Associated Banc-Corp

NYSE:ASB

Earnings Call Analysis

Resilient Performance Amid Economic Headwinds

In the third quarter, Associated Bancorp demonstrated an ability to navigate economic challenges, particularly those arising in the U.S. economy. Despite signs of slowing economic growth, the bank's operations in the Midwest revealed stability, with unemployment in key states like Wisconsin resting at a low 2.9%. This environment has allowed the company to maintain a strong base of prime and super-prime customers, who continue to manage the pressures of inflation and rising interest rates effectively.

Key Strategic Initiatives Driving Customer Growth

The bank has been proactive in transforming its customer experience through a modernized digital banking platform. Enhancements introduced over recent years, such as Grayson, Early Pay, and credit monitoring products, have significantly improved customer engagement. In 2024, the bank achieved record-setting mobile banking satisfaction scores and began attracting higher deposit balances from new customers. The implementation of a mass affluent program is also aimed at strengthening relationships with high-value consumer segments.

Commercial Momentum Building

On the commercial front, Associated Bancorp is actively expanding its team, having added a net of 16 relationship managers (RMs) since September of last year, with plans to reach a total of 26 by early 2025. This expansion is projected to contribute to cumulative incremental commercial loan growth of $750 million and deposit increases of $2.5 billion by 2025. Key personnel have been strategically recruited from other reputable institutions, enhancing the bank's competitive edge in growth markets.

Financial Highlights and Growth Metrics

The bank reported a diluted EPS of $0.56 for the quarter with core customer deposits increasing by over 2% from the previous quarter. Year-on-year core deposits have also shown a consistent 2% growth. The total loan portfolio experienced a modest 1% growth during the quarter, driven mainly by commercial and industrial loans. Overall, total period-end loans grew by $373 million. However, the bank anticipates total loan growth to be at the lower end of its target range of 4% to 6% in 2024.

Revenue Trends and Net Interest Income Expectations

The bank's net interest income (NII) exhibited a slight increase of $6 million compared to the prior quarter, totaling $263 million. The net interest margin (NIM) expanded by 3 basis points to 2.78%. For 2024, Associated Bancorp now expects NII growth to range between 0% and 1%. This cautious estimate is due to anticipated interest rate adjustments and competitive pressures on deposit pricing.

Efficiency and Cost Management

Despite an increase in total noninterest expenses, which reached $201 million, the adjusted efficiency ratio improved to 60.4%. The bank has lowered its expense growth outlook, forecasting a 1% to 2% increase in noninterest expenses for 2024 compared to the adjusted 2023 base. These measures reflect a disciplined approach towards maintaining operational efficiency while investing in growth initiatives.

Capital Adequacy and Credit Quality

Capital ratios exhibited positive trends, with the Common Equity Tier 1 (CET1) ratio ending the quarter at 9.72%, a 33 basis point increase. This positions the bank within its target range of 9% to 10% for 2024. Additionally, the bank has continued to show sound credit quality, with a decrease in nonaccruals and net charge-offs. The allowance for credit losses has been adjusted to $398 million, reflecting a stable outlook on credit metrics.

Looking Ahead: Strategic Guidance and Projections

As Associated Bancorp looks toward future growth, it expects improvements and stability in key metrics. The bank anticipates that customer satisfaction, a growing household base, and the careful recruitment of top commercial talent will position it for continued performance. The bank aims for a 3% annual household growth rate by the end of 2025, with stable financial stewardship guiding its path forward amidst fluctuating economic conditions.

Earnings Call Transcript 2024-Q3

[Operator]

Good afternoon, everyone, and welcome to Associated Bancorp's Third Quarter 2024 Earnings Conference Call. My name is Paul, and I will be your operator today. [Operator Instructions] Copies of the slides that will be referenced during today's call are available on the company's website at investor.associatedbank.com. As a reminder, this conference call is being recorded.

As outlined on Slide 1, during the course of the discussion today, management may make statements that constitute projections, expectations, beliefs or similar forward-looking statements. Associated's actual results could differ materially from the results anticipated or projected in any such forward-looking statements. Additional detailed information concerning the important factors that could cause Associated's actual results to differ materially from the information discussed today is readily available on the SEC website 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 28 through 30 of the slide presentation into Pages 10 and 11 of the press release financial tables. Following today's presentation, instructions will be given for the Q&A 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 Harmening, executive]

Well, good afternoon, everyone, and welcome to our third quarter earnings call. I'm Andy Harmening, and I'm joined once again by our CFO, Derek Meyer; and our Chief Credit Officer, Pat Ahern. I'll start off by sharing some highlights from the quarter. And then from there, Derek will provide a few updates on our margin, income statement and capital trends, and Pat will provide an update on credit. .

At a macro level, the third quarter did bring a variety of data points indicating the slowing of the U.S. economy. But closer to home, we continue to see signs of resiliency and stability in our Midwestern footprint. Unemployment in Wisconsin is at 2.9% and many other Midwestern states are also below the national average. Our prime and super prime consumer base has remained strong, and our commercial clients have largely been able to manage their way through elevated rates, supply chain issues and inflation.

We serve stable markets and in tandem with our conservative approach to credit, that stability has translated to strong asset quality trends again this quarter. Importantly, it has also enabled us to stay squarely focused on the execution of our strategic plan. And now we're seeing several tailwinds start to emerge across our company. On the consumer side, we now have a value proposition that stacks up well against just about anyone in the industry, whether that's a commercial bank or a fintech. Over the past few years, we've completely transformed the customer experience by building out a modernized digital banking platform to make it easier for our customers to manage their money when and where they want.

