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spk00: Good afternoon, everyone, and welcome to Associated Bank Corp's first quarter 2022 earnings conference call. My name is Hillary, and I will be your operator today. At this time, all participants are in listen-only mode. We will be conducting a question and answer session at the end of this conference. Copies of the slides that will be referenced during today's call are available on the company's website at investor.associatedbank.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's 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's actual results to differ materially from the information discussed today is readily available on the SEC website in the risk factors section of Associated's most recent form 10-K and subsequent SEC filings. These factors are incorporated herein by reference. For your reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please refer to page 23 of the slide presentation and to page 8 of the press release financial table. Following today's presentation, instructions will be given for the question and answer session. At this time, I would like to turn the conference over to Andy Harmoning, President and CEO, for opening remarks. Please go ahead, sir.
spk06: Thank you, Hillary, and good afternoon, everyone. Welcome to our first quarter earnings call. I'm Andy Harmoning, and I'm joined here today by Chris Niles, our Chief Financial Officer, and Pat Ahern, our Chief Credit Officer. I'd like to start things off by covering the highlights of the quarter and provide an update on our strategic initiatives. From there, Chris is going to walk through our updates on income, expense, and capital, and then Pat will follow up with an update on our credit trends. So here in the Upper Midwest, we continue to see signs of a strong economy in our footprint. COVID restrictions have largely been eased or lifted, and employment trends remain remarkably strong, with unemployment rates in Wisconsin and Minnesota now down below 3%. We also continue to see encouraging strength in our commercial loan pipelines and utilization rates, giving us confidence that the momentum we began to see in manufacturing back in the second half of 2021 is in fact carrying over into 2022. Meanwhile, all of our new lending initiatives are now officially up and running, putting Associated in a position to deliver more and relevant product solutions to our customers. While the war in Ukraine, continuing supply chain disruptions, and inflation issue pose significant question marks at the macro level, our core customer base has remained resilient and continues to borrow and to grow. This resilience is seen in the overall credit trends in our loan portfolios, which largely continue to improve. As we continue to transform the bank, one of our biggest opportunities is to listen to our customers and then take action. Guided by their feedback, we announced that we're making several changes to our overdraft program, and these changes will significantly reduce the financial burden of overdrafts to our customers. In summary, we have positioned Associated to be in a far better place than we were a year ago. Today, we're in a strong position to deliver expanding margins, continued positive operating leverage, and enhanced value to all of our stakeholders. So now let me touch on the first quarter highlights that are outlined on slide two. This quarter was marked by meaningful growth in our core loan portfolios, disciplined expense management, improving credit dynamics, and strong bottom line results. Our total loans grew at a 5% annualized rate on both an average and a period-end basis, and excluding PPP, Average commercial and business loans expanded at an even faster 8% annualized pace. This loan growth, along with our continued investment strategies, helped drive net interest income and margins higher, despite having two fewer days in the quarter. Now shifting to expenses. We managed our total expenses down quarter over quarter and year over year, while simultaneously increasing our minimum wage, investing in our technology platforms, and invest in our initiatives. We attribute these savings to the significant actions we took to consolidate our operations and support functions in the latter half of 2021. With respect to credit, we would highlight that we are posting a modest net recovery this quarter. Portfolio metrics continue to be strong and stable as we keep a close eye on geopolitical and economic risks. Taken together, loan growth, margin expansion, expense discipline, and strong credit drove robust EPS of 47 cents and another quarter of double-digit returns on capital. So, turning to slide