Q3 2022 Associated Banc-Corp Earnings Call
Good afternoon, everyone and welcome to associated Banc Corp's third quarter 2022 earnings Conference call. My name is Kevin and I'll 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 will be.
Referenced during today's call are available on the company's website at Investor day at associated Banc Dot Com 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.
<unk> actual results could differ materially from the results anticipated or projected in any such forward looking statements additional detailed information concerning the important risk factors that could cause associated actual results to differ materially from the information discussed today is readily available on the S. E C website in the risk.
Resection of associated its most recent Form 10-K and subsequent SEC filings. 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 21, and 'twenty two 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, thank you and good afternoon, everyone and welcome to our third quarter earnings call I'm, Andy Harmening, and I'm joined here today by Derek Meyer, our Chief Financial Officer, and Patty earn our Chief Credit Officer, I'd like to start things off by sharing a few highlights from the quarter and providing a quick update on our strategic initiatives from there Derek who'll walk through the update.
On margins income statement trends in capital and then paddle round us out with an update on credit.
In the past 18 months since I've joined associated Bank, we have been building a digital fall were growth focused strategic path for the company that also plays to our foundational strengths.
As we continue to execute execute against our plan, we've demonstrated an ability to drive positive operating leverage improve our ROTC and serve our customers more efficiently and effectively we have seen promising momentum momentum on several fronts. Since March of 'twenty, one we've expanded our commercial our EM team by 33.
[noise] percent these.
These high quality additions have helped us drive added loan volume in focused markets like Milwaukee and Chicago, but they're also helping us drive a full banking relationship that includes deposits and services such as Treasury management.
We've added over $1 billion in high quality auto loans under our prime Super Prime strategy, and we have consistent growth in our new asset based lending and equipment finance verticals, giving us additional leverage to drive balanced loan growth.
And last month, we officially launched the most significant digital upgrade in our company's history with our new digital platform. This represents a big step forward for our customer experience, but in many ways. We're just getting started here, we expect to make regular upgrades upgrades going forward with the first enhancements on track for implementation.
By year end in fact by the end of this month empowering us to further expand capabilities and deepen relationships with our customers.
We're pleased with the momentum we've seen so far and we're equally committed as ever to maintaining our discipline around credit quality and expense management.
These foundational strengths have been developed over the course of a decade and will continue to serve as our foundation as we look to deliver enhanced value for all of our stakeholders.
Turning to the current environment we.
We have experienced the strength and resilience in our core Midwestern markets well.
Unemployment rates have ticked up slightly in recent months states like Wisconsin, and Minnesota remained well below the national average.
Our consumer remains healthy while our business customers continue to pursue growth and expansion opportunities with an increasing awareness of the uncertain macro environment.
Last quarter, we talked about commercial line utilization trends normalizing for the first time in over two years.
This trend has continued in the fall and our customers are actually running slightly above historical average as they continue to grow and expand.
On the consumer front the housing market has cooled due to high interest rates, but this environment has allowed us to retain more mortgages on our balance sheet.
We've also seen steady activity in our home equity and auto portfolios, but despite this steady consumer borrowing activity and healthy consumer spending our consumer deposit balances grew again during the quarter.
Taken together with the implementation of our initiatives. These trends have allowed us to enjoy another strong quarter here in Q3, we view this as both a reflection of the health and stability of our core markets as well as a sign that our initiatives are resonating in these core markets.
As we look towards the remainder of the year in 2023 significant macroeconomic and geopolitical question marks remain but we've put ourselves in a good position to support our customers and drive our stakeholders without stretching to take additional risk.
With that I'd like to highlight a few items outlined on slide two.
Our third quarter results reflected strong loan and deposit growth expanding margins and stable credit.
The continued strength in our markets the execution of our initiatives and the impact of rising rates on our asset sensitive balance sheet.
Our total net interest income increased 22% from the prior quarter and 44% year over year.
Total revenue growth outpaced expense expense growth by a wide margin, allowing us to deliver positive operating leverage and returns on tangible common equity north of 14% for the quarter.
