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Associated Banc-Corp
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Good afternoon, everyone, and welcome to Associated Banc-Corp's First Quarter 2023 Earnings Conference Call. My name is [Schmoli], 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 website at investor.associatedbanc.com. As a reminder, this conference call is being recorded.
As outlined on Slide 1, during the course of the discussion today, management may make statements that constitute projections, expectations, beliefs or similar forward-looking statements. Associated'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 a reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please refer to Pages 24 and 25 of 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 Andy Harmening, President and CEO for opening remarks. Please go ahead, sir.
Well, thank you, Schmoli, and good afternoon, everyone, and thank you for joining us. I'm Andy Harmening, and I'm joined here today by Derek Meyer, our Chief Financial Officer; and Pat Ahern, our Chief Credit Officer. I'd like to start things off by sharing some financial highlights from the quarter, and then from there, Derek will walk through an update on margin, income statement trends and capital, then Pat will provide an update on credit.
Then in light of the recent turmoil in the banking industry, we've also pulled together some additional information that underscores the stability of our markets and the durability of our business model. So while these past five weeks have generated a wide range of headlines about regional banks and financial service industry in general, we can still say that Associated Banc continues to operate from a position of strength and it starts with our market.
As the largest bank headquartered in Wisconsin, we've been operating largely in conservative, diversified Midwest markets for more than 160 years, including metropolitan areas, mid-size cities and small towns. And it's important to note we serve a stable and diversified customer base with deposits from all banking segments: consumer, high net worth, small businesses, large corporate, government agencies and commercial real estate. And here in the early part of 2023, these markets have remained resilient in the face of an uncertain macroeconomic environment.
Unemployment rates remain stable with Wisconsin and Minnesota continuing to come in below the national average. The consumer remains healthy and our business customers continue to seek ways to expand and optimize their operations where it makes sense. This backdrop has enabled us to stay on offense with our initiatives, and while I like these initiatives and company strategic focus coming into the year, I like I am even more right now.
As we've discussed, our customer and deposit acquisition initiatives began well over a year-ago, and over that time, we've demonstrated an ability to execute as a company. And after delivering the most profitable year in our company's history in 2022, we've carried that momentum forward in 2023 with several key milestones here in the first quarter.
In February, we launched our new "Champion of You" brand campaign to support our customer acquisition strategy with television, radio and digital ads. The campaign demonstrates our commitment to helping our customers, communities and our colleagues become financially stronger.
In March, we launched a new Grace Zone for the consumer and business accounts that are overdrawn up to $50, helping our customers when life brings the unexpected challenge. We also continue to build momentum in our recently launched deposit initiatives such as our digital sales platform, our mass affluent strategies that give us the ability to attract and deepen more quality customer relationships. All of these efforts are positioned us to drive positive operating leverage, enhance our profitability and meet the needs of our customers and communities when and where they need us.
And while we like the progress we've made on our initiatives, maintaining discipline with regards to credit risk, expense management and operational risk, that is the foundation of our company. These foundational strengths will continue to be our focus as we deliver enhanced value and provide a source of stability for our stakeholders.
So with that, I'd like to highlight the key results for the first quarter on Slide 2. Our first quarter results reflected the continued expansion of our balance sheet, strong profitability and stable credit impact. Loan balances continue to grow in each of our major segments, but as expected, the pace of that growth has slowed compared to the trends we saw in the back half of 2022.
As we continue to execute our strategic plan and benefit from rising rates, we once again delivered strong net interest income and net interest margin north of 3%. We also saw a slight increase in our non-interest income while our expenses declined 5% from the prior quarter. Taken together, these inputs helped us drive positive operating leverage while delivering PTPP income of $149 million and a return on tangible common equity above 15%.
We are continuing to monitor asset quality closely, but our credit trends in the first quarter remain favorable. We saw just 5 basis points of net charge-offs during the quarter and added 3 basis points of ACLL. Despite an $18 million provision for the quarter, net income available to common still reflected a 41% increase compared to the same period a year-ago.
With that, I'd like to provide a little more detail on our loan trends. As shown on Slide 3, the diversifying impacts of our strategic plan have continued to drive broad high quality loan growth across all major segments. We've now reported growth in nearly every major loan category for four consecutive quarters. However, this growth has slowed as compared to the strong pace we saw in 2022. This has been especially true for areas such as auto and CRE.
Nonetheless, we've continued to add balances in consumer verticals such as auto and mortgage, and in several of our commercial businesses. As we have seen over the past couple of quarters, this dynamic is being influenced by the funding of prior commitments and a slowdown in payoff activity. On an end of period basis, our mortgage warehouse business led the way in the first quarter, but we would not expect this trend to continue over the remainder of the year.
