Associated Banc-Corp

NYSE:ASB

Earnings Call Analysis

Company Plans Cost Cuts, Loan Growth

The company is reducing expenses by $25 million to $30 million and anticipates 3% to 5% core customer deposit growth and 4% to 6% loan growth into 2024. Net interest income is projected to rise between 2% and 4%, incorporating prospective Fed rate cuts starting in March. Noninterest income is expected to slightly decrease by 0% to 2% against a $264 million adjusted 2023 base. The firm also anticipates a total noninterest expense growth of 2% to 3%, with an annual operating leverage of between -1% and 0% for the upcoming year.

Navigating Through Rate Hikes and Balance Sheet Repositioning

Throughout the challenging economic landscape marked by rising interest rates, the company has strategically repositioned its balance sheet and crafted initiatives to drive durable interest income. This multifaceted approach saw a gradual decline in net interest margin (NIM), with a reduction by 27 basis points in Q2, 9 basis points in Q3, and a mere 2 basis points drop in Q4. The fourth quarter's net interest income (NII) was largely steady, dipping slightly by less than $1 million. These trends indicate a positive response to the repositioning efforts, which are expected to make a fuller impact in the subsequent quarters, suggesting a near stabilization of NIM in the near future.

Financial Forecasts and Yield Improvements

Looking ahead, the company anticipates net interest income growth of 2% to 4% in 2024, based on a projected rate cuts scenario, suggesting an adaptive response to the Federal Reserve's monetary policy. Additionally, there's been a significant rise in the average yield on the company's securities book by 86 basis points, showcasing effective asset management strategies. The composition of the company's asset portfolio remains a focus, with targeted investments in securities and cash intended to stay within 18% to 20% of total assets.

Delivering on both Noninterest Income and Expense Management

Despite one-off losses and adjustments, the company's core noninterest income showed resilience with slight growth, supporting the view of its fee income's durability even amid market challenges. Going into the new year, noninterest income compression is expected to be contained between 0% to 2%. In response to increased investments in organic growth initiatives and strategic hiring, the company projects noninterest expense growth to be moderated at 2% to 3% in 2024. This prudent financial stewardship aims to balance growth ambitions against cost containment.

Capital Adequacy and Credit Quality

Financial fortitude is also reflected in the company's capital position, with tangible common equity (TCE) ratio seeing an improvement and common equity tier 1 (CET1) ratio well within its target range, even after the balance sheet restructuring. Projections for TCE and CET1 ratios for 2024 have been maintained to accommodate current market conditions. Credit quality remains robust, with overall positive signs in core metrics and a disciplined focus on managing the credit portfolio in line with economic headwinds, ensuring prudence in provisioning for 2024.

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon, everyone, and welcome to Associated Banc-Corp's Fourth Quarter 2023 Earnings Conference Call. My name is Diego, 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 29 through 31 of the slide presentation and to Pages 10 and 11 of the press release financial tables. Following today's presentation, instructions will be given for the question-and-answer session.

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

[Andrew Harmening, executive]

Well, good afternoon, everyone, and welcome to our fourth quarter earnings call. I'm Andy Harmening, and I'm joined here once again by Derek Meyer, our Chief Financial Officer; and Pat Ahern, our Chief Credit Officer.

I'd like to start by sharing some highlights for the fourth quarter and then 2023 as a whole. From there, Derek is going to send an update on margin, income statement and capital trends, and then Pat will provide an update on credit quality.

Now it's safe to say that 2023 was an extraordinary year for regional banks. From rapid interest rate hikes to credit concerns, to all our bank failures, the industry is forced to grapple with new challenges that created uncertainty in the first half of the year.

Here at Associated, we weren't immune to the volatility that impacted the regional banking group as a whole, but we weathered the storm through decisive actions that bolstered our liquidity and communication that was transparent with our customers. Importantly, we also remained forward-looking as this enabled us to pivot quickly and maintain momentum with our strategic plan. Over the course of the year, we reached several important milestones on our Phase 1 initiatives.

We reached nearly $700 million in combined balances in our asset-based lending and equipment finance verticals. We surpassed $2 billion in outstandings in our prime, super-prime auto book and expanded the business within our home footprint.

We launched a new brand campaign, made several product enhancements and sharpened our digital sales capabilities, driving a 19% increase in consumer checking household acquisition and a 7% decrease in attrition. We continue to punch above our weight in digital, launching 11 major platform upgrades and achieving a 3-year high in consumer digital customer satisfaction scores.

We maintained strong momentum in mass affluent, where we added over $730 million in net new deposits since launch at the end of 2022. And all these efforts helped us grow our core customer base by over 3% in the back half of 2023, with growth in both our consumer and our commercial segments.

To further build on this momentum, we announced a multifaceted second phase of our strategic plan in November, addressing expense control, organic growth and balance sheet repositioning simultaneously. The expense cuts and repositioning were completed in the fourth quarter. Multiple leadership positions have already been filled with top industry talent, and [ RM ] hiring is ahead of schedule. Simply put, we are on track.

Now as we look at forward macro questions that remain with regards to the economy and credit and geopolitical landscape, closer to home, however, we're confident in our markets, where unemployment rates in Wisconsin, Minnesota and several other Midwestern states remain below the national average of 3.7%.

We're confident in our Associated Bank team, who have consistently proven that they can drive best-in-class service while continuing to bring new ideas to life. And we're confident in our plan that promotes growth and diversification to enhance our profitability without abandoning our foundational discipline on credit and expense management.

With all these factors coming together at once, we are well positioned to deliver enhanced value to all stakeholders in 2024 and beyond.

With that, I'd like to walk through some highlights from the fourth quarter as well as the full year 2023, starting on Page 2, Slide 2.

On a GAAP basis, our fourth quarter results were impacted by onetime items tied to the balance sheet repositioning we announced back in November and the FDIC special assessment that was finalized during the quarter. After excluding these onetime items, momentum of our core business was reflected through adjusted earnings per share of $0.53.

