Associated Banc-Corp (ASB) Q3 2021 Earnings Call Transcript

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Associated Banc-Corp (NYSE:ASB)
Q3 2021 Earnings Call
Oct 21, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, everyone, and welcome to Associated Banc-Corp’s Third Quarter 2021 Earnings Conference Call. My name is Shamali, and I will be your operator today. [Operator Instructions] 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. [Operator Instructions]

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 and the Risk Factors section of Associated’s most recent Form 10-K and subsequent SEC filings. These factors are incorporated herein by a reference.

For a reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please refer to Pages 20 and 21 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.

Andrew J. HarmeningPresident and Chief Executive Officer

Well, thank you, Shamali. Good afternoon, everyone, and welcome to our third quarter 2021 earnings call. I’m Andy Harmening and I’m joined today by Chris Niles, our Chief Financial Officer; and Pat Ahern, our Chief Credit Officer.

I want to kick things off by covering the macro highlights for the quarter and give you an update on the strategic initiatives that we presented both internally and externally last month, then Chris will walk you through where we are on margin, fees, and expenses, and then finally, Pat will close us out with an update on credit.

On a macro level, we continue to see signs of a strengthening economy in our markets. Unemployment rates in Wisconsin and Minnesota have remained at or below 4% and manufacturing has been consistently expanding, which is reflected in the positive momentum we’re seeing in the Midwestern footprint. While the third quarter news cycle is dominated by — over concerns of surging delta variant and supply chain challenges, we do remain optimistic about growth in the latter part of this year and into next. Our customers are doing well. Sound credit performance continues to be foundational and Associate is well-positioned to participate in the coming expansion.

Now, let me touch on third quarter highlights as outlined on Slide 2. On the top line, we saw revenue expansion across all key areas of our business. Interest income grew, our fee businesses grew, and we realize additional gains during the quarter. We also see signs of increasing customer confidence with spending activity, deposit levels, and capital market transactions, all up from the second quarter. On the liability side, rising deposit levels have also allowed us to further moderate our funding costs.

Now shifting to credit. We continue to benefit from improving credit backdrop as we work our way through 2021. Our customers have proven to be resilient and markets have continued to recover throughout the year. After posting reserve releases in each of quarter one and quarter two, we posted another negative provision in the third quarter and further net reserve release. Our CECL reserves are now below our CECL day 1 levels.

From an operating expense perspective, we continue to be disciplined even as we embark on our multiple initiatives. And aside from the $2 million of facility exit costs we incurred in Q3, expenses were fairly flat. Taken together, these factors have helped us drive our year-to-date returns on average tangible common equity to over 13%.

Moving to Slide 3, I want to dive a little deeper into loans. We shared back in Q2 that we are starting to see signs of increased lending activity and line utilization in our commercial portfolios and I’m pleased to announce that this trend has carried over into the third quarter. Average commercial and business lending loans excluding PPP grew by over 3% quarter-over-quarter led by general commercial. Additionally, we continue to see growth in several specialized lending categories and CRE construction, While certain aspects of the economy faced unexpected headwinds during the quarter due to the resurgence of COVID, we continue to be encouraged by the conversations we’re having on the front line and the numbers that are starting to emerge in our pipelines.

We are also encouraged by customer activity, consumer activity. We officially launched our auto finance vertical on September 30th and have already funded loans across 13 states. We are excited about the early returns in our auto business. This addition to our product set allows us to further diversify our consumer lending portfolio and earn slightly better spreads in our traditional mortgage origination activities. Consumer card spending activity was also remarkably strong during the quarter. Outstanding credit card balances increased 6% quarter-over-quarter, a greater than 24% annualized rate, suggesting a significant uptick in the confidence of our retail customers.

And finally, our PPP and oil and gas portfolios continue to run off as expected. We expect the majority of our remaining PPP to be paid down in Q4 and we expect the oil and gas portfolio to be largely paid down over the coming year. Additional loan trends for the third quarter are highlighted on Slide 4. On a longer-term trend, we’re pleased to see commercial business lending rebound during the quarter, reflecting our first expansion in more than five quarters. Line utilization was a contributor to the rebound, commercial line utilization numbers continue to close the gap relative to our historical levels.

In April, our commercial customers were funding about 12.5 percentage points below our historic line utilization levels. By September, this gap had narrowed to 8.5 percentage points. And while we still remain well below our pre-COVID monthly averages, our September line utilization was the highest we’ve seen since July of 2020 and our momentum coming out of the August low we experienced seems to be establishing a positive trend.

