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spk02: Good afternoon, everyone, and welcome to Associated Bank 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 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 statement. 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 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 this 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 this time, I would like to turn the conference over to Andy Harmoning, President and CEO, for opening remarks. Please go ahead, sir.
spk05: Well, thank you, Paul, and good afternoon. I'm Andy Harmony, and I'm joined once again by our Chief Financial Officer, Derek Meyer, and our Chief Credit Officer, Pat Ahern. 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. deepen our relationship, 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 and 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. With these trends as a backdrop, our credit performance remains solid here in the second quarter. Delinquencies, 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, 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's 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 in reviewing our portfolios on a continual basis to ensure we're staying 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 21. Over three years, we've built a foundation for growth. We've enhanced our lending capabilities through the addition of new loan verticals and expansion of our commercial team. We've strengthened our ability to attract, deepen, and retain customer relationships through products. service, and marketing enhancements. And we've invested significantly into digital to better compete in an evolving financial services landscape. The tailwinds of phase one enhancements continue to benefit our company in exciting ways. We're seeing meaningful improvement in our customer satisfaction scores. We're 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 Bank to friends and family than they have been in years. We've seen household growth, where 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, 2023. And while these trends are fun to talk about, they are 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 a new credit monitoring tool, enabling digital customers to easily track their credit score and safeguard their financial future. As I mentioned back in April, we expect our Phase 2 initiatives to have an increasing impact as we get to the back half of 24 and into 25. Looking forward, the progress we've made to date against our strategic plan is foundational for our company. We've combined legacy strengths in credit and expense management with initiatives that help us grow and deepen our customer base, enhance profitability, and accrete capital. While the macroeconomic 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 tailwinds from initiatives already completed and incremental momentum from phase two. Simply put, we remain on track towards creating a stronger return profile for our associated bank 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 $0.74 for the quarter. This figure includes a one-time $33 million tax benefit resulting from a strategic reallocation of our investment portfolio. Excluding this one-time impact, our adjusted EPS was $0.52 for flat versus Q1. This figure demonstrates the underlying ability of our earning profile in what has continued to be a challenging operating environment for banks. During the quarter, we continued to remix the asset side of the balance sheet 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 in an elevated rate environment. Average quarter customer deposits decreased by less than 1%, and 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 to the income statement. Asset yields and a shift in our funding mix together drove a $1 million decrease in net interest income. Non-interest 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 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 creation of our capital ratios. Here in Q2, our CET1 finished at 9.68%, or 25 basis point increase relative to Q1. And finally, our conservative approach to credit continues to be a cornerstone of our strategy. Here in Q2, asset quality remains solid with delinquencies, 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, consistent approach to loan risk ratings and so we can better understand 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 gap 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 a 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 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 of the plan back in 21, We've added several new loan verticals, grown our commercial RM base, upgraded our product set, invested in digital transformation, and amplified our brand presence throughout the footprint. These investments have generated several tailwinds that are foundational for our company. We diversified our asset base by adding nearly $800 million in asset-based lending and equipment finance verticals and $2.5 billion in prime super prime auto loans. We've expanded our commercial RM base 29% since 2021. We've added over a billion dollars in net new mass affluent deposits since launching the program in December of 22. 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 in 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 up 26% versus 2023. We continue to believe that customer growth and higher quality accounts will deliver enhanced financial tailwinds over time. Shifting to slide five. Phase two of our plan leverages foundational tailwinds from phase one and an infusion of proven leaders in key areas across the bank to accelerate momentum as a company. We continue to expand and deepen our talent base. Over the past two years, we'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 Levins to our commercial team in Minnesota. Mike joined us in May after 20 years with Wells Fargo, where he most recently served as a division portfolio executive for six states, including Minnesota and Wisconsin. Whether at the executive level or on the front line, 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 23. While the recent hires we've made to date are already making a valuable contribution in their 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 2. 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-based Charlie Behrens. 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 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 remaining encouraged by the ongoing momentum we've 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 24 and into 25. 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 of $750 million and cumulative incremental deposit balances of $2.5 billion in an annual household growth rate of 3% by the year end 2025. 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 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 AutoBook, 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 decrease by $140 million during the 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 tailwinds 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 Bank anyway, we also saw an unusually large swing in our point-to-point balance flows relative to the first quarter. This period-end 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-end flows in both the total deposits and DDAs. Nonetheless, the broader trend over the first half of the year has largely remained 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 a more normalized view of these flows, core customer deposits decreased by less than 1%. Slide 9. 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 core customer growth in the coming quarters due to expected tailwinds from promising leading indicators and 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 core customer deposit growth over the back half of 24, the market for deposits has remained competitive in its higher for longer environment. Due to current market conditions, we now expect core customer deposits to finish 2024 at the lower end of the 3% 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?
