Associated Banc-Corp

Good afternoon, everyone, and welcome to Associated Bank Corp's first quarter 2025 earnings conference call. My name is Kevin, and I'll be your operator today. At this time, all participants are in listen-only mode. We'll be conducting a question-and-answer session at the end of the conference. Copies of the slides that will be referred to during today's conference 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 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 Actual results differ materially from the information discussed today as readily available on the SEC website and the risk factor 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 29 through 31 on 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'd like to turn the conference call over to Andy Harmoning, President and CEO, for opening remarks. Please go ahead, sir.

Well, good evening, everyone. This is Andy Harmoning. And in addition to this being our first quarter earnings call, it is also opening night of the draft here in Green Bay. Pretty exciting time for us. I'm joined on our call by our Chief Financial Officer, Derek Meyer, and our Chief Credit Officer, Pat Ahern. I'll start off by sharing some highlights from the quarter. And from there, Derek will cover the income statement and capital trends, and Pat will share an update on credit. And while the macro picture has been clouded by talk of tariffs and trade negotiations, we've continued to see stability in our home Midwestern markets. Unemployment in Wisconsin, Minnesota, and several other Midwestern states remains below the national average of 4.2%. Our largely super prime consumer business has remained resilient, and our commercial customers continue to plan for the long term while taking steps to protect their businesses against short-term volatility in the market. During the first quarter, we hit several key milestones in phase two of our strategic plan, and the hiring and the product launches and all other major investments of phase two have now been completed. In Q1, we completed the expansion of our commercial banking team and we entered a promising new market with the lift out of three talented RMs in Kansas City. We continue to bolster our consumer value proposition that is quickly becoming best in class by adding family banking to our product suite. And we completed the sale of $700 million in residential mortgage loans that we announced in late 2024 as part of a balance sheet repositioning. As we've continued to drive momentum with our strategic plan, that momentum is carried to our financial results. In Q1, we saw over $500 million in loan growth, over $500 million in core customer deposit growth, 16 basis points of margin expansion, and only 12 basis points of charge-offs. In addition to growing our balance sheet in Q1, We also added 10 basis points of CET1 capital. Thanks to our enhanced profitability profile, we are now able to deliver balance sheet growth and capital accretion simultaneously. Looking ahead, there's no denying that tariffs have injected uncertainty into the economy. We're proactively meeting with customers and monitoring our portfolios on a daily basis to stay on top of any emerging concerns. But to date, we have not seen any material changes in customer activity, line utilization, or credit quality. With that being said, our focus has remained squarely on what we can control, and we feel well positioned for 2025 regardless of macro picture. We're positioned to play offense thanks to momentum from our strategic plan, which has given us an industry-leading consumer value proposition, a customer household base that is growing and deepening, record high customer satisfaction scores, an expanded commercial team poised to take market share, and an enhanced profitability profile. We are also well positioned to play defense if necessary, thanks to the stability of our markets, our foundational discipline on credit, strengthened capital profile, bolstered liquidity, and sharpened risk management focus. As we've done for over 160 years, we stand ready to serve the financial needs of our clients. With that, I'd like to walk through some highlights from the quarter beginning on slide two. For the first quarter, we reported gap earnings of 59 cents per share. Total loans grew by $526 million during the quarter, highlighted by another $352 million in C&I loan growth as our middle market commercial growth strategy has continued to take hold. Funding our loan growth primarily with core customer deposit growth continues to be a key priority of our plan. In Q1, we saw $502 million in core customer deposit growth. While our quarterly customer deposit flows are typically boosted by seasonality in Q1, core customer deposits were still up 4% compared to Q1 of 2024. Shifting to the income statement, our net interest income increased $16 million from Q4 to $286 million, while our margin increased 16 basis points to 2.97%. As anticipated, We realized most of the benefit from our balance sheet repositioning in Q1, but we've yet to realize roughly three basis points of incremental NIM impact due to the timing of the loan sale, which closed in late January. We expect a full quarterly benefit of repositioning to flow through in Q2. In Q1, we posted GAAP non-interest income of $59 million. inclusive of a $7 million loss recognized upon closing of the loan sale as we accounted for the FAS 