Associated Banc-Corp (ASB) 2021 Q4 法說會逐字稿

Good afternoon, everyone, and welcome to Associated Banc-Corp's Fourth Quarter and Year-end 2021 Earnings Conference Call. My name is Hillary, 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 24 and 25 of the slide presentation and to Page 10 of the press release financial tables. Following today's presentation, instructions will be given for the question-and-answer session.

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

Well, thank you, Hilary, and good afternoon, everyone, and welcome to our year-end earnings call. I'm Andy Harmening, and I'm joined today by Chris Niles, our Chief Financial Officer; and Pat Ahern, our Chief Credit Officer.

I'd like to start things off by briefly reflecting on 2021, covering the highlights for the fourth quarter and giving you the most recent update on the strategic initiatives we rolled out in September. From there, Chris will walk you through an update on interest income, fees and expenses; and Pat will round us out with an update on credit.

In many ways, 2021 was an inflection point for Associated Bank. We enjoyed consistent deposit growth, improving credit dynamics and stabilization in our loan book. And importantly, we began to accelerate growth in several core and new lending categories. More recently, we continue to see signs of a strengthening economy. In the fourth quarter, unemployment rates in Wisconsin and Minnesota came down below 3.5%. The manufacturing expansion we saw emerge in Q3 has maintained strong momentum, which is being reflected in increasing commercial pipelines and in utilization rates. Customers remain resilient, credit continues to improve, and we feel well positioned to build on our momentum in 2022.

Now let me touch on our fourth quarter highlights as outlined in Slide 2. This quarter was marked by a significant expansion in our balance sheet. Notably, we saw meaningful loan growth as commercial loan outstandings, line utilization and our new initiatives all kicked into gear. We saw $600 million in loan growth for Q4, which equates to 10% annualized growth in terms of loans, even as we intentionally shrank our PPP and our oil and gas portfolios, each, by more than half.

On the liability side, core low-cost deposits continue to grow. And as promised, we began building our investment securities book to put our excess liquidity to work. Taken together, these factors contributed to expanding margins, growing net interest income and total higher revenues for the quarter.

Turning to credit. Our customers continued to prove their resiliency as markets recover throughout the year. After posting reserve releases in each of the first 3 quarters of 2021, we posted another negative provision in the fourth quarter and a further net reserve release. Our CECL reserves remain appropriate for our risk profile. But as we grow into next year, we expect to add to our provision in accordance with our loan growth.

From an operating expense perspective, discipline continues to be our foundational focus for Associated. Our full year noninterest expense was down year-over-year, while our fourth quarter expense ticked up by only 2%, despite the rollout of several new initiatives and an increase in our minimum wage. During the fourth quarter, we also repurchased $25 million of common stock. Taken together, all of these factors helped us drive full year EPS to $2.18 and position us well going into 2022.

Now let's shift to Slide 3. I'd like to provide a little more detail on the trends we saw in our loan book in the fourth quarter. In mid-2021, we started to see some encouraging signals of increased commercial activity and line utilization and this is now beginning to translate into meaningful growth in our commercial balances. In Q4, our total commercial book, and that is commercial and business lending and commercial real estate combined, grew by nearly $500 million which is more than a 13% annualized growth rate from the third quarter. While several of our specialty businesses added balances during the quarter, importantly, general commercial loans were the driving force behind this growth. Additionally, we're still in the early stages of our new commercial initiatives, but our expanded asset-based lending team has already started to bear fruit, and our equipment finance team is not far behind.

On the consumer side, the new auto finance initiative we launched on September 30 is off to a very strong start, adding nearly $140 million of high-quality auto loans to our books. We have now booked over 4,500 loans as mortgage activities moderate. These new auto loans will allow us to further diversify our portfolio while earning slightly better spreads. Following up on a strong Q3, we also saw credit card balances increase by another 6% quarter-over-quarter, which continues to suggest that confidence is growing among our retail customer base. And during the quarter, we took advantage of a positive economic background to exit the majority of our remaining oil and gas book at minimal cost.

Our PPP balances also continue to pay down as expected throughout the quarter. And at year-end, our oil and gas outstandings were just $52 million and our remaining PPP portfolio was down to $66 million. And in January, we realized an additional oil and gas payoff that will bring our remaining oil and gas portfolio to approximately $30 million. With these runoff portfolios worked down, we are squarely focused on driving growth in our general commercial and initiative portfolios in 2022.

