Q2 2023 Associated Banc-Corp Earnings Call

Speaker 1: Good afternoon everyone and welcome to Associate Bancorp's second quarter 2023 earnings conference call. My name is Alicia 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.

Speaker 1: discussion, management may make statements that constitute projections, expectations, beliefs, or similar forward-looking statements. Associates' actual results may differ materially from the results anticipated or projected in such forward-looking statements.

Speaker 1: 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 website in the risk factors section of associates most recent Form 10-K .

Speaker 1: subsequent SEC filings.

Speaker 1: These factors are incorporated herein by reference.

Speaker 1: For 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 10 of the press release financial tables.

Speaker 1: Following today's presentation, instructions will be given for the question and answer session.

Speaker 1: At this time, I would like to turn the conference over to Andy Harmony, President and CEO , for opening remarks. Please go ahead, sir. All right, guys.

Speaker 2: Thank you, Alicia, and good afternoon, everyone. Welcome to our second quarter earnings call. I'm Andy Harmonin. I am joined once again by Derek Meyer, our Chief Financial Officer, and Pat Ahearn, our Chief Credit Officer.ARA Elsizer leads us into strategy as our Mulberry duet

Speaker 2: I'll start by sharing some highlights for the quarter and from there Derek will provide update on margin, income trends, and capital. And then Pat will share an update on credit.

Speaker 2: So, midway through the year, we've started to see some renewed stability through the banking system, and that's especially true here in the Midwest. Unemployment rates in most of our states remain 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.

Speaker 2: And with that stability as our backdrop, we've continued to make progress with our plan to attract, deepen and retain customer relationships, optimize our balance sheet, and enhance our profitability profile over time.

Speaker 2: You can see it in our loan portfolios where we continue to add significant volumes of high quality consumer and commercial loans to our books. You can see it on the deposit side where we're deepening relationships with our Mass Affluence strategy and acquiring new relationships with a brand new brand campaign.

Speaker 2: and multiple product and service enhancements.

Speaker 2: and you can see it in digital, where we've already made several upgrades to the new platform we launched less than a year ago, leading to an increased customer satisfaction score and a decreased customer attrition rate.

Speaker 2: We have become a company that has developed an ability to execute even amid a volatile quarter in banking. But importantly, we've reached these milestones without sacrificing our foundational discipline on credit quality and expense management.

Speaker 2: We look forward to carrying the momentum into the back half of this year.

Speaker 2: So with that, I'd like to highlight key results for the second quarter on slide two.

Speaker 2: Our second quarter results reflected the continued expansion of our balance sheet, stable credit trends, and progress against

Speaker 2: We added loan balances in all three major segments again in the second quarter, led by C&I and auto finance. However, as we discussed a quarter ago, lending activity as a whole has slowed from the strong pace we saw in 2022.

Speaker 2: To fund our growth and enhance our liquidity profile, we tapped the wholesale markets to increase deposits by $1.7 billion during the quarter.

Speaker 2: This reliance on wholesale funding sources is expected to dissipate over time as we begin to realize the full impact of our customer acquisition and relationship deepening initiatives. With increased funding costs impacting the entire industry, our net interest margin came in at 2.8%, which is down.

Speaker 2: from our fourth quarter peak, but it's still nine basis points above the same period a year ago.

Speaker 2: As a partial offset to margin pressures, we saw non-interest income increase by $3 million from the prior quarter, helping us deliver PTPP income of $133 million for the quarter, a $23 million increase from the same period a year ago.

Speaker 2: We are continuing to monitor asset quality closely.

Speaker 2: But our credit trends remained relatively stable during the second quarter. We saw 15 basis points of net charge-offs during the quarter and added one basis point of ACLL. We added $22 million in provision for the quarter, but still matched our net income available to common equity from the same period a year ago.

Speaker 2: Now, staying on the topic of credit, I'd like to take a moment to reiterate a few important points about who we are as a company on slide 3.

Speaker 2: We take an active, disciplined, and conservative approach to credit.

Speaker 2: This includes an ongoing and deep review of existing portfolios. And in addition, our efforts to de-risk our balance sheet over the past 14 years have put us in a relative position of strength.

Speaker 2: Since 2009, we've taken steps to exit high-risk portfolios, replace those balances with lower-risk asset classes, and implement processes and procedures to identify and eliminate risk.

Speaker 2: And today, we're squarely focused on prime, super-prime consumers, core commercial lending, and a diversified balance sheet.

Speaker 2: This broad focus has protected us from overextending ourselves in any one particular area and limited our exposure in at-risk subcategories such

Speaker 2: We also benefit from operating primarily in stable, conservative, Midwestern markets that don't see the big swings you might see in other parts of the country.

Speaker 2: As mentioned previously, this long-held disciplined approach on credit has also given us the flexibility to continue to execute on our strategic initiatives in the face of a dynamic operating environment.

