Q2 2024 Associated Banc-Corp Earnings Call
Good afternoon, everyone and welcome to associated Banc Corp's second quarter 2024 earnings Conference call.
My name is Paul and I will be your operator today.
At this time all participants are in a listen only mode. We will be conducting a question and answer session. At the end of the conference copies of the slides that will be referenced during today's call are available on the company's web site at Investor associated Bank Dot com.
As a reminder, this conference call is being recorded.
As outlined on slide one during the course of the discussion today management may make statements that constitute projections expectations beliefs or similar forward looking statements associated actual results could differ materially from the results anticipated or projected in any such forward looking statements.
Additional detailed information concerning the important factors that could cause associated actual results to differ materially from the information discussed today is readily available on the Sec's website and the risk factors section of associated its most recent Form 10-K and subsequent SEC filings. These factors are incorporated herein by reference.
For a reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call. Please refer to the pages 30 through 32 of the slide presentation and to pages 10, and 11 of the press release financial tables.
Following today's presentation instructions will be given for the question and answer session at.
At this time I would like to turn the conference over to Andy Harmening, President and CEO for opening remarks. Please go ahead Sir.
Well, Thank you Paul and good afternoon, I'm, Andy Harmening, and I'm joined once again by our Chief Financial Officer, Derek Meyer, and our Chief Credit Officer, Patty and her life.
I'd like to start off by sharing some highlights from the quarter and then from there Derek will provide a few updates on our margin income statement and capital trends and Pat will provide an update on credit.
Midway through 2024, we have remained squarely focused on supporting our markets, while continuing to execute on our plans to grow our customer base and deepen our relationships and enhance our profitability.
In the context of the broader U S economy, we remain pleased with the stability and resilience of our upper Midwest footprint.
Several states, including Wisconsin, Minnesota remain below 3% unemployment, our prime Super Prime consumer base has largely taken inflation in stride and our commercial clients have remained upbeat, while navigating a challenging rate environment.
But these trends as a backdrop our credit performance remains solid here in the second quarter delinquency as criticized loans and net charge offs all decreased versus the prior quarter and we've steadily added to our provision over the past several quarters to date, we have yet to see any meaningful negative trends.
That are concerning with regards to specific asset classes or geographies.
This stability is a reflection of our home markets.
But it's also a reflection of our disciplined and proactive approach we've taken as a company.
We've anchored ourselves in familiar Midwest markets, and we've developed a diversified CRE portfolio with limited exposure to downtown office properties and other key pressure points and while we're pleased with the results. We've seen to date, our experienced team remains vigilant methodical and reviewing our portfolios on a continual basis to ensure we are.
And ahead of any issues that may emerge down the road.
Thanks to our strong credit Foundation, we've stayed on offense steadily executing on our strategic plan. This pattern of execution was established shortly after I joined when we launched phase one of our plan back in September of 'twenty. One over three years, we built a foundation for growth we've enhanced our lending capabilities through the addition of new loan verticals.
And the expansion of our commercial team, we've strengthened our ability to attract deepened and retain customer relationships your product service and marketing enhancements and we've invested significantly into digital to better compete in an evolving financial services landscape the tailwind to phase one enhancements.
Continue to benefit our company in exciting ways, we're seeing meaningful improvement in our customer satisfaction scores, where after being named number one in retail customer satisfaction by J D. Power in April we're now seeing the highest net promoter scores we've seen as a company since we started tracking internally in 2017.
Customers today are more likely to recommend associated banc of friends and family than they have been in years, we've seen household growth.
After several year period of negative trends, we've seen a net positive growth in consumer checking households in both Q1 and Q2 of this year in fact net households grew at a faster rate in the second quarter than they have in any other quarter in over a decade.
And we're not just opening more accounts they are higher quality accounts as well year to date, we've seen a 26% increase in deposit balances per new checking customer as compared to last year of 2023.
And while these trends trends are fun to talk about there also foundational for revenue growth and our ability to transform our profitability profile over time and they give us confidence that we're on the right path.
Phase two of our plan is designed to build on this momentum by accelerating our organic growth strategy and midway through the year, we remain on track.
Since April we've made several additional key leadership hires further expanded our promising mass affluent program and launched new marketing tactics. Just this week, we launched another upgrade of our digital platform with the new credit monitoring tool, enabling digital customers to easily track their credit score and safeguard their financial future as I am.
Mentioned back in April we expect our phase two initiatives to have an increasing impact as we get to the back half of 'twenty four and into 'twenty five.
Looking forward the progress you've made the de it against our strategic plan is foundational for our company. We've combined legacy strengths in credit and expense management, but the initiatives that help us grow and deepen our customer base enhanced profitability and accrete capital.
Well the macro economic path is somewhat uncertain in the near term, we feel well positioned to work through that uncertainty and to accelerate with a growing economy. Thanks to tailwind from initiatives already completed and incremental momentum from phase two.
Simply put we remain on track towards creating a stronger return profile for associated banc and our stakeholders.
With that I'd like to walk through some financial highlights from the second quarter beginning on slide two.