Construction lending was also a bright spot for the quarter as our proactive commercial real estate team continue to grow both outstandings and commitments on a year-over-year basis. And given our substantial back book and construction commitments, we’re confident outstandings will continue to grow well into late 2022. As we look to the fourth quarter, we remain optimistic around loan growth but are adjusting our expectation in response to the economic headwinds that played out in the third quarter. Specifically, we now expect full year commercial growth that is CRE and C&I combined excluding PPP of approximately 2%.

On Slide 5, we’ve provided a walk forward of our quarterly pre-tax pre-provision income from the second quarter to the third quarter. And while our pre-tax income was essentially flat for the quarter, this massed the $9 million improvement in our pre-tax pre-provision results and our positive operating leverage. Looking past the $11 million drop in provisioning, both interest income and fee income items were significant contributors to our quarter-over-quarter improvement. I mentioned last quarter that we expected expansion in pre-tax pre-provision income over the second half of 2021 to more than cover the incremental cost contemplated for our newly announced initiatives. We remain committed to these targets as we head into Q4.

Now turning to Slide 6. I’d like to highlight that we announced our strategic vision back in September. We said we’d start executing on our strategies immediately and we have. Slide 6 shows some of the steps we’ve taken to make real progress against the four key pillars of our strategic plan. We continue to expand our lending capabilities. Our Auto Finance business is up and running with book loans and nearly 750 dealer partners signed up. We are currently originating loans in a pilot mode across 13 states and 60 dealers.

Origination activity to date has been in line with our expectations and we’ll be looking to ramp up our volumes as we move through Q4 and rollout our program to our broader dealer network. In addition, we have rounded out the executive leadership team for both our Equipment Finance and our asset-based lending initiatives.

We continue to add experienced relationship managers and lending specialists into our core markets to better serve the needs of our commercial and small business customers and we’ve brought increased focus to our wealth management areas while targeting new opportunities across our footprint. On the digital front, we are on track to transform our consumer digital banking experience in the first quarter with the launch of a new platform, bringing increased customization, and architecture that will more easily allow us to integrate fintech partners to improve the customer experience. This is our first big step and a plan that will transition spending toward our digital channels and technology over the next several years.

And finally, we’re always looking for ways to optimize our capital and balance sheet and in the third quarter alone, we were doing $100 million of preferred stock, repurchased $60 million of common stock, and increased our common dividend by 11%. Simply put, we are full steam ahead on our efforts and we look forward to building on this momentum as we head into 2022.

So let me pause there and hand it over to Chris Niles, our Chief Financial Officer to provide further detail on our margin and income statement trends for the quarter. Chris?

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

Thanks, Andy. Turning to Slide 7, our net interest income increased $4 million from the prior quarter or 2% driven by higher interest income across the board and lower funding in terms of auto cost. Our quarterly net interest margin decreased slightly expanding 1 basis point quarter-over-over. We’ve seen slowing refinance activity which has stabilized our mortgage yields and a steady decline in liability costs. Demand continue to be pressured by high liquidity levels and compressed commercial loan yields.

Moving to Slide 8. We continue to see record average deposit levels. Third quarter average deposits were up over $1.2 billion or 5% on a year-over-year basis. This growth continue to be concentrated in our low-cost deposit categories. Low-cost deposits have grown approximately $2 billion from a year ago and at quarter-end accounted for 67% of our total deposits.

During the quarter, we continue to work down our high-cost network and time deposit balances. These decreased by approximately $1.3 billion in the third quarter of 2020. Meanwhile, our aggregate in wholesale funding levels have continued to steadily decrease over the past five quarters and have decreased by nearly $2 billion year-over-year. Looking forward, the deposit pricing and funding actions we have taken are anticipated to help improve our margins in Q4 and into 2022.

Turning to Slide 9. Given the high levels of liquidity, we began investing in securities late in Q3. We anticipate deploying additional cash balances into investment securities over the next 9 months. Reinvestment yields are expect to be approximately 2% or better and accretive to our current portfolio earnings. We continue to target investment in total assets ratio of between 17% and 19% for 2021 and expect to rebuild the investment portfolio to somewhere north of 20% of assets by year-end 2022. Looking forward, we expect our full year margin to end this year at approximately 2.40% for the full year.

