Associated Banc-Corp

Good afternoon, everyone, and welcome to Associated Bank Corp's first quarter 2023 earnings conference call. My name is Shamali, 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 associated most recent form 10-K and subsequent SEC filings. These factors are incorporated herein by reference. For 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 8 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, thank you, Shamali, and good afternoon, everyone, and thank you for joining us. I'm Andy Harmoning, and I'm joined here today by Derek Meyer, our Chief Financial Officer, and Pat Ahern, our Chief Credit Officer. I'd like to start things off by sharing some financial highlights from the quarter. And then from there, Derek will walk through an update on margin, income statement trends, and capital. Then Pat will provide an update on credit. Then in light of the recent turmoil in the banking industry, we've also pulled together some additional information that underscores the stability of our markets and the durability of our business model. So while these past five weeks have generated a wide range of headlines about regional banks and financial service industry in general, We can still say that Associated Bank continues to operate from a position of strength, and it starts with our markets. As the largest bank headquartered in Wisconsin, we've been operating largely in conservative, diversified Midwest markets for more than 160 years, including metropolitan areas, mid-sized cities, and small towns. And it's important to note we serve a stable and diversified customer base with deposits from all banking segments. consumer, high net worth, small businesses, large corporate, government agencies, and commercial real estate. And here in the early part of 2023, these markets have remained resilient in the face of an uncertain macroeconomic environment. Unemployment rates remain stable with Wisconsin and Minnesota continuing to come in below the national average. The consumer remains healthy and our business customers continue to seek ways to expand and optimize their operations where it makes sense. This backdrop has enabled us to stay on offense with our initiatives. And while I like these initiatives and company strategic focus coming into the year, I like them even more right now. As we've discussed, our customer and deposit acquisition initiatives began well over a year ago. And over that time, we've demonstrated an ability to execute as a company. And after delivering the most profitable year in our company's history in 2022, we've carried that momentum forward in 2023 with several key milestones here in the first quarter. In February, we launched our new Champion of You brand campaign to support our customer acquisition strategy with television, radio, and digital ads. The campaign demonstrates our commitment to helping our customers, communities, and our colleagues become financially stronger. In March, we launched a new grace zone for the consumer and business accounts that are overdrawn up to $50, helping our customers when life brings the unexpected challenge. We also continue to build momentum in our recently launched deposit initiatives, such as our digital sales platform, our mass affluence strategies that give us the ability to attract and deepen more quality customer relationships. All of these efforts are positioned us to drive positive operating leverage, enhance our profitability, and meet the needs of our customers and communities when and where they need us. And while we like the progress we've made on our initiatives, maintaining discipline with regards to credit risk, expense management, and operational risk, that is the foundation of our company. These foundational strengths will continue to be our focus as we deliver enhanced value and provide a source of stability for our stakeholders. So with that, I'd like to highlight the key results for the first quarter on slide two. Our first quarter results reflected the continued expansion of our balance sheet, strong profitability, and stable credit impact. Loan balances continued to grow in each of our major segments, but as expected, the pace of that growth has slowed compared to the trends we saw in the back half of 22. As we continue to execute our strategic plan and benefit from rising rates, we once again delivered strong net interest income and net interest margin north of 3%. We also saw a slight increase in our non-interest income, while our expenses declined 5% from the prior quarter. Taken together, these inputs helped us drive positive operating leverage while delivering PTPP income of $149 million and a return on tangible common equity above 15%. We are continuing to monitor asset quality closely. But our credit trends in the first quarter remained favorable. We saw just five basis points of net charge offs during the quarter and added three basis points of ACLL. Despite an $18 million provision for the quarter, net income available to common still reflected a 41% increase compared to the same period a year ago. With that, I'd like to provide a little more detail on our loan trends. As shown on slide three. the diversifying impacts of our strategic