As mentioned, we also continue to see stability on the credit side, we saw just three basis points of net charge offs in Q3, we.
We did add to our loan loss provision during the quarter, but this was largely driven by the significant loan volume as evidenced by our a C. L L rate ratio, which held firm at 1.2% quarter over quarter.
Now, let me give a little bit more color on our loan dynamics.
Slide three helps us underscore the broad based diversified nature of the loan growth story in 2022.
As was the case in Q2, we reported growth in nearly every major loan vertical here in the third quarter residential mortgage led the way as we retain more loans on our balance sheet in a rising rate environment, but we also posted significant growth in several buckets within our core CRE consumer and commercial lines of business.
This broad based growth reflects the strength of our franchise, but it also highlights the diversified nature of our initiatives. This gives us additional levers to pull when we need to drive balanced diversified growth across the portfolio over time without feeling like we need to stretch on credit in any area.
As we move to slide four we've been able to make significant progress against our R. R initiative loan targets in 2022 in fact as of September 30th we've already passed our year end target for core commercial loan growth and are well on track to either meet or exceed targets, we set for our new ABL equipment finance.
And auto verticals.
With respect to core commercial the growth of our R. M bass normalization of line utilization trends and strong loan demand have combined to more than offset the moderation we expected from P. P P and mortgage warehouse throughout the year allowed.
Allowing us to surpass our yearend target by September .
While we do not expect to maintain this pace of growth in Q4 pipelines do remain healthy and we do expect to see some growth continue.
Into the year end.
Our new ABL and equipment finance verticals have also gained momentum throughout the year as each team is fully staffed and continues to develop their respective plans.
We remain confident in our ability to hit the $300 million combined target we set for the end of the year.
Turning to consumer lending the auto team has continued to produce very high quality loans. It helped diversify our consumer book.
As I mentioned last quarter. This team joined associate a little over a year ago, but they are by no means new to the auto industry. They have decades of experience and a prime Super Prime strategy in it for a variety of environments and I'm confident in the team's ability to hit their $1.4 billion target by year end.
But I'm just as confident that theyre going to get there responsibly without stretching on credit.
We also continue to expect residential mortgage balances to remain relatively stable through the end of the year.
As I've stated the loan growth we've seen in 2022 it's been driven by the resilience of our core customers and disciplined execution of our strategic plan.
This gives us a stronger balance sheet in the short term, but it also gives us more flexibility to pursue high quality lending opportunities across the spectrum of business units over the long term.
Without abandoning the credit discipline, we've established over the past 12 years.
Now turning to slide five we highlight our deposit trends for the third quarter, despite inflation and increased competition in the market. We were pleased to see our deposits grew at an almost 9% annualized rate versus the prior quarter.
This deposit growth has not come by accident in fact, it's been driven by several strategic actions, we've taken over time to set ourselves up for success.
First we've cultivated a low cost granular granular deposit over time by focusing on deepening relationships with customers in our markets. This has led to a high degree of resilience and stability in our base and has limited our post COVID-19 surge outflows to date.
Yeah.
Second while I've been pleased with the loan growth we've seen from our strategic initiatives. The core focus of these initiatives has always been to attract and deep and holistic relationships.
On the commercial side in particular, our efforts to grow our relationship manager base and moved to a balanced scorecard model have already resulted in significant deposit inflows here in the fall.
And third while much of the growth thus far has been on the commercial side. We also have several consumer focused strategies already in flight that are expected to bolster our deposit gathering efforts going into 2023.
Examples include our new mass affluent strategy targeting of high potential segment of customers with up to $1 million investable assets, and our new digital platform, which will fill a gap, allowing us to increase acquisition retention and deepening across consumer and business banking.
We recognize that look generating low cost funding is more crucial now than ever, particularly as we look to fund our growth strategies on the lending side.
Based on initiatives in flight, we feel confident in our ability to fund the bank at a reasonable cost in 2023 and beyond.
On slide six.