Now turning to Slide 10, we’ll comment on noninterest income trends. Fee income grew nicely during the quarter. We saw growth across several key categories including our mortgage-banking unit where net income grew $3 million from the prior quarter assisted by MSR recoveries. We also saw solid growth in our fee-based revenues where service charges on deposits and account fees were up 9% for the quarter and up 19% year-over-year.

Card-based fees were also up 9%. Taken together, we view these trends as encouraging indicators of growth, growing consumer confidence as we emerge from the pandemic. Our noninterest income for the quarter also included $5 million in asset gains tied to private equity distributions. But even excluding this impact, income grew by nearly 5% from the previous quarter. Reflecting this continued strength in our core fee businesses, we now expect to finish 2021 at the upper end of our most recent key guidance range.

On Slide 11, we highlight our expenses. The third quarter came in at $178 million, a $3 million increase from the prior quarter, including $2 million facilities exit costs. Excluding these exit costs, expenses were up about $1 million. As we continue to roll out our new strategic initiatives, we remain committed to maintaining our expense management discipline. Taking into consideration all the pending initiative actions, we continue to expect our total 2021 noninterest expense to come in consistent with our prior guidance range.

Lastly, let me comment on capital. As shown on Slide 12, our tangible book value per share continues to grow quarter-over-quarter and has increased 7% year-over-year to $17.58. Associated’s regulatory capital levels all remain strong. Our Common Equity Tier 1 ratio has grown in the third quarter of 2020 even as we repurchase shares, redeem preferred, and increase the dividend. We will continue to target TCE levels at or above 7.5% and CET1 at or above 9.5%.

With that, let me turn it over to our Chief Credit Officer, Pat Ahern to give you an update on credit portfolio.

Patrick E. AhernExecutive Vice President, Chief Credit Officer

Thanks, Chris. I want to start by providing an update on our allowance as shown on Slide 13. We utilized the Moody’s September 2021 baseline forecast for our CECL forward-looking assumptions. The Moody’s baseline forecast assumes additional fiscal support continuing low-interest rate environment, the recent acceleration in consumer prices to be transitory, and relatively localized COVID cases.

Following net reserve releases of $28 million and $40 million in the first and second quarters of 2021 respectively, we posted a further net release of $32 million in the third quarter. This net release was driven by gross reductions in our allowance for all of our core, commercial, and CRE business units with a $3 million gross reduction in our allowance related to our general and commercial and business-lending portfolio, a $12 million reduction in our CRE allowance, a $14 million reduction in oil and gas, and a $2 million reduction in retail lending.

As of September 30th, our total ACLL was $332 million, down from $364 million in the prior quarter. Furthermore, our ratio of reserves to loans declined to 1.41% from 1.52% during the quarter. We had previously guided that we expected ACLL to loans to drop back down to CECL day 1 levels by the end of 2021. And three quarters of the way through the year, we’ve dropped comfortably below that mark.

Turning to our quarterly credit trends presented on Slide 14. Most of our key credit metrics continue to improve over the course of the quarter. Our key COVID commercial exposures continue to decline for the quarter led by declines in our retailer and shopping center exposures. Nonaccrual loans also decreased in Q3 and were down 42% year-over-year.

Net charge offs increased slightly from the quarter and we’re tied to only one credit. Potential problem loans also increased with the increases tied to continued pressure in some select-COVID-related industries. We expect these trends to normalize as we get into 2022. For the fourth quarter, we expect to adjust provision to reflect changes to risk ratings, economic conditions, other indications of credit quality, and loan volume.

With that, I will now pass it back to Andy to share some closing thoughts as we look to round out the final quarter of 2021.

Andrew J. HarmeningPresident and Chief Executive Officer

Thanks, Pat. On Slide 15, we recap our updated guidance for 2021. Amid the economic headwinds we faced in the back half of the year, we are expecting full year commercial loan growth excluding PPP to come in at approximately 2%.

We expect our full year net interest margin to land at approximately 2.4% due to elevated liquidity levels and compressed commercial loan yields. And we expect to finish 2021 at the upper end of the $315 million to $328 million range we gave for noninterest income back in September, reflecting continued strength in our core fee businesses over the remainder of the year. And lastly, as I mentioned, we continue to experience positive credit trends due to economic conditions as we — and as such we expect fourth quarter provision to be adjusted to reflect changes to risk grade economic conditions and other indications of credit quality and loan volume.

