Associated Banc-Corp

Good afternoon, everyone, and welcome to Associated Bank Corp's third 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 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 to 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 a reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please refer to pages 28 through 30 of the slide presentation and to pages 10 and 11 of the press release financial tables. Following today's presentation, instructions will be given for the Q&A 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 third quarter earnings call. I'm Andy Harmoning, and I'm joined once again by our CFO, Derek Meyer, and our Chief Credit Officer, Pat Ahern. I'll 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. At a macro level, the third quarter did bring a variety of data points indicating a slowing of the U.S. economy. But closer to home, we continue to see signs of resiliency and stability in our Midwestern footprint. Unemployment in Wisconsin is at 2.9% and many other Midwestern states are also below the national average. Our prime and super prime consumer base has remained strong and our commercial clients have largely been able to manage their way through elevated rates, supply chain issues and inflation. We serve stable markets and in tandem with our conservative approach to credit, That stability has translated to strong asset quality trends again this quarter. Importantly, it has also enabled us to stay squarely focused on the execution of our strategic plan. And now we're seeing several tailwinds start to emerge across our company. On the consumer side, we now have a value proposition that stacks up well against just about anyone in the industry, whether that's a commercial bank or a fintech. Over the past few years, We've completely transformed the customer experience by building out a modernized digital banking platform to make it easier for our customers to manage their money when and where they want. We've deployed customer favorite product enhancements like Grace Zone, Early Pay, Credit Monitoring, and we've launched a new Mass Affluent program to deepen relationships with their strategically important customer segment. We're going to continue to make enhancements, but we already have what we need to grow in our markets on the consumer side of the business. and we are growing. We believe we're right on track and importantly so to our customers. In 2024, we've seen the highest net promoter and mobile banking satisfaction scores on record. We're also growing our customer base for the first time in years and attracting a higher per household deposit balances with these new customers. On the commercial side, we continue to build momentum by adding strong producers in key growth markets. Following the addition of several experienced leaders such as Phil Trier, Neil Riegelman, and Michael Levins over the past year, we're progressing on our overall plan to add 26 commercial and business RMs by early 2025. Earlier this week, we announced the launch of a new specialty deposit and payment solutions vertical focused on deposit-centric industries such as title and escrow, HOA property management, and fintechs. This vertical will be led by Rick Braun, an industry expert, who joins us from U.S. Bank where he spent the past 18 years of his career. Our organic phase two initiatives are already impacting our financial results. Here in the third quarter, we saw encouraging signs of progress with over $600 million in core customer growth, core customer deposit growth, and nearly $300 million in C&I loan growth and solid core earnings growth. We have positioned ourselves to outperform in both an improving macroeconomic scenario or in a low growth market condition. With that said, I'd like to walk through some of the additional financial highlights from the third quarter beginning on slide two. On a GAAP basis, we posted diluted EPS of 56 cents per share. Core customer deposits grew by over 2% from the prior quarter, but they also grew by 2% relative to the same period last year. demonstrating the incremental impact of our initiatives above and beyond the seasonal inflows we typically see this time of year. This core deposit growth has also enabled us to work down our wholesale funding balances by 2% during the quarter. On the other side of the balance sheet, we've continued to make progress on our efforts to enhance our profitability profile by diversifying our loan portfolio. Total loans grew by over 1%, led by emerging C&I growth and steady production in our auto book. Shifting to the income statement, our balance sheet growth combined with an expansion of asset yield and a slight decrease in liability costs drove a three basis point increase in our net interest margin and a $6 million increase in NII during the quarter. Our revenues were also boosted by a $2 million increase in non-interest income, led by continued growth in wealth management fees. Total non-interest expense increased to $201 million for the quarter, but our efficiency ratio decreased slightly as we've continued to diligently manage our expense level while executing on our growth strategy throughout the year. On the capital front, the stability and expansion of our core profitability profile has enabled us to accrete capital throughout the year. Here in Q3, our CET1 finished at 9.72%. a 33 basis point increase from the end of 2023. Underpinning our entire strategy is our foundational discipline on managing credit risk, and we again saw solid results in