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Associated Banc-Corp (NYSE:ASB)
Q2 2021 Earnings Call
Jul 22, 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 Second Quarter 2021 Earnings Conference Call. My name is Hector and I will be your operator today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session at the end of this conference. Copies of the slides that will be referenced during today's call are available on the Company's website at investor.AssociatedBanc.com. As a reminder, this conference call is being recorded.

As outlined on Slide 1, during the course of the discussions 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 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. Harmening -- President, Chief Executive Officer

Well, good afternoon, everyone, and welcome to our second-quarter earnings call. Joining me today are Chris Niles, our Chief Financial Officer; and Pat Ahern, our Chief Credit Officer. Now, we're going to get to our financial results in a moment, but with this being my very first official earnings presentation since taking over as Associated's President and CEO back in late April, I'd like to start by taking a moment to reflect on what I've learned in my last few months on the job and why I think the future is bright for Associated. Under Phil Flynn's guidance, Associated built a strong reputation based on disciplined approach to credit, capital, operational risk, and expense management. As an outsider looking in, I saw a clean balance sheet, a strong capital position, and a franchise known for great customer satisfaction. These are all very attractive foundational qualities to build upon. And qualities have been able to validate since my arrival. Upon joining Associated, one of my first priorities was to listen and learn as much as I could, both from internal and external stakeholders; What's working well for our company? what are our growth opportunities? What we must do to win more customers and deepen community engagement? We started with 100 days of listening and a listening tour. And we have held over 175, largely in-person, sessions with hundreds of colleagues participating and thousands of ideas shared. Throughout this process, I have personally spoken with over 300 colleagues across our footprint. I've also spoken directly with some of our largest customers and many of our key investors. And with this feedback in mind, we've already taken several actions to drive performance across the organization.

First, knowing that competing digitally is more important than ever, we promoted Doug Peacock, who was previously our Director of Strategic Channels to lead our digital strategies going forward and build a comprehensive digital roadmap across our entire consumer and business bank. Secondly, we have refocused our wealth management teams under the leadership of John Thayer, CFA, previously, our Chief Investment Officer, and a seasoned wealth management professional, who will lead our integrated strategic vision for a business that already has many strengths. And finally, we are centralizing our FP&A team to bring additional discipline to the execution of our line of business activities. Our cross-group activities and importantly the growth initiatives we intend to formally announce, later this quarter. We are actively working on these strategies and initiatives, and we expect to lead to additional growth and positive operating leverage. We will communicate those strategies to you no later than September 13.

Now, let me touch on the business environment in our markets and our second quarter highlights as outlined on Slide 3. The first half of 2021 has been marked by encouraging transition to a new normal. We continue to see many signs of strengthening, the strengthened economy in our markets. Many businesses in the Midwest are running at full capacity. In fact, we are seeing really large gatherings. Gatherings such as those of our newly minted World Champion Milwaukee Bucks, which we just got to see outside our door today during their Championship parade. Encouraged by these trends, our frontline teams have been back and front of clients, and working directly with our customers for much of the year. We are optimistic about growth and feel Associated is well-positioned to participate in the ongoing recovery. In fact, we started to see signs of increasing lending activity in line utilization in our commercial portfolios, which is reflected in our period-end loan balances. Commercial and business loans excluding PPP, hereby are nearly 3% quarter-over-quarter, while the CRE segment of our loan book grew by nearly 1%. And further, our PPP portfolio continued to pay down as expected with period-end loan balances in PPP down over 50% from the first quarter. We find all of these trends encouraging.

We also began to see signs of increasing customer confidence and spending activity with deposits and card fees up $2 million from the first quarter and credit card spend up 19% quarter-over-quarter and 40% year-over-year. Now, shifting to credit. We continue to be very pleased with the improving credit environment over the first half of 2021, which speaks to the resiliency of our customers and to the resiliency of our core markets. Non-accrual loans were down 10% quarter-over-quarter and net charge-offs remained flat at just $5 million. After posting a negative provision of $23 million in the first quarter of 2021, we posted another negative provision of $35 million for the second quarter. Taken together, charge-offs and negative provision combined to drive a net reserve release of $40 million for the period. And finally, we repurchased $30 million of common stock for the quarter and also added $0.40 to our tangible book value per share.