three, I'd like to provide a little more detail on the loan trends we saw in the quarter. Looking to our average balances, we had net loan growth across all of our core business segments. Consumer loans grew as our auto finance vertical kicked into gear. and commercial lending grew, including our new verticals, more than offset the headwinds of the mortgage warehouse and PPP. General commercial lending again showed strong momentum, reflecting broad underlying loan demand with our customer base. On slide four, we'd like to highlight several dynamics which give us confidence in the continuation of the loan trends we've seen emerging over the past several quarters. First, the left-hand side of this page highlights the emerging total commercial growth we've experienced. Aside from the dual headwinds of PPP and mortgage warehouse, our commercial portfolio at March 31st was up 9% year-over-year and expanded at double-digit annualized growth rates versus the third quarter. This has largely been fueled by a rebound in commercial C&I balances, growth from our new ABL and equipment finance initiatives, as well as increased line utilizations. and we still see upside and room for more borrowing as the economic environment continues to normalize. Now, second, on the lower right, we'd also highlight that our back book of unfunded CRE construction projects has continued to grow. Year over year, we've added over a half billion dollars in unfunded commitments, most of which we would expect to see funded over the next 18 months. And while the first quarter is seasonally slow for construction in our markets, We fully expect this activity to pick up as the spring weather arrives in our footprint. Excuse me. Underscoring the points I just made, I'd like to affirm our full-year loan targets on slide five. With respect to commercial loans, we expect to end the year with $16 billion of outstandings, excluding ABL and equipment finance, which I'll touch on in a moment. Given the growth that we've seen, the robust pipelines that have continued to grow since year end, and the funding activity we expect to see this quarter, we're confident we're on track to hit our commercial loan goals for the year, even with the headwind of dampening of mortgage warehouse activity. We're also pleased to update you on the strong progress we're driving in our new ABL and equipment finance verticals. We've strengthened the teams. both groups have added commitments and outstandings during the quarter and we feel very confident about the 300 million dollar target we've set for year end so taken together we expect our total commercial book in the year at approximately 16.3 billion dollars turning to auto finance the first quarter demonstrated our team's ability to deliver we expect this portfolio to continue to grow strongly and maintain its strong credit profile as we roll out the program to our broader dealer network and into our core footprints later this year. In summary, despite some uncertainty in the markets and modest headwinds such as mortgage warehouse, we expect to achieve our lending growth targets in 2022. Now turning to slide six, let me make a few comments with respect to our continued investment in talent, our digital transformation, and our capital priorities. With respect to talent, we've continued to add new relationship and portfolio managers to our commercial and small business teams during the quarter and are on track to hire 15 to 20 bankers by year end. We also opened our Houston CRE office during the quarter and continue to ramp up our ABL and equipment finance teams. On the digital front, we crossed a milestone by launching our internal pilot for our new NCR digital platform. which we plan to roll out to all of our consumer customers this summer. Now, this is one I'm personally very excited about because it's going to give us an open architecture platform. It's going to allow us to integrate both customization and fintech solutions. Turning to capital. We remain committed to optimizing our capital to support our customers. In 2022, that means focusing squarely on organic growth. We see plenty of loan growth in our outlook and envision using all of our capital to support that growth while paying a competitive dividend. We continue to see our investments and strategies as creating a differentiated growth path for Associated that will drive further margin and efficiency gains in a time where we are already expecting to see significant tailwinds from the rate environment. So let me pause there for a moment and hand it over to Kristen Iles, our Chief Financial Officer, to provide a little more detail on our revenue and income statement trends for the quarter. Chris?
