Q2 2022 Associated Banc-Corp Earnings Call
Good afternoon.
They're known everyone and welcome to associated Banc Corp's second quarter 2022 earnings conference call. My name is Alex and I will be your operator today.
At this time all participants are in a listen only mode.
We will be conducting a question and answer session at the end of this conference.
Copies of the slides that will be referenced during today's call are available on the company's web site at Investor day at associated Banc Dotcom.
As a reminder, this conference call is being recorded.
As outlined on slide one during the course of the discussion today management may make statements that constitute projections expectations beliefs or similar forward looking statements.
Associated actual results could differ materially from the results anticipated or projected in any such forward looking statements.
Additional detailed information concerning the important factors that could cause associated actual results to differ materially from the information discussed today is readily available on the SEC's website and the risk factors section of associated <unk>. Most recent Form 10-K, and subsequent SEC filings. These.
These factors are incorporated herein by reference.
For a reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call. Please refer to pages 23, and 24 of the slide presentation and to page 10 of the press release financial tables.
Following today's presentation instructions will be given for the question and answer session. At this time I would like to turn the conference over to Andy Harmening, President and CEO for opening remarks. Please go ahead Sir.
Well good afternoon, everyone and welcome to our second quarter earnings call.
Andy Harmening and I'm joined here today by Chris Niles, Our Chief Financial Officer, and Patty earn our Chief Credit Officer.
I'd like to start things off by reflected upon my first full year sharing highlights for the quarter and providing a quick update on our strategic initiatives from there Chris will walk through an update on our funding and more.
Virginia, some statement trends in capital.
Pat will follow up with an update on trends.
So last fall, we announced a new digital forward growth focused strategic plan built on associate so associated banks foundation of strong credit and expense management.
Our strategic plan is already well into the execution phase and we are driving significant positive core operating leverage improving our ROTC and transforming our systems to more efficiently serve our customers over time.
Our plan called for us to grow middle market lending as you'll see we've significantly grown and deepened our core existing middle market and small business relationships.
Our plan calls for us to expand our lending capabilities by adding higher higher yielding asset classes and asset base lending equipment finance and auto finance.
All three of these verticals are now driving growth.
And our plan calls for us to shift investment dollars from brick and mortar assets to digital platforms and we expect the first of these digital updates to be rolled out to our customers later this quarter.
But let me be clear.
Well, we're excited to see these investments and growth in digital come to life. We are.
<unk> also committed to sticking with the foundational principles that got US here, our disciplined approach to credit and expense management.
Taken together after a full four quarters on the job.
Even more impressed with the quality of the team and more convinced that we're on track to deliver higher revenue growth continued positive operating leverage and improving value for our stakeholders.
Now turning to the current environment in the most recent quarter, while the macroeconomic environment has shifted over the past year here in our markets. We've continued to see signs of strength.
Unemployment levels remain near all time lows in Wisconsin, and Minnesota are business customers remain upbeat and their outlooks and our core consumer households are proving financially resilient.
On the commercial side, we hinted at improving commercial activity and upward line utilization trends back in the spring and that activity continues to ramp.
But throughout quarter bye.
By June line utilization reverted the prepaying pools as our customers continue to grow and expand.
On the consumer front, we saw steady activity as households purchased homes, but they're home equity to work and purchased thought us all while keeping steady deposit balances.
These trends complemented by our selective additions of new RMS and our continued expansion of our initiative verticals contributed to one of the strongest loan growth quarters in our company's history.
And importantly, we accomplished this while growing in point to point deposits and seen further improvements in credit.
We see this as a testament to the stability and resilience of our customers and markets, but its also a clear indication that our initiatives are having an impact.
Looking ahead, there is no denying that there are significant question marks remaining in the economy.
Senior and warn Ukraine Covid lockdowns.
And China inflation and supply chain disruptions, they all pose risks, but our customer base remains strong and we feel that we're very well positioned to support them with an expanding variety of products and services without stretching on credit.
Our optimism stems from the fact that we're growing in our core markets with our core customers and are comfortable with our credit capital and liquidity outlook as we look to the back half of the year.
With that let me touch on a few highlights outlined on slide two.
Our second quarter results reflected robust loan growth expanding margins stable deposits and resilient credit trends.
Through a combination of normalizing business trends and the ramp up of our initiatives and generally rising rates, our revenues increased 15% year over year, while expenses were held to just 4% year over year.