We've deployed customer favorite product enhancements like Grayson, Early Pay, credit monitoring, and we've launched a new mass affluent program to deepen relationships with the strategically important customer segment. We're going to continue to make enhancements, but we already have what we need to grow in our markets on the consumer side of the business, and we are growing.

We believe we're right on track and importantly, so do our customers. In 2024, we've seen the highest net promoter and mobile banking satisfaction scores on record. We're also growing our customer base for the first time in years and attracting a higher per household deposit balances with these new customers. On the commercial side, we continue to build momentum by adding strong producers in key growth markets. Following the addition of several experienced leaders such as Phil Trier, Neil Reigelman and Michael Levens over the past year, we're progressing on our overall plan to add 26 commercial and business RMs by early 2025.

Earlier this week, we announced the launch of a new specialty deposit and payment solutions vertical focused on deposit-centric industries, such as title and escrow, HOA property management and fintechs. This vertical will be led by Rick Brown, an industry expert, who joins us from U.S. Bank, where he spent the past 18 years of his career. Our organic Phase 2 initiatives are already impacting our financial results. Here in the third quarter, we saw encouraging signs of progress with over $600 million in core customer growth -- core customer deposit growth and nearly $300 million in C&I loan growth and solid core earnings growth.

We have positioned ourselves to outperform in both an improving macroeconomic scenario or in a low-growth market condition. With that said, I'd like to walk through some of the additional financial highlights from the third quarter, beginning on Slide 2. On a GAAP basis, we posted diluted EPS of $0.56 per share. Core customer deposits grew by over 2% from the prior quarter, but they also grew by 2% relative to the same period last year. demonstrating the incremental impact of our initiatives above and beyond the seasonal inflows we typically see this time of year.

This core deposit growth has also enabled us to work down our wholesale funding balances by 2% during the quarter. On the other side of the balance sheet, we've continued to make progress on our efforts to enhance our profitability profile by diversifying our loan portfolio. Total loans grew by over 1%, led by emerging C&I growth and steady production in our order book.

Shifting to the income statement. Our balance sheet growth combined with an expansion of asset yields and a slight decrease in liability costs drove a 3 basis point increase in our net interest margin and a $6 million increase in NII during the quarter. Our revenues were also boosted by a $2 million increase in noninterest income, led by continued growth in wealth management fees. Total noninterest expense increased to $201 million for the quarter, but our efficiency ratio decreased slightly as we continue to diligently manage our expense level while executing on our growth strategy throughout the year.

On the capital front, the stability and expansion of our core profitability profile has enabled us to accrete capital throughout the year. Here in Q3, our CET1 finished at 9.72% a 33 basis point increase from the end of 2023. Underpinning our entire strategy is our foundational discipline on managing credit risk, and we again saw solid results in Q3. During the quarter, our nonaccruals and net charge-offs decreased meaningfully. We added another $21 million in provision and increased our ACL by a basis point.

As always, we remain committed to staying ahead of the curve by taking a disciplined, consistent approach to loan risk ratings so we can better understand credit risk in our portfolio by both segment and geography. We will continue to monitor asset quality closely.

Shifting to Slide 3. We've talked at length about the foundational outcomes from Phase 1 of our strategic plan. And here in '24, we've worked hard to build on the momentum by steadily executing our Phase 2 initiatives. As we sit here in October, much of the consumer product work has already been completed. Specifically, we've continued to roll out quarterly product and service updates that enhance the consumer customer experience and position us to attract, deepen and retain customer relationships. You can see that in the front line, where we've addressed pain points that improve the branch and call in experience. And you can see it in the product set we've added tools to make it easier for customers to manage their money regardless of where they are.

We still plan to make regular enhancements going forward. But the fact is we now have a value proposition that enables us to compete with just about anyone in the marketplace, whether that be the community banks down the street, the large banks in the urban centers or even fintechs. We also remain on track for growth on the commercial side of the company, where we've continued to make progress on our plans to hire 26 commercial and business RMs to support and amplify our growth strategy.

To date, we've added a net of 16 RM since September 30 of last year, and we expect to hit our target of 26 by early next year. The impact of our hires thus far is beginning to emerge in our financial results, and we expect this impact to grow throughout 2025 as the new RMs across our footprint settle in and build their respective pipelines. Taken together, we remain on track with Phase 2, and we continue to expect cumulative incremental commercial loan growth of $750 million, cumulative incremental deposit balances of $2.5 billion an annual household growth of 3% by the end of 2025.

We added Slide 4 to give a more visual snapshot of where we've been, where we are and where we're going as a company. These are the 3 metrics that drive our story. First, our customers are more satisfied. After being named #1 for customer satisfaction by J.D. Power back in April, we're now seeing the highest net promoter in mobile banking satisfaction scores we've ever seen on record at Associated Bank.

Secondly, we've taken a year's long negative household trend and flipped it. to positive in 2024. This sets us up to deepen relationships and drive deposit growth over time. And finally, we're continuing to add top talent to our commercial team. As we've said in the past, this sets us up to drive loan growth, but it also positions us to deepen full banking relationships with deposits and other services like TM. We feel good about our trajectory and look forward to sharing more specifics around our 2025 outlook in January.

