Q1 2023 Associated Banc-Corp Earnings Call
Good afternoon, everyone and welcome to associated Banc Corp's first quarter 2023 earnings conference call.
My name is Molly 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 associated Bank 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.
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 associate.
<unk> 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 24, and 25 of the slide presentation and to page eight 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 smile and good afternoon, everyone and thank you for joining us I'm, Andy Harmening and I'm joined here today by Derek Meyer, our Chief Financial Officer, and Patty Egan, our Chief Credit Officer.
I'd like to start things off by sharing some financial highlights from the quarter and then from there Derek will walk through an update on margin income statement trends and capital then Pat will provide an update on credit.
And then in light of the recent turmoil in the banking industry. We've also pulled together some additional information that underscores the stability of our markets and the durability of our business model.
So while these past five weeks have generated a wide range of headlines about regional banks and financial service industry. In general we can still say that associated bank continues to operate from a position of strength and it starts with our markets.
As the largest bank headquartered in Wisconsin, we've been operating largely in conservative diversified Midwest markets for more than 160 years, including Metro metropolitan areas mid sized cities and small towns.
And it's important to know we serve a stable and diversified customer base with deposits from all banking segments consumer high network small businesses large corporate government agencies and commercial real estate.
And here in the early part of 2023 of these markets have remained resilient in the face of an uncertain macroeconomic environment.
Unemployment rates remained stable with Wisconsin, and Minnesota, continuing to come in below the national average the consumer remains healthy and our business customers continue to seek ways to expand and optimize their operations, where it makes sense.
This backdrop has enabled us to stay on offense with our initiatives and while I like these initiatives and company's strategic focus coming into the year I like them, even more right now as we've discussed our customer and deposit acquisition initiatives began well over a year ago and over that time, we've demonstrate.
And our ability to execute as a company.
And after delivering the most profitable year in our company's history in 2022.
Carried that momentum forward in 2023 with several key milestones here in the first quarter.
In February we launched our new champion of U brand campaign to support our customer acquisition strategy with television radio and digital ads. The campaign demonstrates our commitment to helping our customers communities and our colleagues become financially stronger.
In March we launched a new Grace zone for the consumer and business accounts that are overdrawn up to $50, helping our customers when life brings the unexpected challenge.
We also continue to build momentum in our recently launched deposit initiatives such as our digital digital sales platform, our mass affluent strategies that give us the ability to attract and deepen more quality customer relationships.
All of these efforts are positioning us to drive positive operating leverage enhance our profitability and meet the needs of our customers and communities when and where they need us.
And while we like the progress we've made on our initiatives maintaining discipline with regards to credit risk expense management and operational risk that is the foundation of our company.
These foundational strengths will continue to be our focus as we deliver enhanced value and provide a source of stability for our stakeholders. So with that I'd like to highlight the key results for the first quarter on slide two.
Our first quarter results reflected the continued expansion of our balance sheet strong profitability and stable credit impact loan balances continue to grow in each of our major segments, but as expected the pace of that growth has slowed compared to the trends we saw in the back half of 'twenty two.
As we continue to execute our strategic plan and benefit from rising rates. We once again delivered strong net interest income and net interest margin north of 3%.
We also saw a slight increase in our noninterest income while our expenses declined 5% from the prior quarter taken together. These inputs helped us drive positive operating leverage while delivering P. T. P. P income of $149 million and return on tangible common equity above 15%.
We are continuing to monitor asset quality closely but our credit trends in the first quarter remain favorable we saw just five basis points of net charge offs during the quarter and added three basis points of H C. L. L. <unk>.
Despite an $18 million provision for the quarter net income available to common still reflected a 41% increase compared to the same period a year ago.
With that I'd like to provide a little more detail on our loan trends.
As shown on slide three the diversifying impacts of our strategic plan have continued to drive broad high quality loan growth across all major segments.
We've now reported growth in nearly every major loan category for four consecutive quarters.
However, this growth has slowed as compared to the strong pace. We saw in 2022. This.
This has been especially true for areas such as auto and CRE. Nonetheless, we've continued to add balances and consumer verticals, such as auto and mortgage and in several of our commercial businesses.
As we've seen over the past couple of quarters. This dynamic is being influenced by the funding of prior commitments and a slowdown in payoff activity.
On an end of period basis, our mortgage warehouse business led the way in the first quarter, but we would not expect this trend to continue over the remainder of the year.
Now as we've discussed over the past several quarters one of the benefits of our lending initiatives is that they've given us more flexibility to drive returns without stretching on credit.
This also enabled us to decrease our reliance on lower yielding non relationship asset classes with this in mind, we made the decision to exit the third party originated mortgage business in Q1.
