Associated Banc-Corp (ASB) 2018 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to Associated Banc-Corp's First Quarter 2018 Earnings Conference Call. My name is Hector, and I will be your operator today. (Operator Instructions) 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 2, 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 any subsequent SEC filings. These factors are incorporated herein by reference.

For a reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please refer to the slide presentation and to Page 8 of the press release financial tables.

Following today's presentation, instructions will be given for the question-and-answer session.

At this time, I would like to turn the conference over to Philip Flynn, President and CEO, for opening remarks. Please go ahead, sir.

Thank you. Welcome to our first quarter earnings call. Joining me today are Chris Niles, our Chief Financial Officer; and John Hankerd, our Chief Credit Officer.

Turning to Slide 3. We're pleased to close the Bank Mutual merger on February 1. The addition of Bank Mutual is the primary driver of the first quarter's results. Excluding the acquisition costs related to the merger, we're reporting earnings of $0.50 per share.

Average loans in the quarter were up $1.2 billion, driven primarily by the addition of 2 months of Bank Mutual balances and generally positive loan momentum. Please note that unless otherwise discussed, statements in this update include 2 months of Bank Mutual's contribution.

Average deposits were up $1.4 billion. We benefited from improving fee revenue trends with both insurance and mortgage banking providing lift during the quarter. We recorded $21 million in Bank Mutual-related acquisition costs and remain confident that we'll deliver total acquisition costs within our original estimate. We're pleased with our overall expense control to date, and we're on track to maintain our noninterest expense within our original guidance adjusted for the addition of Diversified Insurance Solutions in the quarter.

We repurchased $26 million of shares this quarter at an average price of $23.90 and increased our dividend to $0.15 per share.

Loan details for the first quarter are highlighted on Slide 4. Average loans grew by 6% from last quarter. Bank Mutual loans flowed mostly into our commercial real estate and residential mortgage categories, resulting in significant increases from the fourth quarter. Our general commercial business started the year slowly, but we saw acceleration through the quarter, particularly in March. Seasonality and higher mortgage rates negatively impacted our mortgage warehouse business, which was down over $100 million from the fourth quarter.

Looking forward, our C&I loan pipeline is robust, and we expect solid growth in the second quarter. In our commercial real estate business, we anticipate growth in the second quarter as well but expect that growth will moderate over the back half of the year. So we expect 1% to 2% quarterly growth in our overall loan portfolio for the remainder of 2018.

At Associated, we actively have positioned our balance sheet to maximize returns for our shareholders while managing risks. Over the last year, our variable rate commercial loan growth was weaker than we'd anticipated, while our fixed rate portfolio grew as a result of our on-balance sheet mortgage retention strategy. Given our expectations for rising rates, we believe a more asset-sensitive balance sheet will be beneficial. Therefore, we've recently entered into pay fixed balance sheet swaps totaling $500 million, which will have the effect of increasing our asset sensitivity.

On Slide 5, we highlight our quarterly deposit trends. Average deposits grew by 6% from the fourth quarter. Our deposit mix was essentially unchanged by the Bank Mutual acquisition. During the quarter, we displaced some of our more rate-sensitive network transaction deposits and replaced them with lower-cost, fixed-rate Federal Home Loan Bank funding. Our loan-to-deposit ratio climbed to 96% as a result of seasonal factors and the Bank Mutual acquisition. We typically see outflows during the first half of the year as municipalities and school districts work down their state funding. Bank Mutual had a loan-to-deposit ratio of approximately 102% at closing. Consequently, the merger itself contributed to a slight increase in the loan-to-deposit ratio.

Turning to Slide 6. Net interest income of $210 million was up $23 million from the fourth quarter and up $30 million from a year ago. Net interest margin was 2.92% in the first quarter, up 13 basis points from the fourth quarter and up 8 basis points from the prior year. Our commercial loan portfolio yield increased nicely, benefiting from the full effect of the December rate hike and receiving some additional lift from the March rate hike. Our residential loan portfolio yield also increased, reflecting in part the addition of higher-yielding mortgages from Bank Mutual. The yield on the securities portfolio decreased by 3 basis points as a result of the reduced tax equivalent yield on our municipal securities. We've begun to see competitive pricing pressure in deposit -- in the deposit marketplace. However, we've been able to maintain pricing discipline, and our interest-bearing deposit yield increased just 8 basis points during the quarter. Going forward, we expect further fed action and continuing deposit pricing pressures. We will actively manage our deposit rates to balance our objectives of attracting and retaining customer deposits and maintaining low funding costs.

