Good afternoon, everyone, and welcome to Associated Banc-Corp's second quarter 2022 earnings conference call. My name is Alex 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.associatedbank.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 23 and 24 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.
Well, good afternoon, everyone, and welcome to our second quarter earnings call. I'm Andy Harmening, and I'm joined here today by Chris Niles, our Chief Financial Officer, and Pat Ahern, our Chief Credit Officer. I'd like to start things off by reflecting upon my first full year, sharing highlights for the quarter, and providing a quick update on our strategic initiatives. From there, Chris will walk through an update on our funding and margins, some statement trends and capital. Then Pat will follow up with an update on trends. Last fall, we announced a new digital-forward, growth-focused strategic plan built on Associated Bank's foundation of strong credit and expense management. Our strategic plan is already well into the execution phase, and we are driving significant positive core operating leverage, improving our ROTCE, and transforming our systems to more efficiently serve our customers over time.
Our plan called for us to grow middle-market lending, and as you'll see, we've significantly grown and deepened our core existing middle market and small business relationships. Our plan called for us to expand our lending capabilities by adding higher yielding asset classes and asset-based lending, equipment finance and auto finance. All three of these verticals are now driving growth. Our plan called for us to shift investment dollars from brick-and-mortar assets to digital platforms. We expect the first of these digital updates to be rolled out to our customers later this quarter. Let me be clear. While we're excited to see these investments in growth and digital come to life, we are also committed to sticking with the foundational principles that got us here, our disciplined approach to credit and expense management.
Taken together, after a full four quarters on the job, I'm even more impressed with the quality of the team and more convinced that we're on track to deliver higher revenue growth, continued positive operating leverage, and improving value for our stakeholders. Now turning to the current environment in the most recent quarter. While the macroeconomic environment has shifted over the past year, here in our markets, we've continued to see signs of strength. Unemployment levels remain at near all-time lows in Wisconsin and Minnesota. Our business customers remain upbeat in their outlooks, and our core consumer households are proving financially resilient. On the commercial side, we hinted at improving commercial activity and upward line utilization trends back in the spring, and that activity continued to ramp up throughout the quarter. By June, line utilization reverted to pre-pandemic levels as our customers continued to grow and expand.
On the consumer front, we saw steady activity as households purchased homes, put their home equity to work, and purchased autos, all while keeping steady deposit balances. These trends, complemented by our selective additions of new RMs and our continued expansion of our initiative verticals, contributed to one of the strongest loan growth quarters in our company's history. Importantly, we accomplished this while growing point-to-point deposits and seeing further improvements in credit. We see this as a testament to the stability and resilience of our customers and markets, but it's also a clear indication that our initiatives are having an impact. Looking ahead, there is no denying that there are significant question marks remaining in the economy. The continuing war in Ukraine, COVID lockdowns in China, inflation and supply chain disruptions, they all pose risks.
Our customer base remains strong, and we feel that we're very well positioned to support them with an expanding variety of products and services without stretching on credit. Our optimism stems from the fact that we are growing in our core markets with our core customers and are comfortable with our credit, capital, and liquidity outlook as we look to the back half of the year. With that, let me touch on a few highlights outlined on Slide 2. Our second quarter results reflected robust loan growth, expanding margins, stable deposits, and resilient credit trends.
Through a combination of normalizing business trends, the ramp-up of our initiatives, and generally rising rates, our revenues increased 15% year-over-year, while expenses were held to just 4% year-over-year. This drove a significant improvement in pre-tax, pre-provision income and another quarter of 13%+ returns on tangible common equity. We also continue to see improving credit dynamics throughout our portfolios. In fact, we had less than 1 basis point of net charge-offs for the quarter. We also resolved several non-performing asset situations and saw significant declines in non-accrual asset levels throughout the quarter. Together, these improving credit factors allowed us to absorb this quarter's loan growth with zero net loan provision. Now, let me give some more color around our commercial loan dynamics. Shifting to Slide 3.