Turning to Slide 4. We we highlight our annual loan trends for 2021. And as you can see, total end-of-period loan balances were down slightly year-over-year, but that was largely driven by intentional reductions in our oil and gas exposures, runoff of PPP and some declining mortgage balances. These reductions were largely offset by strong growth in general commercial and other commercial specialty verticals, giving us a very strong base to build on in 2022.

On Slide 5, we've highlighted a couple of additional metrics that give us optimism as we turn the page going into 2022. In Q4, growth in commercial balances was once again supported by a steady monthly uptick in line utilization. Commercial line utilization numbers continue to close the gap relative to our historic levels. In April '21, we hit a low point in utilization with regional commercial customers funding 12 percentage points below our historic line utilization. From that point, the monthly gap has continued to narrow. And in December, the gap closed to 5 percentage points.

Line utilization increases during Q4, drove about $125 million of the commercial loan balance growth. Additionally, our commercial real estate team has steadily grown construction lending exposures on a quarterly basis. And in the fourth quarter, exposures grew 5% from Q3.

Given seasonality in our substantial back book, we remain confident outstandings will continue to grow well into 2022, especially once the ground thaws in the Upper Midwest footprint. As we look to 2022, we remain bullish around loan growth. Specifically, we now expect full year auto finance loan growth of over $1.2 billion and total commercial loan growth of $750 million to $1 billion.

Turning to Slide 6. Let me give you an update on our initiatives. When we talked back in the fall, we laid out a multiyear balance targets for our new initiatives. And while we're still in the initial phases of the plan, I'm very pleased with the progress so far. I've already talked about total commercial and the reasons I'm excited about the broader segment, but we thought it was important to show a breakout of asset-based lending and equipment finance, so you can more clearly see progress in those verticals going forward.

What you see here so far through year in is mostly ABL balances. And while we have some ABL loans on the books historically, the team has already made meaningful progress quarter-over-quarter. Now that equipment finance is up and running in Q1, I'm confident both teams are working towards the targets we've set as we move through 2022.

On the auto side, the team is off to a very strong start, but we've been very thoughtful about steadily ramping up the program over time to ensure effective execution. Production is now eclipsing $4 million per business day, and we expect this portfolio to grow more quickly as we roll out the program to our broader dealer network and into our core footprint states over the course of 2022.

Turning to Slide 7. We've highlighted some of the additional steps we've taken to make headway against the 4 pillars of our strategic plan and the auto finance businesses, we've stuck largely to prime and super-prime space, with average FICOs north of 750 and 82% average LTVs on the loans we booked in the fourth quarter. Additionally, we've officially began closing new ABL deals in November of '21 and are currently building an active equipment finance pipeline while rounding out our full lending team.

As we look to augment the growth in our core businesses, we've continued to ramp up our staff in our commercial and small business segments, and we also established a new commercial real estate office in Houston, allowing controlled expansion in the great state of Texas.

On the digital front, we're on track to pilot our consumer digital bank platform in the second quarter of the year, bringing increased flexibility and architecture that will more easily allow us to integrate fintech partners to improve the user experience. And as always, we continue to seek ways to efficiently deploy our capital. While we see plenty of balance sheet growth in our outlooks, should that not materialize, we also have $80 million in remaining repurchase flexibility available to optimize our capital position.

In summary, our initiatives are in full swing and we look forward to building on this momentum as we head into 2022.

Let me pause there and hand over to Chris Niles, our Chief Financial Officer, to provide a little more detail on our revenue and income statement trends for the quarter. Chris?

Thanks, Andy. Turning to Slide 8. Our net interest income increased $3 million from the prior quarter or nearly 2%, driven by higher net interest income across most major segments and lower funding and time deposit costs. Our quarterly net interest margin continued to move higher after having bottomed out in Q2. We continue to see a steady decline in liability costs and expect asset yields to continue to move higher as we move through 2022. Our nearly $16 billion of commercial and commercial real estate portfolios have historically been primarily floating rate LIBOR and prime-based portfolios.

Over 90% of those commercial loans will mature, reprice or reset within the next year. Relative to our mid-cap banking peers, we have a higher percentage of near-term repricing earning assets and more capacity to grow our investment portfolio. So we believe we're at the upper end of the asset sensitivity range as we look into 2022. We have already seen our margins stabilize and begin to move higher and every major lending category is poised to benefit from our rising rate outlook. This puts Associated in a solid position to capitalize on the expecting rising rate environment in 2022. Given our expectations for at least 2 rate increases, we expect our full year 2022 GAAP reported net interest income to exceed $800 million.

