Afternoon, everyone. Thank you for being here. Starting our afternoon sessions of fireside chats with Associated Bank, neighboring state rival. I see you're wearing a green tie, but that's more for the bank than,
I thought it was for you.
Okay.
Doing it for you.
Okay. I should have had a purple tie on, but anyway. So Derek Meyer here, Chief Financial Officer from Associated Bank. Appreciate you being here, Ben, as well. And I think you have some prepared comments to start with, and then we'll get into some of the Q&A. And like all of our sessions, if you have questions, just put your hand up and we can get those questions handled.
Yeah. Great. Jon, first of all, thanks for having us here. Since the rollout of our strategic plan in November, we've had a lot of the great things going on. So it's a good opportunity for us to update everybody on how we're doing. First of all, if we think about where the bank has come from, and what's the kind of transition we're going on now, it really started quite some time ago, with a lot of hard work over many years. And the first part of that transition started back after the Great Financial Crisis. And the bank really made a priority out of cleaning up its balance sheet and getting speculative high-risk lending sort of off the balance sheet and focusing on clean credit quality relationships and getting risk controls in place.
So that's a credit towards the prior leadership and all the work they did. It's gotten us comfortable with our balance sheet. It's one of the reasons why Andy was interested in coming to Associated and why I've been interested. So while we're certainly not, it's not clear where the macroeconomy is going and where we are in the credit cycle, we feel really good about where we are with our balance sheet, the risk controls we have in place around credit, and the team managing credit for us. With that being said, it was, it allowed us to then set up phase one of our strategic plan when Andy got here. So when he got here three years ago, he came in with this when we talked about it last year with a growth mindset.
Mm-hmm.
A focus on customer experience and a leadership style that encouraged collaboration and execution. As the team put together the phase one strategy, which was a result of talking to customers, talking to colleagues, talking to the communities, we set the firm up for growth while maintaining a conservative risk culture. At the end of 2023, we end up with a lot of milestones being achieved from that phase one. We had hired a lot of RMs that focused on relationships, not just lending. That helped bring in deposits and loans, while we managed risk. We increased our RMs about 33%. We also rolled out and grew an indirect auto portfolio, a prime, super prime autos, about $2 billion. We also rolled out ABL and equipment lease to complement our relationship lending rather than referring those to other firms and potentially losing customers.
We reworked how we did our marketing and focused on products and segments that customers were interested in and account acquisition and retention. And the results of that, by the end of last year, were a 19% increase in customer acquisition and a 7% decrease in attrition.
Mm-hmm.
So that was very helpful as we thought about as we think about what's going on with deposits. We also replatformed our digital platform, and did it on a platform that allowed us to continuously update our digital presence. And since then, that was September of 2022, we've rolled out 11 additional upgrades and increased our customer satisfaction to a four-year high. We also rolled out mass affluent, which gave us another $730 million of deposits. And we finished up last year, the second half of the year, with 3% deposit growth, which was higher than peers and was really the results across commercial and consumer, of all of our initiatives. So with that being said and tailwinds from that coming into this year, we decided to make additional investments and further accelerate the benefits of our strategy.
So as many of you know from our strategic announcement in the fourth quarter, we went through expense cuts. We freed up about $25 million-$30 million of run rate expenses, 3% reduction in workforce and closed a few branches. We repositioned our balance sheet. So we sold securities, and reinvested those proceeds, sold some of our residential real estate, and paid off FHLB. So that repositioned us in a way that's more consistent with how we're going to grow going forward. And what I mean by that is we now our mortgage company now is primarily an originate to sell with some portfolioing for customer relationships. But we don't have all the third-party origination that we had spent so much time doing. It was low risk but low yield and that's still on our balance sheet.
So this holds some of that off, and then allowed us to warehouse additional funding by paying down wholesale funding.
Mm-hmm.
For future growth. And then finally, we announced what we're doing with all the investments. So we made the expense cuts and we accelerated more hiring of RMs into our metro markets. You know, we've had great success across the state. We're the largest bank holding company in Wisconsin, but we were underpenetrated in our metro markets: Milwaukee, Chicago, Minneapolis, and St. Louis.
Mm-hmm.