We show a five quarter trend of our P. T. P. P. As you can see our strong revenue trends and diligent management of expenses have combined to deliver operating significant operating leverage growth in 2020 two.
We remain on track to deliver positive operating leverage in the final quarter of 2022 as well. So let me pause there I'm going to hand, it over to Derek Meyer, our Chief financial officer to provide further detail on our margin revenue and income statement trends for the quarter Derek.
Sandy slide seven highlights our asset sensitivity and our ability to manage funding costs and the current rising rate cycle.
On the asset side average, earning asset yields have increased significantly in most key categories over the course of the year.
Through September earning asset yields have increased by 113 basis points or roughly 38% of the increase we've seen in fed funds target rate over the same period, reflecting our core asset sensitivity.
On the liability side year to date interest bearing liability costs and now decrease increased by 54 basis points for roughly 18% of the move in fed funds target.
We continue to lag on funding costs. It raised rise and continue to see our margin expand accordingly throughout the year.
Slide eight helps us to quantify the acceleration in margin expansion, we've seen in recent quarters as a result of recent loan growth and our structural asset sensitivity.
Here in Q3, our net interest margin expanded by 42 basis points versus the prior quarter and on.
NII basis, this expansion equated to a $48 million lift to revenue for the quarter.
As we get into the home stretch of 2022, we now expect short term interest rates to rise by 75 basis points. Following the federal open market Committee meeting in November and they expect a 50 basis point increase following the F. O M sees December meeting.
Based on these assumptions, we now expect our net 2022 net interest income to exceed 935 million.
Moving to slide nine we've recently discuss several factors that have positioned us to benefit from the current rising rate environment.
These factors include a sizable portfolio of variable rate loans are reduced reliance on wholesale network funding and our ability to lag on deposit betas due to our low cost granular deposit base. We expect to continue benefiting from these dynamics in the near term.
With that said, we also recognize that the macroeconomic forecast carrying significant uncertainty as we look into 2023 and beyond.
In order to start managing through this uncertainty and began reducing our interest rate risk, we executed $850 million of interest rate swaps this quarter.
While we don't expect to determine when interest rates will peak, we do expect to take modest steps over time to continue managing down managing our downside interest rate risk.
Shifting to slide 10, noninterest income remains pressured by the mortgage banking and service charge headwinds we've discussed previously.
In the third quarter modest increases in card based fees and other fee based revenues, partially offset reductions in mortgage banking service charges and wealth management fees.
As a reminder, we expect to see deposit account fee income moderate beginning in the third quarter based on the implementation of the O D. NSF changes, we announced earlier this year.
Also driven by rising rates mortgage banking revenue continued to moderate during the third quarter.
$6 million of our Q3 noninterest income was driven by an investment securities gain that allowed us to make a contribution to our charitable foundation as we helped strengthen the communities we serve.
Moving to slide 11 third quarter expenses came in at $196 million with $6 million of the expense driven by the contribution to our charitable foundation.
Year to date expenses have grown by 4% versus the first nine months of 2021 consistent with our prior guidance.
We've continued to scale up investments in people and technology, but we remain committed to keeping expense growth below revenue growth.
Elsewhere, our efficiency ratio continued to improve in the third quarter on an FTE basis, we've now decreased our efficiency ratio by approximately 480 basis points as compared to the same period last year, which reflects our ability to maintain expense discipline, while driving higher revenues.
We now expect total noninterest expense of approximately $740 million to $750 million for 2022.
Moving to slide 12 capital levels had been managed near the lower end of our range as we continue to support customer loan growth.
Nonetheless, we remain comfortable with our capital levels, given our enhanced profitability profile in 2022.
Given current market conditions and the expectation for short term rates to remain elevated in Q4, we now expect TCE to end the year in the seven to $7 two 5% range. We continue to expect CET one to end the year between $9, two five and $9 75.
I'll now hand, it over to our Chief Credit Officer, Pat a her and to provide an update on credit quality.
Thanks Derek.