Speaker 2: With that, I'd like to provide some details on our loan trends on slide 4.

Speaker 2: During the second quarter, we continue to add high quality loans to the balance sheet in areas such as C&I and auto finance.

Speaker 2: And while we've continued to book loans, the pace of new deals coming into the pipeline has slowed, as our customers take a more cautious approach in the uncertain macro environment.

Speaker 2: Within our portfolio, we continue to emphasize selective growth in high-quality loan categories that help us diversify our portfolio while delivering an enhanced profitability profile.

Speaker 2: Over the last seven quarters, the expansion of our C&I business and growth in our new equipment finance and asset-based lending verticals has helped us expand our offerings and sharpen our focus on high-quality, relationship-based lending.

Speaker 2: This enables us to de-emphasize lower yielding non-relationship asset classes such as third-party originated mortgage.

Speaker 2: As we announced back in Q1, we've chosen to exit this low-margin business with relatively low relationship value. We originated approximately $1 billion of these loans in 2022, and we now expect to originate just $60 million in 23 as we wind down this business to focus on other areas that enable us to optimize our returns over time.

Speaker 2: So, in summary, we remain confident in our ability to drive high quality accretive growth on our balance sheet. And as such, we continue to expect loan growth of between 6 and 8 percent in 2023. On slide 5, we highlight our funding trends for the second quarter.

Speaker 2: During the quarter, we tapped the wholesale and broker deposit markets to help enhance our liquidity profile, fund our loan growth, and

Speaker 2: During the quarter, we tapped the wholesale and broker deposit markets to help enhance our liquidity profile, fund our loan growth, and replace higher cost FHLB advances.

Speaker 2: These actions were temporary in nature and not intended to be part of our long-term strategy.

Speaker 2: Within our core customer deposit base, we did see some short-term volatility from a subset of uninsured businesses, business deposits, and public funds in March and April . But that volatility largely dissipated by the end of the quarter. And in the face of this challenging environment, we actually saw modest growth in our consumer deposit base during the quarter.

Speaker 2: This stabilization reflects the granularity of our deposit base and our recent efforts to attract and deepen customer relationships with digital tools and product enhancements.

Speaker 2: We expect to hold wholesale network funding levels in check as we move through the back half of the year, and we remain confident in our ability to fund our growth at a reasonable cost going forward based on our initiatives. With that said, based on current market conditions, we now expect total core customer deposits to decrease by 3% for the year.

Speaker 2: However, we expect to drive growth of 2% in the back half of the year as we continue to execute on our initiatives.

Speaker 2: On slide six.

Speaker 2: We're sharing additional details on our initiatives designed to acquire deep and retain customer relationships. We've continued to see promising signs of progress with these efforts. We've actually seen momentum pick up as we've moved through the year. As I mentioned previously, we've seen a lot of progress in the last few months.

Speaker 2: We're up and running with a variety of initiatives across the bank and we've seen several leading indicators that give us confidence we are on track.

Speaker 2: the bank and we've seen several leading indicators that give us confidence we are on track. First... plaintiff.

Speaker 2: In one of the most challenging environments for regional banks in years, we actually grew net consumer and business households during all three months of the second quarter. Secondly,

Speaker 2: We've implemented several enhancements to our product and service offerings and launched a new brand campaign.

Speaker 2: which resulted in an 11% increase in consumer household acquisition rates and a 13% decrease in attrition year over year.

Speaker 2: Third.

Speaker 2: I want to remind you that the new digital platform we launched last fall was built with open architecture.

Speaker 2: enabling us to quickly respond to customer feedback and deliver more and more frequent upgrades.

Speaker 2: Since launching the platform 10 months ago, we've already successfully released 9 upgrades.

Speaker 2: As a result, we've seen a strong positive trend in our top box, completely satisfied customer satisfaction scores. And most recently, during the second quarter, our satisfaction scores hit a three-year high in mobile banking.

Speaker 2: Finally, since launching a new mass affluent strategy to deepen relationships with high potential customers, we've already added over $300 million in net new deposits and surpassed our full year goal. This growth represents a roughly 8% increase from our prelaunch baseline. As you can see, we've added over $300 million in net new deposits and surpassed our full year goal.

Speaker 2: We're bringing in new dollars and deepening relationships with a customer base that is more satisfied.

Speaker 2: While we're pleased with the initial results of these efforts, we've yet to realize the full impact of the initiatives and we're working on additional enhancements as we speak.

Speaker 2: What's not going to change though is our commitment to the foundational strength of our company.

Speaker 2: which is maintaining discipline with regards to credit risk.

Speaker 2: expense management, and operational risk management. So finally, on slide seven, our team once again paired strong revenues with diligent expense management during the second quarter. And despite facing, despite the challenges facing the industry during the quarter, our company delivered PTPP income of $133 million.

Speaker 2: ago. We remain committed to delivering positive operating leverage during 2023.

