Associated Banc-Corp

Good afternoon, everyone, and welcome to Associated Bancorp's first quarter 2024 earnings conference call. My name is Paul, 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 is being recorded. As outlined on slide one, during the course of 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 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 pages 8 and 9 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 first quarter earnings call. I'm Andy Harmoning, and I'm joined this afternoon by our Chief Financial Officer, Derek Meyer, and our Chief Credit Officer, Pat Ahern. I'll kick things off by sharing some highlights from the quarter. From there, Derek will provide a few updates on our margin, our income statement, and capital trends, and Pat will cover up on an update on the credit. Now, as we entered 2024, we've had two key themes in mind. First, the resilience of our local markets in the face of macro uncertainty, and then our continuing to drive our strategic plans by acquiring customers, deepening relationships, and enhancing our return profile. While recent economic data has clouded the macro outlook over the remainder of the year, we're encouraged by the resilience we've seen in our Midwestern footprint. Our unemployment levels in Wisconsin and Minnesota remain at or below 3%. The consumer remains relatively healthy despite rising prices, and our commercial customers continue to explore investments in their businesses while remaining vigilant about the challenges posed by the current environment. Also giving us confidence is our disciplined approach to credit. We've anchored ourselves in stable Midwestern markets, and we developed a diversified CRE portfolio with limited exposure to key pressure points, such as rent-controlled multifamily or downtown office properties. Given the pressures from elevated rates, we have continued to see signs of normalization in the portfolio, but it has been on a case-by-case basis. We have yet to see any meaningful negative trends concerning specific asset classes or geographies. With that said, our team has remained disciplined, methodically reviewing our portfolios on a regular basis to ensure we're rating appropriately and staying ahead of any issues that may emerge down the road. All of these factors have enabled our company to remain front footed on executing our strategic plan. Since I joined the company three years ago, we've generated significant momentum. We've bolstered our leadership team with several key hires across the bank. We've continued to add talented commercial RMs throughout the footprint, and we have significantly elevated the customer experience for our retail and small business customers by deploying several product upgrades and modernizing our customer facing digital experiences. These efforts are driving results across the company. Our customer satisfaction scores have continued to improve to historically high levels. And earlier this month, we were recognized by J.D. Power who named us number one for retail banking satisfaction in the Upper Midwest. Our colleague engagement scores have also improved as we've advanced our plans. We were recently named a winner of the 2024 Top Workplaces in the USA Award, while also winning five Intergage Awards for cultural excellence. We believe the foundation of a successful company starts with happy customers and happy colleagues, and we can see evidence that we're on the right track. Importantly though, our efforts have also translated to results that have direct impact on our bottom line. Here in Q1, we saw positive household growth across the bank after several years of downward trends in organic numbers. And we again delivered broad-based loan growth and core customer deposit growth for the quarter, both of which enable us to remix our balance sheet and improve our return profile over time. To build on this organic growth momentum, We're hard at work executing phase two of our strategic plan originally announced in November. With several key hires, product launches, and other initiatives already completed in the past 180 days, we remain on track with our plans. We expect the full impact of these actions in phase two to be realized in the second half of 2024 and into 2025. As we look forward, we're encouraged by the early results from our plan, but we expect to make additional progress as we move throughout the year. While macro question marks remain, we feel well positioned due to our foundation discipline around credit and expenses. Tailwinds from growth initiatives already completed and incremental momentum from phase two. We're on track towards providing a stronger future for our company and importantly, our key stakeholder group as well. With that, I'd like to walk through some of the financial highlights for the first quarter beginning on slide two. On a diluted gap basis, we posted earnings of 52 cents per share here in Q1, demonstrating the underlying strength of our core earnings profile in what has been a challenging operating environment for the industry. We continue to remix both sides of the balance sheet by executing on initiatives that help us lower our funding costs, improve our liquidity position, while also improving earning asset yields. On the funding side, we're focused on driving core customer deposit growth, and here in Q1, We accomplished that by adding customer deposits for the third consecutive quarter. Specifically, core customer deposits grew by 2% during the first