Associated Banc-Corp - Q2 2023
July 20, 2023
Transcript
Operator (participant)
Good afternoon, everyone, and welcome to Associated Banc-Corp's 2nd quarter 2023 earnings conference call. My name is Alicia, and I'll 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 slide that will be referenced during today's call are available on the company's website at investor.associatedbank.com. As a reminder, this conference is being recorded. As outlined on slide 1, during the course of the discussion, management may make statements that constitute projections, expectations, beliefs, or similar forward-looking statements. Associated's actual results may differ materially from the results anticipated or projected in 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 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 10 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.
Andy Harmening (President and CEO)
Thank you, Alicia. Good afternoon, everyone. Welcome to our second quarter earnings call. I'm Andy Harmening. I am joined once again by Derek Meyer, our Chief Financial Officer, and Pat Ahern, our Chief Credit Officer. I'll start by sharing some highlights for the quarter, and from there, Derek will provide update on margin, income trends, and capital, and then Pat will share an update on credit. Midway through the year, we've started to see some renewed stability through the banking system, and that's especially true here in the Midwest. Unemployment rates in most of our states remain 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.
With that stability as our backdrop, we've continued to make progress with our plan to attract, deepen, and retain customer relationships, optimize our balance sheet, and enhance our profitability profile over time. You can see it in our loan portfolios, where we've continued to add significant volumes of high-quality consumer and commercial loans to our books. You can see it on the deposit side, where we're deepening relationships with our mass affluent strategy and acquiring new relationships with a brand new brand campaign and multiple product and service enhancements. You can see it in digital, where we've already made several upgrades to the new platform we launched less than a year ago, leading to an increased customer satisfaction score and a decreased customer attrition rate. We have become a company that has developed an ability to execute even amid a volatile quarter in banking.
Importantly, we've reached these milestones without sacrificing our foundational discipline on credit quality and expense management. We look forward to carrying the momentum into the back half of this year. With that, I'd like to highlight key results on slide 2. Our Q2 results reflected the continued expansion of our balance sheet, stable credit trends, and progress against our initiatives. We added loan balances in all three major segments again in Q2, led by C&I and Auto Finance. However, as we discussed a quarter ago, lending activity as a whole has slowed from the strong pace we saw in 2022. To fund our growth and enhance our liquidity profile, we tapped the wholesale markets to increase deposits by $1.7 billion during the quarter.
This reliance on wholesale funding sources is expected to dissipate over time as we begin to realize the full impacts of our customer acquisition and relationship deepening initiatives. With increased funding costs impacting the entire industry, our net interest margin came in at 2.8%, which is down from our Q4 peak, but it's still 9 basis points above the same period a year ago. As a partial offset to margin pressures, we saw non-interest income increase by $3 million from the prior quarter, helping us deliver PTPP income of $133 million for the quarter, a $23 million increase from the same period a year ago. We are continuing to monitor asset quality closely, Our credit trends remained relatively stable during Q2.
We saw 15 basis points of net charge-offs during the quarter and added 1 basis point of ACL. We added $22 million in provision for the quarter, still matched our net income available to common equity from the same period a year ago. Staying on the topic of credit, I'd like to take a moment to reiterate a few important points about who we are as a company on slide 3. We take an active, disciplined, and conservative approach to credit. This includes an ongoing and deeper view of existing portfolios, and in addition, our efforts to de-risk our balance sheet over the past 14 years have put us in a relative position of strength. Since 2009, we've taken steps to exit high-risk portfolios, replace those balances with lower-risk asset classes, and implement processes and procedures to identify and eliminate risk.
Today, we're squarely focused on prime, super prime consumers, core commercial lending, and a diversified balance sheet. This broad focus has protected us from overextending ourselves in any one particular area and limited our exposure in at-risk subcategories, such as CRE Office. We also benefit from operating primarily in stable, conservative Midwestern markets that don't see the big swings you might see in other parts of the country. As mentioned previously, this long-held disciplined approach on credit has also given us the flexibility to continue to execute on our strategic initiatives in the face of a dynamic operating environment. With that, I'd like to provide some details on our loan trends on slide 4. During Q2, we continued to add high-quality loans to the balance sheet in areas such as C&I and Auto Finance.
We've now reported growth in each major segment for five consecutive quarters. While we've continued to book loans, the pace of new deals coming into the pipeline has slowed as our customers take a more cautious approach in the uncertain macro environment. Within our portfolio, we continue to emphasize selective growth in high-quality loan categories that help us diversify our portfolio while delivering an enhanced profitability profile. Over the last seven quarters, the expansion of our C&I business and growth in our new equipment finance and asset-based lending verticals has helped us expand our offerings and sharpen our focus on high-quality, relationship-based lending. This enables us to de-emphasize lower-yielding, non-relationship asset classes, such as third-party originated mortgage. As we announced back in Q1, we've chosen to exit this low-margin business with relatively low relationship value.
We originated approximately $1 billion of these loans in 2022. We now expect to originate just $60 million in 2023, as we wind down this business to focus on other areas that enable us to optimize our returns over time. In summary, we remain confident in our ability to drive high quality, accretive growth on our balance sheet, and as such, we continue to expect loan growth of between 6% and 8% in 2023. On Slide 5, we highlight our funding trends for Q2. During the quarter, we tapped the wholesale and broker deposit markets to help enhance our liquidity profile, fund our loan growth, and replace higher-cost FHLB advances. These actions were temporary in nature, not intended to be part of our long-term strategy.