To start by providing an update on our allowance as shown on slide 13.
We've utilized the Moody's August 2022 baseline forecast for a seesaw forward looking assumptions the Moody's baseline forecast it remains fairly consistent with recent trends and assumes increasing fed rate actions and minimal COVID-19 impact.
And on a dollar basis.
C L. L. At September 30th settled at $333 million well. This figure represents a $15 million increase from Q2 to build was largely driven by significant growth in our loan portfolios.
This dynamic is more clearly reflected in our ratio of reserves to loans, which has held flat at one 2% during the quarter.
On slide 14, we highlight our quarterly credit trends.
Overall credit metrics remained stable throughout the third quarter, while nonperforming assets and non accrual loans increased slightly from the prior quarter. They remained down 21% and 14% respectively from the same period a year ago.
Delinquencies, a leading indicator of potential problem loans were held flat at seven basis points at quarter end, while our year to date net charge offs have been just $110000.
Following a net zero provision in the prior quarter and five consecutive net reserve releases prior to that we added $17 million of provision in the third quarter.
As mentioned this provision build was largely a function of loan growth and was not a reflection of credit quality concerns within our portfolio.
As we've discussed previously the recent growth in our loan portfolios has been driven by investing in our core business growing our core relationships and expanding our engagement with customers segments with which we are very familiar.
We spent more than a decade bolstering the credit foundation of associated with a disciplined underwriting culture and a focus on quality.
But that said we are fully aware of the warning signs in the economy, and we remain stringent and our portfolio management with underwriting, reflecting elevated inflation supply chain disruption and labor costs to name just a few economic concerns.
As well as continued interest rate sensitivity analysis across all lines of business.
Going forward, we expect any provision adjustments 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.
Thank you Pat I'd.
I'd like to reiterate a couple of points from our discussion this afternoon on slide 15.
First we remain confident in our ability to drive quality loan growth over the remainder of the year, while we tactically already achieved our $1 $7 billion in total commercial loan growth target for 2022 pipelines remain healthy and we expect to see continued growth between now and year end.
Next we remain asset sensitive and we expect to continue benefiting from the rising rate environment in the near term.
We now anticipate a 75 basis point increase in November's F O M C meeting and another 50 basis point increase in December as.
As such we expect our full year 2022, net interest income to exceed $935 million.
Lastly, we continue to continue to invest strategically in our initiatives and now expect between $740 million and $750 million of noninterest expense in 2022 with that said, we will remain disciplined on expenses as we work to continue delivering positive operating leverage.
In future quarters with that let's open it up for questions.
Thank you well now be conducting a question answer session, if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Press Star two if you'd like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing star one one moment. Please while we poll for questions.
Our first question today is coming from Jared Shaw from Wells Fargo. Your line is now live.
Okay.
Hello, Gerrick, perhaps your phone is on mute please pickup your handset.
Hi, good afternoon, sorry about that this is a team or Brazil or filling in for Jared how are you guys.
Good.
So maybe just starting a little bit more broadly and we've heard some other banks today talk about economic activity slowing in their markets, particularly in the second half of the quarter.
Clearly that doesn't seem to be the case for you guys. Maybe just talk of what Youre hearing more broadly from your client base, how those conversations have progressed throughout the quarter and.
And whether or not you're seeing any kind of signs of caution from them looking to extend borrowings build operations.
May be the case.
Well look I I think it actually would be the same answer from US we look at the second quarter and we had record growth of about $2 billion point to point the third quarter benefited in average loan growth as a result of that second quarter, but we saw it point to point growth slow I believe it was right around $1 3 billion.
So it's a matter of scale there what I would say is we have seen commercial pipelines peak.
At mid year, and they do seem to be managing down a little bit. However, there's still on pace something close to where they were in the first quarter. So it's hard to determine what the final trend is here what is seasonal and what is the trend.
We have seen a little bit of dampening and we expect that to continue when we look at increasing our underwriting variables interest rate underwriting variables that inherently dampen our pipeline as we go forward when you're looking at a deal perhaps a customer needs to put a little bit more money in or where there maybe not wanting to do.
