Bridgewater Bancshares Inc

NASDAQ:BWB

Earnings Call Analysis

Bridgewater Shows Stability and Growth

Closing 2023, Bridgewater Bancshares sees a promising shift in momentum leading to a more favorable rate and economic environment in 2024. Despite slowing loan growth and a loan-to-deposit ratio dropping to 100%, net interest margin trends are stabilizing, with margins set at 2.27%, and a strong core deposit pipeline is emerging. Expenses are under control, up only 4.8% with asset growth at 6.1%, and asset quality remains high with low charge-offs and nonperforming assets. The company's tangible book value grew nearly 10% this year and has been consistently on the rise over the past 28 quarters, marking exceptional shareholder value. Bridgewater is well-positioned for future rate cuts with over $1 billion in short-term rate-tied funding and a 70% fixed-rate loan portfolio that can reprice higher despite rate reductions.

Welcoming the Positive Trends

As we review Bridgewater Bancshares' fourth quarter earnings for 2023, the executive team opens with a sense of encouragement from the positive trends observed in the latter half of the year. The expectation for 2024 is a more favorable interest rate and macroeconomic environment, hinting at an optimistic outlook for potential investors.

Navigating Interest Rate Dynamics

The company has managed to navigate interest rate dynamics effectively. A continued trend of net interest margin stabilization is highlighted, with a slight compression of 5 basis points observed in Q4 down to 2.27%. However, with an adaptable balance sheet, Bridgewater stands ready to seize the advantage should rate cuts occur as anticipated in 2024.

Strong Balance Sheet and Cost Management

Bridgewater exhibits a conscious balance sheet strategy, slowing loan growth to build deposits, thereby lowering their loan-to-deposit ratio to 100% in Q4 from 108%. Expense control remains a hallmarked strength, with an overall expense growth of just 4.8% in 2023, which is notably lower than the 6.3% asset growth rate for the same period. The ability to manage costs will be crucial in maintaining profitability and operational efficiency.

Asset Quality and Business Focus

Asset quality remains exceptional with minimal charge-offs and nonperforming assets, indicative of disciplined credit assessment and client engagement. The company's expertise particularly stands out in the multifamily portfolio sector within the Twin Cities market—a region they note as being stable and conducive to multifamily investments.

Capital Build-Up and Strategic Priorities

Looking forward, Bridgewater plans to fortify their capital ratios in 2024 through retained earnings and a moderated approach to loan growth. Strategic goals for the coming year include balance sheet optimization for long-term profitability, taking more market share in the Twin Cities, particularly in affordable housing, and enhancing operational efficiencies across the business. Furthermore, an emphasis on scaling risk management and monitoring asset quality underlines their commitment to sustaining stable asset performance.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, and welcome to the Bridgewater Bancshares 2023 Fourth Quarter Earnings. My name is Betsy, and I will be your conference operator today. [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, executive]

Thank you, Betsy, and good morning, everyone. Joining me on today's call are Jerry Baack, Chairman, President and Chief Executive Officer; Joe Chybowski, Chief Financial Officer; Jeff Shellberg, Chief Credit Officer; and Nick Place, Chief Lending Officer.

In just a few moments, we will provide an overview of our 2023 fourth quarter financial results. We will be referencing a slide presentation that is available on the Investor Relations section of Bridgewater's website investor.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 the slide presentation and our 2023 fourth 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 fourth quarter and year ended December 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 disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP. Please see our slide presentation and 2023 fourth quarter earnings release for reconciliations of the 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 Baack.

[Gerald Baack, executive]

Thank you, Justin, and thank you to everyone joining us today. As we wrap up 2023, I'm encouraged by the positive trends we began seeing in the third and fourth quarters. And how this momentum sets us up for what we anticipate to be a more favorable interest rate and macroeconomic environment in 2024.

