Q3 2023 Associated Banc-Corp Earnings Call
Speaker 1: Good afternoon, everyone, and welcome to Associate Bank Corp's third quarter 2023 earnings conference.
Good afternoon, everyone and welcome to associated Banc Corp's third quarter 2023 earnings Conference call. My name is Alicia and I'll be your operator today.
Speaker 1: My name is Alicia and I'll be your operator today. At this time, all participants are in a listen only mode.
At this time all participants are in a listen only mode.
Speaker 1: We will be conducting a question and answer session at the end of this conversation.
We'll be conducting a question and answer session at the end of this conference.
Speaker 1: Copies of the slides that will be referenced during today's call are available on the company's website at investors.associatebank.com. As a reminder, this call is not a
Copies of the slides that will be referenced during today's call are available on the company's website at investors thought associate bank dotcom.
As a reminder, this conference is being recorded.
Speaker 1: 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.
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.
Speaker 1: Associates' actual results could differ materially from the results anticipated or projected in any such forward-looking state.
Associates actual results could differ materially from the results anticipated or projected in any such forward looking statements.
Speaker 1: Additional detailed information concerning the important factors that could cause associates actual results to differ materially from the information discussed today is readily available on the SEC website in the risk factor sections of associates most recent Form 10-K and subsequent SEC filing.
Additional detailed information concerning the important factors that could cause associates actual results to differ materially from the information discussed today is readily available on the S. E C website and the risk factors sections of associates. Most recent Form 10-K, and subsequent S. E C filings.
Speaker 1: These factors are incorporated herein by reference.
These factors are incorporated herein by reference.
Speaker 1: For reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in the conference...
For a reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in the conference call.
Speaker 1: Please refer to pages 23 and 24 of the slide presentation and to page 10 of the press release financial tape.
Refer to pages 23, and 24 of the slide presentation and to page 10 of the press release financial people.
Speaker 1: Following today's presentation, instructions will be given for the question and answer session.
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 Harmonning, President and CEO , for opening remarks.
At this time I would like to turn the conference over to Andy Harmening, President and CEO for opening remarks. Please go ahead Sir.
Speaker 2: Well, good afternoon and welcome to our third quarter earnings call. I'm Andy Harmonin. I am joined once again by Derek Meyer, our Chief Financial Officer, and Pat Ahern, our Chief Credit Officer.
Well good afternoon, and welcome to our third quarter earnings call I'm, Andy Harmening I am joined once again by Derek Meyer, our Chief Financial Officer, and Patty or our Chief Credit Officer, I will start today by sharing some highlights for the quarter from there Derek to provide an update on margin income capital trends and then paddle.
Speaker 2: I will start today by sharing some highlights for the quarter from there. Derek provide an update on margin income capital Trends and then paddle share an update on credit.
Fair enough date on credit.
Speaker 2: Now, I mentioned back in July that we were starting to see renewed stability after a volatile spring. And what we saw here at Associated in the third quarter was a definitive continuation of those stabilizing trends. Employment trends remain very strong in our footprint. With most Midwestern states seeing unemployment below the national average and Wisconsin coming in below 3%. For more information, visit www.aclu.org
Now I mentioned back in July that we're starting to see renewed stability after a volatile spring and what we saw here at associated in the third quarter was a definitive continuation of those stabilizing trends employment trends remain very strong in our footprint with most mid western states seen unemployment below the national average in Wisconsin.
Johnson coming in below 3%.
Speaker 2: our prime and super prime retail customers remain resilient in the face of macro uncertainty.
Our prime and Super Prime retail customers remain resilient in the face of macro uncertainty.
Speaker 2: What this means for us is that we've been able to focus squarely on execution of our initiatives as we look to track and deepen customer relationships, optimize our balance sheet, and improve our profitability profile.
What this means for us is that we've been able to focus squarely on the execution of our initiatives as we look to track and deepen customer relationships optimize our balance sheet and improve our profitability profile.
Speaker 2: These initiatives have clearly taken hold in the face of challenging operating environments.
Initiatives have clearly taken hold in the face of challenging operating environments.
Speaker 2: On the asset side, we steadily added high quality consumer and commercial loan balances that enable us to rely less heavily on lower yielding non-relationship balances.
On the asset side, we steadily added high quality consumer and commercial loan balances that enable us to rely less heavily on lower yielding non relationship balances.
Speaker 2: on the funding side. The customer acquisition and attrition trends we shared for Q2 look even stronger in Q3.
On the funding side, the customer acquisition and attrition trends, we shared for Q2 look even stronger in Q3.
Speaker 2: Initiatives such as our new mass affluent strategy, product enhancements, and brand campaign are clearly having an impact. And that led to $527 million in core customer deposit growth during the third quarter.
Initiatives, such as our new mass affluent strategy product enhancements and brand campaign are clearly, having an impact and that led to $527 million in core customer deposit growth during the third quarter.
Speaker 2: This not only helps us fund our loan growth, but it enables us to decrease our reliance on wholesale and network funding sources now and in the future.
Not only helps us fund our loan growth.
It enables us to decrease our reliance on wholesale and network funding sources now and in the future.
Speaker 2: And finally, on the digital side, we've regularly upgraded our online and mobile experiences since we launched our new platform a year ago. These changes have contributed significantly to higher customer satisfaction scores and decreased customer attrition.
And finally on the digital side, we've regularly upgraded our online and mobile experiences since we launched our new platform a year ago. These.
These changes have contributed significantly to higher customer satisfaction scores and decreased customer attrition.
Speaker 2: And while we've continued to get traction since launching phase one of our strategic plan a little bit over two years ago, we haven't lost sight of what got us here in the first.
And while we've continued to get traction since launching phase one of our strategic plan a little bit over two years ago. We haven't lost sight of what got US here in the first place our foundational discipline on credit quality and expense management.
Speaker 2: our foundational discipline on credit quality and expense management.
Speaker 2: As the banking environment continues to evolve in the coming quarters, that discipline is going to remain front and center for us. It's also important that we're thoughtful about what comes next for Associated Bank as we look to set the bank up for long term.
As the banking environment continues to evolve in the coming quarters that discipline is going to remain front and center for US. It's also important that we're thoughtful about what comes next for associated Banc as we look to set the bank up for long term success.
Speaker 2: That's why our team is working hard putting the finishing touches on phase two of our strategic plan, which we look forward to sharing in more detail later this quarter.
That's why our team is working hard putting the finishing touches on phase two of our strategic plan, which we look forward to sharing in more detail later this quarter.
Speaker 2: With that, I'd like to highlight our results for the third quarter on slide two.
With that I'd like to highlight our results for the third quarter on slide two.
Speaker 2: Our third quarter results reflected the steady growth of our balance sheet and continued progress against our initiatives. As mentioned in the past, our stated goal is to fund the majority of our growth with core customer deposits.
Our third quarter results reflected the steady growth of our balance sheet and continued progress against our initiatives as mentioned in the past. Our stated goal is to fund the majority of our growth with core customer deposits. We grew these deposits meaningfully in 2022 and after a period of industry wide volatility in the first half of.
Speaker 2: We grew these deposits meaningfully in 2022. And after a period of industry-wide volatility in the first half of this year, core customer deposits grew by over $500 million here in Q3 as we continue to realize the impacts of our customer acquisition and relationship deepening initiative.
This year court customer deposits grew by over $500 million here in Q3, as we continue to realize the impacts of our customer acquisition and relationship deepening initiatives.
Speaker 2: This enabled us to pay down high cost non-customer funding sources like brokered CDs during the quarter.
This enabled us to pay down high cost non customer funding sources like brokered Cds during the quarter.
Speaker 2: on the loan side. All three of our major consumer and commercial loan segments once again saw net balance growth during the quarter led by growth in our auto finance business.
On the loan side, all three of our major consumer and commercial loan segments. Once again saw net balance growth during the quarter led by growth in our auto finance business with that said, it's clear that lending activity has slowed in most categories as compared to 2022.
Speaker 2: With that said, it's clear that lending activity has slowed in most categories as compared to 2022.
Speaker 2: Shifting to the income statement, funding costs continue to be a pressure point for the entire industry in this rate environment. Here at Associated, however, the pace of downward pressure on margin has slowed. In Q3, our NIM decreased by nine basis points to 2.71%.
Shifting to the income statement funding costs continue to be a pressure point for the entire industry in this rate environment here at associated however, the pace of downward pressure on margin has slowed in Q3, our NIM decreased by nine basis points to 2.71%.
Speaker 2: For the third quarter, we saw a slight increase in our non-interest income. Our third quarter non-interest income grew by 2% versus the prior quarter, partially offsetting the ongoing pressure on NII.
For the third quarter, we saw a slight increase in our noninterest income our third quarter noninterest income grew by 2% versus the prior quarter, partially offsetting the ongoing pressure on NII.
Yeah.
Speaker 2: And as always, we continue to monitor asset quality closely. Our net charge off ratio came in at 25 basis points for the quarter, as we added another 22 million in provision and held our ACLL ratio flat at 1.26%.
And as always we're continuing to monitor asset quality closely our net charge off ratio came in at 25 basis points for the quarter as we added another 22 million in provision and held our ACL ratio flat at 1.26%.
Speaker 2: While several key credit metrics have ticked up slightly compared to the prior quarter, we consider the data to be consistent with a gradual normalization to pre-COVID performance level.
While several several key credit metrics have ticked up slightly compared to the prior quarter. We considered the data would be consistent with a gradual normalization to pre COVID-19 performance levels, we have not seen anything to suggest trouble on the horizon for a specific industry or geography.
Speaker 2: We have not seen anything to suggest trouble on the horizon for a specific industry or geography.
Speaker 2: On slide three, we highlight our deposit trends for the third quarter. As you know, industry-wide volatility in the spring combined with an ongoing battle for deposits to create significant funding headwinds for the first half of the year.
On slide three we highlight our deposit trends for the third quarter as you know industry wide volatility in the spring combined with an ongoing battle for deposits to create significant funding headwinds for the first half of the year.
Speaker 2: While much of the volatility cleared up by June , short-term funding and liquidity pressures, combined with a mix shift in customer accounts, had a lingering impact on Q2 balance flows.
While much of the volatility cleared up by June short term funding and liquidity pressures combined with the mix shifting customer accounts had a lingering impact on Q2 balance flows.
Speaker 2: We continue to see some impact from a mix shift during the quarter, but the situation is largely stabilized, providing a clearer view of the impacts from our deposit gathering initiatives that started to take hold in 2022.
We continue to see some impact from mix shift during the quarter, but the situation is largely stabilized providing a clearer view of the impacts from our deposit gathering initiatives that started to take hold in 2022.
Speaker 2: During the quarter, we saw net growth in both consumer and commercial balances and core customer deposits as a whole grew by $527 million, or 2%.
During the quarter, we saw net growth in both consumer and commercial balances in core customer deposits as a whole grew by $527 million or 2%.
Speaker 2: This growth enabled us to decrease our reliance on higher cost network and broker deposits, which decreased by $418 million, or 8%, during the quarter.
This growth enabled us to decrease our reliance on higher cost network, and broker deposits, which decreased by $418 million or 8% during the quarter.
Speaker 2: As a reminder, our strategy is to fund our loan growth primarily with customer deposits. We expect to hold wholesale network funding levels in check as we move through the remainder of the year and into 2025.
As a reminder, our strategy is to fund our loan growth primarily with customer deposits. We expect the whole wholesale network funding levels in check as we move through the remainder of the year and into 2024, and we remain confident in our ability to fund our growth at a reasonable cost going forward based on our initiatives.
Speaker 2: and we remain confident in our ability to fund our growth at a reasonable cost going forward based on our initial.
Speaker 2: Based on year to date trends and current market conditions, we're affirming our guidance and continue to expect total core customer deposits to decrease by 3% for 2023, but increased by 2% in the back half of the year.
Based on year to date trends and current market conditions, we're affirming our guidance and continue to expect total core customer deposits to decrease by 3% for 2023, but increased by 2% in the back half of the year.
Speaker 2: On slide four, you can see that the deposit growth hasn't come by accident. As we've discussed previously, our team has been hard at work to enhance our offerings with an eye towards attracting new relationships, deepening existing relationships, and increasing retention.
On slide four you can see that the deposit growth hasnt come by accident as we've discussed previously our team has been hard at work to enhance our offerings with an eye towards attracting new relationships deepening existing relationships and increase increasing retention. It's.
Speaker 2: It's clear at this point our initiative has taken hold. Since 2022, we focused on upgrading product and surface offerings and have promoted these new offerings with a customer-centric brand strategy.
It is clear at this point our initiatives taking hold since 2022 we focus on upgrading product is surface offering offerings and I promoted these new offerings with a customer centric brand strategy.
Speaker 2: As of the third quarter, our consumer household acquisition rate was up 20% versus the same period a year ago, and our attrition rate was down seven.
As of the third quarter, our consumer household acquisition rate was up 20% versus the same period, a year ago, and our attrition rate was down 17%.
Speaker 2: Digital has also been instrumental to our success. And through the open architecture of our new platform, we've been able to move more quickly to deploy upgrades and enhancements to make our customers' lives easier. In a little more than a year since the platform launched, we've had 99.9% uptime, and have already made 11 customer-facing upgrades, leading to a multi-year high in customer satisfaction.
Digital has also been instrumental to our success and through the open architecture of our new platform, we've been able to move more quickly to deploy upgrades and enhancements to make our customers lives easier and a little more than a year since the platform launched we've had 99.9% uptime and I've already made 11 customer facing.
Upgrades, leading to a multiyear high in customer satisfaction scores.
Speaker 2: And finally, since launching a new mass effluent strategy to deepen relationships with high potential customers, we've already added over $550 million in net new deposits, nearly doubling our full year goal by September 30th. This growth represents a roughly 12% increase in our pre-launch basis.
And finally since launch in a new mass affluent strategy to deepen relationships with high potential customers, we've already added over $550 million and net new deposits nearly doubling our full year goal by September 30th this growth represents a roughly 12% increase in our prelaunch baseline.
Speaker 2: So as we've said, our plan is to fund our loan growth with core customer relationships, deposit relations.
So as we've said our plan is to fund our loan growth with core customer relationships deposit relationships and we steadily continued to execute this plan in the face of a challenging funding environment. As a result, we're bringing in new dollars and deepening relationships with a customer base that is more satisfying.
Speaker 2: And we've steadily continued to execute this plan in the face of a challenging funding period.
Speaker 2: As a result, we're bringing in new dollars and deepening relationships with a customer base that is more satisfied.
Speaker 2: Shifting to slide five, we've steadily added high quality loan balances to our portfolio with another 344 million added here in the third quarter. This marks the six consecutive quarters in which all three of our major loan segments have reported net growth.
Shifting to slide five we've steadily added high quality loan balances to our portfolio with another $344 million added here in the third quarter. This marks the sixth consecutive sixth consecutive quarters, which all three of our major loan segments have reported net growth.
