Associated Banc-CorpASBNYSE
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Operator: Good afternoon, everyone, and welcome to Associated Banc-Corp's Third Quarter 2025 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 24 through 26 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: Well, good afternoon, everyone, and thank you for joining us for our third quarter earnings call. This is Andy Harmening. I am joined once again by our Chief Financial Officer, Derek Meyer; and our Chief Credit Officer, Pat Ahern. I'll start some highlights of the quarter. Derek will cover the income statement and capital trends, and Pat will provide an update on credit quality. Over the course of 2025, we've been squarely focused on execution and delivering on the strategic growth investments we've made across our company. 9 months into the year, we continue to see several trends that are both leading to strong current results and positioning us for future performance. We're proving that we can grow and deepen our customer base organically. We've posted net household growth each quarter so far in '25 and are on pace to deliver our strongest year for organic checking household growth since we began tracking a decade ago. We're also proving that we can grow and remix our balance sheet simultaneously. On the asset side, we've added nearly $1 billion in high-quality C&I loans year-to-date while working down our mix of low-yielding low-relationship value resi mortgages. On the liability side, we added over $600 million in core deposits in the third quarter, enabling us to work down our wholesale funding mix. As this mix shift continues, it enables us to drive stronger profitability after delivering quarterly net interest income of $300 million in the second quarter, a record for our company. We posted another record of $305 million in Q3. And with this enhanced profitability comes enhanced capital generation. We added another 13 basis points of CET1 capital in Q3 and have now added 30 basis points year-to-date. This capital generation enables us to support our growth while continuing to execute on our organic strategy. Now I'll remind you, just because we're growing assets doesn't mean we're stretching. Credit discipline remains foundational to our strategy, and our growth is focused on high-quality commercial relationships and prime/super prime consumer borrowers, which is consistent with our conservative credit culture built over the last 1.5 decades. We continue to manage our existing portfolios proactively and meet with our customers regularly to stay on top of emerging risks. As we look at the remainder of 2025 and '26, Associated Bank has strong momentum that continues to build. While we continue to monitor risks tied to the macro uncertainty, our growth strategy puts us in a position to grow and deepen our customer base, take market share, remix our balance sheet and improve our return profile without having to rely strictly on a hot economy or a perfect rate environment. With that, I'd like to walk through some additional financial highlights on Slide 2. In Q3, we reported earnings of $0.73 per share. Total loans grew by another 1% versus the prior quarter and 3% versus Q3 of '24. Adjusting for the loan sale we completed in January, we've grown loans by 5.5% over that same time period. C&I lending has continued to lead the way as we deepen relationships across our markets and see noncompete agreements from our new RMs expire, we grew nearly $300 million of C&I loans and we've now grown C&I loans by nearly $1 billion year-to-date. Shifting to the other side of the balance sheet, seasonal deposit positive inflows came back as expected during the quarter, with our core customer deposits up 2% or $628 million from Q2. With that said, we're seeing more than just seasonal strength core customer deposits were also up over 4% or $1.2 billion relative to the same period a year ago. Moving to the income statement. Our Q3 net interest income of $305 million set a new record as the strongest quarterly NII we've seen in our company's history. Our NII was up 16% relative to Q3 of 2024. We also saw strong quarterly noninterest income of $81 million in Q3, a 21% increase from the prior quarter. The increase was driven primarily by capital markets revenue, wealth fees and a onetime asset gain of approximately $4 million tied to deferred compensation plans. Total noninterest expense was $216 million in Q3, up $7 million from the prior quarter. The quarterly increase was primarily driven by performance-based incentive programs, delivering positive operating leverage continues to help us post strong quarterly operating