91 impact and slight valuation adjustments. Total non-interest expense finished at $211 million for the quarter, but that number also includes the impact of a $4 million OREO write-down that we wouldn't expect to be a recurring item. Staying disciplined on expenses remains a foundational focus for our company. We also continue to closely manage credit risk. In Q1, our delinquencies, charge-offs, and provision all decreased versus Q4. We remain committed to staying ahead of the curve by taking a disciplined, consistent approach to loan risk rating so we can better understand our credit risk and our portfolio by segment and by geography. Moving to slide three, our company is in a better position than ever to drive organic growth. We announced in March that we've completed the expansion of our commercial team through a lift out of three talented RMs in the Kansas City market. That announcement marked the completion of all major investments in phase two of our strategic plan. And while we've already seen tailwinds start to emerge across the bank in the back half of 24, 2025 is about monetizing our investments. We're in a great position to do so in commercial, where we've added top talent to our leadership team, increased commercial RMs by nearly 30%, and added specialty verticals that help us deepen relationships with our clients and diversify our business. These actions position us to take market share in key metros like Milwaukee, Chicago, Minneapolis, St. Louis, and Kansas City, where we're under-penetrated while still holding serve in our important home market of Green Bay. We also have a consumer value proposition that competes with anyone in the industry, which is translated to record high customer satisfaction, positive household growth, and higher quality households. The investments we've made in talent, products, marketing, and technology have positioned us to attract and deepen customer households sustainably over time. As we mentioned last quarter, Each percentage point increase in our household numbers represents approximately $150 million in incremental deposits. Ultimately, we expect our efforts to translate to growth in lower-cost core customer deposit categories that enable us to further decrease our reliance on wholesale funding sources. We've also provided ourselves with additional capacity to grow in more profitable, relation-driven lending categories to take several actions to reduce our concentration of low-yielding non-customer residential mortgage loans. We've reduced our residency loan concentration from 29% in Q3 of 23 to 23% in Q1 of this year. As we think about what comes next, we're going to continue to invest in our business and our leadership team has plans to sit down together later this quarter to align on what the next wave of investments might look like. In the meantime, phase two has put us in a position of strength for 25 and beyond, and we look forward to building on that momentum. On slide four, we highlight our loan trends through the first quarter. Total average quarter loans decreased slightly during the quarter, with the decrease primarily driven by the recognition of the $695 million mortgage loan sale that settled in January. Total period end loans, which exclude the impact of the loan sale, increased by 2% or $526 million point to point. Segment growth was led by CRA investor category, But this was once again heavily influenced by the completion of construction projects during the quarter. As a whole, the commercial real estate category increased by $196 billion. The limited production we've seen is lower risk, underwritten at today's higher interest rates and expenses and lower leverage with highly experienced and tested CRE clients. We continue to expect elevated payoffs in the coming quarters, but payoff activity remain limited in Q1. As mentioned previously, the commercial industrial category continued to perform strongly, adding another $352 million in Q1. We do not have reason to believe this number is inflated meaningfully by preemptive inventory bills, line draws, or other activity tied to tariffs. Line utilization levels held steady in Q1 and have remained below pre-COVID levels. Finally, Auto finance balances grew by 69 million in Q1 as we've continued to diversify our consumer portfolio. We expect auto to continue growing at a decreasing rate in future quarters as the portfolio matures. And we continue to expect commercial industrial loan growth of $1.2 billion and total bank loan growth of 5% to 6% for the year. Moving to slide five. Total deposits and core customer deposits both increased 2% for the quarter, while wholesale funding sources, including network and broker deposits, decreased 2%. After adding over $600 million of core customer deposits in Q3 and nearly $900 million in Q4, we added another $500 million in Q1. As was the case in prior years, I'll remind you that our first quarter deposit flows are impacted by some seasonal customer inflows that typically flow back out in Q2. With that being said, core customer deposits were up 4% in Q1 of 25 as compared to Q1 of 24. Over that time, we've added commercial RMs and we've grown our customer base. These trends give us confidence in our growth outlook for the year, and as such, we continue to expect core customer deposits to grow by 4% to 5% in 2025. With that, I'll pass it to Derek to discuss our income statement and capital trends.