With that, I'd like to highlight a few balance sheet trends for the third quarter, beginning on Slide 5 with the loan portfolio. Total period-end loans grew by $373 million during the quarter, and this growth was once again led by our C&I and auto verticals. We look to continue remixing our balance sheet while retaining our conservative approach to credit. As a partial offset to this growth, we saw CRE construction loans decreased by $141 million during the quarter as an elevated payoff trend extended into Q3. We also saw our resi mortgage book decreased slightly from the prior quarter as we continue to diversify the consumer side of our loan portfolio. Across our broader portfolio, we've continued to seek selective growth that emphasizes full banking relationships, quality credit profiles and diversification to deliver improved returns.

With this in mind, we continue to expect total loan growth to land at the lower end of our original range of 4% to 6% in 2024. Moving to Slide 6. We mentioned back in July, we expected deposit growth to ramp up in the second half of 2024. And here in Q3, that trend has played out just as expected. During the quarter, we added over $600 million of core customer deposits, a 2% increase relative to Q2. While the primary driver of this growth was customer CDs, we kept it short, funneling the vast majority of that production through our 7-month CD. And importantly, most of our CD holders are already customers.

77% of active CD holders had a checking account with us in September. This percentage has risen significantly from prior years, thanks to our relationship deepening initiatives. -- such as mass affluent. Those relationship deepening efforts are also visible through growth in other deposit categories, such as DDA and interest-bearing checking during the quarter. The inflow of core customer deposits during the quarter enabled us to work down our wholesale funding by 2%, but the primary driver being a decrease in FHLB advances. We continue to expect core customer deposit growth to finish 2024 at the lower end of our original 3% to 5% growth range. And we remain confident in our ability to attract and deepen quality customer deposit relationships over time.

With that, I'll pass it to Derek to walk through the income statement and capital trends.

[Derek Meyer, executive]

Thanks, Andy. I'll start by discussing our asset and liability yield trends on Slide 7. Despite the 50 basis point rate cut at the tail end of the quarter, we saw asset yields inch higher in all major loan categories, including CRE, C&I, auto and resi here in Q3. largely driven by these trends, our overall earning asset yield increased by 3 basis points during the quarter to 5.68%. On the liability side, interest-bearing deposit costs ticked up by 3 basis points but growth in deposits enabled us to decrease reliance on higher cost wholesale funding during the quarter.

As such, our total cost of interest-bearing liabilities decreased to 3.59%. Moving to Slide 8. The trends I just described netted out to a 3 basis point expansion in our quarterly net interest margin, landing us at 2.78% for the quarter. Our NII came in at $263 million for the quarter, representing a $6 million increase from prior quarter and an $8 million increase from the same period a year ago. Based on our latest expectations for balance sheet growth, deposit betas and Fed action, we now expect to drive net interest income growth of between 0% and 1% in 2024.

On Slide 9, we provide some additional color on the proactive steps we've taken to dampen our asset sensitivity and prepare for a falling rate environment. This process started in late 2021 when we began adding fixed-rate prime and super prime auto loans to our books. As of September 30, the portfolio has grown to $2.7 billion. While we've been clear all along that we don't intend to become known as the auto bank, these balances come at an attractive yield with less prepayment risk or extension risk than mortgages.

In addition, we began layering in a portfolio of received fixed swaps to our books in 2022 to protect against downside rate risk. As of September 30, we maintained notional balances of approximately $2.85 billion. And finally, we've been thoughtful about our funding mix, emphasizing shorter-term durations for contractual funding sources such as CDs and wholesale funding.

As of Q3, we had over $10 billion in obligations set to mature in 1 year or less, which is about 87% of the total. Taken together, these actions have put our balance sheet in a much more neutral position with a down 100 ramp scenario representing about a 1% impact to our NII as of Q3, which has reduced from the 3.4% impact we were modeling in Q4 of 2022. We -- our goal is to maintain this modestly asset-sensitive position going forward.

Shifting to Slide 10. We've continued to manage our securities book within our 18% to 20% target range. With the benefit of rising rates, combined with the securities repositioning we completed late last year, the average yield on our securities book is 50 basis points higher than the same period a year ago. On a dollar basis, both our cash and investment securities positions increased slightly as compared to Q2, and these combined positions now represent 22% of total assets. Over the remainder of 2024, we continue to target investments to total assets of between 18% to 20%. On Slide 11, we provide an update on noninterest income through Q3. We Total noninterest income came in at $67 million during the quarter, which represents a 3% increase from Q2.

On a year-to-date basis, noninterest income continues to track roughly $3 million higher than in 2023. Here in the third quarter, growth trends were primarily driven by wealth management fees, which were up $2 million compared to Q2 in service charges, which were million over the same period. This growth was partially offset by smaller decreases in BOLI mortgage banking and capital markets. We continue to feel encouraged by the durability of our noninterest income in a challenged environment and as such, we continue to expect full year noninterest income to finish in a range of negative 1% to 1% growth as compared to our adjusted 2023 base of $264 million.

Moving to Slide 12. We continue to make ongoing investments to support our growth initiatives, but maintaining our thoughtful, disciplined approach to where we invest those dollars continues to be a foundational focus. In the third quarter, total noninterest expense of $201 million was up $5 million compared to the prior quarter, driven primarily by increases in legal, professional and FDIC assessment costs. Despite the dollar uptick in expenses, our adjusted efficiency ratio actually decreased during the quarter to 60.4%, and our noninterest expense to average assets ratio has remained in line with prior quarters at 1.93%.

These metrics are a reflection of our commitment to keeping expenses in check while investing in our organic growth strategy. With this in mind, we lowered our full year expense outlook. We now expect total noninterest expense growth of between 1% and 2% in 2024, off of our adjusted 2023 base of $783 million. As a reminder, this outlook excludes the $31 million FDIC special assessment expense booked in 2023 Harmening and an additional $4 million of net FDIC special assessment expense booked in the first 3 quarters of 2024.