Now, as we've discussed over the past several quarters, one of the benefits of our lending initiatives is that they have given us more flexibility to drive returns without stretching on credit. This also enabled us to decrease our reliance on lower yielding non-relationship asset classes. With this in mind, we made the decision to exit the third-party originated mortgage business in Q1. This TPO business has historically represented about a third of our mortgage production, and while the loans have been high quality, they are lower margin than our retail mortgage loans are more susceptible to prepayments and have relatively low relationship value.
Put it in context, we originated approximately $1 billion of these loans in 2022, and we expect to originate less than $100 million in 2023 as we wind down this business to focus on other areas that enable us to optimize returns over time. Given current market conditions, we now expect total loan growth of between 6% and 8% in 2023.
Shifting to Slide 4. We highlight our deposit trends for the first quarter. Clearly, this was a very unique quarter for the entire industry with deposits already at a premium in a current rate environment. The events of the past few weeks have added significant volatility for regional banks across the country. Despite those macro trends, our core customer deposit balances decreased by less than 1%, and our retail deposits actually increased slightly for the quarter.
Like most of the industry, we did see some short-term volatility from a subset of uninsured deposits in March, but those flows have stabilized. We view this as a result of stability and resilience of our markets. The diverse granular deposit base of our company has cultivated over the course of several decades and our recent efforts to attract and deepen customer relationship with digital tools and product enhancements.
On an end of period basis, our total deposits grew 2% compared to the prior quarter and 7% compared to the same period a year-ago. We remain comfortable flexing wholesale and network funding levels in the short-term, but we expect to hold this type of funding and check as we move through the year. We remain confident in our ability to fund our growth at a reasonable cost in 2023 and beyond based on our in-flight initiatives. With that said, based on current market conditions, we now expect to drive total core customer deposit growth of 1% to 3%.
Finally, on Slide 5, our team has once again helped to deliver strong revenue for the first quarter, and when combined with diligent management of expenses, we have been able to deliver consistent positive operating leverage and strong PTPP income. In the first quarter, PTPP income of $149 million represented a 67% increase as compared to the same period a year-ago. We remain committed delivering positive operating leverage during 2023.
With that, I'll hand it over to Derek Meyer, our Chief Financial Officer, to provide further detail on our margin, income statement and capital trends for the quarter. Derek?
Thanks, Andy. Slide 6 highlights our asset sensitivity and liability rate trends throughout the first quarter. Average earning asset yields once again expanded meaningfully in the first quarter due to rising rates in the asset sensitive nature of our balance sheet. Versus the fourth quarter of 2021, total earning asset yields are now increased by 235 basis points or roughly 53% of the increase in Fed funds target rate over the same period.
On the liability side, interest-bearing liability costs have now increased by 221 basis points since the fourth quarter of 2021 or roughly 50% of the move in Fed funds target. Consistent with the rest of the industry, we have seen the pace of liability costs continue to increase into the first quarter. This S-curve effect has unfolded largely as expected, but the pace accelerated in response to Fed's aggressive actions to fight inflation. We have also seen betas increase from the success of our efforts to attract and deepen relationships in areas such as commercial deposits, wealth management and mass affluent. These deposits often carry a higher beta by nature, but nonetheless, we are pleased with our initial momentum in these businesses.
Moving to Slide 7. We continue to deliver strong net interest income in the first quarter, but the numbers come down slightly versus fourth quarter as rising liability costs outpace rising asset yields during the quarter. As compared to the fourth quarter, our net interest income decreased by 5%, while our margin compressed by 24 basis points. With that said, our margin profile has transformed significantly over the past 12 months, and we are taking steps to drive more durable margin over time. As compared to the same period a year-ago, our net interest income increased by 46% in the first quarter and our NIM increased by 65 basis points.
Moving to Slide 8. We continue to take gradual steps to lock in a more durable margin profile and reduce our interest rate risk over time. First, we have taken steps to reduce our interest rate risk by gradually layering in swaps over the past three quarters. Given ongoing uncertainty around the macroeconomic picture in the near-term rate environment, we do not intend to call the peak on interest rate on the interest rate environment in 2023, but we will continue to take reasonable steps over time to dampen our asset sensitivity and manage our downside risk.
Within our core balance sheet, we've added high quality liquid securities to take advantage of rising rates. We are also continuing to manage our deposit costs while actively working to bolster our funding base of low cost core customer relationship deposits. With that said, the macro outlook remains uncertain. Our current expectations assume one additional 25 basis point Fed funds increase in May with 225 basis point decreases in September and November, respectively. Based on our current expectations for balance sheet growth, deposit betas and Fed action, we now expect net interest income growth of between 13% to 15% in 2023.