plan have continued to drive broad, high quality loan growth across all major segments. We've now reported growth in nearly every major loan category for four consecutive quarters. However, this growth has slowed as compared to the strong pace we saw in 2022. This has been especially true for areas such as auto and CRE. Nonetheless, we've continued to add balances and consumer verticals such as auto and mortgage and in several of our commercial businesses. As we've seen over the past couple of quarters, this dynamic is being influenced by the funding of prior commitments and a slowdown in payoff activity. On an end of period basis, our mortgage warehouse business led the way in the first quarter, but we would not expect this trend to continue over the remainder of the year. Now, as we've discussed over the past several quarters, one of the benefits of our lending initiatives is that they've given us more flexibility to drive returns without stretching on credit. This also enabled us to decrease our reliance on lower yielding non-relationship asset classes. With this in mind, we made the decision to exit the third party originated mortgage business in Q1. This TPO business has historically represented about a third of our mortgage production. And while the loans have been high quality, they are lower margin than our retail mortgage loans are more susceptible to prepayments and have relatively low relationship value. Put it in context, we originated approximately $1 billion of these loans in 2022, and we expect to originate less than $100 million in 2023 as we wind down this business to focus on other areas that enable us to optimize returns over time. Given current market conditions, We now expect total loan growth of between 6% and 8% in 2023. Shifting to slide four, we highlight our deposit trends for the first quarter. Clearly, this was a very unique quarter for the entire industry. With deposits already at a premium in the current rate environment, the events of the past few weeks have added significant volatility for regional banks across the country. Despite those macro trends, Our core customer deposit balances decreased by less than 1%. And our retail deposits actually increased slightly for the quarter. Like most of the industry, we did see some short-term volatility from a subset of uninsured deposits in March, but those flows have stabilized. We view this as a result of stability and resilience of our markets. The diverse grain that our deposit base of our company has cultivated over the course of several decades and our recent efforts to attract and deepen customer relationship with digital tools and product enhancements. On an end of period basis, our total deposits grew 2% compared to the prior quarter and 7% compared to the same period a year ago. We remain comfortable flexing wholesale network funding levels in the short term, but we expect to hold this type of funding in check as we move through the year. We remain confident in our ability to fund our growth at a reasonable cost in 2023 and beyond, based on our in-flight initiatives. With that said, based on current market conditions, we now expect to drive total core customer deposit growth of 1% to 3%. Finally, on slide five, our team has once again helped to deliver strong revenue for the first quarter. And when combined with diligent management of expenses, we've been able to deliver consistent positive operating leverage and strong PTPP income. In the first quarter, PTPP income of $149 million represented a 67% increase as compared to the same period a year ago. We remain committed delivering positive operating leverage during 2023. With that, I'll hand it over to Derek Meyer, our Chief Financial Officer, to provide further detail on our margin, income statement, and capital trends for the quarter.

Derek. Thanks, Andy. Slide six highlights our asset sensitivity and liability rate trends throughout the first quarter. Average earning asset yields once again expanded meaningfully in the first quarter due to rising rates and the asset sensitive nature of our balance sheet. Versus the fourth quarter of 2021, total earning asset yields have now increased by 235 basis points, or roughly 53% of the increase in Fed funds target rate over the same period. On the liability side, interest bearing liability costs have now increased by 221 basis points, since the fourth quarter of 2021, or roughly 50% of the move in Fed funds target. Consistent with the rest of the industry, we've seen the pace of liability costs continue to increase into the first quarter. This S-curve effect has unfolded largely as expected, but the pace has accelerated in response to Fed's aggressive actions to fight inflation. We have also seen beta's increase from the success of our efforts to attract and deepen relationships in areas such as commercial deposits, wealth management, and mass affluence. These deposits often carry a higher beta by nature, but nonetheless, we're pleased with our initial momentum in these businesses. Moving to slide seven, we continue to deliver strong net interest income in the first quarter, but the number has come down slightly versus fourth quarter as rising liability costs outpace rising