It's not the end for these guys. They still have meetings afterwards, so this is probably a good break for you, Andy, to get up here and tell the story a bit. And we have Andy Harmening here, CEO and President of Associated, so thank you for being here. Derek has taken a pass, so he's sitting in the front row. He did fill in last year, but I'm happy to have Andy here to tell the story, and I appreciate it. Andy, you've been busy. I know you've got some opening comments you'd like to make. You've made a lot of progress in your tenure as CEO, and why don't you go ahead with your opening comments, and then we can get into some Q&A?
Yeah, sure. So thank you for having us. Derek did a great job last year. In fact, I think there's two to three fewer conferences I'm going to do this year as a result of his skill set. I'm closing in on four years in this role as the President and CEO of Associated Bank, and we are in as good a position as we've been in from the controllables. What we can control entering the year is we've been in for a long time. So I think of that in terms of the foundation, the consumer bank and the commercial bank, and then I think about how that translates into positive operating leverage, expense control, and credit.
And so our outlook for the year being up 12%-13% in net interest income, 0%-1% in fee income, which we think there's probably some upside to that based on current regulatory environment. And then expense control, which has been important. While we've added huge numbers of commercial RMs, our expenses are only forecast to grow 3%-4%. So we always look to cut before we invest. So when we look at that, we've also finished out a restructure of the balance sheet in the fourth quarter, which has gone as planned. And then digging deep into that, the credit piece has been benign. We have a Prime, S uper Prime portfolio, largely in the Midwest that's weathered many a storm and is pretty well situated in terms of if there is a downturn. And then the fundamentals, the consumer bank, we're growing our customer base.
That's a big deal. We're getting deeper into customer base with a mass affluent strategy. We have the highest Net Promoter Score over 50 in our company's history and the highest satisfaction coming into the year, which means attrition's down. On the commercial side, we said we would build out a commercial workforce, and as of the end of the month, we will have increased 25+% RMs, launched a new deposit vertical, and really have promised increased growth, about 50% increase in growth in 2025 versus 2024, assuming kind of similar GDP, similar market conditions.
So I just close it out by saying that the structure of the balance sheet and the profitability look pretty promising as we've gone from before I started to 36% of our balance sheet was residential real estate, and now it's 24%. So that just starts to change the dynamic, and we believe with the focus on C&I and a decrease in mortgage that will continue to pull forward in the years to come.
Okay. Like other sessions, we're open for questions. So if you do have a question, just put your hand up and we'll get a microphone to you. Talk a little bit about the health of the markets. It's been topical. You're obviously upper Midwest primarily. What are you seeing? What are you hearing from clients? Just general assessment of how the markets are doing.
Yeah, well, I know that's a serious question, but for all of you out there, we're headquartered in Wisconsin, and like beer, cheese, and brats, we still have full access to all of those, and we don't have tariffs impacting any of them. That's good news. From the standpoint of, we're a heavy manufacturing area, and so when we think about manufacturing and we're talking to our customers every day, what I would say is there's still optimism about where the economy's going. They're talking about solutions, and what we have heard very, very recently is they feel like they have enough inventory to get through a 30-day period of time, a 45-day period of time without it being a significant issue on the tariff side. We have 3% unemployment in the state of Wisconsin, so a pretty strong economy heading into this.
We do not have large fluctuations in real estate prices, so we didn't go way up. We didn't go way down. We're not impacted by some of the insurance questions that you see on some of the higher risk markets, so very, very stable, and then on top of that, we have a portfolio that the FICO scores are really in the super prime range, so we're not immune. If tariffs would be out there for an extended period of time, every 90 days it goes on, I think that impacts the entire community, but I would say big optimism right after the election that they knew who the president was going to be, it's pro-business. There's still a belief, though, that the president is pro-business in spite of maybe some of the impacts, short-term impacts of the tariff announcements.
Okay, so generally still favorable.
Yes, generally still favorable.
Okay, good. Any change in competition in the lending environment over the last year or so?