Speaker 2: While growth has continued throughout the year, the pace of growth has slowed. And it's clear that pipelines have also slowed as customers make a more cautious approach in what appears to be a higher for longer rate environment.
While growth has continued throughout the year the pace of growth has slowed and it's clear that pipelines have also slowed as customers make a more cautious approach and what appears to be a higher for longer rate environment. During the third quarter. We again saw moderate growth in our auto finance portfolio, where we continue to focus squarely on <unk>.
Speaker 2: During the third quarter, we again saw moderate growth in our auto finance portfolio, where we continue to focus squarely on prime and super prime clientele. As a reminder, we do not intend to come disproportionately reliant on auto loans, but the portfolio continues to provide us a high-quality, yield-friendly option to diversify our consumer loan book away from lower-yielding, non-relationship assets such as third-party-originated...
I'm in Super Prime clientele as a reminder, we do not intend to come to disproportionately reliant on auto loans, but the portfolio continues to provide us a high quality yield friendly option to diversify our consumer loan book away from lower yielding non relationship assets such as third party originator.
Mortgage.
Speaker 2: on the commercial side. Our mortgage warehouse business led the way during Q3, but that's not something we would expect to become a theme.
On the commercial side, our mortgage warehouse business led the way during Q3, but that's not something we would expect to become a theme looking forward. It's clear that the lending environment has begun to slow for the industry, but we continue to seek selective growth that emphasizes relationships quality and diversification, while delivering accretive returns.
Speaker 2: Looking forward, it's clear that the lending environment has begun to slow for the industry, but we continue to seek selective growth that emphasizes relationships, quality, and diversification while delivering a creative return.
Speaker 2: This enables us to de-emphasize lower yielding non-relationship asset classes over time.
This enables us to deemphasize lower yielding non relationship asset classes over time.
Speaker 2: given the slowdown in the lending environment, we now expect total loan growth of between 5 and 6% for 2020.
Given the slowdown in lending environment, we now expect total loan growth up between five and 6% for 2023.
Speaker 2: So finally, on slide six, our team once again, paired solid revenues with diligent expense management during the third quarter.
So finally on slide six our team once again appeared solid revenues with Delek diligent expense management during the third quarter.
Speaker 2: given the funding pressures facing the industry, our PTPP income dipped to $125 million or $8 million lower than the second quarter.
Given the funding pressures facing the industry are P. T. P. P income dipped to $125 million or $8 million lower than the second quarter.
Speaker 2: But despite these funding pressures, our year-to-date PTPP income is $68 million higher in 2023 than it was in 2022, a 20% increase.
But despite these funding pressures our year to date P. T. P. P income is $68 million higher in 2023 than it was in 2022% to 20% increase.
Speaker 3: With that, I'll hand it over to Derek Meyer, Chief Financial Officer, to provide further detail on our margin, income statement, and capital trends for the quarter. Derek? Thanks, Andy. I'll start by highlighting our asset liability rate trends through the third quarter on slide seven.
With that I'll hand, it over to Derek Mire, Chief Financial Officer to provide further detail on our margin income statement and capital trends for the quarter. Derek Thanks, Andy I'll start by highlighting our asset and liability rate trends through the third quarter on slide seven.
Speaker 3: Our total asset yields have continued to rise due to rising rates and the repricing nature of a large segment of our loan book. Since the start of the rate cycle, total earning asset yields have increased by 277 basis points, or roughly 53% of the increase of Fed funds target rate over the same period.
Total asset yields and continued to rise due to rising rates and the repricing nature of a large segment of our loan book since the start of the rate cycle total, earning asset yields and increased by 277 basis points of roughly 53% of the increase in fed funds target rate over the same period.
Speaker 3: Commercial and CRE yields have grown the most as we continue to add new loans and categories such as asset based lending and equipment finance While our Sony rate back book continues to reprice higher.
Commercial and CRE yields and grown the most as we've continued to add new loans in categories, such as asset based lending and equipment finance, although Sony right back book continues to reprice higher.
Speaker 3: On the liability side, rising rates, liquidity pressures, and a mixed shift in customer deposits, it converged to create significant funding cost pressure for the whole industry.
On the liability side rising rates liquidity pressures and a mixed shifts in customer deposits. They converge to create significant funding cost pressure for the whole industry.
Speaker 3: While these pressures have stabilized meaningfully in Q3, they continue to pose a challenge for profitability in the near term.
While these pressures are stabilized meaningfully in Q3, they continue to pose a challenge for profitability in the near term.
Speaker 3: Beard associated interest bearing liability costs have now increased by 309 basis points since the fourth quarter of 2021.
Here at associated interest bearing liability costs. It now increased by 309 basis points since the fourth quarter of 2021.
Speaker 3: Specific to deposit betas, the S-curve we were planning to see in the rising rain environment has largely played out as expected. But the shape of the curve has steepened meaningfully in 2023 amid the funding cost pressures described previously.
Specific to deposit betas. The S curve, we were planning to see in a rising rate environment has largely played out as expected, but the shape of the curve has steepened meaningfully in 2023 mm in the funding cost pressures described previously.
Speaker 3: As such, our interest-bearing deposit beta has now climbed to roughly 56% since the start of the rate cycle.
As such our interest bearing deposit beta has now climbed to roughly 56% since the start of the rate cycle.
Speaker 3: Moving to slide eight, the funding cost pressures facing the industry combined to drive a nine basis point compression in our NIM and Q3. While pressures remain, we view this trend as a clear sign of stabilization compared to margin trends in the first half of the year.
Moving to slide eight the funding cost pressures facing the industry combined to drive a nine basis point compression in our name in Q3, while prices remain we view this trend as a clear sign of stabilization compared to margin trends in the first half of the year.
Speaker 3: This stabilization was also demonstrated by our dollar net interest income, which decreased by just $4 million after significant pressure in Q1 and Q2. As we mentioned previously, however, we're not relying solely on the rating environment to dictate our earnings going forward.
This stabilization was also demonstrated by our dollar net interest income, which decreased by just 4 million after significant pressure in Q1 and Q2.
As we've mentioned previously however, we're not relying solely on the rate environment to dictate our earnings going forward.
Speaker 3: We benefited from our natural asset sensitivity over the past couple of years as rates have risen, but we've also taken actions on both sides of the balance sheet to decrease that sensitivity and drive more durable interest income in future quarters.
We benefited from a national at natural asset sensitivity over the past couple of years as rates have risen, but we've also taken actions on both sides of the balance sheet to decrease that sensitivity and drive more durable interest income in future quarters.
Speaker 3: Whether it's adding high quality customer loans, core customer deposits, or lettering in interest rate hedges, these actions have been designed to provide our company with additional flexibility to maintain our performance through the cycle.
Whether it's adding high quality customer loans core customer deposits or Larry and interest rate hedges. These actions had been designed to provide our company with additional flexibility to maintain our performance during the cycle.
Speaker 3: As a reminder, we do not intend to call the peak on the interest rate environment in the near term, but we will continue to take reasonable steps over time to manage our asset sensitivity and downside rate risks.
As a reminder, we do not intend to call. The peak on the interest rate environment in the near term, but we will continue to take reasonable steps over time to manage our asset sensitivity and downside rate risk.
Speaker 3: As you can see on the right-hand side of this slide, these efforts have gradually decreased our ISO sensitivity over the past several quarters. We expect to continue benefiting in a rising rate or higher for longer scenario, but we're also better positioned for an eventual decrease in rates over time.
As you can see on the right hand side of this slide these efforts and gradually decrease our asset sensitivity over the past several quarters.
We expect to continue benefit in a rising rate higher for longer scenario, but we're also better positioned for an eventual decrease in rates over time.
Speaker 3: The macro-oblig remains uncertain, but based on our current expectations for balance sheet growth.
The macro outlook remains uncertain, but based on our current expectations for balance sheet growth.
Speaker 3: deposit betas and Fed action, we now expect net interest income growth of between 8 and 10 percent in 2023.
Deposit betas and fed action, we now expect net interest income growth of between eight and 10% in 2023.
Speaker 3: On slide 9, we continue to manage our securities book in the third quarter to remain within our 18 to 20 percent target. Since the third quarter of 2022, the yield on our securities book has risen by 74 basis points, but we've continued to reign in our durations to reduce our longer-term rate risk.
On slide nine we continue to manage our securities book in the third quarter to remain within our 18% to 20% target.
Since the third quarter of 2022, the Uva Securities book has risen by 74 basis points, but we've continued to rein in our durations to reduce that longer term rate risk.
Speaker 3: After adjusting our CET1 capital ratio to include the impacts of AOCI, this impact would have represented a 101 basis point hit to CET1 in the third quarter. This impact is up slightly from the prior quarter, primarily driven by the rebounding rate.
After adjusting our CET one capital ratio and to include the impacts of the OCI. This impact would have represented a 101 basis point hit to <unk> 81 in the third quarter.
This impact is up slightly from the prior quarter, primarily driven by the rebound in rates.
Speaker 3: As a percentage of total assets, our investment, security, and cash positions were maintained to roughly 20% for the second straight quarter. We continue to target investments to total assets of between 18% and 20% in 2023.
As a percentage of total assets, our investment security and cash positions were maintained at roughly 20% for the second straight quarter, we continue to target investments to total assets of between 18 and 20% in 2023.
Speaker 3: On slide 10, we highlight our not interest income trends.
On slide 10, we highlight our noninterest income trends, despite the downward pressure from market driven headwinds in adjustments to our fee structure noninterest income grew modestly for the third straight quarter and landed at $67 million.
Speaker 3: Despite the downward pressure for market-driven headwinds and adjustments to our fee structure, non-interest income grew modestly for the third straight quarter and landed at $67 million.
Speaker 3: The primary factors for the quarter over quarter increase were a $1 million increase in asset gains and modest increases in service charges and deposit account fees and wealth management.
The primary factors for the quarter over quarter increase were $1 million increase in asset gains and modest increases in service charges and deposit account fees and wealth management fees.
Speaker 3: With that said, we continue to expect total 2023 non-interest income to contract by between 8 and 10% versus 2022.
With that said, we continue to expect total 2023 noninterest income to contract by between eight and 10% versus 2022.
Speaker 3: As a reminder, this anticipated compression is driven by current market dynamics and moderation in deposit account fee income due to OD NSF changes we made in the back half of 2022.
As a reminder, this anticipated compression is driven by current market dynamics and moderation in deposit account fee income due to Oh D. NSF changes, we made in the back half of 2022.
Speaker 3: Moving to slide 11, our third quarter expenses increased by 3% versus the prior quarter, but were flat with the same period a year ago. We continue to make targeted investments in people and technology to support our initiative.
Moving to slide 11, our third quarter expenses increased by 3% versus the prior quarter, but were flat with the same period a year ago.
We continue to make targeted investments in people and technology to support our initiatives, our FTE efficiency ratio rose to 58.5% during the quarter, but it remains 29 basis points below lower than the same period a year ago.
Speaker 3: Our FTE efficiency ratio rose to 58.5% during the quarter, but it remains 29 basis points lower than the same period a year ago. Additionally, our non-interest expense basis remained below 2% as a percent of average assets and is now down 18 basis points from the same period last year.
Additionally, our noninterest expense bases remained below 2% as a percentage of average assets and is now down 18 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. On an ongoing basis, we will continue to pursue opportunities to optimize our expense base where possible.
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.
On an ongoing basis, we will continue to pursue opportunities to optimize our expense base where possible.
Speaker 3: With that in mind, we expect total non-interest expense growth in between 3% and 4% in 2023, but would note that this number excludes the impact of any non-recurring items incurred in the fourth quarter, such as FDIC's Special Assessment.
With that in mind, we expect total noninterest expense growth of between 3% and 4% in 2023, but would note that this number excludes the impact of any nonrecurring items incurred in the fourth quarter, such as FDIC Special assessment.
Speaker 3: Shifting to slide 12, we continue to prioritize paying a competitive dividend and funding organic growth while managing capital levels towards the target region.
Shifting to slide 12, we continue to prioritize paying a competitive dividend and funding organic growth, while managing capital levels towards the target ranges.
Speaker 3: Here in the third quarter, our capital ratios grew versus the prior quarter and versus year-end 2022. We remain comfortable with our capital levels as we look out over the remainder of the year.
During the third quarter, our capital ratios grew versus the prior quarter and versus year end 2022.
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 at the 6.75 to 7.25 range by year end.
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 that 675% to seven to five range by year end.
Speaker 3: We've increased the upper end of our CET1 target range, and are now targeting a range of 9 to 9.75.
We've increased the upper end of our CET, one target range and are now targeting a range of nine to $9 75.
Speaker 3: I'll now hand it over to our Chief Credit Officer, Pat Aherne, to provide an update on credit quality.
I'll now hand, it over to our Chief Credit Officer, Pat her and to provide an update on credit quality.
Speaker 4: Thanks, Derek like to start on slide 13 with an update on our allowance trends.
Thanks, Derek I'd like to start on slide 13, with an update on our allowance trends, we utilized the Moody's August 2023, basically and forecasts for our Cecil forward looking assumptions the Moody's baseline forecast remains consistent with a resilient economy. Despite the high interest rate environment does.
Speaker 4: We utilize the Moody's August 2023 baseline forecast for our CECL forward-looking assumptions. The Moody's baseline forecast remains consistent with a resilient economy despite the high interest rate environment. The baseline forecast contains no additional rate hikes, slower but positive GDP growth rates, a cooling labor market, and a continued deceleration of inflation.
Basically I'd forecast contains no additional rate hikes slower, but positive GDP growth rates, a cooling labor market and a continued deceleration of inflation.
Speaker 4: Our ACLL increased by $4 million during the quarter to $381 million.
Our ACL L increased by $4 million during the quarter to $381 million.
Speaker 4: Our allowance continues to be driven by a combination of portfolio loan growth, nominal credit movement, and general macroeconomic trends that reflect the stability of our Midwest footprint.
Our allowance continues to be driven by a combination of portfolio loan growth nominal credit movement in general macroeconomic trends that reflect the stability of our Midwest footprint.
Speaker 4: Accordingly, our reserves to loans ratio remained flat to the prior quarter and six basis points higher than the same period a year ago at 1.26 percent.
Accordingly, our reserves to loans ratio remained flat to the prior quarter and six basis points higher than the same period, a year ago at $1 two 6%.
Okay.
Speaker 4: Moving to slide 14, quarterly credit trends remain relatively stable across the portfolio during the 3rd quarter, with migration reflecting a broad based normalization in portfolio performance.
Moving to slide 14 quarterly credit trends remained relatively stable across the portfolio during the third quarter with migration, reflecting a broad based normalization and portfolio performance.