Now, turning to Slide 4. Let me highlight a few quarterly loan trends. Compared to the first quarter of 2021, average second-quarter loans decreased 1%. However, on a sequential quarter-end period basis, we saw solid, solid growth in several of our commercial, CRE, and specialty lending portfolios, including REITs, general, commercial, and power and utilities, as our customers began to modestly draw on their lines. As expected, PPP loan balances continued to decrease, declining by $431 million or more than 50%, as we've seen the SBA accelerate their pay down and forgiveness processing. We continued to enjoy strong mortgage originations during the second quarter and have originated over $2 billion year-to-date, but we remain reluctant to add low-rate mortgages to our balance sheet. After seeing significant refinance activity in Q1, this activity carried over into Q2, driving our residential mortgage and HELOC balances modestly lower during the quarter.

Looking forward -- looking toward the back half of the year, we remain optimistic around loan growth. Specifically, we are optimistic about commercial loan demand and still expect full-year commercial loan growth that is CRE and C&I combined, excluding PPP of approximately 2% to 4% [Phonetic]. I would also like to provide an update on our indirect auto lending initiative. As mentioned back in April, we are expanding our consumer lending platform to add indirect auto lending to our product set. We continue to build out the infrastructure and expect to begin booking loans during the fourth quarter of 2021. While adding auto allows us to diversify and add to our total -- our consumer portfolio slightly better spreads, we are also continuing to evaluate other consumer and commercial verticals with good lending characteristics.

Slide 5 provides a bit more color around the period end trends that are giving us confidence that we are on track to meet our full-year guidance for commercial loan growth. At June 30, our commercial and business lending segment, excluding PPP, grew by 2.8% for the quarter, while its CRE grew by 0.6% during the quarter as well. Combined, these two segments represented roughly 2% on a period-end basis, which is in line with our full-year expectations. Moving to Slide 6. We continue to see record deposit levels for Associated customers and second-quarter average deposits were up $1.3 billion or 5% year-over-year. This continued growth has reflected strong trends in our lowest cost deposit category averages, which grew approximately $2.4 billion from the same period a year ago. From a period and quarter-over-quarter standpoint, however, we began to see signs of increasing business confidence. Combined DDA balances from our corporate and commercial specialty segments, which includes trust, were down by 12% or nearly $450 million from their historic highs at the end of the first quarter. We see this as a positive sign that businesses are putting their money to work in our economy.

During the quarter, we also continued to work down our average higher cost network and time deposit balances, which decreased by approximately $1.6 billion from the second quarter of 2020, and on a related note, our aggregate wholesale funding levels decreased to approximately $3 billion at the end of the second quarter, and have steadily decreased over the past five quarters. In addition, last week, we exercised an early redemption option on $300 million of our 3.5% medium-term banknotes, which will also help our margin going forward.

On Slide 7, we provide a walk down of our quarterly pre-tax pre-provision income or PTPP, from [Phonetic] first quarter to the second quarter. Adjusting for the MSR write-ups and one-time gains recognized in Q1, you can see our run rate has held steady and our net interest income is beginning to move higher. With net interest income increasing, we believe we have reached an inflection point on PTPP. In addition, the growth initiatives and efficiency strategies we will be rolling out later this quarter are intended to capitalize on our market strengths and position us to drive positive operating leverage and expand PTPP over the next several quarters. We do believe the expansion in PTPP over the second half of 2021 will more than cover the incremental cost contemplated for the initiatives on deck.

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

Christopher J. Del Moral-Niles -- Chief Financial Officer, Executive Vice President

Thanks, Andy. Turning to Slide 8. We had previously indicated that net interest income and net interest margin would gradually start to expand over the last three quarters of 2021, based on slowing refinance activity, a steady decline in liability cost, and expected loan growth. In the second quarter, we started to realize the benefits of these factors, with net interest income rising. Similarly, while quarterly NIM continued to be pressured, we saw an encouraging uptick from month to month, with the June NIM finishing at 2.45%, up nicely from March.

