Bridgewater Bancshares Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 27, 2023

Key Takeaways

  • Earnings performance: Bridgewater earned $0.37 per share in Q1 2023, maintaining a strong mid-40% efficiency ratio through disciplined expense control.
  • Net interest margin pressure: NIM compressed by 44 basis points to 2.72% amid rising funding costs and a shift to interest-bearing deposits, with modest further compression expected in Q2.
  • Liquidity and capital strength: Available liquidity rose to $1.9 billion—over twice uninsured deposits—and capital ratios remained solid, supported by a high-quality securities portfolio and hedges limiting AOCI impact.
  • Asset quality remains robust: Nonperforming assets held at 0.02% of total assets and no net charge-offs for nine consecutive quarters; CECL adoption slightly increased loan loss reserves, underlining proactive risk management.
  • Deposit trends and retention: Deposit balances dipped seasonally and amid March market disruptions, with a cycle-to-date core deposit beta of 40%; management is focused on client engagement and retention initiatives.
AI Generated. May Contain Errors.
Earnings Conference Call
Bridgewater Bancshares Q1 2023
00:00 / 00:00

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Bridgewater Bancshares 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. Please note, today's call is being recorded.

Operator

At this time, I would like to introduce Justin Horstmann, Director of Investor Relations, to begin the conference call. Please go ahead.

Speaker 1

Thank you, Jordan, and good morning, everyone. Joining me on today's call are Jerry Bach, Chairman, President and Chief Executive Officer Joe Chabowski, Chief Financial Officer Jeff Kjellberg, Chief Credit Officer and Nick Place, Chief Lending Officer. In just a few moments, we will I will now 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 it up for questions.

Speaker 1

During today's presentation, we may make projections Please see the forward looking statement disclosure in our 2023 Q1 earnings release for more information about risks The information we will provide today is as of March 31, 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 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.

Speaker 2

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 is 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.

Speaker 2

It all starts with our simple business model serving local clients in the Twin Cities That we have known well and have long standing relationships with. This became even more apparent as we had proactive conversations balances such as leveraging the IntraFi network, which we have had in place for many years. Only 24% of our deposits We're uninsured as of March 31. We also have a strong capital and liquidity position and high quality securities portfolio We have taken several actions to increase our borrowing capacity without using the new bank term funding program. I'll have available liquidity of $1,900,000,000 more than twice the level of uninsured deposits.

Speaker 2

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 is evident through 2022 as we're able to continue growing tangible book value even as interest rates continue to rise 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.

Speaker 2

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 1. 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 4. Given all the noise in the banking sector and challenging rate environment, We are pleased with our 2023 Q1 results as we earned $0.37 per share.

Speaker 2

As we indicated on our 2022 Q4 earnings call, we expected to see more moderated levels of balance sheet growth And additional margin pressure in the Q1, both of which we experienced. Loan balances drew at a 13% annualized pace As the loan pipeline slowed and we remain more selective on deals. Deposit balances declined slightly as we saw typical seasonal outflows in March And as we turn 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.

Speaker 2

Expenses were Very well controlled in the Q1 and helped offset some of the near term revenue headwinds. We maintained a very strong efficiency ratio in the mid-forty percent range as we execute on opportunities to better manage discretionary spend in the current environment. Asset quality also remains superb With low non performing assets and our 9th consecutive quarter of no net charge offs. We adopted CECL during the Q1 and Had an impact on our lower net provision due to reduction in unfunded commitments. With that, I'll turn it over to Joe Chubowski.

Speaker 3

Thank you, Jerry. Turning to Slide 5, I'll provide some additional details on the net interest margin, which saw expected further compression in the Q1. The margin declined 44 basis points to 2.72 as funding costs continue 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 work to retain balances given the banking disruption in mid March.

Speaker 3

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 6, 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.

Speaker 3

In addition, we have over $400,000,000 of fixed And adjustable rate loans scheduled to reprice over the next year and over $600,000,000 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 2nd quarter, although we expect it to be at a more modest pace than we saw in the Q1. 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.

Speaker 3

Our current assumption is that Fed Funds peaks at 5% and remains there throughout 2023. Turning to Slide 7, 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 of quarters, Given the vast majority of our revenue is spread based. However, on the fee side, non interest income increased 11.8% From the Q4, primarily due to higher letter of credit fees and nearly $300,000 of FHLB prepayment income, which we don't expect to occur Raker, overall, we've been pleased with enhancements across the business that will incrementally benefit non interest income over the long run. Turning to Slide 8, we continue to operate with a strong efficiency ratio of 46.2 percent due to our ability to In an environment where revenue growth is more challenging.

