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Associated Banc-Corp
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Good afternoon, everyone and welcome to Associated Banc-Corp's First Quarter 2018 Earnings Conference Call. My name is Hector 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 this conference. Copies of the slides that will be referenced during today's call are available on the company's Web site at investor.associatedbank.com. As a reminder, this conference call is being recorded.
As outlined on Slide 2, during the course of 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 Web site in the risk factors section of the Associated's most recent Form 10-K and any 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 slide presentation and to Page 8 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 Philip Flynn, President and CEO for opening remarks. Please go ahead, sir.
Thank you, welcome to our first quarter earnings call. Joining me today are Chris Niles, our Chief Financial Officer and John Hankered, our Chief, Credit Officer.
Turning to Slide 3, we're pleased to close the Bank Mutual merger on February 1. The addition of Bank Mutual was the primary driver of the first quarter's results. Excluding the acquisition costs related to the merger, we're reporting earnings of $0.50 per share.
Average loans in the quarter were up $1.2 billion, driven primarily by the addition of two months of Bank Mutual balances and generally positive loan momentum. Please note that unless otherwise discussed statements in this update include two months of Bank Mutual's contribution.
Average deposits were up 1.4 billion. We benefited from improving fee revenue trends with both insurance and mortgage banking providing lifts here in the quarter. We recorded 21 million in Bank Mutual related acquisition cost and remain confident that will deliver total acquisition costs within our original estimate.
We're pleased with our overall expense control to date and we're on track to maintain our noninterest expense within our original guidance, adjusted for the addition of diversified insurance solutions in the quarter.
We repurchased 26 million of shares this quarter at an average price of $23.90 and increased our dividends to $0.15 per share.
Loan details for the first quarter are highlighted on Slide 4. Average loans grew by 6% from last quarter. Bank Mutual loans flowed mostly into our commercial real estate and residential mortgage categories resulting in significant increases from the fourth quarter.
Our general commercial business started the year slowly, but we saw acceleration through the quarter particularly in March. Seasonality and higher mortgage rates negatively impacted our mortgage warehouse business which was down over a hundred million from the fourth quarter.
Looking forward our C&I loan pipeline is robust and we expect solid growth in the second quarter. In our commercial real estate business, we anticipate growth in the second quarter as well, but expect that growth will moderate over the back half of the year. So we expect 1% to 2% quarterly growth in our overall loan portfolio for the remainder of 2018.
At Associated, we actively have positioned our balance sheet to maximize returns for our shareholders while managing risks. Over the last year, our variable rate commercial loan growth was weaker then we'd anticipated, while our fixed rate portfolio grew as a result of our on balance sheet mortgage retention strategy.
Given our expectations for rising rates, we believe a more asset sensitive balance sheet will be beneficial. Therefore, we've recently entered into pay fixed balance sheet swaps totaling $500 million, which will have the effect of increasing our asset sensitivity.
On Slide 5, we highlight our quarterly deposit trends. Average deposits grew by 6% from the fourth quarter. Our deposit mix was essentially unchanged by the Bank Mutual acquisition. During the quarter, we displaced some of our more rate sensitive network transaction deposits and replaced them with lower cost fixed rate Federal Home Loan Bank funding.
Our loan to deposit ratio climbed to 96% as a result of seasonal factors and the Bank Mutual acquisition and we typically see outflows during the first half of the year as municipalities and school districts worked down their state funding. Bank Mutual had a loan to deposit ratio approximately 102 % at closing, consequently the merger itself contributed to a slight increase in the loan to deposit ratio.
Turning to Slide 6, net interest income of 210 million was up 23 million from the fourth quarter and up 30 million from a year ago. Net interest margin was 2.92 % in the first quarter, up 13 basis points from the fourth quarter and up 8 basis points from the prior year.
Our commercial loan portfolio yield increased nicely benefiting from the full effect of the December rate hike and receiving some additional lift from the March rate hike. Our residential loan portfolio yield also increased reflecting in part, the addition of higher yielding mortgages from Bank Mutual.