Speaker 2: So with that, I'm going to hand it over to Derek Meyer, our Chief Financial Officer, to provide a little more detail in our margin, income statement, cap and capital trends for the quarter. Thanks, Andy. Starting on slide 8, I'll begin by highlighting our asset and liability rate trends through the second quarter. Our total asset yields have continued to rise.

Speaker 3: due to rising rates and the floating rate nature of a large segment of our loan book.

Speaker 3: Since the start of the rate cycle, total earning asset yields have increased by 259 basis points, or roughly 53% of the increase in Fed funds target rate over the same period. Our commercial and CRE portfolios, largely comprised of floating rate loans, have seen the largest increase.

Speaker 3: On the Liability side, rising rates and the volatility impacting the industry this Spring have combined to put additional pressure on funding costs across the industry.

Speaker 3: Here at Associated, interest-bearing liability costs have now increased by 279 basis points since the fourth quarter of 2021, or roughly 50% of the move-in Fed funds target.

Speaker 3: While the general S-curve effect we expected to see on deposit betas has played out largely as we expected, our beta accelerated following the volatility we saw in the spring and the earnings were huge, almost one million doses were in the early spring and this is theClock record on accumulated currency soaring. We saw the increase in cost a bit in the Feel Octav1 to $ dece fox and VoD back in May of 2020. Ascore and a concept, but more generally, so look at all of the performances of appreciate future as we also Loud Corinthians and looking at the contract of what we saw and how we purged IN pediatric brilliant by-product arms. All right, I will convenient to him.

Speaker 3: our short-term build and wholesale network funding, and the ongoing mix shift away from non-interest bearing deposits.

Speaker 3: Accordingly, our interest-bearing deposit beta has now climbed to roughly 52% since the start of the rate cycle. Moving to slide 9, mixed shift and other funding cost pressures combined to drive a 27 basis point compression in our NIM for the second quarter.

Speaker 3: Nonetheless, our NIMS still represented a 9 basis point increase from the same period a year ago.

Speaker 3: On a dollar NII basis, we saw similar impacts during the quarter, yet still delivered dollar NII that reflected a 19% increase from the same period a year ago. And as Andy discussed, we continue to take significant actions on both sides of the balance sheet to drive more durable margin over time.

Speaker 3: One example is that we've gradually layered in swaps over the past several quarters to decrease our asset sensitivity and enhance the durability of our margin.

Speaker 3: Given the ongoing uncertainty around the macroeconomic picture and the likelihood of a higher-for-longer scenario, we did not add additional swaps during the second quarter.

Speaker 3: Nonetheless, we've continued to see our estimated NII sensitivity come down gradually by design.

Speaker 3: The macro outlook remains uncertain. Our current expectations assume one additional 25 basis point Fed funds increase in September , with no rate cuts in 2023.

Speaker 3: Based on our current expectations for balance sheet growth, deposit betas, and Fed action, we now expect net interest income growth of between 10 and 12% in 2023.

Speaker 3: As a reminder, we do not intend to call the peak on interest rate environment in 23, but we will continue to take reasonable steps over time to dampen our asset sensitivity and manage our downside risk.

Speaker 3: On slide 10, we've continued to manage our securities book in the second quarter to align with our 18 to 20 percent target. Throughout the past year, the yield on our investments has steadily risen with the rate environment, but we've reined in durations to reduce our longer-term rate risk. After adjusting our CET1 capital ratio to include the impacts of AOCI, this impact would have represented an 88 basis point hit to CET1.

Speaker 3: in the second quarter. This impact is up slightly from the prior quarter, primarily driven by the rebound in rates from the decrease at the end of March.

Speaker 3: As a percentage of total assets, our investment security and cash positions

Speaker 3: were maintained at roughly 20% during the quarter. We continue to target investments to total assets of between 18% to 20% in 2023.

Speaker 3: Shifting to slide 11, non-interest income grew by $3 million in the second quarter despite the ongoing pressure from market-driven headwinds and customer-friendly fee adjustments that we've faced in the past several quarters.

Speaker 3: The largest contributing factor for the increase was the moderate growth in mortgage banking income driven by higher MSR values.

Speaker 3: We also saw modest growth in card-based wealth management and other fee-based revenues. These increases were partially offset by decreases in service charges, bullion income, and asset gains. Despite the quarterly increase in noninterest income, we continue to expect total 2023 noninterest income to track between 2023 and 2023.

Speaker 3: 8 and 10 percent versus 2022. As we've discussed, this anticipated compression is driven by current market dynamics and moderation in deposit account fee income due to customer-friendly overdraft NSF changes made in the back half of 2022. WeaaS derives from an evolved media structurehonored to pilot advances in industry and understand queers. We began to engage customers in leadership initiatives such as repetitive shopping,

Speaker 3: These proactive changes gave us additional confidence in our ability to strengthen our low-cost deposit base and enhance our broader profitability profile in 2023 and beyond.