results and is a primary objective as we execute our plan. Managing credit risk is also a top priority, and we remain pleased with asset quality trends. In Q3, delinquencies were flat and nonaccruals were just 34 basis points of total loans. Net charge-offs were also flat at 17 basis points and our ACLL decreased 1 basis point to 1.34%. And finally, we posted a return on average tangible common equity of over 14% in Q3, a 250 basis point improvement from Q3 of last year. On Slide 3, we provide a reminder of how our strategic investments are transforming our return profile and setting us up for additional momentum over the remainder of this year and into 2022. First, we're positioned to take market share in commercial lending and deposit acquisition, thanks to a strategy predicated on hiring talented RMs in metro markets where we're underpenetrated. In fact, we've already seen results from our efforts. Through the first 9 months of the year, we've already added nearly $1 billion in C&I loans to our balance sheet with pipelines remaining strong and several more noncompete set to roll up between now and the first quarter of next year, we expect our momentum to carry through '26. And as those relationship C&I balances come onto the books, they're replacing lower-yielding nonrelationship resi mortgage balances that are rolling off, positioning us to diversify our asset base more profitably without changing our conservative approach to credit. This mix shift is driving enhanced profitability. Over the past 2 quarters, we saw our margin climb above 3% and posted back-to-back quarters of record NII. As we continue to grow and remix our asset base and support it with low cost core deposits, we see additional opportunity ahead. On Slide 4, we highlight our loan trends through Q3. On both an average and period-end basis, quarterly loans grew by 1% versus Q2. And that growth was once again led by the C&I category. On a spot basis, C&I loans grew by 3% or nearly $300 million versus the prior quarter. After adding nearly $1 billion in C&I balances to our balance sheet year-to-date, we feel very well positioned to meet or exceed the $1.2 billion growth target we originally set for ourselves in 2025, thanks to the strength of our pipelines and the additional lift from newly hired RMs as our noncompetes expire. Auto balances also grew by $72 million in the third quarter as we've continued to be, to selectively add prime and super prime balances to our book. Total CRE balances grew slightly for the quarter, but decreased by $160 million on a quarterly average basis. We expect elevated CRE payoff activity in the coming quarters as rates continue to fall. Overall, we continue to expect total bank loan growth of 5% to 6% for the year. Shifting to Slide 5. Total deposits and core customer deposits both bounced back as expected in Q3 following Q2 seasonality. Core customer deposits increased by over $600 million point-to-point with gross spread across most key categories. Relative to the same period a year ago, core customer deposits were up 4% or $1.2 billion. And growth in our core deposit book has enabled us to work down our wholesale funding balances. Here in Q3, overall wholesale funding sources decreased by 2% versus Q2. Based on our latest forecast, we now expect core customer deposit growth to come in towards the lower end of our 4% to 5% growth range for the year, but we remain confident in our ability to grow granular low-cost core customer deposits over time for 2 key reasons. First, our consumer value proposition stacks up well against any bank or fintech in the industry, and we have additional product upgrades planned for late Q4 of '25 and into 2026. This gives us an engine to attract deep and retain checking households over time, and it's already driving results. After posting the strongest organic primary checking household growth numbers we've seen since we began tracking a decade ago back in Q2, we followed that up with another quarter of solid growth in Q3. Second, we've refined our focus on commercial deposits by moving to a balanced scorecard, hiring relationship-focused RMs, launching a new deposit vertical and most recently, hiring Eric Lien as our new Director of Treasury Management. With pipelines growing and several noncompetes set to expire in the coming months, we feel very well positioned for growth in 2026. We continue to expect that our efforts to drive growth in lower-cost core customer deposit categories, will enable us to further decrease our reliance on wholesale funding sources over time. And with that, I'll pass it to Derek to discuss the income statement and capital trends.