Net interest margin stabilization trends continued in the fourth quarter as loan yields expanded and the pace of rising funding costs slowed. Joe will talk more about the margin in a few minutes. But overall, we are pleased with the recent trends we have seen. With our liability-sensitive balance sheet, we believe we are well positioned to benefit from potential rate cuts and a more normalized yield curve in 2024. From a balance sheet perspective, deposit growth continued down pace or more muted pace of loan growth. Given the environment in 2023, we have been slowing loan growth, building deposits and optimizing our funding base. As a result, our loan-to-deposit ratio declined to 100% in the fourth quarter from 108% just a few quarters ago.

As we head into 2024, our core deposit pipeline remains strong, and we are seeing signs of loan demand picking up in the Twin Cities. Well-managed expenses have always been a trademark of Bridgewater, and that was no different in 2023. As expected, we saw expenses pick up in the back half of the year, but overall, whole year expense growth was just 4.8% in 2023, lower than our 6.1% pace of asset growth. We're able to do this even with continued investments in our people and technology.

Asset quality continues to be superb with just 1 basis points of charge-offs and 2 basis points of nonperforming assets. I continue to be impressed by our client-centric discipline of our lending and credit teams. Our underwriting is consistent and our outreach and partnership with clients have been very productive. In addition, our multifamily portfolio continues to perform well. I know we get lumped in with some of the more volatile coastal and high-growth markets. but the data shows that Twin Cities market is stable and much more favorable for multifamily. And after 18 years, we have extensive experience in this space. Another true highlight continues to be our consistent tangible book value growth. Tangible book value was up nearly 10% in 2023 and has increased each of the past 28 quarters.

Turning to Slide 4, you can see our Tangible Book value is up 180% during those 28 quarters compared to a median of just 50% for banks with $3 billion to $10 billion in assets. We continue to feel that this is a true differentiator for Bridgewater in a way that we can provide shareholder value going forward.

Before I turn it over to Joe, I wanted to share updates on a few other initiatives that our teams have been working on. Our risk team continues to enhance our all-encompassing risk management framework to be scalable to support our longer-term growth plans. Our technology team has worked to implement enhancements to improve organization-wide efficiencies and install new data technology to create insights our teams can use to better serve our clients.

For example, an upgrade to our commercial client-facing platform was completed in November providing state-of-the-art technology for our business clients. And at Bridgewater, people are key. With our low turnover, we have worked hard to cultivate a growth mindset with our leadership and development program. Many of these are behind the scenes efforts, but they are all significant in executing our long-term strategy. With that, I'll turn it over to Joe.

[Joseph Chybowski, executive]

Thank you, Jerry. Turning to Slide 5. Net interest margin compression slowed in the fourth quarter, down 5 basis points from the third quarter to 2.27 as stabilization trends continued. The compression was primarily due to ongoing industry-wide deposit cost pressures and the timing of loan fees, which were stronger in the third quarter due to higher payoff activity. However, overall margin stabilization continued as our December stand-alone margin was $2.30, which was flat compared to September stand-alone.

The stabilization in the margin has also driven stability in our net interest income as loan growth has moderated. In fact, net interest income, excluding loan fees, which have been impacted by fewer payoffs in the current environment, increased quarter-over-quarter for the first time since the third quarter of 2022. As Jerry mentioned, our balance sheet is well positioned to benefit from potential rate cuts, but more specifically, a more normalized yield curve.

We have over $1 billion of adjustable funding explicitly tied to short-term interest rates, which should reprice lower when there is a potential rate cut. This includes immediately adjustable deposits as well as derivative cash flow hedges. In addition, our loan portfolio, which is 70% fixed rate should continue to reprice higher even when interest rates come down, given the blended roll-off rate relative to new origination yields.

Turning to Slide 6. You can see the portfolio loan yield steadily moving higher. Loan fees had just an 8 basis point impact on the portfolio yield in the fourth quarter. This is down from roughly a 30 basis point impact in mid-2022 as payoffs have declined and new loan originations have moderated. The yield on our securities portfolio has also continued to increase, up 24 basis points from the third quarter to 4.63%. This is up 72 basis points year-over-year.