The yield on the securities portfolio decreased by 3 basis points as a result of the reduced tax equivalent yield on our municipal securities. We've begun to see competitive pricing pressure in the deposit marketplace. However, we've been able to maintain pricing discipline and our interest bearing deposit yield increased just 8 basis points during the quarter.
Going forward, we expect further Fed action and continuing deposit pricing pressures. We will actively manage our deposit rates to balance our objectives of attracting and retaining customer deposits and maintaining low funding costs.
Turning to Slide 7, we have a breakdown of the specific factors that contributed to the $23 million increase in net interest income between the fourth quarter of '17 and the first quarter of this year. 10 million of the increase was due to growth of loan portfolio and deposit balances driven by the addition of Bank Mutual.
An additional 6 million was from purchased loan accounting accretion items including 4 million of purchase loan accretion and 2 million of prepayments and other adjustments related to Bank Mutual. It's not uncommon to have prepayments, we anticipated there may be additional such events in 2018, but it's difficult to predict their timing.
Our securities portfolio also contributed 3 million as we repositioned the Bank Mutual portfolio primarily into municipal securities which despite the recent tax cuts still offer higher tax adjusted yields. The widening of the LIBOR Fed funds spread, further added 2 million and other net changes rounded up the quarter.
On Slide 8, we project our net interest margin range for the remainder of 2018. Beginning with our first quarter margin of 2.92%, we expect that the full quarter effect of Bank Mutual purchase accretion versus two months of accretion in this past quarter will add up to an additional basis point to our margin.
Prepayments and other adjustments could add or subtract a basis point. We expect the LIBOR Fed fund spread to normalize at some point during the year reducing margin by up to 1 basis point. We anticipate the benefit of two expected Fed rate hikes to add between 2 and 4 basis points. These factors result in a projected net interest margin range for 2018 of 2.92 % to 2.98%.
Turning to Slide 9, first quarter noninterest income of 90 million was up 5 million from the fourth quarter and up 10 million from the first quarter of 2017. A key contributor to our noninterest income this quarter was our Diversified Insurance Solutions acquisition which closed on March 1. Including Diversified, our insurance revenue was up 3 million compared to the prior quarter.
Our mortgage business also increased 3 million as we returned to selling newly originated loans after completing our mortgage loan retention strategy in the fourth quarter. These increases were offset somewhat by $2 million decline in capital markets revenue after a very strong fourth quarter. With additional rate increases expected in 2018, we anticipate continued year-over-year growth in this business as our commercial customers tend to be more active in the capital markets in a dynamic interest rate environment.
Turning to Slide 10, noninterest expense of 213 million was up 31 million from the fourth quarter. We were pleased with our cost controls during the quarter. Excluding 21 million of Bank Mutual acquisition related costs, our noninterest expense would have been 192 million given an annualized run rate below our previous full year noninterest expense guidance. With the addition of Diversified Insurance, we've updated our full year noninterest expense guidance to 825 million including 40 million of acquisition related costs.
We continue to invest in technology that will improve our ability to attract and retain customers. During the quarter, we completed the rollout of our new online platform and our new mobile application. This was the most complex conversion that we've done in the last several years and the new platforms will enable us to more efficiently perform upgrades without the significant effort we extended on this update. This successful implementation gives us confidence that the Bank Mutual system conversion scheduled for June 23 should go well.
On Slide 11, we detail our quarterly credit quality trends. Our potential problem loans increased in the quarter primarily driven by the addition of a few loans to this category and 42 million of problem loans from Bank Mutual.
We believe it's important to note that our problem loans are a small percentage of our total portfolio, consequently the addition of a handful of loans can give the appearance of a degrading credit environment when in fact our credit profile remains generally favorable and steady.