So we put out a target of hiring an additional 26 RMs in those markets. We've already hired 12 of them. We allocated upgrading the number of colleagues we have dedicated to our mass affluent strategy for another 40, of which 20 of those we've already got identified and in training. We expect to complete training for those 20 by mid-year. Then additional marketing investments. We have 12 marketing initiatives in flight or planned, an additional four of them have already in flight, and 15 digital and product upgrades, four of which are also already completed. So lots of offense.
Yeah.
We were asked today a couple of times, is this a good time to play offense or defense? Because we feel good about our defense vis-à-vis what we put in place in credit risk management, we are on offense.
Mm-hmm. Okay. And what's the timeline for all of this hiring, this phase two timeline?
All of this is this year, 2024. Then we shared the benefits of these with targets for 2024 and 2025. For example, the incremental RMs would result in $750 million of additional production, loan production out of $2.5 billion of additional deposit production when you roll in mass affluent and all the product and marketing upgrades we're making through Bryan Carson's team.
Mm-hmm. Okay. Good. We're gonna step back for a second, but we're gonna go right back into where we were. But one of the things I like to do is just get a, like a pulse check on the economy in your footprint. You know, we've been to Tennessee in the Southeast today. We've been to Texas, California, Ohio, a company you're familiar with.
Yeah.
Talk about your footprint a little bit.
Yeah.
What we're seeing.
Yeah. Well, things are pretty stable. So the consumer's in good shape. Our unemployment rate's below the national average. And so I think, you know, you have the normal, consumer concerns around inflation and those type of things. But what we're seeing in actual, loan production and payment behavior is what you'd expect, still in an expanding economy. We in the commercial line, we're always a little weak, seasonally at the beginning of the year. So we tend to book a lot of loans at the end of each year, and pipelines, and utilization rates are a little soft at the beginning. But we don't see pessimism. We see a little bit of cautiousness, as business owners are trying to determine whether or not the economy's okay.
And should they make the investment in spite of the hotter for expansion in spite of higher interest rates or not? Now, our plan is not predicated on a lot of expansion because really what we're trying to do is take market share. And we started by taking people share with some of the great leaders we brought over from banks like BMO and U.S. Bank. But you don't see the pessimism on the commercial side.
Okay.
They're looking for when is the time to take advantage of opportunities.
Yep. Okay. Good. That's good to hear. You wouldn't think that if you read the newspaper, but it's a pretty consistent message that we hear.
Yeah.
From the banks. Yeah. Okay. You've talked about mid-single-digit loan growth. Talk a little bit about the sources of that, what could bring you to the higher end or lower end of your loan growth thinking for the year.
Yeah. So one of the important things for us is the opportunity we have on the asset side of the business. So the reason we keep investing in the commercial side where we're underpenetrated is because it provides us an opportunity to rotate out of the residential book, which is very large for us. And so the growth we see is mostly C&I. And with the initiatives I made reference to, it's an incremental from the hires we're making related to these new investments, about $750 million in balances by end of 2025. That offsets what we see as a potential $600 million runoff in resi. So the rest of the growth then is organic growth from our existing initiatives.
Okay. Good. You mentioned mass affluent before, that initiative, and it's been successful over the past few years. Talk to us a little bit more about what that is and where you see it showing up on the balance sheet.
Yeah.
You know.
Yeah. So, mass affluent is where the balances are. And this is really something that Andy, you know, worked on at a couple of his stops, including the last one where I worked with him. But it's a matter of taking your product set and focusing on offering more of to mass affluent customers who are not yet wealth customers. You're not gonna dedicate those amount of resources, but essentially giving them more for bringing more balances over, designing products for that instead of just offering them mass market products, and then training your team to identify and ask for that kind of business and offer a little bit better service. If you don't have that focus, it doesn't happen on its own. People still will a la carte bank instead of relationship bank. So that focus helps.
The other thing that is gonna help us in the evolution of this, one is gonna be designing more products for them, but is also, making sure you have an effective ramp from mass market to mass affluent, but then from mass affluent to wealth. And we hired Jayne Hladio, as you've seen in our announcements, who was a private wealth executive at U.S. Bank and covered many of those states. And so she not only is helping us continue to take what was a very effective private wealth business in northeastern Wisconsin and spread it into the rest of our footprint markets, but also embrace the mass market opportunity and being able to upstream from that to private wealth. So you already have the business model where private wealth works well with commercial. And with our new commercial leaders, that's being enhanced.
