Associated Banc-Corp

Good afternoon, everyone, and welcome to Associated Bank Corp's third quarter 2021 earnings conference call. My name is Shamali, and I will be your operator today. At this time, all participants are in 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 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 actual results to differ materially from the information discussed today is readily available on the SEC website in the risk factors section of associated with 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 Open Remarks. Please go ahead, sir.

Well, thank you, Shamali. Good afternoon, everyone, and welcome to our third quarter 2021 earnings call. I'm Andy Harmony, and I'm joined today by Chris Niles, our Chief Financial Officer, and Pat Ahern, our Chief Credit Officer. I want to kick things off by covering the macro highlights for the quarter and give you an update on the strategic initiatives that we presented both internally and externally last month. Then Chris will walk you through where we are on margin, fees, and expenses. And then finally, Pat will close us out with an update on credit. On a macro level, we continue to see signs of a strengthening economy in our markets. Unemployment rates in Wisconsin and Minnesota have remained at or below 4%, and manufacturing has been consistently expanding, which is reflected in the positive momentum we're seeing in the Midwestern footprint. While the third quarter news cycle is dominated over concerns of surging Delta variant and supply chain challenges, we do remain optimistic about growth in the latter part of this year and into next. Our customers are doing well. Sound credit performance continues to be foundational, and Associated is well positioned to participate in the coming expansion. Now, let me touch on third quarter highlights as outlined on slide two. On the top line, we saw revenue expansion across all key areas of our business. Interest income grew, our fee businesses grew, and we realized additional gains during the quarter. We also see signs of increasing customer confidence with spending activity, deposit levels, and capital market transactions all up from the second quarter. On the liability side, Rising deposit levels have also allowed us to further moderate our funding costs. Now shifting to credit, we continue to benefit from improving credit backdrop as we work our way through 2021. Our customers have proven to be resilient and markets have continued to recover throughout the year. After posting reserve releases in each of quarter one and quarter two, we posted another negative provision in the third quarter and further net reserve release. Our CECL reserves are now below our CECL day one levels. From an operating expense perspective, we continue to be disciplined even as we embark on our multiple initiatives. And aside from the $2 million of facility exit costs we incurred in Q3, expenses were fairly flat. Taken together, these factors have helped us drive our year-to-date returns on average tangible common equity to over 13%. Moving to slide three, I want to dive a little deeper into loans. We shared back in Q2 that we were starting to see signs of increased lending activity and line utilization in our commercial portfolios, and I'm pleased to announce that this trend has carried over into the third quarter. Average commercial and business lending loans, excluding PPP, grew by over 3 percent quarter over quarter, led by general commercial. Additionally, we continue to see growth in several specialized lending categories and CRE construction. While certain aspects of the economy face unexpected headwinds during the quarter due to the resurgence of COVID, we continue to be encouraged by the conversations we're having on the front line and the numbers that are starting to emerge in our pipelines. We're also encouraged by customer activity, consumer activity. We officially launched our auto finance vertical on September 30th and have already funded loans across 13 states. We are excited about the early returns in our auto business. This addition to our product set allows us to further diversify our consumer lending portfolio and earn slightly better spreads than our traditional mortgage origination activities. Consumer card spending activity was also remarkably strong during the quarter. Outstanding credit card balances increased 6% quarter over quarter, a greater than 24% annualized rate, suggesting a significant uptick in the confidence of our retail customers. And finally, our PPP and oil and gas portfolios continue to run off as expected. We expect the majority of our remaining PPP to be paid down in Q4, and we expect the oil and gas portfolio to be largely paid down over the coming year. Additional loan trends for the third quarter are highlighted on slide four. On a longer-term trend, we're pleased to see commercial and business lending rebound during the quarter, reflecting our first expansion in more than five quarters. Line utilization was a contributor to the rebound. Commercial line utilization numbers continue to close the gap relative to our historical levels. In April, our commercial customers were funding about 12.5 percentage points below our historic line utilization levels. By September, this gap had narrowed to 8.5 percentage points. And while we still remain well below our pre-COVID monthly averages, our September line utilization was the highest we've seen since July of 2020, and our momentum coming out of the August lull we experienced seems to be establishing a positive trend. Construction lending was also a bright spot for the quarter as our proactive commercial real estate team continued to grow both outstanding and commitments on a year-over-year basis. And given our substantial back book and construction commitments, we're confident Outstanding's will continue to grow well into late 2022. As we look to the fourth quarter, we remain optimistic around loan growth, but are adjusting our expectation in response to the economic headwinds that played out in the third quarter. We now expect full-year commercial growth, that is, CRE and C&I combined, excluding PPP, of approximately 2%. On slide five, we've provided a walk forward of our quarterly pre-tax, pre-provision income from the second quarter to the third quarter. And while our pre-tax income was essentially flat for the quarter, this masked the $9 million improvement in our pre-tax, pre-provision results and our positive operating leverage. Looking past the $11 million drop in provisioning, both interest income and fee income items were significant contributors to our quarter-over-quarter improvement. I mentioned last quarter that we expected expansion in pre-tax, pre-provision income over the second half of 2021 to more than cover the incremental cost contemplated for our newly announced initiatives. We remain committed to these targets as we head into Q4. Now, turning to slide six, I'd like to highlight that we announced our strategic vision back in September. We said we'd start executing on our strategies immediately, and we have. Slide six shows some of the steps we've taken to make real progress against the four key pillars of our strategic plan. We continue to expand our lending capabilities. Our auto finance business is up and running with book loans and nearly 750 dealer partners signed up. We're currently originating loans in a pilot mode across 13 states and 60 dealers. Origination activity to date has been in line with our expectations, and we'll be looking to ramp up our volumes as we move through Q4 and roll out our program to our broader dealer network. In addition, we have rounded out the executive leadership team for both our equipment finance and our asset-based lending initiatives. We continue to add experienced relationship managers and lending specialists into our core markets to better serve the needs of our commercial and small business customers. And we brought increased focus to our wealth management areas while targeting new opportunities across our footprint. On the digital front, we're on track to transform our consumer digital banking experience in the first quarter with the launch of a new platform, bringing increased customization and architecture that will more easily allow us to integrate FinTech partners to improve the customer experience. This is our first big step in a plan that will transition spending towards our digital channels and technology over the next several years. And finally, we're always looking for ways to optimize our capital and balance sheet. And in the third quarter alone, we redeemed $100 million of preferred stock repurchased $60 million of common stock, and increased our common dividend by 11%. Simply put, we are full steam ahead on our efforts, and we look forward to building on this momentum as we head into 2022. So let me pause there and hand it over to Chris Niles, our Chief Financial Officer, to provide further detail on our margin and income statement trends for the quarter. Chris?