On Slide 9, we highlight that we continue to build our securities book in the first quarter to align with our 18% to 20% target. Throughout the past year, the yields on our investments have risen steadily with the rate environment, but we've reigned in durations to reduce our longer term rate risk. We also reduced exposure to unrealized losses in AOCI during the quarter. After adjusting our CET1 capital ratio to include the impacts of AOCI, this impact would have represented an 84 basis point hit to CET1 at year end. That gap has been reduced to 71 basis points in March. As a percentage of total assets, we built our investment security and cash positions to roughly 21% during this quarter. We continue to target investments to total assets of between 18% to 20% in 2023.
Shifting to Slide 10. Non-interest income grew slightly in the first quarter despite the ongoing pressure from market-driven headwinds and customer-friendly fee adjustments that we've faced for the past several quarters. Modest increases in mortgage banking income and other fee income reduced other fee-based revenue, offset reductions in service charges, card-based fees, BOLI income and capital markets.
Our relative non-interest income growth versus prior quarter was also impacted by a $2 million investment securities loss recognized in the prior quarter. While non-interest income stabilized quarter-to-quarter, we now expect total 2023 non-interest income to contract by between 8% and 10% versus 2022. This anticipated compression is driven by current market dynamics and moderation and deposit, account fee income due to customer-friendly OD NSF changes made in the back half of 2022. These proactive changes give us additional confidence in our ability to strengthen our low cost deposit base and enhance our broader profitability profile in 2023 and beyond.
Moving to Slide 11. Our first quarter expenses came in at $187 million, a 5% decrease versus the prior quarter despite our ongoing investments in people and technology. Our FTE efficiency ratio rose slightly from the fourth quarter, but at 54.6%, it remains more than 9 percentage points lower than the same period a year-ago. Additionally, our non-interest expense decreased 11 basis points as a percent of total assets from prior quarter and 8 basis points versus the same period a year-ago. These proof points underscore our commitment to maintaining expense discipline as we continue to make progress against our growth strategy.
While we continue to invest in strategies that support these growth aspirations in 2023, we are committed to keeping expense growth below revenue growth. On an ongoing basis, we will continue to pursue opportunities to optimize our expense base where possible. With that in mind, we now expect total non-interest expense growth of approximately 4% in 2023.
Shifting to Slide 12. We continue to support the company's growth while managing capital levels towards our target ranges. Despite recent volatility in the marketplace, our capital ratios grew versus the prior quarter. We also saw a meaningful increase in our tangible book value per share driven in part by our enhanced profitability profile. We remain comfortable with our capital levels as we look out over the remainder of the year. Given current market conditions and the expectation for short-term rates to remain elevated in the near-term, we continue to expect TCE to land in the 6.7 to 7.25 range by year-end and CET1 to land between 9% and 9.5%.
I'll now hand it over to our Chief Credit Officer, Pat Ahern, to provide a credit update.
Thanks, Derek. I'd like to start by providing an update on our allowance as shown on Slide 13. We've utilized the Moody's February 2023 baseline forecast for our CECL forward-looking assumptions. The Moody's baseline forecast remains fairly consistent with recent trends and assumes continued Fed rate action, minimal GDP growth in the labor market cooling in 2023.
At the end of the first quarter, our ACLL landed at $366 million. This figure represents a $15 million increase from the prior quarter, largely driven by a combination of portfolio loan growth, nominal credit movement and general macro economic trends. Accordingly, our reserves to loan ratio increased 3 basis points from 1.22 to 1.25 during the quarter.
Moving to Slide 14. Our quarterly credit trends remained stable during the first quarter. We did see non-performing assets and non-accrual loans increased slightly from the fourth quarter, but both measures are down 18% as compared to the same period a year-ago. Delinquencies decreased on both [hold hour] basis and as a percentage of total loans as compared to the fourth quarter. After posting a $20 million provision in Q4, we added another $18 million of provision in the first quarter. As mentioned, this provision bill will be a function of loan growth, limited credit movement and macro trends.
Given recent volatility in the industry, I'd like to take the opportunity to reiterate that the recent growth in our loan portfolios has been driven by investments in our core business, growth of core relationships and expanding our engagement with familiar customer segments. Our experienced team continues to adhere to a disciplined underwriting culture and proactive approach to portfolio management. We remain focused on the uncertainty in the macro economy and vigilant with current underwriting, reflecting elevated inflation, supply chain disruption and labor costs, just to name a few economic concerns.