As we move past the halfway point in 2022, the uptick in line utilization has clearly been a driver of our balances. On the left side, our PPP runoff has been more than offset by new activity and line uptick, fueled by general commercial originations, CRE expansion, and growth from our new verticals. Average total commercial balances have grown strongly over the past quarter, and line utilization has now reverted to pre-pandemic historical levels. Turning to Slide 4. While we're pleased with the rebound we've seen on the commercial side, we're also pleased to report growth in nearly every vertical. The chart on the right-hand side shows this diversified growth. While general commercial led the growth for the quarter, we also added significant balances in consumer, commercial real estate, and specialized portfolios.
As you can see, we have broad-based growth reflecting the strength of our franchise and the diversifying impact of our strategic initiatives. Based on the robust trends we've just discussed, we're revising our full-year loan targets higher on Slide 5. Given the continued strength in our markets, we now expect to end the year with approximately $17 billion of outstanding core commercial loan balances. This outlook includes expected further moderation in our mortgage warehouse portfolio runoff and the runoff of our remaining PPP book. We continue to drive progress in our new ABL and equipment finance verticals, with both teams adding new high-quality balances to our books. We remain confident in the team's ability to hit the $300 million combined target we've set for the end of the year.
Taken together, we expect our total commercial book to end the year at approximately $17.3 billion. Now turning to consumer lending. We continue to be impressed with our auto team's ability to drive high-quality balances that help diversify our loan book. While this team is relatively new to Associated, they've been doing this for decades in a variety of economic environments without sacrificing on quality. This makes the team a great fit for us from a risk mindset and cultural perspective, and we're confident we're on track to hit our year-end targets. We also continue to expect residential mortgage balances to remain relatively stable through the end of the year. To summarize, the growth we saw in the second quarter was driven by the resilience of our core customers and the disciplined execution of our strategic plan and investments.
Our results provide us optionality to pursue high-quality, risk-aware lending across a diversified set of business lines without the need to stretch on credit in the current environment. On Slide 6, we show a five quarter trend of our PTPP income. A year ago, we drew a line in the sand and stated that $78 million was a baseline that we would improve upon. PTPP income has consistently performed above that level in each subsequent quarter, and we remain on track to deliver strong positive operating leverage throughout the remainder of 2022. Let me pause there. I'm going to hand it over to Chris Niles, our Chief Financial Officer, to provide a little more detail on our funding, revenue, and income statement trends for the quarter. Chris?
Thanks, Andy. Turning to Slide 7. We recognize that having access to core customer deposits and other low-cost funding sources is more important than ever, particularly as we look to fund growth on the asset side of the balance sheet. That's why we've taken meaningful steps in recent years to grow our core customer deposit base while reducing our reliance on higher-cost wholesale funding sources. As we sit here today, we've started this rate cycle from a much better funding position than where we were in 2016. We expect to hold wholesale funding to approximately 15% of total funding going forward. Despite recent macro volatility, our core deposit customers have remained resilient. While we typically would expect to see deposit outflows in the first half of the calendar year, we've actually seen modest net deposit growth versus the prior quarter and year-end.
Our consumer and commercial mix has remained stable, reflecting consistent balances by business segment over the last several quarters. Our consistent growth in low-cost deposit categories has resulted in a franchise with deposit costs well below peer medians. Given our profile, we feel well-positioned to control our deposit betas going forward. Slide 8 highlights our asset sensitivity and our ability to manage funding costs in a rising rate cycle. Year to date, we've seen a significant uptick in the average yields of most of our earning asset categories. Since the fourth quarter of last year, earning asset yields have increased by 38 basis points on average, or roughly 55% of the increase we've seen in average Fed funds over the same period. Our assets are fundamentally positioned to participate with further rate increases.
On the liability side, year-to-date interest-earning liability costs have only increased by 9 basis points or roughly 13% of the move in average Fed funds. This reflects our ability to lag funding costs as rates rise and to capture margin in higher rate level environments. This widening gap between rapidly rising asset yields and more moderately increasing liability costs is the core benefit of our structural asset-sensitive profile. Slide 9 highlights the resulting NIM expansion that comes from this structural asset sensitivity and the related growth in net interest income that is derived from that profile. Our net interest margin expanded from 2.5% in the month of March to 2.78% for the month of June. Consistent with our quarterly expansion of 29 basis points in average.