Slide 9 provides a breakdown of the specific factors that lifted net interest income in Q2. On the mortgage side, margins and investment income were driven higher by decline in refinance activity, which contributed to slower prepayment rates on mortgages, and mortgage-backed securities. We expect mortgage yields to continue to rise over the back half of the year as the refinance wave continues to taper. On the commercial side, we saw an uptick in PPP income recognition, relative to Q1. We had approximately $15 million of unrecognized deferred fees remaining at the end of the quarter and expect that most of that will be realized over the back half of the year.

On the liability side, we continue to see downward momentum in overall deposit cost quarter-over-quarter. This is especially true for time deposits where average yields have continued to decline period-over-period. Average time deposit yields finished the second quarter at just 51 basis points and we still have about $50 million in consumer CDs, with rates above 2% set to mature by the end of the third quarter. Given the second quarter's margins, current CD rates and market trends, we continue to expect our full-year net interest margin to finish between 2.45% and 2.55%.

Turning to Slide 10. Second-quarter non-interest income came in at $73 million, up from $68 million in the same period last year, excluding ABRC related income. But down from the $95 million in the first quarter. The quarter-over-quarter decrease was driven primarily by a decline in mortgage banking income amid the Seagreen refinance wave. Partially offsetting this, fee-based revenues continue to expand, led by service charges, deposit account fees, and card-based fees. Fee-based revenues overall increased by 4% quarter-over-quarter and 16% year-over-year.

As shown on the upper right, mortgage banking gross gains of $9 million were down quarter-over-quarter due to sale margin compression. Despite the sale of Whitnell, which closed in March 1, this year, we continue to see strength in our wealth management business. Wealth management fees saw a slight increase in Q2 after a strong first quarter, and we're pleased to have ended the quarter with over $13 billion of assets under management, up 12% year-over-year. Given we are halfway through the year, we are tightening our range of our full-year fee income outlook to $315 million to $325 million.

Turning to expenses on Slide 11. The first quarter came in at $174 million in total expenses, a slight decrease from the first quarter and a 5% decrease from the same period last year. Personnel expenses rose for the quarter, however, other core expenses including occupancies continue to spend lower, more than offsetting the additional personnel expense we saw.

Turning to capital on Slide 12. Our tangible book value per share continues to grow quarter-over-quarter and has increased 7% year-over-year to $17.35. Associated's regulatory capital levels also remain strong. Our common equity Tier 1 ratio has grown 45 basis points in the second quarter of 2020, as we conserved capital in light of the economic uncertainty we saw over the last year. We continue to target a TCE level at or above 7.5% and CET 1 level at or above 9.5%.

With that, let me turn it over to Pat Ahern, our Chief Credit Officer.

Patrick E. Ahern -- Executive Vice President, Chief Credit Officer

Thanks, Chris. Wanted to start off by providing an update on our allowance as shown on Slide 13. We utilized the Moody's June 2021 baseline forecast for our CECL forward-looking assumptions. Moody's baseline forecast assumes additional fiscal support, a continuing low-interest rate environment, the recent acceleration in consumer prices to be transitory, and relatively localized corporate cases. Following a net reserve release of $28 million in the first quarter of 2021, we posted a further net reserve release of an additional $40 million in the second quarter. This net release was driven by gross reductions in our allowance for all of our core business units, with a $12 million gross reduction in our allowance related to our general commercial and business lending portfolio, a $13 million reduction in our CRE allowance, an $11 million reduction in oil and gas, and a $3 million reduction in retail lending.

As of June 30, our total ACLL was $364 million, down from $404 million in the prior quarter. Similar to that, our ratio of reserves to loans declined to 1.52% from 1.67% 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 halfway through the year, we're in line with those expectations.

Turning to our quarterly credit trends presented on Slide 14. Potential problem loans and non-accrual loans both declined during the quarter, with net charge-offs flat from the first quarter. Our key COVID commercial exposures also continue to decline, notably oil and gas, retail and restaurant exposures all declined during the quarter. After peaking at $1.6 billion in the second quarter of 2020, our quarterly active loan deferrals had continued to decline each quarter and fell to a total of just $20 million across all core business units in the second quarter of 2021. Total deferrals now make up just 8 basis points of total loans at quarter-end. Most customers who received deferrals have not needed additional assistance and have been able to resume making normal payments. Going forward, we expect to adjust our provision with changes to risk grades, 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 the second half of 2021.