spk08: Thanks, Andy. I'll start on slide 10 with some color on our asset and liability and yield trends. While the target Fed funds rate has remained stable since July of last year, we continue to see asset yields inch higher in most major loan categories, including CNI, auto, and mortgage here in Q2. We also saw investment yields increase 14 basis points during the quarter, as we continue 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 CNI loans. Taken together with the core growth in our loan and securities yields mentioned previously, our earning asset yields increased by one basis point 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 decrease 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 3.6% for the quarter. On slide 11, the trends I just described netted out to four basis point decrease in our quarterly net interest margin, with 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 1 and 3 percent in 2024. This guidance assumes two 25 basis point Fed cuts by year end beginning in September. Shifting to slide 12, we've 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 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 non-interest income trends throughout the second quarter. Our non-interest 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, non-interest income was up 3 million or 2% compared to 2023. During the second quarter, our results were highlighted by growth in wealth management fees car-based fees, and BOLI income. This was partially offset by a $4 million decrease in net investment securities gains, with a 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 31st. We continue to feel encouraged by the durability of our non-interest income in a challenging environment, and we now expect full-year 2024 non-interest income to finish 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 two 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 non-interest expense to average assets ratio continued to decrease in the second quarter, landing at 1.92%. This metric underscores our ability to keep expenses in check while continuing to invest in our organic growth strategy. We continue to expect total non-interest expense growth of between 2 and 3 percent in 2024 off of our adjusted 2023 base of $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 7.18%. This net increase was driven by improved profitability partially offset by asset growth in the denominator. After falling to 9.39% as a result of our balance sheet repositioning in Q4, our CET1 rebounded to 9.43% in Q1 and finished Q2 at 9.68%, the highest CET1 ratio we've posted in two years. Both our TCE and CET1 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 7.75% in 2024. We also expect CET1 to remain in a range of 9% to 10% over the same timeframe. I'll now hand it over to our Chief Credit Officer, Patty Herring, to provide an update on credit quality.
spk09: Thanks, Derek. I'd like to start our credit portion with an allowance update on slide 16. We've utilized the Moody's enrollment 2024 baseline forecast for our CECL forward-looking assumptions. The Moody's baseline forecast remains consistent as a resilient economy despite the high interest rate environment. The baseline forecast contains no additional rate hikes, slower but positive GDP growth rates, a cooling labor market, and continued deceleration of inflation. Our ACLL 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, and general macroeconomic trends that reflect the stability of our Midwest footprint. As such, our reserve to loan ratio landed at 1.32% here in Q2, up one basis point versus Q1, and up six basis points compared to the same period a year ago. Moving to slide 17, we've continued to see solid performance in our core credit quality trends, with credit metric changes reflected of the 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 sign 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. While 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 remained 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 was largely driven by a CRE office credit. However, early indications are leading to a path towards favorable resolution with this credit in Q3. Outside of that one particular credit, 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 in net charge-offs during the quarter and $23 million in provisions. both of which represented a $1 million decrease from Q1. The overall net charge-off rate still remains within 2024 expectations. Taken together, our credit metrics continue to give us confidence that what we've seen to date is a handful of credits migrating through our rating system and not necessarily a sign of broader issues coming down the road in future quarters. As we've done over the past couple 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 to the back half of 2024, we remain diligent on monitoring credit stressors in the macro economy to ensure current underwriting reflects ongoing inflation pressures and labor costs, to name just a few economic concerns. In addition, we continue to maintain specific attention to the effects of elevated interest rates on the portfolio, including ongoing interest rate sensitivity analysis bank-wide. Going forward, we expect many provision adjustments to continue to reflect changes to risk rates, economic conditions, loan volumes, and other indications of credit quality. Finally, we've 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. In building our CRE portfolio, we focused on partnering with well-known developers and built a portfolio predominantly in stable Midwest markets. Two-thirds of our CRE portfolio is based in the Midwest, with an emphasis on multifamily and industrial properties. We do not have any exposure to the rent-controlled New York City real estate market. Office loans now represent just 3.4% of our total loans as a bank. Within that portfolio, we are weighted towards Class A properties in non-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 refinance, sale, or qualifying for expense at prevailing underwriting standards. While we feel well-positioned given our business model approach and the markets we operate in, we continue to monitor this and all of our portfolios closely. With that, I will now pass it back to Andy for closing remarks.