This drove a significant improvement in pretax pre provision income and another quarter of 13% plus returns on tangible common equity.
We also continue to see improving credit dynamics throughout our portfolios.
In fact, we had less than one basis point of net charge offs for the quarter.
We also resolved several nonperforming asset situations and saw significant declines in nonaccrual asset levels throughout the quarter together. These improving credit factors allowed us to absorb this quarter's loan growth with zero net loan provision.
Now, let me give some more color around our commercial loan dynamics.
Shifting to slide three.
As we moved past the halfway point in 2020 to the uptick in line utilization has clearly been a driver of our balances on the left side. Our P. P. P run off but there are more than offset by new activity in line uptick fueled by general commercial originations CRE expansion and growth from our new verticals.
Average total commercial balances have grown strongly over the past quarter and line utilization has now reverted to pre pandemic historical levels.
Turning to slide four.
While we were pleased with the rebound we've seen on the commercial side. We're also pleased to report growth in nearly every vertical the chart on the right hand side shows this diversified growth while general commercial led the growth for the quarter. We also added significant balances in consumer commercial real estate and specialized portfolio.
Yes and no.
As you can see we have broad based growth, reflecting the strength of our franchise and to diversify and impact of our strategic initiatives.
Okay.
Based on the robust trends, we just discussed we're revising our full year loan targets.
Target is higher on slide five.
Given the continued strength in our markets. We now expect to end of year will be approximately we now expect to end the year with approximately $17 billion of outstanding core commercial loan balances.
This outlook includes the expected further moderation in our mortgage warehouse portfolio run off and the run off of our remaining P. P. P book.
We continue to drive progress on our new ABL and equipment finance verticals with both teams, adding new high quality balances to our books.
We remain confident in the team's ability to hit the $300 million combined target we've set for the end of the year.
Taken together, we expect our total commercial book to end the year at approximately $17 $3 billion.
Now turning to consumer lending.
We continue to be impressed with our auto teams ability to drive high quality balances that help diversify our loan book.
And while this team is relatively new to associated they've been doing this for decades in a variety of economic environments without sacrificing on quality. This makes the team a great fit for us from a risk mindset and cultural perspective, and we're confident we're on track to hit our year end targets.
We also continue to express expect residential mortgage balances to remain relatively stable through the end of the year.
So to summarize the growth we saw in the second quarter was driven by the resilience of our core customers and the disciplined execution of our strategic plan and investments.
Our results provide us optionality to pursue high quality risk aware lending across a diversified set of business lines without the need to stretch on credit in the current environment.
On slide six we show a five quarter trend of our P. T. P. P income.
A year ago, we drew a line in the sand and stay to that $78 million was a baseline that we would approve upon improve upon.
P. T. P. P income has consistently performed above that level in each subsequent quarter and we remain on track to deliver strong positive operating leverage throughout the remainder of 2022. So let me pause there I'm going to hand, it over to Chris Niles, Our Chief financial officer to provide a little more detail on our funding revenue and income.
Statement trends for the quarter Chris.
Thanks, Andy turning to slide seven we recognize that having access to core customer deposits and other low cost funding sources is more important than ever, particularly as we look to fund growth on the asset side of the balance sheet.
That's why we've taken a we've taken meaningful steps in recent years to grow our core customer deposit base, while reducing our reliance on higher cost wholesale funding sources as.
As we sit here today, we've started this rate cycle from a much better funding position than where we were in 2016, we expect to hold wholesale funding to approximately 15% of total funding going forward.
Despite recent macro volatility our core deposit customers have remained resilient, while we typically would expect to see deposit outflows in the first half of the calendar year.
<unk> actually seen modest net deposit growth versus the prior quarter and year end and.
In our consumer and commercial mix has remained stable, reflecting consistent balances by business segments over the last several quarters.
Our consistent growth in low cost deposit categories has resulted in a franchise with deposit costs well below peer medians, given our profile, we feel well positioned to control our deposit betas going forward.
Slide eight highlights our asset sensitivity and our ability to manage funding costs and a rising rate cycle.
Year to date, we've seen a significant uptick in the average yields of most of our earning asset categories since.
Since the fourth quarter of last year, earning asset yields have increased by 38 basis points on average or roughly 55% of the increase we've seen in average fed funds over the same period.
Our assets are fundamentally positioned to participate with further rate increases.