That on the commercial side. It can also change the cash flow assumptions are in the credit so its not a falling off a cliff as much as a dampening situation for us we've been able to maintain some diversified growth because we had some strategic initiatives heading into this point in time, but we are hearing and seeing some disc.
<unk> of that and then from a final perspective, I'll say that particularly in Wisconsin, and Minnesota. The economies have remained pretty strong with regards to being heavily manufacturing influence and that being a pretty strong.
<unk> placed in the market. The other pieces unemployment remained extremely low in those two markets for the time being so part of it as initiatives. We have seen some dampening I'm part of it is the resilience of the Midwest markets that we're in.
That's good color, thanks, maybe switching to the deposit side.
Are you able to parse out what portion of the deposit growth in the quarter is coming from the new lending initiatives and then as a corollary to that just given the continued build out and the growth in those lending initiatives.
Are you able to kind of bucked broader industry trends in both growing and maintaining deposit balances or do you think you will still come to some of the same industry pressures that we've seen elsewhere.
Yeah, Let me answer the first part of that and I'll turn it over to Derek for this or I'm going to answer the second part first and then turn it over to Derek for the other piece.
Clearly the initiatives that we've had going on for quite some time are having a positive impact for us. So what we're able to do you know can you how much can you say is strictly from adding in our EM well when you see your Treasury management sales go up by 50% year over year, you get a pretty good idea that youre talking about liquidity management.
With the customer that's exactly what we've seen the income from that Treasury management is not what changes our income trajectory as much. It is the balances that come with that when you create a balanced scorecard that incent them to focus on that a year before you need it you start to see the resulting.
Trends starting to emerge.
We know on the mass affluent side, which we're starting training for literally this week and full launch by the end of next month, we know that we're under indexed in dollars per customer and this mass affluent segment and we know that that segment carries about 70% of the deposits are a consumer bank. So in as much as we're under IND.
<unk> getting to average gives us a lift in growth versus the marketplace. Certainly we will be impacted by the pressures of the marketplace in some way shape or form but coming into this situation. We have multiple initiatives in our commercial bank, we have multiple initial initiatives in our consumer.
Bank now I could go through the entire litany, but when you think about product enhancements and consumer marketing shift spend change digital acquisition sales process and frankly, bringing in a new executives that has expertise in deposit acquisition that was not an accident, our new chief marketing Chief product officer.
Has launched many of these products in the past and once launched has gotten traction in those so that's what gives us some some optimism in this category heading into 2023, but we certainly are impacted by the broader market.
Derek I don't know if you want to take that yeah, I think you've covered about all of it the only thing I would add is what we saw in the actual quarter was broad which is what we suggested in our discussions was broad based through the commercial and CRE side of the business across the products. Both end of period and average balance. So you would expect the raw.
Rest of the initiatives that Andy referred to to start to pull through on the consumer side and carry us through into next year.
Okay, Great and then just last one for me.
Looks like the asset remix with the new loan production is helping to accelerate NIM trends.
Can you disclose what the production rate was in the loan book in the third quarter and then just how should we think about net interest margin once the fed does stop hiking with the continued remix do you see <unk>.
<unk> NIM expansion opportunities pass that point or are we kind of nearing an inflection point with our with the fed moves.
Yeah, I think the farthest, we're saying is that we're going to continue to remain asset sensitive.
I think for this year, our guidance pretty much lays out what you what you're likely to expect in terms of further margin expansion you can sort of back into that and then the rest is.
We've laid out if you look at the table.
The talks about asset sensitivity, that's probably as far as we'll go as displayed out how much upside we have which structurally we have quite a bit even though we're starting to put in some downside protection. So I think that's as far as we'll take it but we feel very good about it we are concerned about is <unk>.
As we get into later innings is the fact that we have put a hedging program in place and that will start to leg into that over time to protect us from the downside and that's probably a new.