Turning to Slide 9. Given the high levels of liquidity in the industry, we selectively added securities throughout Q4. During the quarter, our average investment security balances grew by over $400 million and our blended portfolio yields rebounded to 1.76%. We anticipate deploying additional cash balances into the investment securities portfolio throughout 2022. Reinvestment yields today are expected to be 2% or better and will generally be accretive to our portfolio earnings. We expect to rebuild the investment portfolio to between 20% and 22% of total assets by year-end 2022.

Moving to Slide 10. We continue to see record average deposit levels. Average deposits were up nearly $1.7 billion in Q4 or 6% year-over-year. Notably, growth continues to be concentrated in our lowest cost deposit categories. Our aggregated wholesale funding levels have also continued to steadily decrease over the past 5 quarters and have decreased by nearly $750 million year-over-year. We expect the deposit and funding trends to continue and our margins continue to benefit into 2022.

On Slide 11, we know Associated has shifted its lower cost deposits -- shift to lower cost deposits has been even more pronounced when viewed on an annual basis. In 2017, our average low-cost deposits represented less than half of our total deposit base, while at year-end '21, they accounted for 68% of our year-end deposit levels. Switching to noninterest income trends on Slide 12, we note that noninterest income was essentially flat during the fourth quarter as strong wealth and capital markets fees offset softening mortgage banking results.

We also saw modest growth in service charges, card based and other fee-related income items. Taken together, we view these collective trends as encouraging indicators of growing customer confidence as we continue to emerge from the pandemic. Looking to 2022, we expect full year noninterest income to exceed $300 million for the year.

On Slide 13, we highlight our expenses. The fourth quarter came in at $182 million, a $4 million increase from the prior quarter, including $1 million of facilities-related exit costs. Our fourth quarter expenses included initiative-related expenses and our recent announced increased the minimum wage to $17 an hour. For the full year 2021, total noninterest expense of $710 million was within our guided full year range and down $66 million from the prior year. I'll remind you that we executed on expense initiatives in the second half of this year that are expected to shave about $10 million per year off of our run rate. As we continue to roll out our strategic initiatives, we remain committed to maintaining expense discipline. Taking all of our initiatives into consideration, we expect full year 2022 noninterest expense of between $725 million and $740 million.

On Slide 14, we have provided a walk forward of our quarterly pretax preprovision income from the third quarter to the fourth quarter. While our pretax income was down from the prior quarter, our pretax preprovision results were relatively flat quarter-over-quarter and remained well above the $78 million baseline we set for you in the second quarter.

As shown on Slide 15, our tangible capital -- tangible book value per share continues to grow and our quarter-over-quarter has increased 7% to $17.87. While we have taken several steps to deploy capital in an effort to support stronger growth and shareholder returns, Associated's regulatory capital levels also remained strong. We will continue to target TCE levels at or above 7.5% and CET1 levels at or above 9.5%.

With that, let me hand over to our Chief Credit Officer, Patrick Ahern to provide an update on credit.

Thanks, Chris. I'd like to start by providing an update on our allowance as shown on Slide 16. We utilized the Moody's December 2021 baseline forecast for our CECL forward-looking assumptions. The Moody's baseline forecast assumes additional fiscal support, a continuing low interest rate environment, the recent acceleration in consumer prices to be transitory and relatively localized COVID cases.

Following net reserve releases of $28 million, $40 million and $32 million in the first 3 quarters of 2021, respectively, we ended the year by posting a further net reserve release of $12 million in the fourth quarter. This net release was driven by gross reductions in our allowance for several of our specialty commercial and CRE business units. Specifically, an $11 million reduction in oil and gas and another $12 million reduction in CRE.

As of December 31, our total ACLL was $320 million, down from $332 million in the prior quarter. In addition, our ratio of reserves to loans declined to 1.32% from 1.41% during the quarter. We had previously guided that we expected ACLL to loans to drop back down to CECL day 1 levels by the end of 2021, and we ended the year comfortably below that benchmark.