Non-accrual loans were unchanged from the fourth quarter at 209 million excluding 15 million of Bank Mutual purchase credit impaired loans. The declining trend we've seen over the last year continued this quarter. Charge offs included four million from the oil and gas portfolio and continued to be very moderate.
The allowance for loan losses decreased to 1.13% of total loans from 1.28% in the fourth quarter. If we include un-accreted loan purchase discounts, this ratio would have been 1.27%. With the benign credit environment our provision for loan losses was zero unchanged from the fourth quarter.
Turning to Slide 12, I'd like to provide you with a quick update on the completed Bank Mutual acquisition as you know we closed on February 1, the conversion of customer accounts scheduled for June 23 and were busy conducting conversion tests and communicating with Bank Mutual customers about how the change will affect them.
We recently conducted customer surveys at Bank Mutual branches and pleased to report that the customer satisfaction rate is running at more than 85%. We believe this encouraging result portends customer attention after the conversion. We continue to expect that our total acquisition related costs will come in within the $40 million guidance we laid out at the beginning of the year.
We recorded 21 million in costs in the first quarter. We expect the majority of the remaining cost to be recorded in the second quarter. Additionally, we've updated our fourth quarter 2018 noninterest expense run rate guidance to include the impact of Diversified Insurance Solutions.
On Slide 13, we update our outlook for 2018, we anticipate 1% to 2% quarterly loan growth for the remainder of the year, while the first quarter did not get off to a fast start, conversations with our customers have been positive and we remain optimistic. We anticipate that the tax cut enacted at the end of 2017 will have a positive impact on loan growth in 2018.
We expect our net interest margin to continue improving on a year-over-year basis as we previously discussed. However, one of the challenges faced in all banks in 2018 is how to maintain low funding costs while attracting and retaining customers in a rising rate environment. We will actively manage the balance sheet to optimize our funding mix, while maintaining our loan deposit ratio under 100%.
Increasing our noninterest expense, I'm sorry, our noninterest income guidance to a range between 365 million and 375 million to include the additional revenue from Diversified Insurance Solutions. Diversified will also impact our expenses. We're raising our full year noninterest expense guidance to 825 million, which includes 40 million of acquisition related charges.
We expect our tax rate will remain in the 20% to 22% range. Our capital priorities have not changed as we look to fund organic growth, pay a competitive dividend, pursue non-organic growth opportunities that increase shareholder value and repurchase shares.
So with those comments I'll open it up for your questions.
Thank you. At this time we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Scott Siefers with Sandler O'Neill & Partners. Please proceed with your question.
Good afternoon, guys. First question I want to ask was just on the margin and overall rate sensitivity obviously a lot of moving parts between what you guys did with the networks deposit, the addition of Bank Mutual to kind of ongoing balance sheet and then the swaps to turn it into. Maybe Chris you could talk a little about where Associated's asset sensitivity stand today versus say 90 days ago? In other words, what's the order of magnitude of the increase in your rate sensitivity?
Sure, so - you've correctly noted, the networks transaction deposits were down about a quarter of a billion for the period end and as you also correctly noted, the addition of the swaps will make a slightly more asset sensitive. As we noted in our 10-K, we were essentially neutral at year end and I think part of our goal here was to make sure we maintained modestly asset sensitive going forward.
Okay and when you say modestly, are you able to put out like any numbers around there by any chance?
Yeah, so I think on Slide 8 of the slide presentation, we outline the factors that we see as positive, so we think that effect of future Fed funds will be 2 to 4 basis points going forward and we sort of baked in already what's happened from year end until today. We also outline the effect of the accretion recoveries and Fed funds, LIBOR that's occurred [ph] in the quarter and those could and those are outlined on Slide 8, but I think that's in the range, so we believe it's a range of 292 to 298 and we believe 2 to 4 of that will be driven by expectations about change in the curve.
Okay, thank you. And then just so I understand the ins and outs of the changes to the income and expense guidance, those changes are only the inclusion of Diversified, right. There's no other change [indiscernible] plus or minus either way, is that correct?