Within our core customer deposit base, we did see some short-term volatility from a subset of uninsured businesses, business deposits and public funds in March and April. That volatility largely dissipated by the end of the quarter. In the face of this challenging environment, we actually saw modest growth in our consumer deposit base during the quarter. This stabilization reflects the granularity of our deposit base and our recent efforts to attract and deepen customer relationships with digital tools and product enhancements. We expect to hold wholesale network funding levels in check as we move through the back half of the year, and we remain confident in our ability to fund our growth at a reasonable cost going forward based on our initiatives. With that said, based on current market conditions, we now expect total core customer deposits to decrease by 3% for the year.
We expect to drive growth of 2% in the back half of the year as we continue to execute on our initiatives. On slide six, we're sharing additional details on our initiatives designed to acquire, deepen, and retain customer relationships. We've continued to see promising signs of progress with these efforts. We've actually seen momentum pick up as we've moved through the year. As I mentioned previously, we're up and running with a variety of initiatives across the bank, and we've seen several leading indicators that give us confidence we are on track. First, in one of the most challenging environments for regional banks in years, we actually grew net consumer and business households during all three months of Q2.
Secondly, we've implemented several enhancements to our product and service offerings and launched a new brand campaign, which resulted in an 11% increase in consumer household acquisition rates and a 13% decrease in attrition year-over-year. Third, I want to remind you that the new digital platform we launched last fall was built with open architecture, enabling us to quickly respond to customer feedback and deliver more and more frequent upgrades. Since launching the platform 10 months ago, we've already successfully released nine upgrades. As a result, we've seen a strong positive trend in our top box, completely satisfied customer satisfaction scores. Most recently, during Q2, our satisfaction scores hit a 3-year high in mobile banking.
Finally, since launching a new mass affluent strategy to deepen relationships with high potential customers, we've already added over $300 million in net new deposits and surpassed our full year goal. This growth represents a roughly 8% increase from our pre-launch baseline. As you can see, we're bringing in new dollars and deepening relationships with a customer base that is more satisfied. While we're pleased with the initial results of these efforts, we've yet to realize the full impact of the initiatives, and we're working on additional enhancements as we speak. What's not going to change, though, is our commitment to the foundational strength of our company, which is maintaining discipline with regards to credit risk, expense management, and operational risk management. Finally, on slide 7, our team once again paired strong revenues with diligent expense management during the second quarter.
Despite the challenges facing the industry during the quarter, our company delivered PTPP income of $133 million, which represented a 21% increase as compared to the same period a year ago. We remain committed to delivering positive operating leverage during 2023. With that, I'm going to hand it over to Derek Meyer, our Chief Financial Officer, to provide a little more detail on our margin, income statement, cap, and capital trends for the quarter.
Derek Meyer (CFO)
Thanks, Andy. Starting on slide 8, I'll begin by highlighting our asset and liability rate trends through the second quarter. Our total asset yields have continued to rise due to rising rates and floating rate nature of a large segment of our loan book. Since the start of the rate cycle, total earning asset yields have increased by 259 basis points, or roughly 53% of the increase in Fed Funds' target rate over the same period. Our commercial and CRE portfolios, largely comprised of floating rate loans, have seen the largest increase. On the liability side, rising rates and the volatility impact in the industry this spring have combined to put additional pressure on funding costs across the industry.
Here at Associated, interest-bearing liability costs have now increased by 279 basis points since Q4 of 2021, or roughly 50% of the move in Fed Funds target. The general S-curve effect we expected to see on deposit betas has played out largely as we expected, our beta accelerated following the volatility we saw in the spring, our short-term build in wholesale and network funding, and the ongoing mix shift away from non-interest-bearing deposits. Accordingly, our interest-bearing deposit beta has now climbed to roughly 52% since the start of the rate cycle. Moving to slide 9, mix shift and other funding cost pressures combined to drive a 27 basis point compression in our NIM for Q2. Nonetheless, our NIM still represented a 9 basis point increase from the same period a year ago.
On a $ NII basis, we saw similar impacts during the quarter, yet still delivered $ NII that reflected a 19% increase from the same period a year ago. As Andy discussed, we continue to take significant actions on both sides of the balance sheet to drive more durable margin over time. One example is that we've gradually layered in swaps over the past several quarters to decrease our asset sensitivity and enhance the durability of our margin. Given the ongoing uncertainty around the macroeconomic picture and the likelihood of a higher for longer scenario, we did not add additional swaps during Q2. Nonetheless, we've continued to see our estimated NII sensitivity come down gradually by design. The macro-outlook remains uncertain. Our current expectations assume 1 additional 25 basis point Fed Funds increase in September, with no rate cuts in 2023.
Based on our current expectations for balance sheet growth, deposit betas, and Fed action, we now expect net interest income growth of between 10%-12% in 2023. As a reminder, we do not intend to call the peak on interest rate environment in 2023, but we will continue to take reasonable steps over time to dampen our asset sensitivity and manage our downside risks. On slide 10, we've continued to manage our securities book in Q2 to align with our 18%-20% target. Throughout the past year, the yield on our investments has steadily risen with the rate environment, but we've reined in durations to reduce our longer-term rate risk.