Thanks, Andy. I'll start with our asset and liability yield trends on slide six. In Q1, earning asset yields decreased by just one basis point during the quarter, with anticipated decreases in our floating rate CRE and CNI portfolios largely being offset by an increase in investment yields following the securities repositioning that was completed at the end of Q4. On the other side of the balance sheet, total interest-bearing liability costs decreased by 23 basis points. We remain pleased by our ability to reprice deposits downwards each of the past two quarters, and after seeing interest-bearing deposit costs decrease by 23 basis points in Q4, they fell by another 19 basis points in Q1, landing at 2.91 for the quarter. One area we benefit in is time deposits. Costs on time deposits decreased by 23 basis points in Q4 and by another 27 basis points in Q1. With nearly $8 billion in CDs scheduled to mature over the next 12 months, we expect additional repricing opportunities in 2025. Moving to slide seven, our total net interest income grew to $286 million in Q1, a $16 million increase versus the prior quarter, and a $28 billion increase versus Q1 of 2024. Our net interest margin expanded by 16 basis points to 2.97%. Both increases were largely driven by the balance sheet repositioning announced in December, However, we also saw approximately two basis points of organic NIM expansion during Q1. Due to the timing of the loan sale, which settled in late January, we have not yet fully recognized a full quarter's benefit of the balance sheet repositioning. On a pro forma basis, we estimate that the loan sale would have added approximately three more basis points to our Q1 net interest margin had the transaction settled on December 31st, 2024. 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 continue to expect to drive net interest income growth of between 12% and 13% in 2025. This forecast assumes four rate cuts in 2025 versus two rate cuts previously. On slide eight, we provided a reminder of the proactive steps we've taken to get a more neutral asset sensitivity position to protect our balance sheet in a falling rate environment. Our auto book provides a solid base of fixed rate assets with low prepayment risk and strong credit characteristics. We've maintained received fixed notional swap balances of approximately 2.85 billion, and we've emphasized shorter duration contractual funding obligations to maintain repricing flexibility. Taken together, these actions have reduced our asset sensitivity over time, with a down 100 ramp scenario representing about a 0.6% impact to our NII as of Q1. This is reduced from the 2.3% impact we were modeling in Q1 of 2023. Our goal is to maintain this modestly asset sensitive position going forward. Shifting to slide nine, our securities book increased to 8.7 billion on a period end basis as we continue to modestly build AFS securities in proportion to asset growth. We also bolstered our liquidity position during the quarter, bringing our securities plus cash to total asset ratio to 23% for the quarter. We expect to manage the ratio in the 22 to 24% range throughout 2025. On slide 10, we highlight our non-interest income trends for the quarter. As Andy mentioned, our first quarter gap results included a 7 million pre-tax loss, primarily driven by the FAS91 impact from the loan sale that settled in January. Aside from that non-recurring item, our first quarter non-interest income trends were largely consistent with the same period a year ago. On a quarterly basis, capital markets fees were $5 million lower due to elevated syndication revenue recognized in the prior quarter. Wealth, service charges, and card-based fees also ticked down from the prior quarter, but these quarterly decreases were partially offset by $3 million increase in BOLI income. In 2025, we continue to expect non-interest income to grow by 0 to 1%. After excluding the non-recurring items that impacted our fourth quarter 2024 and our first quarter 2025 results from the balance sheet repositioning we announced in December. Moving to slide five, first quarter expenses of $211 million were impacted by a $4 million Oreo write-down recognized during the quarter, which is not something we'd expect to impact our run rate going forward. Within our core expense base, quarterly decreases of $2 million in personnel costs, $1 million in business development and advertising, and $1 million in legal and professional fees were partially offset by $1 million quarterly increase in occupancy, FDIC, and loan and foreclosure costs, respectively. 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 continue to expect total non-interest expense growth of between 3% and 4% in 2025 off of our adjusted 2024 base of $804 million. On slide 12, we once again saw capital ratios increase across the board in Q1. Our TCE ratio increased to 7.9% in Q4, which represents a 14 basis point increase relative to Q4 and an 88 basis point increase relative to Q1 of 2024. After climbing steadily in 2024, our CET1 ratio now sits at 10.11% as of Q1, a 10 basis point increase relative to the prior quarter and a 68 basis point increase versus the same period a year ago. Also in Q1, we continue to see a reduction in the AOCI impact during the quarter with our CET1 plus AOCI ratio coming in at 10.01%, representing just a 10 basis point gap versus our standard CET1 ratio. Based on our expectations for growth in 2025 and current market conditions, we continue to expect to manage CET1 within a range of 10 to 10.5% for the year. I will now hand it over to our Chief Credit Officer, Pat Ahern, to provide an update on credit quality.