On a GAAP basis, our earnings per share came in at 74 cents for the quarter. This figure includes a onetime $33 million.
Tax benefit, resulting from our strategic reallocation of our investment portfolio ex excluding this one time impact our adjusted EPS was <unk> 52 cents or flat versus Q1.
This figure demonstrates the underlying ability of our earning profile and what it has continued to be a challenging operating environment for banks during.
During the quarter, we continue to remix the asset side of the balance sheet, which with average loan growth of $211 million. Once again. This growth was led by commercial and our prime Super Prime Auto book, but the pace of loan growth slowed in several categories due to payoffs and slightly lower loan demand and an elevated rate environment.
Average core customer deposits decreased by less than 1% in what is typically a slower growth deposit growth quarter for the bank. This broad trend was largely in line with our expectations and we remain confident in our ability to grow our core customer deposits in the back half of the year shifting.
Shifting to the income statement asset yields and a shift in our funding mix together drove a $1 million decrease in net interest income noninterest income trends have remained stable overall with continued momentum from our wealth business, leading the way on fee based revenue.
On the expense front, we continue to invest in our initiatives, but discipline remains a foundational focus for our company total interest expense came in at $196 million for the quarter and we will continue to diligently manage our expense level as we actually execute against our growth strategy throughout the year.
Shifting to capital the stability of our core profitability combined with a one time tax benefit recognized during the quarter added meaningfully to our accretion of our capital ratios here. In Q2 are seeing Q1 finished at 96, 8% or 25 basis point increase relative to Q1.
And finally our.
Our conservative approach to credit continues to be a cornerstone of our strategy here in Q2 asset quality remained solid with delinquencies and criticized loans and net charge offs, all down compared to prior quarter. We remain committed to staying ahead of the curve by taking a disciplined and consistent approach to loan risk ratings. So we can better understand.
<unk> credit risk in our portfolio by both segment and geography as always we will continue to monitor asset quality closely.
On slide three.
We provided a walk forward of our of our GAAP and adjusted EPS to more clearly display the impact of the $33 million tax benefit we incurred during the second quarter as mentioned this one time item was the result of a strategic reallocation of our investment securities portfolio.
This represented a 22 cent impact to our EPS for the quarter adjusting for this one time item EPS of <unk> 52 cents was flat compared to the first quarter.
Moving to slide four.
I'd like to provide a little bit more color on where we are with our strategic plan and how we're setting up to create a stronger associated since announcing phase one the plan back in 'twenty. One we've added several new loan verticals grown our commercial RM base upgraded our products that invested in digital transformation and amplified our brand presence throughout.
The footprint.
These investments have generated several tail winds that are foundational for our company, we diversified our asset base by adding nearly 800 million and asset based lending equipment finance verticals and $2 5 billion in prime Super Prime auto loans, we've expanded our commercial RM based 29% since 2021, we've had are over 1 billion.
And net new mass affluent deposit since launching the program in December of 'twenty, two we've seen meaningful improvements in customer satisfaction scores, where after being named number one in retail banking customer satisfaction by J D. Power in April we are now seeing a four and a half year high and our digital satisfaction scores and the highest net promoter scores we've seen since.
Started tracking this metric in 2017.
And finally.
We are now growing primary checking households associated reversing a steady trend of net decreases over the past decade.
After posting net growth across the board in consumer business and wealth households in Q1, we posted the highest consumer checking household growth we've seen in over a decade in Q2.
We're also seeing higher quality accounts being opened with the deposit balances per new household off 26% versus 2023.
We continue to believe that customer growth and higher quality accounts will deliver enhanced financial tailings overtime.
Shifting to slide five.
Two of our plan Leverages foundational tail winds up from phase, one and an infusion of proven leaders in key areas across the bank to accelerate accelerate momentum as a company, we continue to expand and deepen our talent base over the past few years, you've added a number of executives and key leaders across the bank, who are uniquely positioned to support.
And amplify our growth strategy, that's particularly true on the commercial side, where most recently, we added Mike lemons to our commercial team in Minnesota, Mike.
Mike joined US in May after 20 years with Wells Fargo, where he most recently served as the division portfolio executive for six states, including Minnesota and Wisconsin.
Whether at the executive level or on the frontline, having the right people in the right places is essential to the success of our strategic plan with that in mind. We're also progressing on our plan to hire 26, additional commercial RMS, which represents an incremental 28% increase versus September of 'twenty three.
While the recent hires that we've made to date are already making a valuable contribution in the short time with associated we're confident that their impact will grow over time.
As we've continued to add talent to our team. We've also made steady quarterly progress with our product marketing and digital initiatives in phase two.
After launching a new social media campaign in Q1 to amplify our brand and highlight our products and services, we expanded that campaign through a partnership with multiple social media Influencers in Q2, including local Wisconsin base Charlie Barents.
We've also continued to expand our mass affluent program, providing training for bankers across our footprint since launching phase two in November we've trained an additional 28 bankers to manage mass affluent relationships and we now have a total of 58 bankers who are specially trained to handle these unique relationships helping to grow this promising segment for the bank.