Andrew J. Harmening -- President, Chief Executive Officer

Thanks, Pat. On Slide 15, we recap our updated guidance for 2021. We are tightening our noninterest income guidance and now expect the full year to come in between $315 million to $325 million, reflecting the strong mortgage activity we see in the first half of the year and to continue to strengthen our Wealth Management business over the course of the year. As a result of our ongoing planning for growth and efficiency initiatives, we are withdrawing our prior 2021 total expense guidance. Before the impact of such initiatives, we expected total expense for 2021 will be approximately $695 million to $700 million, reflecting incentive accruals and additional business development expense. Now, our total expenses for 2021 will ultimately reflect the impact of the initiatives that we will announce later in Q3.

But let me reiterate. Even with the expenses we're contemplating to support our growth initiatives, we still expect to deliver PTPP above our second quarter baseline in each of Q3 and Q4. Lastly, as mentioned, we continue to experience positive credit trends due to economic conditions and as such we expect provision to be adjusted accordingly, inclusive of risk grade and future loan volume.

With that, we'd be happy to take your questions.

Questions and Answers:

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Your first question comes from the line of Scott Siefers with Piper Sandler. Please proceed with your question.

Robert Scott Siefers -- Piper Sandler & Co. -- Analyst

Good afternoon, guys. Thanks for taking the question. [Speech Overlap] Hey. Chris, maybe first, one for you. So, year-to-date the margins are around 2.38% [Phonetic], so it looks like you'll need some good acceleration in the second half, and I imagine PPP fees, later this year, are a big part of that. But maybe to the extent you could, would you mind please refreshing thoughts on sort of the ex-PPP margin? I know you've got some of the CDs rolling off or that -- that should give you a little bit of tailwind but just maybe thoughts on sort of the ex-PPP puts index, please?

Christopher J. Del Moral-Niles -- Chief Financial Officer, Executive Vice President

Absolutely. So, as I stated, we're anticipating to have the benefits, and you restated now of the CDs repricing, which will come to us. We're anticipating to seeing the benefit of having paid off the medium-term banknotes, which we fully paid off last week. We're anticipating to see a sort of stabilization of LIBOR at hopefully what we expect to be slightly above today's levels as we move toward the back half of the year. And we're expecting to see loan growth. And those four factors together will always drive our margins meaningfully higher from even where they were in June.

Robert Scott Siefers -- Piper Sandler & Co. -- Analyst

All right, perfect. And then, similarly, so on the fee side, only a little acceleration. We got toward the middle or high-end of that range. Just curious about the main drivers. It sounds like wealth management is going to be sort of a key growth area for you. But [Indecipherable] maybe puts and takes you would see as we look into the second half of the year on fees?

Christopher J. Del Moral-Niles -- Chief Financial Officer, Executive Vice President

We certainly expect wealth management, which typically set its fees for the subsequent quarter based on quarter-end levels to have a good quarter, given that June 30 was a pretty good point for the markets. We also expect to see the depositees continue to come in nicely. And based on what we've seen in card fees -- that can also be a positive as we move to the back half of the year.

Robert Scott Siefers -- Piper Sandler & Co. -- Analyst

All right, perfect. All right, Chris [Phonetic]. Thank you, guys, very much. I appreciate it.

Christopher J. Del Moral-Niles -- Chief Financial Officer, Executive Vice President

Thanks, Scott.

Operator

Your next question comes from the line of Michael Young with Truist Securities. Please proceed with your question.

Michael Masters Young -- Truist Securities, Inc. -- Analyst

Hey. Thanks for taking the question this afternoon.

Christopher J. Del Moral-Niles -- Chief Financial Officer, Executive Vice President

Good afternoon, Michael.

Andrew J. Harmening -- President, Chief Executive Officer

Afternoon, Michael.

Michael Masters Young -- Truist Securities, Inc. -- Analyst

And congrats on the Milwaukee win. I may note [Phonetic] that the hope was Green Bay but you take what you could get right?

Andrew J. Harmening -- President, Chief Executive Officer

Maybe, it's one of many.

Michael Masters Young -- Truist Securities, Inc. -- Analyst

Maybe it's a [Phonetic] step in the right direction. So, just wanted to follow up and maybe put a bow kind of on the expense commentary. So, I think you said it would -- the increased expenses would be kind of covered by the incremental PPP fees you expect in the second half. So maybe if you could just kind of put a dollar amount on that? And then, on an ongoing basis, are those kind of one-time expenses to put things in place and get people hired, or is a lot of that going to be in sort of the longer-term expense run rate?