This T. P. O business has historically represented about a third of our mortgage production and well the loans have been high quality. They are lower margin than our retail mortgage loans are more susceptible to prepayments and have relatively low relationship value.
Put it in context, we originated approximately $1 billion of these loans in 2022.
And we expect originally originate less than $100 million in 2023, as we wind down this business to focus on other areas that enable us to optimize returns overtime.
Given current market conditions, we now expect total loan growth of between six and 8% in 2023.
Shifting to slide four we highlight our deposit trends for the first quarter.
Clearly this was a very unique quarter for the entire industry with deposits Ori already at a premium in the current rate environment. The events of the past few weeks have added significant volatility for regional banks across the country. Despite those macro trends, our core customer deposit balances decreased by less than 1%.
And our retail deposits actually increased slightly for the quarter.
Like most of the industry, we did see some short term volatility from a subset of uninsured deposits in March but those flows have stabilized.
We view this as a result of stability and resilience of our markets. The diverse granular deposit base of our company has cultivated over the course of several decades and our recent efforts to attract and deepen customer relationships with digital tools and product enhancements.
On an end of period basis, our total deposits grew 2% compared to the prior quarter and 7% compared to the same period a year ago.
Comfortable flexing wholesale network funding levels in the short term, but we expect to hold this type of funding in check as we move through the year.
We remain confident in our ability to fund our growth at a reasonable cost in 2023 and beyond based on our in flight initiatives with that said based on current market conditions. We now expect to drive total core customer deposit growth of 1% to 3%.
Finally on slide five our team has once again helped to deliver strong revenue for the first quarter and when combined with diligent management of expenses.
Been able to deliver consistent positive operating leverage and strong P. T. P. P income.
In the first quarter P. T. P. P income of $149 million represented a 67% increase as compared to the same period a year ago.
We remain committed to delivering positive operating leverage during 2023.
With that I'll hand, it over to Derek Meyer, our Chief financial Officer to provide further detail on our margin income statement and capital trends for the quarter.
Thanks, Andy Slide six highlights our asset sensitivity, our liability rate trends throughout the first quarter.
Average, earning asset yields once again expanded meaningfully in the first quarter due to rising rates and the asset sensitive nature of our balance sheet versus the fourth quarter of 2021 total earning asset yields are now increased by 235 basis points roughly 53% of the increase in fed funds target rate over the same period.
On the liability side interest bearing liability costs now increased by 221 basis points since the first fourth quarter of 2021 were roughly 50% of the move in fed funds target.
<unk> with the rest of the industry, we've seen the pace of liability costs continue to increase into the first quarter. This S curve effect has unfolded largely as expected, but the pace of it accelerated in the response to the fed's aggressive actions to fight inflation.
We have also seen betas increase was the success of our efforts to attract and deepen relationships in areas such as commercial deposits wealth management and mass affluent these deposits often carry a higher beta by nature, but nonetheless, we're pleased with our initial momentum in these businesses.
Moving to slide seven we continued to deliver strong net interest income in the first quarter, but the number has come down slightly versus the fourth quarter as rising liability costs outpace rising asset yields during the quarter.
As compared to the fourth quarter, our net interest income decreased by 5%, while our margin compressed by 24 basis points.
With that said our margin profile has transformed significantly over the past 12 months and we're taking steps to drive more durable margin overtime.
As compared to the same period, a year ago, our net interest income increased by 46% in the first quarter and our NIM increased by 65 basis points.
Moving to slide eight we continue to take gradual steps to lock in a more durable margin profile and reduce our interest rate risk over time.
First we've taken steps to reduce our interest rate risk by gradually layering in swaps over the past three quarters.
Given ongoing uncertainty around the macroeconomic picture in the near term rate environment, we do not intend to call. The peak on interest rate on the interest rate environment in 2023, but we will continue to take reasonable steps overtime to dampen our asset sensitivity and manage our downside risk.
Within our core balance sheet, we've added high quality liquid securities to take advantage of rising rates. We're also continuing to manage our deposit costs were actively working to bolster our funded funding base of low cost core customer relationship deposits.
With that said the macro outlook remains uncertain, our current expectations assume one additional 25 basis point fed funds increase in May with 225 basis point decreases in September and November respectively.
Based on our current expectations for balance sheet growth deposit betas and fed action. We now expect net interest income growth of between 13% to 15% in 2023.
Yeah.
On slide nine we highlight that we continue to build our securities book in the first quarter to align with our 18% to 20% target.
Throughout the past year, the yields on our investments have risen steadily with the rate environment, but we've reined in durations to reduce our longer term rate risk.