On the liability side year to date interest, earning liability costs have only increased by nine basis points or roughly 13% of the move in average fed funds. This reflects our ability to lag funding costs as rates rise and to capture margin and higher rate level environments.
This widening gap between rapidly rising asset yields and more moderately increasing liability costs is a core benefit of our structural asset sensitive profile.
Slide nine highlights the resulting NIM expansion that comes from this structural asset sensitivity and the related growth in net interest income that is derived from that profile.
Our net interest margin expanded from two and a half per cent in the month of March to 2.78% for the months of June consistent with our quarterly expansion of 29 basis points an average.
On a dollar NII basis, our growth and structural asset sensitive.
Growth in structural asset sensitivity provided a $28 million lift to revenue in the quarter.
Moving onto slide 10, we've laid out several of the factors that give us confidence that we're well positioned for the cycle ahead.
First as demonstrated during the second quarter associated is more asset sensitive today than we were heading into the last cycle roughly 90% of our commercial portfolio will reprice or reset within the year, which boosts our one year accumulative repricing gap second as previously mentioned, we worked to improve the mix.
Low cost core customer funding to liabilities since 2016, low cost deposits have grown from less than half to more than two thirds of our total deposits.
This has also contributed to our increasing asset sensitive profile.
We would also like to highlight that associated benefits from a highly granular deposit base relative to our peers. This reflects our emphasis on building stable sticky household and small business relationships throughout our footprint.
Bottom line.
We are structurally in a better place today than we were in the last cycle and we're confident that we're operating from a position of strength as we head into the back half of this year.
We now expect the fed to raise short term rates by 75 basis points as of July F. O M C meeting and potentially an additional 25 basis points at East remaining F. O M. C meeting later this year.
Based on these assumptions and our loan growth expectations. We now expect our full year net interest income to exceed $890 million.
Turning to slide 11, we've highlighted some noninterest income trends while fee income continues to be a headwind for the industry. We actually saw a modest net growth versus the prior quarter and the same period last year.
In Q2 increases in card based fees and other fee based revenues, partially offset the anticipated reductions in mortgage banking and wealth management fees.
I'll remind you that we expect to see fee income moderate beginning in the third quarter based on the implementation of the new O'dea NSS changes, we announced last quarter. We also expect commercial deposit account fees to move slightly lower as higher rates translate into higher you see ours.
What's the expectation for continued rising rates, we also see mortgage banking revenue further moderating as we move through the back half of the year.
Nonetheless, we remain confident in our most recent full year non us expense guidance noninterest income guidance and continue to expect total noninterest income.
290, and $300 million in 2022.
Yes.
Moving onto slide 12 second quarter expenses came in at 181 million. This represents a 4% year over year increase in expenses.
Consistent with our prior guidance.
Driven by higher revenues and controlled expenses, our efficiency ratio continues to improve.
As I stated previously expect to continue to scale up investments in people and technology, but remain committed to keeping expense growth below revenue growth.
Taking all of our initiatives into consideration we are tightening our expense guidance for the full year.
We now expect full year 2022, non interest expense to come in between $730 million and $740 million.
Which is within our prior range.
Moving on to capital.
Slide 13, we manage capital levels towards the lower end of our range as we supported customer loan growth during the quarter.
Nonetheless, given our enhanced profitability trends, we fully expect TCE will grow through year end and we will end the year in the seven and a quarter to seven and a half range. We also expect CET one will end the year between nine in the quarter and 975.
Now, let me turn it over to our Chief Credit Officer, Pat a hunt to provide an update on credit.
Thanks, Chris.
I'd like to start by providing an update on our allowance as shown on slide 14.
We utilized the Moody's may 2022 baseline forecast for our Cecil forward looking assumptions the Moody's baseline forecast remains fairly consistent with recent trends and assumes increasing fed rate actions and minimal COVID-19 impact.
Following five consecutive quarters of net reserve releases, we posted a net zero provision in Q2 with less than one basis point of net charge offs for the quarter.
Our ACL L. At June 30th was flat from the prior quarter at $318 million with additions for loan growth and economic factors fully offset by releases from declining M. P A's and other credit improvements totaling approximately $14 million.
Our ratio of reserves to loans declined from one 3% to one 2% during the quarter.
Turning to slide 15, we highlight our quarterly credit trends.
Overall credit metrics remain strong with continued improvement in nonperforming assets and non accrual loans as a positive indicator of the health of the portfolio is.
As compared to Q1 total nonperforming assets decreased by 22% in Q2, while nonaccrual loans decreased by 24%.