And with that, we’d be happy to take any of your questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question is from Scott Siefers with Piper Sandler. Please proceed with your question.

Scott SiefersPiper Sandler Companies — Analyst

Afternoon, guys. Thanks for taking the questions. Let’s see. Chris, wanted to maybe start with you just on the plan to deploy the $1 billion-plus of excess liquidity over the next nine months or so. Can you talk a little bit about sort of your preference for what you’d like to buy relative to the current compositions of the portfolio and sort of what the interest rate assumptions are, or what kind of rate environment will be necessary to be able to hit those sort of targeted reinvestment rates?

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

Sure. So I think the mix overall, Scott, will look a lot like what you see in our current portfolio and won’t be a fundamental change from what we’ve been doing for the last couple of years, just adding a little more volume. And from a yield perspective, we’ve called out that we think the reinvestment portfolio yields will be in the 2%-plus range, which is consistent with what we purchased in September.

Scott SiefersPiper Sandler Companies — Analyst

Okay. That’s perfect. Excellent. So it doesn’t depend on further increases in the long end reserves, or anything like that, just sort of static environment would be great.

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

A static environment, we since achieve and deliver on this investment plan and if rates move higher, that will be even better.

Scott SiefersPiper Sandler Companies — Analyst

Wonderful. Okay. Good. And then can you let us know what the remaining PPP — pardon me PPP fees are that will flow through NII in the margin?

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

Sure. So I think the details of that are on Slide 4 and the material, and so at the end of our — of the press release table is what I meant, sorry. That $7 million and we — again, we think the majority of that will come off. That doesn’t mean all of it but just for clarity, something probably more than half of it.

Scott SiefersPiper Sandler Companies — Analyst

Okay. Perfect. Yeah, sorry, I missed that and I think I missed that last quarter as well, so appreciate you humoring me. So good. All right. Thank you very much.

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

Sure.

Operator

And our next question is from Michael Young with Truist Securities. Please proceed with your question.

Michael YoungTruist Securities — Analyst

Hey, good afternoon.

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

Good afternoon, Michael.

Andrew J. HarmeningPresident and Chief Executive Officer

Hey, Michael.

Michael YoungTruist Securities — Analyst

Wanted to just touch base on the commercial loan growth. I think you highlighted a lot of positives in terms of utilization rates moving, hiring a good demand in construction fundings moving forward, etc., but then on the flip side maybe moving down to kind of the lower end of the targeted range from a month or two ago. So could you just talk about what’s driving that? Is that payoffs or competition in the market or demand, any color would be helpful?

Andrew J. HarmeningPresident and Chief Executive Officer

Yeah, this is Andy, I’ll take that one. As we look at the fourth quarter, we have a few things. We’ve had very modest increase on line utilization so far, it’s not been a major driver. The — when you look at the fourth quarter, you have to look at mortgage warehouse and what the impact of rates will be to that part of the portfolio. And then we have oil and gas, which we expect to run down. It is running down.

So when you look at all of those pieces together and you see that little bit of a lull in the third quarter. We believe that drives us down to the lower end of the range. But at the same time, what I would say is our commercial pipelines remain strong. So we feel good about the fundamental business heading in the fourth quarter and we feel very good about the state of our initiatives heading into the first quarter as we get new relationship managers up and running and they’re already taking looks at deals, folks we didn’t have in the field before. So that’s the primary driver down for the fourth quarter.

Michael YoungTruist Securities — Analyst

Okay. Great. That’s helpful and then just as my follow-up. Curious as rates have started to move up, especially on the long end of the curve, does that change how you’re looking at any loan categories mainly like longer duration, residential, real estate, or anything like that that you’re kind of looking at differently, especially as it pertains to kind of the capital allocation model that you’re bringing to bear?

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

Yeah. So what I would say is I don’t think it changes what we’re looking at differently. We had already strategically begun to reposition ourselves. An expectation of rising rates generally overtime away from mortgage, which we have seen less volume and less applications on and what we’ve said we would hold the balances there static going forward and shifting toward more shorter duration, but still fixed-rate assets such as the auto, such as Equipment Finance, which are going to come online and are poised to benefit from the repricing and we continue to expect to participate as our customers will in general C&I repricing and theory repricing over time.

Michael YoungTruist Securities — Analyst

Okay. Great to know…

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

But that’s not a change. Yeah.

