Associated Banc-Corp

Good afternoon, everyone, and welcome to the Associated Bancorp's fourth quarter 2024 earnings conference call. My name is Matt, and I'll be your operator today. This time, all participants are in a listen-only mode. We'll 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. Suited 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. Contractors are incorporated herein by reference. For reconciliation of these non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please refer to pages 31 through 34 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 question and answer session. President and CEO, for opening remarks, please go ahead, sir.

Well, good afternoon, everyone, and welcome to our fourth quarter earnings call. I'm Andy Harmoning. I'm joined once again by our Chief Financial Officer, Derek Meyer, and our Chief Credit Officer, Pat Ahern. I want to start off by sharing some highlights from the fourth quarter of 2020. From there, Derek will cover margin, income statement, and capital trends, and Pat will provide an update on credit. We continue to see signs of strength in the U.S. economy, and closer to home in the Midwest, the situation has remained remarkably stable. Unemployment rates in Wisconsin, Minnesota, and several other Midwestern states remain well below the national average of 4.1%. Our prime and super prime consumer borrowers have remained resilient, and our commercial customers are cautiously optimistic about their growth prospects in 2025. This continued stability has enabled us to remain front-footed with the execution of our growth strategy, and the fourth quarter was an active one for our company. We added to our commercial capabilities through the launch of a new specialty deposit and payment solutions vertical. We raised over $300 million of new capital through a common stock issuance and put a portion of that capital work through a balance sheet repositioning, selling approximately $700 million in low yielding mortgage loans and $1.3 billion in AFS securities. We also purchased $55 million in existing customer credit customer credit card balances through an expansion of our participation agreement with the law and financial services. During the quarter, we also announced the addition of two widely respected business leaders to our board of directors in Kristen Ludgate and Owen Sullivan. We elevated three senior business line leaders to our executive leadership team in the head of corporate and commercial banking, Phil Trier, deputy head of commercial real estate, Greg Worsick, and deputy head of consumer and business banking, Steve Zampur, and we welcome several high quality RMs to our growing commercial team. Importantly, we also delivered strong financial results during the quarter as we've continued to benefit from our organic growth strategies. Here in Q4, we delivered adjusted loan growth of over $500 million and core customer deposit growth of nearly $900 million while maintaining stability and discipline with regards to credit risk. As we look forward to 2025, we are positioned to play offense, and we're entering the year with a consumer value proposition that stacks up with anyone in the industry. A growing customer household base with deepened relationships. Strong and improving customer satisfaction results. An expanding commercial team with deep expertise and capabilities. and an enhanced profitability profile from the balance sheet repositioning we announced in December. Taken together, these actions have positions associated for strong performance in 25 and beyond. With that, I'd like to walk through some additional financial highlights from the quarter and 2024 as a whole, beginning on slide two. Our fourth quarter results were impacted by non-recurring items tied to the balance sheet repositioning we announced in December. After excluding these non-recurring items, the emerging momentum of our core businesses was reflected through adjusted earnings per share of 57 cents. Our customer deposits grew by nearly $900 million during the quarter. And on the other side of the balance sheet, we grew total loans by over $500 million after adjusting for the mortgage loan sale announced in December. Over 300 million of that growth came in our commercial and business lending segments. An emerging growth story within our commercial business is starting to take hold. We've said all along that our intention is to fund the majority of our loan growth with core customer deposits. And in 2024, we did just that. For the year, we grew core customer deposits by $1.2 billion or 4.3%. And adjusted loans by $1.3 billion or 4.4%. This will remain a point of emphasis for us in 2025. Shifting to the income statement, our net interest income increased 8 million from Q3 and finished at $270 million. Our margin increased three basis points to 281. Due to the timing of our balance sheet repositioning, we expect to realize most of the margin benefit from the transaction here in Q1 of 2025. Our GAAP non-interest income was impacted by non-recurring items tied to our balance sheet repositioning during Q4. but on an adjusted basis, we saw a $5 million quarterly increase. Total adjusted non-interest expense finished at $210 million for the quarter, and while we've continued to make strategic investments in support of our growth plan, staying disciplined on expenses remains a foundational focus of our company. Another foundational focus is managing credit risk. Here in Q4, our non-accrual loans, charge-offs, and provision all decreased versus the prior quarter and the same period last year. In 2025, we remain committed to staying ahead of the curve by taking a disciplined, consistent approach to loan risk ratings so that we can better understand credit risk in our portfolio by both segment and geography. On slide three, we provide a detailed breakdown of EPS impacts from several non-recurring items impacted our financial results in Q4 first. The balance sheet repositioning we announced during the quarter impacted our income statement through a $130 million loss from the sale of mortgages