Speaker 3: Moving to slide 12, our second quarter expenses increased by 2% versus the prior quarter amid ongoing investments to support our initiatives.

Speaker 3: Our FTE efficiency ratio rose to 57% during the quarter, but it remained 284 basis points below the same period a year ago.

Speaker 3: Additionally, our not interest expense base continues to decrease as a percent of average assets, and is now down 15 basis points from the same period last year.

Speaker 3: While we continue to invest in strategies to support our growth aspirations in 2023, we are committed to keeping expense growth below revenue growth over the long term. Thank you.

Speaker 3: On an ongoing basis, we will continue to pursue opportunities to optimize our expense base where possible.

Speaker 3: With that in mind, we now expect total in-line interest expense growth of between 3 and 4 percent in 2023.

Speaker 3: Shifting to slide 13, we continue to prioritize paying a competitive dividend in funding organic growth while managing capital levels towards our target ranges.

Speaker 3: Here in the second quarter, our regulatory capital ratios grew versus the prior quarter and versus prior year-end 2022. We remain comfortable with our capital levels as we look out over the remainder of the year.

Speaker 3: 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 between $675 and $725 by year-end and see T1 to land between 9 and 9.5%.

Speaker 3: I will now hand it over to our Chief Credit Officer, Pat Ahearn, to provide an update on credit quality.

Speaker 4: Thanks Derek. I'd like to start on slide 14 with an update on our allowance trends. We utilized the Moody's May 2023 baseline forecast for our CECL forward-looking assumptions.

Speaker 4: The Moody's baseline forecast remains consistent with recent observed trends and assumes an additional near-term rate height, GDP growth rate similar to the first half of 2023, a cooling labor market, and a deacceleration of inflation.

Speaker 4: At the end of the second quarter, our ACLL landed at $377 million. This figure represents an $11 million increase from the prior quarter as allowance continues to be driven by a combination of portfolio loan growth, nominal credit movement, and a median annual profit for 2021 backed upJim Duke islene Las Sardis and professor of distinguished national institute of education at occasions at ACLLDOC audience Games

Speaker 4: reflects general macroeconomic trends benefiting from stability in the Midwest. Accordingly, our reserves to loan ratio increased one basis point from 1.25 to 1.26 percent during the quarter.

Speaker 4: Moving to slide 15, the quarterly credit trends remain stable across the portfolio during the second quarter.

Speaker 4: We did see non-performing assets, non-accrual loans, delinquencies, and charge-offs increase slightly during the quarter, but we view these increases as a sign of both normalization back to pre-pandemic levels as well as some one-off situations as opposed to an indication of a broader issue in the portfolio. We added another 22 million dollars in provision during the second quarter.

Speaker 4: which is consistent with the past three quarters. As mentioned, this provision build was largely a function of loan growth, limited credit movement, and some macro trends.

Speaker 4: Given recent volatility in the industry, I'd like to take the opportunity to reiterate that the recent growth in our loan portfolios continues to focus on our core business, growth of key relationships.

and expanding our engagement with familiar customer segments. Our experienced team continues to adhere to a disciplined underwriting culture and a proactive approach to portfolio management that we have solidified over the past 10 plus years when the bank worked to de-risk the portfolio.

We remain focused on monitoring the uncertainty in the macroeconomy to ensure current underwriting reflects elevated inflation, supply chain disruption, and labor costs, to name just a few economic concerns.

In addition, we continue to maintain specific attention to the effects of elevated interest rates on the portfolio, including the ongoing interest rate sensitivity analysis bank-wide.

Going forward, we expect any provision adjustments to reflect changes to risk grades, economic conditions, loan volumes, and other indications of credit quality. Finally, on slide 16, Andy discussed previously that a conservative approach to credit has been optimized over the course of the past several years.

as we've built a diverse portfolio of high quality commercial loans across the bank and a focus on prime and super prime consumer portfolio. While CRE has frequently been cited as an area of risk in the media, our approach to CRE lending reflects the conservative approach we've applied across the bank.

In building our CRE portfolio, we focused on partnering with well-known developers in stable Midwest markets. Over two-thirds of our CRE portfolio is based in the Midwest with an emphasis on multifamily and industrial properties.

Office loans represent just 3.5% of our total loans as a bank, and within that portfolio, we are weighted towards suburban Class A properties.

While we continue to monitor this portfolio closely, we feel well positioned given our business model approach and the markets we operate in.

With that, I will now hand it back to Andy to share some closing thoughts.

to Andy to share some closing thoughts. Thanks, Pat.

I'd like to reiterate a couple points from the presentation on slide 17. First, based on the resiliency of our markets and the ongoing momentum with our lending initiatives, we remain confident in our ability to drive high-quality loan growth throughout the year. As such, we continue to expect total period and loan growth of between 6 and 8 percent in 2023.

