Associated Banc-Corp

Good afternoon, everyone, and welcome to Associated Bank Corp's second 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 the 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 the pages 30 through 32 of this slide presentation and to pages 10 and 11 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, Paul, and good afternoon. I'm Andy Harmony, and I'm joined once again by our Chief Financial Officer, Derek Meyer, and our Chief Credit Officer, Pat Ahern. I'd like to start off by sharing some highlights from the quarter, and then from there, Derek will provide a few updates on our margin, income statement, and capital trends, and Pat will provide an update on credit. Midway through 2024, we have remained squarely focused on supporting our markets while continuing to execute on our plans to grow our customer base. deepen our relationship, and enhance our profitability. In the context of the broader U.S. economy, we remain pleased with the stability and resilience of our upper Midwest footprint. Several states, including Wisconsin and Minnesota, remain below 3% unemployment. Our prime, super prime consumer base has largely taken inflation in stride, and our commercial clients have remained upbeat while navigating a challenging rate environment. With these trends as a backdrop, our credit performance remains solid here in the second quarter. Delinquencies, criticized loans, and net charge-offs all decreased versus the prior quarter, and we've steadily added to our provision over the past several quarters. To date, we have yet to see any meaningful negative trends that are concerning with regards to specific asset classes or geographies. This stability is a reflection of our home markets. But it's also a reflection of our disciplined, proactive approach we've taken as a company. We've anchored ourselves in familiar Midwest markets, and we've developed a diversified CRE portfolio with limited exposure to downtown's office properties and other key pressure points. And while we're pleased with the results we've seen to date, our experienced team remains vigilant, methodical in reviewing our portfolios on a continual basis to ensure we're staying ahead of any issues that may emerge down the road. Thanks to our strong credit foundation, we've stayed on offense, steadily executing on our strategic plan. This pattern of execution was established shortly after I joined when we launched phase one of our plan back in September of 21. Over three years, we've built a foundation for growth. We've enhanced our lending capabilities through the addition of new loan verticals and expansion of our commercial team. We've strengthened our ability to attract, deepen, and retain customer relationships through products. service, and marketing enhancements. And we've invested significantly into digital to better compete in an evolving financial services landscape. The tailwinds of phase one enhancements continue to benefit our company in exciting ways. We're seeing meaningful improvement in our customer satisfaction scores. We're after being named number one in retail customer satisfaction by J.D. Power in April. We're now seeing the highest net promoter scores we've seen as a company since we started tracking internally in 2017. Customers today are more likely to recommend Associated Bank to friends and family than they have been in years. We've seen household growth, where after several year period of negative trends, we've seen a net positive growth in consumer checking households in both Q1 and Q2 of this year. In fact, Net households grew at a faster rate in the second quarter than they have in any other quarter in over a decade. And we're not just opening more accounts. They are higher quality accounts as well. Year to date, we've seen a 26% increase in deposit balances per new checking customer as compared to last year, 2023. And while these trends are fun to talk about, they are also foundational for revenue growth and our ability to transform our profitability profile over time and they give us confidence that we're on the right path. Phase two of our plan is designed to build on this momentum by accelerating our organic growth strategy, and midway through the year, we remain on track. Since April, we've made several additional key leadership hires, further expanded our promising mass affluent program, and launched new marketing tactics. Just this week, we launched another upgrade of our digital platform with a new credit monitoring tool, enabling digital customers to easily track their credit score and safeguard their financial future. As I mentioned back in April, we expect our Phase 2 initiatives to have an increasing impact as we get to the back half of 24 and into 25. Looking forward, the progress we've made to date against our strategic plan is foundational for our company. We've combined legacy strengths in credit and expense management with initiatives that help us grow and deepen our customer base, enhance profitability, and accrete capital. While the macroeconomic path is somewhat uncertain in the near term, we feel well-positioned to work through that uncertainty and to accelerate with a growing economy thanks to tailwinds from initiatives already completed and incremental momentum from phase two. Simply put, we remain on track towards creating a stronger return profile for our associated bank and our stakeholders. With that, I'd like to walk through some financial highlights from