Turning to our quarterly credit trends presented on Slide 17. Most of our key credit metrics continued to improve over the course of the quarter. Our key COVID commercial exposures continue to decline for the quarter, led by further declines in retail and shopping center exposures. Nonaccrual loans also decreased by 3% in Q4 and were down 38% year-over-year. While aggregated restructured loans and delinquencies have fluctuated throughout the year, I'm pleased to announce they decreased 35% year-over-year. Net charge-offs also decreased by $1 million quarter-over-quarter and by $21 million versus Q4 of 2020. Going forward, we expect to adjust provisions to reflect changes in risk rates economic conditions, loan volumes and other indications of credit quality.

With that, I will now pass it back to Andy to share some closing thoughts as we look to secure our momentum into 2022.

Thanks, Pat. On Slide 18, we recap our full year guidance for 2022. As we look to capitalize on the economic outlook in '22, we are expecting strong loan growth at Associated with full year auto finance loan growth of over $1.2 billion, total commercial loan growth of $750 million to $1 billion, and then reflecting our growth outlook in of a rising rate environment, we expect total interest income to exceed $800 million and total noninterest income of $300 million plus for a grand total north of $1.1 billion. We expect to finish 2022 with approximately $725 million to $740 million of noninterest expense.

With that, and before moving to Q&A, I'd like to say a few words about the CFO transition we also announced this afternoon. After nearly 12 years with Associated Bank, our CFO, Chris Niles, will retire from the bank later this year. We've engaged diversified search group and the search for a successor is underway. Chris will continue in his current position until a successor is in place to ensure a seamless and successful transition.

Chris, on behalf of the whole Associated Bank team, I want to thank you for your many contributions over the years. First, serving as our Treasurer, then serving as the CFO. And on a personal note, I want to say I appreciate you helping me get my footings at Associated Bank. Your partnership and generosity of spirit has allowed me to get acclimated internally and externally.

I also want to emphasize that I believe we are making the CFO transition from a position of strength, especially given our positive momentum at year-end, our Midwest markets are robust, and our 2021 performance demonstrates we are driving revenue growth across our core business lines, and we are moving decisively to accelerate our digital transformation. I am confident in our strategy, and I'm confident in our team to continue to deliver strong performance for our stakeholders in the years to come. I'll now pass it over to Chris for a few words.

Thank you, Andy, for those kind words. It has been my privilege to work alongside an exceptional team over the last decade. I could not be prouder of our collective accomplishments.

As I indicated to Andy and the Board, I've been thinking about the next phase of my life for a while. In consultation with Andy, we agreed 2022 is a good time to initiate the succession process. Retirement from Associated will allow me to attend to personal and family interests, and I'm deeply grateful for that opportunity.

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

(Operator Instructions) Our first question is from Scott Siefers of Piper Sandler.

So I guess before I get into it, Chris, I enjoyed working with you over the years and we do so more this year and wish you the best. So first, yes -- you bet, so thank you for all your help. Maybe first question is for you, Chris. Just on sort of how you see the margin projecting from this quarter's 2.40%. Kind of where do you stand with respect to the 2.75% aspirational margin in terms of progress this year? It seems like you should get a bunch of help from rates, so maybe just some thoughts there.

Yes. So when we look back on the year, clearly, our margin results for the year were weighed down by the excess liquidity levels that we carried over the course of the year. We estimate that probably cost us about 11 basis points in margin for the year. So absent the excess liquidity, our start point probably is somewhere north of 2.50%. And we're continuing to build into positive yield accretive asset classes as we move through the course of the year. So I'd like to think that we're going to quickly move towards 2.50% and build from there. I don't expect we'll get to 2.75% this year. We didn't say we would either, but we're going to make solid progress and move a nice way in that direction.

Okay. Perfect. And then -- so a lot of moving parts with the change in the balance sheet and mix as well as just the higher rates. So I guess, just as a follow-up, I want to confirm, you suggested that 2 rate hikes are sort of embedded in the NII guide for the year? And then do you have sort of an easy rule of thumb that you're using for how much NII help you get for each 25 basis points rate hike kind of in isolation?

$1.5 million per month for a 25 basis point hike.

Our next question is from Chris McGratty of KBW.

Chris, we'll miss you. In terms of the outlook, I was hoping you could refine or give a little bit more color on Slide 18? The $800-plus million to $300-plus million, obviously, it's I bet intentionally open ended. But I wonder if you could provide a little bit more clarity on what would drive those to meaningfully above it? And how meaningfully above the $1.1 billion do you expect?