Michael YoungTruist Securities — Analyst

Right. Okay. Yeah, that’s what I was curious about, so I appreciate the color. Thanks.

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

Shamali, do we have the next question in queue?

Andrew J. HarmeningPresident and Chief Executive Officer

Shamali, have we lost you? Please note that we just lost Shamali. We’ve just lost connection.

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

We lost connection, do we need to dial in?

Unidentified Participant

I’m not sure if my line’s still open, but I can still hear you guys if that helps.

Andrew J. HarmeningPresident and Chief Executive Officer

That is helpful and your line is still open. This is Andy Harmening, I have some skills as a moderator as well, and I’d be happy to take the next question. If you’ve got anything for us, happy to answer it.

Unidentified Participant

I’ll throw one out there, nothing else to stall. Just on the network deposits as a factor kind of moving forward into a higher rate environment that’s historically been kind of a nice buffer for you guys to pull on when you needed the funding, but can you just talk about that again, maybe in the context of potentially rising rates going forward and I think we’re a long way from liquidity scarcity but just as you think about that on a go-forward basis?

Andrew J. HarmeningPresident and Chief Executive Officer

Sure. We’ve been able to — I mean nicely maintain our core deposits. As you can see that we’ve maintained that are pretty low level. Our customer satisfaction coming off of last year’s, those satisfaction scores remain pretty strong, which is also a key driver of retention. So we believe that the networks are a big positive for us whether that’s in community markets that are very — they play a very key factor or major metropolitan markets.

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

Yeah. So just so we’re all on the same page. The core funding levels have reflected very positive dynamics and the low cost as Andy has articulated. The network deposits that come to us from the large mutual fund complexes and the broker dealers, those deposits, we’ve been working directly with those providers to manage those balances down and you see that on Slide 8 on how we manage our balances down. But we’ve endeavored to keep relationships open with each of the large dealers so that should the market come back in a way that would require us to access incremental funding, we would still have good access there and we’ve tried to manage the largest providers to be the largest remaining components of our current outstanding so that we’re active with them, we remain active in the flow, and when the market necessitates that we might need incremental funding, we hope we’ll have already and easy access to those same large providers to support us as we grow in say, 2023 or ’24 when liquidity perhaps starts to take a turn.

Andrew J. HarmeningPresident and Chief Executive Officer

I think I was taking that from a different perspective, which is we have optionality but we also have the strength of branch network deposits outside of additional network deposits that are still available. I’d be happy as Andy Harmening to take this next question. This is a first for me.

Unidentified Participant

Let me know if you get the operator back but I guess I’ll just continue. Just on share buyback, obviously good to see some strong utilization this quarter. Stock’s a little bit higher than where it’s probably been throughout 3Q, so just there is still pretty strong appetite there. At some point do you start to lean more heavily on a escalating dividend, or do you look at M&A, kind of how are you walking through the capital allocation buckets?

Andrew J. HarmeningPresident and Chief Executive Officer

Yeah, I’m going to — this is Andy, I’ll take the first part of that and what I would say is our focus is on growth. We think that’s the best most profitable way to advance the company. And so as we head into 2022, we feel really good about the trajectory that we have of the initiatives and our core businesses where we’ve been able to add commercial bankers and small business bankers. We felt like we had an opportunity in the short term as we’re getting that ramped up toward year-end to maximize our capital position and we are in a position to buyback stock. If there is a situation where there is some slowdown and we remain, we’ll give ourselves that optionality, but our number one priority is growth. Chris?

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

You said it well. First, organic growth. Second, maintain a competitive dividend, and we think with the active repurchase we took in the third quarter, we enhanced our competitive dividend positioning. Third, looking at inorganic opportunities but the internal organic is the key focus there so we’re downplayed for the moment and we’ll always look at share repurchase as use of the incremental capital, but frankly, with the plans we have for organic growth, we have a good use case to deploy our capital in the near term for those initiatives.

Unidentified Participant

Thank you. Again, if there’s another question out there. Are other people connected, are you guys able to open other lines, or are we just?

Andrew J. HarmeningPresident and Chief Executive Officer

Yeah, I think that we have our moderator, Shamali has been disconnected momentarily, so we can’t reposition the lines. So I think that right now others can hear us. But you already get to be the private I’m assuming.

Unidentified Participant

Well, I’ll step back so others can ask questions if they are able.