And just this week, we introduced a new credit monitor to offer we introduced a new credit monitor tool for our digital customers taken together with the enhancements. We've already made actions like these are expected to bolster our efforts to attract new customers and deepen existing relationships. While we remain encouraged by the ongoing momentum we have.
Seen from phase two we expect our phase two initiatives to have a more meaningful impact on our financial results as we get to the back half of 'twenty four and into 'twenty five.
This gives us confidence that we're on the right track with our strategic plan and as such we continue to expect cumulative incremental commercial loan growth with a $750 million in cumulative incremental deposit balances of $2 $5 billion in annual household growth rate of 3% by the year end 2025.
Okay.
On slide six this is just a reminder, that we are in the process of Remixing, our balance sheet to drive higher returns through multiple different efforts.
I'll quickly transition to slide seven I'd like to highlight a few balance sheet trends for the second quarter, beginning with loans on slide seven.
On a quarterly basis loans grew by $211 million during the second quarter led once again by our CNI and auto portfolios. We've continued to emphasize these two areas as a way to help remix our balance sheet over time and to degree sorry decrease our reliance on low yielding low relationship asset classes and to enhance our return profile.
While still maintaining solid credit standards with that said, we did see the rate of growth slow in the second quarter, particularly in auto book, where we saw softer demand across our dealer network. In Q2. We were also impacted by elevated payoffs in our CRE portfolio and saw average CRE loans decreased by $140 million during the <unk>.
Quarter.
Across our broader portfolio, we continue to seek selective growth that emphasizes full banking relationships quality credit profiles and diversification to deliver improved returns.
While we continue to expect tailwind from our initiatives in the back half of the year. We now expect total loan growth to land at the lower end.
Of our range of 4% to 6% due to market conditions and previously mentioned increase in CRE payoffs.
Moving to slide eight we mentioned back in April that our Q1 deposit trends were somewhat inflated by seasonality and as we expected those balances normalized in Q2.
While the second quarter is typically a slower seasonal growth quarter for associated Banc anyway. We also saw an unusually large swing in our point to point balance flows relative to the first quarter. This.
This period and decrease was largely a timing issue driven by disbursement of seasonal balances that were expected to flow out before the end of Q1, but didn't flow out until early Q2. This timing issue was a key driver in the period and flows in both the total deposits and DDA.
Nonetheless, the broader trend over the first half of the year as large remain in line with what we've communicated previously we expected balances to bottom in Q2, and then grow modestly the rest of the year that continues to be our expectation on a quarterly average basis, which allows for more normalized view of these flows core customer deposits decrease by.
Less than 1%.
Slide nine we include a broader three quarter view of our quarterly average deposit trends to more clearly show the stability we've seen in the first half of the year. Despite the lumpy point to point balances between Q1, and Q2 quarterly average core customer deposits were essentially flat from Q4 of 23 to Q2 of 24 in fact.
They were slightly up.
As discussed earlier, we continue to feel very well positioned for our core customer growth in the coming quarters due to expected tailwind from promising leading indicators such as customer household growth and satisfaction metrics.
These leading indicators are foundational changes for our company that will enable us to sustainably grow our customer base over time.
While we remain confident in our ability to deliver our core customer deposit growth over the back half of 'twenty for the market for deposits has remained competitive and is higher for longer environment.
Due to current market conditions, we now expect core customer deposits to finished 2024 at the lower end of the three years to 5% range given previously.
So with that I'll pass it on to Derek to walk through the income statement and capital trends Derek Thanks, Andy I'll start on slide 10, with some color on our asset and liability of yield trends.
While the target fed funds rate has remained stable since July of last year, we've continued to see asset yields inch higher in most major loan categories, including C&I auto and mortgage here in Q2. We also saw investment yields increased 14 basis points during the quarter as we continued to benefit from the securities repositioning we completed last year.
With that said, our overall Q2, earning asset yield was also negatively impacted by two basis points relative to Q1 due to a lower level of non accrual interest rate recoveries, particularly within CRE and C&I loans taken together with the core growth in our loan and securities yields mentioned previously our earning asset yields increased by one basis.
Points and landed at 565% during the first quarter or second quarter.
On the liability side of the balance sheet, we've continued to see lingering funding cost pressures due primarily to elevated wholesale funding costs, we've actually seen both our cost of total interest bearing deposits and cost of total deposits decreased slightly in Q2, but these trends were more than offset by the addition of higher cost wholesale funding during the quarter.
All in our cost of total interest bearing liabilities increased five basis points to three 6% for the quarter.
On slide 11, the trends I, just described netted out to a four basis point decrease in our quarterly net interest margin was two basis points impact coming from the quarterly swing in recoveries on the asset yield side and the other two basis points attributed to higher funding costs.
Despite this pressure on NIM, our net interest income has remained stable.
The 257 million, we posted in Q2 was down just $1 million from Q1, and it was higher than our NII in the third and fourth quarters of last year.
