Associated Banc-Corp

Good afternoon, everyone, and welcome to Associated Bank Corp's second quarter 2021 earnings conference call. My name is Hector, and I will be your operator today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session at the end of this conference. 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 one, 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 20 and 21 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 Harmoning, President and CEO, for opening remarks. Please go ahead, sir.

Well, good afternoon, everyone, and welcome to our second quarter earnings call. Joining me today are Chris Niles, our Chief Financial Officer, and Pat Ahern, our Chief Credit Officer. Now, we're going to get to our financial results in a moment, but with this being my very first official earnings presentation, since taking over as Associated's president and CEO back in late April, I'd like to start by taking a moment to reflect on what I've learned in my last few months on the job and why I think the future is bright for Associated. Under Phil Flynn's guidance, Associated built a strong reputation based on disciplined approach to credit, capital, operational risk, and expense management. As an outsider looking in, I saw a clean balance sheet a strong capital position, and a franchise known for great customer satisfaction. These are all very attractive foundational qualities to build upon and qualities I've been able to validate since my arrival. Upon joining Associated, one of my first priorities was to listen and learn as much as I could, both from internal and external stakeholders. What's working well for our company? What are our growth opportunities? what we must do to win more customers and deepen community engagement. We started with 100 days of listening and a listening tour, and we have held over 175 largely in-person sessions with hundreds of colleagues participating and thousands of ideas shared. Throughout this process, I have personally spoken with over 300 colleagues across our footprint. I've also spoken directly with some of our largest customers and many of our key investors. And with this feedback in mind, we've already taken several actions to drive performance across the organization. First, knowing that competing digitally is more important than ever, we promoted Doug Peacock, who was previously our Director of Strategic Channels, to lead our digital strategies going forward and build a comprehensive digital roadmap across our entire consumer and business bank. Secondly, we have refocused our wealth management teams under the leadership of John Thayer, CFA, previously our chief investment officer, and a seasoned wealth management professional who will lead our integrated strategic vision for a business that already has many strengths. And finally, we are centralizing our FP&A team to bring additional discipline to the execution of our line of business activities. Our cross-group activities and importantly, the growth initiatives we intend to formally announce later this quarter. We are actively working on these strategies and initiatives, and we expect to lead to additional growth and positive operating leverage. We will communicate those strategies to you no later than September 13th. Now, let me touch on the business environment in our markets. and our second quarter highlights as outlined on slide three. The first half of 2021 has been marked by an encouraging transition to a new normal. We continue to see many signs of strengthening the strengthening economy in our markets. Many businesses in the Midwest are running at full capacity. In fact, we are seeing really large gatherings. Gatherings such as those of our newly minted world champion Milwaukee Bucks, which we just got to see outside our door today during their championship parade. Encouraged by these trends, our frontline teams have been back in front of clients and working directly with our customers for much of the year. We're optimistic about growth and feel associated as well-positioned to participate in the ongoing recovery. In fact, we've started to see signs of increasing lending activity and line utilization in our commercial portfolios. which is reflected in our period-end loan balances. Commercial and business loans, excluding PPP, grew by nearly 3 percent quarter over quarter, while the CRE segment of our loan book grew by nearly 1 percent. And further, our PPP portfolio continued to pay down as expected, with period-end loan balances and PPP down over 50 percent from the first quarter. We find all of these trends encouraging. We also began to see signs of increasing customer confidence in spending activities, with deposit and card fees up $2 million from the first quarter and credit card spend up 19% quarter over quarter and 40% year over year. Now shifting to credit, we continue to be very pleased with the improving credit environment over the first half of 2021, which speaks to resiliency of our customers and to the resiliency of our core market. Non-accrual loans were down 10% quarter over quarter, and net charge-offs remained flat at just $5 million. After posting a negative provision of $23 million in the first quarter of 2021, we posted another negative provision of $35 million for the second quarter. Taken together, charge-offs and negative provision combined to drive a net reserve release of $40 million for the period. And finally, we repurchased $30 million of common stock for the quarter and also added 40 cents to our tangible book value per share. Now turning to slide four, let me highlight a few quarterly loan trends. Compared to the first quarter of 2021, average second quarter loans decreased 1%. However, on a sequential quarter end period basis, We saw solid growth in several of our commercial, CRE, and specialty lending portfolios, including REITs, general commercial, and power and utilities, as our customers began to modestly draw on their lines. As expected, PPP loan balances continued to decrease, declining by $431 million, or more than 50%, as we've seen the SBA accelerate their pay down and forgiveness processing. We continue to enjoy strong mortgage originations during the second quarter. We've originated over $2 billion year-to-date, but we remain reluctant to add low-rate mortgages to our balance sheet. After seeing significant refinance activity in Q1, this activity carried over into Q2, driving our residential mortgage and HELOC balances modestly lower during the quarter. Looking towards the back half of the year, we remain optimistic around loan growth. Specifically, we are optimistic about commercial loan demand and still expect full-year commercial loan growth. That is CRE and C&I combined, excluding PPP of approximately 2% to 4%. I would also like to provide an update on our indirect auto lending initiative. As mentioned back in April, we are expanding our consumer lending platform to add indirect auto lending to our product set. We continue to build out the infrastructure and expect to begin booking loans during the fourth quarter of 2021. While adding auto allows us to diversify and add to our consumer portfolio slightly better spreads, we are also continuing to evaluate other consumer and commercial verticals with good lending characteristics. Slide five provides a bit more color around the period end trends that are giving us confidence that we are on track to meet our full year guidance for commercial loan growth. At June 30th, our commercial and business lending segment, excluding PPP, grew by 2.8% for the quarter, while CRE grew by 0.6% during the quarter as well. Combined, these two segments represented roughly 2% on a period end basis, which is in line with our full year expectations. Moving to slide six. We continue to see record deposit levels for associated customers, and second quarter average deposits were up $1.3 billion, or 5% year over year. This continued growth has reflected strong trends in our lowest cost deposit category averages, which grew approximately $2.4 billion from the same period a year ago. From a period end, quarter over quarter standpoint, however, We began to see signs of increasing business confidence. Combined DDA balances from our corporate and commercial specialty segments, which includes trust, were down by 12% or nearly $450 million from their historic highs at the end of the first quarter. We see this as a positive sign that businesses are putting their money to work in our economy. During the quarter, we also continue to work down our average higher cost network and time deposit balances, which decreased by approximately $1.6 billion from the second quarter of 2020. And on a related note, our aggregate wholesale funding levels decreased to approximately $3 billion at the end of the second quarter and have steadily decreased over the past five quarters. In addition, last week, We exercise an early redemption option on $300 million of our 3.5% medium-term bank notes, which will also help our margin going forward. On slide seven, we provide a walk-down of our quarterly pre-tax, pre-provisioned income, or PTPP, the first quarter to the second quarter. Adjusting for the MSR write-ups and one-time gains recognized in Q1, you can see our run rate has held steady and our net interest income is beginning to move higher. With net interest income increasing, we believe we have reached an inflection point on PTPP. In addition, the growth initiatives and efficiency strategies we will be rolling out later this quarter are intended to capitalize on our market strengths and position us to drive positive operating leverage and expand PTPP over the next several quarters. We do believe the expansion in PTPP over the second half of 2021 will more than cover the incremental costs contemplated for the initiatives on deck. So let me pause there and hand it over to Chris Niles, our Chief Financial Officer, to provide a little further detail on our margin and income statement trends for the quarter.