After adjusting our CET1 capital ratio to include the impacts of AOCI, this impact would have represented an 88 basis point hit to CET1 in Q2. This impact is up slightly from the prior quarter, primarily driven by the rebound in rates from the decrease at the end of March. As a percentage of total assets, our investment security and cash positions were maintained at roughly 20% during the quarter. We continue to target investments to total assets of between 18%-20% in 2023. Shifting to slide 11, non-interest income grew by $3 million inQ2, despite the ongoing pressure from market-driven headwinds and customer-friendly fee adjustments that we've faced in the past several quarters. The largest contributing factor for the increase was the moderate growth in mortgage banking income driven by higher MSR values.
We also saw a modest growth in card-based wealth management and other fee-based revenues. These increases were partially offset by decreases in service charges, BOLI income, and asset gains. Despite the quarterly increase in non-interest income, we continue to expect total 2023 non-interest income to contract between 8%-10% versus 2022. As we've discussed, this anticipated compression is driven by current market dynamics and moderation in deposit account fee income due to customer-friendly overdraft NSF changes made in the back half of 2022. These proactive changes gave 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 12, our Q2 expenses increased by 2% versus the prior quarter amid ongoing investments to support our initiatives.
Our FTE efficiency ratio rose to 57% during the quarter. It remained 284 basis points below the same period a year ago. Additionally, our non-interest expense base continues to decrease as a % of average assets and is now down 15 basis points from the same period last year. While we continue to invest in strategies to support our growth aspirations in 2023, we are committed to keeping expense growth below revenue growth over the long term.
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 between 3% and 4% in 2023. Shifting to slide 13, we continue to prioritize paying a competitive dividend and funding organic growth while managing capital levels towards our target ranges. Here in Q2, our regulatory capital ratios grew versus the prior quarter and versus prior year-end 2022. 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 between 675 and 725 by year-end, and CET1 to land between 9% and 9.5%.
I will now hand it over to our Chief Credit Officer, Pat Ahern, to provide an update on credit quality.
Pat Ahern (EVP and Chief Credit Officer)
Thanks, Derek. I'd like to start on slide 14 with an update on our allowance trends. We utilized the Moody's May 2023 baseline forecast for our CECL forward-looking assumptions. The Moody's baseline forecast remains consistent with recent observed trends and assumes an additional near-term rate hike, GDP growth rate similar to the first half of 2023, a cooling labor market, and a deceleration of inflation. At the end of the second quarter, our ACLL landed at $377 million. This figure represents an $11 million increase from the prior quarter, as allowance continues to be driven by a combination of portfolio loan growth, nominal credit movement, and reflects general macroeconomic trends benefiting from stability in the Midwest. Accordingly, our reserves to loan ratio increased 1 basis point from 1.25% to 1.26% during the quarter.
Moving to slide 15, our quarterly credit trends remained stable across the portfolio during Q2. We did see non-performing assets, non-accrual loans, delinquencies, and charge-offs increase slightly during the quarter, but we view these increases as a sign of both normalization back to pre-pandemic levels, as well as some one-off situations, as opposed to an indication of a broader issue in the portfolio. We added another $22 million in provision during Q2, which is consistent with the past three quarters. As mentioned, this provision build was largely a function of loan growth, limited credit movement, and some 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 continues to focus on our core business, growth of key relationships, and expanding our engagement with familiar customer segments.
Our experienced team continues to adhere to a disciplined underwriting culture and a proactive approach to portfolio management that we have solidified over the past 10-plus years when the bank worked to de-risk the portfolio. We remain focused on monitoring the uncertainty in the macroeconomy to ensure current underwriting reflects elevated inflation, supply chain disruption, 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 the ongoing interest rate sensitivity analysis bank-wide. Going forward, we expect any provision adjustments to reflect changes to risk grades, economic conditions, loan volumes, and other indications of credit quality.
Finally, on slide 16, Andy discussed previously that 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 the bank and a focus on prime and super prime consumer portfolio. While CRE has frequently been cited as an area of risk in the media, our approach to CRE lending reflects the conservative approach we've applied across the bank. In building our CRE portfolio, we focused on partnering with well-known developers in stable Midwest markets. Over two-thirds of our CRE portfolio is based in the Midwest, with an emphasis on multifamily and industrial properties. Office loans represent just 3.5% of our total loans as a bank. Within that portfolio, we are weighted towards suburban Class A properties.
While we continue to monitor this portfolio closely, we feel well-positioned given our business model approach and the markets we operate in. With that, I will now hand it back to Andy to share some closing thoughts.
Andy Harmening (President and CEO)
Thanks, Pat. I'd like to reiterate a couple points from the presentation on slide 17. First, based on the resiliency of our markets and the ongoing momentum with our lending initiatives, we remain confident in our ability to drive high-quality loan growth throughout the year. As such, we continue to expect total period-end loan growth of between 6% and 8% in 2023. Secondly, while we see that our core deposits have stabilized, we now expect core customer deposits to shrink by 3% for the year. With that said, we also remain confident in our initiatives on the deposit side, based on several leading indicators that point to momentum in the back half of the year. With this in mind, we expect to see positive core customer deposit growth of 2% in the H2. Shifting to revenue.
We've adjusted our most recent forecast for balance sheet growth, deposit betas, and Fed action following unique events of the spring. We now expect to deliver net interest income growth of between 10% and 12% in 2023.
... Finally, we continue to invest strategically in both people and technology, but our disciplined approach to expenses remains foundational. We also remain committed to delivering positive operating leverage to the company. As a result, we've lowered our expense guidance to between 3% and 4% growth for the year. With that, let's open it up for questions.
Operator (participant)
Thank you. We will now conducting a question- and -answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Thank you. Our first question comes from Daniel Tamayo with Raymond James. Please proceed with your question.