Speaker 3

In fact, we saw non interest expense decline 6.7% from the 4th quarter as we reduce 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.

Speaker 4

Thanks, Joe. On

Speaker 5

Slide 9, overall deposit growth was relatively flat during the Q1 We turned our focus toward deposit retention given the market dynamics in March. Our 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 help with these conversations. That said, there were some modest deposit outflows, but overall balances held strong. Although like most banks, we did see a shift from non As we mentioned last quarter, our focus remains on better aligning loan growth with core deposit growth over the course 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.

Speaker 5

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, In fact, as you can see on the slide, the trajectory of deposit flows in March of 2023 tracked 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, This is an area where we feel very comfortable.

Speaker 5

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 IntraFi product, which allows them to to 24% of total deposits. Finally, our cycle to date deposit beta as of the end of the Q1 was 40%, in line with our expectations. The largest increase we've seen in the beta was from the Q3 of 2022 to the Q4 with the pace slowing in the Q1. Turning to Slide 11, we saw the pace of loan growth in the Q1 moderate to 13.1% annualized.

Speaker 5

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 Lower pace of originations, which totaled $75,000,000 in the Q1, down 69% year over year. In fact, the primary driver of our loan growth in the Q1 was advance On existing loans, offsetting the reduced originations are slower payoffs and paydowns, which declined 39% year over year.

Speaker 5

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 $80,000,000 of participations in the Q1. The portfolio of participation sold has increased each quarter over the past year, now totaling over $500,000,000 Over $640,000,000 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 1st quarter loan growth across all loan types, led by construction and development, driven by draws on existing loans, most of which are multifamily related.

Speaker 5

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 re pricing 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 of quarter end, we had $195,000,000 of non owner occupied CRE office exposure, which is just 5% of total loans. This includes only 3 loans in the Central Business Districts of Minneapolis and St.

Speaker 5

Paul, totaling 26,000,000 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 are primarily Midwestern Suburban Exposure. I'll now turn it over to Jeff Kjellberg.

Speaker 6

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 offs for the 9th consecutive quarter. In fact, we have had cumulative net charge offs Just 379,000 over the past 6 plus years.

Speaker 6

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.

Speaker 6

In addition, we adopted CECL on January 1, 2023. The day 1 impact included a $650,000 increase to the allowance for credit losses and a $4,900,000 increase The tax affected impact totaled $3,900,000 and was recorded as an adjustment to retained earnings. Overall, our total reserve stands at 1.36 percent of gross loans at the end of the Q1, up 2 basis points from the last quarter. In terms of classified assets, we saw an increase of $8,300,000 in the Q1 due to the downgrade of 1 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.

Speaker 6

Classified assets are pretty evenly split between C and I and CRE loans. Watch list balances declined by $4,700,000 primarily due to one C and 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.

Speaker 3

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.

Speaker 3

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 4th 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 $544,000,000 to 1,900,000,000 More than twice the level of our uninsured deposits. These actions included pledging loans and securities To create $833,000,000 of additional borrowing capacity at the Federal Reserve and adding $129,000,000 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.

Speaker 3

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 CET1 remains stable at 8.48%, while tangible common equity dropped slightly 7.23%, primarily due to the day 1 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.

Speaker 3

Beyond that, we continue to review and evaluate potential M and A opportunities. We also have a $25,000,000 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.

Speaker 3

Tangible book value per share increased another 2.2% to $11.95 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.

Speaker 3

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 Q2 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 And as I mentioned from a capital standpoint, we will look to build our tangible common equity and CET1 ratios throughout 2023.

Speaker 3

I'll now turn it back to Jerry.

Speaker 2

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 function, including proactively We recently purchased a piece of land in Lake Elmo, Minnesota for a future de novo 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.

Operator

First question comes from Brendan Nosal with Piper Sandler. Please go ahead.

Speaker 7

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 Q1 Can you give us a sense of where spot funding costs were at the end of March?

Speaker 3

Hey, Brandon, this is Joe. Yes. So I think when we last quarter when we guided to margin and obviously talked about the components that drive the margin, We certainly talked about a competitive deposit environment. I think there There's certainly competition for deposits and there's certainly plenty of alternatives amongst treasuries and other money market alternatives. So I mean we were experiencing elevated funding costs really at the beginning of the quarter.