Strategies I would like to lay out so that we've got some of this back then.
Uh huh.
I'll answer this is Andy I'll also make another point, which is more of a reiteration that we had before which is we see this as a bit of an S. Curve. So you go up and then deposit slowly catch what we've said was in the last rate cycle I believe we're around a 50% beta because we've changed the structure of our balance sheet.
And there are about 85% core funded versus wholesale network being about 15 in last time going into the cycle. We're at 33% wholesale network funded that's what makes US believe that we can keep that beta at about 40% or below through the cycle that hasnt changed its held very true to what were seeing.
Now, we're seeing some extraordinary increases from the fed unlike.
Many of us have seen in and maybe our career in a short period of time and that's why we're not giving long term guidance I think that we stick to the basics of where we are and what we're doing and the impact that we're seeing so right now it's on track to what we've given guidance for in the past.
Understood. Thanks for all the color and congrats on the good quarter.
Thank you.
Thank you. Your next question is coming from Scot Ciccarelli from Piper Sandler Your line is now live.
Afternoon, guys. Thanks for taking the question.
I think I wanted to take another stab at that margin question I guess now that the guidance for the fourth quarter or the full year imply somewhere.
Round 267 million of NII in the fourth quarter. So it's still up but you know.
Much much less of a trajectory than in the last couple quarters. It sounds like there should still be balance sheet growth into the fourth quarter, but.
I think they like the 935 side of the range would imply not much margin expansion in there. So I guess, maybe sort of the puts and takes of you know.
What what does it take to get you to the plus side of the $935 million.
Well Scott. Thank you for asking that question and making this just continue to be uncomfortable you get mad at us if we Miss a number and so we always put a plus at the end of that.
935, we have you know, we're well into the fourth quarter, we see the trends, where we are and we have confidence in the in the forecast that we have out there.
You know, we don't want to get ahead of ourselves with understanding what the reactions of the customer base could be when you have a market that is fluctuating the way. It is we want to make sure that regardless of our actions for the next two months that we we do what we say and so we feel very comfortable with that 935 I feel very comfortable.
Put in a plus at the end of that 935.
I don't think I would have a lot more color to that than to tell you that you know clearly we have had a relationship manager increase of 33% that puts us in a unique position to continue to have growth both on the deposit side and the loan side and so we think we'll have some growth in the fourth quarter, but there also.
Some things on the long term side of what's happening with permanent money and to take out of existing products and so the question on what gets paid off in the fourth quarter is an open question for us. So we wanted to make sure we put out a number that we could hit them there could be timing of what gets paid off we're seeing historically.
Low pay down monthly pay downs on residential.
Which has allowed us to grow and we've seen significant decrease in production so with some of that uncertainty bouncing around on what the payoff side of it is we put the plus out there. We will say that we will expect to grow in the fourth quarter, but I wouldn't want to get over my skis on this particular number so I'd probably leave it at.
135, plus.
Okay perfect. All the time that that context is helpful. So it sounds like it's as Beth just a very very conservative outlook them with you know hopefully hopefully that were on the plus side you know fairly easily so okay. I. Appreciate we are we are bankers Scott yeah.
Yeah, Good point Touche, and then when we talk about moderating our asset sensitivity, maybe a little more color regarding what the what the ultimate goal is in terms of sensitivity one way or the other and you know if we if our swaps are our sort of main then avenue to get there.
And in your mind, how much more might it take to get you where do you want to be.
I think the firm's taken the view that we look at the rate of growth in the change of our structural balance sheet first.
And then when you take a look at what kind of hedging we want of course afterwards.
And we took our first bite at that because we saw that the fixed rate growth was being matched by the variable rate growth of our loan book. So we're as we look out into our guidance for next year, which we will put out in January we will do that same reevaluation will take a look at what we what we expect to do structurally with our business.
And then where the interest rate risk is sitting and then what we what we can use in our tool bag to manage that and take some of the downside risk off the table. So.
That sort of lays out the process by which we're going to make that determination and when we're willing to share that impact, but I don't see us doing any esoteric I think we took the first.