In addition, we continue to maintain specific attention to monitoring the effects of elevated interest rates on the portfolio, including ongoing interest rate sensitivity analysis across the bank. Going forward, we expect any provision adjustments to reflect changes to risk rates, economic condition, loan volumes and other indications of credit quality.
With that, I will now hand it back to Andy to share some closing thoughts.
Thank you. Look, given recent events in the industry, we have included a few supplemental slides that underscore the strength and stability of our franchise. First, on Page 16, our deposit portfolio is very granular by nature with a large percentage of our deposits coming from consumers, small business and other insured depositors. After removing collateralized deposits, uninsured deposits represent only 24% of our total base. We have enough liquidity for 177% coverage of these deposits, and we can access 103% of that coverage as soon as tomorrow without liquidating any securities.
On the commercial side, no single sector represents more than 10% of our total deposits, but the largest sector being public municipalities. Additionally, we have no material exposure to the banks in other parts of the country that have recently failed.
On Slide 17, we provide additional information regarding our liquidity sources as of yesterday. As mentioned on the prior page, we have enough readily available funding to cover 103% of our uninsured/uncollateralized deposits. But if we include all liquidity sources, that number increases to 177%. In summary, we feel very comfortable with the levels of uninsured/uncollateralized deposits we have at Associated, and we are also comfortable with our liquidity levels.
Moving to Slide 18. Our conservative approach to credit has been honed over the course of the past 12 years, and we've built a diverse portfolio of high quality loans across our consumer business and corporate customer bases, CRE is no different. In building our CRE portfolio, we have focused on partnering with well-known developers in stable Midwest markets. Approximately 70% of our CRE portfolio is based in the Midwest with an emphasis on multi-family and industrial properties. Office loans represent less than 5% of our total loans as a bank and within that portfolio, we are weighted towards suburban Class A properties. While we continue to monitor this portfolio closely, we feel well positioned giving our business model approach in the markets that we operate in.
With that, I'd like to reiterate a couple points from our discussion this afternoon on Slide 19. First, remain confident in our ability to drive balanced loan growth throughout the year, but the pace is expected to slow given current market conditions. With that in mind, we now expect total period end of loan growth between 6% and 8% in 2023. We are pleased with the initial results of our deposit initiatives to remain confident in our ability to track and deepen customer relationships in 2023 and beyond.
With that said, based on current market conditions, we now expect to drive total core customer deposits growth of approximately 1% to 3%. And while we are taking steps to dampen our asset sensitivity, we expect to continue to benefit from the rising rate environment in the near-term. Based on our most recent forecast for balance sheet growth, deposit betas, Fed action, we now expect to deliver net interest income growth of between 13% and 15% in 2023.
And lastly, we continue and invest strategically in people and technology, and we now expect non-interest expense to grow by approximately 4% in 2023. In fact, we have already taken action to drive to this new target. And as always, we remain committed to delivering positive operating leverage in future quarters.
With that, Schmoli, let's open it up for questions.
At this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Jared Shaw with Wells Fargo. Please proceed with your question.
Hey, good afternoon.
Hey, Jared.
Hey. Maybe just on the billion of deposits that we've seen so far this quarter, can you give a little breakdown of what categories those are coming in and is it similar beta should we expect, I guess, beta going through the next few quarters will be similar to what we saw this quarter?
Are you talking about Slide 16 and 17?
Yes.
Okay. Yes. Sure. So what we've done since the end of the quarter really started in the middle of March was continue to look at ways of getting liquidity that's immediately available. And – so that we were – we could accelerate any kind of coverage that we had for any events. And as a result of doing that, we had plenty of liquidity coverage available on it. This really speaks to it on the next page on 17 in brokered CDs, and we decided to issue brokered CDs, which is what that deposit growth is and term out our FHLB short-term funding and create secured liquidity that way that'd be available immediately. So that's what we're trying to capture on that – on those two pages.
Okay. And then when we look at the guidance for the core deposit growth of that 1% to 3%, that implies obviously a slowdown from here. And then in terms of the cost of those, I mean, we should assume that that quarter beta is still at the higher level?
Yes. And to be clear, the 1% to 3% is customer deposits as opposed to network or brokered. So it's exclusive of that. In the first quarter, we were just under 1% decrease in customer deposits. We think we'll make that up and grow in the neighborhood of 1% to 3% for the year. The other thing I'll mention on those brokered deposits, the way that Derek and our finance team were able to handle that was really just an opportunity to increase liquidity, but not really have any significant increase in terms of cost to the bank.
Okay. And then, I guess trying to piece together the – some of the components of guidance. Does that imply that quarterly net interest income should be sort of flat from here? I mean, clearly, we'll see some margin pressure, but I mean, overall NII, is that sort of flat at these levels or how should we think about that?