Speaker 4: We did see moderate increases in non-accrual loans, delinquencies, and charge-offs during the third quarter, but as previously discussed, we anticipated these shifts as a sign of normalization back to pre-pandemic levels as opposed to an indication of broader issues in the portfolio.
We did see moderate increases in non accrual loans delinquencies and charge offs during the third quarter, but as previously discussed we anticipated. These shifts is a sign of normalization back to pre pandemic levels as opposed to an indication of broader issues in the portfolio.
Speaker 4: As Andy mentioned, we have not seen anything to suggest a pattern of credit stress in a specific industry or geography.
As Andy mentioned, we have not seen anything to suggest a pattern of credit stress in a specific industry or geography.
Speaker 4: We added another $22 million in provision during the third quarter, which matches our second quarter provision build and is consistent with the past four quarters. As mentioned, this provision build was largely a function of loan growth, limited credit movement, and macro trends.
We added another 22 million in provision during the third quarter, which matches our second quarter provision build and is consistent with the past four quarters. As mentioned this provision build was largely a function of loan growth limited credit movement and macro trends.
Speaker 4: We remain focused on monitoring the uncertainty of 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 ongoing interest rate sensitivity analysis bank-wide.
We remain focused on monitoring the uncertainty of the Macroeconomy to ensure current underwriting reflects elevated inflation supply chain disruption and labor cost 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 <unk>.
Ongoing interest rate sensitivity analysis bank wide.
Speaker 4: Going forward, we expect any provision adjustments to continue to reflect changes to risk rates, economic conditions, loan volumes, and other indications of credit quality.
Going forward, we expect any provision adjustments to continue to reflect changes to risk grades economic conditions loan volumes and other indications of credit quality.
Speaker 4: On slide 15, I'll remind you that our 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 and a focus on prime and super prime consumer portfolio.
On slide 15, I'll remind you that our 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 and a focus on prime and Super Prime consumer portfolio.
Speaker 4: While CRE has been cited as an area of risk in the media over the past several quarters, we feel well positioned given the conservative approach we've applied across the bank.
Well CRE has been cited as an area of risk in the media over the past several quarters, we feel well positioned given the conservative approach, we've applied across the bank and.
Speaker 4: In building our CRE portfolio, we focused on partnering with well-known developers in stable Midwest markets.
In building, our CRE portfolio, we focused on partnering with well known developers and stable Midwest markets.
Speaker 4: Over two-thirds of our portfolio is based in the Midwest, with an emphasis on multifamily and industrial property.
Over two thirds of our portfolio is based in the Midwest with an emphasis on multifamily and industrial properties.
Speaker 4: Office loans represent just 3.4% of our total loans as a bank, and within that portfolio, we are weighted towards suburban Class A property.
Office loans represent just three 4% of our total loans as a bank and within that portfolio, we are weighted towards suburban class a properties.
Speaker 4: While we feel well positioned given our business model approach and the markets we operate in, we continue to monitor this and all of our portfolios closely.
While we feel well positioned given our given our business model approach in the markets. We operate in we continue to monitor this in all of our portfolios closely.
Speaker 2: With that, I will now hand it back to Andy to share some closing thoughts. Thank you. I'd like to close out by reiterating a couple key points from our presentation on slide 6.
With that I will now hand, it back to Andy to share. Some closing thoughts. Thank you I'd like to close out by reiterating a couple of key points from our presentation on slide 16, first we've set ourselves up to drive quality relationship focused loan growth that decreases our reliance on lower yielding non relationship balances.
Speaker 2: first. We've set ourselves up to drive quality relationship focused lung growth that decreases our reliance on lower yielding non-relationship balances and enhances our profitability.
And enhances our profitability profile.
Speaker 2: However, given the recent slowdown in the lending environment, we now expect total loan growth of between 5 and 6 percent in 2023.
However, given the recent slowdown in the lending environment. We now expect total loan growth of between five and 6% in 2023.
Speaker 2: The deposit environment is clearly stabilized following a volatile first half of the year.
Second.
The deposit environment has clearly stabilized fallen a volatile first half of the year.
Speaker 2: stabilized environment combined with our deposit initiatives, drove strong core customer deposit growth in the third quarter. With that said, we're leaving our guidance unchanged for the full year, given the seasonality we typically see imbalanced flows as we approach your end.
A stabilized environment combined with our deposit initiatives drove strong core customer deposit growth in the third quarter with that said, we're leaving our guidance unchanged for the full year given the seasonality. We typically see imbalance flows as we approach year end.
Speaker 2: Shifting to revenue, we've adjusted our most recent forecasts for balance sheet growth, deposit betas, and rate environment. We now expect to deliver net interest income growth between 8 and 10 percent in 2023.
Shifting to revenue we've adjusted our most recent forecast for balance sheet growth deposit betas and rate environment. We now expect to deliver net interest income growth between eight and 10% in 2023 and.
Speaker 2: And lastly, our disciplined approach to expenses remains a foundational focus for our company. As such, we are maintaining our non-interesting expense guidance for the year, but would note that this guidance excludes non-recurring items incurred in Q4, such as the FDIC's special assessment. With that, let's open up for questions.
And lastly, our disciplined approach to expenses remains a foundational focus for our company as such we are maintaining our noninterest expense guidance for the year, but would note that this guidance excludes nonrecurring items incurred in Q4, such as the FDIC Special assessment.
With that let's open up for questions.
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Operator: Good afternoon everyone, and welcome to Associated Banc-Corp's 3rd 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.
One moment, please while we poll for questions.
Thank you.
Operator: We will be conducting a question-and-answer session at the end of this conference. Copy of the slides that will be referenced during today's call are available on the company's website at investors.associatedbank.com. As a reminder, this conference is being recorded. As outlined on slide 1, during the course of the discussion today, management may make statements that constitute projections, expectations, beliefs, or similar forward-looking statements. Associated actual results put differ materially from the results anticipated or projected in any such forward-looking statements.
First question comes from the line of Daniel Tamayo with Raymond James. Please proceed with your question.
Hi, good afternoon everybody.
Hmm maybe first.
Speaker 4: Just on the non-accruals, the increase in CNI, I know you mentioned there was not really a pattern to that increase, but if it's just a normalization of credit costs, I'm just curious how you're thinking about what we should or how we should be thinking about what normalization of net charge-offs or even provision could look like.
Just on the on the non accruals I and the increase in C&I. I know you mentioned there was not really a pattern that took to that increase but.
If it's just a normalization of credit costs I'm just.
Curious, how youre thinking about what what we should or how we should be thinking about what what normalization of.
Net charge offs or or even a provision could look like thanks.
Operator: Additional detailed information concerning the important factors that could cause associates' actual results to differ materially from the information discussed today is readily available on the SEC website in the Risk Factor sections of Associated Most Recent Form 10K and subsequent SEC filings. These factors are incorporated herein by reference. For reconciliation of the non-GAP financial measures to the GAP financial measures mentioned in the conference call, please refer to pages 23 and 24 of the slide presentation and to page 10 of the press release financial tables.
Speaker 4: I would say, you know, in terms of net charge off.
I would say in terms of net charge offs.
Speaker 4: You know, we saw a little bit of a spike this quarter, but I think, you know, last quarter was probably a little more normal than what we saw this quarter. I think these are just a handful of things. I think, you know, not accruals could be, you know, going forward. We're going to watch as credits normalize back, you know, where they settle at, you know, it's hard to say right now.
We saw a little bit of a spike this quarter, but I think last quarter was probably a little more normal than what we saw this quarter. I think these are just a handful of things I think are non accruals. It could be you know going forward, we're going to watch us as credits normalize back.
Where there where they settle at you know it's hard to say right now.
Speaker 4: And for provision, we're probably pretty consistent over the last couple of quarters, and I would expect similar pattern.
And for provision you know, we're probably pretty consistent over the last couple of quarters and I would expect similar similar pattern.
Okay great.
And then.
Operator: Following today's presentation, instructions will be given for the question-and-answer session.
Speaker 5: Looking at the loan growth, I'm just curious what the thought is in terms of future loan growth, where that might come from. And then if you could touch on where new loan yields are for those categories, that'd be helpful.
Looking at the loan growth I'm just curious.
What the the the thought is in terms of future loan growth where that might come from and then you know if you could touch on where new loan yields are for those categories that'd be helpful.
Andy Harmening: At this time, I would like to turn the conference over to Andy Harmoning, President and CEO for Open remarks. Please go ahead, sir.
Andy Harmening: Well, good afternoon and welcome to our third quarter earnings call. I'm Andy Harmoning. I am joined once again by Derek Meyer, our Chief Financial Officer, and Patty Hurn, our Chief Credit Officer. I will start today by sharing some highlights for the quarter from there, Derek provided an update on margin, income, capital trends, and then Pat will share an update on credit. Now, I mentioned back in July that we were starting to see renewed stability after a volatile spring.
Speaker 3: This is Derek. So obviously the auto has been pretty steady. And we expect that to continue. We haven't we haven't moved the credit box.
Yeah. This is Derek so obviously the auto has been a.
Pretty steady and we expect that to continue we haven't we haven't moved up the credit box is getting bigger. So you would normally expect the rate of growth to drop but we also expanded into our footprint states and so the the dollar increases is alright.
Speaker 3: It's getting bigger, so you would normally expect the rate of growth to drop, but we also expanded into our...
Speaker 3: footprint state and so the dollar increases is steady.
Speaker 3: I think this quarter, like most quarters, we expected balanced growth.
Steady.
Andy Harmening: And what we saw here to associate in the third quarter was a definitive continuation of those stabilizing trends. Employment trends remain very strong in our footprint. With most Midwestern states seen unemployment below the national average and Wisconsin coming in below 3%. Our prime and super prime retail customers remain resilient in the face of macro uncertainty. What this means for us is that we've been able to focus squarely on execution of our initiatives as we look to track and deepen customer relationships, optimize our balance sheet, and improve our profitability profile.
I think this quarter, we like most quarters, we expect that balanced growth.
Speaker 3: So you would have, we would have in our prior guidance that we just took down, expected similar growth in CNI.
So you would have we would have in our prior guidance that we just took down expected similar growth in C&I.
Speaker 3: And while we continue to have more new names this year.
And while we continue to have more new names this year.
Speaker 3: and grow that year over year because of our our emirates, we saw the back of our pipeline not replenish and pull through into additional fundings at the pace we saw earlier in the year. And so that has pulled through in our guidance.
And grow that year over year because of our RM hires we saw the back of our pipeline not replenish and pull through.
Into additional fundings at the pace, we saw really in the ear and so that has pulled through into our guidance.
Speaker 3: And then we'll think about how we position that for next year when we give 2024 guidance. We really haven't been sharing new production yields.
And then we'll think about how we position that for next year, Let me give a 'twenty 'twenty four guidance, we really haven't been sharing our new production yields.
Andy Harmening: These initiatives have clearly taken hold in the face of challenging operating environments. On the asset side, we steadily added high quality consumer and commercial loan balances that enable us to rely less heavily on lower yielding non relationship balances. On the funding side, the customer acquisition and attrition trends we shared for Q2 look even stronger in Q3. Initiatives such as our new mass affluent strategy, product enhancements, and brand campaign are clearly having an impact, and that led to $527 million in core customer deposit growth during the third quarter.
Speaker 2: So I won't go there, but that's how things are materializing. But I'll say, Daniel, this is Andy. With regards to portfolio growth, it's important to know where you're growing and where you're not, and where we're not growing is on the third-party-originated mortgages, and that by far has been the lowest-yielding portfolio that we have.
<unk>.
So I won't go there, but that's that's how things are and then materializing, but I'll say Daniel This is Andy yeah with regards to portfolio growth, it's important to know where you're going and where you're not and where we're not growing is on the third party originated mortgages and that by far has been the lowest yielding portfolio that we have so.
Speaker 2: So when we stopped origination of that portfolio, which in its peak, I believe in 2020, was just around a billion and a half dollars in production, and then a billion, and then we shut it down.
When we when we stopped origination of that portfolio, which in its peak I believe in 2020 was just around 1 billion and a half dollars in production than a $1 billion and then we shut it down.
Speaker 2: So basically you'll see a run off on the balance sheet or decrease in that category, which means that our residential real estate most likely won't grow at the pace of the market.
Andy Harmening: This not only helps us fund our loan growth, but it enables us to decrease our alliance on wholesale and network funding sources now and in the future. And finally, on the digital side, we've regularly upgraded our online and mobile experiences since we launched our new platform a year ago. These changes have contributed significantly to higher customer satisfaction scores and decreased customer attrition. And while we've continued to get traction since launching phase one of our strategic plan, a little bit over two years ago, we haven't lost sight of what got us here in the first place.
So basically youll see a run off on the balance sheet, a decrease in that category, which means that our residential real estate most likely won't grow at the pace of the market. We believe that over time, we'll be able to replace that with quality CNI business today, clearly CRE as a.
Speaker 2: We believe that over time we'll be able to replace that with quality CNI business.
Speaker 2: Today, clearly, CRE is a very stable low to no growth category, although paydowns have been a little bit slow. So I think over time, you'll see that in the CNI. With regards to fourth quarter numbers, we just took a hard look at our pipeline. And we also took a hard look at relationships that may not have a thanks to our hyd Institute leadership as part of our Broken C centre, which really is our take-out bracket. With this being a major step, there was a big difference in the number of numbers that we returned across in term of the accumulation in terms of, Leaf p,ica L, Evergreen.
Very stable.
Low to no growth category, although paydowns have been a little bit slow. So I think over time, you'll see that in the C&I with regards to fourth quarter numbers. We we just took a hard look at our pipeline and we also took a hard look at relationships that may not have be full relationships and so.
Andy Harmening: Our foundational discipline on credit quality and expense management. As a bank environment continues to evolve in the coming quarters, that discipline is going to remain front and center for us. It's also important that we're thoughtful about what comes next for associated bank as we look to set the bank up for long-term success. That's why our team is working hard putting the finishing touches on phase two of our strategic plan, which we look forward to sharing in more detail later this quarter.
Speaker 2: be full relationships. And so we won't extend or be aggressive in those that are lower yielding and those that are not full relationships. And usually those are tied together. So that's a little bit of the reason that we've adjusted the year end forecast on full growth.
We we won't extend or or be aggressive in those that are lower yielding and those that are not full relationships and usually those are tied together. So that's a little bit for the re of the reason that we've we've adjusted the the year end forecast on on full growth.
Speaker 5: Okay, that's helpful. And then just lastly, a high level question. You touched on third party origination mortgages. But I guess just just for that asset class overall, can we thought about or would it? Is there a way that it might make sense to sell perhaps some of those, some of those loans to kind of reset the margin to a certain extent? Or is there a
Okay. That's helpful. And then just lastly at a high level question you touched on third party origination mortgages.