Based on our latest expectations for balance sheet growth deposit betas and fed action, we expect sequential growth in our net interest income over the remainder of the year and NIM expansion by year end with that said given market conditions. We now expect to drive net interest income growth of between one and 3% in 2024.
This guidance assumes 225 basis point fed cuts by year end beginning in September.
Shifting to slide 12, we have continued to manage our securities book within our 18% to 20% target range with the benefit of higher rates combined with the securities repositioning we completed last year. The average yield on our Securities book has now risen by 64 basis points from the same period a year ago.
On a dollar basis, both our cash and investment security positions increased slightly versus Q1, but as a percent of total assets. These positions held firm at 21% in Q2.
Over the remainder of 2024, we will continue to target investments to total assets of between 18 and 20%.
On slide 13, we highlight our noninterest income trends throughout the second quarter.
Noninterest income came in at $65 million for the quarter, which was up slightly compared to Q1 and down slightly from the same period a year ago.
On a year to date basis, noninterest income was up $3 million or 2% compared to 2023.
During the second quarter, our results were highlighted by growth in wealth management fees card based fees and bully income.
This was partially offset by a $4 million decrease in net investment securities gains with the decrease driven by the $4 million gain on sale of visa B shares we booked back in Q1.
As a reminder, we have no visa b shares remaining as of March 31.
We continue to feel encouraged by the durability of our noninterest income in a challenged environment and we now expect full year 2020 for noninterest income to finished plus or minus 1% as compared to our 2023 adjusted base of $264 million.
Moving to slide 14, we've continued to manage our expense base diligently despite ongoing investments to support our growth initiatives. This discipline remains a foundational focus across the company.
Our second quarter expenses of $196 million were down 2 million from the prior quarter, but embedded in our Q2 number was a $2 million adjustment of the FDIC special assessment expense booked in Q1. Following an updated estimate received from the FDIC here in Q2.
Our adjusted efficiency ratio increased from the multi quarter low we now posted in Q1, but our noninterest expense to average assets ratio continued to decrease in the second quarter landing at 192%.
This metric underscores our ability to keep expenses in check while continuing to invest in our organic growth strategy.
We continue to expect total noninterest expense growth of between two and 3% in 2024 off of our adjusted 2023 base at $783 million.
These figures exclude the FDIC special assessment impacts in Q4, Q1 and Q2.
Shifting to slide 15, our stable core profitability trends combined with the one time tax benefit booked during the quarter drove meaningful capital accretion across the board in Q2.
We saw a 10 basis point net increase in our TCE ratio during the quarter, finishing at 718%. This net increase was driven by improved profitability, partially offset by asset growth in the denominator.
After following the 939% as a result of our balance sheet repositioning in Q4, our CET one rebounded to 943% in Q1 and finished Q2 at 968% the highest CET one ratio we posted in two years.
Both our TCE and CET, one remain well within our 2024 target ranges as of Q2, given current market conditions. We continue to expect TCE to remain in the range of $6, 75% to 775% in 2024. We also expect CET. One do you remain in the range of 9% to 10% over the same timeframe.
I'll now hand, it over to our Chief Credit Officer, Patty adhering to provide an update on credit quality.
Thanks Derek.
To start our credit portion with our allowance update on slide 16.
We utilized the Moody's 2024 baseline forecast for our seasonal forward looking assumptions the Moody's baseline forecast remains consistent so resilient economy, despite the high interest rate environment.
Based on forecast contains no additional rate hikes slower, but positive GDP growth rates are cooling labor market and continued deceleration of inflation.
Our ACL increased by another $2 million in Q2 to finish the quarter at $390 million with increases in CRE construction and other consumer categories, partially offset by decreases in commercial and business lending CRE investor and resi mortgage.
Our allowance continues to be driven primarily by loan growth in select areas such as auto nominal credit movement in general macroeconomic trends that reflect the stability of our Midwest footprint.
As such a reserve to loan ratio landed at 132% here in Q2.
One basis point versus Q1, and up six basis points compared to the same period a year ago.
Moving to slide 17.
Continued to see solid performance in our core credit quality trends with credit metric changes reflected a continued theme of normalization within the portfolio.
At the top of the pipeline total bank wide delinquencies have decreased for the second consecutive quarter with $37 million in total delinquencies in Q2. This figure represents a $14 million improvement from the prior quarter and a $4 million improvement from the same period a year ago.
Delinquencies often serve as an early warning signs of stress in the portfolio. So we've been pleased to see the improvement in these numbers despite a challenging macro environment in 2024.
Further down the line total criticized and classified loan trends also improved slightly for the third consecutive quarter.
We did see an uptick in the substandard accruing bucket. This is more than offset by decreases in our special mention and non accrual segments.
We remain encouraged with the stability of total criticized assets and the decrease in those credits showing early stress.
Within the non accrual bucket, specifically, we continue to see puts and takes consistent with our normal course of business in Q2.
We did see an uptick in non accruals within CRE, which is largely driven by our CRE office credit However, early indications.
Our leading to a path towards favorable resolution with this credit in Q3.