On Slide 13, we once again saw our key capital ratios increased across the board here in Q3. We saw a 32 basis point net increase in our TCE ratio during the quarter, finishing at 7.50%. This net increase was driven by AOCI recovery and improved profitability, partially offset by asset growth in the denominator. AOCI recovery represented about 27 basis points of benefit. After falling the 9.39% as a result of our balance sheet restructure repositioning in Q4 of last year, our CET1 ratio has steadily climbed throughout 2024 and currently sits at 9.72% as of Q3. The -- this is now the highest CET1 ratio we posted since Q1 of 2022. TCE and CET1 both remain well within our 2024 target ranges as of Q3. Given current market conditions, we continue to expect TCE to remain in the range of 6.75% to 7.75% in 2024.

We also expect CET1 to remain in the range of 9% to 10% over the same time frame. I'll now hand it over to our Chief Credit Officer, Pat Ahern, to provide an update on credit quality.

[Patrick Ahern, executive]

Thanks, Derek. I'd like to start our credit portion with an allowance update on Slide 14. We utilized the Moody's August 2024 baseline forecast for our CECL forward-looking assumptions. The Moody's baseline forecast remains consistent with the resilient economy despite the high interest rate environment. The baseline forecast contains no additional rate hikes, slower but positive GDP growth rates, a cooling labor market and continued deceleration of inflation. Our ACLL increased by another $8 million in Q3 to finish the quarter at $398 million, with an increase in CRE partially offset by a decrease in commercial and business lending. .

The uptick in CRE largely stemmed from some migration into criticized loans during Q3. We do not feel that this increase is an indication of a significant shift in credit stress but rather, it is a reflection of our adherence to risk rating definition guidance, acknowledging shifts in credit profiles. The bank does not view these credits representing risk of loss at this time as reflected in our stable ACL. Altogether, our reserve to loan ratio increased by 1 basis point from the prior quarter and 7 basis points from the same period a year ago to 1.33%.

Moving to Slide 15. We maintain a high degree of confidence in the quality of our loan portfolio with continued solid performance in core credit quality trends. Credit metric changes are reflective of the continued theme of normalization within the portfolio. At the front of the pipeline, total bank-wide delinquencies landed at $56 million during the third quarter. After a downtick last quarter, Q3 is in line with recent trends and historical averages. Further down the line, total criticized and classified loans increased from the prior quarter. As noted earlier, the majority of this increase was driven by a migration within CRE loans Again, we do not feel that this increase is an indication of a significant shift in the credit profile of the portfolio, but rather it is a reflection of our adherence to risk rating definition guidance, which acknowledges shifts in specific credits but does not represent risk of loss at this time.

We continue our ongoing portfolio deep dives and don't see a systemic shift in the CRE portfolio. In fact, we see near-term resolution in many of the noted downgrades. Within the nonaccrual bucket, specifically, we saw balances decreased for the second consecutive quarter to $128 million. We continue to see a steady pace of resolution within these stress credits. Finally, we booked $13 million in net charge-offs during the quarter and $21 million in provision, both of which represented the lowest numbers we've seen in the past several quarters. Our net charge-off ratio decreased by 11 basis points to 0.18%.

Taken together, our credit metrics continue to give us confidence that what we've seen to date is a handful of credits migrating through the rating system and not necessarily a sign of broader issues coming down and future quarters. Overall, outside of these specific situations, we remain comfortable in the normalized level of activity we've seen across the bank. Going forward, we remain diligent on monitoring credit stressors in the macro economy to ensure current underwriting reflects ongoing inflation pressures and labor cost to name just a few economic concerns. In addition, we continue to maintain specific attention to the effect of elevated interest rates on the portfolio, including ongoing interest rate sensitivity analysis bank-wide.

We expect any future provision adjustments will continue to reflect changes to risk rates, economic conditions, loan volumes and other indications of credit quality. Finally, we've provided a refresh of key CRE metrics on Slide 16. In building our CRE portfolio, we focused on partnering with well-known developers and built a portfolio predominantly in stable Midwest markets. 2/3 of our CRE portfolio is based in the Midwest with an emphasis on multifamily and industrial properties. We do not have any exposure to rent control New York City real estate market. Office loans now represent just 3.1% of our total loans as a bank. And within that portfolio, we are weighted towards Class A properties in nonurban environments.

We continue to take a proactive approach to CRE office credits with the majority of those maturing for the remainder of 2024 and into 2025, already having strategies in place, whether that be refinance, sale or qualifying for extensions and prevailing underwriting standards. While we feel well positioned given our business model approach in the markets in, we operate in, we will continue to monitor this and all of our portfolios closely. With that, I will now pass it back to Andy for closing remarks.

[Andrew Harmening, executive]

Thanks, Pat. I'll wrap up by reiterating a couple of key points from our presentation on Slide 17. We -- starting with the balance sheet. We've continued to seek selective loan growth that emphasizes full banking relationships, quality credit profiles and diversification to deliver improved returns. With this in mind, we continue to expect total loan growth to land at the lower end of our original range of 4% to 6% in 2024.

We're pleased with the work that's been done across the bank to attract, deepen and retain customer relationships -- and with the resulting momentum we've seen in foundational areas such as customer satisfaction and household growth. We remain confident in our ability to deliver core customer deposit growth. and we continue to expect our core customer deposit growth to finish 2024 at the lower end of our original 3% to 5% growth range. On the income statement, we've adjusted our most recent forecast for balance sheet growth, deposit betas and rate environment.