Thanks Andy. Turning to slide 8, we had previously indicated that net interest income and net interest margin would gradually start to expand over the last three quarters of 2021. Based on slowing refinance activity, a steady decline in liability costs and expected loan growth. In the second quarter, we started to realize the benefits of these factors with net interest income rising. Similarly, While quarterly NIM continued to be pressured, we saw an encouraging uptick from month to month, with the June NIM finishing at 2.45%, up nicely from March. Slide 9 provides a breakdown of the specific factors that lifted net interest income in Q2. On the mortgage side, margins and investment income were driven higher by declining refinance activity, which contributed to slower prepayment rates on mortgages and mortgage-backed securities. We expect mortgage yields to continue to rise over the back half of the year as the refinance wave continues to taper. On the commercial side, we saw an uptick in PPP income recognition relative to Q1. We had approximately $15 million of unrecognized deferred fees remain at the end of the quarter, and expect that most of that will be realized over the back half of the year. On the liability side, we continue to see downward momentum in overall deposit costs, quarter over quarter. This is especially true for time deposits, where average yields have continued to decline period over period. Average time deposit yields finish the second quarter at just 51 basis points. and we still have about 50 million in consumer CDs with rates above 2% set to mature by the end of the third quarter. Given the second quarter's margin, current CD rates, and market trends, we continue to expect our full year net interest margin to finish between 245 and 2.55%. Turning to slide 10, Second quarter non-interest income came in at $73 million, up from $68 million in the same period last year, excluding ABRC-related income, but down from the $95 million in the first quarter. The quarter-over-quarter decrease was driven primarily by a decline in mortgage banking income amid the tapering refinance wave. Partially offsetting this, fee-based revenues continued to expand led by service charges, deposit account fees, and card-based fees. Fee-based revenues overall increased by 4% quarter-per-quarter and 16% year-over-year. As shown on the upper right, mortgage banking gross gains of $9 million were down quarter-per-quarter due to sales margin compression. Despite the sales of Whitnell, which closed in the first of March this year, we've continued to see strength in our wealth management business. Wealth management fees saw a slight increase in Q2 after a strong first quarter, and we're pleased to have ended the quarter with over 13 billion of assets under management, up 12% year over year. Given we are halfway through the year, we are tightening our range of our full year fee income outlook to 315 to 325. Turning to expenses on slide 11, the first quarter came in at $174 million in total expenses, a slight decrease from the first quarter, and a 5% decrease from the same period last year. Personnel expenses rose for the quarter. However, other core expenses, including occupancy, continued to trend lower, more than offsetting the additional personnel expenses loss. Turning to capital on slide 12, Our tangible value per share continues to grow quarter over quarter and has increased 7% year over year to $17.35. Associated regulatory capital levels also remain strong. Our common equity tier one ratio has grown 45 basis points from the second quarter of 2020 as we conserve capital in light of the economic uncertainty we saw over the last year. We continue to target a TCE level at or above 7.5% and a CET1 level at or above 9.5%. With that, let me turn it over to Pat Ahern, our Chief Federal Officer.