Andy Harmening: With that, I'd like to highlight our results for the third quarter on slide two. Our third quarter results reflected the steady growth of our balance sheet and continued progress against our initiatives. As mentioned in the past, our state of goal is to fund the majority of our growth with core customer deposits. We grew these deposits meaningfully in 2022. After a period of industry-wide volatility in the first half of this year, core customer deposits grew by over $500 million here in Q3 as we continue to realize the impacts of our customer acquisition and relationship deepening initiatives.
But I guess, just just for that asset class overall.
Have you thought about or or would it is there.
The way that it might make sense to sell perhaps some of those some of those loans to kind of reset the margin to it to a certain extent or if there is there are.
Speaker 5: a break-even point or a place where rates could get to where that could be more attractive.
A a breakeven point or a place where rates could get to where that.
It could be more attractive.
Speaker 2: Well, I mean, Danny, you know, it's been a pretty interesting market the last six months. And so over that period of time, we've looked at every loan category, we've looked at every security, we've looked at tranches of tranches. And what I would say is we know our portfolio as well as we could know it right.
Well I mean data you know its been a pretty interesting market. The last six months and so over that period of time, we've looked at every loan category. We've looked at every security we've looked at tranches of tranches and what I would say is we know our portfolio as well as we could know it right now.
Andy Harmening: This enabled us to pay down high cost non-customer funding sources like brokerage CDs during the quarter. On the loan side, all three of our major consumer and commercial loan segments once again saw net balance growth during the quarter, led by growth in our auto-finance business. With that said, it's clear that lending activity has slowed in most categories as compared to 2022. Shifting to the income statement, funding costs continue to be a pressure point for the entire industry in this rate environment.
Speaker 2: If there comes a time when there's an opportunity in one of those tranches, we'll be prepared for that. Right now, we're not prepared to speak to that. Okay, thank you for all.
There comes a time when there's an opportunity in one of those tranches will be prepared for that right now we're not prepared to speak to that.
Okay.
Thank you for all the color.
Thank you.
Thank you.
Next question comes from John Armstrong with RBC capital markets. Please proceed with your question.
Hey, Thanks, good afternoon.
Andy Harmening: Here at Associated, however, the pace of downward pressure on margin has slowed. In Q3, our Nim decrease by nine basis points to 2.71%. For the third quarter, we saw a slight increase in our non-interest income. Our third quarter non-interest income grew by 2% versus the prior quarter, partially offsetting the ongoing pressure on NII. And as always, we're continuing to monitor asset quality closely. Our net charge-off ratio came in at 25 basis points for the quarter as we added another 22 million in provision and held our ACLL ratio flat at 1.26%.
Speaker 6: Hey, John . Hey, I'm looking at slide eight. And I don't know if this is Derek or Andy, but it can you talk about just the cadence of when you think your margin might bottom out? I mean, when I look at slides eight and slide seven, it sure seems like
Hey, John.
Looking at slide eight and I don't know if this is derek or Andy but.
Can you talk about just the cadence of when you think your margin might bottom out I mean, when I look at slide eight and slide seven it sure seems like some of the pressure on interest bearing liabilities is starting to fade, a little bit and you're getting the asset repricing, but.
Speaker 6: some of the pressure on interest-bearing liabilities is starting to fade a little bit and you're getting the asset repricing. Would you guys say we're at or near a bottom on your margin?
Did you guys see where we're at or near a bottom on your margin.
Speaker 2: Well, John , it's a good question. I can tell you I feel a lot more certainty than I did on March 10.
Well, John it's a it's a good question I can tell you I feel a lot more certainty than I did on March 10th when we look at the last few months, it's been pretty interesting. The one encouraging sign several encouraging signs I would say is we've seen a decrease I talked about the decrease in attrition that we've experienced that.
Speaker 2: When we look at the last few months, it's been pretty interesting. The one encouraging sign, several encouraging signs, I would say is we've seen a decrease. I talked about the decrease in attrition that we've experienced. That helps us understand what the volatility is going to be. We've seen a, I think we're pretty near the bottom on our non-interest bearing deposit.
Andy Harmening: While several key credit metrics have ticked up slightly compared to the prior quarter, we consider the data to be consistent with a gradual normalization to pre-COVID performance level. We have not seen anything to suggest trouble on the horizon for specific industry or geography.
<unk> us understand what the volatility is going to be we've seen a I think we're pretty near the bottom on our noninterest bearing deposit.
Andy Harmening: On slide three, we highlight our deposit trends for the third quarter. As you know, industry-wide volatility in the spring combined with an ongoing battle for deposits to create significant funding headwinds for the first half of the year. While much of the volatility cleared up by June, short-term funding and liquidity pressures combined with a mix-shifting customer accounts had a lingering impact on Q2 balance flows. We continue to see some impact from a mix-shifter in the quarter, but the situation is largely stabilized, providing a clearer view of the impacts from our deposit-gathering initiatives that started to take hold in 2022.
Speaker 2: percentage. You know, we don't see it going down significantly from where it is. And that slowdown that we saw this quarter, we actually expect it to slow down again in the fourth quarter. And that's why we have confidence that we're getting near.
Percentage you know, we we don't see it going down significantly from where it is and that slowdown that we saw this quarter, we actually expect it to slow down again in the fourth quarter and that's why we have confidence that where we're.
Getting near a bottom we think knowing that that noninterest bearing is where it is and then the question becomes what what is your asset growth.
Speaker 2: we think knowing that that non-interest bearing is where it is, then the question becomes, what is your asset growth? What can you put on at higher yields? And that's what is to be determined what the market will allow. We won't force it. We're not gonna force growth for growth's sakes as we go into the end of this year and the beginning of next year, but we think there will be some modest growth out there for us. When you put that in at higher yields, that of course takes the place of.
Can you put on at higher yields and and that's what is to be determined what the market will allow we won't force. It we're not going to force a growth for growth's sake as we go into the end of this year and the beginning of next year, but we think there will be some modest growth out there for us when you put that in at higher yields that of course takes the place of.
Andy Harmening: During the quarter, we saw net growth in both consumer and commercial balances and core customer deposits as a whole, grew by $527 million or 2%. This growth enabled us to decrease our reliance on higher-cost network and broker deposits, which decreased by $418 million or 8% during the quarter. As a reminder, our strategy is to fund our loan growth primarily with customer deposits. We expect a whole wholesale network funding levels in check as we move through the remainder of the year and into 2024, and we remain confident in our ability to fund our growth at a reasonable cost going forward based on our initiatives. Based on year-to-date trends and current market conditions, we're affirming our guidance and continuing to expect total core customer deposits to decrease by 3% for 2023, but increased by 2% in the back half of the year.
<unk>.
Speaker 2: creates less pressure on that margin. So we expect the margin pressure to continue to decrease in the fourth quarter. We do believe that in 2024, we will see an inflection point in there. Of course, it's based on multiple variables, but the number one positive that I see right now is hitting a terminal number, getting close to the terminal number on non-interest-bearing deposits.
But creates less pressure on that margin. So we expect the margin pressure to continue to decrease in the fourth quarter. We do believe that in 2024, we will see an inflection point.
Point in there of course, it's based on multiple variables, but the number one positive that I see right now is hitting a terminal.
Number getting close to the terminal number on noninterest bearing deposits yeah. Okay. Yeah, I don't think so.
Speaker 7: Yeah, OK. Yeah, that was OK. Not allowed to add for my stamp.
From my standpoint.
Speaker 6: Okay, that's helpful though. Slide three on the customer CDs versus brokered CDs.
Okay.
That's helpful fly.
Slide three on the customer Cds versus brokerage Cds.
Speaker 6: You talk a little bit about what you did there and how you attracted the customer CD balances and should we expect more of that in the next couple of quarters?
Hmm.
Can you talk a little bit about what you did there.
And how you attract the customer CD balances and should we expect more of that.
Andy Harmening: On slide 4, you can see that the deposit growth hasn't come by accident. As we've discussed previously, our team has been hard at work to enhance our offerings with an eye towards attracting new relationships, deepening existing relationships, and increasing retention. It's clear at this point our initiatives taken hold. Since 2022, we focused on upgrading products and surface offerings and have promoted these new offerings with a customer-centric brand strategy. As of the third quarter, our consumer household acquisition rate was up 20% versus the same period a year ago, and our attrition rate was down 17%.
In the next couple of quarters.
Speaker 3: Yeah, our customers CD balances have been largely the same rates for quite some time. I think even towards the end of the last quarter. And in fact, now we're toying with the idea of dropping the promo rates a little bit this quarter.
Yes, our customers CD balances have been largely the same rates for quite some time I think even towards the end of the last quarter and in fact, we're toying with the idea of dropping the promo rates a little bit this quarter to cfe.
Speaker 3: continue to hold, sounds like we're getting some interference, but to see if we can continue to hold the production. So that strategy has worked well and we stayed fairly short. Most of our production all along this year has been in the seven month CD.
Continue to hold.
It's like we're getting some interference but to see if we can continue to hold their production.
So and that strategy has worked well and.
And we stayed fairly short the most of our production all along this year has been in the seven month CD.
Speaker 3: And that's about the only story there. The brokerage CDs, we've stayed short all along. When we first went into them after Silicon Valley, we mostly went into three months with almost everything. And then as things progressed and we wanted to make sure we had secured funding coverage, that grew a little bit more. And then we've just spread out the maturity buckets so that we don't have a large lump anywhere. And then as we get,
And really that's about the only story there.
Andy Harmening: Digital has also been instrumental to our success, and through the open architecture of our new platform, we've been able to move more quickly to deploy upgrades and enhancements to make our customers lives easier. In a little more than a year since the platform launched, we've had 99.9% uptime, and have already made 11 customer-facing upgrades leading to a multi-year high in customer satisfaction scores. And finally, since launching a new math affluent strategy to deepen relationships with high potential customers, we've already added over 550 million in net new deposits, nearly doubling our full year goal by September 30th.
The.
The brokerage Cds, we've stayed short all along when we first went into them. After Silicon Valley, we mostly went into three months with for almost everything and then is this as things progressed and we wanted to make sure we had secured funding coverage.
We've that grew a little bit more and then we've just spread out to maturity buckets. So that we don't have a large lump anywhere and then as we get a.
Speaker 3: short-term deposit growth or long-term deposit growth, we have the option each month on whether we want to roll over a piece or just pay it down.
Uh huh.
Short term deposit growth or long term deposit growth, we have the option each months and whether you want a rollover piece or just pay it down.
And that was very helpful. This quarter obviously.
Speaker 2: And so, you know, I maybe expand on that even a little bit, John , when I when I started with how we've attracted customers in CDs, and I, I would even stop that question shorter and say how we attracted customers.
Andy Harmening: This growth represents a roughly 12% increase in our pre-launch baseline. So as we've said, our plan is to fund our long growth with core customer relationships, deposit relationships, and we've steadily continued to execute this plan in the face of a challenging funding environment. As a result, we're bringing in new dollars and deepening relationships with a customer base that is more satisfying.
And so you know.
Maybe expand on that even a little bit John when I. When I you started with how we've attracted customers in C D's and I I I would even stopped that question sure and say, how we attracted customers.
Speaker 2: When I look at one thing that gives me confidence heading into 2024 is we have made purposeful actions towards product marketing digital in our approach to business. What we are seeing is we are reversing literally in the process of reversing a multi-year trend on customers.
When I look at one thing that gives me confidence heading into 2024 as we have made purposeful actions towards product marketing digital and in our approach to business. What we're seeing is we have we are reversing literally in the process of reversing a multi year trend on customer growth and it's going in the right.
Andy Harmening: Spies, Shifting to Slide 5. We've steadily added high-quality loan balances to our portfolio with another 344 million added here in the third quarter. This marks the six consecutive quarters which all three of our major loan segments have reported net growth. While growth has continued throughout the year, the pace of growth has slowed. And it's clear that pipelines have also slowed as customers making more cautious approach in what appears to be a higher for longer rate environment.
Speaker 2: and it's going in the right direction. And we've reversed that trend in what many would argue is one of the most volatile years we've had for regional banks in the.
Or action and we've reversed that trend in what many would argue is one of the most volatile.
Yes, we've had for regional banks in the past decade. So when we look at that those customers. When you marry that customer growth with customer deepening tactics, whether that goes into a C. D. Whether that is managing the backend tranche of a C D whether that goes into a money market, whether it goes into noninterest bearing.
Speaker 2: So when we look at that, those customers, when you marry that customer, grow.
Speaker 2: with customer deepening tactics, whether that goes into a CD, whether that is managing the back end tranche of a CD, whether that goes into a money market, whether it goes into non-interest bearing, there's no doubt that when you have customer growth, you create a tailwind for yourselves. So in a market that is normalizing to some extent, we've put ourselves through the initiatives we've had in a pretty good position on the foundational customer growth.
Andy Harmening: During the third quarter, we again saw moderate growth in our auto finance portfolio, where we continue to focus squarely on prime and super prime clientele. As a reminder, we do not intend to come to disproportionately reliance on auto loans. But the portfolio continues to provide us a high quality yield-friendly option to diversify our consumer loan book away from lower yielding non-relationship assets such as third-party originators. On the commercial side, our mortgage warehouse business led the way during Q3, but that's not something we would expect to become a theme.
There's no doubt that when you have customer growth you create a tailwind for yourselves. So in it and in a market that is normalizing to some extent we've put ourselves through the initiatives. We've had in a pretty good position on the foundational customer growth.
Speaker 6: Okay, good and helpful. And then just last thing.
Okay. That's helpful.
And then just last thing.
Speaker 6: Andy, I travel a lot and I'm trying to look at my calendar, but when do we expect the timing on the big reveal of phase two? And is this strategic, quantitative, or both? What can we expect?
Andy I travel a lot and I'm trying to trying to look at my calendar, but when do we expect the timing on the big reveal a phase two.
And is this strategic quantitative or both what what can we expect when you give us I was a little nervous that you're going to ask me to predict the future of the Packers here in the fourth quarter. When you did that lead in.
Andy Harmening: Looking forward, it's clear that the lending environment has begun to slow for the industry, but we continue to seek selective growth that emphasizes relationships, quality and diversification, while delivering a creative returns. This enables us to de-emphasize lower yielding non-relationship asset classes over time. Given the slowdown in the lending environment, we now expect total loan growth of between 5 and 6 percent for 2023.
Speaker 2: when you give us those. I was a little nervous that you're going to ask me to predict the future of the Packers here in the fourth quarter when you did that lead in. We're putting that together right now, John . It's not long. I mean, we're nearing the end of October going into November . We will be in the fourth quarter, just as fast as we can put the right, accurate presentation together.
We're putting we're putting that together right now John it's not long I mean, where we're nearing the end of October going into November we will be in the fourth quarter I'm just as fast as we can put the the right accurate presentation together. So it's been something we've been working on for a little bit, but it will be it will.
Speaker 2: It's been something we've been working on for a little bit, but it will be later in the fourth quarter. Exact times shared in the near future.