Straightforward simple steps that were available and I think most people understand that and be happy about it.
Perfect Alright wonderful I appreciate the thoughts.
Thanks Scott.
Thank you next question is coming from Chris Mcgratty from K B W.
Right.
Oh good afternoon. Thanks.
Can you speak to the just the outlook for the loan to deposit ratio remind us of targets and.
Where do you see that trending over the next couple of quarters.
Yeah, I think we've.
We've been shooting to maintain at 95% loan to deposit ratio or less.
I'd say plus or minus two 3%.
And that's sort of the benchmark we shoot for.
We got a little on the high end of that this quarter and but theres. Some seasonality involved with that and there was some pull forward of our loan production that we saw him and so that's how I would think about it if I'm in your shoes modeling that as we look out going forward, where we will be pricing our products and our deposit initiatives to keep that balance.
The other piece of that is not just loan to deposit, but we also think about our funding source and we've been trying very hard to keep our core of the network and wholesale ratio in line I think you'll notice that we've done that in the fourth quarter being at about an 80 515 split we talked last quarter.
And somebody said well could that go up and the answer is yes. It could go up it could shift.
For a short period of time.
It could bulge, depending on what asset growth is.
Clearly we saw a very large asset growth in the second quarter. We saw the asset growth that was strong in the third quarter, but decreased and were seeing a pipeline that is slowly decreased as well. So our target is still to remain over time and that 80 515 range as well.
Okay great.
Maybe I missed this but did you provide or could you provide the spot rate part for your loan yields and also interest bearing deposit costs.
We are we have not provided those spot rates, we've got the the asset yields.
The quarterly asset yields I think we're on page.
Page seven of the presentation.
And I think that's where we're going to leave it I think what we did try and lay out what is how much asset sensitivity, we still have on the loan side and deposit side on the interest bearing.
Any interest bearing liabilities and I think that sensitivity, even though we've put the hedging program in place is still relatively high and it's still offers with lots of upside.
Okay, great. Thanks.
Thank you next question is coming from Terry Mcevoy from Stephens. Your line is now live.
Hi, good afternoon, everyone.
Good afternoon, Terry Hi.
Hi, So first question are all the expected banker hires and the investments you're making in digital are those built into your fourth quarter expense outlook and the reason I ask because I'm just trying to look ahead into that first quarter and it make sure I've got a kind of a decent run rate to think about the beginning of next year.
Yeah Fair question so.
Clearly we've been up significantly in our EMS in the way where did I answer that question really on that front is that.
We have a strong performer that comes available in the market, we're going to hire them, that's a really valuable commodity in the markets that we serve.
And so.
Put that piece out so we would expect some small level of hiring were not going to see anything similar to what we've seen over the past 18 months, we don't need to frankly, what we've seen is we brought in talented people when we brought them in throughout the year and as you know Terry It takes some period of time to establish that pipeline and relationship at the new.
Company. So we're still benefiting from those hires and will benefit from those hires throughout 2024 without the need to have as significant of an investment.
On that front the way that I look at the expense side, we've given the guidance for the year and I think you can see we tried to point out we had one opportunistic expense in the third quarter and.
We had a an investment gain that specifically when I saw that gain an extraordinary gain I saw an opportunity to put that in our foundation about a 6 million dollar expense, we pulled through there that's above what you've seen historically in that space and you wouldn't expect.
Those are recurring type of quarterly expenses for us so.
We remain firmly in the space, where we had said we were in the 4% to 5% expense.
Growth range, we we take very seriously what we're going to look like in 2023, we're all faced with some pressure on increased cost of doing business, but for US. What we've tried to do is identified cost saves going into the year and we've pulled a couple of those lovers or made those decisions heading into the.
The fourth quarter, so whether that'd be some branch consolidations or or.
Decrease in the size of our mortgage business commensurate with the current volume so what I would say is that $6 million.
We do invest in the foundation typically about $3 million to $4 million a year.