Outside of that one particular credits total non accruals would have decreased even further for the quarter, which we see as another sign of overall credit stability.
Finally, we booked $21 million and net charge offs during the quarter and $23 million and provision both of which represented a $1 million decrease from Q1.
Overall net charge off rate still remains within 2024 expectations.
Taken together, our credit metrics continue to give us confidence.
We have seen to date is a handful of credits migrating to a rating system and not necessarily a sign of broader issues coming down the road in future quarters overall outside of these specific situations, we remain comfortable in the normalized level of activity we've seen across the bank.
As we've done over the past couple of years, our ongoing quarterly portfolio deep dives and risk rating analysis remain a focus and a key tool to stay ahead of credit concerns given the uncertain macro outlook noted earlier.
As we look back to the as we look to the back half of 2024, we remain diligent in monitoring credit stressors in the macro economy to ensure current underwriting reflects ongoing inflation pressures 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 ongoing interest rate sensitivity analysis bank wide.
Going forward, we expect bromine provision adjustments to continue to reflect changes to risk grades economic conditions loan volumes and other indications as well.
Yeah.
Finally, we provided a refresh of key CRE metrics on slide 18.
As a reminder, 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 across our portfolios with a focus on prime and Super Prime consumer portfolios.
While CRE continues to be cited as an area of risk in the industry feel well positioned given the conservative approach, we've applied across the bank and building our CRE portfolio, we focused on partnering with well known developers and build a portfolio of predominantly in stable and Midwest markets.
Two thirds of our CRE portfolio is Midwest with an emphasis on multifamily and industrial properties.
Do not have any exposure to the rent control in New York City real estate market.
Office loans now represent just three 4% of our total loans as the bank within that portfolio. We are weighted towards class a properties in that urban environments. We continue to take a proactive approach to CRE office credits with the majority of those maturing for the remainder of 2024 already having strategies in place.
Whether that be refinanced sale, we're qualifying purchases at prevailing underwriting standards.
Well, we feel well positioned given our business model approach in the markets. We operate in we continue to monitor this and all of our portfolios closely.
With that I will now pass it back to Andy for closing remarks.
Thanks, Pat I'll wrap this up by reiterating a couple of key points from our presentation on slide 19.
First our strategy emphasizes quality relationship focused loan growth that decreases our reliance on low yielding non relationship balances and enhances our profitability profile.
While we continue to expect tailwind from our initiatives in the back half of the year. We now expect total loan growth to land at the lower end of our original range of 4% to 6% due to current market conditions and previous previously mentioned increase in CRE payoffs.
On the other side of the balance sheet, we've been pleased with the momentum we've seen from leading indicators such as household growth quality of accounts and customer satisfaction scores, which are foundational for growing your customer base and delivering quality deposit growth.
We're also encouraged by our ongoing cadence of product service and marketing enhancements expected to help build on that and we expect that to help build on our momentum in the coming quarters.
Due to current market conditions, we now expect core customer deposit growth to finish 2024 at the lower end of our 3% to 5% range that was given previously.
On the income statement, we've adjusted our most recent forecast for balance sheet growth deposit betas and rate environment. Our latest forecast assumes two fed rate cuts beginning in September and taking these factors into account. We now expect net interest income growth of between one and 3% in 2024.
Yes.
We continue to feel encouraged by the durability of our noninterest income in a challenged environment and as such we've updated our full year 2024 growth guide to plus or minus 1%.
And finally, our disciplined approach to expense remained foundational for the company and with this in mind, we continue to expect noninterest expense growth of 2% to 3% in 2024 after excluding the impact of FDIC Special assessment expenses in Q4, Q1, and Q2, so with that.
Let's open it up for questions.
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Sarkies.
One moment, please while we poll for questions.
Thank you. Our first question is from Daniel Tamayo with Raymond James. Please proceed with your question.
Thank you I appreciate it good afternoon guys.
Maybe first.
Daniel Tamayo: Yeah, maybe first just a just to start on the noninterest income guidance.
Just back of the envelope as I as I look at what you guys have done in the first half and the guidance for the full year it looks like.
Daniel Tamayo: There is some solid NIM expansion that that wood.
Daniel Tamayo: I assume are baked in the back half of the year guidance.
Daniel Tamayo: Thinking about that Ryan I think I think I heard you say the NIM expansion, you're expecting by the end of the year not sure. If we should think about that as kind of stable in the third quarter and then.
More meaningful in the fourth quarter.
Maybe you can help me just in terms of how I'm thinking about the.
Speaker Change: The dynamics for the rest of the year.
Yeah. So this is Andy I'll start this off and then turn it over to Derek I I'd say, what I'd emphasize is.
We expect deposit growth and we expect loan growth in both the third and the fourth quarter. So with that we're expecting a steady expansion of our NIM throughout the second half of the year and so maybe Derek could put a finer point on that.
You got it right.
We expect to sequentially increase both third and fourth quarter and our.
Margin expansion in both quarters handful of basis points each one.
Okay, alright, great. Thanks for that help.
And then maybe are looking at the expense guidance.
