going to be quarters where we’ll may be below or exceed that, but over the course of the year, that’s really how we’re thinking about it.
Brendan Nosal: Okay. Great. That’s helpful, Nick. Thank you. Moving on to deposit pricing. I’m just kind of curious how responsive pricing was in your own book, as well as the market more broadly to that initial 50 basis points of cuts that we got. And then, if you happen to have it, what were spot deposit costs at 9/30? Thanks.
Joe Chybowski: Hey, Brendan. This is Joe. Yeah. I think, we -- as we’ve said, I mean, we spent a lot of time over the last couple of quarters really posturing for kind of the seizing cycle. And so a lot of that, was conversations with clients to educating them, they -- a lot of them got to see the benefit on the way up, and certainly, now as we see rates pull back. So there was -- there’s an education piece certainly. I mean, we talked to a lot of our bankers and just really arm them with talking points. I think, obviously, it was very well telegraphed that it was coming. I think some of us were surprised maybe that it was 50 basis points. But we saw eight days of that certainly in the third quarter. And to this point, I think, it’s been relatively well received. I mean, I think, we’ve -- it was just a lot of proactive movement there and then we continue to do that. You saw us uptick from a $1 billion in Q2 to now a $1.4 billion, moving clients into those Fed Funds linked to short-term rates accounts. So, I think, it’s the -- again, it’s a really proactive piece to it. I think the other piece too, is just, we’re trying to be cognizant, obviously, of the growth and certainly the market. So, while there’s -- while those are explicitly linked, I think, obviously, we certainly have growth plans and so we want to be mindful of that on a go forward basis, and the market itself still continues to be competitive from a deposit pricing standpoint. On the spot rates, as of 3Q.
Nick Place: Yeah. It’s in the low 3.40%s…
Joe Chybowski: Yeah.
Nick Place: … relative to the 3.58%, I think, for the quarter. So, come down.
Brendan Nosal: All right. That’s super helpful. I’m just going to sneak in one last modeling question here. Just given the outlook for flat end-of-period loan growth, it’s fair to say that average loans outside of the deal would perhaps take down a little bit just to align those numbers. Is that fair?
Jerry Baack: Outside of the transaction, yeah, I’d expect our loan balances absent First Minnetonka City Bank to be relatively flat on the quarter.
Brendan Nosal: Yeah. Yeah. Okay. Thank you for taking the questions.
Operator: [Operator Instructions] Our next question comes from Nathan Race with Piper Sandler. Please go ahead.
Nathan Race: Hi, guys. Good morning. Thanks for taking the questions.
Jerry Baack: Hi.
Nathan Race: I apologize I hopped on a little late, but just in terms of the margin outlook for the fourth quarter, the guidance for moderate expansion. Does that contemplate just the slightly higher margin profile at the acquisition and there’s just the opportunity to kind of deliver the balance sheet?
Joe Chybowski: Hey, Nate. This is Joe. Yeah. I mean, I think that’s part of it. Just the optionality that their balance sheet provides for us similar to kind of this last quarter where there’s loan growth. The pace is slowed and such that we’ve been able to somewhat deliver the balance sheet and push out higher cost funding. I think the deal obviously gives us that flexibility to. I think just from the margin standpoint, the modest outlook is more kind of my comments earlier that, we’ve always said kind of the magnitude and the speed of cuts, the faster that happens, the quicker we can pass that on. I think a slower kind of easing cycle makes it harder to do that. And so I think that’s more of the modest kind of outlook is just Fed Funds futures have been very volatile, as you know, and so I think we want to be mindful of while we have deposits that are certainly linked to Fed Funds, it really depends on the path of really Fed Funds cuts. And so I think we want to be mindful of really trying to grow certainly even after the deal and deposit competition still is -- it still is strong here in the Twin Cities. We’ve had some banks that haven’t lowered rates at all. So I think that’s more the modest guide itself.
Nathan Race: Okay. Great. And then just thinking about payoffs, curious if you guys have kind of the way average rate on payoffs that came off in the quarter relative to kind of the yield on new production and just based on kind of what you see in terms of yields on the current loan pipeline?