Yeah, we've gotten that question a lot. What I deduce from that, we have not seen strong detriment to the pricing that we get on the commercial side or the loan side of our book. We've heard maybe in the Southeast that's been a little bit different in the last 60-90 days, but we've just not seen that in the upper Midwest.
Okay, good. Good. You mentioned your relationship management hires, and maybe talk a little more about the number of hires that you've had and what kind of expectations you have for them and how that translates into loan growth, kind of in the near and medium term.
Yeah, so the mandate when we were trying to grow 25%, get roughly 25 RMs across our footprint was we don't want to just fill seats. We want to get seasoned veterans, people with experience. The first part of that is we hired a leader that came to us from U.S. Bank, managed 12 states for them, and has a following and was very known within his own company, but within the marketplace. So he came on board, immediately brought on a leader within the Twin Cities. So we're getting folks that for that market, they'd both been market president in Minneapolis for U.S. Bank, for Wells Fargo, and they know all the key players. And we're able to fill out and grow that team pretty quickly. And so for us in Milwaukee, it's a market that we're in Wisconsin, but we're not number one in market share.
So we are growing in markets that are fairly flat. And Milwaukee is another good instance of that. We brought in a long-tenured veteran from a strong competitor, and the impact they've had has been almost immediate. So we expect that we'll announce something in the next two weeks with the final team that we'll bring in to the fold before the end of the month, and we'll be complete with that. With regards to how fast they ramp up, I would just say first, we cut to spend. So the reason we've been very even with peers, even as we've increased digital spend and increased RM spend, is that before we make the investment, we find a place to cut and reinvest in resources that are going to grow revenue.
However, on the commercial side, it takes about six months to get ramped up, probably 12 months to get fully ramped up. So we had people that started at the end of 2023, beginning of 2024, second quarter of 2024. So many of them are now at their nine to 12-month period and are fully ramped up. But each quarter as we go along this year, that impact will be noticeable, we think.
These are really its market share gains?
It's absolutely market share gains. We have a long way we can run in Chicago, Minneapolis, and Milwaukee still.
I wanted to ask you about Chicago. What's the strategy in Chicago?
I've known Chicago for a long time. For a bank like ours, unless you're one of the top three or four banks in the country, the retail strategy is going to be very difficult. Small business, middle market is a big opportunity, a really good base in that market. That has been a focus for us. We have a fairly significant team in Chicago that we've had for quite some time, and we've added to that. Probably as we continue on with that, you start with consumer in many markets in Chicago, you're starting with commercial, and you're probably translating that into wealth at some point. We have $15 billion in assets under management. As we go through this year, we'll be thinking more about that, Chicago specific. I think first commercial, and I think private wealth.
Okay, good. When you think about the mix of loan trajectory in 2025, how do you want us to think about Commercial Real estate? It seems like it's commercial-driven growth. What's the story on commercial real estate and your expectations there?
Well, you know there's a lot of prognostication about commercial real estate payoffs are going to be up in the industry, and they are. Production kind of hit an all-time low a couple of years ago, came to a screeching halt and then steadily increased and steadily increased. So we think CRE is a very low, very low single-digit grower for us. If it's 1%-3%, that would be fine. We're not going to push the envelope on that. Payoffs will be significantly up. Production will be modestly up, and the draws on deals that were done in the prior year will be modestly up as well. So all that being said, we're going to be able to deal with some very good properties and have kind of low single-digit growth in CRE.
Okay. And then the $1.2 billion in commercial that you alluded to earlier, it sounds like you're feeling optimistic on that generally.
Well, yeah, I do. Yeah, I do. I mean, you know, it is a lot of work to hire 25 good commercial relationship managers. I think our head of commercial, I mean, that's what he did for a year. [crosstalk] He went around and hired people.
10% commercial growth. So it's a real number.
It's a real number. And we see already evidence in 2024. So the first half of the year, I think we grew about $200 million, second half about $600 million of 2024. So we had already started to see that increase. And that's literally as we started hiring people, we had a very small impact from new hires. First half, we expect a similar split. It's just a typically bigger middle end of the year. But we expect to be higher in the first half of this year than we were in the first half of last year and higher in the second half. And we know that we have hired talent.