Derek Meyer: Thanks, Andy. I'll start on Slide 6 with our yield trends. In the third quarter, total earning asset yields remained flat at a 5.5% and interest-bearing deposit costs also held flat at 2.78%, while total interest-bearing liabilities ticked up 1 basis point to 3.03%. Within our major asset categories, slight decreases in commercial, CRE and auto yields were offset by slight increases in mortgage and investment yields. While total interest-bearing deposit costs were flat compared to Q2, they were down 55 basis points from Q3 of 2024. Moving to Slide 7. Third quarter net interest income of $305 million was up $5 million versus the prior quarter and $42 million versus Q3 of 2024. Q3, net interest margin held firmly above 3% at 3.04%, which was flat compared to Q2 but 26 basis points higher relative to Q3 of 2024. Based on our latest expectations for balance sheet growth and mix, deposit betas and Fed action, we continue to expect to drive net interest income growth of between 14% and 15% in 2025. This forecast assumes 2 additional Fed rate cuts in 2025. Given the potential for additional rates, we've provided a reminder of the steps we've taken to dampen our asset sensitivity on Slide 8. Over time, we put ourselves in a more neutral position to minimize interest rate risk. We've maintained repricing flexibility by keeping our funding obligations short we've protected our variable rate loan portfolio by maintaining received fixed swap balances of approximately $2.45 billion, and we built a $3 billion fixed rate auto book with low prepayment risk. While we're still modestly asset sensitive, a down 100 ramp scenario now represents just a 0.5% impact to our NII as of Q3. We expect to maintain this relatively neutral position going forward. Moving to Slide 9. Total securities increased to $9.1 billion in Q3 as we've continued to modestly build our AFS book. Our securities plus cash to total assets ratio climbed to 23.4% for the quarter. We continue to target a range of 22% to 24% for this ratio. On Slide 10, we highlight our noninterest income trends for the quarter. In Q3, total noninterest income of $81 million was up 21% relative to both the prior quarter and the same period last year. The increase in Q3 was primarily driven by strength in capital markets and wealth fees with an additional boost from nonrecurring asset gains. In the capital market space, in particular, the increase was due to an elevated level of activity in our syndications and swaps businesses. The asset gain booked during the quarter was approximately $4 billion for deferred compensation valuation adjustment. Given the strong quarter, we now expect a total of -- we now expect total 2025 noninterest income to grow by 5% to 6% relative to 2024, after excluding the nonrecurring items that impacted our fourth quarter 2024 and first quarter 2025 results from the balance sheet repositioning we announced last December. Moving to Slide 11. Third quarter expenses of $216 million were up $7 million versus Q2, with much of the increase attributed to performance. The increase came in personnel where we booked $4 million of additional expense for the same deferred comp valuation adjustment that was recognized as a gain in our noninterest income. Another large component was a $4 million increase in variable compensation expense the result of strong execution against our strategic plan. During Q3, the personnel bucket was also impacted by approximately $1 million of incremental health care costs relative to Q2. Outside of personnel expense, we also saw quarterly increases in technology, business and development and advertising expenses, offset by decreases in legal and professional fees, loan and foreclosure costs and other noninterest expense. As we've stated previously, we continue to invest to support growth, but driving positive operating leverage remains a top priority. Here in Q3, our efficiency ratio decreased for the third consecutive quarter coming in below 55%. Based on our latest forecast, we now expect total noninterest expense growth of between 5% and 6% in 2025 off our adjusted 2024 base. On Slide 12, capital ratios increased across the board once again in Q3. Our TCE ratio of 8.18% in Q3 was up 12 basis points versus the prior quarter and 68 basis points versus Q3 of 2024. Our CET1 ratio increased to 10.33%, a 13 basis point increase relative to the prior quarter and a 61 basis point increase versus the same period a year ago. Based on our expectations for growth in 2025 and current market conditions, we continue to expect to manage CET1 within a range of 10% to 10.5% for the year. I'll now hand it over to our Chief Credit Officer, Pat Ahern, to provide additional updates on credit quality.