Andrew J. Harmening -- President, Chief Executive Officer

Yeah, this is Andy. Let me just clarify that. It is PTPP that we believe will cover that as opposed to PPP. We clearly are seeing an increase in net interest income. And so that increase in net interest income, we believe, gets void even additionally by margin increases that we expect in the third quarter. So, right now we're finalizing our growth initiatives. We do anticipate making investment in our company and recognizing the current environment that we're in, as we come through the pandemic. But even after any new investments that are made in the third quarter or the fourth quarter, we do expect to exceed the Q2 PTPP, in each of, individually, the third quarter and the fourth quarter.

Michael Masters Young -- Truist Securities, Inc. -- Analyst

Okay, that's helpful. And thanks for the clarification. Sorry, I didn't hear that correctly. And then my -- I guess my other question was sort of more on the capital front, but just as you guys are looking at sort of deploying capital, you've been active with the share buyback, but there is also a lot of these kind of growth initiatives that you're investing in as well. So, just trying to kind of think about or understand how you guys are kind of weighing the payback period of various investments kind of across the platform? And how that will pertain to future capital allocation?

Andrew J. Harmening -- President, Chief Executive Officer

Yeah, I'll start that one out and maybe have Chris piggyback on this one. So, as we look at our growth initiatives, of course, growth and funding growth is our number one priority. So, when we think of operating leverage, obviously in a prudent risk fashion, we don't believe we have to step out of our credit box. We will finalize the initiatives and we expect it'll probably be a shift in the use of capital, a little bit away from maybe not quite as much on the share repurchase as much on the growth. So, as you have positive operating leverage, you invest in businesses that drive your margin, you do that in a prudent risk framework. We think between -- the growth would be number one, and then, we'll also, of course, look at what dividend strategy and share buyback strategy is combined. So, as we finalize those numbers, we'll pull that through to the capital plan as well.

Christopher J. Del Moral-Niles -- Chief Financial Officer, Executive Vice President

That was well said, Andy.

Michael Masters Young -- Truist Securities, Inc. -- Analyst

Okay. Yeah, I was going to ask maybe Chris could kind of add a little bit more on the financial metrics side? So, are you looking at certain like tangible book value earn-back periods or anything like that? A recoup of investment timelines as you're hiring teams are adding new origination platforms, etc.

Christopher J. Del Moral-Niles -- Chief Financial Officer, Executive Vice President

We are. And we look at those internal rates of return metrics on a variety of measures. The good news is, typically, the addition of incremental adjacent lines don't have significant other costs other than people. And people tend to pay for themselves very quickly. So, we are pretty [Phonetic] encouraged by the early measures that we have and we look forward to announcing more of that news later this quarter.

Michael Masters Young -- Truist Securities, Inc. -- Analyst

Okay, thank you.

Andrew J. Harmening -- President, Chief Executive Officer

Thanks, Michael.

Operator

Your next question comes from the line of Terry McEvoy with Stephens, Inc. Please proceed with your question.

Terence James McEvoy -- Stephens, Inc. -- Analyst

Good afternoon, everyone.

Christopher J. Del Moral-Niles -- Chief Financial Officer, Executive Vice President

Good afternoon, Terry.

Andrew J. Harmening -- President, Chief Executive Officer

Hey, Terry.

Terence James McEvoy -- Stephens, Inc. -- Analyst

A question for Andy. As you were out on the road the last 100 days listening to your colleagues, I'm just curious, the ideas that they were presenting, would you -- could you put them into call it the expense bucket and then the revenue bucket kind of where you'd kind of line those up and maybe just the technology bucket as well, given the promotion to the individual to run the digital strategy? What were the comments you heard internally on your digital platform relative to to your competitors?