During the quarter, we continued to transform our balance sheet by executing on initiatives that helped us lower our funding costs and improve our liquidity position while improving earning asset yields. On the funding side, our focus remains squarely on growing core customer deposits.

After growing these core customer deposits by 2% in Q3, we add an additional 1% growth in Q4, with growth once again coming from both the consumer and commercial sides of the business. All in all, we grew core customer deposits by over $800 million in the back half of the year as we continue to realize the impacts of our customer acquisition and relationship-deepening initiatives.

We also added broker CDs during the quarter as a way to replace FHLB advances. These actions and business results led to an overall decrease in our wholesale funding of 9%. Within our loan portfolio, our fourth quarter results were skewed by the $969 million in mortgage loans we sold toward the end of the quarter. But on an adjusted basis, we were essentially flat for the quarter.

On the consumer side, we continue to see steady growth in our prime, super-prime auto book. This was offset by a decrease in our commercial portfolios, which was primarily driven by a decrease in Mortgage Warehouse balances. While commercial loan balance growth slowed in the back half of the year, we still saw loan balance growth by 5% relative to 2022 on an adjusted basis.

Moving to the income statement. Funding cost pressures have lingered in this dynamic rate environment, but this pressure has continued to abate each quarter. Here in Q4, our net interest income was essentially flat versus Q3, and our NIM decreased by just 2 basis points. Due to the mid-quarter timing of our Q4 balance sheet transaction, we expect to see full benefit from our asset sales beginning in Q1 of 2024.

Regards to noninterest income, our GAAP number is impacted by onetime items tied to our balance sheet repositioning during Q4. But on an adjusted basis, we saw another slight quarterly increase. Taken together, despite the significant funding cost pressures the industry experienced in 2023, we were still able to grow our total adjusted revenue by 5% for the year.

In 2023, we are once again able to demonstrate an ability to control our expense run rate by identifying cost saves in underperforming areas and redirecting those funds into targeted investments that help us grow our customer base, deepen relationships and enhance our profitability profile. We did see a slight uptick in personnel expense late in the year, but that was largely driven by the acceleration of our previously announced hiring plan through our initiatives.

As we execute on our growth strategy, our conservative credit culture remains foundational, and we've continued to monitor asset quality closely. In Q4, our NCO ratio decreased 4 basis points and our ACLL ratio increased by 6 basis points. We continue to see modest signs of a gradual normalization to pre-COVID levels but have not yet seen indications of broader issues impacting specific industries or geographies.

Now, with several extraordinary items impacting our financials during the fourth quarter, we provided a detailed breakdown of EPS impacts from notable onetime items on Slide 3. These items can be summarized into two categories.

First, the balance sheet repositioning we announced during the quarter impacted our income statement through a $133 million net loss from the sale of mortgages and another $65 million net loss on the security sale we completed. Combined, these losses impacted our GAAP EPS by [ $1.30 ].

Secondly, the FDIC special assessment added $31 million to our noninterest expense during the quarter, which further impacted GAAP EPS by $0.20. Net of tax, our EPS came in at a positive $0.53 for the quarter. This adjusted number underscores the strength of our business, gives us confidence that we're on the right path with our strategic plan. And importantly, it sets us up for continued success in 2024.

On Slide 4, we provide a bit more context for why we're bullish heading into 2024. As we've discussed previously, the first phase of our strategic plan announced back in 2021 was about laying the foundation through the addition of new loan verticals, new relationship-focused deposit gathering initiatives and the launch of an open-architecture digital platform that enables us to control our own destiny.

Through these efforts, we've proven that we can execute as a company by driving diversified loan growth, riding the ship on the multiyear pattern of household attrition and achieving 3-year highs in digital customer satisfaction.

The second phase of our strategy is designed to build on our momentum and position us for the future success of the company. This plan was dynamic, in that it enables us to address expenses, enhance organic growth and accelerate balance sheet repositioning inorganically, all at the same time.

We knew we need to start by managing expenses, and we did, by identifying and executing on $25 million to $30 million expense run rate reductions, including a 3% reduction in force, around the branch closures and additional spending cuts. These actions, while difficult, set us up to reinvest dollars into initiatives that will help us accelerate household growth, deepen relationships, remix our balance sheet and improve our profitability profile.

During the fourth quarter, we also completed a sale of mortgage loans and securities designed to further accelerate the financial benefits of our organic initiatives by disposing of low-yielding assets and high-cost funding. We sold nearly $1 billion of low-yielding mortgages and nearly $800 million of securities, enabling us to free up funding capacity and reinvest at higher rates.

Now, successful execution of any strategy hinges on having the right talent in the right places. And we've made significant strides in bolstering our leadership team with top talent across the Midwest, who align with our culture and have a skill set to drive our plan forward.

As our plans picked up steam in the marketplace, we're seeing that the message is resonating, not just for our customers or our existing colleagues, but for the others in the industry, who have started to view Associated Bank as an employer of choice.

That's how we've been able to grow our RM base by 33% since 2021, and it's how we've been able to add talented leaders across key business segments in the past 12 months. Attracting top talent is the first step towards execution, and it's clear, we're off to a strong start.

Moving to Slide 6. The second wave of organic initiatives we announced back in November, are on track. In fact, in some cases, we're ahead of schedule. In the 2.5 months since we made our announcement, we made significant progress adding commercial and small business RMs throughout our footprint.

We've also already launched several marketing, product and digital initiatives, designed to drive customer acquisition, relationship deepening and retention. We expect to continue to roll these enhancements out as a steady cadence throughout 2024.

Taken together, between the success we've seen in Phase 1 of our initiatives and the progress we've already made in Phase 2 of our initiatives, we're well on our way down the path to building a higher return profile for our company. That's what gives us confidence as we get into 2024 and beyond.

With that, I'd like to highlight a few balance sheet trends for the fourth quarter, beginning on Slide 7. As we've discussed previously, the first half of 2023 was marked by [ industry-wide ] volatility and an ongoing battle for deposits.