We know that we've hired people that have a following, and it's just a matter of time. And we've told them, don't get into bad deals, get into deals, make sure that the market knows where you are. So yeah, I like to tell our head of commercial banking, it's just a math game at this point, isn't it? They don't fully agree with that. They think it's harder than that.
Is it easier to hire now than it was, say, a year and a half or two ago?
Well, it is for me. I was the lead recruiter three years ago. And when you bring in talent at the top of the house, it turns out that people follow them. And so I probably for the first two years, I got involved in almost every recruitment that we had. And frankly, now we have people calling us, and it is a much better situation. We have a story, and that really helps in the market. It's small. Many of the people, many of the commercial bankers know each other. And they know when you get the top person, that's great. When you get the team leader, that's really good.
But where the value is, is when you start to get the relationship managers that don't have to go anywhere, and they know each other. And so for us on the recruiting front, again, nothing's easy, but our story is much better, receptivity is better. And yeah, as I said, we think we'll be fully staffed here in the next couple of weeks.
Good. Do you touch on consumer a little bit? What are you seeing in auto? You feel like that business is properly sized relative to your balance sheet?
Yeah, auto for us was an opportunity. So that was planned right before I got here. I have some experience in that space. The returns have been pretty good. It gives us a lot more flexibility. It's not a 30-year product. It has a duration of maybe three years. And so we're building off a base of zero, and we had some big growth. And the question was, well, are you going to be the auto bank? We're never going to be the auto bank.
At the same time, we had forfeited about $1 billion in production and third-party origination. It filled that gap and gave us kind of control of that portfolio. So the answer to that is we are growing at a decreasing pace every quarter in auto. That will continue for us. We'll probably land that book, get 10%-12% of the balance sheet, and that'll be just fine.
What kind of a pickup in yield are you getting with what's rolling off versus what's coming on?
Yeah, you know the auto piece is really interesting. And two things on this. This is kind of a phenomenal number. So in the month of December, the average FICO for our new customers was 798, 798. I mean, I'm not going to say how many people in this room would qualify. I don't know, but that's a pretty good number. We have seen the captives offering incentives, and that kind of slowed down our business. And we're just fine with that. We don't need to force it. We will continue on. Even if it's a little lower production number, it's still a kind of a slow growth, good return, solid credit portfolio.
Okay. Any comments on the card business, what your aspirations are there?
Card business?
Card business, yeah.
Well, so we have a growing portfolio now. So we had shrunk our customer base by 1%-2% a year for a decade. Then we got to 0%, big celebration. Then we got to 1%. The forecast is to get to 2%. As we do that, the card is in the wallet. We partner with Elan. It's branded Associated Bank. We just thought we should have a little bigger and bigger portion of that portfolio. So we have a significant amount that we actually own the balances of. And when you own a certain percentage of the portfolio balances and you're growing, it's a bigger deal than when you're shrinking.
So we want to be able to have a bigger influence on that and experience the upside. We expect that we're going to continue to grow our customer base. And so strategically, we saw an opportunity at the end of the year to buy into it. And it was a pretty quick payback for us.
Okay. You touched on the balance sheet optimization and the restructuring essentially being done. Anything left beyond the first quarter? Do you have an appetite to do anything more?
I thought you were going to ask if we executed on this one because not all of it's public yet. So maybe I'll just answer the question I wish you would have asked. Is that okay?
I think you said it was done.
It's done.
Yeah.
It was done right well. And we're going to hit the forecast. So our CFO is here, Derek, and he put that together awfully fast in conjunction with the capital raise in the fourth quarter. So the settlement of the mortgages happened about roughly $700 million at the end of January. The pickup that we expected on NIM has pulled through. So if I don't publicly praise him once in a while, it gets harder for me. And so they did a great job really in a very short period of time. With regards to what's next, that's two fourth quarters in a row. This one was out of opportunity. So the capital was there. Prices had just gone up on the stock. We found the pricing of it. People liked our story at the time. We were 8x-9x oversubscribed.