We also reduced exposure to unrealized losses and OCI during the quarter after adjusting our C. O T. CET one capital ratio to include the impacts of a OCI. This impact this impact would have represented an 84 basis point hit to CET one at year end.
That gap has been reduced to 71 basis points in March.
Yeah.
As a percentage of total assets, we built our investment security and cash positions to roughly 21% during this quarter.
We continue to target investments to total assets of between 18% to 20% in 2023.
Yeah.
Shifting to slide 10, noninterest income grew slightly in the first quarter. Despite the ongoing pressure from market driven headwinds and customer friendly fee adjustments that we faced for the past several quarters.
Modest increases in mortgage banking income and other fee income reduce but other fee based revenue offset reductions in service charges card based fees bully income and capital markets.
Our relative noninterest income growth versus prior quarter. It was also impacted by a 2 million dollar investment securities loss recognized in the prior quarter.
While noninterest income stabilized quarter to quarter. We now expect total 2023 noninterest income to contract by between eight and 10% versus 2022.
This anticipated compression is driven by current market dynamics and moderation in deposit account fee income due to customer friendly o'dea NSF changes made in the back half of 2022.
These proactive changes give us additional confidence in our ability to strengthen our low cost deposit base enhance our broader profitability profile in 2023 and beyond.
Moving to slide 11, our first quarter expenses came in at 187 million, a 5% decrease versus the prior quarter. Despite our ongoing investments in people and technology.
Our FTE efficiency ratio rose slightly from the fourth quarter, but at 54, 6% it remains more than nine percentage points lower than the same period a year ago.
Additionally, our noninterest income our noninterest expense decreased 11 basis points as a percent of total assets from prior quarter and eight basis points versus the same period a year ago.
These proof points underscore our commitment to maintaining expense discipline, because we continue to make progress against our growth strategy.
While we continue to invest in strategies that support these growth aspirations. In 2023, we are committed to keeping expense growth below revenue growth on an ongoing basis, we will continue to pursue opportunities to optimize our expense base where possible.
With that in mind, we now expect total noninterest expense growth of approximately 4% in 2023.
Shifting to slide 12, we continue to support the company's growth, while managing capital levels towards our target ranges.
Despite recent volatility in the marketplace, our capital ratios grew versus the prior quarter. We also saw a meaningful increase in our tangible book value per share driven in part by our enhanced profitability profile.
We remain comfortable with our capital levels as we look out over the remainder of the year given current market conditions and the expectation for short term rates to remain elevated in the near term. We continue to expect TCE to land in the $6 seven to seven five range by year end and CET, one to land between nine and nine 5%.
I'll now hand, it over to our Chief credit Officer pottery barn to providing a credit update.
Thanks Derek.
I'd like to start by providing an update on our allowance as shown on slide 13.
We've utilized the Moody's February 2023 baseline forecast for Cecil forward looking assumptions.
Moody's baseline forecast remains fairly consistent with recent trends and assumes continued fed fed rate action minimal GDP growth in the labor market cooling in 2023.
At the end of the first quarter our E. C O L landed at $366 million. This figure represents a $15 million increase from the prior quarter largely driven by a combination of portfolio loan growth nominal credit movement in general macroeconomic trends.
Accordingly, our reserves to loan ratio increased three basis points from one point to two to 1.25 during the quarter.
Moving to slide 14, our quarterly credit trends remained stable during the first quarter.
We did see nonperforming assets and non accrual loans increased slightly from the fourth quarter, but both measures are down 18% as compared to the same period a year ago.
Delinquencies decreased on both a whole dollar basis and as a percentage of total loans as compared to the fourth quarter.
After posting a $20 million provision in Q4, we added another.
$10 million of provision in the first quarter as mentioned this provision building a function of loan growth limited credit movement and macro trends.
Given recent volatility in the in the industry.
I'd like to take the opportunity to reiterate that the recent growth in our loan portfolios has been driven by investments in our core business growth of core relationships and expanding our engagement with familiar customer segments. Our experienced team continues to adhere to a disciplined underwriting culture and proactive approach to portfolio management.
Yeah.
We remain focused on the uncertainty in the macro economy, and vigilant with current underwriting, reflecting elevated inflation supply chain disruption and labor costs just to name a few economic concerns.
In addition, we continue to maintain specific attention to monitoring the effects of elevated interest rates on the portfolio.
Including ongoing interest rate sensitivity analysis across the bank.
Going forward, we expect any provision adjustments to reflect changes to risk grades economic condition 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, but given recent events in the industry. We have included a few supplemental slides that underscore the strength and stability of our franchise.
First on page 16.
Our deposit portfolio is very granular by nature with a large percentage of our deposits coming from consumer small business and other insurer depositors'.