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

Send them to you? Do we have any other option?

Andrew J. HarmeningPresident and Chief Executive Officer

Yeah, we’ll play.

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

For our analysts that are online, feel free to send your email questions directly into Ben McCarville, that’s [email protected] I think most of you have his information handy, and we’ll be sure to answer them in queue order as we come along.

Andrew J. HarmeningPresident and Chief Executive Officer

I hope you hear from this series of events that we’re really better at operating a bank that we are serving as moderators but we are trying like heck to do it. So I will say, we have a couple of questions that came through from Scott Siefers — additional questions that came through from Scott.

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

Great.

Andrew J. HarmeningPresident and Chief Executive Officer

And I’ll recite the first one here.

Scott SiefersPiper Sandler Companies — Analyst

So what will be the amount of strategic initiatives charges in 4Q ’21? I think you took $2 million in charges in the third quarter but have been saying $8 million for full year ’21, so $6 million remaining and embedded in the full year ’21 guide.

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

I think that’s the right way to think about it, Scott. So we’re changing our — we’re not changing our full guide, so that leaves us that amount that you’ve articulated there as the likely range of outcomes. We’re obviously working through those and we’ll be diligent and disciplined about managing those properly, but our total expense guidance unchanged.

Scott SiefersPiper Sandler Companies — Analyst

Next one from Scott. What was the 28% linked quarter increase in potential problem loans this quarter?

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

Pat?

Patrick E. AhernExecutive Vice President, Chief Credit Officer

So those were really as I mentioned tied to what we call COVID-related industries, some movie theater exposure, hospitality, transportation, etc. It’s really a handful of select deals that we don’t see as a systemic increase over the portfolio, it was just really very select credits.

Scott SiefersPiper Sandler Companies — Analyst

Also from Scott. What type of wage inflation are you seeing and can you absorb it within your existing efficiency initiatives.

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

Yeah. A great question. It’s something we’re all seeing. As you probably noticed last week, we noticed — we announced a wage increase across our entire footprint effective November 21st. That wage increase has already been budgeted for and we believe we have appropriate plans in place for 2022. So we can absorb what we see as increases going forward pretty effectively. And the good news is we’ve had very nice success on turnover year-over-year relative to other — what we’re hearing in the marketplace.

Scott SiefersPiper Sandler Companies — Analyst

Okay. Last question from Scott. The provision guidance is less specific than usual. Your 1.41% reserve is below the fees CECL day 1of 1.55% and energy with a portion of that. Are we done with the negative provisions, should we assume that without meaningful economic changes we’ll keep the 1.4%, if it is, we’ll keep pace with loan growth?

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

This is Chris Niles. Let me give a first response to that. So we’ve given the more broad guidance because we think going forward, our provision will be more economic and portfolio-factor driven. That having said, we feel very comfortable with where we are at the end of the quarter as we think the reserve is appropriate. But we also see some good overall dynamics and we won’t be necessarily expecting significant negative pressure over the near term.

Andrew J. HarmeningPresident and Chief Executive Officer

All right. Our next question comes from Chris McGratty with KBW.

Christopher McGrattyKeefe, Bruyette & Woods, Inc. — Analyst

What is your expense guidance for Q4, trying to get a better idea of impact of prior one-time items?

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

So our expense guidance is for the full year on a total basis. So you can take our total guidance, subtract the first three quarters, and that will be the fourth quarter guidance.

Patrick E. AhernExecutive Vice President, Chief Credit Officer

I think the other thing to state there as we’ve launched multiple initiatives, what we committed to is having positive operating leverage above the second quarter. We clearly did that in Q3 and we expect to do that again in Q4.

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

Yeah. Positive pre-tax pre-provision above the $78 million that we outlined.

Andrew J. HarmeningPresident and Chief Executive Officer

I think then we have a few here from Jon Arfstrom with RBC Capital Markets.

Jon ArfstromRBC Capital Markets — Analyst

So the first question is when do you think commercial loan yields can bottom out.

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

I like to think they already have. Now that’s a bit over my skis, but the reality is we’re beginning to see market yields generally rise and we take comfort in what we’ve seen as some of the larger bank syndicated transactions that have come out where they started to build in software adjustments and other factors that perhaps the compression in spreads that we’ve been experiencing, that’s driven absolute yield to the bottoms. We hope that’s perhaps behind us and while spread may not expand, absolute yield will continue to rise if market levels rise.