On a dollar NII basis, our growth and structural asset sensitivity provided a $28 million lift to revenue in the quarter. Moving on to Slide 10. We've laid out several of the factors that give us confidence that we're well-positioned for the cycle ahead. First, as demonstrated during the second quarter, Associated is more asset sensitive today than we were heading into the last cycle. Roughly 90% of our commercial portfolio will reprice or reset within the year, which boosts our one-year cumulative repricing gap. Second, as previously mentioned, we've worked to improve the mix of low-cost core customer funding to liabilities. Since 2016, low cost deposits have grown from less than half to more than two-thirds of our total deposits. This has also contributed to our increasing asset sensitive profile.
We would also like to highlight that Associated benefits from a highly granular deposit base relative to our peers. This reflects our emphasis on building stable, sticky household and small business relationships throughout our footprint. Bottom line, we are structurally in a better place today than we were in the last cycle, and we're confident that we're operating from a position of strength as we head into the back half of this year. We now expect the Fed to raise short-term rates by 75 basis points at the July FOMC meeting and potentially an additional 25 basis points at each remaining FOMC meeting later this year. Based on these assumptions and our loan growth expectations, we now expect our full year net interest income to exceed $890 million. Turning to Slide 11, we've highlighted some non-interest income trends.
While fee income continues to be a headwind for the industry, we actually saw modest net growth versus the prior quarter and the same period last year. In Q2, increases in card-based fees and other fee-based revenues partially offset the anticipated reductions in mortgage banking and wealth management fees. I'll remind you that we expect to see fee income moderate beginning in the third quarter based on the implementation of the new OD/NSF changes we announced last quarter. We also expect commercial deposit account fees to move slightly lower as higher rates translate into higher ECRs. With the expectation for continued rise in rates, we also see mortgage banking revenue further moderating as we move through the back half of the year.
Nonetheless, we remain confident in our most recent full year non-interest income guidance and continue to expect total non-interest income of between $290 million and $300 million in 2022. Moving on to Slide 12. Second quarter expenses came in at $181 million. This represents a 4% year-over-year increase in expenses consistent with our prior guidance. Driven by higher revenues and controlled expenses, our efficiency ratio continues to improve. As I stated previously, expect to continue to scale up investments in people and technology, but remain committed to keeping expense growth below revenue growth. Taking all of our initiatives into consideration, we are tightening our expense guidance for the full year.
We now expect full year 2022 non-interest expense to come in between $730 million and $740 million, which is within our prior range. Moving on to capital. Slide 13. We manage capital levels towards the lower end of our range as we supported customer loan growth during the quarter. Nonetheless, given our enhanced profitability trends, we fully expect TCE will grow through year-end, and we will end the year in the 7.25-7.5 range. We also expect CET1 will end the year between 9.25 and 9.75. Now let me turn it over to Chief Credit Officer Pat Ahern to provide an update on credit.
Thanks, Chris. I'd like to start by providing an update on our allowance as shown on Slide 14. We've utilized the Moody's May 2022 baseline forecast for our CECL forward-looking assumptions. The Moody's baseline forecast remains fairly consistent with recent trends and assumes increasing Fed rate actions and minimal COVID impact. Following 5 consecutive quarters of net reserve releases, we posted a net zero provision in Q2 with less than 1 basis point of net charge-offs for the quarter. Our ACLL at June 30 was flat from the prior quarter at $318 million, with additions for loan growth and economic factors fully offset by releases from declining NPAs and other credit improvements totaling approximately $14 million.
Our ratio of reserves to loans declined from 1.3% to 1.2% during the quarter. Turning to Slide 15, we highlight our quarterly credit trends. Overall, credit metrics remain strong with continued improvement in non-performing assets and non-accrual loans as a positive indicator of the health of the portfolio. As compared to Q1, total non-performing assets decreased by 22% in Q2, while non-accrual loans decreased by 24%. Of note, our $10 billion commercial and business lending book currently has under $1 million of non-accrual loans, which equates to less than 1 basis point.
We would also highlight that across our entire book delinquencies, which are a leading indicator of potential problem loans, were just 7 basis points at quarter end. Shifting to Slide 16. We've spent more than a decade bolstering the credit foundation of Associated. As you can see, we've built a bank that is diversified and balanced with a disciplined culture and a focus on quality. Of note, year-to-date, our net charge-offs is zero, and our total non-accruals are down about one-third year-over-year. The strong growth in the second quarter was driven by investing in our core business, growing our core relationships, expanding our engagement with customer segments with which we are very familiar.