Secondly, while we see that our core deposits have stabilized, we now expect core customer deposits to shrink by 3% for the year. But with that said, we also remain confident in our initiatives on the deposit side based on several leading indicators that point to momentum in the back half of the year.

With this in mind, we expect to see positive core customer deposit growth of 2% in the second half of the year. Shifting to revenue. We've adjusted our most recent forecast for balance sheet growth, deposit betas, and Fed action following unique events of the spring. We now expect to deliver net interest income growth.

of between 10 and 12 percent in 2023. And finally, we continue to invest strategically in both people and technology, but our disciplined approach to expenses remains foundational.

We also remain committed to delivering positive operating leverage as a company. As a result, we've lowered our expense guidance to between 3 and 4 percent growth for the year.

We also remain committed to delivering positive operating leverage as a company. As a result, we've lowered our expense guidance to between 3 and 4 percent growth for the year. So with that, let's open it up for questions.

Thank you. We will be now conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.

Thank you. Our first question comes from Daniel Tomlio with Raymond James. Please proceed with your question.

Good afternoon guys, thanks for taking my questions. Hey Dan. I guess first, just on the funding side, I think I heard you say this, I think it was Andy, that you talked a little bit earlier in this COVID-19 pandemic,

the wholesale and network transaction deposits are expected to be

Stable in the back half of the year. Correct me if I'm wrong on that, but you know, I was just hoping to to get kind of a sense into that's wrong expectation for how that how those fluctuate.

if there's a loan or deposit target that you're hoping to keep, or if there's levels that you don't want to go above related to those funding sources. Then just kind of

trends within the second quarter in terms of the

the core deposits that gave you confidence in being able to grow in the back half of the year.

Yeah, maybe I'll start that one out and then turn it over to Derek. One of our absolute imperatives in the second quarter is to ensure that we had a strong liquidity position, which we do. So we wanted to make sure that our day one liquidity position was in a good place for the bank in an uncertain time.

Since that period of time, we've been able to see that our uninsured, un-collateralized deposits are down to 21%. We've seen that we have day one coverage of well over a hundred percent and we've seen we have seen the stability of our deposit base.

Because we took a bit of a conservative approach, in my opinion, an appropriate approach to liquidity, we actually lowered our loan-to-deposit ratio in the second quarter. And so, we're well within the range. We don't have to add to that on the high-cost deposit front in order to maintain it. And to me, there's finally an emergence of a deposit trend that we think we...

We have seen a growth in our core commercial outside of government banking. The government banking dollars that we've seen run off of typically been collateralized, low margin deals, and that's over $300 million. We had an extraordinary one customer take $300 million. That was

a higher yielding customer. But when you put those two things together, those we believe are extraordinary events that frankly we aren't in a position to incur. And that's why we've seen that stability happen in May and June . We see it halfway through the month of July as well. And so when you pair customer satisfaction, when you pair that with customer growth, you do expect to get operating accounts with that. We are getting better and better at deepening.

but we can see very clearly that that mix shift has slowed in the last two months. And so we expect that to temper a bit each of the subsequent months as the year goes along.

Okay, okay, so then when we look at DDA as a percentage of total, you're at 20.5%, is this a floor or do you think we could still see that go lower from here? I couldn't call that a floor but...

I absolutely do not believe you'll see the pace that you saw in the previous two quarters. Okay. And then, as we look out a little further into 24 and when some of these brokered deposits come due, do you feel that the momentum that you just described earlier will be enough to be able to replace those with homegrown deposits or...

on because we think we still have continued opportunity to optimize our yields that way. I would not expect it as a percent of our balance sheet to grow.

to optimize our yields that way. I would not expect it as a percent of our balance sheet to grow.

disproportionately. So we do expect that the consumer side of the business will provide significant funding and

So the mix would be the same or decrease from where it is now. Okay, and then just finally for me, you know in the past you've talked about the the optionality of the auto program being able to you know, sort of ramp that up and ramp it down. You had growth this quarter. Would that be a lever you would use?

to offset either better than expected deposit flows or weaker than expected deposit flows? Or is that sort of the place you should be looking at making up slack or giving some opportunity?

We're not going to double down on auto and increase that rate to the point that it becomes too heavily concentrated. However, the idea all along is that we could decrease our reliance on third-party originated mortgages which are having less significant yield and are a non-relationship play. We're seeing very good yields on the the auto book as we're going along right now. They're also not one that's likely to refinance if you see rates go down in 12 months.

So, that puts us in a pretty decent position as well. What you will see from us, so I see those two as a bit of a trade-off, the third-party originated mortgages and auto. Over time then, we will dissect the balance sheet and look at expanding businesses that we have had some success in. So this is a slide, and it uses our curriculum and finds yourself just as successful as potentially even if you're moving north. Because at 100 percent, this is a state of the art experiment. We lost this in 2008, but Democrats yes, actually ran it in 2000 for about five years and one

We will look at that right now and come up with a plan heading into your end on that.