While loan growth has moderated, we have continued to grow our AFS portfolio as opportunities present themselves. Deposit costs increased just 20 basis points in the fourth quarter, down from 33 basis points in the third quarter and 65 basis points in the second quarter. While this pace continues to slow, competition for deposits remains and is still driving deposit costs higher across the industry.

Meanwhile, reduced levels of borrowings in the second half of the year have helped to slow overall funding costs. In addition to the $1 billion of adjustable funding tied to short-term interest rates, which I mentioned earlier, we have an additional $479 million of funding, including Time Deposit Maturities over the next year and Callable Brokered Deposits, that while less immediate can be a benefit to funding costs over time as rates start to come down.

Turning to Slide 7. Total revenue has continued to stabilize with the margin and net interest income as well. You'll notice that noninterest income declined $317,000 in the fourth quarter, primarily due to $493,000 of FHLB prepayment income in the third quarter, not reoccurring in the fourth quarter.

Turning to Slide 8. Expenses remained very well controlled in 2023. As we've said in the past, our goal is to generally grow expenses in line with asset growth over time. Full year noninterest expense in 2023 increased 4.8% below the pace of asset growth, which was 6.3% in 2023. In fact, the majority of the expense increase from 2022 to 2023 was due to higher FDIC Insurance Assessment costs, while salaries and benefits actually decreased from last year.

As expected, we saw higher expenses in the second half of the year, primarily due to the accrual for bonuses paid to all of our team members as well as continued investments in technology. I would also mention that we early adopted a tax accounting rule that retroactively moves our amortization of tax credit investment and expense from NIE down to the income tax line.

Overall, our efficiency ratio has continued to increase throughout the year to 58.8% in the fourth quarter due primarily to revenue headwinds. We still maintain a highly efficient operating model relative to other banks and expect that to remain the case. We feel good about our ability to control expenses, while still making key investments in the business, technology and our people. With that, I'll turn it over to Nick.

[Nicholas Place, executive]

Thanks, Joe. Turning to Slide 9. Deposit growth continues to be a primary focus as balances increased 3.7% annualized and outpaced loan growth for the third consecutive quarter, reducing our loan deposit ratio to 100%. Since March, we have seen good deposit momentum with noninterest-bearing balances up each of the past 3 quarters and solid core deposit growth. After two consecutive quarters of core deposit growth, core balances declined 5.8% annualized in the fourth quarter. This was not unexpected as our core deposit growth tends not to be linear due to the higher balance client relationships, longer acquisition and onboarding times and timing of larger inflows and outflows.

As we head into 2024, we look to continue growing core deposits over time, keeping in mind that quarterly balances may have some ups and downs along the way. This includes the first quarter, which is typically a seasonally lower quarter for core deposits due to the tax season and industry cyclicality. As has been the case throughout our history, we will continue to supplement core deposit growth with wholesale funding as needed to support loan growth. Overall, we continue to steadily onboard new deposit client relationships and with several key hires to our Treasury Management team in 2023, we feel good about our deposit pipeline and the opportunities we continue to get in front of as we enter 2024.

From a broader funding perspective, as Joe mentioned earlier, we have ample repricing opportunities if rates move lower.

Turning to Slide 10. Loan balances remained relatively flat during the fourth quarter. As we indicated last quarter, we expected more limited near-term loan growth given reduced demand and fewer deals penciling out due to the interest rate environment as well as elevated levels of payoffs. Overall, we saw loan growth of 4.3% in 2023. For 2024, we expect loan growth in the low to mid-single-digit range for the full year, with growth being more heavily weighted toward the back half of the year. Keep in mind that new loan yields are coming on around 7%, which is accretive to our overall portfolio yield of 5.33%. Market loan demand will be the biggest driver of growth in 2024, and we are starting to see signs of this picking up in the Twin Cities. In fact, our loan pipeline has increased to levels on par with year-end 2022. The rate environment and levels of payoffs and paydowns will also affect our pace of loan growth in 2024.