But you also have now an end-to-end path for mass market, mass affluent, and private wealth coming through the consumer side of the business also.
Mm-hmm. Okay. Okay. You just said something I hadn't heard you talk about, just the link between private wealth and commercial. Can you talk about that?
Yeah. Well, I think one of the things, if you're a relationship bank and many of the leaders that have joined come from areas where they've invested a lot of energy into this, so they bring this expectation to the table, is you wanna bank a company. And banking doesn't just mean lending, but then you wanna bank their owners and their executives. And that doesn't just mean lending also. It means their deposits and their loans. Well, it's very hard for a commercial lender or a relationship manager who's had a very good relationship with the company and the executives in that company and has built a lot of trust to then hand them over to have someone else handle their private affairs.
That's fun.
Yeah. So what we're seeing now is a lot of energy out of the people that have joined who want that. They've seen it work. They know each other in the market, and they see this as something that really is untapped for us. Everybody knows about it, but actually turning it into opportunities and introductions in the business community is where the excitement is.
That's interesting. I mean, it starts at the top.
Yep.
It has to be cultural.
That's right.
Yeah. Okay. Good. Deposit growth for you, I think, has been stronger than peers. Maybe it's mass affluent. You talked about $700 million in new deposits there. Anything else that you think is driving the deposit growth that you call out?
I think it's honestly, I think it's all of the above. Mass affluent is a piece of it. There's no question about that. But, I can't tell you how much different it is culturally to make the pivot, which we did during phase one of our strategy, to banking the whole relationship. Our credit team, when they have credits brought before them, are interested in the loan pricing. You know, everybody strives for this, but what are the deposits that come with it? Having incentive plans where you actually get paid for the deposits, not just the loans. When we were rebuilding ourselves after the financial crisis and really cleaning up credit in our balance sheet, that was the priority, and perhaps deposits were undervalued. So having that the value placed on deposits now catch up in our evolution is helped quite a bit.
Mm-hmm. Okay. And what are you seeing on pricing for deposits in general?
Yeah. So we've tested. I've shared this before. We've tested our – we tested, particularly on the consumer side, pricing fourth quarter. We, you know, the rate increases, it stopped. We knew there were many banks interested in improving the economics. We thought, well, we'll test the waters, and we lowered our rates. I joked before, no one followed us. And so we took our – I think we took a seven – I think the test in November was we took a seven-month promotional rate CD from 5 to 4.5, and the production dropped in half. So we just put it back to five after a few weeks. And that was that. It – in December, at the end of December, you saw brokered CD rates go down quite a bit, and that was an opportunity. And so we paid off all our FHLB.
We don't consider those core customer deposits, so that doesn't really reflect much on the market. But then later in January, you started to see the big players. And in some markets, it's really been the big banks have had high CD rates, which is not what I've seen before. But you saw them take, say, their 13-month CD specials down, kept the short ones high. But so you saw a little bit of recognition of some of that.
That's interesting. The bigger banks and the bigger markets doing that.
Yeah. It was, it wasn't, again, it wasn't what I expected. That's why we tried to make a move early, thinking they were going to, they were probably already thinking about those moves, and they, they weren't yet.
Okay. So still pretty competitive. Yeah.
Yeah. It's still pretty competitive. Yeah.
Okay. You've done some things to help the margin, though, the restructuring. Can you talk a little bit about what you did? You know, do you view it as a success and anything more you feel you need to do?
Yeah. So what we did was we sold—the number moved around a little bit, but it, you know, $700 million or $800 million of securities and then immediately reinvested them in higher rate securities that were zero risk-weighted asset weights. So you got a little bit of capital release, regulatory capital, and you got much better yields. And we took no interest rate risk. We priced them both the same day. That was in November. Then we, on the same day, priced selling our piece of our resi book, another $800 million or $900 million. We priced it that day, did due diligence through December, and closed on that at the end of December and used the proceeds on that to pay off FHLB. So, we think that helped quite a bit.
As rates have turned out to be higher for longer, since that FHLB rates were variable, if they're gonna stay higher for longer, perhaps the benefit's even better than we expected.
Okay. And any more to do from your point of view?
No. I think we're in good shape, and we can, you know, everything that we've thought about, we've put into our guidance, and pretty excited about the results we're expecting.
Okay. Good. Any updated views on rates? Talk about, you know, the assumptions that you.
Yeah.