Yeah, that's correct.
Okay. Alright, perfect. Thank you guys very much.
Our next question comes from the line of Ken Zerbe with Morgan Stanley. Please proceed with your question.
Great, thanks. Just want to clarify, I know this is maybe a silly question, but the $825 million of expenses that includes merger costs, correct?
Correct, so if you back out - if the merger cost turned out to be 40 million, back out 40 million.
Got it, perfect. Okay and then can you just talk about your plans for additional capital return because obviously you closed the deal where you're buying back stock, like how should we think about that over the next quarter or two?
Sure, we have - after the purchases we made we have to give or take $25 million of additional authorization remaining and we'll be opportunistic depending on where the stock price is. You saw we bought back shares at an average of 23.90, which we thought was a very attractive price, so if unfortunately we're in those kind of ranges we'll be opportunistic, we'll see how it goes.
Got it, okay. And then just last question, in terms of Bank Mutual the accretion piece, going back to Slide 8 that you were referencing, it didn't seem like there was an expectation that the purchase accretion actually declines it at all over the course of the year, is it just such a long duration asset if you will, but it just - stays fairly stable, thanks.
I think Ken, I think we only had two months of realized accretion during the first quarter, so actually it will step up in our likelihood into Q3 and then yes it will moderate, but it probably won't moderate considerably below the fact that we only had two months in the first quarter.
Got it, understood. Okay, great, thank you.
And then on top of that there will be prepayments and other unforeseen events coming out of that book which will also impact it, most likely on an additional side.
Got it and you build in your best guess estimate for prepayments already into that 292 to 298?
Correct.
We shouldn't be adding anything on top of that, okay.
Right, [pay date] [ph] is our best estimate of the puts and takes there.
Alright, great, thank you.
Our next question comes from the line of Ebrahim Poonawala with Bank of America Merrill Lynch. Please proceed with your question.
Good afternoon, guys.
Good afternoon, Ebrahim.
Just a quick question, one on loan growth, so I guess we expect 1% to 2% quarterly loan growth. And I believe you mentioned that CRE should be strong earlier in the year and then tail off. One, in terms of CRE, could you remind us where we stand, I know you were limiting CRE growth ahead of the Bank Mutual acquisition, just from a mix standpoint, like how you see the loan book shaping up through the rest of the year.
Yeah, so we continue to be as always disciplined about what we're doing in commercial real estate at this point in the cycle. It is late in the cycle as we all probably would have acknowledge, but we have significant room under all of our internal guidelines in the commercial real estate book post Bank Mutual with the exception of multifamily, which is where we've been for frankly the last couple of years. So we're very judicious about multifamily, but we're seeing significant opportunities in other asset classes like industrial, office etcetera.
Understood and then on the C&I side is it a lot of that driven by mortgage warehouse lending or are you seeing growth beyond that portfolio?
No, we actually are really encouraged by our pipeline across our traditional commercial banking businesses. Perhaps we're finally starting to see, what I think everyone expected after the tax reform, more optimism and more spending, but the pipeline is quite robust across traditional commercial lending.
Understood and just very quickly switching gears to - in terms of deposits, I think you mentioned we expect deposit betas to go up. Can you quantify in terms of just how intense it is, are you seeing a lot more competition from the larger banks or the foreign banks in your markets where - who are driving deposit pricing or is it going to be a gradual sort of increase through the year?
Yeah, nothing dramatic is happening in deposit pricing. In our core Wisconsin markets there is increasing slow pressure from a variety of places, I mean there's a lot of credit unions here, there's a lot of community banks and there's a few of the larger banks we compete with. Deposit pricing seems to be reasonable in Minnesota, I'd say Chicago as - but almost everything in Chicago is going to get more competitive. But we didn't really make any prognostications about our deposit data's, we don't really see a lot of change there we just think that as Fed funds go up there is going to be increasing pressure to pass some of that on to depositors which one would expect, but I'm not sure we're going to see any dramatic movement in the betas.