asset yields during the quarter. As compared to the fourth quarter, our net interest income decreased by 5% while our margin compressed by 24 basis points. With that said, our margin profile has transformed significantly over the past 12 months, and we're taking steps to drive more durable margin over time. As compared to the same period a year ago, our net interest income increased by 46% in the first quarter, and our NIM increased by 65 basis points. Moving to slide eight, we continue to take gradual steps to lock in a more durable margin profile and reduce our interest rate risk over time. First, we've taken steps to reduce our interest rate risk by gradually layering in swaps over the past three quarters. Given ongoing uncertainty around the macroeconomic picture in the near-term rate environment, we do not intend to call the peak on the interest rate environment in 2023, but we will continue to take reasonable steps over time to dampen our asset sensitivity and manage our downside risk. Within our core balance sheet, we've added high-quality liquid securities to take advantage of rising rates. We're also continuing to manage our deposit costs while actively working to bolster our funding base of low-cost core customer relationship deposits. With that said, the macro outlook remains uncertain. Our current expectations assume one additional 25 basis point Fed funds increase in May, with two 25 basis point decreases in September and November, respectively. Based on our current expectations for balance sheet growth, deposit betas, and Fed action, We now expect net interest income growth of between 13 to 15% in 2023. On slide nine, we highlight that we continue to build our securities book in the first quarter to align with our 18 to 20% target. Throughout the past year, the yields on our investments have risen steadily with the rate environment, but we've reined in durations to reduce our longer term rate risk. We also reduced exposure to unrealized losses in AOCI during the quarter. After adjusting our CET1 capital ratio to include the impacts of AOCI, this impact would have represented an 84 basis point hit to CET1 at year end. That gap has been reduced to 71 basis points in March. As a percentage of total assets, we built our investment security and cash positions to roughly 21% during this quarter. We continue to target investments to total assets of between 18 to 20% in 2023. Shifting to slide 10, non-interest income grew slightly in the first quarter despite the ongoing pressure from market-driven headwinds and customer-friendly fee adjustments that we've faced for the past several quarters. Modest increases in mortgage banking income and other fee income reduce other fee-based revenue, offset reductions in service charges, card-based fees, bully income, and capital markets. Our relative non-interest income growth versus prior quarter was also impacted by a $2 million investment securities loss recognized in the prior quarter. While non-interest income stabilized quarter to quarter, we now expect total 2023 non-interest income to contract by between 8% and 10% versus 2022. This anticipated compression is driven by current market dynamics and moderation in deposit account fee income due to customer-friendly OD NSF changes made in the back half of 2022. These proactive changes give us additional confidence in our ability to strengthen our low-cost deposit base and enhance our broader profitability profile in 2023 and beyond. Moving to slide 11, our first quarter expenses came in at $187 million, a 5% decrease versus the prior quarter, despite our ongoing investments in people and technology. Our FTE efficiency ratio rose slightly from the fourth quarter, but at 54.6%, it remains more than nine percentage points lower than the same period a year ago. Additionally, our non-interest expense decreased 11 basis points as a percent of total assets from prior quarter and eight basis points versus the same period a year ago. These proof points underscore our commitment to maintaining expense discipline as we continue to make progress against our growth strategy. While we continue to invest in strategies that support these growth aspirations in 2023, we are committed to keeping expense growth below revenue growth. On an ongoing basis, we will continue to pursue opportunities to optimize our expense base where possible. With that in mind, we now expect total non-interest expense growth of approximately 4% in 2023. Shifting to slide 12, we continue to support the company's growth while managing capital levels towards our target ranges. Despite recent volatility in the marketplace, our capital ratios grew versus the prior quarter. We also saw a meaningful increase in our tangible book value per share, driven in part by our enhanced profitability profile. We remain comfortable with our capital levels as we look out over the remainder of the year. Given current market conditions and the expectation for short-term rates to remain elevated in the near term, we continue to expect TCE to land in the 6.7 to 7.25 range by year end and CET1 to land between 9 and 9.5%. I'll now hand it over to our chief credit officer, Pat Ahern, to provide an accredited update.