Q3. During the quarter, our non-accruals and net charge-offs decreased meaningfully. We added another $21 million in provision and increased our ACLL by a basis point. As always, we remain committed to staying ahead of the curve by taking a disciplined, consistent approach to loan risk ratings so we can better understand credit risk in our portfolio by both segment and geography. We will continue to monitor asset quality closely. Shifting to slide three, we've talked at length about the foundational outcomes from phase one of our strategic plan. And here in 24, we've worked hard to build on the momentum by steadily executing our phase two initiatives. As we sit here in October, much of the consumer product work has already been completed, specifically We've continued to roll out quarterly product and service updates that enhance the consumer-customer experience and position us to attract, deepen, and retain customer relationships. You can see that in the front line where we've addressed pain points that improve the branch and call-in experience. And you can see it in the product set. We've added tools to make it easier for customers to manage their money regardless of where they are. We still plan to make regular enhancements going forward, but the fact is we now have a value proposition that enables us to compete with just about anyone in the marketplace, whether that be the community banks down the street, the large banks in the urban centers, or even FinTechs. We also remain on track for growth on the commercial side of the company, where we've continued to make progress on our plans to hire 26 commercial and business RMs to support and amplify our growth strategy. To date, we've added a net of 16 RMs since September 30th of last year, and we expect to hit our target of 26 by early next year. The impact of our hires thus far is beginning to emerge in our financial results and we expect this impact to grow throughout 2025 as the new RMs across our footprint settle in and build their respective pipelines. Taken together, we remain on track with phase two and we continue to expect cumulative incremental commercial loan growth of $750 million. cumulative incremental deposit balances of $2.5 billion, and annual household growth of 3% by the end of 2025. We added slide four to give a more visual snapshot of where we've been, where we are, and where we're going as a company. These are the three metrics that drive our story. First, our customers are more satisfied. After being named number one for customer satisfaction by J.D. Power back in April, We're now seeing the highest net promoter of mobile banking satisfaction scores we've ever seen on record at Associated Bank. Secondly, we've taken a years-long negative household trend and flipped it to positive in 2024. This sets us up to deepen relationships and drive deposit growth over time. And finally, we're continuing to add top talent to our commercial team. As we've said in the past, this sets us up to drive loan growth, but it also positions us to deepen full banking relationships with deposits and other services like TM. We feel good about our trajectory and look forward to sharing more specifics around our 2025 outlook in January. With that, I'd like to highlight a few balance sheet trends for the third quarter, beginning on slide five with the loan portfolio. Total period end loans grew by $373 million during the quarter. And this growth was once again led by our CNI and auto verticals. We look to continue remixing our balance sheet while retaining our conservative approach to credit. As a partial offset to this growth, we saw CRE construction loans decreased by $141 million during the quarter as an elevated payoff trend extended into Q3. We also saw our resi mortgage book decrease slightly from the prior quarter as we continue to diversify the consumer side of our loan portfolio. Across our broader portfolio, we've continued to seek selective growth that emphasizes full banking relationships, quality credit profiles, and diversification to deliver improved returns. With this in mind, we continue to expect total loan growth to land at the lower end of our original range of 4% to 6% in 2024. Moving to slide six, we mentioned back in July we expected deposit growth to ramp up in the second half of 2024. And here in Q3, that trend has played out just as expected. During the quarter, we added over $600 million of core customer deposits, a 2% increase relative to Q2. While the primary driver of this growth was customer CDs, we kept it short, funneling the vast majority of that production through our seven-month CD. And importantly, most of our CD holders are already customers. 77% of active CD holders had a checking account with us in September. This percentage has risen significantly from prior years thanks to our relationship deepening initiatives, such as Mass Affluent. Those relationship deepening efforts are also visible through growth in other deposit categories, such as DDA and interest-bearing checking during the quarter. The inflow of core customer deposits during the quarter enabled us to work down our wholesale funding by 2%. with the primary driver being a decrease in FHLB advances. We continue to expect core customer deposit growth to finish 2024 at the lower end of our original 3% to 5% growth range, and we remain confident in our ability to attract and deepen quality customer deposit relationships over time. With that, I'll pass it to Derek to walk through the income statement and capital trends.