These dynamics combined to drive significant funding cost pressures and forced banks to rethink their funding strategies. While we're not immune from this volatility at Associated, we saw meaningful stabilization of balance flows and cost pressures in Q3. And that stabilization carried forward into Q4.

In this more stable environment, the impacts of our relationship-focused deposit gathering initiatives, we're seeing much more clearly throughout the back half of the year.

After growing core customer deposits by 2% in Q3, we saw incremental core deposit growth of another 1% in Q4. In both quarters, we saw net growth in both consumer and commercial loan balance -- commercial deposit balances, demonstrated the broad-based impact of our deposit gathering efforts. During the fourth quarter, we also did flex into some brokered CDs as a means to help pay down FHLB advances, which decreased by $1.8 billion during the quarter.

As a reminder, our strategy is to fund our loan growth primarily with customer deposits. We expect to hold wholesale network funding levels in check as we move through 2024. And we remain confident in our ability to fund our growth at a reasonable cost, going forward, based on our initiatives.

On Slide 8, we show an annual view of our deposit trends. We've consistently grown our average annual deposits as our balance sheet has expanded over the years, and '23 was no different. With that said, our 2023 annual deposit numbers clearly demonstrate a mix shift from noninterest-bearing products into higher-yielding savings and CD accounts.

This dynamic reflects the impact of the rising rate environment and the period of volatility we saw in the first half of the year. And as mentioned, however, the back half of the year pulled a different story. With our core customer deposit -- while our core customer deposit strength by 2% during 2023, they grew by over 3% in the back half of the year.

On Slide 9, you'll see our deposit growth has come as a direct result of initiatives. Our deposit initiatives are designed to attract new customers, deepen existing relationships and enhance retention. Throughout 2023, we've seen proof points confirming we're on the right track across the bank.

As of the fourth quarter, our consumer household acquisition rate was up 19% versus the same period a year ago, and our attrition was down 7%. For the full year, our household levels were essentially flat, but we consider this a key turning point for household growth as it comes on the heels of multiple years of shrinking total households.

Digital has also been instrumental in our success, and we continue to make regular enhancements to our offerings after a very-busy 2023. Recent launches include an upgraded digital platform for commercial customers and a tool that provides easier switching for new checking customers.

Finally, since launching our new mass affluent strategy, we've added over $730 million in net new deposits in this segment during 2023, more than doubling our full-year goal. This growth represents a roughly 14% increase from our prelaunch baseline.

In the face of a very challenging environment in 2023, we've steadily continued to execute this plan with proven results. In 2024, we expect to drive core customer deposit growth between 3% and 5%.

Moving to Slide 10, we highlight our loan trends through the fourth quarter. On a quarterly average basis, loan balances grew by $68 million, but they decreased by $977 million on an end-of-period basis, a reflection of the $969 million mortgage loan sale that settled towards the end of December.

On both an average and period-end basis, Q4 loan growth was led by our auto finance business, where we continue to steadily add prime and super prime balances to our book. As a reminder, we do not intend to become disproportionately reliant on auto loans. But we view this portfolio as a means to diversify our customer book with high-quality, yield-friendly loans without stretching on credit.

On the commercial side, we saw growth from our utilities business offset by net outflows in other verticals, including Mortgage Warehouse and general C&I. Within the C&I bucket, the quarterly outflow was primarily driven by a subset of lower-quality credits strategically moved out of the bank at par.

Across our broader portfolio, we continue to seek selective growth that emphasizes relationships, quality and diversification while delivering accretive returns. This enables us to deemphasize lower-yielding, non-relationship asset classes over time.

On Slide 11, we show loan trends on an annual basis. Average annual loans grew by $3.3 billion in 2023, a trend that reflects the torrid pace of broad-based loan growth we saw in the back half of 2022. Point to point, we grew total loans by over $400 million during 2023. And that 1% growth figure is inclusive of the $969 million in mortgage balances that were pulled off our books in December. Excluding that sale, we saw total loan growth of nearly $1.4 billion or 5% for the year.

Consistent with the rest of the industry, it's clear that lending activity is slow going into the end of the year as our customers took a more cautious approach in the uncertain macro environment.

With that said, we've continued to see encouraging signs of activity in our markets. We also expect to benefit over time from the key leaders in RMs, we've already hired throughout our footprint as they get up and running. Taking into account the current lending environment and the anticipated impacts of our initiatives, we expect to drive total loan growth of 4% to 6% in 2024.

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

[Derek Meyer, executive]

Thanks, Andy. I'll start with our asset and liability rate trends through the year-end on Slide 12. While Fed funds rates stabilized in the back half of 2023, our total asset yields have continued to rise due to our remixing loan book and the repricing nature of a large segment of commercial loans.

Since the fourth quarter of 2021, total earning assets have increased by 292 basis points or roughly 56% of the increase in Fed funds target rate over the same period. This trend has been led by rising yields in commercial, CRE and auto, respectively.

On the liability side, it's no secret that rising rates, liquidity pressures and a mix shift in customer deposits combined to create significant funding cost pressure for the industry in the first half of 2023.

In the back half of the year, however, these trends stabilized meaningfully at Associated. In aggregate, our interest-bearing liability costs have now increased by 328 basis points since the fourth quarter of 2021 or roughly [ 62% ] of the move in Fed funds target. Our interest-bearing deposit beta has now climbed to roughly [ 59% ] since the start of the rate cycle.

On the left side of Slide 13, you can see clear evidence of this stabilization pattern in our net interest income and net interest margin trends. Our NIM decreased by 27 basis points in Q2, 9 basis points in Q3 and only 2 basis points here in Q4. On a dollar basis, our Q4 NII was essentially flat, decreasing by less than $1 million during the quarter. While it's true that this flattening effect was a function of the stabilization I described previously, we also received partial benefit from the balance sheet repositioning we announced during Q4. Because the sale of mortgage loans did not officially settle until late December, the benefit we saw was primarily driven by the securities sale and reinvestment that settled in November.