I say that because we weren't planning for that restructure. When we saw that we had an opportunity to cement our capital, ensure that we had capital for the growth that we wanted, at the same time continue that move down on percentage of mortgage that's on our books, particularly non-customer, non-deposit-customer-related mortgages. That was more opportunistic. What I think will happen is, I know will happen over time, is that you have a certain percentage of the portfolio come down.
So what I've said is we're forecasting 5%-6% growth, but we're forecasting that our resi goes down. 5%-6% for us, simultaneous with a balance sheet remix into a higher return asset is a good thing. It might not look like 5%-6% for other people because we are literally each year going to continue to shift that balance sheet and lower the exposure on resi as a percentage of it.
Okay. Can you remind us of the expected benefits to the margin and net interest income?
Yeah, I mean, when all is said and done, and Derek and I were arguing about this as recently as 15 minutes ago. We're discussing this as recently as 15 minutes ago. But the reality is, you know, we had a pickup of roughly 19 basis points from the transaction. We got a couple basis points, I think, from the card purchase. So you know that puts us just under the 3% range. The discussion was what gets us above that. And so you know obviously for us, the conference a couple of times, they did a poll, what's the most important thing for Associated Bank and its return profile slash margin?
Well, we'll get the pickup that we thought from that. And then the question really becomes throughout the year, what is the pressure on deposits? Can we get the growth that we want? That's assuming that you can hit the numbers and control deposit pricing. That's where we'll look to see if we stabilize just under three or can start to move beyond that in the near term.
Okay. You've just answered part of this, but I'll just ask it anyway. The key drivers of the 12%-13% net interest income growth, anything you feel like you haven't covered that we need to talk about?
Well, I mean, we get this asked so many different ways. What happens if you have no growth just from the transaction? And we think we have a pretty healthy lift in 2025 if we didn't have growth, which is certainly not expected.
Not that way.
Yes. So I mean, it's a few things. The things that I watch most closely dependent upon is probably deposit pricing. We want to make sure that the mix shift is done on non-interest bearing. And it sure looks like that. But that's been a drag to the industry for the last two or three years. Obviously, getting the loan growth being at 5%-6%, that will benefit where the margin comes in. And of course, the transaction that we did announced in the fourth quarter, executed in the fourth quarter and the end of January has a big piece of that as well.
Okay. Do you have a preference on the yield curve, short end, long end, anything that would be more?
Yeah, I don't want it to be inverted. I think I probably could agree with almost every banker in here. I mean, getting the change in the yield curve has been a big positive for the industry. Inverted, not great. Upward sloping, of course, allows us to take advantage of our balance sheet. So that's absolutely what we expect, and it allows us to absorb some interest rate cuts on the short end of the curve that are forecasted for the coming year.
Okay. But feels pretty good, that interest income.
Feels fantastic. Yeah.
Yeah. That's good.
Almost makes you forget about tariffs for a couple of days.
That's right. Plus you brew your own beer, I mean.
And cheese.
And cheese. Yeah, that's right. Historically, you've been great on expenses in this 3%-4% expense growth target. I think it's pretty exceptional given all the hiring that you've done. Talk a little bit about some of the puts and takes on expenses. It feels like there's a lot of positive operating leverage that you have for the year. But any expense pressures?
I mean, the question about inflation will come in probably over the course of this year and impact the beginning of next year. But the way that we managed to try to get out in front, so I started in April of 2021, and it was mostly, hey, what can we do to drive revenue? But really, ever since then, we get the budget set, and I immediately asked the question of, okay, so what are the cuts for the following year? Because if you're not thinking of those in April, May, you're not going to achieve them in January, February. So for us, we've had Phase I and Phase II a nd I've asked Derek to let's go through a deeper dive on exactly where we spend, how we spend, what markets we're in.
Let's do that in the second quarter and third quarter of the year because there will be investments that we want to make in 2026, and those investments have to be a trade-off between expense that doesn't drive revenue and expense that does.
How do you typically structure a compensation program for some of the new hires that you're bringing on? Is there a heavy incentive element to that? And is that factored into your guidance?