Look, maybe I could start that off and turn it over to Chris. This is Andy. So Chris, what I would say is we're 20 days into the new year. And we had a strong end of the year, which put us in a really good position. So seeing where our pipelines are, what we've closed, where we started the year, we think we're very much on track to what our midterm, short-term targets are. So yes, we did leave it meaningfully open-ended.

But what I will say is every initiative that we have is on target, not just from hiring people, but from pipeline and not just from pipeline, but from the loans that are booking, whether that's the new RMs that we have in place. We [have] hired enough RMs at this point already to hit our commercial baseline end market targets. We are very much on target in ABL. And our expectation was our first loans in equipment finance would book in the first quarter. So we feel very bullish about what our forecast is. About 20 days into the year, we didn't want to forecast the month-by-month blow of how we end up. Chris?

Yes, understood. Thanks. Totally get it. In terms of the auto book, I'm interested, I know you talked about the prime and super prime. Can you just provide some color on where yields are coming on today. And then also, you're expecting a lot of growth and you talked about providing for that to some degree this year. Maybe throw in a little bit more color on that would be great.

Sure. So as Andy mentioned, we're booking more than $4 million per business day. And that's why we have very high confidence that we're going to get well above the sort of $1.2 billion full year growth level because we're continuing to add more dealers and we'll continue to add more markets as we go through the year. So the baseline is there to support the growth, and we think we're going to add to it.

Second, I would note that the yields have come in essentially where we thought they would, it was a premium to what we've seen in the mortgage market and higher than mortgage yields, which is what we've been targeting in that net 3s, net of the dealer discounts, et cetera. And so when you see the numbers, we'll be breaking those out in future quarters. I suspect you'll see something that will be in a 3-handle with a varying range as we move through the course of the year and as rates perhaps evolve with that policy.

I'll say, Chris, on top of that, as we've opened up the number of active dealers. We purposely controlled the number of active dealers we have. So we're at about 700 active dealers, and we've increased that roughly every 30 days. As we've increased the number of dealers each month, we've seen increased production each month. We want to make sure that we're sound on the operational side. I want to make sure we're sticking to the credit box very strictly, and we have been, in fact, right on target. So I'm pleased with what we've done so far, but we want to make sure we do this the right way.

While we're at 700 active dealers today, we think we could end the year with a number well exceeding double that number. So -- and those -- the dealers have been very accepting based on the long-term relationships we had hoped for. And we had hoped that they would send us strong deals in prime and super prime, and that's exactly what's occurred so far.

Great. And then just a ticky-tack one, Chris. When in the year, are you assuming the hikes? And is there any nonrecurring in net expense guide?

I'll happily take your forecast on Red -- on the Fed. I'm pretty sure it's probably better than ours.

But you said at least to, I think, in your prepared remarks, the midyear and end of the year? I'm just trying to get a sense of what's in the guide.

One in the first half, one in the second and if there's more than that, there's upside.

Okay. Our next question is from Michael Young of Truist.

I wanted to start just on the mortgage portfolio. Obviously, that's been an area that's been kind of shrinking. But as rates rise, we would expect maybe payments in that area and refinances out of that book might slow. So should we expect those volumes to become a little more stable or any other thoughts? Are you doing anything proactively ahead of higher rates to kind of move some of that off the books?

Michael, this is Andy. That's exactly what we're expecting is stability in that book. Not only stability in the mortgage book, but we actually think a long-term trend on home equity is shifting right now as well. In fact, we see that. So we think, for the first time in a long time, home equity has a real chance to grow. So we're proactively addressing that in the first quarter of the year.

Clearly, with the rates, people locked into the first mortgage at very low rates, they're not going to want to refinance that mortgage, which opens up the home equity market. As rates go up, we will start to see a decrease in the churn of that portfolio. So when we looked at the year, our forecast was that the mortgage portfolio is going to be fairly flat and auto would make up for that at a slightly higher margin, that is proving, early on, to be the case.

Okay. And on the auto book, I'm just curious, given your history or how you guys are kind of attacking this, do you expect that rates, as they rise in the market, that the auto book will keep pace in terms of the yield? Or do you think at some point, that may be a less attractive area to deploy capital versus commercial or other areas?

Well, I see the auto as one piece of a balanced approach. And so when I look at the margin being well above 3%, we have room to come down and still hit the forecast that we've put out there. And we are going to stick with prime and super prime, period. That is our focus and has been. Now when I think of the balance of growth, I think of the equipment finance and the ABL, and you can see we put pretty modest targets out there. We booked about $67 million, I believe, in ABL, new ABL in the fourth quarter, that's 2 months' worth of work, and we forecasted $300 million and combined at the end of the year between ABL and equipment finance.