spk05: Thanks, Pat. I'll wrap this up by reiterating a couple 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 tailwinds 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 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, 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 1% and 3% in 2024. We continue to feel encouraged by the durability of our non-interest income in a challenged environment, and as such, we've updated our full-year 2024 growth guide to plus or minus 1 percent. And finally, our disciplined approach to expense remained foundational for the company, and with this in mind, we continue to expect non-interest expense growth of 2 to 3 percent 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.
spk02: Thank you. We'll now be conducting a question-and-answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For part-time students using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. Our first question is from Daniel Tamayo with Raymond James. Please proceed with your question.
spk07: Thank you. Appreciate it. Good afternoon, guys. Maybe first just to start on the interest income guidance. Just back of the envelope as I look at what you guys have done in the first half and the guidance for the full year, it looks like there's some solid NIM expansion that that would assume or bake in the back half of the year guidance. Am I thinking about that right? I think I heard you say the NIM expansion you're expecting by the end of the year. I'm 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 dynamics for the rest of the year.
spk05: Yeah, so this is Andy. I'll start this off and then turn it over to Derek. 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 put a finer point on that.
spk08: Yeah, I think you've got it right. And I expect a sequentially increase both third and fourth quarter and margin expansion in both quarters, handful of basis points each one.
spk07: Okay. All right, great. Thanks for that help. And then maybe looking at the expense guidance, seems like, well, I guess just first a clarification, the adjustment related to the FDIC assessment in the second quarter, was that a negative adjustment? So the operating number was... higher than the reported number or just want to make sure that I have that right?
spk08: That's correct. It was $2 million unwind of an accrual based on receiving the actual bill from the FDIC.
spk07: Okay. All right. That makes more sense with the guide then. It still implies a little bit of a pickup, I guess, in expenses in the back half from what you guys have done in the front half. Should we think about that being kind of personnel driven with the hirings that you guys have been making?
spk08: It is personnel-driven, and then there's investment in actually acquiring accounts and marketing and segmentation to support account acquisition. So some of it you would see as eventually contributing to all the RM hires that we've identified, and then some of it would just be seasonal.
spk07: Okay. All right, terrific. Well, thanks for the color. I'll step back.
spk05: Thanks, Daniel.
spk02: Thank you. Our next question is from Scott Seifers with Piper Sandler. Please proceed with your question.
spk01: Definitely, everybody. Thanks for taking the question. Derek, maybe if we could walk through the idea of margin expansion in the back half. Maybe just 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 quarters. I guess the background is... So the context is we're starting at a little bit of a lower base. And I thought the real juice for the margin would have been the sort of the lingering benefits of the securities portfolio restructuring. So I guess the base question is, what is it that allows the margin to expand from here? Is it Fed rate cuts or is it just sort of richer balance sheet mix with the net net of loan growth as well as core deposit growth? How do those dynamics all play out?
spk08: Yeah, it's more mixed 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 in September, one in November. But more of it is continued trickling up of the investment portfolio, the auto book. Both of those happen. And a little bit of the resi Both of those happen regardless of a lot of movement from the Fed. And then as we expect to see these RMs bring in CNI growth at rates that you saw sort of at the end of phase one, that should help us replace some of this lower yielding resi as it rolls off. And then you have two levers here. But clearly the mix on the deposit piece, as we expect deposit growth, you expect the mix on the wholesale piece to drop. But then if you also look at the quarter over quarter change and our interest-bearing deposits, we already sort of telegraphed those costs coming down a little bit. And we expect with a rate cut, that will allow us from a customer perception standpoint to be a little bit more efficient on that front also.
spk01: Okay. All right. Thank you for that. And then, Andy or Jack, just on the lower loan growth expectation, I guess I'm hoping you can unpack a little more just sort of as you weigh how much of this is lower demand versus how much is sort of profitability within the existing growth aspirations. And then the company-specific nuance that you've always had is the the new hires. I imagine they're producing as hoped, but we'd just love to hear your color on sort of the umbrella of all three of those things.