Joe Chybowski: Yeah. I can touch on the first part and I’ll let Nick talk in a second. The first part, so it’s low-to-mid 6s were payoffs and then originations were coming on in the low-to-mid 7s.
Nick Place: That was for Q3. I think as we look at new transactions today, they’re probably coming a little bit from what we saw in Q3 on an average basis. There’s certainly more competition in the market. As some of the liquidity pressures I mentioned before seem to have eased. So, I think as we think about a blended average going forward, it’s probably right around 7%.
Nathan Race: Okay. Great. And then it was great to see the regulatory approval for the acquisition come through in relatively quick order. And I imagine that reflects well just in terms of your relationship with regulators as it relates to your commercial real estate concentration and the like. So we’ll just be curious to hear any feedback you’re hearing from regulators on that front and just kind of overall comfort levels, because I believe you guys just recently went through a regulatory exam more recently. So just any additional insights on that front I think would be helpful?
Jerry Baack: Yeah. Nate, it’s Jerry. Yeah. It’s really kind of not any different than what we’ve said in the past. We have a joint exam every 12 months at the end of summer with the Commerce Department and the FDIC, and this last exam we had went as well as any have. So we’re pleased with that and it’s more of the same, and we’ve been managing commercial real estate concentration since the very beginning. So I do feel comfortable with their underwriting and how we manage our risk and our overall enterprise risk management system here. So it’s no issues.
Nathan Race: Okay. Great. And then maybe just last one, I imagine, you guys made on the sidelines from a share repurchase standpoint, just as you rebuild CET1 post the acquisition closing in the fourth quarter. So you get that back up to 9%. Is that kind of still the right way to think about kind of the share repurchase appetite, depending on how the stock trade is going forward?
Joe Chybowski: Yeah. I think it’s -- like we say, it’s a confluence of things and we certainly outline our priorities. And I think to your point exactly, I mean, first quarter, I think we felt like we were building capital well, we hit our targets from a CET1 standpoint and we had took opportunities to buy back some stock, obviously, Q2 and Q3 with the deal and certainly going forward and we’re certainly going to be more cognizant of that and just really building back to and maintaining CET1 north of 9%. So, yeah, it’s constantly evaluating and shifting and balancing those priorities.
Nathan Race: Okay. Great. And then, again, I apologize if you touched on earlier, but just to describe the size of the office CRE loan that was problematic in the quarter.
Nick Place: Yeah. I mentioned, we have our sponsor has the property under contract. There’s a significant amount of non-refundable money that was provided as part of the purchase agreement. So, we have a high level of confidence that it’s going to close. There may be some small true-up of the actual charge-off amount in the fourth quarter, but we don’t expect that it’ll have any impact on earnings.
Nathan Race: Okay. Got it. And I apologize actually one last one. Can you remind us just on the margin benefit from each 25-basis-point Fed rate cut under a static balance sheet scenario?
Joe Chybowski: Yeah. I think like we’ve always said, I think, it’s staying away from those types of guides and more just around, we’re certainly well-positioned should rates continue to get cut from here, especially continued movement towards explicitly Fed Funds linked deposit accounts. So I think I would say more that the general comment that the magnitude and the speed of cuts, you know, will allow us to pass on more than a more slow gradual cycle. At the end of the day, we are focused on net interest income growth and we certainly feel like a stable to growing balance sheet with a stable to modestly expanding NIM will certainly do that.
Nathan Race: Okay. Great. I appreciate all the color. Thanks, guys.
Operator: That concludes our question-and-answer session. I will now turn the call back over to Jerry Baack for any closing remarks.
Jerry Baack: Thanks, everyone, for joining the call today. We continue to be very encouraged by our core deposit growth, our margin stabilization and just the overall outlook in the Twin Cities. And obviously very excited about the closing with First Minnetonka City Bank later this quarter. We’re really excited about bringing that team on and we’re continuing to be very impressed with our team here and how we feel about the future. So have a great day, everybody.
Operator: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
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