spk03: Thanks, Andy. Turning to slide seven, net interest income continued to increase for the fourth consecutive quarter. The increase came as we put our excess liquidity to work in loans and securities. As we had previously indicated, our NIM bottomed out last year and has continued to inch higher each quarter since. Given the rising rate environment, our general asset-sensitive profile and the anticipated impacts of our growth initiatives, we fully expect our NIM to continue to expand and come in above the 2.5 level, which we already saw during the month of March. We now expect short-term interest rates to rise following each of this year's upcoming FOMC meetings. Assuming those rate increases are 25 basis points at least following each meeting, we would expect our full year net income to exceed $840 million. On slide eight, we highlight that we've purchased securities, sorry, which have been participating in moves higher in rates. In effect, we've been averaging up into the yields we're earning, even as we've reined in durations. Our blended investment yields for the quarter continue to move higher, and our total portfolio yields have improved by nearly 40 basis points since the third quarter. In anticipation of higher rates, we also took steps in Q1 to redesignate 1.6 billion of our securities from AFS to HDM. Nonetheless, our AOCI does reflect a $127 million reduction in the value of the portfolio during the quarter. This AOCI impacts net of earnings drove the 18 basis point reduction in our TCE, which you can see on our tables. Our TCE nonetheless ended the quarter at 7.7%. Moving on to slide nine, we continue to benefit from our strong deposit trends. In a time of year when we might typically expect to see a post-New Year outflow, average deposits were up 245 million quarter-to-quarter and up 7% year-over-year. Growth continues to be concentrated in our low-cost deposit categories, such as our savings and interest-bearing demand accounts for consumers. With rates expected to rise throughout the year, we may see some outflows later in the year and would expect deposit pricing to heat up at some point. But so far, we have not seen customers reduce balances, and we're not seeing competitive pressure to raise rates in our markets. Moving on to slide 10, our core fee-based revenues came in modestly ahead of last year's comparable quarters. Total non-interest revenues did not improve year over year, with notable reductions in mortgage banking revenue, asset gains, and branch sales, as well as slightly reduced lowly income. With the expectation for continued rising rates, we see mortgage banking revenue further moderating as we move through the year. We also expect that higher rates will ultimately translate into higher earning credit rates for some commercial deposit customers, which will have the effect of dampening commercial deposit fees later in the year. As Andy mentioned, we also announced several changes to our OD NSF programs today that will impact our run rate for fees beginning in the third quarter. While these changes are intended to reduce the burden on our customers, they will also reduce our deposit service charge revenues by approximately $3 million in 2022. Given our outlook for higher rates and the revised expectations of lower service charges revenue from both commercial and consumer customers over the back half of the year, We are therefore modifying our full-year non-injurious income guidance moderately downward. We would now expect total non-injurious income for the full year of between $290 million and $300 million. Moving on to slide 11, first quarter expenses came in at $173 million, $9 million lower than before amid reduced personnel and other expenses. In alignment with the strategic initiatives we announced last fall, we do expect to scale up investments in areas such as technology and personnel later in the year. But as we continue to execute on our plans, we'll remain committed to maintaining our expense growth in line with the revenue and the revenue expectations. Taking all of our initiatives in consideration, we continue to expect our full year 2022 non-exit expense will be in the range of $725 to $740 million. On slide 12, we provided a walk-forward of our quarterly pre-tax, pre-provision income from the fourth quarter of 21 to Q1 of 22. While our non-interest income was down from the prior quarter, our pre-tax, pre-provision income grew by $3 million quarter to quarter, despite having two fewer days in the period. We estimate our daily interest accrual benefit at about $1 million per day. Slide 13 shows the four-quarter trend of our PTPT income. As you'll recall, we had stated back in July that we expected pre-tax, pre-provision to consistently come in above the $78 million baseline we set in Q2. I'm pleased to confirm that we've delivered on that and held to that statement over the past three quarters. Furthermore, We expect PTPP to continue to trend higher as we expand our operating leverage throughout 22 and into 23. Moving on to slide 14, we remain disciplined from a capital perspective and continue to drive our capital ratios towards their targets as we continue to grow loans on the balance sheet. As I mentioned previously, the AOCI impact we realized in our securities book was a key driver of our decrease in the TCE quarter-over-quarter. But thanks to strong earnings and the redesignation actions we took during the quarter, our tangible value per share only decreased 3%. We will continue to target TCE levels of 7.5 and CET1 levels of 9.5. I'll now turn it over to Pat Ahern, our Chief Credit Officer, for a credit quality update.