So we think those businesses are ones that will continue to grow for us. They make sense. We're in a manufacturing belt. The ABL is an extension of our commercial, and we're expanding our commercial team. So I expect that as we look at $750 million to $1 billion in commercial growth this year, that will continue to be a strategy for us to continue to expand on the verticals that we have and feed those. And I think the margin, I'm optimistic that we have room to even go down in that margin on prime and super prime and still hit the forecast that we have laid out.

Okay. And one last one for me, just on expenses. Just as I kind of think about mortgage and volumes kind of coming down, at a macro level. Are you guys kind of shrinking the expense base there, assuming that we're going to be in a lower origination environment for longer? Or are you pivoting personnel into auto? Or just how are you kind of thinking about that expense run rate?

Sure. I think we're positioning ourselves to continue to service our customers and our markets through our mortgage teams across the marketplace in an effective manner recognizing that there may be more -- sorry, less volume to manage as we move through 2022. There will still be plenty of customers to service, plenty of loans to make sure that we're doing the right thing on. So I don't think it's going to be a significant shift in our strategy, but we certainly recognize there may be less than new origination volumes and fewer commissions paid as we move forward.

Yes. I think the other thing is we've built flexibility in our expense base by having outsourced colleagues as well as FTE. So we'll monitor that closely based on volumes and the contractual nature of what we have out there. But we've built in the assumptions that as that goes down, the expenses of that book go down as well. They're not necessarily transferable resources into auto as that's a specialty vertical.

Okay. Fair enough. And Chris, I'd be remiss if I didn't wish you congratulations and I hope you at least get to spend a few weeks somewhere warm here near term.

Thank you. Appreciate it.

He means warmer than Green Bay, Chris.

Our next question is from Terry McEvoy of Stephens.

And Chris, I'll echo what others have said this afternoon. Congrats and I can't believe it's been 12 years. I enjoyed working with you.

Thank you. Thank you very much, Terry. It's been a pleasure.

And then just a couple of questions. In your November investor deck, you talked about '23 revenue growth of 17% to 10% and expense growth of 3% to 4%. I didn't see it in today's presentation. I just want to confirm that those are still good growth rates? And similar in terms of how you're thinking about next year?

Yes. We're not changing our long-term outlook. We think the numbers that we're putting forward here are consistent with that outlook. And I think you'll find that we're making steady progress for taking those long-term goals, and we feel good about those long-term goals.

Right. Others have covered the auto and margin. So the other one was anything to report on the increase in potential problem loans. It just kind of caught my eye up, I believe, about 20% quarter-over-quarter in the commercial portfolio. Anything to talk about there?

No, not really. I think we had -- as you know, in the portfolio, it ebbs and flows quarter-to-quarter. I don't think we're seeing anything systemic there that's affecting the portfolios at large.

And then just one last question. I just want to make sure, have all the hires been made and relationship with dealers established to hit those loan growth targets for the year.

The hiring for the auto team is largely in place, yes, that's not a significant gap. And we have established dealer relationships with about 700 today. As Andy mentioned, we'll likely more than double that as we move through the course of this year. So there's more to come. And we haven't yet opened up our footprint states in Minnesota, Wisconsin, Illinois, in particular, which we think will be a nice source of additional growth later in the year.

And what I'd say on the verticals, we have about 60% to 70% of the colleagues that hired by year-end, already hired and in place. So with what we have there today, we're on track to hit our targets. On the commercial side, we have roughly half of the colleagues already in place. And with that, we're on track to hit our targets. The colleagues that we bring on the rest of the year in commercial will start funding our end of year, beginning of next year target numbers as well. So we are right on pace. We feel very comfortable on the hiring front and what those hires mean from a production standpoint. Thank you.

Our next question is from Daniel Tamayo of Raymond James.

Just one for me here. As we think about -- you've been asked about the revenue guide as a whole. As we think about it just related to fee income, the $300-plus million number, kind of putting aside whatever assumptions that are made for the mortgage banking business. Is there anything within the remaining line items that you would expect not to grow in 2022? Or are you seeing growth in those numbers and then we can kind of put whatever assumption we have on the mortgage banking business?