Patrick Ahern: Thanks, Derek. I'll start with an allowance update on Slide 13. Our CECL forward-looking assumptions utilized the Moody's August 2025 baseline forecast. This forecast remains consistent with a resilient economy despite the higher interest rate environment. It contains no additional rate hikes slower but positive GDP growth rates, a cooling labor market, continued elevated levels of inflation and continued monitoring of ongoing market developments and tariff negotiations. In Q3, our ACLL increased by $3 million to $415 million. This increase was primarily driven by an increase in commercial and business lending, which largely stemmed from a combination of loan growth, plus normal movement within risk rating categories. Our ACL ratio decreased to 1.34%, down 1 basis point from the prior quarter. On Slide 14, we continue to review our portfolios closely given ongoing uncertainty in the macro picture, but we maintain a high degree of confidence in our loan portfolios and continue to see solid performance in Q3. Total delinquencies were flat at $52 million in Q3. These delinquency trends are largely in line with the benign trends we've seen for the past several quarters. Total criticized loans ticked higher in Q3 with an increase in substandard accruing partially offset by decreases in the special mention and nonaccrual categories. [Audio Gap] With the current industry guidance. As a reminder, we do not feel that recent trends in this category are an indication of a material shift in the credit profile of the portfolio nor has there been a corresponding risk of loss. In fact, we continue to see resolution with some of our more stressed credits and liquidity remains present in the market in terms of both payoffs and loan re margin. Nonaccrual balances decreased to $106 million in Q3, and down $7 million versus Q2 and down $22 million from Q3 of 2024. Finally, we booked $13 million in net charge-offs during the quarter and $16 million in provision. Our net charge-off ratio held flat at 0.17%. All 3 of these numbers remain squarely in line with the figures we've seen over the past several quarters. In response specifically to tariffs and ongoing trade policy negotiations, we remain in contact with clients as the trade policy discussion continues. I would note that clients have been planning for tariff changes for some time, and we feel comfortable with the positioning of their strategies and the ability to execute when more clarity exists. Going forward, we remain diligent on monitoring other credit stresses in the macro economy to ensure current underwriting reflects the impact of ongoing inflation pressures and shifting labor markets 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. We expect any future provision adjustments will continue to reflect changes to risk rates, economic conditions, loan volumes and other indications of credit quality. And finally, given the recent industry news surrounding nondepository financial institutions or NBFIs, I'd like to provide a brief update on where we stand. NBFI balances represent a minimal part of the bank's total loans largely comprised of REITs, mortgage warehouse lines and insurance company lending. These facilities have historically performed very well with relationships that average over 10 years with the bank. With that, I will now pass it back to Andy for closing remarks.
Andrew Harmening: Thanks, Pat. In summary, we're really pleased with the results, both in the third quarter and year-to-date over the first 9 months. We feel very well positioned based on the actions we've taken. And believe that the enhanced strength and profitability profile, solid capital position and disciplined approach to growth will serve us well going forward. With that, we'll open it up for questions.
Operator: [Operator Instructions] And our first question comes from Timur Braziler with Wells Fargo.
Timur Braziler: C&I growth has been and remains pretty impressive here. I guess I'm just wondering what happens when the remaining RMs come off of their noncompete? To what extent should we expect that growth rate to accelerate? Is the expectation of that -- that growth rate accelerates from the area as they come online?
Andrew Harmening: Yes. Well, good question. Look, we still have quite a bit of lag, we think, left in this. There are a couple of things that I look at, specific to this initiative I look at what is our production this year? Well, that production is up 12%. What does our pipeline look like? Our pipeline is up 31%. That's on the loan side. So as we head into the end of the year and you start to see some of the nonsolicitations and about half of them are already off. So we're getting up to that point where production, we would expect it to go up just a little bit next year. You may have a little more amortization because your portfolio has grown. What we believe though is we're set for a strong C&I growth above the market in 2026, probably as exciting and something we don't talk about. We thought there would be a lag effect to deposit production on commercial, and it's panning out the way that we thought we're adding some very good new names on the deposit side. But when we pull up our deposit production right now, our deposit production is up 23%. Now that's not seasoned, and we'll roll that into our seasonality and be able to forecast very clearly. But it's a very good omen because the pipeline itself is also up 46%. And I've been asking continually each quarter to our Head of Commercial Banking. When will we see that production start to catch up with the pipeline? And the answer is right now.
Timur Braziler: That's good color. And then looking at fees this quarter, obviously very impressive. The guide does imply a pretty large step down in 4Q. Can you just maybe talk through some of the success you saw in 3Q and what the expectation is for decline in the coming quarter?
Andrew Harmening: Yes. I mean, the fee income in some categories can be a little lumpy. We did have a onetime benefit through a portfolio asset gain. So that's not likely as repeatable at that level. However, when I look towards 2026 versus the fourth quarter, so it was a little bit higher in the fourth quarter but some of the underlying benefit that we're getting in capital markets, commercial production is up. Rates are trending down and likely to continue. That makes fixed rate conversion more attractive. Pipelines are up. And with fixed rate likely up and more popular in 20 -- or fixed rates likely more popular in 2026 and production trending up. We think that bodes pretty well for the forward view. The linked quarter-over-quarter is not likely to be quite as high for the reasons that I mentioned in Q4.