Turning to Slide 7. We have a breakdown of the specific factors that contributed to the $23 million increase in net interest income between fourth quarter of '17 and the first quarter of this year. $10 million of the increase was due to growth of loan portfolio and deposit balances driven by the addition of Bank Mutual. An additional $6 million was from purchased loan accounting accretion items, including $4 million of purchased loan accretion and $2 million of prepayments and other adjustments related to Bank Mutual. It's not uncommon to have prepayments. We anticipate there may be additional such events in 2018, but it's difficult to predict their timing.

Our securities portfolio also contributed $3 million as we repositioned the Bank Mutual portfolio primarily into municipal securities, which despite the recent tax cuts still offer higher tax-adjusted yields. The widening of the LIBOR fed funds spread further added $2 million, and other net changes were added up in the quarter.

On Slide 8, we project our net interest margin range for the remainder of 2018. Beginning with our first quarter margin of 2.92%, we expect that the full quarter effect of Bank Mutual purchase accretion versus 2 months of accretion in this past quarter will add up to an additional basis point to our margin. Prepayments and other adjustments could add or subtract a basis point. We expect the LIBOR fed funds spread to normalize at some point during the year, reducing margin by up to 1 basis point. We anticipate the benefit of 2 expected debt rate hikes to add between 2 and 4 basis points. These factors result in a projected net interest margin range for 2018 of 2.92% to 2.98%.

Turning to Slide 9, first quarter noninterest income of $90 million was up $5 million from the fourth quarter and up $10 million from the first quarter of 2017. A key contributor to our noninterest income this quarter was our Diversified Insurance Solutions acquisition, which closed on March 1. Including Diversified, our insurance revenue was up $3 million compared to the prior quarter. Our mortgage business also increased $3 million as we returned to selling newly originated loans after completing our mortgage loan retention strategy in the fourth quarter. These increases were offset somewhat by a $2 million decline in capital markets revenue after a very strong fourth quarter. With additional rate increases expected in 2018, we anticipate continued year-over-year growth in this business as our commercial customers tend to be more active in the capital markets, in a dynamic interest rate environment.

Turning to Slide 10. Noninterest expense of $213 million was up $31 million from the fourth quarter. We're pleased with our cost controls during the quarter. Excluding $21 million of Bank Mutual acquisition-related costs, our net -- noninterest expense would have been $192 million given an annualized run rate below our previous full year noninterest expense guidance. With the addition of Diversified Insurance, we've updated our full year noninterest expense guidance to $825 million, including $40 million of acquisition-related costs.

We continue to invest in technology that will improve our ability to attract and retain customers. During the quarter, we completed the rollout of our new online platform and our new mobile application. This was the most complex conversion that we've done in the last several years, and the new platforms will enable us to more efficiently perform upgrades without the significant effort we expended on this update. This successful implementation gives us confidence that the Bank Mutual system conversion scheduled for June 23 should go well.

On Slide 11, we detail our quarterly credit quality trends. Our potential problem loans increased in the quarter, primarily driven by the addition of a few loans to this category and $42 million of problem loans from Bank Mutual. We believe it's important to note that our problem loans are a small percentage of our total portfolio. Consequently, the addition of a handful of loans can give the appearance of a degrading credit environment, when in fact, our credit profile remains generally favorable and steady. Nonaccrual loans were unchanged from the fourth quarter at $209 million. Excluding $15 million of Bank Mutual purchased credit-impaired loans, the declining trend we've seen over the last year continued this quarter.

Charge-offs included $4 million from the oil and gas portfolio and continued to be very moderate. The allowance for loan losses decreased to 1.13% of total loans from 1.28% in the fourth quarter. If we include unaccretive loan purchase discounts, this ratio would've been 1.27%. With the benign credit environment, our provision for loan losses was 0, unchanged from the fourth quarter.

Turning to Slide 12. I'd like to provide you with a quick update on the completed Bank Mutual acquisition. As you know, we closed on February 1. The conversion of customer accounts is scheduled for June 23, and we're busy conducting conversion tests and communicating with Bank Mutual customers about how the change will affect them. We recently conducted customer surveys at Bank Mutual branches. I'm pleased to report that the customer satisfaction rate is running at more than 85%. We believe this encouraging result portends high customer retention after the conversion. We continue to expect that our total acquisition-related costs will come in within the $40 million guidance we laid out at the beginning of the year. We recorded $21 million in costs in the first quarter. We expect the majority of the remaining costs to be recorded in the second quarter. Additionally, we've updated our fourth quarter 2018 noninterest expense run rate guidance to include the impact of Diversified Insurance Solutions.