Daniel Tamayo (Director, Banking Research Analyst)
Good afternoon, guys. Thanks for taking my questions.
Andy Harmening (President and CEO)
Hey, Dan.
Daniel Tamayo (Director, Banking Research Analyst)
I guess first, just on the funding side, you know, I think I heard you say this, I think it was Andy, that the wholesale and network transaction deposits are expected to be stable in the back half of the year. Just correct me if I'm wrong on that, but, you know, I was just hoping to get kind of a sense into, if that's wrong, your expectation for how those would fluctuate, If there's a loan or deposit target that you're hoping to keep, or if there's, you know, levels that you don't want to go above related to those funding sources.
Just kind of trends within Q2, in terms of, the core deposit, the deposits that gave you confidence in being able to grow, in the back half of the year?
Andy Harmening (President and CEO)
Yeah, maybe I'll start that one out and then turn it over to Derek. You know, one of our absolute imperatives in Q2 is to ensure that we had a strong liquidity position, which we do. We wanted to make sure that our day one liquidity position was in a good place for the bank in an uncertain time. Since that period of time, we've been able to see that our uninsured, uncollateralized deposits are down to 21%. We've seen that we have day one coverage of well over 100%, and we have seen the stability of our deposit base emerge month by month as we've come through this, whatever you want to call this four-month period of time we just came through.
With regards to loan-to-deposit ratio, because we know that we have a stability in our deposit base right now, we've stated that we wanted to be in the 90% to 95% range. We took a bit of a conservative approach, in my opinion, an appropriate approach to liquidity, we actually lowered our loaner deposit ratio in Q2, we're well within the range. We don't have to add to that on the high cost deposit front in order to maintain it. To me, there's finally an emergence of a deposit trend that we think we have a much better view into as we head into the second half of the year. Derek, do you want to take any of the rest of that?
Derek Meyer (CFO)
Yeah, I think the only, the way to connect the dots on the guidance and what Andy just shared is, if we've got 6%-8% loan growth for the year, and we've gotten, you know, 4%, a little over 4% from that since December already, you could see us consuming that 2% customer deposit growth in the back half of the year to fund the low end of our range. I think if we had good quality lending relationships, we wouldn't rule out adding to that funding with additional wholesale.
I think the point we want to make, though, is that we've seen stability at the back half of the quarter in our core customer deposits, and we're confident about being able to grow that, and that the impact that we've seen on our margin from the disruption is largely behind us.
Daniel Tamayo (Director, Banking Research Analyst)
Okay. I appreciate all that color. I guess, as we think about the NII guidance that you gave, specifically kind of thinking about from a margin perspective, and this relates to NII as well, but just curious to get your thoughts on, you know, maybe the cadence of the margin over the next few quarters, just your thoughts on when that might bottom. A clarification within that. I may have misheard you, but I thought you said you were assuming a rate hike in September. Was that supposed to be July or, so just those things with the clarification. Thanks.
Derek Meyer (CFO)
Yep. When we, when we did our forecast, rates had were a little bit softer, and it did assume a September increase. That's moved forward a little bit. We do think, again, as I just stated, most of our margin, the pressure is behind us. Our outlook and our NII guidance for the rest of the year contemplates a margin in the range of 2.80%-2.70%. We think that stabilization is helpful. That's what our outlook suggests.
Andy Harmening (President and CEO)
I'll just expand on that, Daniel, by saying we think we'll support a big portion of loan growth in the second half with the deposit growth that we're going to have. We are asset sensitive and expect that we will have some benefit to the rate increase. We can pretty clearly see what that will be. On the deposit side, there could be some modest deposit mix -shift continue for the rest of the year. If we need to get any wholesale funding, we've factored that in. When we believe that, you know, we won't call the very bottom on margin, I think that would be too bold. We definitely see a more clear path right now than we saw 90 days ago.
Barring any extraordinary industry-wide news that we've had each of the first two quarters of the year, we do think that we're in the range of the bottom.
Daniel Tamayo (Director, Banking Research Analyst)
Just lastly, related to that, the on the rate hike date, if we do get it in July, as the futures are expecting here, rather than September, would you think it would have much impact on the guidance, maybe push you a little bit towards the higher end of the range? I'm sorry, the lower end of the range for NII?
Derek Meyer (CFO)
Yeah, I don't think our level of precision is that high. Part of our NII guidance includes rate of growth on the earning assets. It could be helpful, but I don't think the resolution is that high.
Daniel Tamayo (Director, Banking Research Analyst)
Okay. All right. Thank you for taking all my questions.
Andy Harmening (President and CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from Jared Shaw with Wells Fargo Securities. Please proceed with your question.
Jared Shaw (Senior Equity Analyst)
Hey, thanks. It's just following up on the funding. I guess first, Derek, when you said the margin 2.70% to 2.80%, is that your view for the full year, or is that for the second half of the year?
Derek Meyer (CFO)
That's for the second half of the year.
Jared Shaw (Senior Equity Analyst)
Okay. Okay. Then when we look at the funding outlook, you know, it's good to hear that you feel encouraged that there's opportunity for growth. I guess, what's driving that optimism for consumer deposit growth? Is it just, you know, you can put a rate out there, and that will attract money, or is this more full relationship? I guess, as we look at that growth, is that all going to come in the form of CDs, or do you think that there's opportunity to attract relationships? Should we think that the DDA level is sort of found a floor here as a percentage of deposits?