quarter. These results were boosted somewhat seasonally, but the growth was also a reflection of the momentum we've generated through our organic growth strategy. Across the bank, we've now added $1.4 billion of core customer deposits since the midpoint of 2023. This emphasis on core customer funding sources has also enabled us to draw down on our wholesale funding by another 5% during Q1. During the quarter, we also grew period end loans by $278 million, led by steady growth in our prime super prime auto portfolio and emerging CNI growth. We continue to build high quality balance and balances in these segments to diversify and strengthen our earning asset mix over time. And we're encouraged by these initial results in what is typically a seasonally slow loan growth quarter. Moving to the income statement, improving asset yields were boosted by the full benefit of our Q4 repositioning to drive a 2% increase in net interest income and a 10 basis point increase in our margin for the quarter. Deposit cost pressures have not yet fully subsided as of Q1, but the pressures continue to abate as the mix shift in our back book is slowed and the competitive environment is stabilized. Our non-interest income of $65 million was up $3 million from the same period last year. And while we feel confident about the stability of our non-interest income in the short term and about our ability to grow this category down the road, we continue to expect non-interest income to compress slightly in 2024. And while we continue to invest in people, products, process, and technology, expense discipline remains a foundational focus for our company. Our Q1 non-interest expense of $198 million included another $8 million in FDIC special assessment costs to replenish the deposit insurance fund. We will continue to diligently manage our run rate expense level as we execute our growth strategy throughout the year. Our conservative credit culture also continues to be a foundational component of our strategy. In Q1, We did see our non-accruals and net charge-offs tick higher, but these trends were balanced by decreases in delinquencies and total criticized loans. Taking a disciplined and consistent approach reviewing loan risk rating provides a good view of the credit risk in our portfolio by both segment and geography. We will continue to monitor asset quality closely so we can stay ahead of the curve. Now, we've generated significant momentum as a company over the past three years, and as shown on slide three, the benefits of these efforts are starting to come through in a number of ways. Since announcing our initial strategic plan back in 21, we've added key talent in leadership positions across the bank. We've grown our commercial RM base. We've upgraded the customer experience, implemented a successful mass affluent program, and amplified our brand presence throughout our footprint. In each case, This progress started with listening. Listen to our colleagues, listening to our customers, and by delivering what these stakeholder groups have asked for, our efforts are being recognized. We've used customer feedback to steadily improve the bank experience through digital upgrades, product launches, and service enhancements. These efforts were recognized earlier this month when we were named number one for retail banking customer satisfaction in the upper Midwest by J.D. Power. We've also used colleague feedback to enhance collaboration and provide them with the tools they need to do their jobs better. Just this week, we were named winner of the 2024 Top Workplaces USA Award and also won five Culture Excellence Awards. Importantly though, our efforts aren't just winning awards, they're transforming our financial profile. Here in Q1, we saw net growth across the board in consumer, business, wealth households, reversing a steady trend of net decreases over the past several years. As compared to the same period a year ago, our consumer household acquisition was up 26%. Our consumer household attrition rate was down 9% over the same time. Customer growth with quality accounts will provide a tailwind financially over time. We're also seeing our strategy translate to net growth on both sides of the balance sheet and what has been a challenging growth environment for the industry. Here in Q1, we again saw broad-based loan growth and core customer deposit growth. These are just a few examples of how the work that has been done across the company is setting us up to become a stronger company over time. As we move to slide four, we want to share a few more recent examples of how we're building on our momentum. Since announcing phase two of our organic growth strategy back in November, we've stayed on offense, achieving several milestones in our second wave of organic growth strategies. In some cases, these efforts are already having an impact, but we expect to see the full impact ramp up over the course of the year and into 2025. Now, I've said before, we're not looking to just fill seats at Associated. We're looking to add talent. The success of any strategy hinges on having the right people in the right places, and we've made significant strides in bolstering our senior leadership team with top talent from across the Midwest. We expect that trend to continue. when we add Mike Lebbins to our commercial team in Minnesota next month. Mike joins us from Wells Fargo, where he spent over 20 years in commercial banking, most recently serving as a division portfolio executive for six