Assuming both transactions were completed at the beginning of Q4, this would have represented approximately 11 basis points of incremental lift to our NIM during the quarter. We expect the full impact of our balance sheet repositioning to take hold here in the first quarter. As we've discussed throughout the year, however, we're not relying solely on the rate environment or balance sheet repositioning to dictate our earnings, going forward.

Our organic initiatives are designed to improve economics on both sides of the balance sheet to drive more durable interest income in future quarters. Whether it's adding high-quality customer loans, attracting and deepening core customer deposit relationships or layering in interest rate hedges, these actions have been designed to enable our company to achieve a higher level of profitability through the cycle.

Altogether, the funding cost pressures from elevated rates and mix shift have slowed to a trickle, but they haven't stopped completely. As such, we've not yet called the bottom on our NIM that we believe we're nearly there.

Based on our current expectations for balance sheet growth, deposit betas and Fed action, we expect net interest income growth of between 2% and 4% in 2024. This guidance assumes 625 basis point Fed rate cuts throughout the year, beginning in March.

On Slide 14, we continue to manage our securities book to remain within our 18% to 20% target during the fourth quarter. With benefits of our securities repositioning starting to take hold in Q4, the average yield on our securities book is now risen by [ 86 ] basis points since the same period a year ago.

We also leveraged the securities repositioning as a way to build our cash position during Q4. Largely as a result of the macro rate improvements we saw during the quarter in our securities sale, we saw a meaningful improvement in our AOCI in Q4. After adjusting our CET1 capital ratio to include the impacts of AOCI, this impact would have represented a [ 52 ] basis point hit to CET1 in Q4.

The spread of this impact narrow significantly when compared to Q3. As a percentage of total assets, our investment security and cash positions grew to roughly 21% during Q4. For 2024, we will continue to target investments to total assets of between 18% to 20%.

Our noninterest income trends are highlighted on Slide 15. As Andy mentioned, our GAAP results reflected a net loss for the fourth quarter. And this loss was driven by onetime items tied to the balance sheet repositioning we announced in November.

Specifically, we recognized a onetime $136 million loss on the sale of mortgages and another $65 million loss on the securities sale. Adjusting for these results, our fourth quarter noninterest income came in at $70 million, representing a slight increase for the fourth consecutive quarter.

Our underlying results were primarily driven by a $6 million gain on the sale of vis-a-vis shares, along with increases in wealth management, capital markets, BOLI and other income. These results were partially offset by a $5 million decrease in mortgage banking fees and a $2 million decrease in service fees.

Taken together, we view our core trends as evidence of durability in our fee income in a year that was challenged by market dynamics and changes to fee structure. As we look to 2024, we expect noninterest income to compress by 0% to 2%, as compared to our adjusted 2023 base of $264 million.

Moving to Slide 16. Our fourth quarter expenses were also heavily impacted by a onetime item. The special assessment finalized by the FDIC during the quarter resulted in a $31 million expense added to our results. Excluding this one item, our adjusted noninterest expense came in at $209 million in Q4.

The bulk of the quarterly increase stemmed from investments in our organic initiatives. Of note, severance associated with the reduction in force we announced in Q4 in tandem with an acceleration of hiring drove a $4 million increase in personnel expense for the quarter.

As Andy mentioned, we've seen strong momentum in the hiring of talent, whether filling key leadership roles or adding commercial bankers through our footprint. Thanks to a strong candidate pool and a growing view that Associated as an employer of choice in the marketplace, we've been able to pull our hiring plans forward.

This acceleration did drive an increase in Q4 expense, but it also positions us to accelerate execution on our strategy. For the full year 2023, our adjusted noninterest expense came in at [ $783 million ].

While we continue to invest in our strategies to support our growth aspirations, we are committed to keeping expense growth in check over the long term. On an ongoing basis, we will continue to review our expense base and optimize where possible. With that in mind, we expect total noninterest expense growth of between 2% and 3% in 2024 off of our adjusted 2023 base of [ $783 million ]. We also expect annual operating leverage of between negative 1% and 0% in 2024.

Shifting to Slide 17, we saw a 23 basis point improvement in our TCE ratio during the quarter, finishing the year at 7.11%. Our regulatory capital levels fell slightly as a result of the balance sheet repositioning we announced in Q4, but our CET1 ratio still remains well within our target range at 9.39% as of 12/31.

Given market -- current market conditions and the expectations for short-term rates to remain elevated in the near term, we expect TCE to remain in the range of between 6.75% and 7.75% in 2024. We also expect CET 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 us an update on credit quality.

[Patrick Ahern, executive]

Thanks, Derek. I'd like to start with an allowance update on Slide 18. We've utilized the Moody's November 2023 baseline forecast for our CECL forward-looking assumptions. The Moody's baseline forecast remains consistent with a 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 $5 million during the quarter to $386 million. Our allowance continues to be driven by loan growth in select areas such as auto, nominal credit movement and general macroeconomic trends that reflect the stability of our Midwest footprint.

As such, our reserves-to-loan ratio increased by 6 basis points versus the prior quarter and by 10 basis points versus the same period a year ago, landing at 1.32% in Q4. Note that the loan sale and the corresponding portfolio reduction contributed 3 basis points of the 6 total increase or a 1.29% adjusted from 1.26% in Q3.

Moving to Slide 19. Our portfolio has largely continued to hold up well, as evidenced by our core credit quality trends. During the fourth quarter, we saw net decreases in nonperforming assets, nonaccrual loans and charge-offs.

We did see a slight uptick in our delinquent loans during ratio during the quarter. This increase from recent levels was primarily focused within a few credits managed by our special loan group. As with many workout credits, negotiations can be prolonged, and the resolution for most of these credits did not take place until after year-end.

Overall, outside of these specific situations, we remain comfortable in the normalized level of delinquencies around the bank. Also impacting this ratio is the mortgage sale we completed in Q4, reducing the denominator by the $969 million, this sale represented about a 1 basis point of impact.

In Q4, we added another $21 million in provision, a $1 million decrease from the prior quarter. The decrease was the result of a $3 million release from mortgage sale, partially offset by a build from limited credit movement and macro trends.