Taking these factors into account, we now expect net interest income growth of between 0% and 1% for 2024. We -- we continue to feel encouraged by the durability of our noninterest income in a challenged environment and continue to expect noninterest income growth of negative 1% to positive 1% in 2024 relative to our adjusted 2023 base.

And finally, our disciplined approach to expenses remains a foundational focus for our company. With this in mind, we've lowered our noninterest expense outlook to growth 1%to D of % in 2024 after excluding the impact of FDIC special webcast.

With that let's open it up for question.[Operator Instructions] the queue. from You may start, if you'd like to remove your question from the queue. For participants using speaker equipment and may be necessary to pick up their handset before pressing the arches. One moment please while we poll for questions.

Our first question is from Daniel Tamayo with Raymond James?

[Daniel Tamayo, analyst]

Thank you. Good afternoon, everybody. Maybe first, just on the margin as we think about how we might go forward. Just do you have a table on Slide 9 that shows the funding maturities -- just curious kind of some of the rate pickup opportunities you think on that, especially on the 1-year funding opportunities that you show there, what that might look like? .

[Andrew Harmening, executive]

Yes. So I'll take a couple of things getting a little feedback. Page 9, we put up there on purpose. I mean, we wanted to show our contractual funding obligations really have been contained to 1 year or less. And I think that jumps up pretty clearly. When you think about the 1 year out, we feel like we have a lot of ability to work with a rate increase that is slow and steady. I would say where anybody would get in trouble is or be pressured more on margin would be if you see a big jump quickly. And then you see an inverted rate curve. -- we're not believing that those 2 things will happen. And so with the fact we've been able to remain short.

And then on the CD side, it doesn't even pull up the fact that we have $3.6 billion in customer CDs that are essentially 7 months in duration. When those are renewing, we're getting 90% plus retention on those and we're picking up 100 basis points plus so far. So we feel like we can manage the downward interest rate risk. There are a lot of factors that come into that during the year. We haven't given guidance for next year, but we set ourselves up in a way to be ready for that. And I would say the other thing that Derek has done a very nice job for us is making us less asset sensitive, which is also on Page 9.

And you can see back when I had gotten here, we were very asset sensitive, and we kind of rode that up and then steadily over a couple of years, Derek and his team managed that down purposely where now we think we're very much in line with the industry and with an even playing field, it comes down to execution of strategies.

[Daniel Tamayo, analyst]

And then maybe 1 on the lender hirings where you provided an update as to where you stand now. It looks like there's it looks like it'd be a pretty good jump here in the next quarter or 2 with the kind of the final leg of those hirings, but curious where you stand in terms of where you think you stand in terms of kind of fully baked in opportunities from those lenders for -- from a lending perspective and where that might end up. .

[Andrew Harmening, executive]

Yes. So we gave -- we put at the beginning what our forecast for increased performance would be. Maybe I could share some stats that we haven't explicitly called out -- but when we look up, we're about 17% up in RMs over the past year. What's interesting is we track pipelines greater than 50% probability to close and pipeline is above 50%. Now above 50%, some people might say that's wishful thinking. -- below that. If you have above 50% certainty, you're pretty likely going to close those deals. That pipeline from a year ago is up 18%. And -- so we already see the early -- it's great to hire people. We don't make money by hiring people. We make money by having them get out there, get a full relationship and book it. .

So right now, the category that is the probability of closing above 50% is growing at a rate very similar to what we're seeing in the hiring front. So that's that's pretty impactful to us. We also have hired people that have no solicitations, those expire. We had 1 expire in October. We have 1 expire in November. -- our ability to attract top talent, I'm as confident right now as I have been since I joined this company 3.5 years ago. So I feel quite confident we're going to be able to bring in talent over the next 3 to 4 months and get the entire team net, the net team at a position where we are up 26 RMs. It takes about 6 months for somebody typically to really hit their stride. So we -- I expect the impact from the folks we've already hired throughout the year. We're sticking with what we believe we can get an upside because these folks are talented, and they're bringing their pipelines up at a rate that is quite good. So it's a long answer to a short question, but now we've gone to the second phase which is we've gone from hiring people to seeing a pipeline that has certainty. In this past quarter, we saw a little bit of growth. We expect that, that will continue on even a modest growth marketplace through 2025.

[Operator]

Our next question is from Scott Siefers with Piper Sandler.

[Unknown Analyst]

Andy, I was hoping you might be able to kind of discuss the outlook for the complexion of loan growth in the fourth quarter. I think at least touched on it or a portion of it with the comments about onboarding personnel from earlier this year, but it looks like we need to be just a touch stronger than you generated in the third quarter. So just curious where that will come from? And maybe more broadly, if you can spend a moment on sort of what your customers are saying about appetite to borrow will make get them off the sidelines, et cetera.

[Andrew Harmening, executive]

Yes. Well, you asked a lot in that 1 question. I'm [indiscernible] -- what I would say is every quarter that goes by, if you think about a ramp-up of 6 months, got another quarter for the folks that are here in the commercial team. So that piece of it gives me quite a bit of confidence. We've been able to bring auto loans in at a really nice yield -- and when we're bringing people in last month, I believe, Derek, the FICO was $796, I mean, Derek and I are concerned that we won't be able to get financed. So -- we're really pleased with the quality of that customer, but we're also steadily growing that portfolio going into the rest of the year. We won't accelerate that. But those have been the key drivers.