Andrew J. Harmening -- President, Chief Executive Officer

Well, yeah, great questions, Terry. And I guess, what I would say is, we have a serviceable digital strategy today, but we'll be looking for a lot more. And what I am encouraged by, in fact, when I talked to Doug Peacock, maybe the reason I promoted him is the first thing he said is, don't be afraid to be bold. And when we think about the world that we're living in and the attack on FinTechs, we have a legacy trust advantage. And so, I believed this in my prior job, when I took on digital and omnichannel. I believe it firmly in this position. So, we will look at a combination of what our product strategy is, what our digital delivery strategy is, and certainly, we will have to spend money in digital. The exact amount of that is what we are finalizing right now. What I'd heard from our colleagues as well is we want to grow. We want to participate in the markets that we're in. Inherently, small business in commercial are local businesses, still. We expect to compete very well in small business and commercial. And those will be a focus as we're trying to finalize our plans as well.

So, the things that I heard there and I, in fact, I heard from the investment community as well. And I think one time they said, we want to reason to follow you and for you to be bold and that's what we expect to deliver on come September 13 or before, when we have our plan. So, when we talked about evenly listening to the investment community, our customers and our colleagues, that's exactly what we've done. And interestingly, the feedback wasn't that far apart. The thing that I find encouraging was when you start with listening and you get to as many folks as we have, and it wasn't just me, it's our entire executive leadership team. When you understand the nuance of what is on people's minds and you bring strategies forward that deliver on that, you typically get buy-in [Phonetic] and execution. So it's been a really good 90 days getting to know our colleagues, having a reason to talk to them in person, getting to know them personally, but also to know what they want from our Company.

Terence James McEvoy -- Stephens, Inc. -- Analyst

Great -- great color, Andy. And then, as my follow-up question. Reading here, there is the run-off now of the oil and gas portfolio, which maybe I missed out last quarter. But that's not my question, I guess, the $31 million reserve against that portfolio, and it was much higher on day one, as that goes down, should we expect then the ACL [Phonetic] ratio to move below that day one level of 1.55%?

Andrew J. Harmening -- President, Chief Executive Officer

Pat, why don't you take that one?

Patrick E. Ahern -- Executive Vice President, Chief Credit Officer

Yes. We do expect ACL to continue to decrease below CECL day one, specific to oil and gas, as we continue to wind that down, we're less than 1% of total balances in oil and gas right now. So, we would expect that trend to continue and that does have a big effect looking back to CECL day one in terms of the ACL.

Terence James McEvoy -- Stephens, Inc. -- Analyst

Great. Thanks for that.

Andrew J. Harmening -- President, Chief Executive Officer

Thanks, Terry.

Operator

Your next question comes from the line of Chris McGratty with KBW. Please proceed with your question.

Christopher Edward McGratty -- KBW -- Analyst

Okay, great. And just want make sure I've got the right starting point on the PPNR, the guidance from here. I guess, is that like a mid-80 -- low-to-mid 80s, like $83 million run rate for Q2? Is that what you're using?

Andrew J. Harmening -- President, Chief Executive Officer

All right. Pull that up, Chris.

Christopher J. Del Moral-Niles -- Chief Financial Officer, Executive Vice President

We're starting with the Slide 7, which has the PTPP on it.

Christopher Edward McGratty -- KBW -- Analyst

Okay. [Indecipherable]

Christopher J. Del Moral-Niles -- Chief Financial Officer, Executive Vice President

Yep.

Andrew J. Harmening -- President, Chief Executive Officer

We're showing --

Christopher Edward McGratty -- KBW -- Analyst

[Speech Overlap] And maybe, kind of a [Technical Issues]

Maybe, while you're digging that up, maybe broader, Andy, I appreciate the expense comment on the -- we have to wait for September. Do you envision laying out kind of medium-to-longer term, just high-level profitability targets, ROE, ROA efficiency? I think that's one of the things that we would -- we will be looking for. I just wonder if that was going to be included in that?

Andrew J. Harmening -- President, Chief Executive Officer

Yeah. Our plan is to show what the investments are, what the payback period is, and what that does to the key drivers, whether that's ROTCE, whether that's our efficiency ratio, whether that's our operating leverage. Those are all categories that we know that you're going to want to see and we're walking through that right now to make sure that it's what we mean [Phonetic] and expect for the Company and externally. So, we're very much trying to align with what we heard, what our strategies are, and how that hits our key ratios.