With that said, we are fully aware of the warning signs in the economy, and we remain stringent in both portfolio management as well as sensitizing underwriting to reflect rising interest rates, elevated inflation, supply chain disruption, and labor costs to name a few economic concerns. Going forward, we expect to adjust provision to reflect changes to risk grades, economic conditions, loan volumes, and other indications of credit quality. With that, I will now hand it back to Andy to share some closing thoughts.
Thanks, Pat. On Slide 17, we recap our updated full-year guidance for 2022. First, we remain bullish about quality loan growth over the back half of the year, and we are updating our outlook as a result. Specifically, we now expect full-year total commercial loan growth of approximately $1.7 billion in 2022. We continue to expect full-year auto finance growth of approximately $1.3 billion. We now anticipate a 75 basis point increase at this month's FOMC meeting and a 25 basis point increase at each remaining FOMC meeting this year. As such, we expect our full-year 2022 net interest income to exceed $890 million.
We continue to expect total non-interest income of between $290 million and $300 million for the full year. Taken together, we now expect a combined total of net interest income and fee income to exceed $1.18 billion. Lastly, we remain committed to expense discipline, and we're tightening our non-interest expense guidance as a result. We now expect between $730 million and $740 million of non-interest expense in 2022. Before we move to Q&A, I want to acknowledge that this call marks Chris Niles's last quarterly earnings call before he retires.
Since joining Associated in 2010, Chris has had a tremendously positive impact on the company and has put us in an excellent position as we look to build on our strong foundation. From here, we're looking forward to the addition of two experienced leaders to our executive leadership team. Bryan Carson officially joined us earlier this week as our new Chief Product and Marketing Officer, while Derek Meyer will be joining Associated as our new CFO at the beginning of August. As I've stated previously, I believe we are making the CFO transition from a position of strength, especially given our positive momentum in the first half of the year.
A dding Derek and Bryan to the team will bolster our current growth strategy as we look to deepen relationships, generate deposits, and execute our digital transformation. This will further drive Associated forward on our path to value creation. Despite the macro headwinds in the near term, we are executing on our strategy in real time, and I'm confident in our ability to deliver strong performance for our stakeholders now and in the years to come. With that, let's open it up for questions.
Thank you. At this time, we will be conducting a question-and-answer session. If you'd 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'd 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. Our first question comes from the line of Jared Shaw with Wells Fargo. Please proceed with your question.
Hi, good afternoon. This is Timur Braziler filling in for Jared. Andy, I know you've been quite optimistic on the potential for loan growth, but what we saw this quarter was pretty exceptional. I guess, were you surprised by the pace of the loan growth? Was there anything that was pulled forward from trying to get ahead of higher rates within that number? As you look at an optimistic second half of the year, maybe talk through some of the industries and verticals where you think the majority of that incremental loan growth is gonna be coming from.
Yeah. Well, thank you for the question. You know, first, I'd say I wouldn't say that we were surprised. What I'd say is we had diversification of growth, so we had growth in almost every single category. As we looked, we did get a little tailwind on usage on commercial line utilization. We don't expect that tailwind in the second half of the year. You can see in our forecast, we still expect very nice growth, but nothing where you'd take the second quarter and multiply it. It starts to dampen just a little bit, whether that's from an economy standpoint or our ability to be selective now that we have options on where we grow to try to drive value. Feel very good about what occurred.
Frankly, when you transition your assets as we did, as we took some non-performing or commercial or some real estate assets and transition that into the RM ranks, we were able to grow, not expand our credit box and still get some quality loan growth across the board.
As you're looking to fund future loan growth, are there initiatives or visibility into incremental deposits coming online in the second half of the year to kinda supplement that growth? Or will you continue leaning on FHLBs to kind of bridge the gap?
Yeah, no. With the growth that we expect in the second half of the year, we expect largely to be able to fund that vis-a-vis our deposit growth. We have had a number of initiatives that we've been working on from our HSA to having our commercial RMs focused on deposit acquisition, to having our business banking RMs focused on deposit acquisition, to launching the mass affluent vertical in the last half of the year to work in digital account opening, to having a focus on liquidity management or treasury management for our RMs.