Thanks, Derek. I'll start with an allowance update on slide 13. We utilized the Moody's February 2020-25 baseline forecast for our CECL forward-looking assumptions. The Moody's baseline forecast remains consistent with a resilient economy despite the high interest rate environment. The baseline forecast contains no additional rate hikes, slower but positive GDP growth rates, a cooling labor market, and continued deceleration of inflation with continued monitoring of ongoing market developments. Our ACLL increased by another $4 million in Q1 to finish the quarter at $407 million. with increases in the commercial and business lending, CRE investor, and mortgage categories partially offset by decreases in the CRE construction and other consumer categories. The uptick in commercial stemmed from a combination of loan growth plus normal movement within risk rating categories. Altogether, our reserves to loan ratio decreased by one basis point from the prior quarter and increased three basis points from the same period a year ago to 1.34%. Moving to slide 14, we maintain a high degree of confidence in the quality of our loan portfolio, but continue to review our portfolios closely, giving emerging uncertainty in the macro picture and recent trade policy announcements. In Q1, our portfolio continued to perform well. Total delinquencies decreased to $47 million in Q1, a $33 million decrease from the prior quarter, and $4 million lower than the same period a year ago. Total criticized and classified loans increased slightly from the prior quarter. The majority of this increase was driven by migration within the CRE and CNI categories. Similar to the past couple quarters, we do not feel this increase is an indication of a significant shift in the credit profile of the portfolio, nor does it represent an increased risk of loss, but rather is a reflection of conforming to industry guidance and our proactive and conservative approach relative to credit changes. We continue our ongoing portfolio deep dives and don't see a systemic shift in our commercial portfolios. We continue to see resolution with some of our more stressed credits, and liquidity remains present in the market in terms of both payoffs and loan remargin. After three consecutive quarterly decreases, total non-accrual balances increased slightly to $135 million in Q1, with increases in CRE and consumer partially offset by a decrease in CNI. We remain comfortable with this level of non-accrual loans, which has reflected the normal course of business activity. To that point, Q1 non-accruals were down $43 million, or 24% from the same period a year ago. Finally, we booked just $3 million in net charge-off during the quarter and $13 million in provision. Both numbers have continued to trend downward for the past several quarters. Our net charge-off ratio decreased by four basis points to 0.12%. In summary, our credit metrics continue to give us confidence that what we've seen to date is a handful of credits migrating within our rating system and not necessarily a sign of broader issues coming down the road in future quarters. Overall, outside of these specific situations, we remain comfortable in the normalized level of activity we've seen across the bank. Finally, I'd like to provide a few reminders as to why we feel well-positioned as a company in the face of an uncertain macro backdrop on slide 15. We've discussed CRE in detail in recent quarters, but our consumer book is strong as well. In fact, 94% of our $10.8 billion consumer portfolio is prime or better. Mortgage represents our largest category with $7 billion in balances at a weighted average FICO of 787 as of Q1. In auto, 99% of loans that have been booked with prime or super prime FICOs in the origination FICO in March with 796. Credit cards are a small part of our business at less than 1% of total loans, but those customers also have FICO's north of 790. Simply put, we do business with people who pay you back. In response specifically to tariffs and ongoing trade policy negotiations, we have completed targeted portfolio reviews, contacting a significant portion of clients with any potential impact from new or increased tariffs. While it remains too early to come to any final conclusions, clients have been planning for tariff changes for some time, and we feel comfortable with their positioning of strategies and their ability to execute when more clarity exists. Going forward, we remain diligent on monitoring other credit stressors in the macro economy to ensure current underwriting reflects the impact of ongoing inflation pressures and shifting labor markets to name just a few economic concerns. In addition, we continue to maintain specific attention to the effects of elevated interest rates in the portfolio, including ongoing interest rate sensitivity analysis bank-wide. We expect any future provision adjustments will continue to reflect changes to risk rates, economic conditions, loan volumes, and other indications of credit quality. With that, I will now pass it back to Andy for closing remarks.