Speaker 3

And then I think as the quarter translated and really the events that transpired in March, I think as we are really proactive with a lot of our clients reaching out to them to really talk to them about the situation, Inevitably that resulted in some rate conversations that ultimately resulted in re pricing events. So you kind of put that all together, the pressures I'd say that the deposit costs accelerated at the back half of the quarter. And I think you'll see that translate here in the next quarter. I'd say just generally I think something that will help If we just talk more broader about margin, as we talked last quarter, I think a helpful data point That we provided, with December net interest margin standalone, which was 3%. And so as you couple some of these comments that I've talked about, along with interactions with clients and really The challenge is to grow core deposits, as well as just some migration from non interest bearing to interest bearing.

Speaker 3

I think another helpful data point to Start with is really March standalone margin, which was at right around 2.6%. So I think if you couple all that and you add that together, I think that's a helpful data point to think about margin on a go forward basis. But the environment remains challenging. I think there's a lot of the market itself, there's a lot of dynamics if you think about 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.

Speaker 7

Yes. No, that's great, Joe. Thanks for the color. And the March NIM spot is definitely helpful. Maybe one more for me before I step back.

Speaker 7

Just on expenses, you guys did a really, really nice job kind of working to control the cost base. Looks like it was mostly on On comp accruals, so, yes, trend totally bringing down that expense to average assets ratio as you're combating revenue pressure. Just kind of curious what insights you have into kind of comp accrual line and overall expenses as we move through the year finding revenues? And at what does that kind of reset to its typical run rate?

Speaker 3

Yes, 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, we're at least alongside asset growth and also in terms of revenue. So If we saw some revenue challenges here with NII and net interest margin, we obviously also were able to pull back on expenses and those that relationship was maintained. On a go forward basis, as we talk about kind of 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 on that low 60% of the So I think that's also a fair assumption.

Speaker 3

And so I think As we look at throughout the year, we're certainly going to look to other opportunities to continue to manage discretionary spend. We obviously talked about Some pullback in marketing, but I think we're also cognizant of a growth company that invests in our people and certainly invests in technology, and we've definitely done that Over the last couple of years, and we certainly don't want to shy away from continuing the efficiency of the company. So that will involve Some investment, but overall I think the expense line as always will hold up in line with asset growth.

Speaker 1

Got it. All right, great.

Speaker 7

Thank you for taking the questions.

Operator

Our next question comes from Jeff Rulis with

Speaker 4

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. 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.

Speaker 5

Hey, Jeff. This is Nick. I'll take that one. The momentum that we saw at the tail end of March With balances rebuilding, that trend continued through the 1st 2 weeks of April. And then as expected and is typical seasonality with tax season, we saw some of those balances then Drift back down right around tax time.

Speaker 5

So, we feel good about that momentum that we had that carried through the Part of April and that if we look back similar to what we did in March comparing 23 to 22, That layers right on top of what we saw in April of 2022 as well. So, the balances that have held in and that So our cyclicality has continued. Looking further out, we feel really good about the brand and our staff and Our ability to continue to get in front of good client relationships, we just had a sort of a town hall meeting With our lending and deposit staff last night and we probably spent an hour talking about some really amazing wins that the team is Having 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 experienced 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.

Speaker 5

And ultimately what has Service well and taking market share over our 18 years in the sense of our phenomenal people and our responsive service model, We'll continue to win out and we'll continue to allow us to take market share. So we feel good about our ability to continue to grow the deposit base.

Speaker 4

And Nick, you alluded to the cycle to date beta at 40% and that pace is slowing. What have you updated kind of Through the cycle expectation for ultimate peak beta?

Speaker 3

Jeff, I think this is Joe. I think we're pleased with the experience we've had thus far. I think it's we kind of go back to prior cycles And it's tough because we talk about this cycle is certainly unlike any other. And you couple the events that happened in March, and I think Some of that makes beta assumptions on a go forward basis challenging. I think When we look at the core deposit beta of 38%, I think we feel good.

Speaker 3

From a modeling perspective, that's in line with expectations of prior rate cycles when you kind of look back to 2018 2019. But again, we're up 500 basis points over 12 months. So I think it's hard to anticipate where that goes or where that peaks. But thus far, we're pleased with the experience.

Speaker 4

Sure. Yes, it's a tough one to peg. I wanted to just hop to cap excuse me credit, Jeff. I thought I heard you say that the increase in classifieds Was largely Office CRE. 1, could you confirm or just clarify that?

Speaker 4

And then 2, Any thoughts on the provision obviously impacted by CECL this quarter trying to track a 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.