Thanks, Andy. Turning to slide seven, our net interest income increased four million from the prior quarter, or 2%, driven by higher interest income across the board, and lower funding and time to file the costs. Our quarterly net interest margin increased slightly, expanding one basis point quarter to quarter. We've seen slowing refinance activity, which has stabilized our mortgage yields, and a steady decline in liability costs. NIM continues to be pressured by high liquidity levels. and compressed commercial loan yields. Moving to slide 8, we continue to see record average deposit levels. Third quarter average deposits were up over $1.2 billion, or 5%, on a year-over-year basis. This growth continues to be concentrated in our low-cost deposit categories. Low-cost deposits have grown approximately $2 billion from a year ago, and at quarter end, accounted for 67% of our total deposits. During the quarter, we continue to work down our high-cost network and time deposit balances. These decreased by approximately 1.3 billion from the third quarter of 2020. Meanwhile, our aggregated wholesale funding levels have continued to steadily decrease over the past five quarters and have decreased by nearly 2 billion year over year. Looking forward, the deposit pricing and funding actions we have taken are anticipated to help improve our margins into four and into 2022. Turning to slide nine, Given the high levels of liquidity, we began investing in securities late in Q3. We anticipate deploying additional cash balances into investment securities over the next nine months. Reinvestment yields are expected to be approximately 2% or better and accretive to our current portfolio earnings. We continue to target investment to total assets ratio of between 17 and 19% for 2021, and expect to rebuild the investment portfolio to somewhere north of 20% of assets by year end 2022. Looking forward, we expect our full year margin to end this year at approximately 240 for the full year. Now turning to slide 10, we'll comment on non-interest income trends. Fee income grew nicely during the quarter. We saw growth across several fee categories, including our mortgage banking unit, where net income grew $3 million from the prior quarter, assisted by MSR recoveries. We also saw solid growth in our fee-based revenues, where service charges on deposits and account fees were up 9% for the quarter and up 19% year-over-year. Card-based fees were also up 9%. Taken together, we view these trends as encouraging indicators of growth, growing consumer confidence as we emerge from the pandemic. Our non-interest income for the quarter also included $5 million in asset gains tied to private equity distributions. But even excluding this impact, income grew by nearly 5% in the previous quarter. Reflecting this continued strength in our core fee businesses, we now expect to finish 2021 at the upper end of our most recent fee guidance range. On slide 11, we highlight our expenses. The third quarter came in at $178 million, a $3 million increase from the prior quarter, including $2 million of facilities exit costs. Excluding these exit costs, expenses were up about $1 million. As we continue to roll out our new strategic initiatives, we remain committed to maintaining our expense management discipline. Taking into consideration all of the pending initiative actions, we continue to expect our total 2021 non-exit expense to come in consistent with our prior guidance range. Lastly, let me comment on capital. As shown on slide 12, our tangible book value per share continues to grow quarter over quarter and has increased 7% year over year to $17.58. Associated to regulatory capital levels, all remain strong. Our common equity tier one ratio has grown from the third quarter of 2020, even as we refer to shares redeemed preferred and increased to dividends. We will continue to target TCE levels at or above 7.5% and CET1 at or above 9.5%. With that, let me turn over to our Chief Credit Officer, Pat Ahern, to give you an update on the credit portfolio.