Andy Harmening: So finally on slide 6. Our team, once again, appeared solid revenues with diligent expense management during the third quarter. Given the funding pressure spacing the industry, our PTPP income dipped to $125 million or $8 million lower than the second quarter. But despite these funding pressures, our year-to-date PTPP income is $68 million higher in 2023 than it was in 2022, a 20 percent increase.
It'd be later in the fourth quarter exact times are shared in the near future.
Speaker 6: Okay, strategic and quantitative both. Is that what we can expect?
Okay strategic and quantitative both is that what we can expect.
Speaker 2: with regards to the plan.
Well with regards to the plan.
Speaker 2: of course it will be strategic. We will give indication of what key metrics are going to happen on the financial side. Okay, good, all right, thank you.
Of course, it will be strategic we will give indications of what key metrics are going to happen on the financial side. Okay.
Okay. Okay, alright, thank you.
Derek Meyer: With that, I'll hand it over to Derek Meyer, chief financial officer, to provide further detail on our margin income statement and capital trends for the quarter. Derek. Thanks, Andy. I'll start by highlighting our aspect liability rate trends through the third quarter on slide 7. Our total asset yields have continued to rise due to rising rates and the repricing nature of a large segment of our own book. Since the start of the rate cycle, total earning asset yields have increased by 277 basis points, or roughly 53 percent of the increase of Fed funds target rate over the same period.
Speaker 6: We don't want to put every number into your model, John . It put a lot of pressure on us. No, I'm waiting. I'm just here waiting. Thank you.
We don't want to put every number into your model John It put a lot of pressure on us So I'm waiting just their wedding.
Thank you.
Thank you. Our next question comes from Scott Schneeberger with Piper Sandler. Please proceed with your question.
Speaker 8: Thanks for taking the question. I guess I wanted to take another stab on the NII. It looks like there's a fairly wide range of possible outcomes for the fourth quarter, anywhere from down just a bit to actually up to several percentage points. I guess, just sort of in your view, what would have to happen for NII to have bottomed out at the current level? In other words, there must be some.
Afternoon, guys. Thanks for taking the question I guess I wanted to take another stab on the NII. So it looks like it's a fairly wide range of possible outcomes for the fourth quarter anywhere from down just a bit too actually up several percentage.
Derek Meyer: Commercial and CRE yields have grown the most as we've continued to add new loans and categories such as asset-based lending and equipment finance, while our floating rate backbone continues to reprise higher. On the liability side, rising rates, liquidity pressures, and a mixed shift in customer deposits, it converged to create significant funding cost pressure for the whole industry. While these pressures have stabilized meaningfully in Q3, they continue to pose a challenge for profitability in the near term.
I guess just sort of in your view, what would what would have to happen for.
NII to have bottomed out at their current level or is there must be some.
Derek Meyer: Feared associated interest bearing liability cost have now increased by 309 basis points since the fourth quarter of 2021. Specific to deposit betas, the S curve we were planning to see in the rising rate environment has largely played out as expected. But the shape of the curve has steeped meaningfully in 2023 amid the funding cost pressures described previously. As such, our interest variant deposit beta has now climbed to roughly 56% since the start of the rate cycle.
Speaker 8: some confidence that it may have bottomed out or could even go higher. I mean, what are some of the puts and takes as you sort of think about that range of outcomes?
Some continents that did it may have bottomed out or it could even go higher I mean, what are what are sort of the puts and takes as you you sort of think about that that range of outcomes.
Speaker 3: So the way things look right now, Scott, this is Derek.
So the way things look right now Scott this is Eric.
Speaker 3: the rate of non-interest bearing, DDA runoff, and the impact that had on our margin abated considerably. That was really a bigger story, Q1 and Q2.
The rate of noninterest bearing.
D D a run off and the impact that had on our margin abated considerably that was really a bigger story Q1 Q2.
Speaker 3: And so you still had a fair amount of low-cost deposits moving into higher-cost deposit products. It was probably a little stronger than we thought.
And.
So the work that.
You still had a fair amount of low cost deposits moving into higher cost deposit products. It was probably a little stronger than we thought.
Four things to bottom out you really need to get to a spot and this is where most of the longer range scenarios.
Speaker 3: you really need to get to a spot, and this is where most of the longer range scenarios start to look like for us, even with a few rate cuts next year. Where loans continue to reprice, we've got a big fixed rate book, and those, the old ones, reprice into pay down, and new ones get booked in at much higher rates, particularly in the next year.
Derek Meyer: Moving to slide 8, the funding cost pressure is facing the industry combined to drive a 9 basis point compression in our name and Q3. While as we mentioned previously, however, we're not relying solely on the rate environment to dictate our earnings going forward. We benefited from our natural asset sensitivity over the past couple of years as rates of risen, but we've also taken actions on both sides of the biology to decrease that sensitivity and drive more durable interest income in future quarters.
Start to look like for us even with a few rate cuts next year, where loans continue to reprice, we've got a big fixed rate book and those are the old ones reprice into pay down and new ones.
Get booked into much higher rates, particularly in auto.
And then the deposits finally stabilize.
Speaker 3: And so you see these scenarios where you get two or three or four basis points of asset rate increases. And because of both mix change, a little bit of rate curve, and then you just see the deposits stop.
And so you see as you see these scenarios, where you get two or three or four basis points of asset rate increases and because of mix both mix change.
A little bit of rate curve, and then you just see the deposits stop increasing and that abating.
Derek Meyer: Whether it's adding high quality customer loans, core customer deposits, or learning interest rate hedges, these actions have been designed to provide our company with additional flexibility to maintain our performance through the cycle. As a reminder, we do not intend to call the peak on the interest rate environment in the near term, but we will continue to take reasonable steps over time to manage our asset sensitivity and downside rate risk. As you can see on the right hand side of this slide, these efforts have gradually decreased our asset sensitivity over the past several quarters.
Speaker 3: That's very, you know, we think there's a big psychological lever there if the Fed stops raising rates because consumers don't look at the back of the yield curve and think about should they be doing something else with their money as much as they do the headlines of continuing rising rates.
That's very you know we.
We think theres, a big psychological lever there if the fed stops raising rates because consumers don't look at the back of the yield curve and think about.
Should they be doing something else with their money as much as they do the headlines of continuum of rising rates.
Speaker 3: When that happens, you start to model out slower increases in deposit rates than the repricing of the fixed rate loans. It's very subtle. That's why it's hard to call. You can be off by a couple basis points and it goes the other way.
When that happens you start to model out slower increases in deposit rates than the other.
Repricing of that fixed rate loans, it's very subtle that's why it's hard to call.
Derek Meyer: We expect to continue benefiting in a rising rate or higher for longer scenario, but we're also better positioned for eventual decrease in rates over time. The macro outlook remains uncertain, but based on our current expectations for balance sheet growth, deposit basis and Fed action, we now expect net interest income growth of between eight and 10% in 2023. On slide nine, we continue to manage our securities book in the third quarter to remain within our 18 to 20% target.
It could be off by a couple of basis points and it goes the other way out here.
Speaker 8: Yeah. Okay. Perfect. Thank you for that color. And then, I guess, Andy, just to, I guess, maybe the answer is stay tuned to December , but I know in the past you've alluded quite a few times to the importance of positive operating leverage creation. Are you thinking that that's something that's kind of important and doable in 2024, or should we sort of think about it?
Yeah.
Okay perfect. Thank you for that color and then I guess and he just I guess, maybe the answer is stay tuned to December but I know in the past you've alluded quite a few times to it.
It is a positive operating leverage.
Creation.
Are you thinking that that's something that's kind of important and doable in 2024 or should we sort of think about it or like the way you think about it is that sort of a broader it's important over the long term as opposed to in each individual year.
Derek Meyer: Since the third quarter of 2022, the United Security's book has risen by 74 basis points, but we've continued to reign in our durations to reduce our longer term rate risk. After adjusting our CET-1 capital ratio to include the impacts of AACI, this impact would have represented a 101 basis point hit to CET-1 in the third quarter. This impact is up slightly from the prior quarter, primarily driven by the rebound and rates.
Speaker 8: the way you think about it is that sort of broader is important over the long term as opposed to in each individual year.
Speaker 2: Well, it'll take a lot for me to give up on that in 2024. So for any of my own colleagues listening, I'll tell you, that's our goal for 2024. And so we're looking at both sides, we're looking at what the expense side is. And we're looking at our strategic investment, when we start to look at the shift in our balance sheet. And my question to the team will be is how fast can we do it? And part of that's market driven and part of its execution.
Well it will take a lot for me to give up on that in 2024, so far.
Or any of my own colleagues listening I'll tell you that's our goal for 2024 and so we're looking at both sides. We're looking at what the expense side is and we're looking what our investment strategic investment when we start to.
Derek Meyer: As a percentage of total assets, our investment, security and cash positions were maintained to roughly 20% for the second straight quarter. We continue to target investments to total assets of between 18 and 20% in 2023. On slide 10, we highlight our not interest income trends. Despite the downward pressure for market-driven headloons and adjustments to our fee structure, non-interesting income grew modestly for the third straight quarter and landed at 67 million. The primary factors for the quarter of a quarter increase were $1 million increase in asset gains and modest increases in service charges and deposit account fees and wealth management fees.
Look at the shift in our balance sheet and my question to the team will be is how fast can we do it and part of that's market driven in part it's execution on.
Speaker 2: On the execution front, I'm gaining a lot of confidence in our leadership team. They've shown their ability to execute over the period since we've launched that initial plan in September of 2021. Albeit, we had an interesting four or five months this year, but you can see the fundamentals still coming through.
On the execution front I'm, gaining a lot of confidence in our leadership team they have shown their ability to execute over the period.
Since we've launched that initial plan in September of 'twenty, 'twenty, one, albeit we had an interesting four or five months. This year, but you can see the fundamentals still coming through so as we put that plan together the challenge put out to the team is to try to drive towards positive operating leverage in 2024.
Speaker 2: So as we put that plan together, you know, the challenge put out to the team is to try to drive towards positive operating leverage in 2024. We'll see what the market looks like and what that allows, but that is the message of what we're trying to work for. We don't have the final numbers.
Derek Meyer: With that said, we continue to expect total 2023 not interest income to contract by between 8 and 10% versus 2022. As a reminder, this anticipated compression is driven by current market dynamics and moderation in deposit account fee income due to OD NSF changes we made in the back. In 2022, moving to slide 11, our third quarter expenses increased by 3% versus the prior quarter, but were flat with the same period a year ago.
We'll see what the market looks like and what that allows but that that is that the message of what we're trying to work for we don't have.
The final numbers.
Speaker 2: in place yet for 2024, but that's still the direction. Okay, perfect. All right, thank you all very much.
In place yet for.
For 2024, but but that's that's still the direction.
Okay perfect Alright, thank you very much.
Thank you.
Derek Meyer: We continue to make targeted investments in people and technology to support our initiatives. RFCE Efficiency Ratio rose to 58.5% during the quarter, but it remains 29 basis points below lower than the same period a year ago. Additionally, our non-interested expense basis remained below 2% as a percent of average assets, and is now down 18 basis points from the same period last year. While we continue investing strategies to support our growth aspirations in 2023, we are committed to keeping expense growth below revenue growth over the long term.
Thank you.
Next question comes from Terry Mcevoy bite next CEO with Stephens. Please proceed with your question.
Speaker 3: Thanks Gary, we still know you're Mac, oh boy. Thank you. Thanks Andy. Going back to the increase in commercial non accruals and I saw at the end of the release that
Thanks, Gary we still know your Mcevoy [laughter], thanks, Andy I'm going back to the increase in commercial non accruals and I saw at the end of their lease.
Speaker 4: potential problem loans, I think they were investors CRE. How much of that increase would fall in the legacy bucket versus new lending relationships since the end of 2021? And maybe give you a platform to push back on some of the fears out there that associated with a late cycle grower and commercial, and as such may see a call it a faster normalization of credit trends.
Potential problem loans, I think there were investor CRE.
How much of it how much of that increase would fall in the legacy bucket versus new lending relationships. Since the end of 2021, and maybe give you a platform to push back on some of the fears out there that are associated with a late cycle grower in commercial and as such May may see I'll call. It a faster normalization of credit trends.
Derek Meyer: On an ongoing basis, we will continue to pursue opportunities to optimize our expense base where possible. With that in mind, we expect total non-interested expense growth in between 3% and 4% in 2023, but would note that this number excludes the impact of any non-recurring items incurred in the fourth quarter, such as FDIC's special assessment. Shifting to slide 12, we continue to prioritize paying a competitive dividend and funding organic growth while managing capital levels towards the target ranges.
Speaker 4: Yeah, we're not seeing that at all in what's happened this last quarter. We had a handful of deals that moved into non-accrual, and I think I don't see any of the growth we went through the last couple years isn't coming back to haunt us. In terms of, you know, some of the...
Yeah.
We're not seeing that at all in what what's happened. This last quarter, we had a handful of deals that moved into non accrual.
See I don't see any of the growth we went through the last couple of years isn't coming.
Derek Meyer: Here at the third quarter, our capital ratio is grew versus the prior quarter and versus year end 2022. 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 at the 6.75 to 7.25 range by year end. We have increased the upper end of our CET-1 target range and an out-targeting range of 9 to 9.75.
Coming back to haunt us.
In terms of some of the migration.
Speaker 4: You know, we've got, you know, our real estate book we feel is really still holding up strong.
We've got you know our real estate book, we feel is really still holding up strong.
Speaker 4: you know, the real estate asset class is, is still gets hit by rising interest rates. You've got inflationary pressures, whether it be on, uh, insurance, uh, real estate taxes, you know, all the operating expenses that go in there. So I think there's still, we're still comfortable with how they're weathering the storm, but you know, there's, as you, these costs remain elevated. There'll be a little more added pressure there, but, uh, you know, in our real estate book.
The real estate asset classes is still gets hit by rising interest rates, you've got inflationary pressures whether it be on <unk>.
Insurance real estate taxes, all the operating expenses that go in there. So I think there's still we're still comfortable with how they're weathering. The storm, but you know there is as you. These costs remain elevated there'll be a little more added pressure there, but you know in.
Derek Meyer: We'll now hand it over to our Chief Credit Officer Pat Aher to provide an update on credit quality. Thanks, Derek. I'd like to start on slide 13 with an update on our allowance trends. We utilize the Moody's August 2023 baseline forecast for our Cecil Forward-looking assumptions. The Moody's baseline forecast remains consistent with a resilient economy despite the high interest rate environment. The baseline forecast contains no additional rate hikes, slower but positive GDP growth rates, a cooling labor market, and a continued deceleration of inflation.
In our real estate book.
Speaker 2: The stuff we're doing is with long-standing relationships. We're not out doing transactional work with, you know, one-off customers. These are relationships we've targeted and grown throughout the years. Maybe speak to the non-accrual nature and trend of the real estate book.