Thank you, Pat. In summary, we'll continue to closely monitor impacts to the economy and our customers as trade negotiations evolve, but we feel well-positioned as a company thanks to the emerging momentum of our strategic plan. Based on a good start to the year, growing commercial pipelines, stable credit trends, appropriate expense management, and emerging impacts on the economy in the second half of the year, we've affirmed our forward-looking guidance for balance sheet and income statement expectations in 2025. With that, let's open it up for questions.

Certainly. When I'll be conducting a question and answer session, if you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing star 1. Our first question today is coming from Timur Brazile from Wells Fargo Securities. Your line is now live.

Hi, good afternoon.

Hi, Timur.

Trying to gauge the second quarter NII, it looks like there's quite a few tailwinds that you guys are benefiting from, whether it's the end of period loans versus the average or the DDA end of period versus average. Can you just help frame kind of beyond the three basis point of recognition on the mortgage book, just how second quarter is shaping up from some of these late 1Q actions?

Sure. So when I think about second quarter, I agree there are some clear tailwinds going into it, whether that's the sales portfolio part of the way through and the increase that we've seen through the quarter. we've benefited, as have many, from a deposit market that we've been able to reprice in. I would think that the repricing, you'll be able to continue that, but there'll be a little bit lesser gain on that across the industry as those CDs that come due come in at a little bit lower rate. Even though you're pricing down at a little bit lower rate, the mix is just slightly different, similar volume. And for us, you know, we've seen cyclical growth on the deposit side, but we have a lot of deposit levers that we pull overall. So we feel good about deposits, but we won't have as big of uptake possibly in the second quarter. So all in all, we do have momentum going into second quarter. We do think that translates into NII for the second quarter. and that we think we're in a relatively good position. When you balance loan growth, deposit growth, margin, reposition of pricing, customer growth, you add all that together, we think we're in a relatively good position heading into Q2.

Okay, and then I guess just in terms of deposits, can you maybe box in the magnitude of the seasonal outflows that you're expecting in Q2, and are most of those coming out of that DDA bucket?

No, the non-interest bearing seems to have leveled off for us. And what I would say is it's easier to think of what the impact on deposits is when you think of, frankly, your first question with the balance of multiple pieces coming together and offsetting that. Because if I think strictly of deposits, you think of the fact that you're growing your customer base. You have a very big HSA business that has double-digit customer growth for us right now. We have a commercial vertical that The pipeline is significantly higher. Sorry, a commercial team that's added 25 plus people that the vertical is higher. Expanded mass affluent offering and expertise in the branch and private wealth. So I don't have, Timur, we don't give quarter by quarter in advance growth numbers on deposits, but my confidence in our ability to grow deposits to fund ourselves largely from the customer base is good because of the work that we've had. And then on top of that, you think about attrition improvements. Our net promoter score was 55 in the first quarter, which is the highest our company's ever had. That's great because of the product offering and the service, but then you retain your customers more. So again, I'll say we're in a pretty good position heading into Q2. I think it translates as we go out during the year as well.

Great, thanks for that. And then just looking at the commercial loan growth in particular, how much of that is somewhat insulated from the macro, just given the hiring and bringing over the back books? And I guess just on the thought of loan growth here, just talk to us about building out and accelerating some of that growth into some of this macro uncertainty.