Great, thank you. Thank you. Thank you. Our next question comes from Scott Seifer with Piper Sandler. Please proceed with your question.

Thanks for taking the question. I guess I wanted to go back to the NII discussion for just a second. It sounds like a little bit more margin erosion, but at a much slower pace than certainly this quarter. I guess even if the margin hasn't bottomed, I think the updated guidance implies that the second half NII will have to average something around $7 million or so higher than the second quarter run rate.

I think we'll leave that. I think if you do the math, if that's what you're coming up with, we'll let it at that.

I think we have a range of growth on the asset side that is pretty good. If we think it comes in lighter, then we have options to be more efficient on the funding side.

got a range of growth on the asset side that is pretty good. And if we think that comes in lighter, then we have options to be more efficient on the funding side.

All right, perfect. And then Andy just wanted to discuss, I guess, in a bit more detail just sort of the tactical thinking on your appetite to lend. Your biggest competitors, you know, presumably they're going to be subject to this whole host of new capital and liquidity rules. So the biggest guys seem to be pulling back.

lending. Are there any areas where you guys similarly are pulling back in light of economic uncertainty or by I know you touched on a little in your opening remarks in specific areas but you know by contrast with the larger banks pulling back any areas where you think you you can take some market share if the pricing is good and your competitors are pulling back?

Yeah, that's a good question. You asked two different questions within there. I think, Scott, I think one was with regards to capital and I think you mentioned economic uncertainty. What I would take first is the economic uncertainty and tell you that.

We want to lend to people that can pay us back. And I know that sounds pretty basic, but when you look at almost 99% of our auto book being prime and super prime on the origination side, when you see the loan to value go down and the FICO go modestly up, even above around 780, I believe, in the last quarter.

We are looking at a pretty squeaky clean book. But in that place, there's some people that have pulled back there. We are dealing with prime, super prime borrowers, and we're getting a yield above 7%. So, this seems like a pretty good move for us. So, I'd say that's exactly what is happening in that area. We looked at our third party originated mortgages and in the markets that we're in, the yield...

you're on to something. So we will continue to try to look at that as a source for us to look at lower cost deposits, lower than wholesale funded, lower than FHLB funded, lower than government, high rate government deposits. So there are a few areas that are emerging for us because we've gotten into asset-based lending, equipment, finance and enhanced our commercial.

approach to business. And then finally I'd say just acquiring customers.

through visa v digital and mobile banking, we're seeing the percentage of customers coming through on our brand advertising campaign through digital increasing. They are modest and incremental numbers because we're testing and learning and making sure they're not falling off on the backside. So it's a lot of the things that we've talked about and the answer is yes, we do believe.

that we have an opportunity in the marketplace. That being said, we don't expect anything like the growth that we saw in the previous year in 2022. But that was by design to increase your capabilities so that you can continue to lend in the higher return areas as you de-emphasize some of the lower return areas. With regards to capital.

we feel like we're in a pretty good position as we shift, create that shift in what we're lending on, that of course you increase your capital vis-à-vis profitability. And right now we don't see a constraint on capital based on the way that we're approaching it, de-emphasizing some lower yield, emphasizing some higher yield. So we do think in with regards to regulatory, we're early innings, you know, we've heard

quotes from the OCC and seeing those out there and seeing that they thought it, you know, probably would be a big emphasis on the over 100 billion dollar banks. But it's a little too early to comment, I think, on what that's going to mean to the banks above us in size. Perfect.

Okay, good. I appreciate the thoughts. Thank you very much. Thank you.

Thank you, Scott. Thank you. Our next question comes from Terry McElvey with Stevens. Please proceed with your question.

Our next question comes from Terry McElvey with Stevens. Please proceed with your question. Good afternoon everyone. Good afternoon.

Hey Terry. The forward curve is implying lower rates next year. So as I look at your six billion dollars of brokered CDs and other time deposits, what's the repricing opportunity over the next kind of 12 or within 2024 with the assumption that rates are lower?

both depending on price and volume and appetite, either nine months, six months or shorter than that. And we started out very short. And then if you think about our specials for retail, it's largely centered on the seven-month CD. We had a couple other maturities, but...

most popular that we've been with the last couple months is seven months so we think of most of this all repricing between now and mid next year the majority of it okay and can you remind me the network transaction deposits that that's a hundred percent beta product

months. So we think of most of this all repricing between now and mid next year the majority of it. Okay and can you remind me the network transaction deposits that's a hundred percent beta product? Yes.