Patrick E. AhernExecutive Vice President, Chief Credit Officer

I think the other thing as a tailwind potentially is as we see that slow steady increase in utilization that typically comes with an improved margin as well. So it’s impossible to say on the forward-looking exactly what bottom looks like but more to come.

Jon ArfstromRBC Capital Markets — Analyst

Next up from Jon. Are you still planning on $1 billion in auto outstandings by the end of 2022?

Patrick E. AhernExecutive Vice President, Chief Credit Officer

We’re very much believing we’re on track to be able to achieve that. We’re three weeks into it. We at the writing of this presentation, we were at 60 dealers. Since then, I had a call yesterday afternoon and it looks like we’ve raised that to 111 dealers in the pilot. So we are on track for that number and we expect incremental increases in November and December and that will really hit the ground running very well in January.

Jon ArfstromRBC Capital Markets — Analyst

Also from Jon. If you exclude warehouse and energy, are you more bullish on commercial lending for 2022?

Patrick E. AhernExecutive Vice President, Chief Credit Officer

Yes. I mean, the simple answer is yes. We’ve brought over some talented relationship managers across Wisconsin and Chicago so far in a pretty short period of time. In addition to that, when you think about the markets that we’re in, they’re tailor-made for asset-based lending and Equipment Finance. We are looking at deals already in asset-based lending having had as the leader and that join us in the third quarter.

Equipment Finance, we are ramping up quickly. In fact, I met with our Head of Equipment Finance this afternoon on its first day in the office to talk about how we bring a team around ramping that up as quickly as possible. And it’s a seasoned veteran, Scott Dienes, who comes to us from Wells Fargo and GE Capital. So those are pieces that we don’t have in our numbers today in the third quarter that we expect, I think in the first quarter we will have. And in spite of that, we continue to see a really nice pipeline.

We saw a commercial increase of 3% in the third quarter and we’ve maintained a very nice pipeline in commercial even with the closings that we had there. So feeling very bullish on our commercial business heading into first quarter and 2022.

Jon ArfstromRBC Capital Markets — Analyst

So a couple here that I might blend together on Jon’s, I hope that’s OK. When are you — It seems like the margin should be up nicely in 2022. More broadly, when are you willing to talk about your outlook for 2022 overall?

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

Jon, we’ve historically given our 2022 guidance in our January ’22 call, so you can expect to hear from us then. But obviously, we will be presenting at a conference later this quarter and we’ll perhaps give you a little more update on our strategic initiatives at that time.

Andrew J. HarmeningPresident and Chief Executive Officer

So next up, we have a couple of questions from Terry McEvoy with Stephens.

Terry McEvoyStephens Inc. — Analyst

So first of all, how will the FTE count change from the day Andy joined until the day that your hirings are done with the initiatives?

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

Sure. When you think about the overall FTE counts were roughly at 4,000 in the second quarter 3,990 in the press release tables. We’re just over 4,010 now, so they really haven’t changed much. But the new hires and the additional staff to support all of our initiatives will raise the overall account by a couple of hundred including some backfill open positions that we need to work on as well. So you can expect the overall count to grow our by several hundred.

Terry McEvoyStephens Inc. — Analyst

Another from Terry. What markets have you hired commercial bankers in and what markets are still on the drawing board?

Patrick E. AhernExecutive Vice President, Chief Credit Officer

Well, we’ve hired lenders in Chicago, we’ve hired lenders in Milwaukee, we’ve hired a couple in Northeast Wisconsin, which we thought were very strong. So primarily, so far in Chicago, Milwaukee, and then Northeast Wisconsin, and Central Wisconsin. We think there still be opportunity in Minneapolis to — on the hiring front and we intend to keep moving forward on that front.

Andrew J. HarmeningPresident and Chief Executive Officer

The next question that we have is from Daniel Tamayo with Raymond James.

Daniel TamayoRaymond James Financial — Analyst

With the reduction in the NIM guidance offset by the balance in balance sheet growth — offset by balance sheet growth, excuse me, how do you think of our overall net interest income growth now relative to a quarter ago? Can you provide more details from the NIM improvements comments you made?

Patrick E. AhernExecutive Vice President, Chief Credit Officer

Sure. So I think we’ll refer you to the guidance slide, where we also highlighted that not only do we expect to be at the upper end of our fee range, but we expect to be within the total revenue range that we had previously provided at the Barclays Presentation Conference. And so the difference obviously between the total revenue and the fee guidance is an interest income. So it’s a fairly robust number. I think you’ll find that pretty easy drive.