the second quarter beginning on slide two. On a GAAP basis, Our earnings per share came in at $0.74 for the quarter. This figure includes a one-time $33 million tax benefit resulting from a strategic reallocation of our investment portfolio. Excluding this one-time impact, our adjusted EPS was $0.52 for flat versus Q1. This figure demonstrates the underlying ability of our earning profile in what has continued to be a challenging operating environment for banks. During the quarter, we continued to remix the asset side of the balance sheet with average loan growth of $211 million. Once again, this growth was led by commercial and our prime super prime auto book, but the pace of loan growth slowed in several categories due to payoffs and slightly lower loan demand in an elevated rate environment. Average quarter customer deposits decreased by less than 1%, and what is typically a slower growth deposit growth quarter for the bank. This broad trend was largely in line with our expectations and we remain confident in our ability to grow our core customer deposits in the back half of the year. Shifting to the income statement. Asset yields and a shift in our funding mix together drove a $1 million decrease in net interest income. Non-interest income trends have remained stable overall with continued momentum from our wealth business leading the way on fee-based revenue. On the expense front. We continue to invest in our initiatives, but discipline remains a foundational focus for our company. Total interest expense came in at $196 million for the quarter, and we will continue to diligently manage our expense level as we execute against our growth strategy throughout the year. Shifting to capital. The stability of our core profitability, combined with a one-time tax benefit recognized during the quarter, added meaningfully to our creation of our capital ratios. Here in Q2, our CET1 finished at 9.68%, or 25 basis point increase relative to Q1. And finally, our conservative approach to credit continues to be a cornerstone of our strategy. Here in Q2, asset quality remains solid with delinquencies, criticized loans, and net charge-offs all down compared to prior quarter. We remain committed to staying ahead of the curve by taking a disciplined, consistent approach to loan risk ratings and so we can better understand credit risk in our portfolio by both segment and geography. As always, we will continue to monitor asset quality closely. On slide three, we provided a walk forward of our gap and adjusted EPS to more clearly display the impact of the $33 million tax benefit we incurred during the second quarter. As mentioned, this one-time item was a result of a strategic reallocation of our investment securities portfolio. This represented a 22-cent impact to our EPS for the quarter. Adjusting for this one-time item, EPS of 52 cents was flat compared to the first quarter. Moving to slide four, I'd like to provide a little bit more color on where we are with our strategic plan and how we're setting up to create a stronger associated. Since announcing phase one of the plan back in 21, We've added several new loan verticals, grown our commercial RM base, upgraded our product set, invested in digital transformation, and amplified our brand presence throughout the footprint. These investments have generated several tailwinds that are foundational for our company. We diversified our asset base by adding nearly $800 million in asset-based lending and equipment finance verticals and $2.5 billion in prime super prime auto loans. We've expanded our commercial RM base 29% since 2021. We've added over a billion dollars in net new mass affluent deposits since launching the program in December of 22. We've seen meaningful improvements in customer satisfaction scores, where after being named number one in retail banking customer satisfaction by J.D. Power in April, we are now seeing a four and a half year high in our digital satisfaction scores and the highest net promoter scores we've seen since started tracking this metric in 2017. And finally, We are now growing primary checking households associated, reversing a steady trend of net decreases over the past decade. After posting net growth across the board in consumer, business, and wealth households in Q1, we posted the highest consumer checking household growth we've seen in over a decade in Q2. We're also seeing higher quality accounts being opened, with the deposit balances per new household up 26% versus 2023. We continue to believe that customer growth and higher quality accounts will deliver enhanced financial tailwinds over time. Shifting to slide five. Phase two of our plan leverages foundational tailwinds from phase one and an infusion of proven leaders in key areas across the bank to accelerate momentum as a company. We continue to expand and deepen our talent base. Over the past two years, we've added a number of executives and key leaders across the bank who are uniquely positioned to support and amplify our growth strategy. That's particularly true on the commercial side, where most recently we added Mike Levins to our commercial team in Minnesota. Mike joined us in May after 20 years with Wells Fargo, where he most recently served as a division portfolio executive for six states, including Minnesota and Wisconsin. Whether at the executive level or on the front line, having the right people in the right places is essential to the success of our strategic plan. With