Of note, our $10 billion commercial and business lending book currently has under $1 million of non accrual loans, which equates to less than one basis point.
We would also highlight that across our entire book delinquencies, which are a leading indicator of potential problem loans were just seven basis points at quarter end.
Shifting to slide 16, we spent more than a decade bolstering the credit foundation of it.
Appreciate it as you can see we've built a bank that is diversified and balance with a discipline and culture and a focus on quality.
Of note year to date, our net charge offs is zero and our total non accruals are down about one third year over year.
The strong growth in the second quarter was driven by investing in our cordless growing our core relationships expanding our engagement with customer segments with which we are very familiar.
With that said, we are fully aware of the warning signs in the economy and we remain stringent in both portfolio management as well as sensitizing underwriting to reflect rising interest rates elevated inflation supply chain disruption and labor costs to name a few economic concerns.
Going forward, we expect to just provision to reflect changes to risk grades economic conditions loan volumes and other indications of credit quality.
With that I will now hand, it back to Andy to share some closing thoughts. Thanks, Pat on slide 17, we recap our updated full year guidance for 2022 first we remain bullish about quality loan growth over the back half of the year and we are updating our outlook as a result, specifically, we now expect full year total commercial loan growth.
Approximately $1 $7 billion in 2022, we continue to expect full year auto finance growth of approximately $1 $3 billion.
We now anticipate a 75 basis point increase at this months F. O M C meeting and a 25 basis point increase at each remaining F. O M. C meeting this year.
As such we expect our full year 2022, net interest income to exceed $890 million.
We continue to expect total noninterest income of between $290 million and $300 million for the full year and taken together. We now expect a combined total of net interest income and fee income to exceed $1.18 billion.
Lastly, we remain committed to expense discipline, and we're tightening our noninterest expense guidance as a result, we now expect between we now expect between $730 million and $740 million of noninterest expense in 2022.
Before we move to Q&A.
I want to acknowledge that this call marks Chris Niles last quarterly earnings call before he retires since joining associated in 2010, Chris has had a tremendously positive impact on the company and has put us in an excellent position as we look to build on our strong foundation.
From here, we're looking forward to the addition of two experienced leaders to our executive leadership team, Brian Carson officially joined US earlier this week as our new chief product and marketing officer, while Derrek Meyer will be joining associated as our new CFO at the beginning of August .
As I've stated previously I believe we are making a CFO transition from a position of strength, especially given our positive momentum in the first half of the year.
Adding Derek and Brian to the team will bolster our current growth strategy as we looked at deepen relationships generate deposits and execute our digital transformation.
This will further drive associated forward on our path to path to value creation.
And despite the macro headwinds in the near term we are executing our strategy in real time, and I'm confident in our ability to deliver strong performance for our stakeholders now and in the years to come with that let's open it up for questions.
Thank you.
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Our first question comes from the line of Jared Shaw with Wells Fargo. Please proceed with your question.
Hi, Good afternoon. This is TMR, Brazil are filling in for Jared.
Andy I know you are you've.
<unk> been quite optimistic on the potential for loan growth.
But what we saw this quarter was pretty exceptional I guess were you surprised by the pace of the loan growth was there anything that was pulled forward from trying to get ahead of higher rates within that number and as you look at an optimistic second half of the year, maybe talk through some of the industries and verticals where.
Do you think the majority of that incremental loan growth is going to be coming from.
Yeah, well. Thank you for the question Yeah first I'd say I wouldn't say that we were surprised what I'd say is we had every cat we have diversification of growth. So we had growth in almost every single category.
As we'd liked we did get a little tailwind on on usage on commercial line utilization, we don't expect that tailwind in the second half of the year you can see in our forecast, we still expect very nice growth, but nothing where you would take the second quarter and multiply it it starts to dampen just a little bit whether that's from an economy standpoint.
Our our ability to be selective now that we have options.
On where we grow to try to drive value. So.
So feel very good about what occurred and frankly when you transition your assets as we did is we took some nonperforming or commercial or some real estate assets and trying to transition that into the RM ranks.
We were able to grow not expand our credit box and still get some quality loan growth across the across the board.
Okay, and then as Youre looking to fund future loan growth.
Are there initiatives or visibility into incremental deposits coming online in the second half of the year to kind of supplement that growth or will you continue leaning on.
<unk> to kind of bridge the gap.