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

Our next question comes from Jonathan Rob with Wells Fargo.

Jon RobertsWells Fargo — Analyst

What is the duration on the securities repurchasing as you build the investment portfolio? Also, what would the duration go to in a 200 basis-point plus rating?

Andrew J. HarmeningPresident and Chief Executive Officer

Sure. So, Jon, as I mentioned, the mix of securities that we’re purchasing is very similar to the mix of our current portfolio. It’ll be a little bit longer duration on the new mortgages purchased than the existing book obviously but similar duration on the munis, and so that will be a little lengthening, a little bit beyond sort of the five-year that you’ve seen from us historically but not much.

And with regard to what that would do in an up 200-rate shock, I don’t have the immediate number at my hands but suffice it to say, with a five-year duration at 200 basis point shock is mathematically about a 10-point swing in value. That having been said, I’m not seeing anything in the 10-year yield profile or the forwards that would indicate that’s a consensus view.

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

All right. I have a few more questions here in my inbox, but if you have any others. Feel free to send them along here. Moving on, we have a follow-up from Terry McEvoy with Stephens.

Terry McEvoyStephens Inc. — Analyst

According to other banks, mortgage yields are less than auto yields. But auto is a non-relationship business. How would you respond to that?

Andrew J. HarmeningPresident and Chief Executive Officer

What I would say right now is our mortgage book consists of both originated and third-party originations. And so the third-party origination expansion is not necessary for us and there is a opportunity on the indirect auto portion of that to get a yield that is better than what we had before. So from an Associated Banc standpoint, it puts us in a really good position in a market that is seen a downturn probably in mortgage origination across the industry in 2022 to quickly transpose that.

But I would point out that we have a pretty significant expectations and very customer-friendly relationship businesses of small business and commercial banking. And that was on purpose. We believe those are massive deposit engines. In addition to that, we have an initiative that we haven’t talked as much about and that’s mass affluent initiative, which provides typically 70% to 75% of a retail bank’s deposit base. So we have an upside in gathering deposits from those customers as well.

So in terms of what it means for us, it’s a bit of a mix, a switch out, and a trend on mortgage, while simultaneously adding to plan around deposits on mass affluent and entering very heavy deposit industries of small business in commercial banking in the market.

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

All right. And then we have two remaining questions. That’s one from Scott Siefers with Piper Sandler.

Scott SiefersPiper Sandler Companies — Analyst

So you had suggested a 2.7% steady-state NIM over three-plus years with your September strategic initiative announcement. Do you still feel comfortable with expectation in light of how long excess liquidity sticking around?

Andrew J. HarmeningPresident and Chief Executive Officer

Well, I think the question on excess liquidity, look, there are some indications that typically when you see some spend and you see some account fee increases, that’s typically a leading indicator that something that there may be a decrease in deposits over time. We’re seeing that. So absent stimulus for those have been sticky for us through three quarters and happen through the whole — entire — in the entire industry, heading into the 2022, I think there are some signs of that being a decrease. So overall, right now, I would say that we are, we are still committed to that — the margin that we laid out in our mid-term plan.

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

Okay. And that actually was the final question that we had in queue. So if there are no further questions, Andy, I think, I’ll pass it back to you to wrap up.

Andrew J. HarmeningPresident and Chief Executive Officer

Well, I’ll say two things. Thank you for being with us today and thank you for your perseverance and getting through three different — four different moderators including Shamali and probably one good one. So thank you for the attention you’ve given to Associated Banc. We’re excited by what’s happening here. Have a great evening.

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

Thank you. With that, you can disconnect your lines.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Andrew J. HarmeningPresident and Chief Executive Officer

Christopher J. Del Moral-nilesExecutive vice President, Chief Financial Officer

Patrick E. AhernExecutive Vice President, Chief Credit Officer

Scott SiefersPiper Sandler Companies — Analyst

Michael YoungTruist Securities — Analyst

Unidentified Participant

Christopher McGrattyKeefe, Bruyette & Woods, Inc. — Analyst

Jon ArfstromRBC Capital Markets — Analyst

Terry McEvoyStephens Inc. — Analyst

Daniel TamayoRaymond James Financial — Analyst

Jon RobertsWells Fargo — Analyst

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