No. I think, one, if we look at the size of the drop, we think about 10 basis points of that comes from a mix change in non-interest bearing deposits. So if you work through that math. Then we think about 4 or 5 basis points came from our sub debt issuance and our securities growth to probably more of a 10 basis point drop. There could be an additional drop from this quarter based on that continued mix change from non-interest bearing deposits. We saw it. It was a few hundred million more than we had planned. We did account for some of it. But I don't see anywhere near the same size – magnitude of drop going forward that we saw from fourth quarter to first quarter. The worst of it's behind us.
Were you talking about margin or were you talking about NII?
I was talking about NIM margin.
Yes. I was saying NII, so net interest income. So piecing those components together, should we assume that dollars of net interest income are roughly flat from here for the year?
Yes. I don't think we've timed it out that specifically.
Okay. And then maybe just shifting, looking at capital levels, you're in the range of your goals. How should we think about buybacks through the year here if you're continuing to build capital? Is that something that we should think about? Or is it just the environment is too difficult to really say for bank to be back in buying back stock at this point?
Yes. We continue to stick to the same priorities we've talked about in all our other calls, which would be dividend, organic growth. And we're not – we don't – our guidance does not contemplate buybacks or acquisitions.
Okay. So even with the price pullback that, that wouldn't change your thinking on buying back stock?
Correct.
Okay. All right. Thank you.
Thanks, Jared.
Our next question comes from the line of Daniel Tamayo with Raymond James. Please proceed with your question.
Thanks. Good afternoon, everyone. Maybe first just kind of following up on the non-interest income discussion. So you mentioned that assumes two rate cuts in the back of the year. How would that guidance change if those cuts weren't in the assumptions? I know they're late in the year, but just curious what that would be if it was just the May hike?
Yes. I think the easiest piece to give you is a 25 basis point rate increase is about $2.5 million a quarter, and it's symmetrical, so if we don't get it, we would not get compressed by $2.5 million a quarter and you can use that as a guide.
Okay. And then just digging a little bit deeper into the office, commercial real estate balances, just trying to get a sense for what is kind of metro type of buildings like Chicago or Milwaukee of the office portfolio?
Why don't you take that?
Yes. It's largely suburban properties. We don't have a lot of exposure in I'll say, core urban markets that we're in in our footprint.
Okay. All right. Helpful. And last, quickly just on the loan growth expectations for the year. I heard you say the TPO is obviously coming out of that. Is that most of the difference in the loan growth guidance? Or are you pulling back in other areas or seeing lower demand?
Yes. I would say the TPO is really just a small portion of it, because what's happened in the mortgage business as you may know is prepayments have slowed significantly. And so we're still seeing growth with significantly less production. I would say that we've meaningfully tried to on the auto book. We're trying to make sure that we're getting a nice yield on those. We've not expanded into new markets at the pace that we had originally planned. We see a slight decrease in the pipelines in commercial banking as we go throughout the year. So when you add all those together, I would say, TPO is a small piece of it, but I would say it's a general, some of the decisions that we've made, some of the more severe underwriting that we have, strategic decisions on expansion, and then some decrease in pipeline on the commercial side year-over-year.
Okay. Terrific. That's all I had. Thanks for the color.
Thanks, Daniel.
Our next question comes from the line of Terry McEvoy with Stephens. Please proceed with your question.
Good afternoon, everyone.
Hey, Terry.
Hi. Maybe just big picture, there's a lot of talk about increased bank regulation after the events of March. What could that mean for a bank like Associated kind of $41 billion in growing? Any thoughts there?
Well, I think they showed their hand recently and they're appropriately caring about the granularity of deposits. I think when you look at where we are when we have 24% of uninsured and uncollateralized deposits, we feel like we're in a really good position. When you think about liquidity coverage, I think some of the major banks speak to that maybe in a just a little bit different way versus what's available in 24 hours. Maybe it's within 30 days. But I think liquidity coverage is going to be of course, important there.
The one thing that I will say from a regulatory standpoint, I feel like the OCC and the Fed from Associated Banc perspective quickly got in, asked for a lot of details from I suspect all of their banks and appropriately so and has aggregated that. So learning a lesson from a couple of bank failures is the right approach and appropriate approach. What will come from that in the mid-term and long-term, we will have to wait and see what happens by segment. But to date, I don't feel as if we've been asked questions that are not appropriate for banking. I suppose that there'll be an increased focus on asset liability management with an increased focus on deposits, but with regards to the overall policy change or regulatory changes, it's too early to know what will be formalized.