We feel pretty good about being able to increase the trajectory of our loan growth. We've demonstrated the ability on our deposit growth. We've demonstrated that ability to execute on loan initiatives, and I'm expecting that we'll be able to execute on the deposit initiatives as well. I will say structurally, we do have the luxury of being different this time than in 2016 coming through that rate cycle. Right now, we're reliant on about 15% on wholesale network deposits versus six years ago where we had a 30% reliance on those deposits.
We do have the ability to borrow from the FHLB, but our intent is to continue to drive core funding. With the path that we're on, we feel very good about meeting the deposit betas. You can see we had a strong deposit beta coming through this quarter, and our forecast is 30%-40% for the year. We feel like with the mix, we're right in line to achieve that.
Timur, we would highlight also, seasonally, we'd normally expect to lose deposits through the tax season. That happened. We saw a step down from March into April, and then those balances basically held through the second quarter. Seasonally, though, we would also expect to generally see an uptick in the third quarter as we move towards the September and the funding cycle for municipal governments and the collection of property taxes later in the year. That's historically been a net benefit and a tailwind for us, and we have no reason to believe we won't see that this year as well.
Okay, that's good color. Thank you for that. Then just lastly for me, looking at some of the wholesale borrowing that was taken on, it looks like balance has increased while the cost of that actually declined. Can you talk through that dynamic? Was there some incremental duration that was added there? Yeah, just any color on that decline in cost would be appreciated.
Yeah, we do have a little color around that. Chris, why don't you take that one?
Sure. In general, there are two things. Specific to the Federal Home Loan Bank advances, we did restructure some of our term advances. As rates moved up, we were able to exit those with no penalty, no prepayment fee, and move those into a more advantageous funding profile. Second, we also had the retirement, and you'll see that in sort of total cost of funds of our senior notes, which obviously is flowing through now as a positive to the total wholesale funding costs.
Great. Thank you. Nice quarter, and good luck, Chris, in your retirement.
Thank you. Appreciate it.
Our next question comes from the line of Scott Siefers with Piper Sandler. Please proceed with your question.
Hey, guys. Good afternoon. I just want-
Hey, Scott.
Hey. I just wanted to kind of revisit funding a bit. I mean, the funding profile, there's no question it's significantly better. You guys have such strong loan growth that's outstripping deposits materially. I guess you're sort of getting toward one of the higher loan-to-deposit ratios. Like, what kind of loan-to-deposit ratio do you target? You know, I'd imagine we'll get there fairly soon. So, you know, thereafter, what's sort of the plan to fund the strong loan growth? Understanding that loan growth overall will probably temper down a bit, but just curious for your thoughts.
Yeah. I'll start this, Chris, if you wanna jump in. Ending the quarter around 92.7 in loan-to-deposit ratio, our expectation is we have multiple areas that we're going to be able to attract core deposits. Largely, we'd like to keep that number between 90% and 95%, which we expect and hope to do. If that is not possible, as we know, we have some short-term ability to get wholesale funding. I would say, just as the loan initiatives got going for us and the execution on that, there is a clear path for liquidity management, treasury management. When you do that, you get more commercial deposits from your customers.
There is a clarity for me when I see the numbers on mass affluent that we are under-penetrated in our customer base. This will be the third time that I've launched a mass affluent strategy. Have a pretty clear indication that there's significant dollars available, to us. Our account opening, we will work on a new account opening on digital, in the fourth quarter of the year. That will only gain momentum as we go into year-end and the first quarter. We've added resources on the HSA side of things.
That business starts to ramp up towards the end of the year and the first quarter, so we'll continue to get balances there. While we'd like to stay at the 95% and below range, we also think the deposit initiatives, which we've been working on for quite some time, will continue to kick in in the fourth quarter, in the first quarter, in the second quarter of next year as loan growth, I'd say, dampens. I mean, it was a very good quarter for us, but it dampens.
Yeah.
A little bit in the second half of the year and the first half of next year.
Okay.
Scott, the only thing I would add to that is if you look back at some of our prior earnings decks and investor decks, we used to highlight the seasonal factors that drove our loan to deposit ratio.
Yeah.
The second quarter has historically been our peak loan to deposit ratio period, and usually our fourth quarter is low.
Mm-hmm.