So on Slide 13, we update our outlook for 2018. We anticipate 1% to 2% quarterly loan growth for the remainder of the year. While the first quarter did not get off to a fast start, conversations with our customers have been positive, and we remain optimistic. We anticipate that the tax cuts effected at the end of 2017 will have positive impact on loan growth in 2018. We expect our net interest margin to continue improving on a year-over-year basis as we previously discussed. However, one of the challenges facing all banks in 2018 is how to maintain low funding costs while attracting and retaining customers in a rising rate environment. We will actively manage the balance sheet to optimize our funding mix while maintaining our loan-to-deposit ratio under 100%. We're increasing our noninterest expense -- I'm sorry, our noninterest income guidance to a range between $365 million and $375 million to include the additional revenue from Diversified Insurance Solutions. Diversified will also impact our expenses. We're raising our full year noninterest expense guidance to $825 million, which includes $40 million of acquisition-related charges. We expect our tax rate will remain in the 20% to 22% range. Our capital priorities have not changed as we look to fund organic growth, pay a competitive dividend, pursue nonorganic growth opportunities that increase shareholder value and repurchase shares.

So with those comments, I'll open it up for your questions.

(Operator Instructions) Our first question comes from the line of Scott Siefers with Sandler O'Neill + Partners.

First question I wanted to ask was just on the margin and overall rate sensitivity. Obviously, a lot of moving parts between what you guys did with the network deposits, the addition of Bank Mutual's just kind of ongoing balance sheet and then the swaps that you entered into. Maybe, Chris, if you could talk a little about where Associated's asset sensitivity stands today versus, say, 90 days ago. In other words, what's the order of magnitude of the increase in your rate sensitivity?

Sure. So as you've correctly noted, the network transaction deposits were down about $0.25 billion for the period end. And as you also correctly noted, the addition of the swaps will make us slightly more asset-sensitive. As we noted in our 10-K, we were essentially neutral at year-end, and I think part of our goal here was to make sure we maintain modestly asset-sensitive going forward.

Okay. And when you say modestly, are you able to put out, like, any numbers around that by any chance?

Yes. I think on Slide 8 of the slide presentation, we outlined the factors that we see as positive. So we think the effect of future fed funds will be 2 to 4 basis points going forward, and we sort of baked in already what's happened from year-end until today. We also outlined the effects of the accretion recoveries and fed funds LIBOR that's occurred in the quarter, and those could move. And those are outlined on Slide 8, but I think that's in the range. So we believe it's a range of 2.92% to 2.98%, and we believe 2 to 4 of that will be driven by the expectations about change in the curve.

Okay. And then just to understand the ins and outs of the changes to the fee income and expense guidance. Those changes are only the inclusion of Diversified, right? There's no other change, either plus or minus, either way, is that correct?

Yes. That's correct.

Our next question comes from the line of Ken Zerbe with Morgan Stanley.

I just wanted to clarify. I know this might be a silly question, but the $825 million of expenses, that includes merger costs, correct?

Correct. So if you back out -- if the merger costs turn out to be $40 million, back out $40 million.

Got it. Perfect. Okay. And then can you just talk about your plans for additional capital return? Because obviously, you closed the deal, but you're buying back stock. Like, how should we think about that over the next quarter or 2?

Sure. We have -- after the repurchases we made, we have, give or take, $20 million, $25 million of additional authorization remaining. And we'll be opportunistic depending on where the stock price is. You saw we bought back shares at an average of $23.90, which we thought was a very attractive price. So if unfortunately we're in those kind of ranges, we'll be opportunistic. We'll see how it goes.

Got it. Okay. And then just last question, in terms of Bank Mutual, the accretion piece. Going back to Slide 8 that you're referencing, it didn't seem like there was an expectation that the purchase accretion actually declined at all over the course of the year. Is it just such a long-duration asset, if you will, that it just stays fairly stable?

I think, Ken, one of the things is we only had 2 months of realized accretion during the first quarter. So actually, it will step up in all likelihood into Q3, and then yes, it will moderate. But it probably won't moderate considerably below the fact that we only had 2 months in the first quarter.

And then on top of that, there'll be prepayments and other unforeseen events coming out of that book, which will -- will also impact it, most likely on the additional side.

Got you. And you build in your best guess estimate for prepayments already into that $2.92 to $2.98? We shouldn't be adding anything on top of that.