Slide 11 highlights the repricing of our loan portfolio, which we expect to continue to move higher, even if interest rates decline. This is primarily due to our large fixed-rate portfolio, which makes up 70% of total loans, and our small variable-rate portfolio, which makes up just 15% of total loans. We have $575 million of fixed and adjustable rate loans maturing or repricing over the next 12 months at weighted average yields of 5.11% or 4.15%, respectively. We would be able to redeploy these funds into with meaningfully higher yields, even if we see rate cuts in 2024.

The repricing impact of our larger fixed and adjustable rate portfolios should outweigh the repricing of our smaller variable rate portfolio as rates come down.

On Slide 12, you can see there was not a lot of movement in the various loan portfolios given relatively stable loan balances during the fourth quarter. The movement we saw was primarily related to balances migrating out of construction as these deals complete their construction phase. Our multifamily portfolio generated the most growth in 2023, up $82 million or 6%. I'll now turn it over to Jeff.

[Jeffrey Shellberg, executive]

Thanks, Nick. On Slide 13, we wanted to provide some more detail on our multifamily portfolio. First, our total CRE concentrations as a percent of capital have always been elevated. However, we think it's important to note that over half of this concentration is in multifamily, an asset class we view as lower risk due to our proven track record, substantial experience and expertise and favorable market conditions. The Twin Cities market is more stable than the more volatile coastal and high-growth markets, which often dominate the headlines.

Simply put, there are less booms and bust. In fact, the Twin Cities market ranked second among top markets in multifamily demand due in part to the shortage of single-family housing and rank second in affordability as rent-to-income levels are at all-time lows. Thanks to our deep relationships with local multifamily owners and developers and her strong lending and credit teams we have been able to generate strong growth in this portfolio by experiencing only $62,000 in net charge-offs since inception in 2005. We remain comfortable about our multifamily exposure and will look to continue growing the book in the future.

Slide 14 provides some more additional information on our CRE and Office portfolios. Not much has changed over the past couple of quarters. The majority of our nonowner-occupied CRE book is fixed rate, which helps from a repricing risk standpoint. We continue to engage with our clients that have maturing loans and resetting rates over the next 12 months to identify possible cash flow strain and recommend solutions early in the process, if necessary. We have limited nonowner-occupied CRE office exposure, making up about 5% of total loans. This includes only four loans located in the central business districts totaling $35 million. We continue to monitor this portfolio closely, and we feel good about the outlook given the lower average loan amount diversified client base and primarily Midwestern suburban office exposure.

Turning to Slide 15. We continue to see strong performance across our entire portfolio as nonperforming assets and net charge-offs both remained at consistently low levels. This is a result of our measured risk selection, consistent underwriting standards, active credit oversight and experienced lending and credit teams. We remain well reserved at 1.36% of gross loans. We had no provision for credit losses during the quarter given the stable loan balances, but we did have a $250,000 negative provision for unfunded commitments which are primarily construction loans. This is similar to what we have seen over the past few quarters.

One item to call out is the addition of $15 million to our 30 to 89 days past due loans. This was just an administrative delinquency due to the timing of a closing on one matured loan, the loan closed after year-end and continues to perform as a pass-rated credit. Overall, we are still not seeing early signs of credit weakness and we feel good about our book.

That said, as the interest rate -- the higher interest rate environment continues to put pressure on businesses we do expect to see some credit loss normalization over time.

On Slide 16, you can see that our Watch and Substandard loans again remained relatively stable during the quarter. 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.

[Joseph Chybowski, executive]

Thanks, Jeff. Slide 17 highlights the continued building of our capital ratios, including tangible common equity, which increased from 7.61% to 7.73% and CET1, which increased from 9.07% to 9.16%. In addition, we took advantage of lower valuations during the fourth quarter to resume share repurchases. During the quarter, we bought back over 423,000 shares at a weighted average price of $10.72 per share for a total of $4.5 million.