We have no reason to believe that some of those seasonal deposits aren't gonna swing the way they usually do, and that will contribute to an improving profile there.
Okay. Perfect. Thank you.
Even with wholesale funding, we believe strongly we can hold the margins that we forecasted.
Okay. Perfect. Thank you. Then I guess as we continue to go, do you just sort of naturally become a little less asset sensitive than if the loan growth still kind of trips some things? I mean, it's gonna be great NII trajectory here through the remainder of the year. Just trying to get a sense for what the rate sensitivity profile will look like as we go into next year.
Yeah, that's one of the things we really like, is on the way up, we're very asset sensitive, and you can see that has worked to our benefit. But the initiatives that we have are larger on the fixed rate side, whether that be asset-based lending, whether that be equipment finance, whether that be auto lending. As we're taking advantage and hitting a peak in rates, we expect that there is a dampening to asset sensitivity as we reach that peak and have a potential for a decrease in interest rates at some point in 2023.
Scott, I think internally we've sometimes discussed it as sort of the traditional bond portfolio laddering. We've been laddering into higher rate fixed rate assets as the market has been moving higher, and we're gonna be the beneficiary of that laddering up in this cycle here over the next couple of quarters. If the cycle turns, well, we'll have the benefit. Those are less prepayment-sensitive asset classes than our historical reliance on mortgage to play that part in our portfolio.
Okay. Perfect. All right, well, thank you guys very much for the color. Again, Chris, best wishes.
Thank you.
Thanks, Scott.
Our next question comes from the line of Christopher McGratty with KBW. Please proceed with your question.
Great. Thanks. Chris, maybe a question, I think we've asked in the past what each 25 means. I know we're moving in chunks, but we've all got different rate assumptions. Just trying to see if our rate forecast is a little bit different than yours, what the incremental benefit could be.
Yeah. It's as we've said, it's roughly $1 million per month for each 25 basis point increment above our forecast. We're calling for 75 here at the end of July. That's baked in, 25 at each remaining meeting, that's baked into the 8.90 plus. To the extent you had an extra 25 because it was 100 here in July or because one of the subsequent meetings ends up being 50, it would be $1 million per month in the period following that rate increase.
Okay. Thanks. Andy, maybe one for you, just a bigger picture question. You got a lot of momentum on the initiatives. Can you just remind us, like, long-term targets, ROE, ROA, efficiency? Obviously rates dictate a lot of that, but just how you're thinking about levels and timing. Thanks.
Sure. I think maybe I'll jump in. Initially we've said we're driving towards a 2.75 margin over the near term. In the month of June, we got to 2.78, so that feels like we're gonna be hitting that goal here pretty soon. We've also said we'd be driving towards a 55%-60% efficiency ratio. The fully tax equivalent efficiency ratio came in at 59.8%, so we feel like we're moving in the right direction on that one. Our adjusted efficiency ratio at just over 60% is consistent with that move. Finally, we'd say we've targeted mid-teens ROTCE on a consistent basis, and we came in at 13% again this quarter. I feel pretty confident that we're on the right trajectory to get to a mid-teens level.
Perfect. Thanks, Chris.
Chris, I thought Chris Niles took the softball on that one by owning the margin at 2.78% with the forecast at 2.75%.
Thanks again.
Thank you. Our next question comes from the line of Daniel Tamayo with Raymond James. Please proceed with your question.
Hey, good afternoon, everybody. I guess first, just a clarification on the impact in the second quarter of the excess cash deployment. Obviously, that was because of the tremendous loan growth you had in the quarter. Are you able to strip out what the impact of the mix shift was on the margin relative to just the rate hike?
I think the way we think about it, again, roughly using that $1 million per month. The $1 million per month we had previously guided to a 25% benefit, and obviously we saw more than that in the May and June action. Those sort of stacked on top of each other drove a good portion of the outperformance. Yes, part of it was from cash utilization and the balance sheet growth factor, and the other part was from the rates. I think if you back out the $1 million a month for the rate bumps, you can solve for the residual, which is sort of the balance effect.
Okay. Then my second question is on the expense guidance. The guidance assumes kind of a ramp up in the back half of the year in terms of annualized growth from last year. Just curious how we should think about growth, you know, kind of in the fourth quarter or that base in the fourth quarter entering 2023, if you know, if the number should just flow freely into 2023 or if you think annualized expense growth, you know, once we get past the fourth quarter is a better way to look at it. Thanks.