It seems like well I guess, just first a clarification the adjustment relates to the FDIC assessment that in the second quarter.
Speaker Change: Was that a negative adjustment so the the operating number was.
Higher than the reported number or just wanted to make sure that I have that right.
That's correct, it's Tim it was $2 million.
Unwind of an accrual based on received the actual bill from the FDIC.
Okay.
Alright that makes more sense went with the guy than it.
Still implies a little bit of a pick up I guess in expenses in the back half from what you guys have done in the front half is that should we think about that being kind of personnel driven with the with the hiring that you guys have been making.
It is personnel driven and then there is.
Investment in actually acquiring accounts and.
Marketing and segmentation to support Com acquisition.
So some of it you would see as some of it you'd see us.
Eventually.
Contributing to the all the RM hires that we've identified and then some of it would just be seasonal.
Okay.
Alright terrific well thanks for thanks for the color I'll step back.
Thanks, Dan.
Yes.
Thank you. Our next question is from Scott <unk> with Piper Sandler. Please proceed with your question.
Good afternoon, everybody. Thanks for taking the question Derek.
Derek maybe if we could walk through the idea of margin expansion in the back half maybe just that.
A little more color on what you expect the puts and takes to be that would allow for a few basis points of expansion in each of the next couple of quarters I guess that the background is.
The context is we're starting at a little bit of a lower base than I thought the real juice for the margin would have been.
Sort of a lingering benefits of the securities portfolio restructuring I guess base question is what is it that allows the margin to expand from here you noted that.
Fed rate cuts or is it just.
Richard balance sheet mix with the net net of.
Loan growth as well as core deposit growth, how do those dynamics play out.
Yeah, it's more mix driven although we rerun. This obviously with the rate cuts each time that matters less and less now we have two rate cuts assumed one and September one in November but more of it is continued.
Trickling up of the investment portfolio.
The auto book.
Both of those happen in a little bit of a resi both of those happened regardless of a lot of movement from the fed and then as we expect to see these RMS bring in C&I growth.
At rates that you saw sort of at the end of.
Phase one.
Those that should help us.
Replaced some of this lower yielding <unk> as it rolls off then on the.
Speaker Change: And then you have two levers liquidity the mix on the deposit piece as we expect deposit growth do you expect the mix on the wholesale piece to drop but then if you also look at the quarter over quarter.
Quarter change in our interest bearing deposits.
We already sort of telegraph those costs coming down a little bit and we expect with a rate cut.
That'll allow us from a customer perception standpoint to be a little bit more.
Efficient on that front also.
Okay.
Alright. Thank you for that and then Andy are Jack just on the.
Lower loan growth expectation I guess.
Hoping you could unpack a little more.
Just sort of as you as you weigh how much of this is.
Lower demand versus how much is sort of profitability within the existing growth aspirations and then E com.
Any specific nuances that you've always had it.
The new hires I imagine there theyre producing guys as hoped but would just love to hear your color on color on sort of the umbrella of all three of those things.
Yeah. So this is Andy I'll take that one first thing I'd say it is it's the lower end of the range. So we're staying within the range that we forecasted or gave guidance on at the beginning of the year. Then there are a few puts and takes within that.
We've been proactively managing our CRE book, and we've had some payoffs and we're fine with that so that takes it down a little bit it puts us in a pretty good position credit wise, we've seen the auto industry.
Industry.
The application volume has slowed a little bit in that part of what we do.
But the market has some influence on that however, we see our pipelines are up and so derik and I were just discussing this last week, we compare phase two of our plan with phase one and so if you look at that we're adding about 26 RMS in phase two we added roughly 20 in phase one.
We are seeing very similar impact in the first six months of that remember it's the first six months of that so by the time you hire them. They take an application you don't.
Start closing anything or booking anything until third and fourth quarter and so we see a very similar.
We see a very similar results in that period of time.
Gary I don't know if you can show highlight kind of where we were in phase one and what we grew too just to give an idea on the timing yes.
Uh huh.
I think right before I started Andy was here and then.
September our third quarter of 2021 rolled out phase one and so as I looked at the June.
Before that June <unk> at our C&I loans were about $9 2 billion.
That's $11 1 billion now and really you grew about $1 billion that first year.
Any of the back half of the first year and then another 1 billion in the following year, we're sort of seeing the same thing.
Where you maintain a portfolio you have and then as the new hires come in the pipeline build slowly and then.
We are all eager to see the pull through on that.
And I expect the same thing to happen and so Scott. If you wanted the short version versus the Reader's Digest, we're still within the forecast were slight were slightly low end of that just because auto is a little bit.
Shorter and then CRE is a little bit down.
Yeah got it okay. Thank you very much I appreciate it.
Alright, Thanks Scott.
Okay.
Thank you. Our next question is from TMR, Brazil, or with Wells Fargo Securities. Please proceed with your question.
Hi, good afternoon.
Hello.
Yes.
I'm just wondering of the 28 planned higher 26 planned hires how much of that hiring has already taken place.