spk10: Thanks, Chris. I'd like to start by providing an update on our allowance as shown on slide 15. We utilized the Moody's February 2022 baseline forecast for our CECL forward-looking assumptions. The Moody's baseline forecast remains consistent and assumes additional fiscal support, continued relatively low interest rate environment, the recent acceleration in consumer prices to be transitory, and relatively localized COVID cases. Following net reserve releases in all four quarters of 2021, we posted another negative provision in Q1 of 2022 and saw net recoveries as opposed to net charge-offs during the quarter. Our ACLL as of March 31st was $318 million, down from $320 million at year end. Here in Q1, the reduction in ACLL was driven primarily by a $6 million reduction in oil and gas as that portfolio continues to run off. Our ratio of reserves to loans declined slightly to 1.3% from 1.32% during the quarter. Turning to slide 16, we highlight our quarterly credit trends. As Andy mentioned, most of our key credit metrics continue to improve over the course of the quarter. Non-accrual loans did pick up slightly quarter over quarter with the increase tied to one specific credit. Nonetheless, total non-accruals were down 12% year over year. While in total, restructured loans and delinquencies have fluctuated over the past five quarters They have now decreased 26% quarter-over-quarter and have decreased by $13 million versus Q1 of 2021. Moving forward, we would expect to adjust provision to reflect changes to risk rates, economic conditions, loan volumes, and other indications of credit quality. With that, I will now hand it back to Andy to share some closing thoughts.
spk06: Thanks, Pat. So on slide 17, we recap our four-year guidance for 2022. Over the remainder of 2022, we remain bullish about loan growth. Specifically, we continue to expect full-year auto finance loan growth of over $1.2 billion and total commercial loan growth of $750 million to $1 billion. In our forecast, we had anticipated a 25 basis point increase at each FOMC meeting this year. And accordingly, we expect our full-year 2022 net interest income to exceed $840 million. Given this revised rate outlook, we are also modifying our fee income guidance to account for lower mortgage banking and service charge revenue throughout the remainder of the year. As such, we now expect total non-interest income to be between $290 million and $300 million for the full year. And then taken together, we now expect the combined total of net interest and fee income to exceed $1.135 billion. Lastly, our commitment to expense discipline remains a focus. And we continue to expect between $725 million and $740 million of non-interest expense in 2022. So with that, we'd like to open it up for questions.
spk00: Thank you. At this time, we will 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 tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Scott Seifers of Piper Sandler. Please proceed with your question.
spk05: Good afternoon, guys. Thanks for taking the question. Chris, maybe first question for you. The $40 million favorable delta in the So is that completely due to the higher rate expectation, or are there any other nuances in there? I'm guessing it's mostly due to rates, given no change to the loan growth or securities portfolio outlooks, but just curious to hear your thoughts.
spk03: Yeah, it's rate-driven. We've been monitoring spreads, and I think it reflects our expectations around rates and their impact on spreads and deposit betas. which we've continued to get comfort in as we've gone through the quarter.
spk05: Okay. And I think last quarter you alluded to sort of a $1.5 million per month benefit from each Fed rate hike. Is that still a good rule of thumb in your mind?
spk03: So we would say that the $840 million incorporates the early benefit of the first 25, and the marginal above and beyond that is probably a little tampered down to be about $1 million to the per month for any rate rise above 25. So, for example, it'll be a little more specific than it was last time. If there's 50 basis points in May, we would see that that benefit start to show up in June, and so you'd have seven months of additional million-dollar benefit to the extent there's 50 in May, for example. So, the 840 would be 847-ish. Male Speaker Okay, perfect.
spk05: And then I guess final question, how are you thinking about overall balance sheet growth, specifically earning asset growth for the full year? I guess another way of asking sort of deposit flow expectations.
spk03: Yeah, so we have seen our deposits remain remarkably resilient. And so the balance sheet is going to be driven by the asset growth from our perspective. And we're reaffirming all of the asset growth numbers here.
spk05: Yep. Okay, good. Thank you guys very much. Thank you, Scott.
spk00: Our next question is from Jared Shaw of Wells Fargo. Please proceed with your question.