We still have $20.5 million remaining under our current repurchase plan. 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 18. I'll summarize our thoughts on our outlook for 2024. We expect loan growth in the low to mid-single-digit range, with drivers, including loan demand, market conditions, the pace of payoffs and core deposit growth. While we are seeing signs of increased demand and a larger pipeline, it takes time for those opportunities to work their way through the process and to get to closing. As a result, we expect the slower pace of loan growth we saw in the second half of 2023, and to continue into early 2024 with more of our growth likely weighted toward the back half of the year. We expect the net interest margin to remain relatively stable near current levels in this rate environment. There are still several variables that may cause us to fluctuate from quarter-to-quarter, but we expect to continue seeing stability from here. Our margin is well positioned to benefit when we see rate cuts and an upward sloping yield curve. We look for full year expense growth to again track in line with asset growth in 2024.

Similar to 2023, this will likely be weighted more toward the back half of the year with expenses remaining relatively flat early in 2024. Our quarterly provision expense has been very low through much of 2023. However, the provision in 2024 will likely be tied to our pace of loan growth, the overall asset quality of the portfolio and the broader macroeconomic picture.

Finally, we believe we can continue to build capital ratios in 2024 with earnings retention and a more moderated pace of loan growth than prior years. I'll now turn it back over to Jerry.

[Gerald Baack, executive]

Thanks, Joe. Finishing up on Slide 19, I'll cover our strategic priorities for 2024. First, as we've discussed already, we want to optimize our balance sheet for longer-term profitable growth. to be ready to deploy capital into growth opportunities as interest rate environment normalizes and the market becomes more favorable.

Second, we want to continue taking market share in the Twin Cities. This includes several initiatives such as expanding our niche in affordable housing, which has high demand in the Twin Cities given the lack of single-family housing. We'll also continue to execute further on our C&I initiatives specifically in certain verticals such as our network of women business leaders and implementers of entrepreneurial operating system. In addition, we will continue to monitor and evaluate potential M&A opportunities that could enhance our business.

Third is to generate new efficiencies across the business while continuing to invest. Each department is tasked with identifying ways they can incrementally improve operational efficiencies within their groups. In addition, we will be making ongoing investments in technology, including leveraging a new CRM platform for the organization in launching an upgraded retail and small business online banking solution.

Finally, continuing to scale our risk management function and monitor asset quality risk will be top of mind again in 2024. With that, we will open it up for questions.

[Operator]

[Operator Instructions] The first question today comes from Jeff Rulis with D.A. Davidson.

[Jeff Rulis, analyst]

Maybe, Joe, if you could -- you kind of mentioned kind of well positioned for rate cuts. Do you have specifics or quantify what the margin or NII benefit per 25 basis point rate cut would be?

[Joseph Chybowski, executive]

Yes, Jeff. So I think the way that we're thinking about it is the further the cuts happen. So I mean, the first couple of cuts, right? I mean it's not going to be a reactive one for one. And I think as we think about the evolving as the picture evolves and the curve normalizes, I think you could see an acceleration. But I think early on, I mean, our base case is three rate cuts in the back half of '24. And so I just think when we think about the position of the balance sheet and really the drivers, I mean we are well positioned for a normalized yield curve and certainly rate cuts, especially impacting the front end of the curve is most impactful to the deposit base. And we've highlighted $1 billion of liabilities that would reprice about half of those are explicitly tied to Fed funds.

So I think it's one of those environments where, similar to the way up, where it's you lag betas, I think that's an environment where should rates get cut that we'd evolve, but certainly an environment that we do well.

[Jeff Rulis, analyst]

Okay. So early on, first couple, is that possibly a headwind or kind of neutral to margin or NII?