Thanks, Andy. I'll start by discussing our asset and liability yield trends on slide 7. Despite the 50 basis point rate cut at the tail end of the quarter, we saw asset yields inch higher in all major loan categories, including CRE, CNI, auto, and resi here in Q3. Largely driven by these trends, our overall earning asset yield increased by three basis points during the quarter to 5.68%. On the liability side, interest-bearing deposit costs ticked up by three basis points, but growth in deposits enabled us to decrease reliance on higher cost wholesale funding during the quarter. As such, our total cost of interest-bearing liabilities decreased to 3.59%. Moving to slide eight, the trends I just described netted out to a three basis point expansion in our quarterly net interest margin, landing us at 2.78% for the quarter. Our NII came in at $263 million for the quarter, representing a $6 million increase from prior quarter and an $8 million increase from the same period a year ago. Based on our latest expectations for balance sheet growth, deposit betas, and Fed action, We now expect to drive net interest income growth of between 0% and 1% in 2024. On slide 9, we provided some additional color on the proactive steps we've taken to dampen our asset sensitivity and prepare for a falling rate environment. This process started in late 2021 when we began adding fixed rate prime and super prime auto loans to our books. As of September 30th, the portfolio has grown to $2.7 billion. While we've been clear all along that we don't intend to become known as the auto bank, these balances come at an attractive yield with less prepayment risk or extension risk than mortgages. In addition, we began layering in a portfolio of received fixed swaps to our books in 2022 to protect against downside rate risk. As of the September 30th, we maintain a notional balances of approximately 2.85 billion. And finally, We've been thoughtful about our funding mix, emphasizing shorter-term durations for contractual funding sources such as CDs and wholesale funding. As of Q3, we had over $10 billion in obligations set to mature in one year or less, which is about 87% of the total. Taken together, these actions have put our balance sheet in a much more neutral position, with a down 100 ramp scenario representing about a 1% impact to our NII as of Q3, which is reduced from the 3.4% impact we were modeling in Q4 of 2022. Our goal is to maintain this modestly asset sensitive position going forward. Shifting to slide 10, we've continued to manage our securities book within our 18 to 20% target range. With the benefit of rising rates combined with the securities repositioning we completed late last year, the average yield on our securities book is 50 basis points higher than the same period a year ago. On a dollar basis, both our cash investment security positions increased slightly as compared to Q2, and these combined positions now represent 22% of total assets. Over the remainder of 2024, we continue to target investments to total assets of between 18% to 20%. On slide 11, we provide an update on non-interest income through Q3. Total non-interest income came in at $67 million during the quarter, which represents a 3% increase from Q2. On a year-to-date basis, non-interest income continues to track roughly $3 million higher than in 2023. Here in the third quarter, growth trends were primarily driven by wealth management fees, which were up $2 million compared to Q2, and service charges, which were up a million over the same period. This growth was partially offset by smaller decreases in bullying, mortgage banking, and capital markets. We continue to feel encouraged by the durability of our non-interest income in a challenged environment. And as such, we continue to expect full-year non-interest income to finish in a range of negative 1% to 1% growth as compared to our adjusted 2023 base of $264 million. Moving to slide 12, we continue to make ongoing investments to support our growth initiatives, but maintaining our thoughtful, disciplined approach to where we invest those dollars continues to be a foundational focus. In the third quarter, total non-interest expense of $201 million was up $5 million compared to the prior quarter, driven primarily by increases in legal, professional, and FDIC assessment costs. Despite the dollar uptick in expenses, our adjusted efficiency ratio actually decreased during the quarter to 60.4%, and our non-interest expense to average assets ratio has remained in line with prior quarters at 1.93%. These metrics are a reflection of our commitment to keeping expenses in check while investing in our organic growth strategy. With this in mind, we've lowered our full-year expense outlook We now expect total non-interest expense growth of between 1% and 2% in 2024 off of our adjusted 2023 base of $783 million. As a reminder, this outlook excludes the $31 million FDIC special assessment expense booked in 2023 and an additional $4 million of net FDIC special assessment expense booked in the first three quarters of 2024. On slide 13, we once again saw key capital ratios increase across the board here in Q3. We saw a 32 basis point net increase in our TCE ratio during the quarter, finishing at 7.50%. This net increase was driven by AOCI recovery and improved profitability, partially offset by asset growth in the denominator. AOCI recovery represented about 27 basis points of benefit. After falling to 9.39% as a result of our balance sheet restructure, repositioning in Q4 of last year, our CET1 ratio has steadily climbed throughout 2024 and currently sits at 9.72% as of Q3. This is now the highest CET1 ratio we've posted since Q1 of 2022. TCE and CET1 both remain well within our 2024 target ranges as of Q3. Given current market conditions, we continue to expect TCE to remain in the range of 675 to 775% 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, Pat Ahern, to provide an update on credit quality.