spk09: Hi, good afternoon. This is Timor Braziler filling in for Jared. Maybe just following up on the deposit question, I appreciate the comments that 1Q is typically seasonally weaker and held up better this go-around. Just given kind of the liquidity that you still have in your balance sheet, the loan-to-deposit ratio, to the extent that there are incremental outflows here in the second quarter, which we have seen in the past, are you okay just kind of letting those flow through and having the loan-to-deposit ratio tick up higher? Or is there an expectation that you'll kind of offset those exiting deposits with either brokered money or wholesale funding?
spk06: Well, this is Andy, and of course we always have the option of funding it on the wholesale market. What I would say is that we're in a pretty good position from a core funding standpoint today. But if you look at some of the initiatives we've talked about, our commercial bankers, our business bankers, we've added, since I got here, roughly 22% increase in relationship managers. Those folks don't do just loans. They are in our core markets, and they will start to drive our deposits. strategies. We're also launching a mass affluent strategy and I can tell you that I see the index of our mass affluent customers and in a consumer bank they make up 70% of the deposits. We're under indexed in the amount we have from each of those. This will be the third time I've launched this type of strategy at a bank and I know what to expect. We will see additional growth at the tail end of the year going into the next year. We're a top 20 HSA provider. That is a very deposit heavy business. We have the infrastructure and we'll continue to invest in that. We'll invest in our digital account opening. We'll invest in our branch account opening. So some of the things we haven't talked as much about will directly relate to how we fund our core deposits over time. So to answer the question, we do feel like we have sufficient liquidity from different sources, but we're also making sure we are prepared from a balance sheet standpoint from both the loan side and the deposit side.
spk09: Okay, that's helpful. Thank you. And then on the loan side, I guess how much of an expected remaining headwind is there out of the mortgage warehouse portfolio? And I'm assuming as that stabilizes, as PPP becomes less of an issue, these new initiatives are going to result in faster kind of balance sheet and loan growth. Is there another leg lower in the second quarter for warehouse and then we really start to see loan growth accelerate in the back end of the year, or do you think that much of the warehouse reduction has already been addressed here in the first quarter?
spk06: Yeah, so I think you're hitting the nail on the head a little bit there. We don't expect the year-end balances to be much different than what we forecasted. We just expect, we have seen them more quickly with the ramp up in rates. So we still expect a modest decrease in mortgage warehouse the rest of the year, but not at the rate that we saw in the first quarter. as you add RMs and as you mature these initiatives, we expect our pipeline is the highest we've seen in six months. So we expect that to follow through and pull through to the balance sheets. So yes, there'll be a slight dampening and that's why I use the term modest on purpose. We'll see a modest dampening of mortgage warehouse. where it was much more significant in the first quarter.
spk09: Okay. And then just last for me, on the expenses, great to see the expense control in the first quarter and on that front versus kind of planned dollars in the pipeline that you have visibility to coming in the remainder of the year that's going to drive expenses kind of to that guided level.
spk06: Yeah, great question. I'm going to take your first comment as I'm going to say thank you for the kudos on expense management. And what I would say is, look, this is a growth story. And as we grow, we have to invest to grow. And so we expect as we go through the year, we're going to add another 20% on the RM side. That will set us up not for this year, because the folks we've already hired have set us up for this year. That'll set us up for the end of the year heading into next year. So we want to continue to fuel this. And we expect as we put out in our our strategic initiatives that we expect positive operating leverage, which we are achieving and we believe we'll achieve throughout the year. And so in order to do that, you have to reinvest in the business. And so we see that steady growth, but we'll control that investment to make sure it lines up with our revenue growth. Got it.
spk09: Great. Thank you for the questions. Thank you.
spk00: Our next question is from Terry McAvoy of Stevens. Please proceed with your question.
spk02: Hi, good afternoon, everybody. Hi, Terry. Maybe big picture question for Andy. A lot of what you've done has been on the lending side and I guess deposits, which you highlighted as well. What are your thoughts on adding to the fee income businesses? When I look at your 2022 outlook, it's about 25% fee income, which my gut tells me is a bit light versus some peers. Do you have any bigger picture plans on expanding fee businesses once these lending platforms are up and running?