Yes, Great question, we are at 10, net so nat meaning if somebody leaves we actually have to replace that too and so we're at 10 or 26.
And I expect that we'll be at 100% by my estimation target is by the end of the first quarter of 'twenty five will be at all 26.
And then I guess, just maybe going back to the the growth expectations for both loans and deposits in the back end of the year I mean both of them.
Imply kind of a meaningful ramp I guess on the loan side and I get you know Rms coming in bringing over their books.
<unk>.
The environment does seem soft.
Is the expectation that CRE paydowns slow that auto demand intensifies, I guess, what's giving you confidence that.
That loan growth is going to materialize in a more meaningful capacity into Q.
Seeing as.
The landscape is still a little bit softer.
Yeah, we have the benefit of seeing our pipelines and so we're able to track kind of where they were this time last year. We can do it by same quarter prior year and those pipelines are up and typically when you see pipelines grow the loan production and loan balances follow on that we also think that we've had.
Had we monitor pretty closely what we've seen in the CRE Paydowns and we expect that that net number for CRE won't be quite as negative in the second half as the first half.
So when we look across the board.
The loan growth it doesn't have to be heroic just has to be a little bit better than it was in the first half and frankly, those 10 people that we have hired.
We'll really start to get benefit from them in the second half of the year. So there is additional.
Additional dollars there.
Speaker Change: On the deposit side of it the balance sheet, we can look at annual trends and we see the back half trend.
For the company for the last two years, we have we have significantly improved our capabilities on the consumer side.
Speaker Change: And we and we've added RMS on the commercial side and frankly, our wealth business is doing quite well and deposit acquisition. So both sides of the balance sheet, we feel that we'll be able to fund pretty equally.
Our loan growth in the second half what we're looking at on the low number and then funding and on the deposit side.
Okay, and then I guess, just a corollary corollary on the deposit side.
Whats the implication for noninterest bearing demand.
How is that progressing as the pace of pressure.
Your line item, maybe being a little bit and then just wondering if the loan growth is somewhat dependent on the deposit growth manifest thing or.
If that deposit growth doesn't manifest would you continue funding that loan growth with our wholesale funding.
So a couple of things I think we talked about the last two quarters the noninterest bearing.
Deposits bottoming about $585 8 billion I think it bottomed about five 7%.
We still have the same view.
And bottoms up forecast, telling us its going to grow a few hundred million between now and the end of the year. So.
I think that is largely intact.
One of the things about and so we have contemplated your other question. We did in the fourth quarter about loan growth and deposit growth our loan growth right. Now is not in strategy is not dependent on deposit growth.
But we feel confident in both of them, we grew deposits quite a bit.
Second half of last year and outperformed our expectations. The first quarter this year and a little bit of the second quarter is.
Is rebounding from that so we have confidence in the tactics, but also we don't necessarily want to put the brakes.
On our go to market strategy with the commercial relationship managers, who are tasked with getting both and what I mean by that is when we repositioned our securities and sold or the resi real estate that improved our profitability, but it also freed up capacity in funding so that if loan opportunities.
Get ahead of the pace of deposit growth, we have flexibility there as long as it's profitable because the setup for this is driving growth and profitability and that gives us the flexibility to do that.
Tag onto that we have to think of what our funding sources in the downside scenario of not hitting your deposit numbers are but make sure you understand that a majority of our growth on the deposit side, we expect to come from consumer we have executed on every consumer strategy that we had in the plan every time, we've launched a new piece of it we've seen it improve.
Speaker Change: <unk> and <unk>.
Retention.
We've seen an improvement in customer satisfaction, which typically leads to people stain. So remember the growth is dependent on people stain and adding to it. The second part of that is you can start to see what your tactics are and seen the households, accelerate which we have each of the last three months, including this month when that.
<unk> to accelerate they bring quality deposits and we measure what the quality of those customers are so between that between the decreased runoff the improvement.
From even year and customer satisfaction, leading to decreased runoff and then acquiring new customers that are starting that are that are higher quality than the year before.
While we do have a contingency plan to fund and have loan growth regardless of deposit growth.
That combined with what we've seen in the trend. The last two years gives us gives us the confidence that we'll be able to fund the loan growth vis vis our deposit growth.
Great and if I could just sneak one more question and just.
Speaker Change: For the remainder kind of planned hiring.
I'm just wondering how much of that from an expense standpoint is going to be able to be mitigated with maybe further.
Enhancements reductions on other expenses you guys have done a really nice job kind of keeping the line on expenses over the last four quarters, while adding new people as theirs.
Still capabilities to maybe offset some of the hiring spend or should we see a greater pull through from these expected hires until.
The expense base.
Well, you're making my job easier right now because I assume our leadership team is listening in we go into every single year, saying, where do we cut to invest.
Those conversations have started already.
I'm trying to get out in front of that and so we expect we'll find areas that we can decrease expenses to invest and where the world's moving part of where the world is moving for us is to be local and add to the commercial our Ams, although adding 16 people won't won't make or break our budget all by itself. So that is our approach to business.
This of course everyone's battled.