As we shift into 2024, we remain focused on monitoring the uncertainty in the macro economy to ensure current underwriting reflects the elevated inflation, supply chain disruption and labor cost, to name just a few economic concerns.

In addition, we continue to maintain specific attention to the effects of elevated interest rates on the portfolio, including ongoing interest rate sensitivity analysis bank-wide. Going forward, we expect any provision adjustments to continue to reflect changes in risk rates, economic conditions, loan volumes and other indications of credit quality.

Finally, as we've done in prior quarters, we've provided a refreshed set of key metrics for our CRE portfolio on Slide 20. As we've discussed, our conservative approach to credit has been optimized over the course of the past several years, as we've built a diverse portfolio of high-quality commercial loans across our portfolios and a focus on prime and super prime consumer portfolios.

While CRE continues to be cited as an area of risk in the industry, we feel well positioned, given the conservative approach we've applied across the bank.

In building our CRE portfolio, we've focused on partnering with well-known developers and built a portfolio predominantly in stable Midwest markets. Over 2/3 of our CRE portfolio is based in the Midwest, with an emphasis on multifamily and industrial properties. Office loans represent just 3.26% of our total loans as a bank. And within that portfolio, we are weighted towards non-urban Class A properties. The uptick in delinquencies were some of those same special loan group credits referenced earlier.

We continue to take a proactive approach to CRE office credits, with the majority of those maturing in the first half of 2024, already having strategies in place, whether that be refinanced sale or qualifying for extensions at prevailing underwriting standards. While we feel well positioned given our business model approach in the markets we operate in, we continue to monitor this in all of our portfolios closely.

With that, I will now hand it back to Andy to share some closing thoughts.

[Andrew Harmening, executive]

So I'll close out our formal presentation by reiterating a couple of key points from our presentation on Slide 21.

First, our strategy is designed to drive quality, relationship-focused loan growth that decreases our reliance on lower yielding, non-relationship balances and enhances our profitability profile. Based on the expected benefits of our plan and the current macro outlook, we expect total loan growth of between 4% and 6% in 2024. On the other side of the balance sheet, the deposit environment is much more stable than it was just 6 months ago, but it remains competitive.

Coming off 2 straight quarters of core deposit growth gives us confidence we're on the right track with our initiatives, and we expect to benefit further as Phase II initiatives ramp up. As such, we expect core customer deposit growth of 3% to 5% in 2024.

Shifting to the income statement. We adjusted our most recent forecast for balance sheet growth, deposit betas and the rate environment. Our current forecast assumes 6 Fed rate cuts beginning in March. Taking all these factors into account, we now expect to deliver net interest income growth of between 2% and 4% in 2024.

And lastly, our disciplined approach to expenses remains found -- a foundational focus for our company. While we'll continue to seek smart investments for organizational growth, we will look to offset those costs where possible by shifting dollars from underperforming areas. Taken together with current marketing conditions, we expect noninterest expense growth of 2% to 3% in 2024.

With that, let's open it up for questions.

[Operator]

[Operator Instructions] Our first question comes from Daniel Tamayo with Raymond James.

[Daniel Tamayo, analyst]

Thank you. Good afternoon, everybody. Maybe just starting with a clarification on the margin guidance, first. When you say you're not calling a bottom on the NIM, but it could move down slightly. I'm assuming you're taking into account the 11 basis point benefit of the restructuring in like a pro forma NIM before that? Or is it -- are you talking about on an absolute basis?

[Andrew Harmening, executive]

Let me start that off, and I'll have Derek finish that. Daniel, what we're saying is the core underlying business outside of the inorganic action is pretty close to bottom. Could it go down 1 basis point or 2 basis points? Perhaps. But we're pretty darn close. We don't see a lot of volatility in the underlying margin.

On top of that, we expect to see the full force of the increase that we outlined from the inorganic actions starting in Q1. And then based on what we're doing on our production and balance sheet, we expect to have a positive trend throughout the year. Derek?

[Derek Meyer, executive]

Yes, I think that's right. And you're right, we're talking about looking at our start point levels at the pro forma 279.

[Daniel Tamayo, analyst]

Okay. All right. I just wanted to make sure. And then I guess -- sorry, go ahead. No, just following up on the NIM guidance. You've got 6 rate cuts in there. Wondering if you can kind of frame for us what that looks like either on a per cut basis or if it was going to be more in line with the Fed's guidance of 3 cuts in the back half of the year, how that would impact the guidance?

[Derek Meyer, executive]

Yes. I think the easiest -- the only one that -- the only way we've modeled this more recently to developing sensitivities is what if you don't get the first cut. So you get 5 cuts and that pulls through, you don't get the March cut. That's probably worth about 2 or 3 basis points to us for the year.

[Daniel Tamayo, analyst]

Okay. And just to be clear, so the rate cut is punitive to the margin you're saying, right, you're still asset sensitive?

[Derek Meyer, executive]

We are still asset sensitive. You can get into a longer discussion about what do you -- does the front end of the curve get cut? Or do you have a parallel shift? But the most likely scenario is we've tried to plan conservatively with the 6 rate cuts and then thought about what if you don't get all 6. And that does reflect asset sensitivity.

[Daniel Tamayo, analyst]

Okay. I appreciate that. And then my second question, I just wanted to get a little high level here. Andy, you guys have taken on some pretty big changes since you've been at Associated.

I'm just curious, given the uncertainty going forward, but certainly, what you've -- the changes that you've made, if there's any kind of profitability forecast -- or not forecast but targets that you had in mind that you could share? Or just kind of guideposts that we should be thinking about as the bank goes through these transformations.

[Andrew Harmening, executive]

Daniel, I just want to say, we expect profit to go up, and I was going to stop after that. But in all seriousness, what I would say is the plans that we've put together, when you expand your lending verticals, when you expand your product offering, when you modernize your digital platform and decrease your attrition, when you see a turning point on household growth, when you start deepening customer segments on the deposit side, the reason that we think that we have an opportunity is because we've put in the work in Phase I.