spk05: Yeah, so this is Andy. I'll take that one. First thing I'd say 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, the application volume has slowed a little bit in that part of what we do. The market has some influence on that. However, we see our pipelines are up. And so Derek 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, fourth quarter. And so we see a very similar result in that period of time. Derek, I don't know if you can highlight kind of where we were in phase one and what we grew to, just to give an idea in the timing.
spk08: Yeah, yeah. So I think right before I started, Andy was here. And then in September, our third quarter of 2021, rolled out phase one. And so I looked at the June before that, June 30th, and our CNI loans were about $9.2 billion. That's 11.1 billion now and really you grew about a billion that first year, really the back half of the first year and then another billion the following year. We're sort of seeing the same thing where you maintain the portfolio you have and then as the new hires come in, the pipeline builds slowly and then we're all eager to see the pull through on that and expect the same thing to happen.
spk05: And so, Scott, if you wanted the short version versus the Reader's Digest, we're still within the forecast. We're slightly low end of that just because auto is a little bit shorter and then CRE is a little bit down.
spk01: Yeah, got it. Okay. Thank you very much. I appreciate it. All right. Thanks, Scott.
spk02: Thank you. Our next question is from Timor Brazila with Wells Fargo Securities. Please proceed with your question.
spk04: Hi, good afternoon. Hello? Yes, I'm just wondering of the 26 planned hires, how much of that hiring has already taken place?
spk05: Yeah, that's a great question. We are at 10 net. So net meaning if somebody leaves, we actually have to replace that too. And so we're at 10 of 26. And I expect that we'll be at 100%. My estimation target is by the end of the first quarter of 25, we'll be at all 26.
spk04: And then I guess just maybe going back to 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 of business, environment does seem soft. Like, is the expectation that CRE pay down slow, that auto demand intensifies? I guess what's giving you confidence that, you know, that loan growth is going to materialize in a more meaningful capacity in 2Q, seeing as, you know, the landscape is still a little bit soft here?
spk05: 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, we've monitored pretty closely what we've seen in the CRE paydowns. And we expect 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 doesn't have to be heroic. It 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's additional dollars there. 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 significantly improved our capabilities on the consumer side, and we've added RMs on the commercial side. And frankly, our wealth business is doing quite well in deposit acquisition. So both sides of the balance sheet, we feel that we'll be able to fund pretty equally fund our loan growth in the second half, what we're looking at on the loan number and then funding it on the deposit side.
spk04: Okay, and then I guess just a corollary on the deposit side. What's the implication for non-interest bearing demand? How is that progressing? Is that pace of pressure line item maybe abating a little bit, and then just wondering if the loan growth is somewhat dependent on the deposit growth manifesting, or if that deposit growth doesn't manifest, would you continue funding that loan growth with wholesale funding?
spk08: So a couple things. I think we talked about the last two quarters, the non-interest-bearing deposits bottoming about $5.8 billion. I think it bottomed about $5.7 billion. We still have the same view and bottoms-up forecast telling us it's going to grow a few hundred million between now and the end of the year. So I think that is largely intact. So we have contemplated your other question we did in the fourth quarter about loan growth and deposit growth. Our loan growth right now and strategies is not dependent on deposit growth. but we feel confident in both of them. We grew deposits quite a bit the second half of last year and outperformed our expectations the first quarter this year and a little bit of the second quarter 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 the resi real estate, that improved our profitability, but it also freed up capacity and 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.
spk05: I'll tag on to that. We have to think of what our funding sources and 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 an improvement in retention. we've seen an improvement in customer satisfaction, which typically leads to people staying. So remember, the growth is dependent on people staying and adding to it. The second part of that is you can start to see what your tactics are and seeing the households accelerate, which we have each of the last three months, including in this month. When that starts to accelerate, they bring quality deposits and we measure what the quality of those customers are. So Between the decreased runoff, the improvement from even year-end and customer satisfaction leading to decreased runoff, and then acquiring new customers 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 the confidence that we'll be able to fund the loan growth vis-a-vis our deposit growth.
spk04: Great. And if I could just sneak one more question in just 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. Is there still capabilities to maybe offset some of the hiring spend, or should we see a greater pull through from these expected hires into the expense base?