Stuff, we're doing is with longstanding relationships, we're not out doing transactional work with one off customers. These are relationships we've targeted in growing throughout the years, maybe speak to the non accrual nature and trend of the real estate book.
Speaker 2: Yeah, really, I mean, in terms of non accruals, we haven't seen a lot in real estate. I mean, it's really been more on the CNI side that moved the needle here this quarter. We've had some pretty strong, stable performance in the book. I mean, in fact, non accruals have been down each of the past five quarters and that charge also been negative over that five quarter period. So, so if that would be the specific question, Terry, we see no evidence.
Yeah, really I mean in terms of non accruals, we haven't seen a lot in our real estate I mean, it's really been more on the C&I side that moves the needle here this quarter.
Derek Meyer: Our ACLL increased by $4 million during the quarter to $381 million. Our allowance continues to be driven by a combination of portfolio-long growth, nominal credit movement, and general macroeconomic trends that reflect the stability of our ratio remained flat to the prior quarter and six basis points higher than the same period a year ago at 1.26%. Moving to slide 14, quarterly credit trends remain relatively stable across the portfolio during the third quarter, with migration reflecting a broad-based normalization and portfolio performance.
We've had some pretty strong stable performance in the book I mean in fact that non accruals have been down each of the past five quarters and net charge offs have been negative over that five quarter period. So.
Well, if if that would be the specific question Terry.
We see no evidence of that.
Okay.
Speaker 9: And then maybe just to follow up, I think Scott and John asked a similar question. Does the fourth quarter expense guide, I saw non-reoccurring items, I was thinking related to the phase two of the strategic plan, not the FDIC expense. So does the fourth quarter guide reflect any strategic phase two expenses and will we see a step up in expenses next year due to this announcement that will come out this quarter?
And then maybe just a follow up I think Scott and John asked a similar question.
Just a fourth quarter expense guide I saw nonrecurring items I was thinking related to the phase two of the strategic planning out the FDIC expense. So does the fourth quarter guide reflect any strategic phase two expenses and will we see a step up in expenses next year due to this announcement that will come out this quarter.
Derek Meyer: We did see moderate increases in non-acrual loans, delinquencies, and charge-off during the third quarter, but as previously discussed, we anticipated these shifts as a sign of normalization back to pre-pandemic levels as opposed to an indication of broader issues in the portfolio. As Andy mentioned, we have not seen anything to suggest a pattern of credit stress in a specific industry or geography. We added another 22 million in provision during the third quarter, which matches our second quarter provision build and is consistent with the past four quarters.
Speaker 2: I'll speak to even though we haven't given guidance on 2024. Our approach has been the same each of the last two years. We've gone into each year and when I came in this role, folks suggested that maybe there was no room to cut.
I'll speak to even though we haven't given guidance on 2024. Our approach has been the same each of the last two years, we've gone into each year and when I came in this role she folks suggested that maybe there was no room to cut.
Speaker 2: There's always room to cut. There's always room to cut for the next best investment that you need to make. We've made those in each of the last two years. We see opportunity for investment right now and...
There's always room to cut there's always room to cut for the next best investment that you need to make we've made those in each of the last two years, we see opportunity for investment right now and.
Derek Meyer: As mentioned, this provision build was largely a function of long growth, limited credit movement, We remain focused on monitoring and certainty of the macroeconomy to ensure current underwriting, reflect 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 ongoing interest rate sensitivity analysis, bankwide. Going forward, we expect any provision adjustments to continue to reflect changes to risk rates, economic conditions, loan volumes, and other indications of credit quality.
Speaker 2: Before we do that, we see opportunity to decrease expenses in some areas. So that will be the approach that we have. When we think about new initiatives, you know, people say, God, well, you're going to have very high expenses. We have not in two years. We will not next year. So that's what allows me to feel like we're in the game with regards to learning opportunities.
Before we do that we see opportunities to decrease expenses in some areas. So that will be the approach that we have when we think about new initiatives. You know people say gosh, you're going to have very high expenses, we have not in two years, we will not next year. So that's what allows me to feel like we're in the game with regards to.
Positive operating leverage next year, even though we need to fine tune and see where.
Speaker 2: Positive operating leverage next year, even though we need to fine tune and see where see where we end up with regards to expenses. We don't necessarily have any extraordinary initiative.
See where we end up.
With regards to expenses, we don't necessarily have any extraordinary.
Initiative.
Speaker 2: spike in the fourth quarter as a result of initiatives that we're planning.
Spike in the fourth quarter as a result of <unk>.
Derek Meyer: On slide 15, I remind you that our conservative approach to credit has been optimized over the course of the past several years as we've built a diverse portfolio of high-poly commercial loans and a focus on prime and super prime consumer portfolio. While CRE has been cited as an area of risk in the media over the past several quarters, we feel well positioned given 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.
Initiatives that we're that we're planning.
Okay.
Speaker 9: Yeah, I was one of those people and you proved me wrong so I hear you loud and clear, Andy. Thanks for taking my time.
Yes, I was one of those people and you proved me wrong. So I hear you loud and clear Andy. Thanks, Thanks for taking my call.
Thank you.
Okay.
Thank you.
Next question comes from the line of.
Brazil or with Wells Fargo. Please proceed with your question.
Hi, good afternoon.
Speaker 10: Looking at the Otto Finan's book, I'm just wondering how close that book is to reaching a point of maturity, meaning that you're starting to have some loans pay off. I'm assuming that.
Humor.
Looking at the auto Finance book I'm, just wondering how close that book is reaching a point of maturity, meaning that you are starting to have some loans pay off I'm, assuming that starts to accelerate somewhat in 'twenty, four and and as that process happens I'm just wondering what your expectation for growth is there.
Derek Meyer: Over two-thirds of our portfolio is based in the Midwest with an emphasis on multi-family and industrial properties. Office loans represent just 3.4% of our total loans as a bank, and within that portfolio, we are weighted towards suburban class A properties. While we feel well positioned given our business model approach and the markets we operate in, we continue to monitor this and all of our portfolios closely.
Speaker 10: starts to accelerate somewhat in 24. And as that process happens, I'm just wondering what your expectation for growth is there. Is it expansion into some newer markets? Is that enough to offset that level of maturity? Or at some point, should we see payoffs and kind of maturing well?
Expansion into some newer markets is that enough to offset that level of maturity or at some point should we see payoffs.
Patrick Ahern: With that, I will now hand it back to Andy to share some closing thoughts. Thank you.
Payoffs and kind of maturing loans in that space eat into the growth.
Andy Harmening: I'd like to close out by reiterating a couple key points from our presentation on slide 16. First, we've set ourselves up to drive quality relationship-focused long growth that decreases our reliance on lower yielding, non-relationship balances, and enhances our profitability profile. However, given the recent slowdown in the lending environment, we now expect a total loan growth of between 5% and 6% in 2023. Second, the deposit environment is clearly stabilized following a volatile first half of the year. The stabilized environment combined with our deposit initiatives drove strong core customer deposit growth in the third quarter. With that said, we're leaving our guidance unchanged for the full year.
Speaker 2: Yeah, the payoff's already happened. I mean, that book is interesting. The duration of it has typically been historically been, and for us, been 36 months or less.
Yeah.
The payoffs already happened I mean that that book, it's interesting the duration of it has typically been historically been and for US Ben 36 months or less and so you're seeing that we're seeing that already on a monthly basis and so that's one of the positives about a book like that is that you do you do.
Speaker 2: And so you're seeing that, we're seeing that already on a monthly basis. And so that's one of the positives about a book like that is that you do work through it. With regards to what happens in the future and the growth of that, we'll be purposeful in having a...
[noise] work through it.
With regards to what happens in the future and the growth of that.
We'll be purposeful and having a.
Hey, <unk>.
Speaker 2: exposure to auto and you'll see that start to peak out in what the growth is hold steady and then probably go down a little bit over time which quarter that happens in is I Wouldn't predict exactly what that quarter is, but it won't be a runaway Portfolio our goal is not to be simply known as the auto bank
Exposure to auto and you'll see that start to peak out in what the growth is hold steady and then probably go down a little bit over time, which quarter that happens in is.
Andy Harmening: Given the seasonality, we typically see imbalance flows as we approach your end. Shifting to revenue, we've adjusted our most recent forecast for balance-y growth deposit betas and rate environments. We now expect to deliver net interest income growth between 8% and 10% in 2023.
I wouldn't predict exactly what that quarter is but it won't be a runaway portfolio. Our goal is not to be simply known as the auto bank.
Speaker 2: We have continued to invest in commercial. We think we have a significant opportunity. In fact, market data shows us that we're underpenetrated in deposits in key markets for commercial. We've been working very, very diligently on bridging that gap. We think that we are. And so when we look at that and we look at the loan side, we think there's opportunity.
We have and continued to invest in commercial we think we have a significant opportunity in fact market data shows us that we're underpenetrated in deposits in key markets for commercial we've been working very very hard and diligently on bridging that gap, we think that we are.
Andy Harmening: And lastly, our discipline approach to expenses remains a foundational focus for our company. As such, we are maintaining our non-interesting expense guidance for the year, but would note that this guidance excludes non-recuring items incurring Q4, such as the FDIC Special Assessment.
And so when we look at that and we look at the loan side, we think there's opportunity in commercial.
Speaker 10: Okay, that's helpful. And then maybe from a credit standpoint and how the growth in auto.
Okay. That's helpful. And then maybe from a credit standpoint, and how the growth in auto corresponds with seasonal accounting they'll look back has been nothing so far really just given how new that business line is however, historically consumer auto.
Andy Harmening: With that, let's open up for questions. Thank you.
Speaker 10: corresponds with CISO accounting. The look back has been nothing so far really, just given how new that business line is. However, historically, consumer auto tends to have a higher level of charge offs. I'm just wondering how you're thinking about growth in that portfolio and how you're modeling that from a CISO standpoint, and could we actually see a meaningful step up once that book does start to normalize and we see charge offs move to.
Operator: We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation to indicate your line is in the question Q. You may press star 2 if you would like to remove your question from the Q. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions.
Operator: Thank you.
Tends to have a higher level of charge offs I'm, just wondering how you're thinking about growth in that portfolio and how you're modeling that from a seasonal standpoint, and could we actually see a meaningful step up once that book does start to normalize and we see charge offs move.
To you know more or less at a normal level there.
Speaker 2: Yeah, Tim, I'll start that and I'll flip it over to Pat. But I saw that in a note that you had talking about the higher level of charge-off and I...
Yeah team I'll start that and I'll flip it over to Pat but I saw that in a note that you had talking about the higher level of charge offs.
Daniel Tamayo: Our first question comes from the line of Daniel Tameo with Raymond James. Please proceed with your question. I get afternoon, everybody.
Speaker 2: I wonder if we're mixing strategies. And by that I mean this is a prime and super prime book.
I Wonder I wonder for mixing strategies and by that I mean, this is a prime and Super Prime book.
Speaker 2: We know that the charge off rate is what through the cycle about 35 to 45 basis points. I considered a low risk book. We have about $10 billion in consumer finance on our books of prime and super prime, primarily in real estate between home equity and residential. And we don't see, we see that we're lending to very similar customers in a balanced scorecard model.
Patrick Ahern: Maybe first, just on the non-accruals, I, in the increase in the CNI, I know you mentioned there was not really a pattern to that increase, but if it's just a normalization of credit costs, just curious how you're thinking about what we should, or how we should be thinking about what normalization of net charge-offs or even provision could look like? Thanks. I would say, you know, in terms of net charge-offs, you know, we saw a little bit of a spike this quarter, but I think, you know, last quarter was probably a little more normal than what we saw this quarter.
We know that the charge off rate is what through the cycle about 35 to 45 basis points I considered a low risk book, we have about $10 billion in consumer finance on our books are prime and Super Prime primarily in real estate between home equity and residential on and we don't see we.
See that we're lending to very similar customers in a balanced scorecard model. So we've actually seen an increase in credit bureaus over the last 12 credit Bureau scores and those scores that we lent into this this portfolio and in.
Speaker 2: So we've actually seen an increase in credit bureaus over the last 12 credit bureau scores. And those scores that we lent into this portfolio in the last month, for example, is a FICO of 783. And I believe it was around 780 the month before. And the overall book is between 760 and 770. So I don't consider this a high risk book at all.
In the last month for example has a FICO of 783 and I believe is around 780 of the month before and the the overall book is between $7 60, and 770. So I don't consider this a high risk book at all.
Patrick Ahern: I think these are just a handful of things. I think, you know, non-accruals could be, you know, going forward, we're going to watch as credits normalize back, you know, where they settle at, you know, it's hard to say right now, and for provision, you know, we're probably pretty consistent over the last couple quarters, and I would expect similar pattern. Okay, great.
Speaker 11: And because we're lending to people that pay us back and we're lending in a fashion that takes in multiple variables to calculate the risk parameters. How else would you answer that, Pat?
And because we're lending to people that pay us back and were lending in a fashion that takes in multiple variables to calculate the risk parameters, how how else would you answer that.
Speaker 4: No, I think that's good summary. I mean, we're, we're haven't seen the maturation level yet, but there were metrics in terms of charge offs, delinquencies, etc, are tracking in how we would expect it. And we've been very happy with the deals that have gone into it and how they've performed. Like Andy said, we're, we're in that prime and super prime space. So it's really kind of aligned with our
No I think that's good summary, I mean, we're we haven't seen.
The maturation level, yet, but there were some metrics in terms of charge offs delinquencies et cetera are tracking and how we would expect it.
Derek Meyer: And then looking at the loan growth, I'm just curious what the thought is in terms of future loan growth where that might come from, and then, you know, if you could touch on where new loan yields are for those categories. That would be helpful. Yeah, this is Derek. So obviously, the auto has been pretty steady, and we expect that to continue. We haven't, we haven't moved the credit box. It's getting bigger so you would normally expect the rate of growth to drop, but we also expanded into our footprint state.
We've been very happy with the deals that have gone into it and how they performed like Andy said, where we're in that prime and Super Prime space. So it's really.
Kind of aligned with our expectations were.
Okay. That's great color and then just last one there how can you provide an update on how big that dealer network is and what that growth rate is expected to be in 'twenty four.
Speaker 10: Okay, that's great color and then just last one there. Can you provide an update on how big that dealer network is and what that growth rate is?
Yeah.
Derek Meyer: And so the dollar increases is steady. I think this quarter, we like most quarters, we expected balance growth. So you would have, we would have in our prior guidance that we just took down expected similar growth and CNI. And while we've continued to have more new names this year, and grow that year over year, because of our our employers, we saw the back of our pipeline, not replenish and pull through into additional fundings at the pace we saw in the year. And so that has pulled through into our guidance.
Yeah.