Phase 2 is simply extending what we've done in the past. So when we extend on the commercial side, the pieces that we've had, when we extend on the marketing side to the platforms that we already have, with a company that has a large wholesale reliance on the funding side, we can either replace that or fund the loan growth we have. Either way, that leads to increased profitability.

So what I would say is I don't have a specific number outside of the guidance we've just now given, but we feel very good about achieving the guidance that we've given.

[Operator]

Our next question comes from Scott Siefers with Piper Sandler.

[Robert Siefers, analyst]

So Derek, I wanted to -- I guess I just want to try to be as clear as possible on the margin. So just on a stated basis, the margin should go up, right, from here?

[Derek Meyer, executive]

Yeah.

[Robert Siefers, analyst]

Okay, good. And the starting point for sort of the core at this point is like the 279 and we get some additional benefit due to the full-quarter impact of the restructuring, is that a good way to frame it?

[Derek Meyer, executive]

Yes. So just to connect the dots, we expected about a 16 basis point improvement, right? We ended up getting about 5 of it this quarter. We got another 11 to go, and so any other movement in NIM is the underlying BAU. And I think that's what Andy is trying to get out about what they were calling the bottom. But on a reported basis, we expect to go up.

[Robert Siefers, analyst]

Okay. Perfect. And then, Andy, just on the notion of positive operating leverage, and it's going to be sort of close calls this year, it kind of feels to me like a rounding error, more or less, if it's zero to negative 1%. I guess maybe major levers that in your view, would make it harder or easier to achieve?

And I guess sort of a related question, Derek, just to go back on the trajectory of rates if we only got -- if we got fewer rates than [ what ] you've assumed, that would be better for your NII guide, is that correct?

[Derek Meyer, executive]

Correct.

[Andrew Harmening, executive]

Yes. Going back to it, I mean, I don't want to be [ contrite ] on this, but we're in the business of doing loans and deposits. And the deposit market, if we had a significant headwind, that could create a challenge. What gives me confidence, going into 2024, is the second half of 2023. So the deposit market was challenged for the year, but we had a 6-month growth rate of 3%. So clearly, if you have a funding issue that costs more, then you have a challenge, but we don't see that as of the trend right now.

The second piece of it is that -- we emphasize with the team is the importance of getting out of the gate with good commercial bankers. And I say good commercial bankers, we have a very good team already. We've attracted talent over the last 2 years that I'm pleased with. And then we have people that were here before that, are talented.

So when we add 10 bankers over the course of 2.5 months, we're adding very high-quality bankers. And so it takes 90 days to ramp up, then you accelerate it 6 months, 9 months, 12 months. So for that, the question is how quickly can we get quality bankers. And the answer so far is quite quickly.

The next question is how quickly can they ramp up their pipeline. And we'll see what that timing is. And so that could be a positive for us, and that could create the biggest execution risk. But as I sit here and I look at the hiring and where they come from and what they've done in their past, that gives me some confidence that we're right on track with what we've suggested.

The third part of it is I do think expenses are controllable. And going through the exercise, expense exercise line-by-line, business-by-business, category-by-category in the detail that we went through that and already outlined it and have specific measurements on it, gives me confidence that we'll be able to execute on the expense line item of the budget.

[Operator]

Our next question comes from Terry McEvoy with Stephens.

[Terence McEvoy, analyst]

Maybe just start with an expense question. Could you maybe just talk about the trajectory of quarterly expenses in 2024, given kind of some of the hiring plans and initiatives throughout the year?

[Derek Meyer, executive]

Terry, this is Derek. The way it works out in our current forecast is it's pretty flat for most of the quarters during the year. So that implies coming down a little bit off the core fourth quarter that we have and then flat going forward. The hiring plans obviously started this quarter and have been pleasantly -- we've had pleasant results at the speed and interest. So we don't want to slow that down.

And then we obviously look at the other areas where we have control and discretionary expenses to make sure that we have a balanced timing. But there's not a hockey stick implied in there. We're mindful of where we're going to finish the year in delivering economics and setting ourselves up for 2025 also.

[Terence McEvoy, analyst]

And then the company has aggressive deposit growth goals this year versus peers, and Andy just ran through what gives you guys the confidence. Derek, I guess, for you, how are you modeling deposit betas? Where do you think they'll peak? And if the forward curve is correct and we get the rate cuts, how are you thinking about betas on the way down?

[Derek Meyer, executive]

Yes. So we think they'll peak, obviously, at the end of the first quarter, around 61%, 62%. You could -- if you -- there's a number of ways of looking at them. But if you start the betas going down, we're probably looking at between 45% and 55%. The challenge, as you know, is how long after the last rate hike and hopefully, we've had ours, do this competition to keep rates high before they start cutting it. .

And we tested that in the fourth quarter, I may have shared before, with lowering some of our CD rates and competitors. Even large banks kept the rates high. And so we went back to our 7-month 5% CD because of that. But -- so I feel good about our plans. They're not all rate driven, but rates matter. And so I think that's hard to answer that.

[Andrew Harmening, executive]

Terry, I'll also reiterate, when I got here almost 3 years ago now, we were quite asset sensitive. And we've drawn that asset sensitivity significantly down. So we're not playing in the same space as we were 3 years ago relative to the market or even our bank.

[Operator]

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

[Jon Arfstrom, analyst]

Good afternoon. Quick question on loan growth drivers, that Slide 10 that you lay out, I guess it could be 11 as well. But what do you think that looks like in a year? Where are you seeing the opportunities to generate that kind of loan growth?

[Andrew Harmening, executive]

Well, a few different areas. We'll have very modest growth in CRE and be mindful of what the market is. Clearly, if we add 20 to 25 commercial bankers, we expect for them to increase their productivity. And right now, we're saying that should be about -- for the year, I think it's roughly $0.25 billion increase versus what run rate is.

Then the question of what run rate really is, and I would tell you that I think utilization was slightly down last year, and I think that's unlikely. I think there's a dislocation in the regional banking market that I don't anticipate having again this year.