states, including Wisconsin and Minnesota. We also need to ensure we have the right folks on the front line to help us drive towards our goals. As such, we're continuing to invest in training for our branch bankers to handle mass affluent relationships. We're continuing to add commercial and small business RMs throughout the footprint. And just last week, we enhanced our commercial banking team by adding three senior RMs in Madison, Milwaukee, and Chicago. There is a growing perception in the Midwest that Associated Bank is an employer of choice, and that's both internally and externally. On the right side of the page, we've continued to make progress with various digital product and marketing enhancements, designed to support organic growth. Taken with the enhancements we've already made, these actions bolster our efforts to attract new customers and deepen relationships. As the impact of each of these initiatives ramps up over the course of the year, we expect them to have an increase in impact on our financial results. This gives us confidence that we are on track with our strategic plan, and as such, we continue to expect tonal loan growth of between 4% and 6%. Total core customer deposit growth of between 3% and 5%, and total net interest income growth of between 2% and 4% for 2024. So with that, I'd like to highlight a few balance sheet trends for the first quarter beginning on slide five. As mentioned, we added $557 million of core customer deposit growth in Q1, representing a 2% increase from the prior quarter. While these results were boosted by seasonality, the growth was broad-based across several subcategories, reflecting stabilization of the mix shift we've experienced over the past year. Over the past three quarters, we've now added $1.4 billion in core customer deposits to our balance sheet. This core growth has enabled us to steadily decrease our reliance on wholesale funding sources, and we brought down our total wholesale funding by another 5% here in Q1. Deposit flows continue to be lumpy by nature, and the environment remains competitive. But we remain confident in our growth prospects based on incremental boosts we expect to receive from our initiatives over the course of the year. And as such, we continue to expect to drive core customer deposit growth between 3% and 5% for 2024. Moving to slide six, we highlight our loan trends through the first quarter. On a quarterly average basis, Loan balances decreased by $583 million in Q1, which is a direct reflection of the $969 million mortgage loan sale that settled towards the end of December. On a period-end basis, however, loans grew by $278 million in Q1. As expected, the overall loan growth trends were led by steady growth in our prime super prime auto book and the commercial and industrial bucket. We've continued to emphasize these areas as a way to help us remix our balance sheet over time to decrease our reliance on low yielding, low relationship asset classes, and to enhance our return profile while still maintaining our solid credit standards. Across our broader portfolio, we continue to seek selective growth that emphasizes full banking relationships, quality credit profiles, and diversification to deliver improved returns. Taking into account the current lending environment and the anticipated impacts of our initiatives, we continue to expect to drive total loan growth of 4% to 6% in 2024. With that, I'll pass it to Derek to walk through the income statement and capital trends. Derek?

Thanks, Andy. I'll start with our asset and liability yield trends on slide 7. While the target Fed funds rate has remained stable since July of last year, we continue to see asset yields inch higher through the back half of 2023, and that trend is continuing into Q1 of this year as a sizable portion of our loan book is repriced and remixed over time. This trend has been led primarily by the CNI, CRE, and auto categories. Total earning asset yields increased by 13 basis points over the prior quarter and landed at 5.64% here in Q1. Like others in the industry, we've seen our funding costs increase over the past year due to a combination of rising rates, liquidity pressures, and a mixed shift in our customer deposit base. However, after seeing these pressures stabilize over the back half of 2023, the rate on total interest bearing liabilities flattened out at 3.55% from the fourth quarter to the first quarter. This flattening was largely driven by the pay down of FHLB that we completed as part of our balance sheet repositioning in Q4. But it's also a function of ongoing stabilization in the deposit environment and our efforts to strengthen our funding profile through organic core customer growth, deposit growth. Moving to slide eight, you can clearly see the impact of these recent trends on both our net interest income and our margin. Here in Q1, our NII landed at $258 million for the quarter, a $4 million increase from the prior quarter. Our NIM increased by 10 basis points to 2.79%. As we shift to slide nine, I want to take a moment to discuss how the various elements of our strategic plan are shifting the mix on both sides of our balance shift and driving us towards an enhanced profitability profile. On the asset side of the balance sheet, we've already taken several steps to diversify our loan mix in a way that enables us to decrease our reliance on low yielding, low relationship lending strategies while still maintaining our solid credit standards. We've meaningfully grown our