Timur Braziler: Okay. And then just last for me. ROTCE, 14% this quarter continues to grind higher, 15% seems to be in striking distance. I guess how are you thinking about further improvement here in these next couple of quarters with rate cuts? Is there an ability here to continue grinding that higher? Or does that trend maybe take a step back a little bit as you digest these hikes or these cuts?
Andrew Harmening: Derek, do you want to take that?
Derek Meyer: Yes. Thanks, Tim. Yes. I think the opportunity is there. I think, again, I was just going to come back to the market's response to rates vis-a-vis deposits because obviously, the big, we had a nice uptick in fees we expect the hiring to help that continue, but it will still be choppy. So I see the opportunity on the margin side in the long run still being the bigger the bigger lever. And based on what we saw the first couple of weeks after the rate cut in September and the response to how we rolled out our deposit back book rate cuts and what we're seeing in the market response, the outlook is pretty good. So I think we have the ability to continue to grind that higher. I think it's going to bounce around quarter-to-quarter while we do that. But it feels like everything is on track.
Operator: Your next question comes from Daniel Tamayo with Raymond James.
Daniel Tamayo: Maybe just to follow up on the deposit side. You talked about the momentum you have there, certainly evident in the numbers. We did see deposit costs overall up a bit in the third quarter. Is there a read-through there on an increase in competition? Or something unusual. I'm just curious what you saw in the third quarter that drove those costs modestly higher?
Derek Meyer: Yes. I don't think there's a lot to read you there. Part of our benefit, I know you remember the first part of the year and then the last year, we have seasonality that's in addition to account acquisition that affects the rates. And what happens this quarter is some of that seasonality is in accounts that are at the higher end of pricing. So as those things came back in, they came in at the higher rates relative to the back book and put a little bit of pressure on the overall yields. But I don't think we're uncomfortable with what we netted out altogether. Again, why my early canary in the coal mine read on deposit pricing is what happened when we went and looked at the $11 billion, $12 billion of managed rates we had to reprice right when the Fed cut and where are we able to execute on it and what was the response from the customers, and that went very well.
Daniel Tamayo: Great. That's helpful color. Appreciate it. And then maybe for you, Andy, on the hires. You talked a lot about the solicitation agreements that those folks will be coming off. They are coming off and more coming. Just curious in terms of additional incremental hires that the pace around that timing if there's the time of the year, beginning of the year when that tends to happen.
Andrew Harmening: Yes, I feel like we're open for quality relationship managers year-round. We've shared with our Head of the Commercial Bank that if there is a team that is well known in a market, that has a following that is interested in joining us, we'll consider that any quarter of the year. We don't have a stated plan to increase off of what we have because we know that what we have will lead to pretty solid growth next year. But we'll be opportunistic in a market where we see disruption in dislocation. When you see the M&A activity in the world, that usually leads to opportunity for those banks that have a good reputation in the space. I'll say, as you start to track talent as you start to do deals, you get a reputation that's positive. And so what I would say to that, Daniel, is we will be opportunistic, we won't have a stated number of new RMs, but should that opportunity arise. And I suspect it will during the year, we'll take advantage of that.
Operator: Your next question comes from Scott Siefers with Piper Sandler.
Robert Siefers: Let's see. So Andy, I just wanted to follow up a little on the loan growth discussion. I mean like the C&I really it speaks for itself. Maybe just a thought or 2 on where we stand with some of those areas that have been more of headwinds on total growth, like resi real estate rundown the CRE payoffs. I know you mentioned those in particular, will likely stay elevated in coming periods. But any reason that either of those or are there any recent headwinds would either accelerate or decelerate in coming periods? Just trying to get a sense for kind of likely interplay between the momentum in C&I and the things that have held back even stronger net growth.