After removing collateralized deposits uninsured deposits represent only 24% of our total base.
We have enough liquidity for 177% coverage of these deposits and we can access 103% of that coverage as soon as tomorrow without liquidating any securities on the commercial side no single sector represents more than 10% of our total deposits, but the largest sector being <unk>.
Municipalities. Additionally, we have no material exposure to the banks and other parts of the country that have recently failed.
On slide 17.
We provide additional information regarding our liquidity sources as of yesterday.
As mentioned on the prior page, we have enough readily available funding to cover 103% of our uninsured uncollateralized deposits.
But if we include all liquidity sources that number increases to one hundreds 177%.
In summary, we feel very comfortable with the levels of uninsured uncollateralized deposits, we have at associated and we're also comfortable with our liquidity levels.
Yeah.
Moving to slide 18, our conservative approach to credit has been honed over the course of the past 12 years and we've built a diverse portfolio of high quality loans across our consumer business and corporate customer basis CRE is no different.
Building, our CRE portfolio, we have focused on partnering with well known developers and stable Midwest markets.
Approximately 70% of our CRE portfolio is based in the Midwest with an emphasis on multifamily and industrial properties.
Office loans represent less than 5% of our total loans as a bank and within that portfolio, we're weighted towards suburban class a properties.
Well, we continue to monitor this portfolio closely we feel well positioned given our business model approach and the markets that we operate in.
With that I'd like to reiterate a couple of points from our discussion. This afternoon on slide 19.
First.
We remain confident in our ability to drive balanced loan growth throughout the year, but the pace is expected to slow given current market conditions with that in mind. We now expect total period end up loan growth between 6% and 8% in 2023.
We're pleased with the initial results of our deposit initiatives and remain confident in our ability to attract and deepen customer relationships in 'twenty three and beyond.
With that said based on current market conditions, we now expect to drive total core customer deposits up.
Growth of approximately 1% to 3%.
And while we're taking steps to dampen our asset sensitivity, we expect to continue to benefit from the rising rate environment in the near term.
Just on our most recent forecast for balance sheet growth deposit betas fed action, we now expect to deliver net interest income growth of between 13 and 15% in 2023.
And lastly, we continue to invest strategically in people and technology and we now expect noninterest expense to grow by approximately 4% in 2023. In fact, we have already taken action to drive to this new target.
And as always we remain committed to delivering positive operating leverage in future quarters.
With that she Molly lets open it up for questions.
At this time, we'll be conducting a question and answer session.
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And our first question comes from the line of Jared Shaw with Wells Fargo.
Please proceed with your question.
Hey, good afternoon.
Hey, Jared Hey, maybe just.
On the 1 billion of deposits that we've seen so far this quarter can you give a little breakdown of of what categories are those or are coming in and is it similar data you know should we expect I guess data going through.
The next few quarters will be similar to what we saw this quarter.
Yeah.
Okay.
Oh, you're talking about.
Slides 16 and 17, yes.
Okay, Yeah sure so what we've done.
Since the end of the quarter really started.
In the Middle of March was continue to look at ways of.
Getting liquidity that's immediately available.
And so that we were we could accelerate any kind of coverage that we had him for any events yeah.
As a result of doing that we had plenty of liquidity coverage available on it just really speaks to it on the next page 17.
In brokerage Cds, and we decided to issue a brokered Cds, which is which is what that deposit growth is and term out our FHL being short term funding and create secured liquidity that way that would be available immediately. So that's what we're trying to capture on that.
On those two pages.
Okay. Okay, and then when we look at the guidance for the core deposit growth out of that 1% to 3%.
That that implies obviously, a slowdown or slow down from here on in it.
Of the cost of those I mean, we should assume that the that that core betas, so at the higher level.
Yeah and to be clear, the 1% to 3% as customer deposits as opposed to network or brokered. So it's exclusive of that in the first quarter. We were just under 1% decrease in customer deposits, we think will make that up and grow in the neighborhood of 1% to 3%.
For the year the other thing I'll mention on those brokered deposits.
Deposits the way that Derek and our finance team, we're able to handle that was really just an opportunity to increase liquidity, but not really have any significant increase in terms of cost to.
To the bank.
Okay.
Then.
I guess trying to piece together the that some of the components of guidance does that imply that.
Quarterly net interest income should be.
Yes, her flat from here I mean, clearly we will see see some margin pressure, but any overall NII is that is that sort of flat at these levels or.
How should we think about that.
No I think well one if we look at the size of the drops.
We think of about 10 basis points of that.
It comes from a mix change in noninterest bearing deposits. So if you work through that math.