I would refer you back to our prior investor presentations where we said that over the 2022-2023 horizon, we expected to keep overall expense growth in that 4% zone. We've delivered 4% this year. Our baseline is that we're gonna try and be disciplined about expenses going forward as well. We're gonna hit the range that we've given to you, and we're gonna see expense growth next year. We think it'll be in line with our overall long-term guidance. I would say that.
Okay.
It is gonna ramp up, but in part it's ramping up because a number of the technology initiatives that we've been working on for the last nine months are gonna come into play and be put into service here, and that'll start amortizing through our expense base. We've still got hiring that we're working our way through that is gonna come online and have a full year effect that's gonna roll into the third and fourth quarters. We continue to invest in technology. We continue to invest in people. Those will bump the numbers, but we're growing revenues even faster, and we'll be disciplined about how that grows.
What we had said before with regards to expense is we'd only spend that money if we're driving revenue, and so we are hitting the revenue targets and exceeding them. Of course, it's a combination now of both growth and margin due to the accelerated rate environment. What I would say, though, when we look at fourth quarter, what we'll try to do is we'll position ourselves, as we've said we do every single year, to acknowledge that there's a change in the industry, there's a change in the marketplace, and we will try to make strategic cuts to redeploy that expense back into the business.
As we look at that in the fourth quarter, if we took action on real estate last year, we'll look across whatever we think is a less producing asset and what we can put back into the revenue producing and the supports groups and the technology initiatives that we have as a company.
All right. Terrific. I appreciate that color. It's exactly what I was looking for. Thank you.
Thanks, Daniel.
Our next question comes from the line of Terry McEvoy with Stephens. Please proceed with your question.
Hi, good morning, everyone. Good afternoon.
Good afternoon, Terry.
Terry.
Maybe the first question, just to dig back into the expenses. You know, you continue to hire new teams. There was the equipment finance team last week. I guess just to be clear, the fourth quarter expense run rate, do you think that'll capture the team building, the run rate? Will there continue to be growth off that fourth quarter as you continue to kind of opportunistically add commercial lenders and build out those teams?
They'll continue to be puts and takes, as we build the expense. Feel a lot of confidence that we're still in that 4% range that we'd said. I feel like the number for next year with our long-term forecasting is still in that range. We've been able to steadily build. You know, one of the other questions that we've been asked is, are you committed to growing the same number of relationship managers? What I would say to that is, we've had a lot of success bringing in talent and getting our own relationship managers' productivity up. We will be selective in who we bring in. We'll bring in if there's a talented RM out there, we'll hire them.
I don't feel pressure to be at a 15%-20% because we have the run rate that we need to hit our midterm targets. There's no pressure on adding, but now we're in a position where we can decide where we add and make sure that we have the discipline around the expense approach and stay within those targets that we've stated from the beginning.
as a follow-up, could you maybe comment on any market disruption in Chicago or Milwaukee, which are two important markets for you, and whether you've been able to capitalize on any of that in terms of talent or customers and what your strategy is given the window to possibly gain share? Thank you.
We've been able to add new names. We've gotten relationship managers from almost every major national and regional bank in our footprint. The answer is yes, I believe we've been able to take advantage of that. We've brought in some folks that have immediately come in and started producing.
Our existing group is bringing in new names as well. I feel very good about the core franchise in our footprint and bringing in relationships. The answer is yes, we feel like we've been able to take advantage of some of the disruption, but I feel very optimistic throughout the footprint. We've added three talented players in our Northeast Wisconsin. We've added folks in Minneapolis. We've added people to keep pace with Milwaukee and Chicago.
Terry, the only thing I'd add to that is when we look at our commercial and business loan portfolio quarter-over-quarter, and we think about where do we add the most, Wisconsin and Illinois were at the top of the list. When we think about the specific commercial banking little sub-markets where we operate, Milwaukee, Chicago, and Minneapolis basically led the commercial banking pack. That's exactly where we wanna be. That's exactly where we're seeing the uptick, and I think that speaks to the diversification of growth that we saw across the franchise.