[Joseph Chybowski, executive]

No, I wouldn't say a headwind. I think when you consider the liability side, the $1 billion that we've highlighted, obviously, will benefit should short rates come down. I think the other thing we've highlighted on the earning asset side is obviously the loan portfolio continues to turn over and reprice. As Nick said, in the low to mid-7s. So even if rates come down, the belly of the curve, depending on what happens there, we'll still reprice higher given the roll-off rate of loans itself.

So I think if you consider those factors together, I mean, will definitely benefit in a rate cut environment, certainly. And even more, should the curve itself normalize with more upward sloping shape, I just think it's early on, obviously, you're trying to balance growth, too, and we certainly are confident with our ability to grow core deposits. But I think that first cut, let's say, it's 25 basis points. You're still trying to manage the ability to grow in that environment. And so I don't think we want to say you slashed the deposit base and [ NIU ] at the expense of growth. So I think it's slower to start because deposit competition pressures are still real in the Twin Cities and across the nation. And so I think we're just trying to be mindful of that. But obviously, the further you go along depending on how many cuts we see, the more beneficial it will be to the liability side and obviously more beneficial and more time for the earning asset side to reprice. And then obviously, maintain those yields on a go-forward basis, just given the more heavy fixed rate nature.

[Jeff Rulis, analyst]

Got it. Yes. Just asking about the path as we get into cuts in kind of near term, medium term. And I guess the other piece of that is should loan growth pick up another piece of that is loan fees should also inflect a bit too. Is that the expectation if loan growth is better, you get a better boost on the margin? .

[Joseph Chybowski, executive]

Yes, I think the fees will pick up as growth picks up. I do think one of the things we talked about, too, is on the flip side, if there are payoffs that we experienced more or higher in '24, there's an acceleration of fees as well. So it's kind of puts and takes to the story.

The other thing I'd say is just given the growth outlook and as we highlighted this quarter, I mean, it's the first quarter of net interest income growth since 2022, the back half of '22. So I think as Nick said, the pipeline itself as it picks up and loan growth picks up, obviously, it drives net interest income growth. And so margin is more the output from that perspective. But I think as that growth, as we anticipate picks up in the back half of the year, you see net interest income growth as well and margin itself certainly feel good about stabilization and ultimately, expansion should rates get cut.

[Jeff Rulis, analyst]

Got it. If I could ask a question on Slide 9, just at kind of with Other Repricing Opportunities bucket. Do you have kind of the weighted average of those -- that bucket of CDs and callable brokered the total either combined or individually that $475 million.

[Joseph Chybowski, executive]

I can get that number for you, Jeff, after. I mean the Callable Brokers we've highlighted, the $185 million is the callables that are over 5%. So I know that number off hand. From the CD standpoint, I don't have that number offhand, but I want to say it's probably in the low 4s. Our CD portfolio is -- has a weighted average maturity of less than 11 months. So really trying to highlight that on the way up that portfolio shortened and then ultimately, is certainly a repricing opportunity should rates fall.

[Jeff Rulis, analyst]

Okay. Got it. And then maybe last one. Nick, do you have the -- interested in the paydowns, payoffs linked quarter what that was in the third quarter to the fourth as well as maybe the jump-off point of the loan pipeline number as you exited the third quarter and as you entered the first here.

[Nicholas Place, executive]

Sure. We do have a slide in the appendix, I believe, that kind of highlights...

[Joseph Chybowski, executive]

Slide 22.

[Nicholas Place, executive]

There you go. So I mean, that will just show Q4 information. So it does break out all the components of both new originations and advances, the volume of paydowns and then our payoffs and then amortization to get to our net number. Is that what you're looking for?

[Jeff Rulis, analyst]

Yes, it looks like -- okay. So almost $150 million in payoffs, paydowns in the fourth quarter. Is that up down sideways from the third quarter?

[Nicholas Place, executive]

Yes. Payoffs were elevated in the third quarter. I think August was our high watermark for payoffs in the year. So that -- we did have higher originations and payoffs both in Q3. But I feel good about where our pipeline is today. We mentioned in the prepared remarks that our year-end pipeline is on par with where we ended 2022, and that's been building in each of the last 2 quarters. So we feel really good about our ability to continue to get in front of quality transactions and to rebuild that pipeline.