Okay and then maybe last question I don't want to overlook slide six Andy when you talk about the net growth and some of the deposit products maybe can you can you talk about on the consumer side are you getting are you the primary bank in this relationship our average you know how our average deposits looking and maybe expand a little bit on these new businesses and households that are partnering with associated

Sure. So, you know, I'll give the example of the Massa Fluent. The Massa Fluent is a segment where a large percentage of the deposits reside. And so, I mean, that is a primary deepening play within those within your existing customer base. But then it's also with new accounts that come in. So, when you look at that category for us...

what I'd seen coming into the bank was that we had an opportunity to deepen on the mass affluent side, we had an opportunity to deepen on the commercial side. I would say that those efforts are just happening right now. Now, it was almost impossible to see that in the second quarter of this year because of the extraordinary events that we had, which is exactly why I created page six, because we see the trends behind the trends as the dust settles, as the noise goes away. So...

have gotten better and better at that conversation. In fact, I see the early indicator, I saw the early indicator 90 days ago in our treasury management sales. That is not where you'll make or break the bank from a revenue standpoint, but it's an indication that you're having conversations inML.

on things that matter to the customer with regards to their liquidity. And when you have those conversations, you're typically able to deepen. We've seen that deepening follow from that. The other question comes up, do you want customer growth or do you want deposit growth? And the answer we have here is yes.

that matter to the customer with regards to their liquidity. And when you have those conversations, you're typically able to deepen. We've seen that deepening follow from that. The other question comes up, do you want customer growth or do you want deposit growth? And the answer we have here is yes. Thank you, Andy.

their liquidity and when you have those conversations you're typically able to deepen. We've seen that deepening follow from that. The other question comes up, do you want customer growth or do you want deposit growth? And the answer we have here is yes. Thank you, Andy. Thank you.

Thank you. Our next question comes from John Arstrom with RBC Capital Markets. Please proceed with your question. Good afternoon, guys. Hey, John . A couple of follow-ups and another, I guess, separate question, but why is attrition down, just following up on...

Terry's comments about that's why it's like why is attrition done and why are people not leaving? Yeah, that's a great question. The people stay for a lot of different reasons. It's great when you're nice It's also great when you're nice. It's really nice when you actually have a digital experience, which is the most used channel

And then it's really good when you have products and services they want and need and they start to deepen. And so when we launched our new digital platform, you always take a step back in satisfaction. It's just annoying to change. But we rebounded from that really quickly. In my experience, it usually takes six months. We started to see rebounding in 90 days. That was awesome. So once we did that, we were starting to get back to our previous levels.

But then people actually used it and they liked it. And so when they like it, we saw our branch satisfaction going up with the MassaFluent. The MassaFluent lets us speak to people in a language of what matters to you. When they answer that, we match them up with the product or service. They leave satisfied. They don't walk out the door. Your first year attrition improves.

when you get most of your people dealing with the channel they like. And by the way, we've had 100% up time on our digital channel since we launched it. We've not been down. This is what we promised when we went to this cloud-based solution and we've delivered on that. The number one thing somebody wants is when they pull out their phone and they log in, they want to see their balance and they do not want the system to be down.

we've delivered that. So as they're more satisfied, we haven't given them as many reasons to leave or we've given them more reasons to stay. So that's a pretty encouraging view on our side.

Okay, good. Slide four, you show some strong commercial growth from my point of view.

You're also talking about pipeline slowing a little bit, but it looks pretty good to me. I guess, I don't know if it's for you or Pat, but what's going on with your core commercial clients and what's driving that general commercial growth?

Do you want to take that, Pat? Sure. I think it's largely what Andy's focused on. We spent last year beefing up adding RMs and helping to really focus on where we're going to, what our key relationships are in our core client profile is.

You know, to an earlier point, we're not out chasing business and stretching. We haven't changed our credit box. So it's just a matter of, you know, getting more people on the street, talking to the clients we want to bank. And it's really kind of helped to generate. And while the pipeline is down, it's still a pretty, pretty solid opportunities that we're seeing.

Yeah, I'll just expand on that as well. This is Andy. You know, we've spoken to the quality of the RM and the fact that we've gotten them from almost every major competitor in the footprint, but the proof's in the pudding. And so now when you see Treasury management sales up, when you see pipelines continuing to grow,

the business and when you see your commercial deposits going up, we believe we've hired some really talented RMs and frankly we had some talented RMs in-house as well and so we've married those two and that's put us on a pretty good path.

Okay, good. And then last one for you, Pat, the slide 15 on credit. I agree, the numbers look very tame, but more curious what you're seeing in consumer credit and any themes and anything you're watching in consumer. It's a little tick up and non-accrual, but de minimus, but what are you seeing and what are you watching?

You know, we continue to watch delinquencies, we continue to watch payment trends, and to be honest, we've seen everything really remain flat and improve in some spots. Our residential ARM portfolio continues to improve from a delinquency standpoint.

As Andy mentioned, the indirect auto has done great. Credit card book, we're still trending positive there relative to pre-pandemic. From a consumer standpoint, we've been really happy with the production there, but I think it's a reflection of that prime and super prime focus.