Think about four or five basis points came from our sub debt issuance.
And our security is gross so it probably had more of a 10 basis point drop.
There could be additional drop from this quarter based on that continued mix changed from noninterest bearing deposits. We saw it. It was it was a few hundred million more than we had planned we did account for some of it.
But I don't see anywhere near the same magnitude of drop going forward that we saw from fourth quarter to first quarter is the worst of it is behind us.
Were you talking about margin or were you talking about NII.
I was talking about NIM margin, Yeah, I was saying NII net interest income.
Start piecing piecing those components together should we assume that that dollars of net interest income or roughly flat from here.
For the year.
Yeah, I don't think we've tightened it out that specifically.
Okay.
And then maybe just shifting you know looking at our capital levels you know you're in the range of of your goals are.
How should we think about buybacks through the year here, if you're if you're considering to build capital I mean is that something that that.
We should think about or is it just the environment is too difficult to to really say you know for a bank to be back in buying back stock at this point.
Yeah, we continue to stick to the same priorities, we've talked about in all of our other calls which would be dividend.
Organic growth and we're not content, we don't our guidance does not contemplate buybacks or acquisitions.
Okay, so even though even with the the price pull back that that wouldn't change your thinking on.
On buying back stock.
Correct Okay.
Alright, thank you.
Thanks, Chad.
Yeah.
Our next question comes from the line of Daniel <unk> with Raymond James. Please proceed with your question.
Thanks, Good afternoon, everyone.
Maybe.
First just kind of following up on the on the noninterest income discussion. So you mentioned that assumes two rate cuts in the back of the year.
Hum.
How would that that guidance change if those cuts weren't werent.
And the assumptions I know they are late in the year, but just curious what that would be if it was just the the may hike.
Yeah, I think the easiest.
To give you is.
25 basis point rate increase is about $2 5 million a quarter.
And it's symmetrical so if we don't get it we would not get compressed by $2 5 million a quarter and you can.
You can use that as a guide.
Okay.
And then just digging a little bit deeper into the the office commercial real estate balances.
Just trying to get a sense for.
What is kind of like metro type of buildings, with Chicago or or or Milwaukee of the of the office portfolio.
Why don't you take that yes, it's largely suburban suburban properties, where we don't have a lot of exposure in the I'll say core urban.
You know markets that we're in and our entire footprint.
Yeah.
Okay, Alright helpful and last quickly just on the loan growth expectations for the year.
I heard you say are the T. P. O is obviously coming out of that is that.
Most of the difference in the loan growth guidance or are you pulling back in other areas are seeing lower demand.
Yeah, I would say that T. P. I was really just a small portion of it because what's happened in the mortgage business as you may know is a.
Prepayments have slowed significantly and so we're still seeing growth with significantly less production.
I would say that we've we've meaningfully tried to on the auto book, we're trying to make sure that we're getting a nice yield on those we've we've not expanded into new markets at the pace that we had originally planned we see a slight decrease in the pipelines in commercial.
Banking as we go throughout the year.
So when you add all those together I would say T. P O.
Small piece of it but I would say, it's a general some of the decisions that we've made some of the more severe underwriting that we have a strategic.
Decisions on expansion and then and then some some decrease in pipeline on the commercial side our year over year.
Okay terrific. That's all I had thanks for the color.
Thanks Daniel.
Yeah.
Our next question comes from the line of Terry.
Uh huh.
<unk> with Stephens. Please proceed with your question.
Good afternoon, everyone.
Hi, Terry.
Maybe just big picture, there's a lot of talk about increased bank regulation. After the events of of March what could that mean for a bank like associated kind of $41 billion in and in growing any thoughts there.
Well you know I think they showed their hand Ah recently and in there there are appropriately caring about the granularity of deposits I think when you look at where we are when we have 24% of uninsured and uncollateralized deposits. We feel like we're in a really good position. When you think about liquidity coverage I think some of the major.
Your bank speak to that maybe in a just a little bit different way versus what's available in 24 hours, maybe it's within 30 days, but I think.
Liquidity coverage is going to be of course important there.
The one thing I will say from a regulatory standpoint, I feel like the OCC and the fed from associated Bank perspective quickly got in and asked for a lot of details from I suspect all of their banks.
And appropriately so and as aggregated that so you know learning a lesson from a couple of bank failures is the right approach and appropriate approach what will come from that in the midterm and long term, we'll have to wait and see what happens by segment, but to date I don't feel as if we've been asked questions that are not appropriate for banking.
I suppose that there'll be an increased focus on asset liability management with an increased focus on.
On deposits, but with regards to the overall Hum policy change or regulatory changes, it's too early to know what will be formalized.
Yeah.