Andy Harmening (President and CEO)
Yeah, all good questions, it's not a one thing for us. We started, as you know, several prongs to this. One, you know, I would focus on mobile satisfaction. We know it's the most visited site we have. When you increase your satisfaction there, what you look for immediately is a decrease in attrition. We've seen a double digit decrease in attrition. By the way, that's during a very volatile second quarter. That's one indicator of what we've had. We've seen growth in our customer base on consumer and business each of the last three months. We have seen a growth in our core commercial outside of government banking. The government banking dollars that we've seen run off have typically been collateralized, low margin deals, that's over $300 million.
We had an extraordinary one customer take $300 million. That was a higher-yielding customer. When you put those two things together, those we believe are extraordinary events that frankly, we aren't in a position to incur. That's why we've seen that stability happen in May and June. We see it halfway through the month of July as well. When you pair customer satisfaction, when you pair that with customer growth, you do expect to get operating accounts with that. We are getting better and better at deepening relationships on the commercial side. That will be important for us the rest of this year, next year, and the following year.
If we want to add to those categories, which we may, we know how to deepen relationships now. That will give us confidence on the go forward. The answer is, no, it won't be all CDs. We are subject to the mix shift that's occurring in the marketplace. We can see very clearly that that mix shift has slowed in the last two months. We expect that to temper a bit each of the subsequent months as the year goes along.
Jared Shaw (Senior Equity Analyst)
Okay. Okay. When we look at DDA as a percentage of total, here at, what? 20.5%, is this a floor, or you think we could still see that go lower from here?
Andy Harmening (President and CEO)
I couldn't call that a floor, but I absolutely do not believe you'll see the pace that you saw in the previous 2 quarters.
Jared Shaw (Senior Equity Analyst)
As we look out a little further into 2024 and when some of these brokered deposits come due, do you feel that the momentum that you just described earlier will be enough to be able to replace those with homegrown deposits? Or, you know, we should be thinking that brokered CD levels stay at these levels for, you know, for more of an indefinite period of time?
Derek Meyer (CFO)
Yeah, I think it's going to depend both on how much we want to grow the balance sheet and what the business mix is of the assets that we're putting on, because we think we still have continued opportunity to optimize our yields that way. I would not expect it as a % of our balance sheet to grow disproportionately. We do expect that the consumer side of the business will provide significant funding.
The mix would be the same or decrease from where it is now.
Jared Shaw (Senior Equity Analyst)
Okay. Just finally, for me, you know, as in the past, you've talked about the optionality of the auto program, being able to, you know, sort of ramp that up and ramp it down. You had growth this quarter. Would that be a lever you would use, to offset, you know, either better than expected deposit flows or weaker than expected deposit flows? Is that sort of the place you should be looking at picking up slack or giving some opportunity?
Andy Harmening (President and CEO)
We're not going to double down on auto and increase that rate to the point that it becomes too heavily concentrated. The idea all along is that we could decrease our reliance on third-party originated mortgages, which have a less significant yield and are a non-relationship play. We're seeing very good yields on the auto book as we're going along right now. They're also not one that's likely to refinance if you see rates go down in 12 months. That puts us in a pretty decent position as well. What you will see from us. I see those two as a bit of a trade-off, the third-party originated mortgages and auto.
Over time, then, we will dissect the balance sheet and look at expanding businesses that we've had some success in. We will look at that right now and come up with a plan heading into year-end on that.
Jared Shaw (Senior Equity Analyst)
Great. Thank you.
Andy Harmening (President and CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from Scott Siefers with Piper Sandler. Please proceed with your question.
Scott Siefers (Managing Director and Senior Research Analyst)
Good afternoon, everybody. Thanks for taking the question. I guess I wanted to go back to the NII discussion for just a second. It sounds like a little bit more margin erosion, but at a much slower pace than certainly this quarter's. I guess even if the margin hasn't bottomed, I think the updated guidance implies that the second half NII will have to average something around $7 million or so higher than Q2 run rate. I guess what you're saying is that there's enough loan or earning asset growth overall to overwhelm any further margin erosion. Is the right conclusion that Q2 that we just witnessed the trough for NII?
Derek Meyer (CFO)
I think we'll leave the... I think if you do the math, if that's what you're coming up with, we'll leave it at that. I think we've got a range of growth on the asset side that is pretty good. If we think that it comes in lighter, then we've got options to be more efficient on the funding side.
Scott Siefers (Managing Director and Senior Research Analyst)
Okay. All right. Perfect. Then, Andy, just wanted to discuss, I guess, in a bit more detail, just sort of the tactical thinking on your appetite to lend. You know, your biggest competitors, you know, presumably, they're going to be subject to this whole host of new capital and liquidity rules. You know, the biggest guys seem to be pulling back on lending. Are there any areas where you guys similarly are pulling back in light of economic uncertainty or by... I know you touched on a little in your opening remarks in specific areas, but, you know, by contrast, with the larger banks pulling back, any areas where you think you can take some market share if the pricing is good and your competitors are pulling back?
Andy Harmening (President and CEO)
Yeah, that's a good question. You asked two different questions within there, I think, Scott. I think one was with regards to capital. I think you mentioned economic uncertainty. What I would take first is the economic uncertainty and tell you that we want to lend to people that can pay us back. I know that sounds pretty basic, but when you look at almost 99% of our auto book being prime and super prime on the origination side, when you see the loan-to-value go down and the FICO go modestly up, even, above around 780, I believe, in the last quarter, we are looking at a pretty squeaky clean book. In that place, there's some people that have pulled back there. We're dealing with prime, super prime borrowers, and we're getting a yield above 7%.