Yeah, I know with with the growth that we expect in the second half of the year, we expect largely to be able to fund that visa V. Our deposit growth. We have had a number of initiatives that we've been working on from our HSA to having our commercial our Ams focused on deposit acquisition to having our business banking.
Our Ams focused on deposit acquisition to launch in the mass affluent.
Vertical in the last half of the year to work in digital account opening to having a focus on liquidity management or Treasury management for our our Ams. So we feel pretty good about being able to increase the trajectory of our loan growth. We've demonstrated the ability on our loan initiative I'm sorry deposit growth.
We've demonstrated that ability to execute on lot of initiatives and I'm expecting that we'll be able to execute on the deposit initiatives as well, but I will say structurally we do have the luxury of being different this time than in 2016 coming through that rate cycle, right now where reliance of about 15% on wholesale network.
That's versus six years ago, where we had a 30% reliance on those deposit. So we do have the ability to borrow from the F. H L. B, but our intent is to continue to drive core funding and with the path that we're on we feel very good about meeting the deposit beta as you can see we had a strong deposit beta coming.
Through this quarter and our forecast is 30% to 40% for the year and we feel like with the mix, where we're right in line to achieve that and Tim are we would highlight also seasonally we'd normally expect to lose deposits through the tax season that happened. We saw stepped down from March into April and then those balances basic.
Really held through the second quarter.
Seasonally though we would also expect a generally see an uptick in the third quarter as we move towards the September and the funding cycle for municipal governments and the collection of property taxes later in the year, that's historically been in that benefit and a tailwind for us and we have no reason to believe we won't see that this year as well.
Okay. That's good color. Thank you for that and then just lastly for me looking at some of the wholesale borrowing that was taken on it looks like balances increased while the cost of that actually decline can you talk through that dynamic was there some incremental duration that was added there.
Yes, just any color on that decline in cost I. Appreciate yeah, we do have a little color around we have a little color around that Chris why don't you take that one sure. So in general there are two things specific to the federal home loan Bank advances, we did restructure some of our term advances as rates moved up we were able to exit those with no penalty no pre.
Payment fee and move those into a more advantageous funding profile second we also had the retirement and you'll see that in sort of total cost of funds of our senior notes, which obviously is flowing through now is a positive to our the total wholesale funding costs.
Great. Thank you nice quarter and good luck pressing their retirement.
Thank you I appreciate it.
Our next question comes from the line of Scott D first with Piper Sandler. Please proceed with your question.
Hey, guys good afternoon.
Yeah, Hey.
Hey, I just wanted to could revisit reasons visit funding a bit so I mean, the funding profile. There's no. No question. It's significantly better you you guys have such strong loan growth, that's not stripping deposits materially I guess youre sort of getting towards one of the higher loan to deposit ratios. So like what kind of loan to deposit ratio do you target.
You know I imagine, we'll get there fairly soon so you know thereafter.
What's the what's sort of the plan to fund the strong loan growth and understanding that that loan growth overall will probably temper down a bit but just curious for your thoughts.
Yeah. So I'll start this Chris if you want to jump in so yeah.
And in the quarter around 90 to 92, seven and loan to deposit ratio. Our expectation is that we have multiple areas that we're going to be able to attract core deposits. So largely we'd like to keep that number between 90, and 95%, which we expect and hope to do.
If that is not possible as we know we have some short term we have some ability to get wholesale funding, but I would say just as the loan initiatives got going for us in the execution on that there's a clear path for liquidity management Treasury management. When you do that you get more commercial deposits from your <unk>.
Customers Theres, a clarity for me when I see the numbers on mass affluent that we're underpenetrated in our customer base. This will be the third time that I've launched a mass affluent strategy, so have a pretty clear indication that there.
There's significant dollars available to us our account opening we will work on a new account opening on digital.
In the fourth quarter of the year that will only gain momentum as we go into year end and the first quarter. We've added resources on the HSA side of things that business starts to ramp up towards the end of the year and the first quarter. So we'll continue to get balances there so while we'd like to stay at the 95% and below range.
We also think the deposit initiatives, which we've been working on for quite some time will continue to kick in in the fourth quarter and the first quarter and the second quarter next year as loan growth I'd say Dampens I mean, it was a very good quarter for us, but it depends a little bit in half of the year in the first half of next year.
Scott the only I would add to that is if you look back at some or prior earnings deck in the investor decks, we use to highlight the seasonal factors that drove our loan to deposit ratio in the second quarter has historically been our peak on the deposit ratio period.