that in mind, we're also progressing on our plan to hire 26 additional commercial RMs, which represents an incremental 28% increase versus September of 23. While the recent hires we've made to date are already making a valuable contribution in their short time with Associated, we're confident that their impact will grow over time. As we've continued to add talent to our team, we've also made steady quarterly progress with our product, marketing, and digital initiatives in Phase 2. After launching a new social media campaign in Q1 to amplify our brand and highlight our products and services, we expanded that campaign through a partnership with multiple social media influencers in Q2, including local Wisconsin-based Charlie Behrens. We've also continued to expand our Mass Affluent program, providing training for bankers across our footprint. Since launching phase two in November, we've trained an additional 28 bankers to manage mass affluent relationships, and we now have a total of 58 bankers who are specially trained to handle these unique relationships, helping to grow this promising segment for the bank. And just this week, we introduced a new credit monitor tool for our digital customers. Taken together with the enhancements we've already made, actions like these are expected to bolster our efforts to attract new customers, and deepen existing relationships. While remaining encouraged by the ongoing momentum we've seen from phase two, we expect our phase two initiatives to have a more meaningful impact on our financial results as we get to the back half of 24 and into 25. This gives us confidence that we're on the right track with our strategic plan and as such, we continue to expect cumulative incremental commercial loan growth of $750 million and cumulative incremental deposit balances of $2.5 billion in an annual household growth rate of 3% by the year end 2025. On slide six, this is just a reminder that we are in the process of remixing our balance sheet to drive higher returns through multiple different efforts. I'll quickly transition to slide seven. I'd like to highlight a few balance sheet trends for the second quarter, beginning with loans on slide seven. On a quarterly basis, loans grew by $211 million during the second quarter, led once again by our CNI and auto portfolios. We've continued to emphasize these two areas as a way to help remix our balance sheet over time and to decrease our reliance on low-yielding, low-relationship asset classes and to enhance our return profile while still maintaining solid credit standards. With that said, We did see the rate of growth slow in the second quarter, particularly in AutoBook, where we saw softer demand across our dealer network in Q2. We were also impacted by elevated payoffs in our CRE portfolio and saw average CRE loans decrease by $140 million during the quarter. Across our broader portfolio, we continue to seek selective growth that emphasizes full banking relationships, quality credit profiles, and diversification to deliver improved returns. While we continue to expect tailwinds from our initiatives in the back half of the year, we now expect total loan growth to land at the lower end of our range of 4% to 6% due to market conditions and previously mentioned increase in CRE payoffs. Moving to slide eight. We mentioned back in April that our Q1 deposit trends were somewhat inflated by seasonality. And as we expected, those balances normalized in Q2. While the second quarter is typically a slower seasonal growth quarter for Associated Bank anyway, we also saw an unusually large swing in our point-to-point balance flows relative to the first quarter. This period-end decrease was largely a timing issue driven by disbursement of seasonal balances that were expected to flow out before the end of Q1, but didn't flow out until early Q2. This timing issue was a key driver in the period-end flows in both the total deposits and DDAs. Nonetheless, the broader trend over the first half of the year has largely remained in line with what we've communicated previously. We expected balances to bottom in Q2 and then grow modestly the rest of the year. That continues to be our expectation. On a quarterly average basis, which allows for a more normalized view of these flows, core customer deposits decreased by less than 1%. Slide 9. We include a broader three-quarter view of our quarterly average deposit trends to more clearly show the stability we've seen in the first half of the year. Despite the lumpy point-to-point balances between Q1 and Q2, quarterly average core customer deposits were essentially flat from Q4 of 23 to Q2 of 24. In fact, they were slightly up. As discussed earlier, we continue to feel very well positioned for core customer growth in the coming quarters due to expected tailwinds from promising leading indicators and such as customer household growth and satisfaction metrics. These leading indicators are foundational changes for our company that will enable us to sustainably grow our customer base over time. While we remain confident in our ability to deliver core customer deposit growth over the back half of 24, the market for deposits has remained competitive in its higher for longer environment. Due to current market conditions, we now expect core customer deposits to finish 2024 at the lower end of the 3% to 5% range given previously. So with that, I'll pass it on to Derek to walk through the income statement and capital trends. Derek?