Thanks for that Andy and then as my follow up.
I've noticed the last couple of weeks some larger banks are getting out of the auto floor plan business can you just remind me was that an area you're focused on when you joined or was it more on the the the auto finance side on the consumer business and if not is that an opportunity that would make sense for associated.
You know we will review all of one thing that we've said is we're going to review all of our categories and make sure. We can move towards maximizing returns. We've already made one of those moves and T. P. O third party origination on mortgage which really didn't have anything to do with what occurred in the last 30 days as much as the fact that we have more maturity.
Cross all of our lending verticals.
With regards to floor plan, we don't have immediate plans to enter into that we're not in the floor plan business. Today. We are in the indirect auto business that that was initially started if you might remember as a hedge against mortgage volatility in gosh, I think we've seen a little mortgage volatility so it's.
Working as we had hoped we believe it's significantly better yields than what we'd seen in third party. So we like where that had started had started but if we see an opportunity in floor plan, where there are good yields and good relationship value added opportunity for deposits, we would consider it.
But we don't have immediate plans that tuned into that.
Great. Thanks for taking my questions.
Alright, thank you.
Yeah.
Our next question comes from the line of Brody Preston with UBS. Please proceed with your question.
Hey, good evening, everyone. Thanks for taking my questions.
I just wanted to clarify on the on the interest rate assumptions could you restate when the two cuts you expect to occur.
In the back half of the year.
September and November .
Okay, Great and I hear you on the dollar impact, but as I think through kind of a dynamic balance sheet modeling just given higher higher deposit betas and worsening kind of mixes across the industry is there a is there a possibility where maybe that second cut is actually you know may be beneficial or neutral as it relates to.
The NII and NIM.
Just given that the second cut might help a little bit more on the deposit costs.
Yeah, I'm not sure that would be a great.
That's a very good question and it'll be a great case study.
Typically deposit costs keep going up.
For another month or two or three.
After the last hike.
So it's not obvious to me that that would.
That would help.
But I know why you're asking if you could immediately take advantage of it with deposit pricing it might but I haven't seen that successfully play out that way before.
That being said I've seen a lot of things.
This quarter that I havent seen before I think that for me Brody the real question for our industry as a deposit mix shift and that that impacts any everybody on the demand deposit side. There's some view that that is a reversion to the norm that maybe that money went into their during some of the stimulus and it's coming back out through <unk>.
Band, that's logical and if that is the case, we would expect that impact to decrease every quarter over the next 3456 quarters until that kind of has worked its way through the system I think that is.
Maybe.
As significant of an impact to margin going forward.
Got it.
Just one more on the margin front is it I guess help me think through the or this is more on the NII front with the lower NII guide is it a.
I'm, assuming it's mostly due to funding and is it a mix of of worsening funding mix or are you also expecting accelerating betas.
So the guidance contemplates betas it get just about 53%. So those have crept up we've shared I think it was just below 50% and our last one that's largely driven by mix probably the the.
<unk>.
The new.
Development and as long as you what Andy is talking about is the mix with noninterest bearing does for US those were largely stable as a percent of deposits for the last four quarters.
And there was really much more movement than.
It's been happening.
Really in the last quarter and you put that together.
With a little bit higher deposit betas, and you end up with them sort of what our guidance comes out to be which is flattish NII.
Quarter to quarter.
Got it Okay and I just had a couple of last one just on the auto book I. Just wanted a couple clarifications could you remind me what the you know I guess, if you had to define it by FICO score or prime or Super Prime or whatever like could you help me define you know what.
Most of those but most of those who most of those loans are being made to from a demographic perspective as it relates to credit score.
I'm going to start with the easy part that I'm going to turn it over to our expert Pate earn this is Andy.
I believe about 96 or 97% of these loans would be considered prime or super Prime and infuse our scorecard model, we actually believe that 99% of them are the average FICO in the in the first quarter. For example at the time, we did the loan was 772 in the first quarter. So.
Pretty strong borrowers and that's where we're staying that's the neighborhood, we expect a living because typically when when you you learn to them. They pay you back and so.
Maybe give a little more color around that.
Yeah, I mean, the the metrics across say the last 12 rolling kind of 12 to 13 months averages have been maintained at the same levels and he's talking about I think across the whole portfolio. The FICA always like 755 760. So that's only increased this last this last go round, but we seen.
A fair amount of nice stability, there and we like a lot of other lending areas, we have not stretched too to find volume there.
Got it and this is just a last one on this and it's it's it's something that I'm wondering just about consumers as a whole and when you underwrite those auto loans is there any I guess in the model or in the process is there any part that looks at the like the durability or the stability of that borrowers credit score like over a multiyear timeframe than I am.
