Associated Banc-Corp

Good afternoon, everyone, and welcome to Associated Bank Corp's first quarter 2022 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 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 your reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please refer to page 23 of the slide presentation and to page 8 of the press release financial table. 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.

Thank you, Hillary, and good afternoon, everyone. Welcome to our first quarter earnings call. I'm Andy Harmoning, and I'm joined here today by Chris Niles, our Chief Financial Officer, and Pat Ahern, our Chief Credit Officer. I'd like to start things off by covering the highlights of the quarter and provide an update on our strategic initiatives. From there, Chris is going to walk through our updates on income, expense, and capital, and then Pat will follow up with an update on our credit trends. So here in the Upper Midwest, we continue to see signs of a strong economy in our footprint. COVID restrictions have largely been eased or lifted, and employment trends remain remarkably strong, with unemployment rates in Wisconsin and Minnesota now down below 3%. We also continue to see encouraging strength in our commercial loan pipelines and utilization rates, giving us confidence that the momentum we began to see in manufacturing back in the second half of 2021 is in fact carrying over into 2022. Meanwhile, all of our new lending initiatives are now officially up and running, putting Associated in a position to deliver more and relevant product solutions to our customers. While the war in Ukraine, continuing supply chain disruptions, and inflation issue pose significant question marks at the macro level, our core customer base has remained resilient and continues to borrow and to grow. This resilience is seen in the overall credit trends in our loan portfolios, which largely continue to improve. As we continue to transform the bank, one of our biggest opportunities is to listen to our customers and then take action. Guided by their feedback, we announced that we're making several changes to our overdraft program, and these changes will significantly reduce the financial burden of overdrafts to our customers. In summary, we have positioned Associated to be in a far better place than we were a year ago. Today, we're in a strong position to deliver expanding margins, continued positive operating leverage, and enhanced value to all of our stakeholders. So now let me touch on the first quarter highlights that are outlined on slide two. This quarter was marked by meaningful growth in our core loan portfolios, disciplined expense management, improving credit dynamics, and strong bottom line results. Our total loans grew at a 5% annualized rate on both an average and a period-end basis, and excluding PPP, Average commercial and business loans expanded at an even faster 8% annualized pace. This loan growth, along with our continued investment strategies, helped drive net interest income and margins higher, despite having two fewer days in the quarter. Now shifting to expenses. We managed our total expenses down quarter over quarter and year over year, while simultaneously increasing our minimum wage, investing in our technology platforms, and invest in our initiatives. We attribute these savings to the significant actions we took to consolidate our operations and support functions in the latter half of 2021. With respect to credit, we would highlight that we are posting a modest net recovery this quarter. Portfolio metrics continue to be strong and stable as we keep a close eye on geopolitical and economic risks. Taken together, loan growth, margin expansion, expense discipline, and strong credit drove robust EPS of 47 cents and another quarter of double-digit returns on capital. So, turning to slide three, I'd like to provide a little more detail on the loan trends we saw in the quarter. Looking to our average balances, we had net loan growth across all of our core business segments. Consumer loans grew as our auto finance vertical kicked into gear. and commercial lending grew, including our new verticals, more than offset the headwinds of the mortgage warehouse and PPP. General commercial lending again showed strong momentum, reflecting broad underlying loan demand with our customer base. On slide four, we'd like to highlight several dynamics which give us confidence in the continuation of the loan trends we've seen emerging over the past several quarters. First, the left-hand side of this page highlights the emerging total commercial growth we've experienced. Aside from the dual headwinds of PPP and mortgage warehouse, our commercial portfolio at March 31st was up 9% year-over-year and expanded at double-digit annualized growth rates versus the third quarter. This has largely been fueled by a rebound in commercial C&I balances, growth from our new ABL and equipment finance initiatives, as well as increased line utilizations. and we still see upside and room for more borrowing as the economic environment continues to normalize. Now, second, on the lower right, we'd also highlight that our back book of unfunded CRE construction projects has continued to grow. Year over year, we've added over a half billion dollars in unfunded commitments, most of which we would expect to see funded over the next 18 months. And while the first quarter is seasonally slow for construction in our markets, We fully expect this activity to pick up as the spring weather arrives in our footprint. Excuse me. Underscoring the points I just made, I'd like to affirm our full-year loan targets on slide five. With respect to commercial loans, we expect to end the year with $16 billion of outstandings, excluding ABL and equipment finance, which I'll touch on in a moment. Given the growth that we've seen, the robust pipelines that have continued to grow since year end, and the funding activity we expect to see this quarter, we're confident we're on track to hit our commercial loan goals for the year, even with the headwind of dampening of mortgage warehouse activity. We're also pleased to update you on the strong progress we're driving in our new ABL and equipment finance verticals. We've strengthened the teams. both groups have added commitments and outstandings during the quarter and we feel very confident about the 300 million dollar target we've set for year end so taken together we expect our total commercial book in the year at approximately 16.3 billion dollars turning to auto finance the first quarter demonstrated our team's ability to deliver we expect this portfolio to continue to grow strongly and maintain its strong credit profile as we roll out the program to our broader dealer network and into our core footprints later this year. In summary, despite some uncertainty in the markets and modest headwinds such as mortgage warehouse, we expect to achieve our lending growth targets in 2022. Now turning to slide six, let me make a few comments with respect to our