Correct. Right. Page 8 is our best estimate of the puts and takes there.

Our next question comes from the line of Ebrahim Poonawala with Bank of America Merrill Lynch.

Just a quick question, one on loan growth. So I guess we expect 1% to 2% quarterly loan growth. And I believe you mentioned that CRE should be strong earlier in the year and then tail off. One, in terms of CRE, could you remind us where we stand? I know you were limiting CRE growth ahead of the Bank Mutual acquisition. Just from a mix standpoint, like, how you see the loan book shaping up through the rest of the year?

Yes. So we continue to be, as always, disciplined about what we're doing in commercial real estate at this point in the cycle. It is late in the cycle as we all probably would acknowledge, but we have significant room under all of our internal guidelines in the commercial real estate book post Bank Mutual with the exception of multifamily, which is where we've been for frankly the last couple of years. So we're very judicious about multifamily, but we're seeing significant opportunities in other asset classes like industrial, office, et cetera.

Understood. And then on the C&I side, is it a lot of that driven by mortgage warehouse lending? Or are you seeing growth beyond that portfolio?

No, we actually are really encouraged by our pipeline across our traditional and commercial banking businesses. Perhaps we're finally starting to see what I think everyone expected after the tax reform: more optimism and more spending. But the pipeline is quite robust across traditional commercial lending.

Understood. And just very quickly switching gears to -- in terms of deposits. I think you mentioned we expect deposit betas to go up. Like, can you quantify in terms of just how intense it is? Are you seeing a lot more competition from the larger banks or the foreign banks in your markets who are driving deposit pricing? Or is it going to be a gradual sort of increase through the year?

Yes. Nothing dramatic is happening in deposit pricing in our core Wisconsin markets. There is increasing slow pressure from a variety of places. I mean, there's a lot of credit unions here. There's a lot of community banks, and there's a few of the larger banks we compete with. Deposit pricing seems to be reasonable in Minnesota. I'd say Chicago, as with almost everything in Chicago, it's going to get more competitive. But we didn't really make any prognostication about our deposit betas. We don't really see a lot of change there. We just think that as fed funds go up, there is going to be increasing pressure to pass some of that on to the depositors, which one would expect. But I'm not sure we're going to see any dramatic movement in the betas.

Our next question comes from the line of Dave Rochester with Deutsche Bank.

On just the deposit side and the growth you expect, I know you normally see stronger balances in the back half of the year. Is it possible for growth to fund the loan growth that you're expecting for the rest of the year? And are you actually anticipating reducing network deposits further?

It's entirely possible to fund loan growth with core deposits. They're in -- depending on where the opportunities are, we will, as you saw us just do, look for lower cost sources of funding and look to continue to take opportunities to make the asset -- the balance sheet more asset-sensitive. Locking in some longer-duration FHLB borrowings accomplishes that, and perhaps there are other tools out there that we can use so that we don't get the immediate impact that we do on the network deposits when the fed makes a movement.

Great. And then I guess along those lines, are you guys done with the swaps at this point? Or are you thinking about adding others through the year?

We don't have any immediate plans to do more, but depending on what happens on any given day or week, we will take a look at those opportunities. $500 million of pay fixed, receive floating swaps isn't going to make a huge difference, but I don't really view running a bank as like a car where you can turn it on or turn it off or make it go faster, make it go slow. I mean you try to do things in moderation.

Yes, that make sense. And then just a smaller point in the average balance sheet, just noticed that the CRE yield was up a lot this quarter. I'm sure some of that was related to paydown accretion and whatnot, but is it also a reflection of the type of CRE that Bank Mutual was doing? Or just any color there would be great.

No, it was the purchase accounting stuff. I mean, the Bank Mutual commercial real estate book, although it tends to skew a little smaller, from a quality point of view, is not materially different than what we've been doing. And I think way back when we were first talking about this acquisition, a significant amount of it was actually stuff that Associated had originated and syndicated to Bank Mutual. So it's not materially different from a quality point of view.

And then just one last one if I could, back on capital deployment and how you guys are thinking about M&A going forward, if you're still interested in bank deals or if it's more nonbank, nondepository type transactions you're looking at now.

So we continue to look at the nondepository transactions. You've seen us being fairly active, and we continue to look at those opportunities. We'll continue to look at bank deals that fit our criteria. At least to me, the Bank Mutual transaction is going to be a home run given its characteristics of being efficiency-driven, inside the footprint, et cetera, et cetera. So as we see other opportunities that are similar or that we believe can have similar results, we'll pursue them.