Expense growth and inflation and what that means but.
That conversation has happened as recently as this morning of meetings that I've had as recently as yesterday with our entire <unk> team and we have meetings already scheduled with our executive leadership team to have the same conversation. So it is the way that we do business yes.
And we expect to manage our expenses and 25 in a very similar type.
Type of fashion.
Great. Thank you for the questions I appreciate it.
Got it thank you.
Thank you. Our next question is from Terry Mcevoy with Stephens Inc. Please proceed with your question.
Hi, good morning, good afternoon, everybody.
Maybe could you start talking about the $81 million of office CRE loans that matured in the first half of the year in terms of updated appraisals and if those loans remain on the balance sheet today and I ask the question because I think you've got another 200 thirtyish set to mature in the back half of the year.
Speaker Change: Yes.
I would say in terms of the first half of the year. It was definitely a mix of.
Some we capped.
They met underwriting criteria, we've had others that paid off via sale or refinancing.
Refinance so it's probably a fairly even mix amongst the three and thats kind of how we would look at the rest of the year as well.
Anything that stays on the books that we're looking to renew.
Really Scott, we're looking to reset.
Updated underwriting standards et cetera, and work with clients on that.
Thanks for that and then as a follow up you know page six a complete sense improving the returns involves decreasing wholesale funding sources and I've got a couple of investors reach out to me over the last hour and just.
Just to cite the increase in the FH L B borrowings, which kind of goes against that slide so looking beyond the next couple of quarters, where do you where would you like to see wholesale funding FHL advance as be as a percentage of your balance sheet.
Yes. So we include in our.
For the purposes of.
Managing the firm and our definition of wholesale funding. We also include brokerage Cds. So we generally try and keep that.
15% or below.
Three buckets combined.
Great. Thanks for taking my questions.
Yes, I'd just tack on to that by saying that's why I've emphasized that we're funding the balance sheet with deposit growth in the second half, but to me looking at the second quarter versus first looking at the first and second quarter in combination.
Farms, because we're able to take steps on the wholesale funding in the first quarter. When we had deposits longer than we expected. So that kind of went up and came down our absolute intent is to have budgets and expectations, where we are growing our deposits at the same rate as our loans and so that's that's what I was trying to.
A highlight in the expectation in the second half if you just simply look at that one quarter doesn't tell the story. That's that's the other reason that we tried to show from the fourth quarter average to the second quarter average its pretty much its pretty much flat.
It's a good question.
Yes, Thanks, Andy.
Okay.
Thank you. Our last question is from Jon <unk> with RBC capital markets. Please proceed with your question.
Hey, Thanks, good afternoon.
Hey, John.
I did have a question on that trend that Terry just asked but.
Just to clarify I mean, it's it's late July youre starting to see those.
Posits rebounding already is that fair I understand the first quarter to second quarter normalization does that.
Rebound yet.
It has I mean that it would be a difficult story to tell if we hadn't seen that already in June heading into July as well.
Frankly, it's followed the trend in the forecast that we've had internally yes.
Okay.
Any thoughts on what could push you to the higher end of our net interest income range is it as simple as loan growth or is it something else.
Yes, it's a loan growth I think if we saw fewer payoffs than we currently are rolled up and are forecast on CRE.
And we saw the pipeline.
No.
Mature so pull through come in quicker than what we've currently got penciled in those with both drive it you've.
<unk> seen the pipeline grow as a result of adding all these people that Andy was talking about.
But at the same time, we saw pull through of deals booked slow down a little largely because of high rate so that could easily reverse itself.
The economy itself is strong so we don't see that the softening.
In terms of demand driven by GDP growth, we don't see that as a factor.
The slowing anything down in our markets.
Okay.
So is it possible that lower rates could be a catalyst for some loan growth that's fair yes.
As possible or it could be the.
Both lower rates or slower pay offs than what we've got.
Plant.
Sure.
And then just one Andy you cited a little softer demand in the auto dealer network.
Any idea on the cause of that is that just a blip for persistent.
What do you think.
I think the captive it captures have tried to.
Kind of enhance the sales of auto and so they have some offers out there that are pretty that have been fairly aggressive.
We absolutely won't get out of the prime Super Prime business. So we're not going to we're not going to flex on that where we like it is.
Business for Us and it's one that actually helped the gap.
The attrition that we planned for on the residential real estate and so we won't we don't need to reach there and the average FICO.
Pat was average FICO in June.
Pushing like 7% to $85 790 day.
It was actually over 790, the whole quarter. Yeah. So this is truly a super Prime book, So it slowed a little bit.
Will that increase in the second half, perhaps a little bit.
But we won't we won't press the accelerator on auto so to say.
Speaker Change: Okay.
It can be.
Okay, alright, thanks for the help I appreciate it.
Thank you.
Thank you there are no further questions in queue.
Well, we appreciate everybody's interest and we look forward to executing on phase two as we head into the second half of 'twenty four and ended 25 have a great evening.
This concludes today's conference call you may disconnect. Your lines at this time. Thank you for your participation.
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