For us, on the commercial real estate side, it's healthy to get payoffs when people have completed some of their construction projects. So we're down in that category. I actually see that as a good thing for the bank and for the borrower. However, that longer-term rates stayed a little bit high. So we may not see the payoffs in the fourth quarter that we did in the third quarter. That's uncertain. But it looks like if those stay a little high, and we get the yield curve we are seeing now that, that could also lead to a fewer payoffs.

And then finally, when you have situation where you bring in a lot of new people, you do have some people exit. And so we look closely at the portfolio and say, with exits, what credits are we willing to exit. And so we had a few credits that we thought were okay if they exited in the second and third quarter. We feel pretty clean right now. And so we don't think that we would have the payoff volume that we had in the prior 2 quarters either. So you marry a seasoned commercial group with a steady order book and a decrease in payoffs. And that's where we think we instead -- we've stayed pretty steady in the range that we have. But now we've gone to the lower end of [indiscernible].

[Unknown Analyst]

Okay. Perfect. And then maybe, Pat, can you -- would you spend your second kind of expanding on your comments regarding the increase in criticized loans? -- it feels kind of like because there was just a risk rating shift in there. Would that be sort of a onetime step up? Or does that take a couple of quarters to work its way through? How do the sort of pushes and pulls in their work? .

[Patrick Ahern, executive]

Well, as I noted, I think we've circled a handful of those credits that we think are kind of short term, they could see upgrades in the next quarter or -- so we're not overly concerned that there's going to be some continued migration there. These are kind of -- a lot of the things, these are not portfolio-wide. These are more select credits, and it's kind of normal course of business stuff that we're seeing. And I'll point out that in the CRE book, we continue to focus on long-term customer relationships. And these are sponsors we've worked with for many years we remain very confident on how those relationships are stepping up and working with us to address some of these issues. And like I said, there are more kind of normal course of business stuff, and nothing systematic or a big shift within the portfolio. .

[Operator]

Our next question is from Jared Shaw with Barclays.

[Jared David Shaw, analyst]

Maybe just going back to the auto side, the auto growth has been a little lower than I think what you had indicated earlier in the year, but you called out sort of good yields and great credit metrics there. What's causing you to keep that growth rate a little lower than maybe you would -- that $200 million to $250 million range earlier. Is it just trying to build that capital ratio? Or what's sort of the dynamic from keeping you from seeing better growth there?

[Andrew Harmening, executive]

Yes. It's not -- thanks for your question, Jared. It's not the capital ratio. This is a category where we said we want to be prime and super prime, and we want it to fit into the rest of our book, and we don't want to be aggressive -- we've said we don't want to be the auto bank per se. And we want to make sure that we're keeping our outstandings in a range.

For us, as we've seen a little bit slower growth, we don't want it to outpace the rest of the portfolio. However, -- the deals that we're putting on with the 796 FICO and a very nice yield is a very good business. We don't want to dip down in FICO. We don't want to dip down in credit risk on a balanced scorecard, we won't.

And so when demand has gone down a little bit, we could expand our network dealers we haven't aggressively done that to make up for it. We like the pace that we're running at. We like the dealers that we're dealing with. We like this study growth in the business. And frankly, we want our commercial business to ramp up. And that is -- that's the area of focus for us right now where we were trying to get a pivot in the overall portfolio. So as we've seen some softening in the auto sales overall, we haven't felt that we need to press on that to put something -- put additional volume on the books.

[Unknown Analyst]

Okay. All right. And then on the securities portfolio, I mean, Derek, what's the expectation on cash flow over the next year coming from securities? And can you just sort of remind us of what the roll-off yield and roll-on yield is looking like?

[Timur Braziler, analyst]

So we have about $400 million a quarter that rolls off. We're probably putting on $500 million. The differential in what's rolling off and what's going back on is not as large as it was, but it's still probably 25 to 50 basis points. We have a good portion of that still in our held to maturity that's more muni and those aren't rolling off. They're more long-term investment. So we -- but we still think for the next 5 or 6 quarters, you're going to get 3 or 4 basis points a quarter pickup in the total book. .

[Unknown Analyst]

Okay. All right. And then just finally for me, I guess, looking at expenses and maybe looking out into '25, not guidance for '25, but just sort of the outlook with you pulling back the expense growth going into the end of the year, but still bringing on these new hires? How should we think about the trajectory maybe of longer-term investment in the business and is positive operating leverage, something we should be thinking is attainable as we go out over the next year or so?

[Andrew Harmening, executive]

Let me take that one. So -- you said a few things in there. And I will say we don't share guidance for 2025 until January, but a few things with regards to positive operating leverage because you started with expenses, but of course, it's expense and revenue. And and the revenue part of it is really impacted by rate. And so when we think about the first piece of that, we think we've set ourselves up by staying short on deposits.

What we do know going into next year, and I'm particularly happy with is that we have momentum in categories that we need momentum in, in order to drive revenue, and that is customer growth. that is deposit growth that's sustainable. And when you have customer growth with really high satisfaction that leads to sustainable deposit growth. So I feel really good about that heading into next year. We have a commercial book on the deposit side that we rightsized a couple of businesses, we're done rightsizing that. So as we head into 2025, my expectation is to market outperform versus our peers going into that.

And then, look, we have spent a lot of energy getting really good leaders on the commercial side and good people attract good people. And we mix that with a team that was really pretty solid that we already had at the bank with the new folks we're adding that are quality. I don't see anyone that has that combination of customer satisfaction, customer growth leading to deposit growth on consumer and then investment in additional 26 RMs on a base of 90.