I just just a quick piggyback on that. I mean, just the unemployment rate in state of Wisconsin is 2.4%. People are working. And when they work, they typically pay, especially if they're prime and super prime customers. So we watch closely the unemployment figures and delinquencies and the delinquency on page 15 actually shows a little bump up. But what it doesn't speak to is that we had

on a syndicated credit on the upstream, there's an administrative mix up or slip or slow down that stopped the payment from coming to us that accounted for about three basis points.

And so that's already been rectified in July . So essentially our delinquencies are flat.

And so that's already been rectified in July . So essentially, our delinquencies are flat. Okay, that's helpful. Thank you very much, guys.

Thank you. Thank you. Our next question comes from Brody Preston with UBS. Please proceed with your question. Good evening, everyone. Thanks for taking the questions.

Just a follow up, just what you just mentioned on that syndicated credit, was that what drove the increase in the...

commercial and business lending non accruals as well or is that something different? Not that one particular situation that the suit phrase Andy just talked about was just tied to the delinquency. The non accrual that was actually one other deal. It's a one-off transaction that we recognize in the quarter.

We're not seeing anything from a trend standpoint in the commercial book that would lead us to any other concerns going into Q3.

Got it, okay. And I did want to follow up on the 300 million of mass affluent deposit growth. I just wanted to ask if you had a sense for kind of what deposit categories that growth went into. You had good customer CD growth so I just wanted to know if it was kind of like leading with CDs or anything you any detail you can give us there.

in those categories.

Got it. Okay. And I did want to follow up.

And maybe just ask again on Scott's question from earlier on the NII guidance. I mean, just the math would dictate that if I take the low end of your NII guide, it implies that you, you know, need to earn $521 million in NII in the back half of the year, which is about $260 to $261 million.

per quarter just doing the simple math and so you know it implies a step up, but you know the margin It doesn't sound like we're going to call a bottom the NIBs You know we're not willing to say that they won't go down anymore I guess I'm just I'm struggling with the NII guidance just a little bit in light of those You know two issues You know so any any additional color you could provide around maybe the average earning asset base you

that's in your assumption or what could actually cause the back half of the year to exhibit the growth you need to hit the low end of the guidance would really be appreciated.

Yeah, it's looking at the 68% earning asset growth that we talked about and then margins similar to what we've been looking at.

Yeah, it's looking at the 68% earning asset growth that we talked about and then margins similar to what we've been looking at. Okay. What career tips do you use?

And maybe could I just ask on the auto and maybe the indirect CRE,

I just ask on on on the auto and maybe the the indirect CRE you know maybe talk to me a little bit about like

the funding those funding that loan growth and like what the incremental spread looks like it sounds like you're getting pretty good loan yields on the auto but just given that they don't come with those two categories historically haven't really come with much in the way of deposits just wanted to kind of get a sense for for how you're funding that and what the incremental spread looks like you know when you do fund that loan you

CNI loans. And so that's what our outlook is based on.

And then the performance of the back book and they pay down on fixed rate securities and auto loans from a couple years ago with much lower rates.

I'm not sure how to speak to this because new originated CRE is not a huge number right now, but what I would say is we're getting a very good margin on the deals that we're doing on CRE.

Got it. And you might. Yeah. And then there's the last one on on capital. You know, the credit metrics are

are totally benign here and I understand that. I just wanted to ask, you know, like when you do comp yourself against your peer group, you know, the CET1 is lower than, you know, I think where the peer group is. You know, it's probably justifiable based on the credit outlook, but is on your credit metrics, but is.

Hello.

What we've got in there now is the same range we had at the beginning of the year. It doesn't prohibit us from being higher than that, but if loan growth is at the higher end of what we've expected to then that's where we could come in.

Okay, great. Thank you very much for taking the questions, everyone. I appreciate it.

Thank you Brody. Our next question comes from Chris with KBW. Please proceed with your question.

Oh great, thanks. Maybe asking the prior question is a little bit different. You talked about growing the company and obviously that's the right strategy over time. With your stock at tangible book, is there a scenario where you would consider shrinking additional non-core assets and buying back your stocks? That won't be my priority in the immediate future.

We do have dollars set aside for stock repurchase, but that that would not be my intent for the rest of 2023 But to do that you do need toersize this body is not a good idea to conduct it. We can go back a little bit to think about this Okay

Thank you. And then Derek, I think you said it's 52%. That was a cycle to date beta. I want to make sure I heard that right and also what the updated thoughts are for full cycle. That's it.

Yeah, you did hear that right and we'd expect to be in the high 50s for the full cycle. Okay, great. Thanks. Thanks.

There are no further questions at this time. I would like to turn the floor back over to Andy for closing comments. Well, look, I'll just say this. We've come through the second quarter. There's reason for optimism and we appreciate the interest that you've all shown by being part of the call by following us and by having questions.