Yeah, and usually our fourth quarters alone and so we wouldn't we have no reason to believe that some of those seasonal deposits aren't going to swing the way they usually do and that will contribute to an improving profile there.
Okay, but even for full scale, even with wholesale funding. We believe strongly we can hold the margins that we forecasted.
Okay perfect. Thank you and then I guess as we continue to go.
Do you just sort of naturally become a little less asset sensitive than if if the loan growth still you still got that perhaps some things I mean, it's going to be great NII trajectory here through the remainder of the year just trying to get a sense for what the rate sensitivity profile will look like as we go into next year.
Yeah. That's that's one of the things we really like is on the way up we're very asset sensitive and you can see that that has worked to our benefit but the initiatives that we have our large larger on the fixed rate side, whether that be asset based lending will that'd be equipment finance, whether that'd be auto lending. So as we're taking advantage of hitting a peak in.
Rates, we expect that there is a dampening to asset sensitivity as we reached that peak and have a potential for a decrease in interest rates at some point in 2023.
Scott I think internally, we sometimes discuss it as sort of the traditional bond portfolio lottery, we've been lottery into higher rate fixed rate assets.
As the market has been moving higher and we're gonna be the beneficiary of that lateral being up in the cycle here over the next couple of quarters.
And if the cycle turns what will have the benefit those are less prepayment sensitive assay classes.
Then our historical reliance on mortgage to play that part in our portfolio.
Okay.
Perfect all right well. Thank you guys very much for the color and bag and Chris Best wishes.
Thank you thanks Scott.
Our next question comes from the line of Chris Mcgratty with MPW. Please proceed with your question.
Great. Thanks.
Chris maybe a question I think we've asked in the past what each 25 means I know, we're moving in chunks, but we've all got different rate assumptions, just trying to see if if our rate forecast a little bit different than yours, what the incremental benefit could be.
Yeah. So it's as we said, it's roughly a million dollars per month.
For each 25 basis point increment above our forecast. So we're calling for 75 here at the end of July that's baked in and twenty-five at each remaining meeting that's baked into the 890, plus but to the extent you had an extra 25, because it was 100 here in July or because one of the subsequent meetings ends up being 50.
It would be a million dollars per month in the period following that rate increase.
Okay. Thanks.
And then Andy maybe one for you just a bigger picture question, you've got a lot of momentum on the initiatives.
Can you remind us like long term targets.
Our efficiency.
Obviously rates dictate a lot of that but just how youre thinking about levels and timing.
Sure. So I think maybe I'll jump in initially we said we're driving towards the 275 margin over the near term in the month of June we got the 278, so that feels like we're gonna be.
I mean that goal here pretty soon and we've also said we'd be driving towards.
A 60, 55% to 60% efficiency ratio.
Fully tax equivalent efficiency ratio came in at 59.8, So we feel like we're moving in the right direction on that one and our adjusted efficiency ratio of just over 60%.
Is consistent with that move and finally, we'd say, we we've targeted mid teens R. O T. C E on a consistent basis and we came in at 13% again this quarter, so I feel pretty comfort and confidence.
Confident that we're on the right trajectory to get to a mid teens level.
Yeah.
Perfect. Thanks, Chris.
Yeah.
Personally I thought I thought Chris Niles took the softball on that one by by on the margin one at $2 78, with a forecast of $2 75.
<unk>.
Thanks again.
Thank you. Our next question comes from the line of Daniel Tamayo with Raymond James. Please proceed with your question.
Hey, good afternoon everybody.
Yeah.
I guess first.
Just a clarification on the.
The impact in the second quarter of the excess cash deployment obviously.
That was because of the tremendous loan growth you had in the quarter, but.
Well the strip out kind of what the impact of the of the mix shift was on the margin relative to just just the rate hike.
Hum.
The way, we think about it again roughly using that million dollars per month, the $1 million per month, we had previously guided to a 25% benefit and obviously, we saw more than that in the may and June action. So those sort of stacked on top of each other drove a good portion of the outperformance, but yes part of it was from Kashi.
Realization ends up the balance sheet growth factor and and the other part was from the rates, but I think if you back out the $1 million a month for the rate bumps you can solve for the remaining residual which is sort of a bounce back.
Okay.
And then my second question is on the expense guidance.
Guidance.