and another $148 million net loss on the security sale we completed. Combined, these items reduced non-interest income by $279 million. Second, our total non-interest expense was impacted by a $14 million loss on prepayment of FHLB advances tied to the repositioning. And finally, Our provision increased slightly due to the net impact of a release from the sale of mortgage loans and a build from the credit card balances we purchased during the quarter. Net of tax, our adjusted EPS came in at a positive 57 cents for the quarter. This adjusted number underscores the strengths of our core businesses and gives us confidence that we're on the right path with our strategic plan as we move into 2025. Shifting to slide four. We've made significant progress as a company since I joined in 2021, and thanks to several tailwinds that have started to emerge, I'm more confident than ever that we're on the right track. First, we've made several key leadership hires over the course of the past 12 to 24 months, and those hires are having an impact. This includes the three recent executive leadership team members added in Q4, but it also includes Jane Laudio, who stepped into her role as president of our private wealth business in late 23. In the short time she's been here, we've already seen more new relationships, increased referrals, and higher sales activity for retirement plans and other services. Second, we now have a consumer value proposition that can compete with just about anyone in the industry, which has better equipped us to deepen relationships with existing customers and attract new ones. The results can be seen in our record high customer satisfaction scores, positive household growth trends, and improved quality of those households. Given current market dynamics, we've tweaked our net household growth expectations for 2025, but we continue to be encouraged by the momentum we've seen to date. Third, we've continued to make progress on our efforts to diversify our consumer loan portfolio without abandoning our conservative approach to credit. By getting out of TPO lending, shifting to an originate to sell model, and repositioning our balance sheet, We've reduced our resi loan concentration from a high of 36% of total loans before I got here to 24% of total loans as of year end, which has provided capacity to grow in more profitable lending categories. And finally, commercial banking is a central component of our growth strategy. We've added 21 of 26 planned hires and expect to have hiring fully completed by the end of Q1. As mentioned previously, we expect the balance sheet impact of these new hires to increase throughout 2025 as the new RMs across our footprint settle in and build their respective pipelines. On slide five, we highlight our loan trends through the quarter. After excluding mortgage loans sold as part of the balance sheet repositioning, total loans increased by $501 million in Q4. This growth was led once again by CNI, which grew by over $300 million in Q4. We also saw $157 million in CRE investor growth during the quarter, which was largely driven by the completion of construction projects in Q4. While we continue to expect elevated payoff activity in the coming quarters, payoffs were limited in the fourth quarter. As we continue diversifying our consumer portfolio, we saw auto finance balances grow by $101 million here in Q4, and other consumer categories grow by 69 million. The latter was largely driven by the $55 million in credit card balances we purchased during the quarter. On slide six, we show loan trends on an annual basis. And since 2020, the trend has been clear. We've decreased our reliance on low yielding, non-customer residential mortgage loans and diversified into higher return categories all while growing our total loan portfolio by over 20% and maintaining our conservative approach to credit. More recently, total loans grew by $552 million from year end 23 to year end 24. This growth has been highlighted by emerging traction in our commercial business, particularly in the back half of 24. After growing C&I loans $230 million in the first half of the year, We grew by over 600 million in the back half of the year as the RMs we've hired are steadily accelerating their production. We have clear momentum in the commercial space. We have the leaders in place. Our hiring is largely complete and pipelines continue to build. As such, we expect C&I loan growth of $1.2 billion in 2025. More broadly, we continue to seek selective growth that emphasizes full banking relationships. quality credit profiles, and diversification to deliver improved returns. With this in mind, we expect total bank loan growth of 5% to 6% for the year. Moving to slide seven. We had mentioned back in the summer that we expected customer deposit growth to pick up in the back half of the year, and that trend largely played out as we expected. After adding over $600 million in core customer deposits in Q3, We added nearly $900 million here in Q4. Unlike Q3, which saw heavy CD inflows, growth in Q4 was driven primarily by interest-bearing demand, money market, and savings categories. The inflow of quarter customer deposits during the quarter once again enabled us to work down our wholesale funding reliance. Total wholesale funding sources were down 3% in Q4. On slide 8. We show deposit trends on an annual basis. We've consistently grown our average annual deposits as our balance sheet has expanded over the years and the impacts of our efforts to grow core customer deposits have emerged more clearly in 2024. On a spot basis, core customer deposits grew by $1.2 billion or 4.3% versus 2023. As we look to 2025, our intention is to continue funding our loan growth primarily with core customer deposits and progress against our strategic initiatives has provided several promising tailwinds as we look to continue attracting, deepening, and retaining customer relationships. As such, we expect core customer deposits to grow by 4% to 5% for the year. With that, I'll pass it to Derek to walk through the income statement and capital trends.