Ask just because you know if you if you have a marginal borrowers that might be marginally prime that you know it gets a bunch of cash given to them from the government and then they can make 12 months of consistent payments that really helps the FICO score when maybe behavior early they're not necessarily you know.
What the FICO score that is that the end of the 12 months indicates they would be so is there any kind of like stability to that FICO score given like through time.
Yeah, Let me make sure I give my perspective on how a consumer operates in the way of consumer operators, if they like to pay it doesn't really matter what their income level is they pay and so typically what you see the consumer can get a little bit more healthy, but somebody that is not a payer before they get stimulus doesn't all of a sudden become a really disciplined.
Consumer that that has not been my experience with regards to the durability of the score.
That view doesn't exist to my knowledge and so when we look at what it is we look well beyond just a FICO score. So when we say a balanced scorecard, where looking at multiple iterations in and what we did Brody is we bought data.
In this when we took over the business and brought in a team that has been in this business for decades. So.
I don't have as big a concern on an inflated FICO and in short period of time somebody going from sub prime or near Prime to Prime and Super Prime I, just think that'd be a very very big stretch for that to happen and I think what's important is that's not the only measurement we're using.
We're underwriting this and that is the nature of the balanced scorecard.
Awesome, that's very helpful. Thank you.
Youre welcome.
For joining us.
Happy to.
Alright next question.
<unk> come from the line of John .
Armstrong with RBC capital markets. Please proceed with your question.
Hi, good afternoon guys.
John .
A question on slide four.
Some money market the noninterest bearing decline it looks a lot like others, but I'm just curious.
How much of that runoff happened.
After March 8th.
And.
You know I'm, specifically looking at the money market piece of that with some of the.
Rate driven or intentional one just kind of curious what happened kind of pre and post March 8th.
I don't have the exact breakdown, but I'll say a couple of things here, we did see some uninsured deposits leave the bank and our numbers surely would have looked different on core customers had had silicon Valley Bank had the had the failures not occurred.
So that's one thing the second piece of it but it's not crazy numbers are for us and what I would say, though still is there is a mix shift that is going on that was happening before silicon Valley bank and to be clear that's happening in our industry. It is not a it's not unique to.
<unk> in my opinion across the board, it's a consumer behavior.
Okay.
I guess, maybe another way to get out to us if.
We're sitting here in 90 days does slide four looks similar just.
Perhaps not as amplified is that fair.
It would make me sad if it looked the same because I just told you that I thought we were going to grow deposits for the year.
The challenge on.
On noninterest bearing we think at some level will stay the same so the mix could be similar but just not to such exaggerated dollars if that makes sense yep yep. Okay.
And then how about just bigger picture more on slide three loan growth drivers from here it sounds like Youre, saying commercial's, a little bit slower.
Maybe some of it self imposed maybe the pipelines have changed a bit but how about how about slide three how does that look as the year progresses.
Yeah, we think mortgage warehouse, if you look at that and you look back and there's a table in the back that shows the average deposit that just spiked at the end of the quarter, we don't expect that to be a similar phenomenon.
The rest of the year. So that is not that is not a high growth that would be surprising to me instead of something changes wildly with interest rates that that would be our primary grower for us we'd expect the modest growth in mortgage although we're out of the T. T. P O.
Unless again Theres, a large change in interest rates for the refinance like booms. This year, which we don't anticipate we wouldn't see a large retrench. There we would think that there'd be steady growth in the commercial part of our business and and I'm not so sure that that REIT approach would change so there'd be a little.
And we will have steady growth in the auto finance, assuming that we can continue to lend to high quality borrowers at a good yield.
Mhm, Okay, and then just one more on the expense growth guidance, you talked about already taken some actions to get to the lower gross level can you give us some examples of what youre doing.
And also where do you feel it's necessary to spend money.
Yeah.
Yeah sure. So one thing that I've said is that we'd go into each year with a plan for growth and then we would we would be immediately ready and willing to pull levers on the expense side. If we didn't see that growth emerging so we have a decent amount of growth, but not to what I thought was the upper range of that one thing. We did is we pulled the lever on third.
Party origination, but we also recognize where our mortgage volume was overall and we decreased our staffing both contractors and and F. T E.
In that category than we looked at the rest of the year and we looked at where strategic adds were being made and what where necessary in this environment. We put a process in place that requires it to go through quite a process to add any of those people, including up to our CFO , having to sign off on that and Trust me when Derek doesn't just sign when he sees.
We won't necessarily replace every role that comes in we won't add some of them that were plan. We've reduced we've reduced lines of business and then and then frankly, we'll set up a much more thorough process are in the next two to three weeks to start to look across our company heading into 'twenty four.