Thanks, Andy. I'll start on slide 10 with some color on our asset and liability and yield trends. While the target Fed funds rate has remained stable since July of last year, we continue to see asset yields inch higher in most major loan categories, including CNI, auto, and mortgage here in Q2. We also saw investment yields increase 14 basis points during the quarter, as we continue to benefit from the securities repositioning we completed last year. With that said, our overall Q2 earning asset yield was also negatively impacted by two basis points relative to Q1 due to a lower level of non-accrual interest rate recoveries, particularly within CRE and CNI loans. Taken together with the core growth in our loan and securities yields mentioned previously, our earning asset yields increased by one basis point and landed at 565% during the first quarter, or second quarter. On the liability side of the balance sheet, we've continued to see lingering funding cost pressures due primarily to elevated wholesale funding costs. We've actually seen both our cost of total interest-bearing deposits and cost of total deposits decrease slightly in Q2, but these trends were more than offset by the addition of higher cost wholesale funding during the quarter. All in, our cost of total interest-bearing liabilities increased five basis points to 3.6% for the quarter. On slide 11, the trends I just described netted out to four basis point decrease in our quarterly net interest margin, with two basis points impact coming from the quarterly swing in recoveries on the asset yield side, and the other two basis points attributed to higher funding costs. Despite this pressure on NIM, our net interest income has remained stable. The $257 million we posted in Q2 was down just $1 million from Q1, and it was higher than our NII in the third and fourth quarters of last year. Based on our latest expectations for balance sheet growth, deposit betas, and Fed action, we expect sequential growth in our net interest income over the remainder of the year and NIM expansion by year end. With that said, given market conditions, we now expect to drive net interest income growth of between 1 and 3 percent in 2024. This guidance assumes two 25 basis point Fed cuts by year end beginning in September. Shifting to slide 12, we've continued to manage our securities book within our 18 to 20% target range. With the benefit of higher rates, combined with the securities repositioning we completed last year, the average yield on our securities book has now risen by 64 basis points from the same period a year ago. On a dollar basis, both our cash investment security positions increased slightly versus Q1, but as a percent of total assets, these positions held firm at 21% in Q2. Over the remainder of 2024, we will continue to target investments to total assets of between 18 and 20%. On slide 13, we highlight our non-interest income trends throughout the second quarter. Our non-interest income came in at 65 million for the quarter, which was up slightly compared to Q1 and down slightly from the same period a year ago. On a year-to-date basis, non-interest income was up 3 million or 2% compared to 2023. During the second quarter, our results were highlighted by growth in wealth management fees car-based fees, and BOLI income. This was partially offset by a $4 million decrease in net investment securities gains, with a decrease driven by the $4 million gain on sale of Visa B shares we booked back in Q1. As a reminder, we have no Visa B shares remaining as of March 31st. We continue to feel encouraged by the durability of our non-interest income in a challenging environment, and we now expect full-year 2024 non-interest income to finish plus or minus 1% as compared to our 2023 adjusted base of $264 million. Moving to slide 14, we've continued to manage our expense base diligently despite ongoing investments to support our growth initiatives. This discipline remains a foundational focus across the company. Our second quarter expenses of $196 million were down two million from the prior quarter, but embedded in our Q2 number was a $2 million adjustment of the FDIC special assessment expense booked in Q1, following an updated estimate received from the FDIC here in Q2. Our adjusted efficiency ratio increased from the multi-quarter low we now posted in Q1, but our non-interest expense to average assets ratio continued to decrease in the second quarter, landing at 1.92%. This metric underscores our ability to keep expenses in check while continuing to invest in our organic growth strategy. We continue to expect total non-interest expense growth of between 2 and 3 percent in 2024 off of our adjusted 2023 base of $783 million. These figures exclude the FDIC special assessment impacts in Q4, Q1, and Q2. Shifting to slide 15, our stable core profitability trends combined with the one-time tax benefit booked during the quarter drove meaningful capital accretion across the board in Q2. We saw a 10 basis point net increase in our TCE ratio during the quarter, finishing at 7.18%. This net increase was driven by improved profitability partially offset by asset growth in the denominator. After falling to 9.39% as a result of our balance sheet repositioning in Q4, our CET1 rebounded to 9.43% in Q1 and finished Q2 at 9.68%, the highest CET1 ratio we've posted in two years. Both our TCE and CET1 remain well within our 2024 target ranges as of Q2. Given current market conditions, we continue to expect TCE to remain in the range of 6.75% to 7.75% in 2024. We also expect CET1 to remain in a range of 9% to 10% over the same timeframe. I'll now hand it over to our Chief Credit Officer, Patty Herring, to provide an update on credit quality.