This is higher than that and it all came in one quarter. So that is not likely recurring in the fourth quarter at any similar type of level. So that's how I would think of expenses for the rest of this year within that guidance that we gave and frankly, we would have been within our prior guidance had not seen an opportunity to.
Take care of our local markets are in a way that we think is significant and meaningful so when I think about that and we haven't provided guidance for 'twenty three but I will tell you.
We're not going to say, we're going to spend the gain from every basis point of margin that we're getting we're going to remain disciplined.
In that space and I wouldn't have a change in the expense outlook based on that so really when we talked about the digital cost and what we do what I had to explain before is this more of a shift in spend so it's a shift from dealing with physical spend to digital spend and I still feel the same way and frankly.
<unk> are pretty enthusiastic about what I've seen and it's much as launching a launching a platform in September and following up in October beginning of November with another asset in that space and then following up and in the first quarter with another one because we were able to plug in a fintech into that so I know that wasn't your question, but we're.
Able to do these things as we shift span from physical to digital and the run rate. It is factored in there.
I appreciate that Indian maybe as a follow up.
One might argue there's risk next year that deposit costs are higher wholesale costs are higher and I guess my question is would you be willing to scale back loan growth. If funding just becomes too expensive in and how do you. How do you think about that risk and manage that risk.
I asked that question because when I look on slide four you've got $1 billion of commercial growth and another $1 billion of auto finance, which is unique for a relative to your peers and their need to fund asset growth next year.
Yeah, we have a lot of levers that we can we can consider and are considering I mean I'll give you. An example, we backed off on T. P O.
In the last quarter, I mean were down 44% in originations, but were only down 20% in our core market residential lending origination. So that's on purpose and so when we think about what we can slow and how we should look at our businesses. We will look at all of the businesses. It in and we will bias towards relationship business.
And so whether that is residential whether that is commercial with deposits whether that's the small business customer that brings deposits, whether that's mass affluent where we go out to market, which can bring deposits, but the answer is if need be we can dampen that that growth.
What we'll have to do is look at the cost and the benefit of what we're doing so that we're not running in place on any of those initiatives, but but certainly we will look at all those levers.
Yeah.
Thanks again.
Thank you Sir.
Thank you as a reminder, that star one to be placed in the question queue. Our next question is coming from Daniel Tamayo from Raymond James Your line is that life.
Thanks, guys good afternoon.
Hey, Daniel.
Maybe just wanted to just a quick one here on reserves.
With the contribution of <unk>.
Qualitative side.
Of of the UCL.
Look through how a change in the ER and the Moody's.
Economic forecasts could put them back to the overall reserves.
Well in terms of the.
Qualitative piece, it's it's relatively small part of our reserves of about 12% or so.
You know the reserves this quarter as we mentioned, we're really largely driven by.
The loan growth, we had in really a continued stable.
Credit metrics and credit portfolio.
You know in terms of going forward, we're obviously watching the the Moody's forecast, we feel like we've got a pretty good handle on allocation in terms of our overall AC double L. So we we're we feel good about where we're going into next year, we're constantly watching that obviously given the macro headwinds that we've been talking about.
Okay. Thanks, or would you say, it's more the reserve calculation for you given that the footprint is more focused on on the regional numbers.
More specifically within within the states or you cast a wider net in terms of the forecast.
No, it's probably a little more weighted to the regional for sure I mean, as Andy mentioned, we've got some pretty good strong numbers coming out of Wisconsin, and Minnesota et cetera, We don't typically get the large upswings and.
Conversely, the large down swings you might see in some of the other markets here in the Midwest. So we're we're definitely using that as a big piece of what we're looking at.
It makes sense, that's all I had.
Thank you.
Thank you we reset of our question and answer session I'd like to turn the floor back over to management for any further or closing comments.
Well look this is Andy I'll, just say in closing we appreciate your interest in associated bank and if there are any follow up questions. We'll be happy to answer that we know we're in a dynamic time and we like our relative position heading into year end. Thank you.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.