This seems like a pretty good move for us. I'd say that's exactly what is happening in that area. We looked at our third-party originated mortgages, and in the markets that we're in, the yield we're getting was substantially less than that. Our history has been that that book churns. When rates go down, they immediately go down with it. That would be one example of an area that we will see over time, that shift will be beneficial to us. We're going to focus heavily on relationship businesses. We are now proving within our commercial book that we can grow our core commercial deposits. That will matter a great deal to us over time. We haven't broken that out publicly, but I see the trends on that.
In this year, when you're positive in that space, you're onto something. We will continue to try to look at that as a source for us to look at lower costs, deposits, lower than wholesale funded, lower than FHLB funded, lower than government, high-rate government, deposits. There are a few areas that are emerging for us because we've gotten into asset-based lending, equipment finance, and enhanced our commercial approach to business. You know, finally, I'd say just acquiring customers, vis-à-vis, digital and mobile banking. We're seeing the percentage of customers coming through on our brand advertising campaign through digital increasing. They are modest in incremental numbers because we're testing and learning and making sure they're not falling off on the backside.
It's a lot of the things that we've talked about, and the answer is yes, we do believe that we have a opportunity in the marketplace. That being said, we don't expect anything like the growth that we saw in previous in the previous year, in 2022. That was by design, to increase your capabilities so that you can continue to lend in the higher return areas as you de-emphasize some of the lower return areas. With regards to capital, we feel like we're in a pretty good position as we create that shift in what we're lending on. That, of course, you increase your capital vis-à-vis profitability, and right now, we don't see a constraint on capital based on the way that we're approaching it, de-emphasizing some lower yield, emphasizing some higher yield.
We do think with regards to regulatory, we're early innings. You know, we've heard quotes from the OCC and seen those out there and seen that they thought it, you know, probably would be a big emphasis on the over $100 billion banks. It's a little too early to comment, I think, on what that's going to mean to the banks above us in size.
Scott Siefers (Managing Director and Senior Research Analyst)
Perfect. Okay, good. We appreciate the thoughts. Thank you very much.
Andy Harmening (President and CEO)
Thank you, Scott.
Operator (participant)
Thank you. Our next question comes from Terry McEvoy with Stephens. Please proceed with your question.
Terry McEvoy (Managing Director and Senior Research Analyst)
Hi, good afternoon, everyone.
Andy Harmening (President and CEO)
Hey, Terry.
Terry McEvoy (Managing Director and Senior Research Analyst)
The forward curve is implying lower rates next year. As I look at your $6 billion of brokered CDs and other time deposits, what's the repricing opportunity over the next kind of 12 or within 2024, with the assumption that rates are lower? Do you have a schedule, a maturity schedule on when those roll?
Derek Meyer (CFO)
Yeah, we don't but let me give you some color. All of our brokered CD programs were largely within 12 months. Think of 12-month term as the outside limit, and then we scheduled, both depending on price and volume and appetite, either 9 months, 6 months, or shorter than that, and we started out very short. We wanted to, and then if you think about our specials for retail, it's largely centered on the 7-month CD. We had a couple other maturities, but our most popular that we've been with for the last couple of months is 7 months. We think of most of this all repricing between now and mid-next year, the majority of it.
Terry McEvoy (Managing Director and Senior Research Analyst)
Okay. Can you remind me, the network transaction deposits, that's a 100% beta product?
Derek Meyer (CFO)
Yes.
Terry McEvoy (Managing Director and Senior Research Analyst)
Okay. Maybe last question. I don't want to overlook slide 6, Andy, when you talk about the net growth and some of the deposit products. Maybe, can you talk about on the consumer side, are you the primary bank in this relationship? You know, how are average deposits looking? Maybe expand a little bit on these new businesses and households that are partnering with Associated.
Andy Harmening (President and CEO)
Sure. You know, I'll give the example of the mass affluent. The mass affluent is a segment where a large percentage of the deposits reside. I mean, that is a primary deepening play within your existing customer base. It's also with new accounts that come in. When you look at that category, for us, what I'd seen coming into the bank was that we had an opportunity to deepen on the mass affluent side. We had an opportunity to deepen on the commercial side. I would say that those efforts are just happening right now.
It was almost impossible to see that in the second quarter of this year because of the extraordinary events that we had, which is exactly why I created page six, because we see the trends behind the trends as the dust settles, as the noise goes away. The idea on these is absolutely get activity coming into your bank, but with that activity, put products and services in there and give your people an opportunity to talk about that on the consumer side. That's what segmentation does on the consumer side. On the commercial side, it is simple things like tracking of your pipeline and incenting for your pipeline, and our people have gotten better and better at that conversation. In fact, I see the early indicator.
I saw the early indicator 90 days ago in our treasury management sales. That is not where you'll make or break the bank from a revenue standpoint, but it's an indication that you're having conversations on things that matter to the customer with regards to their liquidity, and when you have those conversations, you're typically able to deepen. We've seen that deepening follow from that. You know, the question comes up: Do you want customer growth or do you want deposit growth? The answer we have here is yes.
Terry McEvoy (Managing Director and Senior Research Analyst)
Thank you, Andy.
Andy Harmening (President and CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from Jon Arfstrom with RBC Capital Markets. Please proceed with your question.
Jon Arfstrom (Managing Director, Associate Director of US Research)
Hey, good afternoon, guys.
Andy Harmening (President and CEO)
Hey, Jon.