Andrew Harmening: Yes. No, that's a great question. You characterized resi as headwind. It's a headwind in terms of balances. It's a benefit in terms of having that run off and what that leads to, and it's purposeful, as you know. Certainly, if rates go down, they'd have to go down pretty significantly, say, 1% to 2% because of the position that those are in today to have a meaningful adjustment. But we plan for the decrease that we're seeing. So that's within the plan. The part that is maybe -- I'm not sure what adjective, a little bit less predictable but expected is CRE. So on the CRE front, as rates go down, there'll be a little bit of pent-up demand for pay downs, not just with us but across the industry. We're expecting that. So does that happen in 90 days? Does it happen in 120 days? Does it happen over 180 days? It's hard to say. So it could have a short-term impact. However, we've already gone back out to market. And the production on the commercial real estate side has increased versus the prior year. So we're up, for instance, about $100 million above the prior year in construction lending. And those are loans that will help offset some of that in 2026. So you could see a short-term impact if a couple of rate drops and there's an opportunity for some of our customers to refinance in the permanent market. So that would be a short-term thing. It doesn't worry me through 2026 because I think we've positioned ourselves with additional lending to make up for that. But probably on the CRE side, that's one where you might see it a little more quickly if rates become advantageous.
Robert Siefers: Got you. Okay. Perfect. And then separately, just sort of following up on that last question about like sort of team and RM lists and stuff like that. I think during the third quarter, you made some comments about perhaps entering some new markets, I think, in particular, you sort of talked out like Oklahoma, Kansas City and Denver. I know you already -- or I believe you already did the team lift in Kansas City. But when you think about adding to the footprint, are you thinking still the bias is strongly organic? Or would M&A become a possibility at some point?
Andrew Harmening: Well, I mean, the bias is strongly organic. We feel like we have a proved it out year, and we're 3 quarters into proving it out. We feel like we're stacking up quarters. So we're really pleased with that. but we want to do that through the fourth quarter. So that remains number one. And Scott, what I would say is I've been here 4.5 years. So I'm in year 5. And the focus has been the same. It's been execution and opportunity. And so when we see things -- and it has to be within our wheelhouse. It has to fit what we understand and what we know and what we can execute on. So that won't change. Does that mean it's organic or inorganic? I would leave it with we continue to evaluate opportunities in a way that's very similar to everything we've done over the last 5 years.
Operator: Your next question comes from Jon Arfstrom with RBC Capital Markets.
Jon Arfstrom: Andy, a question for you on the pipelines. When you talk about the lending pipeline increases, is that from new hires and market share gains? Or is it borrowers expanding and becoming more optimistic. Can you just kind of separate the two?
Andrew Harmening: Yes. I don't think it's from the latter. I think you have an economy that's been -- news has been bouncing around and forecast of kind of perhaps a little bit slower GDP. What we've said is whether GDP is 1.5%, 2%, 2.5%, we believe we can grow. And so this is, I think, largely from the approach from the folks that we have brought into the team, these are A players. They are folks that could get a job anywhere in the country at any bank. And so being able to bring that kind of talent in. And then we've surrounded it with tools that we continue to establish to make it easier for them to do business. But I think the lion's share of this is on the pipeline, and I'm really pleased to see the production pulling through now. I mean that to me is what we've been waiting to see. We've seen it a little bit more each quarter. But I would say it's, by and large, it's mostly people.
Jon Arfstrom: Okay. Good. Derek, one for you, just a follow-up on the margin. I appreciate Slide 8, but what is the message on the kind of the near-term margin outlook from here if we get a couple more cuts? You're talking about reducing asset sensitivity, but I'm wondering, are you signaling a little bit of a dip in the margin? Or do you think the mix shift is enough to keep the margin stable and moving higher?
Derek Meyer: I think we believe that we've been very focused on stability. So generally speaking, our remixing generates a basis point or 2 of margin improvement. That's been true for many forecasts now. You could have a blip in any given quarter based on strange behavior in the market with deposit pricing or movements in the portfolio related to payoffs or nonaccrual reversals or pay downs. But I think over a quarter or 2, it's still mostly stability. And I know you're asking that because frequently, if there's a long lag in repricing deposits, you can get compression. But that's why I keep harkening back to what were the first steps that we were able to take and how did I see customers respond and do we see anything strange in the market that would take us off course and make everyone hesitant. And that hasn't -- I haven't seen a lot of that. It's still early, but it gives us confidence in committing to a pretty stable outlook.