commercial RM base over the past three years while also changing the incentive structure to emphasize holistic relationships, including deposits and other services. We've steadily grown a prime, super prime, indirect auto portfolio to diversify our consumer lending business at higher spreads. And last year, we exited the low-relationship, low-yielding TPO mortgage business, sold nearly $1 billion in mortgage loans, and moved to an originate-to-sell model. Here in the first quarter, you can see the results of these changes in our loan growth figures, where we added $215 million in auto balances to a portfolio with average yield of over 5.5%, added $127 million in C&I balances to a commercial and business portfolio with an average yield of over 7%, and held balances flat on a mortgage book with an average yield of below 3.5%. On the liability side, we've talked extensively about our efforts to attract, deepen, and retain core customer relationships as a way to decrease our reliance on wholesale funding, and you've seen that come to life as we've added significant core customer deposit balances to three straight quarters, while taking steps to decrease our wholesale funding over the same time period. So as you can see, all of this is not happening by accident. We're taking purposeful actions that are changing the makeup of our balance sheet and the return profile of our company for the better. The early results are promising, but we're still working to make sure we stay on track to meet our medium-term goals. Based on our current expectations for balance sheet growth, deposit betas, and Fed action, We continue to expect net interest income growth of between 2% to 4% in 2024. This guidance assumes three 25 basis point Fed rate cuts throughout the year beginning in June. On slide 10, we've continued to manage our securities book to remain within our 18% to 20% target. With the benefit of rising rates and our securities repositioning, the average yield on our securities book has now risen by 67 basis points from the same period a year ago. After adjusting our CET1 capital ratio to include the impacts of the AOCI, this impact would have represented a 64 basis point hit to CET1 and Q1. The spread of this impact grew slightly versus the prior quarter, largely driven by rising interest rates. As a percent of total assets, our investment securities and cash positions held firmly at roughly 21% at the end of the quarter. Over the remainder of 2024, we will continue to target investments to total assets of between 18% and 20%. Moving to slide 11, we highlight our non-interest income trends through Q1. Our non-interest income came in at $65 million for the quarter, which was down $5 million relative to our adjusted Q4 number but was up $3 million from the same period a year ago. Our first quarter results were driven by a $2 million increase in service charges and deposit account fees and a $1 million increase in mortgage banking. After posting a $6 million gain on sale of Visa B shares in Q4, We also booked another $4 million gain on the sale of Visa B in Q1. As of March 31st, we had no Visa B shares remaining. These figures were partially offset by a $5 million decrease in capital markets fees, which stemmed from quarterly decreases in syndications and trading account revenues. While we feel well-positioned on the durability of our non-interest income in a challenged environment, we continue to expect non-interest income to compress by 0% to 2%, as compared to our adjusted 2023 base of $264 million. Moving on to slide 12, we continue to make targeted investments to support our initiatives, but maintaining a discipline on expenses continues to be a foundational focus for the company. Our first quarter expenses of $198 million were up 5% relative to Q1 of 2023, but we're down 17% from the GAAP number we reported in the fourth quarter of 2023. After booking $31 million for the FDIC special assessment in Q4, we booked an additional $8 million in FDIC special assessment expense in Q1. This was partially offset by a $3 million refund in other FDIC assessment costs. On a justice basis, our efficiency ratio landed at 57.2% for the quarter, which is the lowest we've seen since Q2 of 2023. Our non-interest expense to average assets ratio also fell back below 2% for the quarter, which demonstrates our ability to keep expenses in check while investing in our growth strategy. With that in mind, we continue to expect total non-interest expense growth of between 2 and 3% for 2024 off of our adjusted 2023 base of $783 million. These figures exclude the FDIC special assessment expense in Q4 and Q1. We also continue to expect annual operating leverage of between negative 1% and 0% in 2024. Shifting to slide 13, we saw a three basis point net decrease in our TCE ratio during the quarter, finishing at 7.08%. This net decrease was driven by a nine basis point hit from AOCI due to higher long-term rates. After falling to 9.39% as a result of our balance sheet repositioning in Q4, our CET1 rebounded in Q1, ending the quarter at 9.43%. Both our TCE and CET1 remain well within our 2024 target ranges as of Q1. Given current market conditions and the expectation for short-term rates to remain elevated in the near term, we expect TCE to remain in the range of 6.75 to 7.75% in 2024. We also expect CET1 to remain in the range of 8 to, I'm sorry, 9 to 10% for the same timeframe. I'll now hand it over to our Chief Credit Officer, Pat Ahern, to provide an update on credit quality.