Great. Thanks, Chris. We'll miss you on all these calls after all those years. You definitely taught me to read the press release, look at the supplement before asking a question because you were always quick to point that out. I appreciate all the help. Thank you.
You can still read that stuff, though, right, Terry?
Yeah, of course. Definitely. Thanks again.
Thanks.
Thank you. Our next question comes from Jon Arfstrom with RBC Capital Markets. Please proceed with your question.
Hey, thanks. Good afternoon.
Afternoon, Jon.
Afternoon, Jon.
We're once you're gone, Chris, we're just gonna ask Derek to do the work for us, but we're gonna have to wait for you to leave.
Wow.
Quick question for Pat. We haven't talked about credit at all, I think because it's so clean. On Slide 14, there's an up arrow for qualitative and economic factors in your reserving. Can you talk a little bit about that and what you have built in there in terms of some of your assumptions?
I think what we tried to capture there is just the unknowns that we talked about in the marketplace. Obviously, there's a lot of macroeconomic factors that are creating some uncertainty. We're not blind to that, and we wanted to build that in and acknowledge that looking forward. I think what we're doing now, there's nothing. I wouldn't say there's any overarching issues or concerns being raised right now, but there's clearly, you know, inflation, continued supply chain, rising interest rates. These are all things that, you know, point toward potential recession risk, and we wanted to be able to capture that.
Okay. That knocked out one of my questions in terms of not really seeing any stress. One other question I had was on auto. Can you just remind us of some of the risk management factors you built in on auto? Then touch a little bit on pricing. Not being critical, but it looks kind of flattish, and I'm just curious what you're seeing on pricing and you expect yields to rise there.
Yes. I think Slide 16, Jon, has some of the core credit discipline factors around that. Pat, I think you've got LTV factors and FICO factors. I'll jump in just on pricing. To your comment, yes, we've seen pricing be relatively tight there. We would expect that to rise broadly as rates overall rise. I would expect to see that drift higher as we move to the back half of the year. Let me turn it back to Pat for credit.
Yeah. I think from a risk management standpoint, you know, we're constantly watching, you know, the valuation of what's going on in the marketplace. We're reacting, you know, in terms of new applications and what we're seeing to what trends may or may not be happening. You know, we've got a lot of internal monitoring processes in place to deal with not only customers that we're lending to, but also dealerships that we're working with. We're constantly monitoring, and we've got a lot of internal scorecards that kinda give us leading indicators of what's going on there in that marketplace.
Jon, if you remember, this is Andy. We actually bought this, the legacy data customer information so that we had a balanced scorecard that was back-tested with customer information already. It wasn't a matter of us just using the go-forward information to build our models. With that, I'd tell you we're 97% prime and super prime. We're 75% super prime.
Okay. Got it. Then just one, if I can squeeze in one more, kind of a non-financial question. You talked about Bryan, your new, you know, marketing and product officer. What are you charging him with, Andy? And what kind of goals would you set for somebody like that as you continue to, you know, try to grow the company? Thanks.
Yeah. Yeah, great question. Bryan is somebody I know pretty well. And what he is he has a strength on the data analytics, the customer insights, and success in driving growth via understanding customer and differentiation on product. He also led much of the digital sales work that we did on the consumer side of the bank. When you think about understanding what matters to people that switch on the marketing side, when you think about building a product that matters, and you think about doing that digitally, to me, that's where the industry's going on the consumer side of the business in particular. He also had awareness on the commercial side of the business.
when you marry the ability to understand liquidity and how to drive and capture customers with the ability to work with our new CFO, who has expertise on liquidity management and FP&A, I'm really very excited about each one of them individually. I'm probably even more excited about the combination and how they'll work together.
Okay. Got it. I appreciate that. Chris, best of luck. I'm looking at your age here in SNL, and you're younger than I am, and I kinda wonder what I'm doing wrong, and you're retiring. I do wish you the best of luck, okay?
Thank you, Jon. Appreciate that.
Thank you. Ladies and gentlemen, we have reached to the end of the question and answer session. I will now turn the call back over to President and CEO, Andy Harmening, for closing remarks.
Well, I just wanna say thank you for everyone's participation and continued interest in Associated Bank. We look forward to continuing the story and are very available to answer any questions that might come up tonight or tomorrow and follow up to the information we released tonight. Thank you.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.