Fair enough, thanks a lot.
Our next question comes from the line of Dave Rochester - Deutsche Bank. Please proceed with your question.
Good afternoon guys.
Good afternoon, Dave.
On just the deposit side and the growths you expect, I know you normally see stronger balances in the back half of the year, is it possible for growth to fund the loan growth that you're expecting for the rest of the year and are you actually anticipating reducing network deposits further?
It's entirely possible the fund loan growth for core deposits. And depending on where the opportunities are we will - as you saw us just to look for lower cost sources of funding. And look to continue to take opportunities to make the asset - the balance sheet more asset sensitive. Locking in some longer duration FHLB borrowings accomplishes that and perhaps there are other tools out there that we can use so that we don't get the immediate impact that we do on the network process when the Fed makes a movement.
Great and then I guess, along those lines, are you guys done with the swaps at this point are you saying about adding others through the year?
We don't have any immediate plans to do more, but depending on what happens on any given day or week we will take a look at those opportunities. 500 million of pay fixed [ph] or see floating swaps isn't going to make a huge difference, but I don't really view running a bank as like a car where you can turn it on and turn it off or make it go faster, make it go slow, I mean you try to do things in moderation.
Yeah, that makes sense. And then just a smaller point in the average balance, I just noticed that the CRE was up a lot this quarter, I'm sure some of that was related to pay down accretion and what not, but is it also a reflection of the type of CRE the Bank Mutual was doing or just any color there would be great?
And it was the purchase accounting stuff, I mean the Bank Mutual commercial real estate book, although it tends to skew a little smaller from a quality point of view is not materially different than what we've been doing and I think way back when we were first talking about this acquisition, a significant amount of it was actually stuff that associated and originated and syndicated to Bank Mutual. So it's not materially different from a quality point of view.
And then just one last one if I could, back on capital deployment and how you guys are thinking about M&A going forward, if you're still interested in bank deals or if it's more nonbank, non-depository type transactions you're looking at now.
So we continue to look at the non-depository transactions, you've seen as being fairly active and we continue to look at those opportunities and we'll continue to look at bank deals that fit our criteria. At least to me the Bank Mutual transaction is going to be a home run, given its characteristics of being efficiency driven inside the footprint, et cetera, et cetera. So as we see other opportunities that are similar or that we believe can have similar results we'll pursue them.
And are you seeing evidence of more chatter in the market on that or more indications of interest or folks looking to partner up, any market commentary you can give on that front?
There's been a reasonable flow of discussions around M&A particularly in the smaller and for quite a while I don't know that that's picked up particularly. Not a lot of activity - I mean you can talk to your friends across the hall, but not a lot of activity in the larger end. Perhaps if the Senate or if the House acts on the Senate bill maybe that would be a catalyst for larger M&As, but we're not hearing a lot of that right the second.
Okay, great. Thanks, guys.
Our next question comes from the line of Kevin Reevey with D.A. Davidson. Please proceed with your question.
Good afternoon.
Good afternoon, Kevin.
Chris, when you said the 1% to 2% quarterly loan growth for the remainder of 2018, is that based on the average balance of loans or period end.
We always report on averages.
Okay, that's what I figured, but I figured I would just double check. And then given where oil prices are, is that a business that you intend to become a little more aggressive in?
So our view of businesses like oil and gas is that we are steady through the cycles and you've seen us go through the last cycle without downsizing, without curtail in our activities and we have continued to make new loans throughout, so if oil's 70 or if oil's 40, the opportunities right side themselves based upon the outlook for hydrocarbon prices and we're consistent player throughout, so we don't - trying to ramp up when prices are high and ramp down when prices are low is a guaranteed way of working yourself out of that business.
And then lastly your resi of 3 to 89 day [ph] to do would look like that was up substantially how much of that was Bank Mutual versus legacy associated?