Speaker 4: Yeah, we're about 1300 dealers right now. You know, and as Derek said, we're expanding within the footprint, I would say we'll go through the same course of our business model in terms of adding dealers where it makes sense based on their their quality and how they fit our model.
Yeah. It was about 1300 dealers right now.
And as Derek said, we're expanding within the footprint.
I would say we will go through the same course of our business model in terms of adding dealers, where it makes sense based on their their quality and how they fit our model.
Speaker 11: Tiva, we haven't provided guidance for 2024 yet. Okay.
Well, we haven't provided guidance for 2020 for yet.
Okay I understand thank you very much for the color I appreciate the questions.
Thank you.
Okay.
Thank you. Our next question comes from the line of Chris Mcgratty with K B W. Please proceed with your question.
Andy Harmening: And then we'll, we'll think about how we position that for next year when we give 24 guidance. We really haven't been sharing new production yields. So I won't go there, but that's that's all things are been materializing, but I'll say Daniel, this is Andy with regards to portfolio growth. It's important to know where you're growing and where you're not. And where we're not growing is on the third party originated mortgages. And that by far has been the lowest yielding portfolio that we have.
Speaker 10: Hey, good morning or good afternoon. Just a quick one on the on a capital change on slide 16. The the bump up in the high end, Andy, is that just the function of where you're running nine months through the year? Or is it are you trying to signal that you're looking to run a little bit more capital in this kind of account?
Hey, good morning, or good afternoon.
Just a quick one on the on the capital change.
Slide 16.
The bump up in the high end Andy is that just a function of.
Are you running nine months through the year or are you trying to signal that you're looking to run a little bit more capital in this kind of economy.
Speaker 11: Chris, I wanted to answer your question. And Derek literally called me off right here. Yeah. I didn't know such thing. So the question we would have gotten if we didn't move it is, oh, I see you're above your target range because it was 950 before. Is that you're going to do a buyback? So we're not. So we bumped the high end up. It's as simple as that. He really did want to answer that question, Chris. It took 52 minutes, sorry. Thanks a lot. Thank you.
Chris I wanted to answer your question Derek literally called me off here.
Andy Harmening: So when we, when we stopped origination of that portfolio, which in its peak, I believe in 2020 was just around a billion and a half dollars in production and a billion. And, and then we, we shut it down. So basically you'll see a runoff on the balance sheet or decrease in that category, which means that our residential real estate most likely won't grow at the pace of the market. We believe that over time, we'll be able to replace that with quality, C and I business today, clearly CRE is a very stable low to no growth category, although paydowns have been a little bit slow.
I didn't no such thing.
The question, we would have gotten if we didn't move it is oh I see you're above your target range. Because it was 950 before is that are you going to do a buyback. So we're not so we've bumped the high end up it's as simple as that.
He really did want to answer that question Chris.
It took three minutes or.
Thanks, a lot.
Thank you.
Yeah.
Andy Harmening: So I think over time you'll see that in this V and I with regards to fourth quarter numbers, we just took a hard look at our pipeline. And we also took a hard look at relationships that may not have before relationships. And so we won't extend or be aggressive in those that are lower yielding and those that are not full relationships and usually those are tied together. So that's a little bit for the reason that we've adjusted the year in forecast on full growth.
I think we have one more in Q2 right.
Do we know.
Daniel Tamayo: Okay, that's helpful.
Alicia.
Okay, Alicia you there.
Sorry about that.
The next question comes from the line of Brody Preston with UBS. Please proceed with your question.
Hey, good evening, everyone how are you.
Good Brody.
Speaker 3: Hey, so unfortunately, like John , I also travel a lot. And so I'm in an airport right now. So if there's background noise or if you can't hear me, I apologize in advance. All right.
So unfortunately like John I also travel a lot so I'm in an airport right now so if there's background noise or if you can't hear me.
Apologize in advance alright.
Daniel Tamayo: And then just lastly, a high-level question, you touched on third-party origination mortgages, but I guess just for that asset class overall, can we thought about or would it, is there a way that it might make sense to sell perhaps some of those loans to kind of reset the margin to a certain extent, or is there a break-even point or a place where rates could get to where that could be more attractive? Well, I mean, Daniel, you know it's been a pretty interesting market the last six months.
Alright, no problem.
Speaker 12: I wanted just to quickly ask you about the fees. I know you maintained the guidance, but just given this quarter's results, you know, when you kind of flow through the guide, it implies a bit of a step down in the fourth quarter. And I just wanted to know if there was anything specific driving that.
I wanted to just quickly ask you about the fees I know you maintained.
The guidance, but just given this quarters results you know when you kind of flow through the guide it implies a bit of a step down in the fourth quarter and I just wanted to know if there was anything specific driving that.
Okay.
Oh, there's not we've had.
Speaker 3: pretty strong mortgage fees the last two quarters related to
Pretty strong mortgage fees, the last two quarters related to.
Speaker 3: to MSR evaluations going up. That won't continue at that level, but otherwise there's no specific guidance that would suggest a step down from our standpoint.
Two MSR valuations going up.
But that won't continue at that level, but otherwise theres no specific guidance, but.
Daniel Tamayo: And so over that period of time, we've looked at every loan category, we've looked at every security, we've looked at tranches of tranches. And what I would say is we know our portfolio as well as we could know it right now. If there comes a time when there's an opportunity in one of those tranches, we'll be prepared for that. Right now, we're not prepared to speak to that.
No.
With suggests a step down from our standpoint.
Okay.
Speaker 12: And I also want to just ask generically on the loan book, you know, if you could give us the portion of the loan portfolio that is shared national credits and of that, what you're the lead agent on.
Daniel Tamayo: Okay, thank you for all the color. Thank you.
I also wanted to SaaS generically on the loan book.
Give us the.
Portion of the loan portfolio that is shared national credits and of that.
What are the lead agent on.
Yeah.
Speaker 4: You know, in terms of the makeup of our SNCC portfolio, you know, the largest concentration of that portfolio is within both power and utilities in our REIT business. Both those lending verticals, you know, reflect the successful business model we've had there for many years. Those lines of business, as well as the full SNCC portfolio, continue to perform very well from a credit span.
In terms of the makeup of our snick portfolio the largest concentration of that portfolio is within both power and utilities.
John Orstrom: Our next question comes from John Orstrom with RBC Capital Markets. Please proceed with your question. Hey, thanks. Good afternoon. Hey, John.
Our REIT business.
Both those lending verticals you know reflect the successful business model, we've had there for for many years.
Those lines of business as well as the full snick portfolio continue to perform very well from a credit standpoint.
Unknown Executive: Looking at slide eight, and I don't know if this is Derek or Andy, but can you talk about just the cadence of when you think your margin might bottom out? I mean, when I look at slides eight and slides seven, it sure seems like some of the pressure on interest bearing liabilities is starting to fade a little bit and you're getting the asset repricing. But would you guys say we're at or near a bottom on your margin?
Speaker 4: So we're happy with it. We view SNCCS as something that we review both on the front end very specifically to make sure it fits the business model. And we continue to do, from an underwriting and portfolio management standpoint, we do the same from a credit standpoint with those deals as direct deals.
So we're happy with it.
We view snakes as something that we review both on the front end very spin.
Specifically to make sure it fits our business model and we're doing you know we continue to do from an underwriting and portfolio management standpoint, we do the same from a credit standpoint with those deals is.
Unknown Executive: Well, John, it's a good question. I can say I feel a lot more certainty than I did on March 10th. When we look at the last few months, it's been pretty interesting. The one encouraging sign, several encouraging signs, I would say, is we've seen a decrease, I talked about the decrease in nutrition that we've experienced. That helps us understand what the volatility is going to be. We've seen a, I think we're pretty near the bottom on our non-interest bearing deposit percentage.
Direct deals.
Speaker 12: Understood that's great color. Do you happen to have what portion of the loan portfolio it is?
Understood. That's that's great color do you do you happen to have.
What portion of the loan portfolios.
Speaker 11: Yeah, Brody, that's not something we disclose. And with regards to what we're the lead in, you know, for me, when I think of it, we're trying to lend it to industries and customers that we understand.
Yeah, Brian that's not something we disclose.
And with regards to what were the lead and for me when I think of it we're trying to lend into industries and customers that we understand and with that we see this as a a fairly low risk portfolio from my perspective. The question I have for the team is not that we get out of these credits for them of risks.
Speaker 2: And with that, we see this as a fairly low risk portfolio.
Speaker 11: From my perspective, the question I have for the team is not that would we get out of these credits from a risk standpoint, but would we get out of these credits from a return standpoint? And so we've spent the last, I don't know, four months looking credit by credit across all of our portfolios.
Unknown Executive: We don't see it going down significantly from where it is. And that slowdown that we saw this quarter, we actually expected to slow down again in the fourth quarter. And that's why we have confidence that we're getting near the bottom. We think knowing that that non-interest bearing is where it is, then the question becomes what is your asset growth? What can you put on at higher yields? And that's what is to be determined what the market will allow.
Standpoint, but when we get out of these credits from a return standpoint, and so we've spent the last I don't know four months looking credit by credit across all of our portfolios and IC credits in every single almost every single portfolio of the bank that I believe that we can replace with a higher yielding asset.
Speaker 11: And I see credits in every single, almost every single portfolio of the bank that I believe that we could replace with a higher yielding asset. And so as we go quarter by quarter, that will be the goal. But with regards to SNX, there's not a view that this is a high risk portfolio and we've not seen the emergence of that or indication of it, particularly in businesses that we've been in for an extended period of time that have those type of loans.
And so as we go quarter by quarter that will be I think all but with regards to snacks theres not a view that this is a high risk portfolio and we've not seen the emergence of that or indication of it particularly in businesses that we've been in for an extended period of time that that have those type of loans.
Unknown Executive: We won't force it. We're not going to force growth for growth six as we go into the end of this year and the beginning of next year. But we think there will be some modest growth out there for us. When you put that in at higher yields, that of course takes the place of of, put great less pressure on that margin. So we expect the margin pressure to continue to decrease in the fourth quarter.
Speaker 12: Understood. And then on the office portfolio, do you have what the reserve that you suddenly decided against the office, office lenses?
Understood and then on the office portfolio do you have what the.
Preserve that your southern decided against the office office Linzess.
Okay.
Unknown Executive: We do believe that in 2024, we will see an inflection point in there. Of course, it's based on multiple variables. But the number one positive that I see right now is hitting a terminal number, getting close to the terminal number on non-interest bearing in the past. Yeah, okay. Yeah, that's a lot for my standpoint.
Okay.
Yeah.
Unknown Executive: Okay, that's helpful though.
Yeah.
Yeah.
Yeah.
Okay.
Just a second here.
Yes of course, sorry.
Oh.
[noise].
John Orstrom: Slide three on the customer CDs versus brokered CDs. You talk a little bit about what you did there and how you attracted the customer CD balances and should we expect more of that in the next couple of quarters. Yeah, our customer CD balances have been largely the same rates for quite some time. I think even towards the end of the last quarter. And in fact, now we're talking with the idea of dropping the promo rates a little bit this quarter to see if we continue to hold, sounds like we're getting some interference, but to see if we can continue to hold the production.
Speaker 4: I want to say we've been building that. I don't have that specific number in front of me, but we've been building that over the last couple quarters. Our office portfolio has continued to remain pretty stable. We have not seen a lot of degradation there, but we do have an outsized reserve against it, just given the uncertainty in that market.
I want to say, we've been building that I don't have that specific number in front of me but.
We've been building that over the last couple of quarters. Our office portfolio has continued to remain pretty stable. We have not seen a lot of degradation there, but we do have an outsized reserve against it just given the uncertainty in that market.
Speaker 12: Okay, got it understood. And then Andy, I did just want to ask one last one just on you know, the
Okay got it understood.
And then Andy I just wanted to ask one last one just on the.
Speaker 12: 2.0 version of the plan that we're going to get here down the road. Um, but those are going to have kind of like any medium or longer term profitability targets that you're going to set out to achieve.
2.0 version of the plan that we're gonna get here down the road.
Well that was going to have kind of like any medium or longer term profitability targets that you're going to set out to achieve.
John Orstrom: So that strategy has worked well and we stayed fairly short. The most of our production all along this year has been in the seven-month CD. And that really, that's about the only story there. The brokered CDs, we stayed short all along when we first went into them after Silicon Valley. We mostly went in the three months with almost everything. And then as this thing's progressed and we wanted to make sure we had secured funding coverage, we've that grew a little bit more and then we've just spread out the maturity buckets so that we don't have a large lump anywhere.
Yes Brody.
Speaker 11: Brody, what I'll say about that is I try very hard not to get in front of the board.
I'll say about that as I try very hard not to get in front of the board and so we'll be meeting with them over the course of the next 10 days to go over in detail.
Speaker 11: And so we'll be meeting with them over the course of the next 10 days to go over in detail. Once I make sure that I have proper governance, I am very prepared. I'm in fact, they're holding me back from sharing what we're going to do. So they're fair questions. They are good questions. And we intend to have something later this quarter before year end that announces specifically what actions we intend to take. So I hate to delay it that way, but I must in this case. I understood. I appreciate you.
Once I make sure that I have proper governance I am very prepared in fact, they're holding me back from sharing what we're going to do so.
They're fair questions. They are good questions and we intend to have something later this quarter before year end that announced the specifically what actions we intend to take so.
Hate to delay it that way, but I must in this case.
John Orstrom: And then as we get extra short-term deposit, growing with our long-term deposit growth, we have the option each month and whether we want to roll over a piece or just pay it down. And that was very helpful this quarter, obviously. And so, you know, I maybe expand on that even a little bit, John, when I, when I, you started with how we've attracted customers in CDs, and I would even stop that question short and say how we attracted customers.
Understood I appreciate you taking my questions everyone have a good night.
Speaker 13: All right, thank you.
Alright, thank you.
Speaker 11: I think that's it, Alicia. Thank you all for the interest. We appreciate that and we look forward to further conversations.
I think I think that's it Alicia. Thank you all for the interest we appreciate that and we look forward to further conversations.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
John Orstrom: And when I look at one thing that gives me confidence headed into 2024, as we have made purposeful actions towards product marketing digital in our approach to business, what we're seeing is we have we are reversing literally in the process of reversing a multi-year trend on customer growth. And it's going in the right direction and we've reversed that trend and what many would argue is one of the most volatile years we've had for regional banks in the past decade.
Yeah.
[music].
John Orstrom: So, when we look at that, those customers, when you marry that customer growth with customer deepening tactics, whether that goes into a CD, whether that is managing the back-end tranche of a CD, whether that goes into a money market, whether it goes into non-interest bearing, there's no doubt that when you have customer growth, you create a tailwind for yourselves. So, in a market that is normalizing to some extent, we've put ourselves through the initiatives we've had in a pretty good position on the foundational customer growth.
Okay.
Mhm.
John Orstrom: Okay, good and helpful.
Hum.