[Jeff Rulis, analyst]

Okay. So yes, I was looking at that relative linked quarter pipeline increase. So it's up over 3Q. I don't know what the percent is, but something of an increase. Is that fair?

[Nicholas Place, executive]

The pipeline?

[Jeff Rulis, analyst]

What was the balance of the pipeline and entering the fourth quarter to -- till today basically?

[Nicholas Place, executive]

Yes, the pipe on a percentage basis, the pipeline is up probably 35% from where it ended Q3.

[Operator]

[Operator Instructions] The next question comes from Nathan Race with Piper Sandler.

[Nathan Race, analyst]

Going back to margin discussion. I appreciate the guidance in terms of how to think about the cadence and the margin with Fed rate cuts that are expected in the back half of this year, but just kind of think about the outlook for the next couple of quarters if the Feds on hold. I noticed that the cash balances were a little higher quarter-over-quarter on the average balance sheet. So not sure if the plan, just given that loan growth may be a little slower in the first half of the year versus the second half is to maybe pay down some wholesale funding, which may support some margin expansion over the next quarter. And within that context, I would be curious to hear what maybe the spot rate on deposit cost was at the end of December.

[Joseph Chybowski, executive]

Yes, Nate, I think that's always an option. I think we're constantly trying to balance that with, obviously, a growing loan pipeline. So we certainly evaluate that. We've also supplemented some of that loan growth with securities purchases that have been at fairly attractive yields. But obviously, at the end of the day, its loan growth is the driver. So I mean, while balances might have been a bit higher in 4Q, I think ultimately, we look at the entire balance sheet and really try to optimize it as much as we can.

From a spot rate standpoint, so spot rate December was [ $3.18 ] on deposits. It's actually the first quarter, it's been down relative to the average deposit rate. So I think that's another point that we want to highlight is when you think about from stability and potential inflection on the deposit cost standpoint.

[Nathan Race, analyst]

Got you. So put all pieces together, it sounds like it's sort of assume that the margin likely troughed in the first quarter -- I'm sorry, in 4Q. Relative to...

[Joseph Chybowski, executive]

Yes, I think as we've been saying yes. As we've been saying, I think it's -- we've seen stability in a path to stability for the last couple of quarters. And I think ultimately, loan fees, which obviously are really tied to payoffs will cause it to bounce around here or there. But I think long term, it's -- as we think about it, I mean, we feel like it's hit stability, and I think the key point there is September NIM, as I said in prepared remarks, was 2.30% and December NIM stand-alone was 2.30% as well. So I think that's I think certainly highlights the stable nature of it.

[Nathan Race, analyst]

Yes, definitely. And just kind of thinking about the composition of loan growth expectations for this year. Any thoughts perhaps, Nick, in terms of how you're thinking about the composition of C&I growth versus multifamily and CRE and just kind of what that makeup looks like in the pipeline coming out.

[Nicholas Place, executive]

I don't expect our portfolio to shift meaningfully throughout 2024. I mean we certainly have a lot of initiatives around growing our C&I base and our C&I clientele, those transactions, the onboarding times of those are much longer and given the low interest rate environment that we are in for so long, it does make a lot of those more difficult to try to refinance over. So if we think about near-term opportunities for pipeline, those tend to be more CRE driven through some transactions that our clients are getting in front of. So there's probably more opportunity in the near term in our typical multifamily and CRE book to build the pipelines in a faster nature. And the C&I initiatives are really more longer term in nature. And we've made good progress there. It's just those -- it tends to be a slower build.

[Nathan Race, analyst]

Yes. Got it. And just maybe turning to expenses. I think the expectations there are pretty clear kind of follow asset growth, new expenses were up 5%. In 2023, you grew assets 6%. Assuming kind of a similar low to mid-single-digit loan growth outlook for this year, is it fair to expect expenses to follow a similar kind of growth trajectory this year? Even with some of the technology stack upgrades that were described by Jerry?