John, is that ringing a bell for you, no.
Just for clarity, we're talking about a $4 million change on a $7 billion and $8 billion portfolio.
I don't think that material. That's not material.
Okay, thank you.
Our next question comes from line of Chris McGratty with KBW. Please proceed with our question.
Hey, good afternoon.
Good afternoon.
Hey, Chris, just a quick question, I might have missed that on your prepared remarks. What are you assuming for deposit betas in your guide?
So we didn't explicitly call out a deposit beta for this quarter. We talked about last year, we thought the betas would be in 0.5 range or better, they've come in a little bit below that. We continue to expect they'll be below that, but we haven't called out a specific target that's embedded in our interest rate outlook obviously. I think you can see the realized betas has been sort of in the high 0.3's and I think industry observations seem to suggest there's room - if the Fed continue move, it will accelerate a little bit from the level we've been at, but we don't think they're going to get quite back to 0.5, which is what we previously assumed.
Okay, great. On the margin, $6 million of accretion this quarter, what's [indiscernible] from that's going to be realized into margin over the next years, like how much is the discount accretion?
The aggregate mark of the entire credit marks will be roughly $48 million for the entire loan market including credit liquidity and interest rates.
Okay, so most of that will go to the rate mark, but not all of that, okay. And then finally on the securities repositioning, I guess where do you stand on the side of the book? Are you done restructuring, how should you think about just absolute size of investment? Thanks.
Yeah, so we absolutely sold and repositioned the entirety of the book already and so there really won't be a material change. We've been keeping the investment portfolio percentage wise, as a percentage of balance sheet for where it is and it will stay probably where it is unless market conditions change.
Awesome, thanks.
Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question.
Thanks, good afternoon.
Good afternoon, John.
So one of your comments on C&I, just to follow up on optimism, can you touch on footprint versus international businesses? My sense is that Wisconsin's always waged a little bit, not saying it's bad, but curious if you're seeing that same optimism in the footprint is outside of it.
Yeah, when I was referring to traditional commercial business, I was really talking about within the three state footprint, that's where we're seeing an attractive pipeline. There are stepped on in the national businesses too, but I particularly call that out for the reason that you pointed out. We're not in a high growth state here in Wisconsin at least, so it's - people are talking about making some significant capital investments
Okay, good. Provision guidance, it was I guess appropriately vague, but how do you want us to think through that? I know the potential problem question is annoying for you and I won't ask it, but it feels like credit is pretty solid, but how do you want to think about the provision?
Credit's really solid and the provision guidance is vague we haven't actually changed those words for quite a while. Potential problem loans, I just point out that you have a little bit that came in from Bank Mutual and literally a handful of loans that were downgraded into that category, one of which has already paid off. So when we're talking about such low overall levels potential problem loans, a couple or three sizable deals can make the percentage go up, so that's why you know if we really thought that we were seeing true deterioration, you wouldn't be seeing is there a low or large provision.
Yeah, okay. That makes sense. And then the last question maybe a little more subtle, my guess is when you model Bank Mutual, you assume some deposit outflows. I think you maybe hinted it's going a little bit better than your expectations, is that a fair assumption in terms of the part of retention?
We assume 10% and we don't have any reason to think it'll be better or worse than that.
Okay, alright that's all I had. Thank you.
Our next question comes from the line of Terry McEvoy with Stephens Inc. Please proceed with your question.
Hi, thanks. Good afternoon. You took the loan mark on Bank Mutual's loans, how should we think about the provision going forward as those loans mature and you book those into called the core portfolio, will there be a need to rebuild the reserves over the next few years if that happens?
Well, I mean, yeah technically you'll pick up the accretion in the income statement and then we will provide, so the geography will move around, but net result probably about the same from where it was.