You, you know, laid out and with fourth quarter earnings and how you're thinking about it today.
Yeah. So we run all our models off the implied forwards, and our budget and our guidance was based on six rate cuts. I think the ink was barely dry on that, and it was probably already to five rate cuts. And I think I shared already that we'd expect to get maybe 2 or 3 basis points better performance if that's the case. And I think that's still true. The asset side has been fairly stable in terms of forecasting against the rate curve. It's still the deposits. When they're, when's the how are people going to price deposits when the rates change? And that seems to be all over the map.
Mm-hmm. Is there an ideal environment for you in an ideal scenario?
Well, we're asset sensitive, so rates higher for longer is better. I suppose on my wish list, it actually getting rid of the inverted yield curve would be nice.
Yeah.
That's a long ways off, I think.
Okay. Okay. Good. The fee businesses, where are you focused on there? Where do you see the most, you know, opportunity for growth? You don't have, you know, I think you don't have huge fee business aspirations for the year, but, you know, talk about what you expect it to come from.
Yeah. I actually think that's probably a place we haven't mined as much.
Mm-hmm.
In terms of quantifying, where the opportunity is. Part of it is structural. You're not gonna, it's hard to make a lot of money in capital markets off swaps with the inverted yield curve.
Right.
We've switched to an originate-to-sell mortgage business, but there aren't any mortgages to sell, so that's you're not gonna get a lot of new fees from that today, even though in the long run, that's what that does for you. The wealth business, and Jayne's influence on that, along with the team up in Green Bay and who she's bringing to the other markets, it we talk about it as a balance sheet and deposit play. In the long run, that brings you assets under management, which should help. So all of these things, whether it's growing commercial to feed capital markets, switching to originate-to-sell, and more private wealth, all are fee revenue positive, but we haven't explicitly laid out what that means for us.
Mm-hmm. Okay. Good. Good. How do you think about the you have the opportunity to hire good people, you know, kind of phase one, phase two.
Yeah.
It sounds like you're having good success at that. How do you balance that against efficiency, the goal to maybe limit expense growth somewhat? How do you think about that? How do you and Andy balance that in your minds?
Yeah. Well, it starts with that first. I think even this year, you know, our guidance was 2%-3% on expenses, but we knew we wanted to make a lot of investments. We knew we wanted to make those investments because we knew we had a large resi portfolio that we were both selling and gonna let run off, and we needed to replace it with the business with higher yields and that brought some funding with it. So it starts early, and you have to start with a pretty long expense forecast to start deciding where can you either explicitly cut or just stop investing so that you don't have to cut later. So we're already looking at 2025 and 2026 now, and we just closed the books on February of 2024. So it's really trying to have that long view.
It worked for us with this the last couple years. That's how, you know, when I in my prior stop, that's how we worked, and that's how Andy worked. What you started to see culturally, it's expense management is never easy, and it's not a lot of fun.
Right.
But when the leadership team and the colleagues start to believe that you're going to reinvest the money, and they start to see the growth and the energy and the investment in things for colleagues, products for customers, and expansion in the business, then they're much more on board. It's not just an expense death spiral that you're on.
Mm-hmm. Okay. And where do you find the offset in the expense space? You talked about branches a little bit. I know your predecessors trimmed a lot of branches. I mean, that's one example maybe, but where are you finding some of these expense offsets?
Yeah. I think it's everywhere you can. There's been technology opportunities. There's vendor consolidation. There's renegotiating contracts. There's real estate. There's reorging. It one of the things, you know, the first strategy that the leadership team came out with in phase one was based on sort of this listening, getting feedback from colleagues, getting feedback. We, you know, we included communities and all these different sources. But that listening is also where you get your ideas for expense management. We all have sort of the quick toolkit for expense cutting, but when you can get everybody sort of committed to figuring out better ways of doing things, you get a lot more ideas. And so this last round, my own FP&A team was pleasantly surprised at how effective it was relative to its size.
So, it's not a direct answer, but I think I feel good about our process and the way that the team has embraced how to find those things, knowing that part of the bargain at making us the team successful is doing that.
Yeah. Okay. Okay. Good. Another one more expense one, I guess it's kind of an expense question, strategic, but the $100 billion in asset level is kind of the new hot button issue that people wanna hear about. You're a ways away from it, but.
Yeah.