Christopher Edward McGratty -- KBW -- Analyst

Great. That would be great. And then, lastly, can you just -- the CECL day one you referenced, I missed that bogey, that percentage that you're ultimately going to get to. Can you provide that again, please?

Patrick E. Ahern -- Executive Vice President, Chief Credit Officer

Yeah. We're currently equal to where we started. CECL day one at about 1.52%. So we can expect to see that trend down, given where our non-accrual loans are going, potential problem loans have decreased. Where it will flow down to, we'll get back to that. Without oil and gas, it could get down to that $1.25%, 1.30% [Phonetic] range, but we continue to watch that.

Christopher Edward McGratty -- KBW -- Analyst

Thank you.

Operator

Your next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question.

Jon Glenn Arfstrom -- RBC Capital Markets -- Analyst

Thanks. Good afternoon.

Andrew J. Harmening -- President, Chief Executive Officer

Good afternoon, Jon.

Jon Glenn Arfstrom -- RBC Capital Markets -- Analyst

A couple of follow-up questions to bigger picture. Maybe can you talk about -- give us a little more detail on the centralized FP&A and what's behind that? Talk about that a little bit and how it aligns with your growth initiatives? Help us understand that.

Andrew J. Harmening -- President, Chief Executive Officer

Absolutely. Look, they're fun things to talk about when you talk about driving revenue and you talk about changing culture, and you think about all the good things you can do in product. But those things are only as good as your disciplined approach to execution. And so, as we come out with additional initiatives, all at once, we want to make sure that our tracking is in place, we want to make sure that we are clearly understanding the timing of each piece, we want to know how that rolls up to our key financial metrics, we want to make sure that that rolls into our monthly business reviews, we want to make sure that rolls into our forecast. And so, having a team, in my mind, I see it as a best practice. I've experienced that in my past stop. And you really get down to the granular piece -- granular pieces of it and we know what to expect and we know quickly what we need to correct or emphasize. And so, when we bring that essentially under our CFO, it's still incredibly tied into the line of business. However, when we're doing our performance forecasting, budgeting, and tracking of initiatives, to me, that was a really important thing that I want to have a view on all the time.

And so, getting that in line as we make promises to both our colleagues and to the investment community, I don't want to let either side down. And I think this is the best way to get to that point.

Jon Glenn Arfstrom -- RBC Capital Markets -- Analyst

That's helpful. On your listening tour, and maybe, Pat or Chris can add in on this, but what did you hear from commercial customers? Not necessarily on reputation of Associated, but in terms of their level of optimism or bullishness on the growth outlook? And maybe to Pat or Chris, is it much different than it was a quarter ago?

Andrew J. Harmening -- President, Chief Executive Officer

Let me start that one out and then I'll defer it out to Pat, as well. I mean I was with 20 of our customer's last week and what I'm hearing is a general level of increased activity, whether that be thinking about a buyout of someone, whether that's M&A, whether that's thinking about equipment purchases, there is just -- there is just -- it seems to be the beginning of something. So, I believe that we see slight increases in our -- we do see slight increases in our pipelines. We are seeing that slight drawdown on business deposits. We see a slight increase in line utilization. But more than that, anecdotally, I can tell you, it is almost as if there is a pent-up demand that is starting to move. So, anecdotally, those are the conversations that they had and that we've heard. There is, of course, talk about supply chain, but some of them were saying, gosh, we have as much going on right now as we can handle. Now, we want that to improve, but to me that will be additive and that will not stop the recovery.

Pat?

Patrick E. Ahern -- Executive Vice President, Chief Credit Officer

Yeah, I would -- I would agree with that. I think the -- some of the overarching themes we're hearing is demand is outpacing supply. There's a lot of catch-up going on from last year. Obviously, many of our clients still have liquidity and they are, as Andy mentioned, they're starting to deploy that, whether it'd be investment in new technology, equipment, etc. And again, I think like a lot of the country they're dealing with supply chain and labor constraints that are really the only things holding them back.

Jon Glenn Arfstrom -- RBC Capital Markets -- Analyst

Thanks for that. And then, maybe one more for you, Andy. Bigger picture here, but how do you think about the geography of the Company? And I'm thinking about markets like the Twin Cities, Chicago, and St. Louis, which kind of ring the perimeter of your franchise? And then just, they're big markets where you have smaller share and I'm just curious how you're thinking about those markets?

