Associated Banc-Corp

Good afternoon, everyone, and welcome to Associated Bank Corp's fourth quarter and near-end 2021 earnings conference call. My name is Hillary, 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's actual results could differ materially from the results anticipated or projected in any such forward-looking statement. 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 table. Following today's presentation, instructions will be given for the question and answer 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, thank you, Hillary, and good afternoon, everyone, and welcome to our year-end earnings call. I'm Andy Harmoning, 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 strengthened economy. In the fourth quarter, unemployment rates in Wisconsin and Minnesota came down below 3.5 percent. 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 two. This quarter is 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 recovered throughout the year. After posting reserve releases in each of the first three 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 four-year non-interest expense was down year over year, while our fourth quarter expense ticked up by only 2 percent, 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 positioned us well going into 2022. Now, let's shift to slide three. 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 30th 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 percent 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 X 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 four, we highlight our annual loan trends for 2021. And as you can see, total end of period loan balances are 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 five, we've highlighted a couple 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 of 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 five 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 and 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 six, let me give you an update on our initiatives. When we talked back in the fall, we laid out a multi-year 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-end 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 seven, we've highlighted some of the additional steps we've taken to make headway against the four pillars of our strategic plan. In the auto finance businesses, we've stuck largely to prime and super prime space, with average FICO's north of 750 and 82 percent 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 staffing 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 it 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 eight, 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 to pilot costs. Our quarterly net interest margin continues 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 percent 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 a 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 two rate increases, we expect our full year 2022 GAAP reported net interest income to exceed $800 million. Turning to slide nine, 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 five quarters and have decreased by nearly $750 million year-over-year. We expect these deposit and funding trends to continue and our margin to continue to benefit into 2022. On slide 11, we note Associates' 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 percent of our year-end deposit levels. Switching to non-interest income trends on slide 12, we note that non-interest income was essentially flat during the fourth quarter, as strong wealth and capital market fees offset softening mortgage banking results. We also saw modest growth in service charges, card base, 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 non-interest income to exceed $300 million for the year. On slide 13, we highlight our expenses. The fourth quarter came in at 182, 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 increase to minimum wage to $17 an hour. For the full year 2021, total non-exit 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 non-interest expense of between $725 and $740 million. On slide 14, we have provided a walk-forward of our quarterly pre-tax, pre-provision income from the third quarter to the fourth quarter. While our pre-tax income was down from the prior quarter, our pre-tax pre-provision 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 percent 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 remain strong. We will continue to target TCE levels at or above 7.5 percent and CET1 levels at or above 9.5 percent. With that, let me hand it over to our Chief Credit Officer, Pat Ahern, to provide an update on credit.