How do you have growth aspirations? How do you think about that, and how do you think about expenses as you get larger?
Yeah. I mean, it feels to me like the magic that that's a better question once you get up to $80 billion.
Yep.
So I think, up till then, we're in a good operating environment, in a good operating spot. And, when we get to $80 billion, maybe the environment will have changed.
Yeah. That's right. And you've been there. You've been there, done that with.
Yeah. I've been on the other side of it, and I'm having a lot of fun right now on this side of it, just saying.
Yeah. I get it. Give us an update on asset quality, what you're seeing. Is there anything new that you wanna talk about there?
Yeah. There's really not. There's obviously lots of headlines about different asset classes, whether you're talking about multifamily or office. And, you know, we're well under 4% on office, well under 10% on multifamily. We don't have the rent control issues. What I would say is, rates have introduced tension into credit, and but we don't particularly see it popping up in any one spot. You know, you're just as likely to have a C&I customer, that you have to work with or work through as you are a CRE customer. So there's not a particular area where we see extra problems, and nothing that's taken it is outside of our long-term 35 basis point charge-off expectation.
Mm-hmm. So really nothing new.
Yeah.
Yeah. Okay. And the commercial real estate piece of it, just to be a little bit more specific, how far ahead are you looking, you know, and what kind of visibility can you get on potential issues there?
Yeah. Well, we look at it so, we've got and on the office piece, we've got about $300 million that renewed this year, and we're looking at all of them. We look at all of them almost quarterly now. And again, you see some tension, but we've stayed far enough ahead of it that when we sat, you know, we sat here, said almost the same thing this time last year, and got through all of the year, in really good shape. So.
Mm-hmm.
Don't wanna take anything for granted, and you've gotta be very front-footed, but it looks very manageable.
Okay. Good. A few minutes left. All right. We can. We'll go to capital and strategic a little bit to end this. Organic growth, I know that's kind of the main preference for you.
Yep.
How do you think about capital allocation, particularly buybacks as well?
Yeah.
In terms of the equation?
Well, right now, it's driven by opportunity. So, with the level of profitability we have and the capital generation we have, it supports the amount of growth that we've got decked up. So there really isn't more if we're gonna get between 4%-6% loan growth, you're really not gonna have more capital available to do anything other than the dividend and support that growth. And at that level of growth, we're improving profitability a lot. So this should start to solve itself by improving our returns as we go forward.
Mm-hmm.
And then actually start to have a more interesting conversation of now we've got enough capital generation to support all the growth we want, and are there other things that we do with the excess capital? But right now, as you've heard Andy emphatically share, you know, we've got more ideas than we do capital.
Yeah. Okay.
Right now, I'm focused on making sure those ideas are profitable ones.
Yeah. So it's an outcome of the model, really, on both sides of the balance sheet.
That's right.
Is what you're.
Yeah.
Yeah, longer term. Okay. M&A, it's an interesting topic. We had a company set up here yesterday that got a deal approved in four months, which was incredible. We had another one set up here yesterday where it's like, we're not sure if it'll get approved. It's a bigger deal. So how do you guys think about it? You've got a nice footprint. You may be light in some markets.
Yeah.
And heavier in other markets. Is that of interest at all to the company? You know, what could be of interest?
Well, it's of interest. It's always of interest, but it's not as interesting in terms of what we do day-to-day as our strategic plan is right now. I don't see M&A make things hard. There might be some places where we'd like to fill in some of the metro markets that we're making investments in, but making the investments in hiring the people I've been talking about seems to be a better option right now and an easier option, and it gets us everything we need in terms of returns. So, again, maybe when the environment changes, we'll move beyond that. But right now, that's, we're not really thinking about that.
Yeah. Your share is, I don't wanna say small in a negative way, but you have a lot of market share potential to take.
Right. That's exactly right. Particularly in those metro markets. I mean, we've really had a great franchise in the legacy parts of the state where we're at, and the customers love us, love our colleagues, and taking that and having that same success in the rest of our footprint is taking hold. And again, is where the excitement is coming from, and that's why people are calling us to join.
Okay. Last call for questions. All right. Any other final points you'd like to make, or feel we've covered it all?
I think we covered a lot. This is, we think this is gonna be a great year, and looking forward to sharing our results.
Okay. Thank you, Derek, for being here.
All right.
Appreciate it.
Thank you.