As to what we should look like that.
Okay fair enough well Derek seemed like a nice guy at our conference in March, but I didn't ask them to buy me anything so.
Yeah, [laughter] I'll try that Tonight.
That conference.
Yeah.
Alright, thanks for everything.
Thank you.
And our next question comes from the line of Chris Mcgratty with K BW. Please proceed with your question.
Hey, this is Andrew Leischner on for Chris Mcgratty How's it going.
Good Andrew.
So it looks like the quarterly provision has been a little under $20 million in the last three quarters.
Is that a good run rate going forward or do you expect that to ramp up given the macro uncertainty.
And also if you can provide any insight on where you expect to see reserve levels go that'd be great. Thanks.
Yeah.
I would say will probably you know I could see provision increasing from here, we've come off such a small level, but it is hard to say what what that's going to be you know, we're going to continue to monitor loan growth.
Where the markets are going from a macro level, but then more importantly, our or.
Our individual credits in the portfolio, we've just gone through a complete deep dive across the full commercial bank, including C&I and CRE and we really did not find any significant movements in risk rating changes, where there were no surprises that came out of stuff and we'll continue to do that.
On a quarterly basis.
Now that being said if if we see continued pressure of probability of recession are later in the year going into 'twenty, four we will monitor that and make make appropriate adjustments.
Andrew I think it's also important to remember that when you decrease your growth with the seesaw methodology, you don't have as immediate of impact on your level, we've taken qualitative downturn factors and increase those.
In our model and then so so that's already been occurring and then finally, we do believe that the market will slowly have some level of deterioration at some point, but we are not anticipating wild swings with the nature of our portfolio and and remember where we are in the upper Midwest.
And what that means is that the real estate isn't quite as volatile and that's sometimes an area where you see volatility so we're not immune to macroeconomic.
Hum.
Impacts, but we think it would be more of a slow build as we go throughout the year.
Alright, great. Thanks that was real helpful and so with your loan deposit ratio at 96% at quarter end.
And I go deposit trends look positive, but can you provide.
Where you're comfortable with that one deposit ratio going.
Well.
You want to answer this one this one derek likes or I'll take it because I like it to.
Yeah, I don't want to get in your way clean up anything you missed.
Oh Wow, Okay fair enough.
Look we're pretty comfortable staying around that 95% area.
As loan demand and growth decreases our goal is to try to fund that with our with our deposit growth.
And the answer is we're not afraid to flex on the wholesale but we have multiple initiatives I mean, when we think about the digital sales platform. When we think about R. R.
Our mass affluent when we think now where the 13th largest assay HSA business in the country and we are forecasting double digit growth. There. When we think that we have more our ams and if they are not lending insurance I should be talking about primary relationships and we had double digit increases in our treasury management sales. So we have a law.
Lot of reasons to believe that we can outpace the market when it comes to deposit growth. We just have to execute first quarter was a noisy market for our industry, but we still believe that we're in a position to grow our deposits we would like to stay in that 95% range. Our initiatives will continue to have a focus on holistic.
Chip and deposits, we started a new branding campaign and we've already gotten early results and I guess the other thing that gives me some optimism is that our primary customers for consumer and businesses, even with the noise in the first quarter. They still had positive growth they had marginal positive growth, but we're just getting started.
Many of these consumer initiatives. So you ask a simple question I gave you a complicated answer because it's not simple, but the short answer would have been I'm comfortable at the 95% range, we'd like to fund that with what our with.
Customer growth as opposed to wholesale or network growth, but we're comfortable on a short term because we believe in those initiatives using those levers as long as it's profitable.
Okay got it. Thank you and just one final quick one for me.
What is your deposit beta assumption in your guidance.
Just a just north of 53% for interest bearing deposits around 40% for total deposits.
Okay, great. Thank you.
Thank you.
Okay.
And our next question comes from the line of Scott Cyphers with Piper Sandler. Please proceed with your question.
Afternoon, guys. Thank you for taking the question I think most of my questions have been answered, but I was curious on the just a slightly reduced fee guidance is that just a function of the P. P O a transaction or is there anything else underlying that.
No most of that has to do with service charges on consumer with our free friendly.
Rollout and then a little bit of ECR impact.
On the commercial side.
Okay.
Alright easy enough that's actually all I had thank you very much.
Well thank you.
I.
I think that concludes the questions that we have look we appreciate every the level of questions that we know that it's been a dynamic quarter for everyone. In the industry. We appreciate your continued interest we we welcome Brody for the first time and are certainly Derek and Dan and I are available offline. If there are follow up questions. Thank you all.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Okay.
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