We had some purposeful runoff in C&I that we were able to get out of some loans at par that we thought would be wise if there's softening. And so when I look at commercial, I think between the quality of people we have and the program we have and the focus we have and those other items I mentioned and the addition of RMs, I fully expect that to be one of the significant drivers of growth for us.

We'll have steady growth in auto, and that steady growth will kind of grow at a decreasing pace each year that we go along as we execute on our commercial plans. The other thing is -- and I know you asked about '24, but this is a program that continues to build on itself. As you well know, when you bring in quality commercial bankers, it takes time for them to grow their pipeline and their portfolio.

But as we head to the end of the year, having had people on as we got 10 people on, and we will have significant amounts of this hiring done in the first half of the year, meaning that they will have fully formed pipelines as we head into the end of the year, head into 2025. So I think you can see that as a continuation of the balanced reshift of our portfolio that leads to profitability improvement.

[Derek Meyer, executive]

Maybe I can add one tidbit also because Andy will remind me later that I didn't bring it up. We do expect, and as part of our strategy with the transaction we did for the portfolio growth, to change from a residential real estate orientation that we had before. So we are in that business. We have switched our product mix and made investments to support originate to sell and then judiciously use our portfolio for arms and wealth.

But that mix of our total loans should drop by the end of 2024 to about 25% of our loans being resi; in 2025, something more like 23%. So you sort of have to have that piece in the equation to help make the NII and the NIM guidance work the way we expected to.

[Andrew Harmening, executive]

And translated from mortgage, the importance of that is we're doggedly determined to lend to our customers. Our customers define that people that do full business relationships, people that deposit with us and tend to do that on the construction lending side for depositors and intend to do that on our core business, but the third-party origination is something that we no longer do. And that will change the trajectory over time of the residential real estate book.

[Jon Arfstrom, analyst]

Yes. Okay. Got it. And I guess, mass affluent is probably tied in with that as well on resi?

[Andrew Harmening, executive]

It absolutely is.

[Jon Arfstrom, analyst]

Yes. Okay. Just two more kind of more hypothetical. But back to Scott's positive operating leverage question. Andy, would you be spending than investing more if the revenue environment were more robust? Or do you feel like you have everything you need from a budget point of view right now?

[Andrew Harmening, executive]

That's a great question. Well, what I would say is we're being pretty aggressive on the hiring on the commercial banker side. And no, we're not looking to fill seats, we're looking to hire talent. And so as we get good folks in, if there's an opportunity, we -- I've said all along to each line of business, if you find somebody that you believe is a game changer, you should hire them. So we will.

But that being said, there's only so fast you're going to be able to hire responsibly. And so we like the plan that we have. If we add the 20 to 25 bankers this year and they're all very strong, I like where this company is going, based on everything else that we have in flight.

That being said, I promised halfway through the year I will be asking our executive leaders, "Okay, now what? What's next on the deposit front? What other initiatives can drive returns? What is the next phase of what we see being important in banking?" And to me, really, that's just the way you stay ahead of the curve.

And I will tell you, over the last, almost, 3 years now, I felt like we had a first phase, and we ran hard to get that as foundational. The second phase is additive, and the third phase is let's get ahead of the market. So I like the path we're on, and we'll think about investments that way, frankly, for as long as I'm here.

[Operator]

Our next question comes from Timur Braziler with Wells Fargo Securities.

[Timur Braziler, analyst]

Looking at the deposit guidance for '24, can you just maybe talk us through the expectation for mix shift and what the potential for mix shift out of noninterest-bearing remains here in the near term?

[Andrew Harmening, executive]

You want to take that, Derek?

[Derek Meyer, executive]

Yes, I'll answer the first part of it. The big challenge, obviously, has been -- aside from interest-bearing, has been what's happening in the noninterest-bearing. That has slowed down quite a bit. It's -- the way we've got our outlook shaping up is we expect us to bottom at about $5.8 billion or $5.9 billion and then finish the year up a little over $6 billion.

I know people use the shorthand of percent of deposits, but that includes brokered, and it's just easier for us to communicate the absolute dollar expectation, and that's what's in our guidance and our expectations.

[Andrew Harmening, executive]

And I'll just say that in a different way, is that we're a pretty low point on noninterest-bearing. It's what gives me confidence to say that I don't think there's a big story in margin distraction in the first quarter. So whether we call bottom right now or we call it during the first quarter, I think you're only talking 0, 1 or 2 basis points.

And so I think the story comes into, can you shift your balance sheet? Can you bring in full relationships? Can you put loans on the books that have a little bit better yield? And can you grow deposits, overall? So I think from a position of margin decrease, I think we're quickly closing in on the bottom.

[Timur Braziler, analyst]

Okay. And then as we start looking at rate cuts, Derek, did I hear correct that betas on the way down, you're expecting 45% to 55%? And if that's not correct, and I guess, on the way down, what do you expect the deposit beta to be? And is there going to be a lag for the first couple of rate cuts before that beta actually kicks in?

[Derek Meyer, executive]

That assumption includes a lag assumption, but we don't -- I can't say we've formalized a view on it. We're going to try and be as early as we can while still hitting our growth numbers, and we position the balance sheet that way.

Our brokered CD portfolio has a contractual maturity that runs the whole thing down and gives us options by the end of the year. And of our $2.8 billion in the customer CDs, $1.7 billion of that is scheduled to roll over this year, 95% of that by the end of July.

So we're trying to be very opportunistic while still growing and giving us lots of pricing options, so that we can take advantage of any opportunities and keep the beta where we'd like to have it.

[Timur Braziler, analyst]

Great. And then just last for me, you mentioned this briefly in your prepared comments, but maybe can you just talk to the cadence of office paydowns in '24?

[Patrick Ahern, executive]

Office paydowns. Yes, I mean, we saw, I think, in '23, a good trend of office. We had a handful of probably half of the deals that we came through. Our maturities, end of '23, were payoffs. I think it's still going to be kind of a similar pattern, but it's all case-by-case. We've got about -- I think the ones that were kind of circled for the first half of 2024, about 40% of them are going to either refinance or sell, and that's the strategy put in place.