Jon Arfstrom (Managing Director, Associate Director of US Research)
Hey, couple of follow-ups and another, I guess, separate question. Why is attrition down? Just following up on Terry's comments about that slide 6. Why is attrition down, and why are people not leaving?
Andy Harmening (President and CEO)
Yeah, that's a great question. People stay for a lot of different reasons. It's great when you're nice. It's also great when you're nice. It's really nice when you actually have a digital experience, which is the most used channel. Then it's really good when you have products and services they want and need, and they start to deepen. When we, launched our new digital platform, you always take a step back in satisfaction. It's just annoying to change. We rebounded from that really quickly. In my experience, it usually takes six months. We started to see rebounding in 90 days. That was awesome. Once we did that, we were starting to get back to our previous levels, but then people actually used it, and they liked it.
When they like it, we saw our branch satisfaction going up with the mass affluent. The mass affluent lets us speak to people in a language of what matters to you. When they answer that, we match them up with the product or service, they leave satisfied. They don't walk out the door. Your first-year attrition improves. When you get most of your people dealing with the channel they like, and by the way, we've had 100% uptime on our digital channel since we launched it. We've not been down. This is what we promised when we went to this cloud-based solution, and we've delivered on that. The number one thing somebody wants is when they pull out their phone and they log in, they want to see their balance, and they do not want the system to be down. We've delivered that.
As they're more satisfied, we haven't given them as many reasons to leave, or we've given them more reasons to stay. That's a pretty encouraging view, on our side.
Jon Arfstrom (Managing Director, Associate Director of US Research)
Okay, good. slide four, you show some strong commercial growth from my point of view. You're also talking about pipeline slowing a little bit, but it looks pretty good to me. I guess, I don't know if it's for you or Pat, but, you know, what's going on with your core commercial clients, and what's driving that general commercial growth?
Andy Harmening (President and CEO)
Do you want to take that, Pat?
Pat Ahern (EVP and Chief Credit Officer)
Sure. I think it's largely what Andy's focused on. We spent last year beefing up, adding RMs and helping to really focus on where our key relationships are and our core client profile is. You know, to an earlier point, we're not out chasing business and stretching. We haven't changed our credit box, so it's just a matter of, you know, getting more people on the street, talking to the clients we want to bank. It's really kind of helped to generate... While the pipeline is down, it's still a pretty solid opportunities that we're seeing.
Jon Arfstrom (Managing Director, Associate Director of US Research)
Yeah, that looks about right.
Andy Harmening (President and CEO)
I'll just expand on that as well. This is Andy. You know, we've spoken to the quality of the RM and the fact that we've gotten them from almost every major competitor in the footprint, but the proof's in the pudding. Now, when you see treasury management sales up, when you see pipelines, continuing to grow the business, and when you see your commercial deposits going up, we believe we've hired some really talented RMs. Frankly, we had some talented RMs in-house as well, and so we've married those two, and that's put us on a pretty good path.
Jon Arfstrom (Managing Director, Associate Director of US Research)
Okay, good. Then, last one for you, Pat. The slide 15 on credit. I agree, you know, the numbers look very tame, but more curious what you're seeing in consumer credit and any themes and anything you're watching in consumer. You know, it's a little tick up in nonaccrual, but, you know, de minimis. What are you seeing, and what are you watching?
Pat Ahern (EVP and Chief Credit Officer)
You know, we're continuing to watch delinquencies. We continue to watch payment trends, and to be honest, we've seen everything really remain flat and improve in some spots. You know, our residential RM portfolio continues to improve from a delinquency standpoint. As Andy mentioned, the indirect auto has done great. Credit card book we're still trending positive there relative to pre-pandemic. From a consumer standpoint, we've been really happy with the production there, but I think it's a reflection of that prime and super prime focus.
Andy Harmening (President and CEO)
Just a quick piggyback on that. I mean, the unemployment rate in the state of Wisconsin is 2.4%. People are working, and when they work, they typically pay, especially if they're prime and super prime customers. We watch closely the unemployment figures and delinquencies. The delinquency on page 15 actually shows a little bump up, but what it doesn't speak to is that we had on a syndicated credit on the upstream, there was an administrative mix-up or slip or slowdown that stopped a payment from coming to us that accounted for about 3 basis points.
Pat Ahern (EVP and Chief Credit Officer)
Right.
Andy Harmening (President and CEO)
That's already been rectified in July, so essentially, our delinquencies are flat.
Jon Arfstrom (Managing Director, Associate Director of US Research)
Okay. That's helpful. Thank you very much, guys.
Pat Ahern (EVP and Chief Credit Officer)
Thank you.
Operator (participant)
Thank you. Our next question comes from Brody Preston with UBS. Please proceed with your question.
Brody Preston (Equity Research Analyst)
Hey, good evening, everyone. Thanks for taking the questions. Just a follow-up, just to what you just mentioned on that syndicated credit. Was that what drove the increase in the commercial and business lending nonaccruals as well, or was that something different?
Pat Ahern (EVP and Chief Credit Officer)
Not that one particular situation. The situation Andy just talked about was just tied to the delinquency. The nonaccrual, that was actually one other deal. It's a one-off transaction that we recognized in the quarter. We're not seeing anything from a trend standpoint in the commercial book that would lead us to any other concerns going into Q3.
Brody Preston (Equity Research Analyst)
Got it. Okay. I did want to follow up on the $300 million of mass affluent deposit growth. I just wanted to ask if you had a sense for kind of what deposit categories that growth went into. You had good customer CD growth, so I just wanted to know if it was kind of like leading with CDs or any detail you can give us there.