Thanks, Andy. I'll start on slide nine with our asset and liability yield trends. Following the 50 basis point Fed rate cut in September and subsequent 25 basis point cuts in November and December, earning asset yields and interest bearing liability costs both fell meaningfully during the fourth quarter. Total bank earning asset yields decreased by 22 basis points during the quarter, led by 43 basis point decrease in CRE loans and a 53 basis point decrease in commercial and business lending. both of which were largely floating rate portfolios that respond more quickly to changes in market rates. These decreases were partially offset by relative stability in our large fixed-rate auto, resi, and securities books. On the other side of the balance sheet, total liability costs decreased by 30 basis points during the quarter. This larger decrease was a function of our ability to decrease interest-bearing deposit costs by 22 basis points during the quarter, along with our efforts to pay down wholesale funding. Moving to slide 10, Our total net interest income grew by $8 million versus the prior quarter and $17 million versus Q4 of 2023, landing at $270 million for the quarter. Our net interest margin expanded by three basis points to 2.81%. During the quarter, due to the timing of the securities reinvestment, which closed at the end of the year, and the timing of the loan sale, which is expected to be settled by the end of the month, the NII benefit we saw in Q4 was largely driven by initial securities sale and a refinancing of our high-cost FHLB advances. On a pro forma basis, we estimate that our balance sheet repositioning, including the credit card balance acquisition we made in December, would have added approximately 17 more basis points to our net interest margin had we received a full quarter's benefit from the transactions. Based on our latest expectations for balance sheet growth, deposit betas, and Fed action, along with the enhanced profitability from our balance sheet repositioning, We expect to drive net interest income growth of between 12 and 13% in 2025. On flight 11, we provided a reminder of the proactive steps we've taken to get a more neutral asset sensitivity position. Our auto book has grown to 2.8 billion as of year end, providing a solid base of fixed rate assets with low prepayment risk and strong credit characteristics. In addition, as of December 31st, we maintain notional swap balances of approximately 2.7 billion. And finally, we had $10.3 billion in contractual funding obligations set to mature in one year or less as of Q4, which is over 90% of the total. Taken together, these actions have reduced our asset sensitivity over time, with a down 100 ramp scenario representing about a 0.5% impact to our NII as of Q4. This 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 12, our securities book increased to $8.5 billion on a period-end basis, with the increase largely driven by the settlement of securities purchases as part of the balance sheet repositioning we announced in December. During the quarter, we saw a pickup in our CET1 ratio thanks to capital raised from the common stock offering we announced in December, and after putting a portion of that capital to work in the balance sheet repositioning we announced in December, CET1 landed at an even 10% at year end. We also saw a reduction in our AOCI impact due to our securities sale, and as such, the gap between our regulatory CET1 ratio and our CET1 plus AOCI ratio decreased to just 22 basis points in Q4. Following the transaction, our securities plus cash to total assets ratio rose to 22% for the fourth quarter, and we would expect to manage the ratio in the 22 to 24% range in 2025. Our non-interest income trends are highlighted on slide 13. As Andy mentioned, our gap results reflected a net loss for the fourth quarter, and this loss was driven by non-recurring items tied to the balance sheet repositioning we announced in December. Adjusting for these results, our core non-interest income came in at $72 million in Q4, representing a $5 million increase versus the prior quarter and a $2 million increase versus our adjusted Q4 2023 figure. The quarterly increase was primarily driven in increases in capital markets and mortgage banking income, partially offset by a decrease in bolding income. Compared to the same period last year, wealth management fees grew by $3 million, while deposit fees and mortgage banking income both grew by $2 million. In 2025, we expect non-interest income to grow by 0% to 1% as compared to our adjusted 2024 base of $269 million. Moving to slide 14, our fourth quarter expenses were impacted by a $14 million loss on the prepayment of FHLB advances as part of our balance sheet repositioning. Excluding this non-recurring item, our adjusted non-interest expense came in at $210 million in Q4. This adjusted number represents a $9 million increase from the third quarter, but just a $1 million increase from our adjusted Q4 2023 expenses. The bulk of the quarterly increase stemmed from investments in our organic initiatives including an acceleration of hiring that increased our personnel expense in Q4. For the full year, our non-interest expense came in at $804 million after adjusting to exclude the non-recurring loss on the FHLB prepayment. While we've continued to invest in people and strategies to support our growth plans, we've also remained squarely focused on managing our overall expense run rate on an ongoing basis. With that in mind, we expect the total non-interest expense growth of between 3% and 4% in 2025 off of our adjusted 2024 base of $804 million. On slide 15, we once again saw key capital ratios increase across the board here in Q4 after raising $331 million of capital with our November common stock offering. While we did put a portion of this capital to work with the balance sheet repositioning we announced in December, we still expect to maintain a higher level of capital than we did pre-transaction. Our TCE ratio increased to 7.82% in Q4 which represents a 32 basis point increase relative to Q3 and a 71 basis point increase relative to Q4 of 2023. Our CET1 ratio steadily climbed throughout 2024 and currently sits at 10% as of Q4, a 28 basis point increase relative to Q3. With that said, we expect to see an incremental seven basis points of benefit to CET1 once our loan sale closes here in Q1. Following the actions we took in Q4, our expectations for growth in 2025 In the current market conditions, we expect to manage CET1 within a range of 10 to 10.5% in 2025. I'll now hand it over to Chief Credit Officer Pat Ahern to provide an update on credit quality.