And so I find those to be good lead indicators that we're set up to outperform. Now to get to positive operating leverage, we have to understand what happens in the rate cut scenario. And there's no one on this call that knows that. We know that the rates are likely to be cut. We don't know at what pace, at what time. And we don't know what the yield curve will do on that. And I say that those -- the impact of those, they're not just generic loan and deposit impacts, they could impact stuff like the amortization of resi loans that are at a lower rate, which we would love to see. So we're going to get a feel for that, we think, as we go through this final quarter and we'll be set up in a better position to answer that positive operating leverage question. But Jared, you know that's on my mind. Obviously, I could rattle off a lot of things that go into that. That's what our team is discussing what we think the impact of rate. That's probably the biggest unknown because we're tracking every other key indicator going into it.

So we think we're relatively well set up. from a revenue expense standpoint. And I will tell you, we've already -- as we have in every single year, we've actually just wrapped up our expense management tactics going into 2025. So we're ready on that piece down to the line of business at this point.

[Operator]

Our next question is from Jon Arfstrom with RBC Capital Markets.

[Jon Arfstrom, analyst]

One follow-up on Jared's question,, on [indiscernible] the securities portfolio size, should we expect modest growth like we've seen in the last few quarters? Is that the right way to think about it? .

[Unknown Executive]

That's right . Yes.

[Jon Arfstrom, analyst]

Noninterest-bearing deposits, we talked about that a little bit last quarter. I expect them to be a little bit higher, but maybe just Help us understand what's going on there and what kind of an outlook you have? Is that maybe troughed? .

[Unknown Executive]

Yes, I think while we saw a little bit of growth this quarter, it's were -- we're closing in on probably the level that we thought we'd finished the year, maybe it's $100 million to $200 million less than we thought 4 quarters ago, but it it grew this quarter, and we think it stabilized on a nominal dollar amount. We think the rest of the book is going to continue to grow faster going into the next year. So as -- I think I've said before, I think as a percent the industry is going to see a smaller percent of noninterest-bearing, but I don't see it as a risk to earnings like it was at the end of the year and last year. .

[Andrew Harmening, executive]

And I would say, comparatively, if you think about a bank that's growing at 0% on their customer base, checking household customer base for 1 that's growing at 2% to 3%, which is what we expect. And by the way, we haven't been able to enjoy that kind of growth in the past. We went from minus 1.5% to 0 to what we expect 1.5 this year we're forecasting through next year. So -- that plays a positive role when you think about noninterest-bearing accounts and balances. .

[Jon Arfstrom, analyst]

Okay. And then just on the net interest income guide. -- the 0% to 1% when you kind of play around with the numbers, it feels like net interest income is troughing. I know the margin is a little bit tougher. But is it Safe to say that net interest income is likely at a bottom at this point based on what you're seeing.

[Timur Braziler, analyst]

Yes. I think we think, as we look at this year and start to think about scenarios for last -- for next year, that Second quarter, it was our trough.

[Jon Arfstrom, analyst]

Okay. All right. One more, if I can, Pat. I understand you answered the question earlier on criticized. But -- any thoughts on the provision from here? Is this just something that's going to match loan growth and charge-offs? Or is there something telling you, you guys need to continue to slowly build reserves?

[Patrick Ahern, executive]

I think we're pretty solid with where our reserves are right now. And I think we'll continue to watch any movements. But I think loan growth is obviously a factor. So we'll look at that, but we feel pretty good about the reserves right now. .

[Operator]

Our next question is from Terry McEvoy with Stephens Inc.

[Terence McEvoy, analyst]

Maybe if we could start, how is your deposit strategy on non-CD products. How has that changed following last month's Fed announcement and more rates to come? And I asked because I do think of associate as being more of a an offensive bank playing offense. And then how do you see the down rate deposit beta tracking going forward? .

[Unknown Executive]

Do you want to touch on that, [indiscernible]?

[Derek Meyer, executive]

Yes. So the -- so I think what's been pleasing, it might be because of softer loan growth during the quarter. We -- as an industry, we've seen, at least initially, everybody dropped rates pretty aggressively. So that allowed us to do that. We took our rate specials down from 4.5% to 4%, I think we're already moving those down in the next week again. And that seems to be similar to what I see other banks doing. So that's been a positive.

Normally, you see deposits lag quite a bit the first quarter after rates start dropping. Again, I see the industry moving pretty quick, which gives us room from that standpoint. If we think about going into next year, -- we think that the down base are the same that we've shared before, which would be 51% to 56% on interest-bearing, probably 45%, 46% on total deposits. I mean that's looking at this before this first rate cut all the way through next December. .

[Terence McEvoy, analyst]

Perfect. And then a follow-up for Pat. How much should we read into the increase in the construction CRE reserve is up to 3.74%. And was that connected at all to the migration into substandard loans that we've talked about a couple of times. .

[Patrick Ahern, executive]

Yes. In part, it was due to that migration. And then as always, we're always looking at the CRE office book to make sure we're -- that's still playing out in many markets. So we want to make sure we've got enough cushion there just for the future, but it's a combination of both. .

[Terence McEvoy, analyst]

Great. Then maybe one quick on that. The $24 million of wealth management fees, is that a good run rate. The market's been strong. Are there any onetime estate fees or something like that, that can show up in any given quarter? .