Andy Harmening (President and CEO)
I don't have the immediate breakout. Since a lot of it came from existing customers that had checking accounts, it's going to be an interest-bearing deposit accounts on the money that came in. Whether that is money market savings or a CD, it would be largely in those categories.
Brody Preston (Equity Research Analyst)
You got it. Okay, I did want to follow up and maybe just ask again on Scott's question from earlier on the NII guidance. I mean, just the math would dictate that if I take the low end of your NII guide, it implies that you know, need to earn $521 million in NII in the back half of the year, which is about $260 million-$261 million per quarter, just doing the simple math. You know, it implies a step up, but, you know, the margin, it doesn't sound like we're willing to call a bottom. The NIBs, you know, we're not willing to say that they won't go down anymore.
I guess I'm struggling with the NII guidance just a little bit in light of those, you know, two issues. You know, any additional color you could provide around maybe the average earning asset base that's in your assumption, or what could actually cause the back half of the year to exhibit the growth you need to hit the low end of the guidance, would really be appreciated.
Derek Meyer (CFO)
It's the 68% earning asset growth that we talked about and then margins similar to what we've been looking at.
Brody Preston (Equity Research Analyst)
Okay. Maybe could I just ask on the auto and maybe the indirect CRE. You know, maybe talk to me a little bit about, like, the funding that loan growth and, like, what the incremental spread looks like. It sounds like you're getting pretty good loan yields on the auto, just given that they don't come with, those two categories historically haven't really come with much in the way of deposits. Just wanted to kind of get a sense for how you're funding that and what the incremental spread looks like, you know, when you do fund that loan.
Andy Harmening (President and CEO)
Do you want to speak to that?
Derek Meyer (CFO)
Well, yeah, I can speak to that. Generally speaking, our incremental rate, we don't fund one loan at a time and one deposit at a time. Our marginal deposit growth rates have been between 4% and 5%, and the Auto book that we're talking about is generally getting 2% spreads, then you're getting, you know, 1.5% to 2% on your variable rate, C&I loans. That's what our outlook is based on. Then the performance of the back book and the pay down on fixed rate securities and Auto loans from a couple years ago with much lower rates.
Andy Harmening (President and CEO)
I'm not sure how to speak to this because new originated CRE is not a huge number right now, but what I would say is we're getting a very good margin on the deals that we're doing on CRE.
Brody Preston (Equity Research Analyst)
Got it.
Andy Harmening (President and CEO)
[crosstalk]You yeah.
Brody Preston (Equity Research Analyst)
Just the last one on capital. You know, the credit metrics are totally benign here, and I understand that. I just wanted to ask, you know, like, when you, when you do comp yourself against your peer group, you know, the CET1 is lower than, you know, I think, where the peer group is. You know, it's probably justifiable based on the credit outlook, but is... Or on your credit metrics. Is there any thought given to maybe, you know, being closer to the middle of the pack, you know, and having a 10+% CET1 range moving forward, just to maybe give, you know, investors or whoever, more comfort around capital?
Derek Meyer (CFO)
Yeah. What we've got in there now is the same range we had at the beginning of the year. It doesn't prohibit us from being higher than that, if loan growth is at the higher end of what we've expected to, that's where our where we could come in. If our loan growth is less than that, we would accrue above that CET1 range that we've got outlined in there.
Brody Preston (Equity Research Analyst)
Got it.
Derek Meyer (CFO)
Said in another way, if we have 6% loan growth, we would expect to be higher than that.
Brody Preston (Equity Research Analyst)
Okay, great. Thank you very much for taking the questions, everyone. I appreciate it.
Andy Harmening (President and CEO)
Thank you, Brody.
Operator (participant)
Thank you. Our next question comes from Chris McGratty with KBW. Please proceed with your question.
Christopher McGratty (Head of U.S. Bank Research and Managing Director)
Oh, great, thanks. maybe asking the prior question a little bit different. you talked about growing the company, obviously that's the right, strategy over time. With your stock at tangible book, is there a scenario where, you would consider shrinking additional non-core assets and buying back your stocks?
Andy Harmening (President and CEO)
That won't be my priority in the immediate future, Chris. We have opportunity. When you have low-yielding assets on the books and you have initiatives that are working that produce higher-yielding assets, that's a number one way over time to return to the shareholder. That will be the plan. If we see that that growth is not there and we have opportunity to use our capital in a different way, we do have dollars set aside for stock repurchase, but that would not be my intent for the rest of 2023.
Christopher McGratty (Head of U.S. Bank Research and Managing Director)
Okay. Thank you. Derek, I think you cited 52%, that was a cycle-to-date beta. I want to make sure I heard that right, and also what the updated thoughts are for full cycle. I may have missed it.
Derek Meyer (CFO)
Yeah, you did hear that right, and we'd expect to be in the high fifties for the full cycle.
Christopher McGratty (Head of U.S. Bank Research and Managing Director)
Okay, great. Thanks.
Operator (participant)
There are no further questions at this time. I would like to turn the floor back over to Andy for closing comments.
Andy Harmening (President and CEO)
Well, look, I'll just say this: We've come through the second quarter. There's reason for optimism, we appreciate the interest that you've all shown by being part of the call, by following us, and by having questions. Thank you very much, and have a good rest of the evening.
Operator (participant)
This concludes today's teleconference. You may disconnect your lines at this time. Thank you.