spk06: Yeah, that's a good question. I'll say a couple of things. One, the mass affluent strategy, in order to be a good wealth bank, a really good wealth bank, having the mass affluent piece in place is really important. What happens is you have the initial conversation with people that are switchers, that move money. Those folks that are in the mass affluent bucket, which is $250,000 to a million, they grow into wealth customers and you upstream those folks. So as we Launch the Mass Affluent, our expectation is we will rebrand our wealth business. We will have a digital roadmap for wealth that aligns with the conversations we're having, and then ultimately we'll start to feed that business. But getting the Mass Affluent first is important for us. We'll have a focus on the commercial business, which we do believe can drive some additional fees, whether that be treasury management or capital markets. But that is just getting started for us. Terry, I think your observation is right. There is a lot on the margin side of this. And over time, we believe that we can build the capabilities, some organically, on the fee income side of that through wealth and commercial banking.
spk02: Thanks for that. And then maybe my follow-up for Chris is about a $2 million increase in quarter-over-quarter mortgage. Is that a function of earlier in the year adopting kind of fair value of your MSR and just seeing that asset worth more or valued more today than three months ago?
spk03: So if I look at the – yeah, the short answer to your question is yes. Just so that we're on the same page, mortgage banking net was only up modestly, $300,000 quarter over quarter. But the lift for the quarter was all driven by looking at how we adopted fair value. and it came in as we expected, but was a contributor to the lift, yes. Okay.
spk02: Thank you, Chris. Thanks, Andy.
spk03: Thank you. Bye, Terry.
spk00: Our next question is from Daniel Tamayo of Raymond James. Please proceed with your question.
spk11: Good afternoon, guys. Good afternoon, Daniel. Clearly, it's been a good story on the credit quality front. We've had... Very few issues there, but just the non-accrual that you mentioned, it looks like it was commercial real estate, non-accrual in the quarter. If there's any other detail around industry or anything like that that you could provide, I'd be interested. Thanks.
spk10: No, as we mentioned, it was really one specific credit. Given some events around that, we feel confident that we're not going to see a long-term loss there, but we'll continue to watch it. In terms of what we're seeing in commercial real estate space, it's been pretty resilient. As with anyone else, we're watching the CRE office asset class. We feel pretty good about how we've been pretty conservative underwriting that asset class over the historical period. But we're always monitoring and doing probably further deep dives than we had in the past, just given the shift coming out of COVID and how tenants are going to start using their space.
spk11: Okay, thanks for that. And then the NSF fees that are going to be coming out, is that, just a modeling question, the $3 million, is that literally just a million and a half a quarter, or is that going to be started later in the third quarter, or is that just July 1st? from a timing perspective?
spk06: Yeah, I think this is Andy. From a modeling perspective, we expect that $3 million is really a happier impact. So doubling that up, our annualized impact is about $6 million. So it is roughly $1.5 million.
spk11: Okay, perfect. All right, that's all I had. Appreciate the answers. Thank you.
spk00: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. 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 additional questions. Our next question is from Chris McGrady of KBW. Please proceed with your question.
spk07: Oh, great. Thanks. Maybe a question for Chris. Last cycle, you guys You've made some efforts to reduce the network deposits, and those dollars have come down. I guess, where could you be surprised in your deposit base? We saw some of your peers have some chunky movements this quarter. You obviously didn't. But where could you be surprised?
spk03: Well, I'll go with Andy's approach. Thank you for the kudos on the management that we did here over the last couple of years to make sure that when the rate started to turn again, we wouldn't be in a position of being surprised. And so I'd say we've worked hard to make sure that wasn't the dynamic. As you point out, and as we show on our tables, the entire amount of network deposits is down to $760 million, and that number was close to $4 billion at one point in time. So we've had a dramatic role of reversing that. Where I think we're most concerned is the significant uplift in non-interest bearing. And so the non-interest bearing is up to $8.3 billion, which is a remarkable and wonderful thing. And if you had asked me, which Andy did, what's going to happen in the first quarter, the answer was, well, they're going to flow out. And they didn't. And if you'd asked me what's going to happen after April 18th, this year's tax day, I would have said, well, we'll see a downtick. And we haven't. And so the reality is they're proving to be a lot stickier than I would have expected. And That's been a positive, but that's the biggest risk. But so far, knocking on wood here, we just haven't seen it.