[Andrew Harmening, executive]

Yes. No. Look, I'm really pleased with our wealth business. We're just starting to hit the tip of the iceberg with that. The market has been good. That's been a driver of it. However, we're seeing referrals into that at a rate that we've not seen before. And so when you start to grow your customer base, when you create a mass affluent strategy that logically upstreams into private wealth, that's starting to happen. In addition to that, when you add 16 commercial RMs net and then you get to to 26. Those all have business owners and the partnership there has been spectacular. And so they're starting to refer into there. We've had good financial performance there. frankly, in the future. We've had investments in our consumer bank with step 1. We've had investments in our commercial bank. That was step 2. We're going to [indiscernible] here at some point in the future. And -- but in the meantime, we're seeing a really nice trend going into that business.

[Operator]

Our next question is from Timur Braziler with Wells Fargo.

[Timur Braziler, analyst]

Starting with some of the changes on the fund that you saw with the incremental time deposits coming on, the mix shift within the wholesale base. Can you give us some sort of proxy as to where funding costs were at September 30 to help us kind of formulate the starting point for 4Q?

[Unknown Executive]

I'm not sure I -- you mean a spot funding cost estimate -- [indiscernible] I don't have that calculated. [indiscernible] quarter.

[Timur Braziler, analyst]

Okay. So there's just a lot of movement on -- there's just a lot of movement on the liability side. I thought maybe we can get a little bit more detail as to what that did to the pricing dynamic, maybe even just within the deposit base. I guess where were the CDs brought on? Was that at a rate below the 3Q rate? Or how does the [indiscernible] CDs in 3Q [indiscernible]? .

[Unknown Executive]

Yes. I mean, you saw it, we changed pricing all throughout the quarter. So you had -- most of our CD rates were at our specials were at 5%. We took them up above that for a few weeks at the end, and then we took them right down to now they're at 450, and we're taking them to 4 on November 1. So it's been very dynamic from that standpoint. And then you had about half the CD book in the brokered market and all those, we had 4 handles on it in terms of production. So when you see our quarter-over-quarter CD book, it was flat -- we grew it, but the rate was exactly the same the 2 quarters put together. You'll see that on Page 7 of the tables we set out, that was at [indiscernible] both quarters on an ADP basis.

[Timur Braziler, analyst]

Okay. And then I guess just looking at the NII guide, that imply a step up in the fourth quarter. And I get that asset asset sensitivity has been reduced kind of when you extend it out over the next 12 months. But I'm just wondering where the confidence is in NII being able to grow in 4Q given maybe some of the near-term asset sensitivity pressures and the lag that might come on the liability side? .

[Unknown Executive]

Yes. I think our biggest confidence in NII growth and the fact that we think this second quarter this year was the trough is driven by the our strategies. And that -- what I mean by that is the loan growth and the deposit growth, both in improved profitability products, C&I loans versus the resi runoff, core customer deposits versus the wholesale funding. And then the overall growth of the balance sheet is what gives us that confidence. I think if we weren't taking market share and didn't have a plan to take market share vis-a-vis our C&I strategy, it would be harder for us to say that because you just wouldn't have enough balance sheet growth to support the NII outlook we're talking about.

[Timur Braziler, analyst]

Got it. And then maybe another way of asking my first question. Just any thoughts around interest-bearing beta as it sits in 4Q? And then what the expectation is for data on the way down kind of magnitude and time line?

[Robert Siefers, analyst]

No, we don't -- I don't have a quarterly date for you. I think the best guidance would be what I how I answered the question before looking out between before the first rate cut, which would have been August and where we expect our beta to finish in December of next year, I can add that, that would have assumed 75 basis points of cuts yet this year, 100 basis points cut to next year, and you get to a full deposit beta of 46%. .

[Operator]

Our next question is from Chris McGratty with KBW.

[Christopher McGratty, analyst]

Loan betas, I guess, can you just help us on loan betas, your assumptions on the down data for the asset side?

[Unknown Executive]

Yes. So that gets -- I think the easiest thing because that's going to depend a lot on mix. is to -- as we do disclose, it's in the Q, and I don't think it's changed much since the last one, and you'll see it in the new one. Our loan book either reprice or mature -- [indiscernible] of it either reprices or matures within a year. If you take our -- we have a $2.85 billion in swaps, about $1.7 billion of that is against the loans. That would take that 66% at reprice the year down to about 60%. So that offers you some opportunity.

And then if you think of the securities book on top of that in terms of earning assets, you expect those yields. I think I mentioned earlier in the call to trickle up throughout the year. So that can take your overall asset beta below the deposit beta or total liability beta I talked about. You are right -- the challenge is going to be -- is that just how things end next year. And we think that, that gives us the opportunity to expand margin higher at the end of next year than this year, but the path there will largely depend on the aggressiveness in the industry for deposit pricing. And that's why I think a little bit slower growth is probably better for us from a deposit standpoint because we don't think people will be as competitive on deposits.

We still have the advantage of generating our own loan growth because where we have the market share strategy by hiring more C&I relationship managers.

[Christopher McGratty, analyst]

Okay. That's really helpful. The -- I guess maybe a housekeeping. Q4 seasonality on deposits, anything to be aware of? And then also on the securities book, can you just remind us what's fixed floating in that portfolio? .

[Unknown Executive]

Almost all of it is fixed. There's a little bit in terms of the the securities. There's a little bit of FHLBs in there sometimes, but that's -- so I treat that as largely all fixed. And then seasonality for us on deposits tends to be strong. If you look at the back half of last year, we were strong also. I expect that to repeat itself, particularly with the additional initiatives in place. .

[Operator]

There are no further questions at this time.

[Andrew Harmening, executive]

Well, we really appreciate everyone's interest in the questions. We look forward to talking to you soon. If you have a question between now and next quarter, feel free to reach out, and we appreciate your following Associated Banc.

[Operator]

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