It absolutely is factored into the guidance, and there absolutely is an incentive component to it. I think for the commercial side of the business in particular, probably one of the biggest changes that we have is we expect to demand ancillary business. If it's just a loan-only situation, that's probably not going to work for us. And the good news is, whether that's an operating account, we have the 12th largest HSA business in the country. We're managing our own retirement plan services and have several billion dollars in that. So there are a lot of different ways that somebody can come into the bank and not just have a loan, and so that's become a requirement. And then by that, we've also created a balanced scorecard for the commercial relationship managers.
Now, we put that into place two to three years ago, but the culture of it really takes a little bit of time, and so today, as we sit, I will say, versus even 12 months ago, so I'll ask our Chief Credit Officer, tell me what you're seeing on deals, tell me about ancillary business, and he said there's been a change in the last 6 months - 12 months. It is more of a, well, we hope to get this at some point too. We let the customer know that we're going to need to have one of these three in order to go forward, and that, to me, is a really good sign. It's led to good growth in our HSA business. Ultimately, what it will do is it will help ensure that we can fund our loan growth through deposit growth in the midterm.
Can it show up in fee income as well?
It absolutely can show up in fee income. I mean, we think that capital markets ultimately will be a positive for us. We've seen kind of double-digit growth in treasury management. Treasury management fee income is nice to have. However, the deposits associated with it, to me, are just as or probably more important from a profitability standpoint.
Okay. On credit, what's your current assessment on credit quality? You've had, I would call it some migration, but you really haven't had elevated losses or anything to be concerned about. How do you want us to think through credit?
We have been historically, and I give my predecessor credit for this, a very conservative bank. And that conservatism is both how you underwrite but how you manage the portfolio. And so we decided to take some steps on the commercial real estate just to tighten up our approach to identification of potential issues. There's debate about that even within our company, is that the right thing to do? However, the only downside of doing this is you increase your CRIT class, which can increase your provision a little bit. If the credits turn out to be solid, then you get your money. The money comes back, flows back to you. So we haven't seen the pull-through. Some on one side would say, well, that makes us wrong.
I'd say it still makes it a good business practice on the CRIT class because we haven't seen it pull through on the non-accrual, on the provision, on the loss side. And our provision continues to be pretty flat to down.
Okay. Good. Just from a strategic point of view, it sounds like you're very focused on organic, obviously. Maybe we get more rational regulation. Maybe we get some easing of some of the restrictions in terms of M&A. Is that of interest to you at all? Is there anything that could make sense to you?
Maybe someday.
Maybe someday.
For us, very clearly, 2025 is about execution. We have spent not just the last 12 months of this phase II of the plan, but we've spent four years creating this foundation, whether that's the digital platform, whether that's the consumer product set, whether that's the balanced scorecard, whether that's asset-based lending, whether that's equipment finance, both those being launched, whether it's the new deposit vertical. So for us, if we execute, excuse me, if we execute on what we have out there, we think that means really good things for our shareholder. That's number one. Once you land that plan and you get the return that you want and the return profile, that gives you options to think about what could be next. But there's zero question that organic growth for us in 2025 is the priority.
Just delivering on what you've said.
Just delivering.
Okay. What are the meetings like with investors? Do you feel like you're getting full credit for some of this optimism?
Those are two different questions. The meetings have been great. We're not getting full credit. But we will if we execute. And so you know I think we saw really our capital raise was interesting because really what it did, it just invited in a lot of long-only investors to our name in a way we hadn't seen before. The interest that we've seen in the last 60 days-90 days is beyond what we've seen in the last three-four years. And so that's encouraging to us. And the message to us is, look, just hit the numbers that you have forecast, and we like the story. However, you can look at the price-to-earnings number and say that we're below the median. And we've been that way a little bit since the liquidity crisis in 2023.
And we think when I say this is a tipping point year for us, a lot of things that happened foundationally that are good. And if we execute and deliver on what those investments have been, I think we'll get the reward that should be out there.
Okay. Any questions from anyone? Okay. Anything else you feel like we haven't covered?
No, I appreciate the opportunity to tell the Associated Bank story. I appreciate the conference. It's been fantastic.
Okay. Thank you very much.
All right. Thank you, John.