And are you seeing evidence of more chatter in the market on that or more indications of interest or folks looking to partner up? Any market commentary you can give on that front?

There's been a reasonable flow of discussions around M&A particularly in the smaller end for quite a while. I don't know that that's picked up particularly. Not a lot of activity. I mean, you can talk to your friends across the hall, but not a lot of activity in the larger end. Perhaps if the Senate -- or if the House acts on the Senate bill, maybe that'll be a catalyst for a larger M&A, but we're not hearing a lot of that right this second.

Our next question comes from the line of Kevin Reevey with D.A. Davidson.

Chris, when you said the 1% to 2% quarterly loan growth for the remainder of 2018, is that based on the average balance of loans or a period end?

Yes. We tend...

We always report on averages.

Okay. That's what I figured, but I figured I would just double check. And then given where oil prices are, is that a business that you intend to become a little more aggressive in?

So our view of businesses like oil and gas is that we are steady through the cycles. And you've seen us go through the last cycle without downsizing, without curtailing our activities, and we have continued to make new loans throughout. So if oil is 70 or if oil is 40, the opportunities rightsize themselves based upon the outlook for hydrocarbon prices, and we're a consistent player throughout. So we don't -- trying to ramp up when prices are high and ramp down when prices are low is a guaranteed way of working yourself out of that business.

And then lastly, your resi 30- to 89-day past due would look like that was up substantially. How much of that was Bank Mutual versus legacy Associated?

John, is that ringing a bell for you? No?

Just for clarity, we're talking about a $4 million change on a $7 billion, $8 billion portfolio?

Yes.

I don't think that's material.

That's not material.

Our next question comes from the line of Chris McGratty with KBW.

Chris, just a quick question. I might have missed it on your prepared remarks. What are you assuming for deposit betas in your guide?

So we didn't explicitly call out a deposit beta for this quarter. We talked about last year that we thought that betas would be in the 0.5 range or better. They've come in a little bit below that. We continue to expect they'll be below that, but we haven't called out a specific target that's embedded in our interest rate outlook obviously. I think you can see the realized betas have been sort of in the high 0.3s, and I think industry observations seem to suggest there's room should the fact continue to move that they'll accelerate a little bit from the level they've been at. But we don't think they're going to get quite back to 0.5, which is what we've previously assumed.

Okay. Great. And on the margin, the $6 million of accretion this quarter, what's the pool we're pulling from that's going to be realized in the margin over next years? Like, how much is the discount accretion?

The aggregate mark of the entire credit mark will be roughly $48 million for the entire loan mark including credit liquidity and interest rate.

Okay. So most of that will go through the rate mark but not all of it. Okay. And then finally, on the securities repositioning, I guess where do you stand on size of the book? Are you done restructuring? How should we think about this absolute size of investments?

Yes. So we absolutely sold and repositioned the entirety of the book already, and so there really won't be a material change. We've been keeping the investment portfolio percentage-wise as a percentage of the balance sheet sort of where it is, and it will stay probably where it is unless market conditions change.

Our next question comes from the line of Jon Arfstrom with RBC Capital Markets.

Phil, one of your comments on C&I, just to follow up, on optimism, can you touch on, call it, in footprint versus your national businesses. My sense is that Wisconsin has always lagged a little bit. I'm not saying it's bad, but curious if you're seeing that same optimism in the footprint as outside of it.

Yes. When I was referring to traditional, commercial business, I was really talking about within the 3-state footprint. That's where we're seeing an attractive pipeline. There are stuff going in the national businesses too, but I particularly called that out for the reason that you point out. We're not in a high-growth state here in Wisconsin at least, so it's -- people are talking about making some significant capital investments.

Okay. Okay. Good. Provision guidance was, I guess, appropriately vague, but how do you want us to think through that? I know the potential problem question is annoying for you, and I won't ask it. But it feels like credit is pretty solid. But how do you want us to think about the provision?

Yes. Credit is really solid, and the provision guidance is vague. We haven't actually changed those words for quite a while. Potential problem loans, I'll just point out that you have a little bit that came in from Bank Mutual and literally a handful of loans that were downgraded into that category, one of which is already paid off. So when we're talking about such low overall levels of potential problem loans, a couple or 3 sizable deals can make the percentage go up. So that's why if we really thought that we were seeing true deterioration, you wouldn't be seeing a 0 loan loss provision.

Yes. Okay. Okay. That make sense. And then the last question, maybe a little more subtle. My guess is when you modeled Bank Mutual, you assumed some deposit outflows. I think you maybe hinted it's going a little bit better than your expectations. Is that a fair assumption in terms of product retention?