I think broadly speaking, we're seeing positive trends in the service charges, card businesses, capital markets, et cetera. We don't make a practice of projecting a lot of BOLI increase, and we're not necessarily in the business of taking asset gains and losses per se. So those are the sort of the 2 of the wild cards. But generally speaking, our fee -- our core fee-based revenue streams all have a nice year-end trajectory and continue to build nicely.

And just be the wealth business is probably another one that wasn't necessarily mentioned there. We had record production. We have a dedicated leader in that business for the first time in quite some time. And that's really brought the group together. I'm pleased with the results, both on the sales and the retention and the portfolio performance.

Great. Everything else has been asked and answered. And I'll just also give you my wishes for a happy retirement and congratulations on a great career, Chris.

Thank you, Daniel.

Our next question is from Jared Shaw of Wells Fargo.

This is Timur Braziler filling in for Jared. Maybe just starting on the improved line utilization and just the loan growth in general. Maybe talk through paydown activity, kind of how that trended through the quarter. And I'm wondering if you get a sense that any of the loan activity was pulled forward from the first quarter of '22? Or is this type of momentum kind of sustainable as we are now 20 days into the new quarter?

Well, I think if you look at the growth, which was almost $0.5 billion for the quarter. We're not calling for that to be sustained for quarters going forward. We had really strong growth, and we don't think that it was necessarily pulled forward. I think it was really our customers stepping into the market in a very positive way.

Payoffs were not necessarily out of line with what we've seen in prior periods, but new funding and draws were the difference maker this quarter and there were increases. So that's what we saw, both, new customers, new lines from existing customers or new additions and line utilization all contribute to those numbers.

And line utilization has been a steady number for us. We've seen it go up slightly for several months in a row. The auto business, I think, is a very clear line that's increased each of the last 3 months, and we expect that to continue to do it -- do so. The commercial side, as Chris said, look, we're looking for $750 million to $1 billion in growth for the year. So it was a very strong quarter. That puts us in good shape. But when we think about the CRE book and the numbers that we see out there on the construction side, that really bodes well for that business as we head into the year, the commercial pipelines that we had.

And keep in mind, we haven't yet booked our first equipment finance loans. So we'll have equipment finance. We'll have asset-based lending. We have nice growth in the opportunity in CRE. So while I don't expect $500 billion forecast per quarter, and we're not forecasting that, I'm pretty bullish on what we are seeing in the fourth quarter and what that could mean for 2022.

That's good color. And then just one last one for me, if I can follow up on some of the auto-related questions. I guess, the new gross -- is it coming from the addition of the new dealers coming online every 30 days? Is it coming from the existing dealers? And maybe talk about some concentration limits that you're going to be putting in place once the dealer network is kind of fully built out, concentration limits on dealer activity?

Yes. So clearly, the team we hired came over with a very well-established collection of long-standing, deep-rooted relationships. And as part of our acquisition of intellectual property from KeyBank, we acquired dealer scorecards and histories as part of this. So I think we have a very good handle on the folks we're doing business with. We have a very good handle on the type of volume, the consistency of that flow of activity, and we feel very comfortable with what we've been doing here over the last roughly 120 days. And it's coming along at essentially exactly what our team said it would be. So we're actually very pleased with that. And I don't see us running into any constraints or limits for a while as we expect this to become a multibillion-dollar portfolio on our balance sheet over time.

I'll also follow that up by reiterating the balanced nature of what our plan is and how much -- I think we have some legs on small business. We haven't talked much about that. we're looking at a $100 million increase in production year-over-year just in small business. Our commercial businesses, as we've hired people, we've gotten the production fairly quickly, and we have an opportunity in market to grow those.

The verticals that we have, we believe, have legs for years to come. So there will be a point where that growth clearly dissipates in auto in year, I don't know, 3, 4. But as we're moving towards that time, we have a path outlined and we've taken the actions towards the beginning of both verticals, commercial and small business growth.

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

Congrats, Chris.

Thank you, Jon.

Did you think you were this popular by the way?

If I give my usual answer to this, of course, I do.

Question for Chris or Pat. Just how do you want us to think about the provision? You still have pretty healthy reserves, but you did say you're below day 1 CECL? And you obviously have a lot of growth on the horizon. Is this -- are we at the end of the reserve releasing and negative provisions? Or how should we think through that?