Thanks for that, Andy. And then as my follow-up, I've noticed the last couple of weeks some larger banks are getting out of the auto floor plan business. Can you just remind me was that an area you focused on when you joined or was it more on the auto finance side on the consumer business? And if not, is that an opportunity that would make sense for Associated?
We'll review all of – one thing that we've said is we're going to review all of our categories and make sure we can move towards maximizing returns. We've already made one of those moves in TPO, third-party origination on mortgage, which really didn't have anything to do with what occurred in the last 30 days as much as the fact that we have more maturity across all of our lending verticals. With regards to the floor plan, we don't have immediate plans to enter into that. We're not in the floor plan business today. We are in the indirect auto business. That was initially started, if you might remember, as a hedge against mortgage volatility. And gosh, I think we've seen a little mortgage volatility. So it's working as we had hoped. We believe it's significantly better yields than what we'd seen in third party. So we like where that had started. But if we see an opportunity in floor plan where there are good yields and good relationship value and an opportunity for deposits, we would consider it. But we don't have immediate plans to enter into that.
Great. Thanks for taking my questions.
All right. Thank you.
Our next question comes from the line of Brody Preston with UBS. Please proceed with your question.
Hey. Good evening, everyone. Thanks for taking my questions. I just wanted to clarify on the interest rate assumptions. Could you restate when the two cuts you expect to occur in the back half of the year are?
September and November.
Okay, great. And I hear you on the dollar impact, but as I think through kind of dynamic balance sheet modeling just given higher deposit betas and worsening kind of mixes across the industry, is there a possibility where maybe that second cut is actually, maybe beneficial or neutral as it relates to NII and NIM just giving that the second cut might help a little bit more on the deposit costs?
Yes. I'm not sure that'll be a great…
That's a very good question.
That'll be a great case study. Typically deposit costs keep going up for another month or two or three after the last hike. So it's not obvious to me that that would help. But I know why you're asking, if you could immediately take advantage of it with deposit pricing. It might, but I haven't seen it successfully play out that way before. That being said, I've seen a lot of things this quarter that I haven't seen before.
I think that for me, Brody, the real question for our industry is deposit mix shift, and that impacts everybody on the demand deposit side. There's some view that is a reversion to the norm that maybe that money went into there during some of the stimulus and it's coming back out through spend. That's logical. And if that is the case, we would expect that impact to decrease every quarter over the next three, four, five, six quarters until that kind of has worked its way through the system. I think that is maybe as significant of an impact to margin going forward.
Got it. And just one more on the margin front. I guess, it helped me think through the – or this is more on the NII front with the lower NII guide. Is it a – I'm assuming it's mostly due to funding, and is it a mix of worsening funding mix or are you also expecting accelerating betas?
So the guidance contemplates beta as it get just above 53%. So those have crept up. We've shared, I think it was just below 50% in our last one. That's largely driven by mix. Probably the new development, and it's largely what Andy is talking about is the mix, it was non-interest bearing. For us, those were largely stable as a percent of deposits for the last four quarters. And there was really much more movement than – had been happening really in the last quarter. And you put that together with a little bit higher deposit betas and you end up with sort of what our guidance comes out to be, which is flattish NII quarter-to-quarter.
Got it. Okay. And I just had a couple last ones just on the auto book. I just wanted a couple of clarifications. Could you remind me what the, I guess if you had to define it by FICO score or Prime versus Super-Prime or whatever, like, could you help me define where most of those – what most of those loans – who most of those loans would be made to from a demographic perspective as it relates to credit score?
I'm going to start with the easy part, then I'm going to turn it over to our expert, Pat Ahern. This is Andy. I believe about 96% or 97% of these loans would be considered Prime or Super-Prime. And if you use our scorecard model, we actually believe that 99% of them are. The average FICO in the first quarter, for example, at the time we did the loan was 772 in the first quarter. So pretty strong borrowers and that's where we're staying. That's the neighborhood we expect to live in because typically when you lend to them, they pay you back. And so – maybe give a little more color around that, Pat?
Yes. I mean the metrics across, say the last 12 – rolling kind of 12, 13-month averages have maintained at the same levels Andy is talking about. I think across the whole portfolio, the FICO is like 755, 760, so that's only increased this last go around. But we've seen a fair amount of nice stability there. And we like a lot of other lending areas, we have not stretched to find volume there.
Got it. And this is just the last one on this and it's something that I'm wondering just about consumers as a whole. When you underwrite those auto loans, is there any – I guess in the model or in the process, is there any part that looks at the, like the durability or the stability of that borrower's credit score, like over a multi-year timeframe? And I ask just because, if you have a marginal borrower that might be marginally prime that gets a bunch of cash given to them from the government and then they can make 12 months of consistent payments, that really helps the FICO score when maybe behaviorally they're not necessarily, what the FICO score that is at the end of the 12 months indicates they would be. So is there any kind of like stability to that FICO score given like through time?