spk07: Okay. That's a great color. Thanks, Chris. Maybe a second one on just pricing for the auto business. In case you remember, remind us what part of the curve it's priced off, how spreads and pricing held up given competition.
spk03: Sure. So on page six of the press release tables, we break out the yield for the auto finance portfolio, which for the quarter came in at 3.52. I haven't looked at everyone's results on that basis, but Andy did have me look at a bank based in Ohio that has a big auto book, and I noticed that our yields are about 14 basis points higher than theirs, so I guess we're in sync. Thanks.
spk00: Our next question is from John Arfstrom of RBC Capital Markets. Please proceed with your question.
spk01: Thanks. Good afternoon, guys. Good afternoon. Hey, on slide three, when you're going through your prepared comments, Andy, you made a comment about construction lending, and I missed part of it, and I think I understood what you're saying, but can you go through that again in terms of what you're saying on your backlog?
spk06: Yeah, I mean the crux of it is our unfunded commitments continue to grow on the construction side. So clearly our belief is as we get into heavier construction season, we have an opportunity for growth. So we put on roughly a $500 million increase year over year in commercial construction, CRE construction. So what we're saying is we believe that will serve as a tailwind for growth for us the rest of this year. And really, the expectation is that does fund that entire amount over roughly an 18-month period of time.
spk01: Okay. Okay. Okay, good. The other question I had is kind of nuanced, but the general commercial, your averages were up about 240, but period end was up about 40. What's the subtlety there? Yeah. I know it's sometimes different to compare the average to period end. I'm just curious on that one.
spk06: Sure, I think if you look on page three, you can see it's not that subtle. It's mortgage warehouse. That's the biggest part of it.
spk03: The total commercial.
spk06: Oh, outside of?
spk03: Yeah, he's asking.
spk06: General commercial. What we had done on there is we'd shown kind of the fourth quarter combined with the first quarter because we had a very big fourth quarter in commercial. So that dampened a little. We pulled forward some of those deals. They happened to close pretty quickly. The not subtlety that you can't see is we have our highest pipeline in the last six months. So we've been able to refill that during the first quarter. So a little bit of accelerated, all hit at once, drained that a little, built it back up to where it was, and then some significantly above there. So that's what's giving us confidence in the growth as we see the general CNI on the go-forward basis.
spk01: Okay. And then maybe more philosophical on the change in overdrafts. I think we all understand what the bigger banks are doing on it. I'm just curious if you can gain from this. I know there's a loss that we talk about financially, but can you gain from this relative to some of your other competitors that may not be waiving overdraft fees, your small and medium-sized competitors?
spk06: It's hard to predict what their actions are going to be in the future, but when you do things that are in a customer's favor and you do it willingly, that usually serves as a positive when it comes to satisfaction. So our expectation is that as they see this, there's only a positive response to this. I'm particularly pleased with the NSFB. That will go away. Those NSFBs are overdrafts that aren't paid. So to know that goes away, I really like that one in particular, although all of them are in the customer's favor. So my answer probably can't be relative to others because that's a fluid situation, but I do expect a positive response from our own customer base.
spk01: Okay, okay. Last one, Pat, for you. Anything you're wary of if we do get you know, fed funds at 200 basis points by the end of the year? Anything that makes you nervous about that?
spk10: No, not really. You know, we're sizing all of our upfront underwriting to, you know, we're sensitizing interest rates. We're looking out kind of, especially in the real estate book, the commercial real estate book to an exit. So we're building a lot of that stuff into our underwriting. It hasn't happened the last couple of years. We might start to see it now, but yeah, Right now, like I said, the book overall is doing very well. The one item we're watching, like everyone else, is just the office.