Yeah, no, that's a great question. And it's a great question because we started our initiative in the fourth quarter of 23, as you remember. And so, you know, 15 to 18 months later, we have real momentum. So we've hired people. We were not relying on a big GDP. We believe we can grow commercial loans in a low GDP market with really good customers by taking market share. The way that I think about that is you bring someone on, it takes six to 12 months to get up and running, but it takes 12 months for non-solicitations to expire. So we look at non-solicitation expiration by quarter. and we have a lot more people every quarter that that is falling off for them so that will be completely gone in the first quarter of 26 but for instance we had four people their non-solicitation expired in the fourth quarter of 24 we have four more in the first half of 25 we have six more in the second half so we continue to believe that the commercial the fact is we have more people quality lenders that know the market So even if you see a decrease in GDP, which we think is somewhat likely, we still think that we grow by taking market share. Great.

Thank you for the call.

Thank you. Thank you. Next question today is coming from Daniel Tamayo from Raymond James. Your line is now live.

Thank you. Good afternoon, guys. Hey, Daniel. Yeah, I guess my first question, you – You guys talked about it. It's in the slide deck, but the balance sheet looks like it's really close to neutral now. We've talked about the impact being relatively muted, but should we think about NIM impact from each 25 basis point cut at this point to be mostly hedged out?

Well, I'll start that and pass it to Derek. The first simple answer is yes, we are way more neutral than we've been in the past, certainly when I got here four years ago. Derek, do you want to speak to what that looks like then?

Yeah. So 125 basis point cut would cost us about $500,000 per quarter. So it really is very neutral. And the deposit mix, the CD repricing, and the asset growth, all of which, to the earlier set of questions, looks really strong, are bigger drivers than how many rate cuts are left in the year.

Okay, great. And then second question on capital. I know you're utilizing capital for growth and you've still got plenty of growth here and you just kind of entered the bottom of the range for your stated target capital CET1. But given the level of the share price, the depressed level, just curious if there have been any thoughts to kind of capitalizing on that with buybacks in the near term.

Derek doesn't usually let me answer that, but I'm going to. This is Andy. The answer is that we feel pretty strongly about the use of capital to help build this company. And we think that's the best use right now. And for us, when we grow and we think about balance sheet shift, we're going to continue on with that. And we believe that we can continue to expand our margin over time by adding assets that have a little bit better return. We don't want to slow that. We're talking about a balance sheet that at its height had 36% resi in it and today has 23%. And now we have the commercial engine moving for us, albeit a little, you know, challenged like everyone else with the economy, but still moving quite well for us. That gives us a position to continue that mix shift each quarter and each year. And we think that's the best thing for long-term investors.

Understood. Yeah. And if I could squeeze one last one in just on the reserves, you know, if we went into a more recessionary type of environment, just curious kind of if there's any offsets in the offsets, but like in terms of qualitative reserves or something that you could use that are already in reserves rather than having to build reserves in that type of scenario where the economy would be worsening.

Pat, why don't you speak to the overlay that we use on the model?

Sure. Right now, we're really comfortable with our coverage right now, but we've taken kind of a conservative approach and we've included overlays for economic uncertainty for several quarters. So I think that gives us a strong starting position to handle changes within the market. Obviously, we'll watch for more clarity as we get into the balance of the year and decide what steps are appropriate, whether it's Q2 or beyond. Okay.

I appreciate the color, guys.

Thank you.

Thanks for the questions. Thank you. Next question today is coming from Scott Seifers from Piper Sandler. Your line is now live.

Excellent, guys. Thanks for taking the question. So, Andy, you had suggested, you know, customer activity hadn't really changed in the first quarter. And do you have any sort of updated thoughts just based on conversations through April, in other words, after all this tariff uncertainty situation? It really started and has been ebbing and flowing. What broadly are your customers thinking as they deal with this stuff?