Yes. Let me make sure I give my perspective on how a consumer operates. And the way a consumer operates is if they like to pay, doesn't really matter what their income level is, they pay. And so typically what you see, the consumer can get a little bit more healthy, but somebody that is not a payer before they get stimulus doesn't all of a sudden become a really disciplined consumer. That has not been my experience. With regards to the durability of the score, that view doesn't exist to my knowledge. And so when we look at what it is, we look well beyond just a FICO score. So when we say a balanced scorecard, we're looking at multiple iterations. And what we did Brody, is we bought data, in this when we took over the business and brought in a team that has been in this business for decades. So I don't have a bigger concern on an inflated FICO and in short period of time somebody going from sub-prime or near prime to prime and super-prime. I just think that'd be a very, very big stretch for that to happen. And I think what's important is that's not the only measurement we're using, when we're underwriting this and that is the nature of the balance scorecard.
Awesome. That's very helpful. Thank you.
You're welcome.
Thanks for joining us, Brody.
Happy too.
Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question.
Thanks. Good afternoon, guys.
Hey, John.
Question on Slide 4. With some money market, the non-interest bearing decline, it looks a lot like others, but I'm just curious how much of that runoff happened after March 8? And I'm specifically looking at the money market piece of that. Was some of that rate driven are intentional and just kind of curious what happened kind of pre and post March 8?
I don't have the exact breakdown, but I'll say a couple of things here. We did see some uninsured deposits leave the bank. And our numbers surely would've looked different on core customers had Silicon Valley Bank had the failures not occurred, so that's one thing. The second piece – but it's not crazy numbers for us. And what I would say though still is there is a mix shift that is going on that was happening before Silicon Valley Bank. And to be clear, it's happening in our industry. It's not unique to Associated in my opinion across the Board, it's a consumer behavior.
Okay. And I guess maybe another way to get at this, if – we're sitting here in 90 days, does Slide 4 looks similar, just perhaps not as amplified? Is that fair?
It would make me sad if it looked the same because I just told you that I thought we were going to grow deposit for the year. So will it look somewhat similar? Let me take a pause on that. Maybe with the – I was going to say similar with different numbers. The magnitude of the loss we wouldn't think would be as significant. The challenge on non-interest bearing we think at some level will stay the same. So the mix could be similar, but just not to such exaggerated dollars, if that makes sense.
Yes. Okay. And then how about just bigger picture more on Slide 3, loan growth drivers from here? It sounds like you're saying commercial is a little bit slower, maybe some of it's self-imposed, maybe the pipelines have changed a bit, but how about Slide 3? How does that look as the year progresses?
Yes. We think mortgage warehouse, if you look at that and you look back and there's a table in the back that shows the average deposit, that just spiked at the end of the quarter. We don't expect that to be a similar phenomena the rest of the year. So if that is not a high growth that it would be surprising to me unless something changes wildly with interest rates that that would be a primary grower for us. We'd expect the modest growth and mortgage, although we're out of the TPO. Unless again, there's a large change in interest rates for the refinance, like it booms this year, which we don't anticipate, we wouldn't see a large retrench there. We would think that there'd be steady growth in the commercial part of our business and I'm not so sure that that reapproach would change. So there'd be a little bit of – and we'll have steady growth in the auto finance, assuming that we can continue to lend to high quality borrowers is that a good yield.
Okay. And then just one more on the expense growth guidance. You talked about already taking some actions to get to that lower growth level. Can you give us some examples of what you're doing? And then also where you feel it's necessary to spend money? Thank you.
Yes. Sure. So one thing that I've said is that we'd go into each year with a plan for growth. And then we would be immediately ready and willing to pull levers on the expense side if we didn't see that growth emerging. So we have a decent amount of growth, but not to what I thought was the upper range of that. One thing we did is we pulled the lever on third party origination, but we also recognized were our mortgage volume was overall, and we decreased our staffing both contractors and FTE in that category.
Then we looked at the rest of the year and we looked at where strategic adds were being made and what were necessary in this environment. We put a process in place that requires it to go through quite a process to add any of those people, including up to our CFO having to sign off on that. And trust me, when Derek doesn't just sign when he sees that he has a discussion about that. So that will slow any strategic adds that we might have had. And then we look at the areas that we think are going to thrive going into the end of the year and into next year, and we will continue to add quality people in those places. But net-net, we won't necessarily replace every role that comes in. We won't add some of them that were planned. We've reduced lines of business. And then frankly, we'll set up a much more thorough process in the next two to three weeks to start to look across our company heading into 2024 as to what we should look like then.