The guidance assumes kind of a ramp up in the back half of the year in terms of annualized growth from from last year.
Just curious how how we should think about.
Gross you know kind of in the fourth quarter or that that base in the fourth quarter entering 2023, if you know if if.
The number should just flow freely and into 2023 or do you think annualized or annualized our expense growth you know once we get past the fourth quarters is a better way to look at it.
I would refer you back to our prior investor presentations, where we said that over the 2022 'twenty 'twenty three horizon, we expect that to keep overall expense growth in that 4% zone. We delivered 4%. This year. Our baseline is that we're going to try and be disciplined about expenses going forward as well so.
We're going to hit the range that we've given to you and we're gonna see expense growth next year, we think it'll be in line with our overall long term guidance.
And I would say that it isn't a ramp up but in part it's ramping up because a number of the technology initiatives that we've been working on for the last nine months are going to come in to play and be put into service here and that'll start amortizing through our expense base and we still got hiring that we're working our way through that is going to come online and have a full year effect.
That's gonna roll into the third and fourth quarters. So we continue to invest in technology, we continue to invest in people those will bump the numbers.
But we're growing revenues, even faster and we'll be disciplined about how that grows and what we had said before with regards to expenses, we'd only spend that money. If we're driving revenue and so we are hitting the revenue targets and exceeding them of course, its a combination now of both growth and margin due.
Due to the accelerated our rate environment, what I would say, though when we look at fourth quarter. What we'll try to do is we'll position ourselves as we've said we would do every single year to acknowledge that there's a change in the in the in the.
The industry, there's a change in the marketplace and we will try to make strategic cuts to redeploy that expense back into the business. So as we look at that in the fourth quarter. We took action on real estate last year, we'll look across whatever we think is a.
Less producing asset and what we can put back into the revenue producing and and the support groups and the technology initiatives that we have as a company.
Alright terrific I appreciate that color that's exactly I was looking for thank you.
Thanks Daniel.
Our next question comes from the line of Terry Mcevoy with Stephens. Please proceed with your question.
Hi, good morning, everyone.
Good afternoon.
Good afternoon Jerry.
Maybe first question just to dig back into the expenses you continue to hire new teams or is the equipment finance team last week and in sorry, I guess just to be clear the fourth quarter expense run rate do you think that will capture the team building.
The run rate or will there continue to be growth off that fourth quarter. As you continue to kind of opportunistically add commercial lenders and build out those teams.
They'll continue to be puts and takes as we build the expense, but feel a lot of confidence that we're still in that that 4% range that we'd said I feel like the number for next year with our long term forecast still in that range.
We've been able to steadily build you know.
One of the other questions that we've been asking is are you committed to growing the same number of relationship managers and what I would say to that is we've had a lot of success, bringing in talent and getting our own relationship manager's productivity.
And so.
We will be selective in who we bring in will bring in if there is a talented RM out there which are higher than I don't feel pressure to be at a 15% to 20, because we have the run rate that we need to hit our midterm.
Targets. So there's no pressure on adding but now we're in a position where we can decide where we add and make sure that we have the discipline around the expense approach and stay within those targets that we stated from the beginning.
And then as a follow up could you maybe comment on any market disruption in Chicago, or Milwaukee, which are two important markets for you in and whether you've been able to capitalize on any of that in terms of talent or our customers and what your strategy is given the window to possibly gain share. Thank you.
We've been able to add new names, we've been we've gotten we've.
We've gotten relationship managers from almost every major national and regional banking and our footprint. So so the answer's, yes, I believe we have been able to take advantage of that and and we brought in some folks that are immediately come in and started producing in our on our existing group is bringing in new names as well so I feel very.
Good about the core franchise in our footprint and bringing in relationships.
So the answer is yes, we feel like we've been able to take advantage of some of the.
Disruption, but I feel very optimistic throughout the footprint. We've added three talented players in our our northeast, Wisconsin, we've added folks in Minneapolis.
Added people keep decent Milwaukee and Chicago.
And Terry you only have to add to that is when we look at our commercial and business loan portfolio quarter over quarter.
And we think about where do we add the most.
Wisconsin, Illinois, where at the top of the list when we think about the specific commercial banking little sub markets, where we operate.
Milwaukee.
Chicago and Minneapolis, basically led the commercial banking pack.
That's exactly where we want it be that's exactly where we're seeing the uptick and I think that speaks to the diversification of growth that we saw across the franchise.
Okay.