Andrew Harmening: Jon, I just -- I agree with everything Derek said, but I'd also add on to that is every time we go from a negative 2% to negative 1% to a 0% household growth, 2.5% to 1% to 1.5%. We intend to continue that trend as we head into next year. It's small incremental movements, but those are operating accounts that we're bringing in. That is the cream of the crop when it comes to how you think about managing your margin and your funding sources. And then we go into next year with, really, frankly, again, more tools than we've had before, whether it's a focus on wealth, the product mix that we're going to launch before year-end or it's the expansion of the vertical and HOA and title, that is significant and those are things we just haven't had. There are more quivers that fit into that. So the household growth as in addition to additional capabilities, that is what allows us to believe that we're able to remain either flat or slightly up as we go through the course of the next several quarters regardless of the multiple interest rate changes.
Operator: And your next question comes from Jared Shaw with Barclays.
Jared David Shaw: Tying into the margin, I guess it was this time last year that we got a little bit of an update on thoughts around beta on the deposits through the cycle. If we get the 2 cuts or if we get 2 more cuts this quarter, where do you see with the changes in the deposit base, where do you see that sort of cumulative beta moving from there?
Derek Meyer: Yes. I think the range I'm thinking about now is about 55% to 58%, I think that's a little bit better potential. I think last time, it was more like 55%, 56% to the cycle. So again, things look good. And I also think we get more confidence as we get closer to the additional verticals rolling out because it gives us more options on how to manage levers and handle the higher-priced accounts.
Jared David Shaw: Okay. And then on the expense, especially on -- specifically on the personnel expense, you called out a couple of things. As we look at fourth quarter, should we assume that the incentive comp stays in the numbers going forward? Or is that more of a onetime catch-up? How should we think of that?
Derek Meyer: Yes. So the deferred comp is largely tied to market value. So if -- so that -- it should stay where it is, unless the market goes up a lot from here were down from here. So set that aside. We tie that largely to our forecast. So as long as if we are consistent with our guidance, we would expect that to stay at similar levels, not step up from here. but we're not going to complain if we blow through our guidance, and we have to share some of the comp for it.
Andrew Harmening: And just to piggyback on that, too, Jared, you didn't ask necessarily about what we're expecting next year, but that usually is the next question. And we're planning for '26 expense increase to be -- the increase to be less than 25%. We've been opportunistic this year when we see opportunities to drive revenue and drive return and improve operating leverage, we've taken it. But those are manageable and we've already planned for going into if we don't have the exact same scenario.
Jared David Shaw: Okay. All right. And then, Andy, I think in your comments, you mentioned something about a new deposit system or a system upgrade that can help drive maybe some incremental growth. Any details around that? And is that fully baked into the expense structure?
Andrew Harmening: It is baked into the expense structure. The capability, really, it's a product enhancement first, on the wealth side that we expect to launch by the end of November that is substantial in the value proposition that we've had, which we've largely not built out before. So we focused on the consumer, growing that, mass affluent, growing that, commercial growing that, and it kind of meets at wealth management. So we believe that's one of the opportunities. The HOA title is a business where we have a very good team that's ready to go. And they have helped us with what capabilities their customers require in detail. And so that will be an ongoing road map. We expect to launch something either by the end of the year, if not the first part of January but then we think we'll have additional pieces in second quarter and third quarter. That will be a priority for us. It won't raise the cost. We'll do that at the expense of something else that is not such a large opportunity for the bank.
Operator: And ladies and gentlemen, there are no further questions at this time. So I'll hand the floor back to Andy Harmening for closing remarks.
Andrew Harmening: Well, look, we leave here pleased with the third quarter. We expect to land the plane in the fourth quarter and are optimistic about the fundamentals going into 2026. And as always, we appreciate your interest in Associated Bank.
Operator: Thank you. And with that, we conclude today's call. All parties may disconnect. Have a good day.