The others are going to -- we have extensions in place, so they qualified for extensions, but that's under the current environment. So it's still a mixed bag. Clients are starting to -- the office market is hard to tell. I think that stabilization is still early to call that.

I think in other areas, we're seeing payoffs from multifamily as long-term rates have come down. I think we're starting to see a lot of clients kind of move off the sidelines there in the industrial market as well. We're still -- it's not as hot as it was 2 years ago, certainly, but still a pretty steady pace of lease-up and therefore, sale in that asset class as well.

[Timur Braziler, analyst]

Okay. And then just the maturities for office, both in the first half and for the year, if you have those numbers?

[Patrick Ahern, executive]

We've got -- first half of the year, we've got about $140-some million in maturing office loans coming up. And like I said, we've kind of circled the majority of those with strategies in place.

[Andrew Harmening, executive]

I'll just close out on commercial real estate by saying we've had 5 straight quarters without a charge-off. We like how that portfolio is holding up. We're all over both the office portfolio and the overall CRE portfolio. And frankly, the experience level of our bankers in the CRE group is very strong. And I think relative to the industry, we feel pretty good about the position we're in. Certainly, it could be lumpy as time goes by, but have a pretty good handle on that.

[Operator]

Our next question comes from Chris McGratty with KBW.

[Unknown Analyst]

This is Nick [ Mutares ] on for Chris McGratty. Maybe just on the capital levels, given as we move through 2024 and further out, any appetite for a buyback or even further tweaking or derisking of the loan portfolio as we look more longer term?

[Andrew Harmening, executive]

Nick, I like our organic plan. If we can hire the most talented in the industry and grow our balance sheet in the key areas that we have, I believe the investment community will be happy with the return. So that's where our entire focus is right now.

With regards to another action on the portfolio, we don't have anything planned there at this time. And buybacks, that is not front and center for me. I think we have ways to use our capital that we'll be happy with the midterm and long-term results.

[Unknown Analyst]

Okay. Great. And then just on the cash flow from the bond book, do you guys have like the quarterly cadence of runoff of the securities?

[Derek Meyer, executive]

It's about [ 150 ] to [ 200 ]. And because we're growing it with fixed assets, you would expect to reinvest maybe [ 300 ]. So think of a [ 150 ], [ 200 ] runoff, [ 300 ] purchase quarter. And then the spread on that, the runoff rate versus the buy rate would be 150, 200 basis point difference.

[Operator]

Our next question comes from Brody Preston with UBS.

[Broderick Preston, analyst]

I just wanted to ask a handful of questions on the NII. Derek, I just want to put a finer point on the beta commentary. Was that 45 to 55 what you expect to achieve by year-end '24? Or is that more of a comment about where it will be over the next couple of years?

[Derek Meyer, executive]

That's March to December of this year.

[Broderick Preston, analyst]

March to December. Within the core deposit growth guidance that you guys have laid out, how much of that is coming from CDs?

[Derek Meyer, executive]

I don't think we've provided that level of detail. I guess, it's going to depend on the market. I'd be happy with the mixed detail I gave you already on the noninterest-bearing deposits and the residential real estate.

[Broderick Preston, analyst]

I want it all there.

[Derek Meyer, executive]

I wanted to say when you said 5 questions or 6 questions or whatever it was.

[Andrew Harmening, executive]

I did ask Derek why he is providing so much detail, and he said Brody demands it.

[Broderick Preston, analyst]

This is true. I'm a little bit of a pain in the butt. I just wanted to also ask on the [ BTFP ]. I noticed in the appendix, you kind of called out how much you have in capacity. I wanted to ask how much of the [ BTFP ] you've used at this point?

[Derek Meyer, executive]

As of the end of the year, none.

[Broderick Preston, analyst]

None. Okay. I felt like I had one more for you guys...

[Andrew Harmening, executive]

Brody, I feel compelled to say that I wouldn't be afraid to draw on that. In fact, I think there's a reason that is put in place. And if we can get advantageous terms relative to the market, then we'll use it.

[Broderick Preston, analyst]

Got it. Last couple for me on the loan growth guide. Wanted to better understand, another mix question, how much of that -- how much of the growth you're expecting to come from the auto portfolio?

[Derek Meyer, executive]

We're looking at similar levels that you've seen quarter after quarter. So in dollar terms, it's about [ $200 million ] to [ $250 million ].

[Broderick Preston, analyst]

Got it. And then the last one I had is just on the auto yields. The pickup this quarter was pretty strong at 35 basis points. I wanted to understand if given the growth guidance that you just outlined for auto, what we could expect for maybe the yield cadence from a repricing perspective within that book?

[Derek Meyer, executive]

We're not providing that specific guidance on that. Nice try.

[Andrew Harmening, executive]

But I think you had a nice pickup from the fourth quarter. Look, the business is a good business for us, and the average FICO in December was [ 786 ]. So when you think about an opportunity, when you see the yields that we're getting and you see the quality of the credit, we've said before, we don't want to just be the auto bank, but it's a nice portfolio for us that is performing well, that we're getting a good yield on and has a very, very strong underlying credit.

[Derek Meyer, executive]

Yes. What is fair to say, Brody, despite my snarky comment there, was the spreads that we've seen, and I've talked about the sweet spot has been getting sweeter, I think I've said that a couple of times; it really did stay that way fourth quarter, and it has stayed that way now. So the inputs that are driving that sequential type of rate increase are still strong.

[Broderick Preston, analyst]

Got it. Most of the book -- is most of your auto business used autos?

[Patrick Ahern, executive]

No, maybe 2/3 or so. 70%, I think, in the last quarter, was what we saw in the used stuff.

[Andrew Harmening, executive]

Thank you, Brody. Well, look, I think that's all the questions we have tonight. We really appreciate your interest. We're bullish on the plans that we have, and we're glad that we could explain the story of 2023 and frankly, ready to turn the page and get into '24. Thank you, everyone. Have a great night.

[Operator]

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.