spk01: Okay. Thanks for the help, guys. Appreciate it.
spk06: All right. Thanks for the interest.
spk00: Our next question is from Michael Young of Truist Securities. Please proceed with your question.
spk08: Hey, thank you for taking the question. John took a couple of mine, but I did want to take another crack at the higher rates sort of question. And just, you know, as we move later in this year and we are at, you know, higher levels of absolute rates, is there any interest in, you know, maybe turning back on or putting some mortgage on the balance sheet at, you know, kind of higher interest rates or is that still, you know, kind of really in runoff even once we reach those levels?
spk03: I would say we're not really in runoff, but we said balance will be relatively stable. And so clearly mortgage rates in the high fours and even fives are relatively attractive, but so is a growing commercial book, and so is our auto book. And so I think we've got focus on growth, but we won't turn blind eyes to opportunities. And what we might say is, if I can put on a mortgage at four or security at three, sometimes the mortgage looks better.
spk08: Gotcha. And then my, my followup question was, was actually just on auto, you know, obviously, you know, it's been performing well thus far, but consumers are starting to feel a little bit more of a pen. Sure. Are you guys seeing any early signs or anything that you're, you're monitoring more closely now? Um, just kind of with the inflation backdrop and the squeeze on some consumers.
spk06: You know, it's an interesting question of who's feeling the pinch and what that means. And what we're hearing and seeing is the subprime market is feeling the pinch, and maybe those delinquencies are at a level that may be similar to pre-pandemic. We virtually don't have that in our portfolio, so we're not seeing that. The second thing is general consumer is fairly healthy relative to where they entered the crisis from an average liquidity position. So the answer is, you know, The consumer is fairly healthy in the segments that we're lending to. We have not seen anything, and, you know, we won't have a blind eye to that with inflation at the levels that we have and the actions that are being taken having geopolitical conflict. But we like the way that we're lending into a very prime, super prime customer.
spk08: Okay. Thanks very much.
spk05: Thank you.
spk00: Our next question is from Jared Shaw of Wells Fargo. Please proceed with your question.
spk09: Hey, guys. It's Timur again. Just one more follow-up on Otto. The implied balance for year-end kind of suggests a similar growth rate to what we've seen here in the first quarter. I'm just wondering, as you continue to roll out that product set to the rest of your footprint, does that – Does that growth accelerate? Is there something that you're going to be doing on your end to kind of limit that growth to that 1.2, 1.3 billion by year end? I would just love to hear your comments on the trajectory of the expected growth rate in auto.
spk06: Yeah, so this is Andy. I'll take that one. And the way that I would answer that is, While I like the auto vertical, we don't want to be just an auto bank. We want to be lending across the spectrum and using our capital for commercial, for business banking, for ABL, for equipment finance, for auto. I also want to make sure that we're operationally solid and strong as we go through this. I don't feel a need to put too much pressure on this machine. To me, $1.2 billion in growth is a strong year. If we are getting returns, if we are operationally strong, if we believe that it fits within the capital usage of all the other pieces of that, that will bear out what our decision is. But as it goes right now with the pipelines that we're seeing in commercial and the successful launch of multiple initiatives, the successful hiring of talented RMs on the commercial side, I really like the balance that we're getting right now. I very much want to get into footprints. I actually think that with our brand name and our recognition, it's actually a product while it's indirect. It actually can translate on the direct side for our customer base. And so that's probably where our focus is. And I don't feel the need to come out and modify the forecast on that for the sake of volume. Got it. Okay. Thank you. Thank you.
spk00: We have reached the end of the question and answer session. I will now turn the call back over to Andy Harmoning for closing remarks.
spk06: Well, thank you. And based on the questions, I want to thank you for your interest in Associated. As always, if you have questions, reach out to us. We're more than happy to answer those. And we appreciate your continued interest in the story that's unfolding for us at Associated Bank.
spk00: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.
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