This is Pat. I would say, from a reserve ratio, we might see that come down a little bit. Could it be in the 1.25% to 1.30% range, possibly. But I think we're starting to see this quarter with growth, some needed to add to that provision. So I think as we get into the year, the growth that we've outlined here will kind of push that provision in more of a build standpoint than a release.

Okay. Okay. Chris, the $1.5 million per month reached 25 basis points, that's great. That's a great way for us to think through it. How long does that relationship hold? Meaning, how do you think about deposit betas and how comfortable are you with the rate sensitivity in the deposit base?

Yes. So I think we've been very thoughtful about the sensitivity that we experienced deposits in the last run up, and our estimate reflects that into the number that I gave you, the $1.5 million per month for 25 basis points. Clearly, it's our expectation that liquidity levels are elevated and that there's going to be a shift somewhat downward. I think if you'd asked us a year ago, we would have thought that would be a more rapid shift than we're actually seeing. And the reality is, as I think, Jon, you and I have talked about in the past, the alternatives that used to be out there for investors, whether the commercial paper market, the asset-backed CP conduits, money market alternative funds, the prime rate funds.

Money market reform really did away with a lot of that. And so there's fewer alternatives, and we're seeing that reflected in the biggest banks pricing. And so I think there's an opportunity here where you'll see, as we have seen in the past, a fair amount of deposit lag, but we'll see some outflows. And so we're assuming those outflows, and we're assuming some deposit lag, and that's baked into that $1.5 million per months.

Okay. Okay. Fair enough. And then last question, maybe for you, Andy. You touched on the footprint being strong. And kind of -- I'm looking at Slide 6 and Slide 18 in terms of the commercial loan growth and some of the expectations there. How much of that do you think is just from the footprint versus some of the specialty lines of business?

I would tell you that we're getting a lot of single name credits. And we're seeing it balanced out between Wisconsin, specifically probably Milwaukee, Chicago and Minneapolis. So I don't have the exact mix in front of me, but I will tell you that the occurrence of single name, we can follow up on that, but the occurrence of single-name credits has been significant for us, particularly as we've added RMs in market.

Yes. I would throw out that we do some geographic reporting. And our largest growth in commercial real estate was absolutely in our Wisconsin market. And it's a nice turn. And we saw growth -- Wisconsin, Minnesota, Michigan, Illinois, those are sort of the top 4 out of the 5 states in the commercial land. So it's happening today in our core markets.

Our next question is from Scott Siefers with Piper Sandler.

So Andy, for you. One of the questions that I have gotten more recently since the forward curve has really changed quite a bit since back when you guys put out the strategic plan is -- do you still feel the same need to grow the newer verticals at the same rates you discussed last year? Or does the likely help from rates, would that allow you to sort of ease off the gas or be more measured? I think I know the answer from sort of the tone of a lot of your prepared comments and responses to questions, but would just be curious to hear your thoughts on that.

Well, I think the good news is we started measured. So when you have numbers that you feel are very attainable, you don't have to change your strategy. We don't have to reach for credit to hit $150 million in ABL. I think we exhibited that with $67 million in the fourth quarter. Equipment finance in a heavy manufacturing hub, people are asking for these kind of loans. So I feel very comfortable with the numbers. That doesn't change our strategy and our approach. We're going to stay true to the credit side. We're going to stay true to the prime and super prime in auto. We're going to make sure that we have the fundamentals down behind it. I see the rate increase is more of a tailwind for us.

Perfect. And then just maybe returning to loan growth for a second. So I mean it's pretty clear what's going on with auto and commercial. But I was curious, Chris, if you might have a sense for what full kind of all-in loan growth would look like in '22 after you kind of take into account all the moving parts, be it the combination of the C&I momentum, auto finance, but -- also PPP runoff, middle hit averages and some of the other areas that are kind of getting deemphasized to make room for auto?

I mean the reality is, is our runoff portfolios now are down to -- given the payout that we had here in the first -- here in January, down to less than $100 million. So that's the runoff book is $100 million and shrinking. And we're looking to stabilize the mortgage book. So they're really the only moving part that we haven't given you is home equity. And I'd like to think that in a rising rate environment, home equity will probably stabilize. So if those are stable and really the growth is all coming from the initiatives that we've outlined and talked through.

We have reached the end of the question-and-answer session. I will now turn the call back over to Andy Harmening for closing remarks.

Well, I want to thank you all for your interest in Associated Bank. And I would be remiss if I didn't end with, I hope you guys are all going to have a great weekend and support our Packers. Thank you so much.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great evening.