Speaker 6

Sure. I'll start off on the CRE and then let Joe talk about the provision. But Yes, 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 loans been on the books for about 5 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

Speaker 3

And then Jeff, I'll talk to the CECL line. I mean, Just kind of what transpired in the Q1 and then really from a go forward basis. So as we talked about day 1, The allowance for credit losses, we saw an increase of $650 and then the allowance for unfunded commitments, the ACL for unfunded commitments, We saw roughly a I want to say it was a $4,500,000 increase to the allowance for unfunded. So overall, the net effect as we talked about to retained earnings on a tax affected basis was $3,900,000 So then as we translate, we move throughout the quarter, loan growth itself, we provided for the ACL for 1,500,000 And as a lot of those unfunded commitments funded and moved to funded loans, we actually experienced a reverse provision on unfunded commitments. So ultimately, the P and L impact in the Q1 was $625,000 And then we're comfortable with that $136,000 on a go forward basis, Obviously, barring the environment changing, but we feel good about that level.

Speaker 4

Okay. We should kind of look at that preserved loans is a good you kind of hold that is a good mark.

Speaker 3

Yes, assuming things don't change in the environment certainly.

Speaker 4

Understood. Okay, last one. Maybe Jerry, just on capital, it sounds a touch more cautious, Understandable given the environment. More on the M and A side, you're not a big M and A shop, but you've always Health Conversations. I'm interested in your thoughts about the current kind of environment It's a little choppy, but thinking about opportunities on potentially the other side of this, any thoughts On M and A from your

Speaker 2

perspective? Yes. I mean, my overall thoughts on that, Clearly, this year is going to be a real tough environment for M and 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 on for some of these bankers. And we just we continue to Do as we've done in the past, and we've only done one deal, but we certainly talk to a lot of owners And banks locally and some outside of the Twin Cities also and just continue to have those talks and make sure that They know we would like an opportunity to meet with them if they decide at some point to sell.

Speaker 2

And I've certainly had some conversations with some that Are really leaning toward that in the next 2 to 5 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. So

Speaker 4

Thanks, Jerry, and thank you all. Appreciate it.

Operator

Our next question comes from Ben Gurlinger with Hovde Group. Please go ahead.

Speaker 8

Hey, good morning guys. Hi Ben. I was curious if we could I mean when you think about deposits here, it's obviously been a tough environment By no means am I picking on you guys, but loan growth continues kind of working against your goal Is there any kind of red line where you're like you will not exceed it if deposits continue to kind of underwhelm Overall deposit or loan growth?

Speaker 5

Hey, Ben. This is Nick. Maybe I'll start with just sort of what we're seeing loan growth side of things and then I'll maybe pass it over to Joe and he can add some color on the loan deposit ratio. But I think we've done a lot to manage the loan growth. I think if we look at Q1, The bulk of the funding is coming from existing loan advances, really just that construction book.

Speaker 5

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 over coming 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 if you look at our loan growth in Q1 at 13% annualized, I think was a bit elevated with some fundings on Loans that came in toward the end of the quarter, but that's really in line with what our 5 quarter deposit growth pace was. So we're making progress on that front. We will continue to support our client relationships though.

Speaker 5

I mean we've got Great long term client relationships 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. Those dynamics we're well aware of. We'll continue to 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.

Speaker 3

Yes. And Ben, I just piggyback on Nick. I think what Nick said is exactly right. And I think we when we just think purely from the ratio standpoint, I mean, Our long term target is always 95 to 105. And so 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.

Speaker 3

If we go over that, we're going to completely shut down the pipeline. We're cognizant of it and we're certainly even more cognizant of it given the environment. I think there's obviously more attention to that line item. To the extent the core deposit 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 conscious of that ratio.

Speaker 8

Got you. That's fair. When you think, I don't know, bigger picture longer term, are there any sort of New strategies or peripheral deposit gathering sources that you might be entertaining. I'm not necessarily asking you to And 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're seeing some diversification within deposit base or how you're approaching that From just a long term thesis perspective?

Speaker 5

Yes, Ben, it's Nick. That's a great question. We've set forth a strategic priority to not only from a loan diversification perspective, but also on the deposit front to grow our sort of C I book to levels beyond where it is today. We've made a lot of progress on Those identifying those verticals, staff internally that's going to push into that space and then external staff that we could potentially hire That will help us in those verticals. Obviously, those types of clientele tend to carry larger deposit balances on average and also Comes with treasury management fees and other things that will help on the non interest income side of things.

Speaker 5

So, but I wish there was a silver bullet on deposit, 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.

Operator

This concludes our question and answer session. I would like to turn the call over to Jerry Bock for any closing remarks.

Speaker 2

I just want to thank everybody for their time today. Obviously, We're pleased with the results and our team is phenomenal here. And clearly, it's a more challenging environment Than last year was, but we continue to be 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.

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