spk05: Well, you're making my job easier right now because I assume our leadership team is listening. And we go into every single year saying, where do we cut to invest? Those conversations have started. already, trying to get out in front of that. And so we expect we'll find areas that we can decrease expenses to invest in where the world's moving. Part of where the world's moving for us is to be local and add to the commercial RMs. Although adding, you know, 16 people won't make or break our budget all by itself. So that is our approach to business. Of course, everyone's battled expense growth and inflation and what that means. But That conversation has happened as recently as this morning in meetings that I've had, as recently as yesterday with our entire FP&A 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 in 25 in a very similar type of fashion.
spk04: Great. Thank you for the questions. Appreciate it. Thank you.
spk02: Thank you. Our next question is from Terry McEvoy with Stevens, Inc. Please proceed with your question.
spk03: Hi. Good morning. Good afternoon, everybody. Could you start and talk 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 230-ish set to mature in the back half of the year.
spk09: Yeah. I would say in terms of the first half of the year, it was definitely a mix of some we kept if they met underwriting criteria. We've had others that paid off via sale or refinance. So it's probably a fairly even mix amongst the three. And that's 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 is really we're looking to resize to updated underwriting standards, et cetera, and work with clients on that.
spk03: Thanks for that. And then as a follow-up, page six, complete sense, improving the returns involves decreasing wholesale funding sources. And I've had a couple of investors reach out to me over the last hour and just to cite the increase in the FHLB borrowings, which kind of goes against that slide. So Looking beyond the next couple quarters, where would you like to see wholesale funding, FHLB advances be as a percentage of your balance sheet?
spk08: Yeah, so we include in our, for the purposes of managing the firm, in our definition of wholesale funding, we also include brokered CDs. So we generally try and keep that under 15% or below, those three buckets combined.
spk03: Great. Thanks for taking my questions.
spk05: Terry, I just tacked on to that by saying, you know, 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 combinations is important because we're able to take steps on wholesale funding in the first quarter when we had deposits longer than we expected. So that kind of went up and then 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 what I was trying to highlight in the expectation in the second half. If you just simply look at that one quarter, it doesn't tell the story. That's the other reason that we tried to show from the fourth quarter average to the second quarter average, it's pretty much flat. It's a good question. Thank you.
spk03: Thanks, Andy.
spk02: Thank you. Our last question is from John Arkstrom with RBC Capital Markets. Please proceed with your question.
spk06: 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 late July. You're starting to see those deposits rebounding already. Is that fair? I understand the first quarter to second quarter normalization. Does that rebound starting to happen? Yeah.
spk05: It has. I mean, it would be a difficult story to tell if we hadn't seen that already in June heading into July as well. And frankly, it's followed the trend and the forecast that we've had internally. Yes.
spk06: Okay. Any thoughts on what could push you to the higher end of the net interest income range? Is it as simple as loan growth or is it something else?
spk08: Yeah, it's loan growth. I think if we saw fewer payoffs than we currently have rolled up in our forecast on CRE. And we saw the pipeline mature, the pull-through come in quicker than what we've currently got penciled in. Those would both drive it. We've 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 as deals booked slow down a little and largely because of high rates. 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 that's slowing anything down in our markets.
spk06: Okay. So it's possible that lower rates could be a catalyst for some lung growth.
spk08: Is that fair? It's possible, or it could be the... both lower rates or slower payoffs than what we've got planned.
spk06: Okay. 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 or persistent? What do you think?
spk05: Yeah, no, I think the captives have tried to – kind of enhance the sales of auto, and so they have some offers out there that have been fairly aggressive. We absolutely won't get out of the prime, super prime business, so we're not going to flex on that. We like it as a business for us, and it's one that actually helped the attrition that we planned for on the residential real estate. So we don't need to reach there, and the average FICO – Pat, what was the average FICO in June?
spk08: We were pushing like 785, 790. It was actually over 790 the whole quarter.
spk05: Yeah, so this is truly a super prime book. So it slowed a little bit. You know, will that increase in the second half? Perhaps a little bit. But we won't press the accelerator on auto, so to say. As clever as I can be. All right.
spk06: Okay. All right. Thanks for the help. I appreciate it.
spk00: Thank you.
spk02: Thank you. There are no further questions in queue.
spk05: Well, we appreciate everybody's interest, and we look forward to executing on Phase 2 as we head into the second half of 24 and into 25. Have a great evening.
spk02: This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
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