[Joseph Chybowski, executive]

Yes, Nate, I think that's a good way to think about it. I think we continue to optimize the technology stack and continue to see benefits to. I think as three years ago, we put a loan origination platform in place, and we've really seen a ton of efficiencies from that. I think that's part of the reason we can grow to the pace we are and net FTEs were only up 9% on a year-over-year basis. So I think, yes, we look at those that the technology efficiencies, whether it's the small business platform that we look to implement at the back half of '24 or it's even just generic workflow solutions. I think all of those are helping us become more efficient. And then obviously, we continue to invest in our people that's obviously our greatest asset. So yes, the expense growth as it always has. It's on a year-over-year basis, should run in line with asset growth. As we highlighted quarter-over-quarter, similar to deposits, it's not linear. But generally, if you look over the long haul, it's in line with asset growth.

[Nathan Race, analyst]

Got you. And A couple more for me. Just in terms of fee income. With some of the C&I initiatives that you guys have in place, I imagine it's generally a longer sales cycle in terms of kind of onboarding clients and given the treasury suites set up, but just kind of any thoughts on just kind of the fee income run rate of some of those initiatives take hold this year?

[Nicholas Place, executive]

Yes. This is Nick. I think certainly, there's more opportunity to build some [ TM ] related fees associated with those higher treasury clients. You're right that, that's a longer onboarding cycle. I think we have been diligent about providing our clients with all the tools and resources that they need and then also diligently doing digging through and looking at the market to determine are we charging the appropriate amounts for those. So I think that's been a big initiative here over the last couple of years. that will be something we'll continue to focus on. But as you know, it tends not to be a really large component of our income.

[Nathan Race, analyst]

Right. And then just on share repurchases going forward, it's nice to see the buyback step up in the fourth quarter. Was that more of kind of an idiosyncratic situation where there was like a share block that came up that you guys just wanted to be proactive on or do you kind of anticipate share repurchases remaining a more continual components of the capital management approach over at least the next quarter or two, just given where the stock trades relative to tangible book?

[Joseph Chybowski, executive]

Yes, Nate, this is Joe. I mean we're always looking at it. I think we always try to balance the priorities. We certainly outlined those in how we think about it. Organic growth obviously being our top priority. And so as we said in fourth quarter and with the moderation in the loan growth and I think the other piece to it to was -- we had a goal to get CET1 back above 9%, which we achieved in the third quarter. And so I think we look at it constantly across the realm of things that we can do. And and felt like it was appropriate to be more active, like you said, given valuations in the fourth quarter. So it's something we'll continue to always evaluate in the spectrum of priorities. And we'll certainly be opportunistic as we've always said.

[Nathan Race, analyst]

Okay. Sounds good. And then just on the tax rate. I think you had mentioned in the release that there was some tax credits that occurred in the fourth quarter. Is that going to be more kind of episodic going forward? Or do you kind of anticipating back to kind of the 23% to 25% range, at least over the next quarter or two?

[Joseph Chybowski, executive]

Yes, I think that's a good range. I think the noise, too, I think, will help with that we mentioned is the change in policy that we've made going forward, where there used to be this above the line, below the line on tax credits. That's all going to be concentrated below the line now. So it'll be a lot cleaner. But yes, tax credits are always -- we'll continue to do that. I think that's definitely an expertise of ours to invest and also finance. And I think that will be cleaner from a presentation standpoint, but your tax rate is a range that you mentioned is right in line with how we're thinking about it.

[Operator]

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

[Gerald Baack, executive]

Well, thanks, everybody, for joining our call today. We feel well positioned for 2024 and going forward and continue to see encouraging trends and our brand and our culture and our team has never been stronger. So we're looking forward to talking to you in about 3 months. Thank you. Bye.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.