Great. Thanks, Chris and we'll Miss you on all these calls after all those years you definitely taught me to read the press release look at the supplement before asking a question because you were always quick to point that out and I. Appreciate all the help thank you.
You can still read that stuff, though right Terry.
Yeah of course definitely.
[laughter] Thanks again.
Thanks.
Thank you. Our next question comes from John Armstrong with RBC Capital markets. Please proceed with your question.
Hey, Thanks, good afternoon.
Afternoon John .
Where once you grow on Chris we're just going to ask Derek to do the work for us, but we're gonna have to wait for you [laughter] quick question on for for Pat.
We haven't talked about credit at all I think because it's so clean but on slide 14, there's an up arrow for qualitative and economic factors.
And your reserving can you talk a little bit about that and.
What you have built in there in terms of.
Some of your assumptions.
Well I think what we tried to capture there is just the unknowns that we talked about in the marketplace and obviously, there's a lot of macroeconomic factors that are creating some uncertainty.
We're not blind to that and we wanted to build that in and acknowledge that looking forward I think what we're doing now theres nothing I wouldn't say, there's any overarching issues or concerns being raised right now, but there's clearly you know inflation continued supply chain rising interest rates.
These are all things that you know point toward potential recession risk and we wanted to be able to capture that.
Okay.
But that knocked out one of my questions and terms have not really seen any stress, but one other question I had was on auto.
Can you just remind us of.
Some of the risk management mm factories, you built in on auto.
Touch a little bit on pricing.
Not being critical but it looks it looks kind of flattish and I'm just curious what you're seeing on pricing and do you expect yields to rise there.
Yeah. So I think slide 16, John has some of the core credit discipline factors around that and Pat I think you've got L. T. D factors in FICO factors, and then I'll I'll jump in and just on pricing. So your comment yes, we've seen pricing be relatively tight there.
We would expect that to rise broadly as rates overall rise. So I would expect to see that drift higher as we move through the back half of the year, but let me turn it back to Pat for credit Yeah.
Yeah, I think from a from a risk management standpoint.
We're constantly watching you know the valuation of what's going on in the marketplace. We're reacting in terms of new applications and what we're seeing to what trends may or may not be happening.
We're we've got a lot of internal monitoring processes in place to deal with not only customers that were lending to but also dealerships that were working with so we're constantly monitoring and we've got a lot of internal scorecards that kind of give us leading indicators of what's going on there in that marketplace.
John If you remember we actually this is Andy we actually bought this the legacy data customer information. So that we had a balanced scorecard that was tested with a back test with customer information already so it wasn't a matter of US just using the go forward information to build our models and with that I'd tell you, we're 97% prime and Super.
Prime where 75% Super Prime.
Yeah.
Okay got it and then just one if I can squeeze in one more kind of a non financial question, but.
You talked about Brian your new marketing and product officer, what what are you charging him with Andy and what kind of goals do you set for somebody like that.
You continue to try to grow the company.
Yeah, Yeah, Great question, So Brian somebody I know pretty well and what he is he has a strength on the the data analytics customer insights and success in driving growth via understanding customer and differentiation on product. He also led much of the.
Digital sales work that we did on the consumer side of the bank. So when you think about understanding what matters to people that switch on the marketing side. When you think about building a product that matters and you think about doing that digitally to me, that's where the industry's going on the consumer side of the business in particular, but he also.
Had awareness on the commercial side of the business.
And so when you marry the ability to understand liquidity and how to drive and capture customers are with.
With the ability to work with.
Our new CFO , who has the expertise on liquidity management in F. P. N. A I'm really very excited about each one of them individually and problem.
Probably even more excited about the combination and how they work together.
Okay got it.
With that Chris Best of luck.
I'm looking at your age here in personnel, when you're younger than I am and I kind of wonder what I'm doing wrong.
And you're retiring but I just I do wish you the best of luck okay.
[laughter] John appreciate that.
Thank you ladies and gentlemen, we have reached to the end of our question and answer session.
I'll now turn the call back over to President and CEO , Andy Harmening for closing remarks.
Well I just wanted to say.
Hey, Thanks for everyone's participation and continued interest in associated bank, we look forward to continuing the story in our very available to answer any questions that might come up Tonight or tomorrow and follow up to the information We released Tonight. Thank you.
Yeah.
This concludes today's conference and you may disconnect your lines at this time.
You for your participation and have a wonderful day.
Yeah.
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Hum.
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