And then just one last follow up, I think in the past you provided a little bit more details on the mortgage business and mortgage revenue. I know you said it was up this quarter at least versus my expectations because of the change in strategy. Was there any MSR movement that contributed to that $6 million revenue this quarter?
No, it really wasn't MSR, the pipeline was a little bit bigger at the end of the period and so we had to higher 133 or fair valuation at the end of the quarter than we had at the end of the year.
Okay, that's it. Thanks, guys.
[Operator Instructions] our next question from the line of Michael Young - SunTrust Robinson Humphrey. Please proceed with your question.
Hey, thanks for taking the question. Just wanted to ask on the loan portfolio, you've traditionally run at or try to run it a third a third a third between resi, CRE and commercial, little over indexed to residential this point and put on some longer duration assets there last year, is that an area that you would potentially look to rationalize at all at any point if betas take up or how are you just kind of thinking about that?
That's very observant and we do feel like we're over weighted resi, really translate into over weighted fixed rate assets and so we have a significant effort underway to rebalance and pick up more floating rate commercial and commercial real estate loans within the context of late cycle et cetera, et cetera and being conservative.
And the swap you put on is that more directly related to the resi book and some of the growth last year, is that how you thought through that decisioning or was it just a general decision?
I think that's a general decision and a combination of slightly more resi, slightly less floating rate commercial production particularly in the late half of last year than we had anticipated previously and therefore want to make sure we had the right size positioning going into 2018 and through '18.
Okay and a little different question, hopefully last one you get on the oil and gas loan loss reserve, but it's down at 2.9% now, how close is that to the rate of provision that you have to put against new energy or oil and gas loans?
John, you want to take that?
Yeah, at 3% on a normalized basis we're probably approaching more or like around 1.5%.
Even with the historical loss look back, it's 1.5 on new production?
In a normalized environment, 1.5 would we the number yes.
Okay, so still a little kind of release could come there. Okay, thank you.
Our next question comes from line of Scott Siefers with Sandler O'Neill & Partners. Please proceed with your question.
Hey, thanks for taking the follow up. Chris, just wanted to ask about the size of the balance sheet going forward. So the end of period running asset base, you still have about billion, billion and a half above the average just given that we don't have the full quarter's worth of BKMU in there, are you doing or have you done anything to the legacy BKMU balance that would make the end of period not representative of the likely size of the balance sheet going forward. In other words are you taking down any non-loan earning assets for example?
So maybe starting to fade, we're not planning any portfolio fills or shrinking the balance sheet any meaningful way. The end of period balances represent essentially the pro-forma levels that we have and I think as we've previously discussed and talked about, we're talking about continue to grow loans from this point forward to the balance of the year and we anticipate funding good portion of that all of that with deposits hopefully over the course of the year, so the balance sheet kind of grows from here at a steady clip and we don't expect to have a portfolio adjustment per se.
Okay, alright. Thanks and then I think you hopefully you didn't mention that in response to one of the other questions, but just on the - or just accounting benefits, the roughly $6 million this quarter, what is the life of that portfolio, is that kind of a three year sort of tail that that would have until it becomes just sort of inconsequential in terms of the benefit to the margin and M&A?
Yeah, so the reality is that yes, the average commercial book and there's a large commercial book here is a short dated book, but there was a half a billion dollar residential book as part of it, so it's a mix of course, but yeah most of it is in the commercial related assets and the commercial related assets have sort of one to three year life.
Okay, alright, perfect, thank you.
Ladies and gentlemen we have reached the end of the question-and-answer session and I would like to turn the call back to Mr. Philip Flynn for closing remarks.
Thanks. Thanks for joining us today. We were pleased with the expanded bottom line this quarter, the progress we're making on the Bank Mutual integration, the continued favorable credit environment and in particular the sense of optimism that we pick up from our commercial clients that we talk to and we're looking forward to good results for the balance of the year. So thanks for spending the time with us, we'll talk to you again in July and if you have any questions in the meantime, as always give us a call and thanks for your interest in Associated.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.