continued investment in talent, our digital transformation, and our capital priorities. With respect to talent, we've continued to add new relationship and portfolio managers to our commercial and small business teams during the quarter and are on track to hire 15 to 20 bankers by year end. We also opened our Houston CRE office during the quarter and continue to ramp up our ABL and equipment finance teams. On the digital front, we crossed a milestone by launching our internal pilot for our new NCR digital platform. which we plan to roll out to all of our consumer customers this summer. Now, this is one I'm personally very excited about because it's going to give us an open architecture platform. It's going to allow us to integrate both customization and fintech solutions. Turning to capital. We remain committed to optimizing our capital to support our customers. In 2022, that means focusing squarely on organic growth. We see plenty of loan growth in our outlook and envision using all of our capital to support that growth while paying a competitive dividend. We continue to see our investments and strategies as creating a differentiated growth path for Associated that will drive further margin and efficiency gains in a time where we are already expecting to see significant tailwinds from the rate environment. So let me pause there for a moment and hand it over to Kristen Iles, 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 seven, net interest income continued to increase for the fourth consecutive quarter. The increase came as we put our excess liquidity to work in loans and securities. As we had previously indicated, our NIM bottomed out last year and has continued to inch higher each quarter since. Given the rising rate environment, our general asset-sensitive profile and the anticipated impacts of our growth initiatives, we fully expect our NIM to continue to expand and come in above the 2.5 level, which we already saw during the month of March. We now expect short-term interest rates to rise following each of this year's upcoming FOMC meetings. Assuming those rate increases are 25 basis points at least following each meeting, we would expect our full year net income to exceed $840 million. On slide eight, we highlight that we've purchased securities, sorry, which have been participating in moves higher in rates. In effect, we've been averaging up into the yields we're earning, even as we've reined in durations. Our blended investment yields for the quarter continue to move higher, and our total portfolio yields have improved by nearly 40 basis points since the third quarter. In anticipation of higher rates, we also took steps in Q1 to redesignate 1.6 billion of our securities from AFS to HDM. Nonetheless, our AOCI does reflect a $127 million reduction in the value of the portfolio during the quarter. This AOCI impacts net of earnings drove the 18 basis point reduction in our TCE, which you can see on our tables. Our TCE nonetheless ended the quarter at 7.7%. Moving on to slide nine, we continue to benefit from our strong deposit trends. In a time of year when we might typically expect to see a post-New Year outflow, average deposits were up 245 million quarter-to-quarter and up 7% year-over-year. Growth continues to be concentrated in our low-cost deposit categories, such as our savings and interest-bearing demand accounts for consumers. With rates expected to rise throughout the year, we may see some outflows later in the year and would expect deposit pricing to heat up at some point. But so far, we have not seen customers reduce balances, and we're not seeing competitive pressure to raise rates in our markets. Moving on to slide 10, our core fee-based revenues came in modestly ahead of last year's comparable quarters. Total non-interest revenues did not improve year over year, with notable reductions in mortgage banking revenue, asset gains, and branch sales, as well as slightly reduced lowly income. With the expectation for continued rising rates, we see mortgage banking revenue further moderating as we move through the year. We also expect that higher rates will ultimately translate into higher earning credit rates for some commercial deposit customers, which will have the effect of dampening commercial deposit fees later in the year. As Andy mentioned, we also announced several changes to our OD NSF programs today that will impact our run rate for fees beginning in the third quarter. While these changes are intended to reduce the burden on our customers, they will also reduce our deposit service charge revenues by approximately $3 million in 2022. Given our outlook for higher rates and the revised expectations of lower service charges revenue from both commercial and consumer customers over the back half of the year, We are therefore modifying our full-year non-injurious income guidance moderately downward. We would now expect total non-injurious income for the full year of between $290 million and $300 million. Moving on to slide 11, first quarter expenses came in at $173 million, $9 million lower than before amid reduced personnel and other expenses. In alignment with the strategic initiatives we announced last fall, we do expect to scale up investments in areas such as technology and personnel later in the year. But as we continue to execute on our plans, we'll remain committed to maintaining our expense growth in line with the revenue and the revenue expectations. Taking all of our initiatives in consideration, we continue to expect our full year 2022 non-exit expense will be in the range of $725 to $740 million. On slide 12, we provided a walk-forward of our quarterly pre-tax, pre-provision income from the fourth quarter of 21 to Q1 of 22. While our non-interest income was down from the prior quarter, our pre-tax, pre-provision income grew by $3 million quarter to quarter, despite having two fewer days in the period. We estimate our daily interest accrual benefit at about $1 million per day. Slide 13 shows the four-quarter trend of our PTPT income. As you'll recall, we had stated back in July that we expected pre-tax, pre-provision to consistently come in above the $78 million baseline we set in Q2. I'm pleased to confirm that we've delivered on that and held to that statement over the past three quarters. Furthermore, We expect PTPP to continue to trend higher as we expand our operating leverage throughout 22 and into 23. Moving on to slide 14, we remain disciplined from a capital perspective and continue to drive our capital ratios towards their targets as we continue to grow loans on the balance sheet. As I mentioned previously, the AOCI impact we realized in our securities book was a key driver of our decrease in the TCE quarter-over-quarter. But thanks to strong earnings and the redesignation actions we took during the quarter, our tangible value per share only decreased 3%. We will continue to target TCE levels of 7.5 and CET1 levels of 9.5. I'll now turn it over to Pat Ahern, our Chief Credit Officer, for a credit quality update.