Andrew J. Harmening -- President, Chief Executive Officer

Yeah, absolutely. So look, I'll just do a quick overview. Northeast Wisconsin, we have a strong hold and we have really deep roots and meeting those customers, you feel the presence of Associated, the value of long-term relationships. We want to make sure we maintain those. I moved to Milwaukee and clearly a population concentration. That's why I'm splitting time between Milwaukee and Green Bay, as in-office time. But we expect to do very well in Milwaukee. But with that, you get discipline on the small business side and the commercial side, and to me, those are businesses you can scale without having a massive footprint. So, we would expect on the small business side and the commercial side to compete quite well in Chicago, in Minneapolis. We haven't focused as much on St. Louis, yet, but what we intend to do is show that we can compete in the major markets. Then you look midterm and you build out your digital strategy, and that makes you attractive in every market; rural, urban, large, small. And so, that will be a point of emphasis for us on the midterm.

So that's how we're thinking about it right now. As we get into our growth initiatives and execute on those, I believe that will open up optionality for us, both from a market standpoint and then ultimately, from a scale standpoint, and potentially a second step in the merger and acquisition market.

Jon Glenn Arfstrom -- RBC Capital Markets -- Analyst

Okay. Thanks a lot.

Operator

[Operator Instructions] Your next question comes from the line of Daniel Tamayo with Raymond James. Please proceed with your question.

Daniel Tamayo -- Raymond James -- Analyst

Hi. Good afternoon, guys. Thanks for taking my question [Speech Overlap] Just wondering if you're able to quantify the modest increase in line utilization rates for -- to [Phonetic] a couple of times? And maybe give us a sense for how far below pre-pandemic levels that -- those lines are?

Andrew J. Harmening -- President, Chief Executive Officer

I'll take that. Daniel, this is Andy. We think we hit a trough or bottom, in April. And it was in the very low-30s, 30% on line utilization, and we are up 2% at quarter-end. Now, historically speaking, as we look at that, that's about 10% below what our historic numbers are. So, we think there is room. We are not forecasting a massive increase to that, but modest increase to that. So we're seeing evidence that that will -- that we clearly have room. And we see capacity from our customers of over $7 billion to drawdown. So -- so, we believe that the growth will be steady, slow in the second half, but that will be enough to meet that 2 -- 2% to 4% commercial and CRE growth target that we have out there.

Daniel Tamayo -- Raymond James -- Analyst

All right, terrific. And I guess on just also sticking on the commercial loan growth side, the -- if you have any commentary on what pay-downs looked like in the second quarter relative to prior quarters?

Christopher J. Del Moral-Niles -- Chief Financial Officer, Executive Vice President

Sure. We certainly saw a fairly held-in [Phonetic] activity, but obviously, in our core commercial books, we had a net increase. Right here -- So, for the overall bank, obviously new transactions exceeded all net pay downs. And we had a fairly nice doing [Phonetic] of rollover of the shorter-term loans. So, it was a net positive quarter.

Daniel Tamayo -- Raymond James -- Analyst

All right. Terrific. That's all I had. Thanks, guys.

Andrew J. Harmening -- President, Chief Executive Officer

Thanks, Daniel.

Operator

Ladies and gentlemen, [Speech Overlap] there are no further questions at this time. And I'll like to turn the call back over to Andy Harmening for closing remarks.

Andrew J. Harmening -- President, Chief Executive Officer

Well, in closing, I just want to thank you for joining us today. We look forward to talking to you again later this quarter. If you have any questions for us in the meantime, please don't hesitate to call. And thank you for your interest in Associated Bank.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Andrew J. Harmening -- President, Chief Executive Officer

Christopher J. Del Moral-Niles -- Chief Financial Officer, Executive Vice President

Patrick E. Ahern -- Executive Vice President, Chief Credit Officer

Robert Scott Siefers -- Piper Sandler & Co. -- Analyst

Michael Masters Young -- Truist Securities, Inc. -- Analyst

Terence James McEvoy -- Stephens, Inc. -- Analyst

Christopher Edward McGratty -- KBW -- Analyst

Jon Glenn Arfstrom -- RBC Capital Markets -- Analyst

Daniel Tamayo -- Raymond James -- Analyst

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