Okay. Fair enough. Well, Derek seemed like a nice guy at our conference in March. But I didn't ask him to buy me anything, so I'll try the next time.
He's the nice guy. He should be at that conference.
All right. Thanks for everything.
Thank you.
And our next question comes from the line of Chris McGratty with KBW. Please proceed with your question.
Hey. This is Andrew Leischner on for Chris McGratty. How's it going?
Good, Andrew.
So looks like the quarterly provision has been a little under $20 million in the last three quarters. Is that a good runway going forward? Do you expect that to ramp up given the macro uncertainty? And also if you can provide any insight on where you expect to see reserve levels go? That'd be great. Thanks.
Pat?
I would say, we'll probably – I could see provision increasing from here. We've come off such a small level, but it's hard to say what that's going to be. We're going to continue to monitor loan growth where the markets are going from a macro level, but then more importantly, our individual credits in the portfolio. We've just gone through a complete deep-dive across the full commercial bank, including C&I and CRE, and we really did not find any significant movements in risk rating changes were there were no surprises that came out of stuff and we'll continue to do that on a quarterly basis. That being said, if we see continued pressure on probability or recession later in the year going into 2024, we'll monitor that and make appropriate adjustments.
Andrew, I think it's also important to remember that when you decrease your growth with the CECL methodology, you don't have as immediate of impact on your level. We've taken qualitative downturn factors and increased those in our model. And then – so that's already been occurring. And then finally, we do believe that the market will slowly have some level of deterioration at some point, but we are not anticipating wild swings with the nature of our portfolio. And remember, we're in the upper Midwest. And what that means is that the real estate isn't quite as volatile and that's sometimes an area where you see volatility. So we're not immune to macroeconomic impacts, but we think it would be more of a slow build as we go throughout the year.
All right. Great. Thanks. That was really helpful. And so with your loan deposit ratio at, I think it was 96% at quarter end, and I know deposit trends look positive, but can you provide where you're comfortable with that loan deposit ratio going?
Well, do you want to answer this one – this one Derek likes, or I'll take it because I like it too.
I don't want to get in your way. Clean up anything you missed.
Okay, fair enough. Look, we're pretty comfortable staying around that 95% area. As loan demand and growth decreases, our goal is to try to fund that with our deposit growth. In the instances we're not afraid to flex on the wholesale, but we have multiple initiatives. I mean, when we think about the digital sales platform, when we think about our mass affluent, when we think now we're the 13th largest HSA business in the country, and we are forecasting double-digit growth there when we think that we have more RMs, and if they are not lending as sure as heck should be talking about primary relationships, and we have double-digit increases in our treasury management sales.
So we have a lot of reasons to believe that we can outpace the market when it comes to deposit growth. We just have to execute. First quarter was a noisy market for our industry, but we still believe that we're in a position to grow our deposits. We would like to stay in that 95% range. Our initiatives will continue to have a focus on holistic relationship and deposits. We started a new branding campaign and we've already gotten early results. And I guess the other thing that gives me some optimism is that our primary customers for consumer and businesses, even with the noise in the first quarter, they still had positive growth, they had marginal positive growth, but we're just getting started in many of these consumer initiatives. So you asked a simple question, I gave you a complicated answer because it's not simple, but the short answer would've been, I'm comfortable at the 95% range. We'd like to fund that with customer growth as opposed to wholesale or network growth. But we're comfortable in a short-term because we believe in those initiatives using those levers as long as it's profitable.
Okay. Got it. Thank you. And just one final quick one for me. What is your deposit beta assumption in your guidance?
Just north of 53% for interest-bearing deposits, around 40% for total deposits.
Okay. Great. Thank you.
Thank you.
And our next question comes from the line of Scott Siefers with Piper Sandler. Please proceed with your question.
Good afternoon, guys. Thank you for taking the question. I think most of my questions have been answered. But I was curious on the just a slightly reduced fee guidance. Is that just a function of the [CPO] transaction? Or is there anything else underlying that?
No, most of that has to do with service charges on consumer with our free friendly rollout and then a little bit of ECR impact on the commercial side.
Okay. All right. Easy enough. That's actually all I had. So thank you very much.
Well, thank you. I think that concludes the questions that we have. Look, we appreciate the level of questions and we know that it's been a dynamic quarter for everyone in the industry. We appreciate your continued interest. We welcome Brody for the first time. And certainly, Derek and Ben and I are available offline if there are follow-up questions. Thank you all.
And this concludes today's conference, and you may disconnect your line at this time. Thank you for your participation.