We assume 10%, and we don't have any reason to think it will be better or worse than that.

Our next question comes from the line of Terry McEvoy with Stephens Inc.

You took the loan mark on Bank Mutual's loans. How should we think about the provision going forward as those loans mature? And you booked those into, call it, the core portfolio. Will there be a need to rebuild the reserves over the next few years if that happens?

Well, I mean, yes, technically, you'll pick up the accretion in the income statement. And then we will provide. So the geography will move around, but the net result, probably about the same, probably a wash.

And then one just last follow-up. I think in the past, you've provided a little bit more details on the mortgage business and mortgage revenue. I know you said it was up this quarter at least versus my expectations because of the change in strategy. Was there any MSR movement that contributed to that $6 million revenue this quarter?

No, it really wasn't MSR. The pipeline was a little bit bigger at the end of the period, and so we had a higher FAS 133 or fair value evaluation at the end of the quarter than we had at the end of the year.

(Operator Instructions) Our next question comes from the line of Michael Young with SunTrust Robinson Humphrey.

Just wanted to ask on the loan portfolio. You've traditionally run or tried to run at 1/3, 1/3, 1/3 between resi, CRE and commercial, a little overindexed to residential at this point and put on some longer-duration assets there last year. Is that an area that you would potentially look to rationalize at all at any point if betas tick up? Or how are you just kind of thinking about that?

That's very observant, and we do feel like we're overweighted. Resi really translating to overweighted fixed rate assets, and so we have a significant effort underway to rebalance and pick up more floating rate commercial and commercial real estate loans within the context of late cycle, et cetera, et cetera, and being conservative.

And the swap you put on, is that more directly related to the resi book and some of the growth last year? Is that how you thought through that decisioning? Or was it just a general decision?

I think a general decision and a combination of slightly more resi, slightly less floating rate commercial production particularly in the late half of last year than we had anticipated previously and therefore want to make sure we had the right size positioning going into 2018 and through '18.

Okay. And a little different question, hopefully the last one you get on the oil and gas loan loss reserve, but down at 2.9% now. How close to that to the rate of provision that you have to put against new energy or oil and gas loans?

John, do you want to take that?

Yes. At 3% on a normalized basis, we're probably approaching more like around 1.5%.

Even with the historical loss look back, it's 1.5% on new production?

In a normalized environment, 1.5% would be the number, yes.

Okay. So it's still -- a little credit release could come there. Okay.

Our next question comes from the line of Scott Siefers with Sandler O'Neill + Partners.

Chris, just wanted to ask about the size of the balance sheet going forward. So the end-of-period earning asset base, you still have about 1 billion, 1.5 billion above the average, just given that we have -- don't have the full quarter's worth of BKMU in there. Are you doing or have you done anything to the legacy BKMU balance sheet that would make the end of period not representative of the likely size of the balance sheet going forward? In other words, are you taking down any nonloan earning assets, for example?

So maybe sort of onto date, we're not planning any portfolio sales or shrinking the balance sheet any meaningful way. The end-of-period balances represent essentially those pro forma level that we have, and I think as we previously discussed and talked about, we're talking about continue to grow loans from this point forward through the balance of the year. And we anticipate funding a good portion of that, if not all of it, with deposits hopefully over the course of the year. So the balance sheet kind of grows from here at a steady clip, and we don't expect to have a portfolio adjustment per se.

I think you -- hopefully you didn't mention this in response to one of the other questions, but just on the purchase accounting benefits of the roughly $6 million this quarter, what is the life of that portfolio? Is that kind of a 3-year sort of tail that, that would have until it becomes just sort of inconsequential in terms of the benefit to the margin and NII?

Yes. So the reality is that yes, the average commercial book, and there's a large commercial book here, is a short-dated book. But there was a $0.5 billion residential book as part of it, so it's a mix of course. But yes, most of it is in the commercial-related assets, and the commercial-related assets have sort of a 1 to 3-year life.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Philip Flynn for closing remarks.

Thanks. Thanks for joining us today. We were pleased with the expanded bottom line this quarter, the progress we're making on the Bank Mutual integration, the continued favorable credit environment and in particular, the sense of optimism that we pick up from our commercial clients that we talk to. And we're looking forward to good results for the balance of the year, so thanks for spending the time with us. We'll talk to you again in July. And if you have any questions in the meantime, as always, give us a call. And thanks for your interest in Associated.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.