[music].
Andy Harmening: And then just last thing, Andy, I travel a lot and I'm trying to try and to look at my calendar. But when do we expect the timing on the big reveal of phase two and is this strategic quantitative or both? What can we expect when you give us? I was a little nervous that you're going to ask me to predict the future of the packers here in the fourth quarter when you did that lead-in.
Yes.
Uh-huh.
Okay.
Hum.
Hello.
Hum.
[noise].
Andy Harmening: We're putting that together right now, John, it's not long. I mean, we're nearing the end of October going into November. We'll be in the fourth quarter just as fast as we can put the right accurate presentation together. So, it's been something we've been working on for a little bit, but it will be later in the fourth quarter. Exact times shared in the near future. Strategic and quantitative both, is that what we can expect?
Andy Harmening: With regards to the plan, of course it will be strategic, we will give indication of what key metrics are going to happen on the financial side. We don't want to put every number into your model, Jon, it put a lot of pressure on us. We're waiting, I'm just here waiting. Thank you.
Scott Sieber: Our next question comes from Scott Sieber with Piper Sandler. Please proceed with your question. Thanks for taking the question.
Derek Meyer: I guess I wanted to take another step on the NII, so it looks like a fairly wide range of possible outcomes for the fourth quarter anywhere from down just a bit to actually up to several percentage points. I guess just sort of in your view, what would happen for NII to have bottomed out at the current level? In other words, there must be some confidence that it may have bottomed out or could even go higher.
Derek Meyer: What are sort of the puts and takes as you sort of think about that range of outcomes? So the way things look right now, Scott, this is Derek, the rate of non-intersparing speedier runoff and the impact that had on our margin abated considerably. That was really a bigger story, Q1 and Q2. And so the work that you still on a fair amount of low cost deposits moving in a higher cost deposit products, it was probably a little stronger than we thought.
Derek Meyer: For things to bottom out, you really need to get to a spot, and this is where most of the longer range scenarios start to look like for us even with a few rate cuts next year. Where loans continue to reprise, we've got a big fixed rate book, and those as the old ones reprise into paydown and new ones get booked in at much higher rates, particularly in auto. And then the deposits finally stabilize, and so you see these scenarios where you get two or three or four basis points of asset rate increases.
Derek Meyer: And because of mixed both mixed change, a little bit of rate curve, and then you just see the deposits stop increasing in that abating. That's very, you know, we think there's a big psychological lever there. If the Fed stops raising rates, because consumers don't look at the back of the yield curve and think about should they be doing something else with their money as much as they do the headlines of continuing rising rates.
Derek Meyer: When that happens, you can start to model out slower increases in the deposit rates than the repricing of the fixed rate loans. It's very subtle. That's why it's hard to call. You can be off by a couple basis points and it goes the other way and yeah. Yeah, okay, perfect. Thank you for that.
Andy Harmening: And then I guess Andy just I guess maybe the answer is stay tuned to December, but you know, I know in the past you alluded quite a few times to the importance of positive operating leverage creation. Are you thinking that that's something that's kind of important and doable in 2024 or should we sort of think about it? Like the way you think about it, is that sort of broader? Is it important over the long term as opposed to in each individual year?
Andy Harmening: Well, it'll take a lot for me to give up on that in 2024. So, for any of my own colleagues listening, I'll tell you, that's our goal for 2024. And so, we're looking at both sides, we're looking at what the expense side is and we're looking at what our investment, strategic investment when we start to look at the shift in our balance sheet. And my question to the team will be is, how fast can we do it?
Andy Harmening: And part of that's market-driven and part of its execution. On the execution front, I'm gaining a lot of confidence in our leadership team. They've shown their ability to execute over the period of since we've launched that initial plan in September of 2021. I'll be if we had an interest in four or five months this year, but you can see the fundamentals still coming through. So, as we put that plan together, the challenge put out to the team is to try to drive towards positive operating leverage in 2024.
Andy Harmening: We'll see what the market looks like and what that allows, but that is the message of what we're trying to work for. We don't have the final numbers in place yet for 2024, but that's still the direction. Okay, perfect.
Scott Sieber: Alright, thank you all very much. Thank you.
Terry Mcevoy: Our next question comes from Terry McVeo with Stevens. Please proceed with your question. Thanks, Terry. We still know your backup, boy. Thank you. Thanks, Andy. Going back to the increase in commercial non-accruals, and I thought the end of the release, the potential problem loans. I think they were investors, CRE. How much of it, how much of that increase would fall in the legacy bucket versus new lending relationship since the end of 2021?
Terry Mcevoy: And maybe give you a platform to push back on some of the fears out there that associated with the late cycle grow and commercial. And as much may see a call to faster normalization of credit trends. Yeah, we're not seeing that at all in what's happened this last quarter. We had a handful of deals that moved into non accrual. And I think I don't see any of the growth we went through the last couple of years isn't coming back to haunt us.
Terry Mcevoy: In terms of some of the migration, we've got our real estate book, we feel is really still holding up strong. The real estate asset class is still gets hit by rising interest rates. You've got inflationary pressures, whether it be on insurance, real estate taxes, all the operating expenses that go in there. So I think they're still we're still comfortable with how they're weathering the storm, but you know, there's as you these costs remain elevated, they'll be a little more added pressure there.
Terry Mcevoy: But you know, in our real estate book, the stuff we're doing is with long standing relationships. We're not out doing transactional work with, you know, one off customers, these are relationships we've targeted and grown throughout the years.
Patrick Ahern: Maybe speak to the non accrual nature and trend of the real estate book. Yeah, really, I mean, in terms of non-accruals, we haven't seen a lot in real estate. I mean, it's really been more in the CNIside that moved the needle here this quarter. We've had some pretty strong, stable performance in the book. I mean, in fact, non-accruals have been down each of the past five quarters and that charge also been negative over that five quarter periods. So if that would be the specific question, Terry, we see no evidence of that.
Patrick Ahern: And then maybe, just to follow up, I think Scott and Jon asked a similar question, does the fourth quarter expense guide, I saw non-reoccurring items, I was thinking related to the phase two of the strategic plan, not the FDIC expense. So does the fourth quarter guide reflect any strategic phase two expenses and will we see a step up in expenses next year due to this announcement that will come out this quarter?
Patrick Ahern: I'll speak to, even though we haven't given guidance on 2024, our approach has been the same each of the last two years. We've gone into each year and when I came in this role, folks suggested that maybe there was no room to cut. There's always room to cut. There's always room to cut for the next best investment that you need to make. We've made those in each of the last two years.
Patrick Ahern: We see opportunity for investment right now and before we do that, we see opportunity to decrease expenses in some areas. So that will be the approach that we have. When we think about new initiatives, you know, people say, God, well, you're going to have very high expenses. We have not in two years. We will not next year. So that's what allows me to feel like we're in the game with regards to positive operating leverage next year, even though we need to fine tune and see where we end up. With regards to expenses, we don't necessarily have any extraordinary initiative spike in the fourth quarter as a result of initiatives that we're planning.
Terry Mcevoy: Yeah, I was one of those people and you proved me wrong. So I hear you loud and clear, Andy. Thanks. Thanks for taking my time. Thank you.
Timur Braziler: Our next question comes in the line of PMORB Braziler with Wells Fargo. Please proceed with your question. Hi, good afternoon. As looking at the auto-finance book, I'm just wondering how close that book is to reaching a point of maturity, meaning that you're starting to have some loans pay off. I'm assuming that starts to accelerate somewhat in 24 and as that process happens, I'm just wondering what your expectation for growth is there. Is expansion into some newer markets? Is that enough to offset that level of maturity or at some point should we see payoffs and kind of maturing loans in that space eat into the growth?
Andy Harmening: Yeah, the payoffs already happen. I mean, that book is interesting. The duration of it has typically been historically been and for us been 36 months or less. And so you're seeing that already on a monthly basis. So it's one of the positives about a book like that is that you do work through it. With regards to what happens in the future and the growth[inaudible] Exposure to Auto, and you will see that start to peak out in what the growth is, hold steady, and then probably go down a little bit over time. Which quarter that happens in is I wouldn't predict exactly what that quarter is, but it won't be a runaway portfolio.
Patrick Ahern: Our goal is not to be simply known as the auto bank. The way it shows is that we're under penetrated in deposits in key markets for commercial. We've been working very, very heart diligently on bridging that gap. We think that we are. And so when we look at that and we look at the loans side, we think there's opportunity in commercial. Okay, that's helpful.
Patrick Ahern: And then maybe from a credit standpoint and how the growth in auto corresponds with Cecil accounting, the look back has been nothing so far really just given how new that business line is. However, historically consumer auto tends to have a higher level of charge. I'm just wondering how you're thinking about growth in that portfolio and how you're modeling that from Cecil standpoint. And could we actually see a meaningful step off once that book does start to normalize and we see charge offs move to more or less of a normal level there.
Patrick Ahern: Yeah, Tim, I'll start then. I'll flip it over to Pat, but I saw that in a note that you had talking about the higher levels charge off. And I wonder if we're mixing strategies. And by that, I mean, this is a prime and super prime book. We know that the charge off rate is what through the cycle about 35 to 45 basis points. I considered a low risk book. We have about $10 billion in consumer finance on our books of prime and super prime primarily in real state between home equity and residential and.
Patrick Ahern: And we don't see we see that we're learning to very similar customers in a balanced scorecard model. So we've actually seen an increase in credit bureaus over the last 12 credit bureau scores and those scores that we lent into this portfolio in in the last month, for example, is a FICO of 783. And I believe it's around 780 the month before and the overall book is between 760 and 770. So I don't consider this a high risk book at all.
Patrick Ahern: And because we're learning to people that pay us back and we're learning in a fashion that takes in multiple variables to calculate the risk parameters. How else would you answer that path? No, I think that's good summary. I mean, we're we're haven't seen the maturation level yet, but our metrics in terms of charge off, the link with these, etc, are tracking in how we would expect it. And we've been very happy with the deals on into it and how they performed. Like Andy said, we're we're in that prime and super prime space. So it's really kind of aligned with our expectations were.
Patrick Ahern: That's great color. And then just last one there. Can you provide an update on how big that dealer network is and what that grows? is expected to be in 24. Yeah, it's about 1300 dealers right now. You know, and as Derek said, we're expanding within the footprint. I would say we'll go through the same course of our business model in terms of adding dealers where it makes sense based on their their quality. And how they fit our model.
Chris Mcgratty: Timur, we haven't provided guides for 2024 yet. Okay, I understand. Thank you very much for the color. Appreciate the questions. Thank you.
Chris Mcgratty: Our next question comes from the line of Chris McGratty with KBW. Please proceed with your question. Hey, good morning or good afternoon.
Andy Harmening: Just a quick one on the on a capital change on slide 16, the bump up on the high end Andy, is that just a function of where you're running nine months through the year or are you trying to signal that you're looking to run a little more capital in this kind of economy? Chris, I wanted to answer your question. Derek literally called me off right here. I didn't know such thing. The question we would have gotten if we didn't move in is, oh, I see you're above your target range, because it was nine fifty before, is all you're going to do a buyback. So we're not so we bumped to high end up with the simple with that. He really did want to answer that question, Chris. It took 52 minutes. Sorry. Thank you.
Operator: I think we have one more in queue.
Operator: Ben, do we know? Alicia. Alicia, you there?
Brody Preston: Sorry about that. The next question comes from the line of Brody Preston with UBS. Please proceed with your question. Hey, good evening, everyone. Are you? Good Brody. Hey, so I'm unfortunately like John. I also travel a lot. I'm in an airport right now, so if there's background noise or if you can't hear me. I apologize in advance. All right. I want to just to quickly ask you about the fees. I know you maintained the guidance, but just given this quarters results, you know, when you kind of flow through the guide, it implies a bit of a step down in the fourth quarter, and I just want to know if there's anything specific driving that.
Brody Preston: Oh, there's not. We've had pretty strong mortgage fees the last two quarters related to MSR evaluations going up. That won't continue at that level, but otherwise there's no specific guidance that would suggest a step down from our standpoint.
Derek Meyer: Okay. I also want to just ask, generically, on the loan book, if we could give us the portion of the loan portfolio that is shared national credits and of that, what's your elite agent on? You know, in terms of the makeup of our, our snake portfolio, the largest concentration of that portfolio is within both power and utilities in our read business. Both those lending verticals reflect the successful business model we've had there for many years.
Derek Meyer: Those lines of business as well as the full snake portfolio continue to perform very well from a credits standpoint. So we're happy with it. You know, we, we view snakes as something that we review both on the front end very specifically to make sure fits the business model and we're doing, you know, we continue to do from an underwriting and portfolio management standpoint. When we do the same from a credits standpoint with those deals as direct deals understood that's great color.
Derek Meyer: Do you happen to have what portion of the loan portfolio is? Yeah, Brody, that's not something we disclose. And with regards to what we're the lead in, you know, for me, when I think of it, we're trying to lend into industries and customers that we understand. And with that, we see this as a fairly low risk portfolio from my perspective, the question I have for the team is not that would we get out of these credits from a risk standpoint, but would we get out of these credits from a returns standpoint.
Derek Meyer: And so we've spent the last, I don't know, four months looking credit by credit across all of our portfolios. And I see credits in every single almost every single portfolio of the bank that I believe that we could replace with the higher yielding asset. And so as we go quarter by quarter, that will be the goal. But with regards to Snicks, there's not a view that this is a high risk portfolio. We've not seen the emergence of that or indication of it, particularly in businesses that we've been in for an extended period of time that that have those type of loans.
Derek Meyer: Understood. And then on the office portfolio, do you have what the reserve that you set aside against the office loans is? Yeah. Just a second here. I want to say we've been building that I don't have that specific number in front of me, but we've been building that over the last couple quarters. Our office portfolio has continued to remain pretty stable. We have not seen a lot of degradation there, but we do have an outsized reserve against it, just given the uncertainty in that market.
Andy Harmening: Okay, got it understood. And then Andy, I did just want to ask one last one just on the. 2.0 version on the plan that we're going to get here down the road. But those are going to have kind of like any medium for longer term profitability targets that you're going to set out to achieve. Yeah, Brody, what I'll say about that is I try very hard not to get in front of the board, and so we'll be meeting with them over the course of the next 10 days to go over in detail.
Andy Harmening: Once I make sure that I have proper governance, I am very prepared. In fact, they're holding me back from sharing what we're going to do. So they're fair questions, they are good questions, and we intend to have something later this quarter before your end that announces specifically what actions we intend to take. So I hate to delay it that way, but I must in this case.
Unknown Executive: I appreciate you taking my questions, everyone. Have a good night. All right, thank you. I think that's it. Alicia, thank you all for the interest. We appreciate that, and we look forward to further conversations. Thank you. This concludes today's teleconference. You may disconnect your lines at this time.
Operator: Thank you for your participation.