Yeah, that's a constant day by day, as you probably know. But I think the important thing is that we're in that mix every day. So we've changed conversations to include every standard renewal has a discussion of that. Every outbound call has a discussion of it. And what we've found is a lot of preparation happens. On the CRE side, what we found is people had already looked for alternatives to China. What we found is when we go line by line on a credit deal or construction deal that they understand if they have a 20% tariff, what that translates into overall project costs. So that was heartening for us. They're ahead of the game. They anticipated this in some respects. Maybe not the magnitude, but they certainly had planned for it. There's no question that it brings to light the idea of, you know, do we go forward? However, what we've seen is a very steady production number for us. And what we've seen also is the overall pipeline has grown in the over 50. The question is how that translates into how it comes back in based on confidence. But I wouldn't say there's a lack of confidence as much as a cautious of you right now and and frankly i've been i've been pleased with what what we've heard in fact i'll be with customers tonight and asking the same question i know uh they do like to talk about what's going on with their business and we get really good insight so i'd say cautious cautious um however um uh very aware and in many cases planful perfect okay appreciate that color thank you very much and then it's just a broader question you added the um

Kansas City commercial talent, I think another or a branch in St. Louis as well. Maybe if you can just sort of speak to the top level aspirations in sort of that lower part of the Midwest, you know, kind of outside that upper part that you're known for so well.

Yeah, thank you. I think of it in this way. Green Bay is such a source of strength for us. Our customer base has been very loyal to us for a long time. So we want to make sure we're holding serve in Green Bay. We wanted to prove that we could grow our business in Milwaukee, a major metropolitan area. We are growing our households faster in Milwaukee than anywhere else in our footprint. And that is from a product set, a marketing strategy, a digital strategy, a commercial strategy. We can carry that on, we think, next to Minneapolis. We're doing that in Chicago. These are some major markets. And then the question, if you can do that in those markets, you have a recipe to succeed in others. And so from a product, a marketing, a digital and a commercial perspective, we think that we have an overlay that works in other major metropolitan markets. So over time, and we want to grow organically and land phase two and monetize it. But over time, if we get into markets that have a little faster population growth or economic growth, we think that could put us in a really good position because right now we're growing in markets that are a little bit slower growing than something maybe west or south.

Yeah. Okay. Perfect. Good. Thanks again for the details.

Thank you. Thank you. Next question is coming from Jared Shaw from Barclays. Your line is now live.

Hey, good afternoon.

Hey, Jared.

Hey, maybe just on the commercial real estate, the investor commercial real estate growth there, how much more growth should we be expecting from that or how much should that be contributing to growth going forward? Is that more opportunistic this quarter or is there something more there that's going to sustain that for a little longer?

It's a couple of things, and I'll have Pat fill in the details, but it's really properties transitioning into income producing from construction. So there's actually a stability in that type of property where it's hitting some thresholds. And then pay downs have been a little bit slower than we had expected based on the market, but that still allows us to convert those into amortizing loans. Pat, do you want to put a little more color on that?

Yeah, I think that the positive point that Andy's bringing up is that the loans that are moving out of construction have met hurdles, have continued to meet the original underwriting, and they're staying with us in the income-producing investor bucket. So we're comfortable with that. We like that the sponsors have lived up to what we originally had both underwritten, and, you know, we like – I'm certain they would like to use the markets to go with long-term financing, but right now they fit our underwriting criteria and they're solid loans that we want to keep.

Jared, it's Derek. If you look at slide 22, we've got the trends for our quarter-end loan mix, and you'll see it's not, we don't talk about this as a growth platform for us, and while we feel extremely good about it, You'll see we finished first quarter last year at $7.3 billion. It's $7.4 this year. If you add up all the categories in that bucket, it's pretty flat.

Okay. All right. Good. Thanks. And then maybe shifting to CNI, as a follow-up to the conversation you just mentioned about the strong markets, where is the CNI growth coming from? Is that sort of mirroring what you're seeing on the – household growth, or are there certain markets that are outperforming others right now? And along that lines, what are you seeing in terms of like spread compression and competition on middle market CNI?

Yeah, so the first answer, and this is the answer that makes me the happiest, is we're not seeing it specifically in one market. We're seeing it, of course, in the major metropolitans, but we're also seeing across our community banking markets. where we have a win Wisconsin strategy, for instance. I mean, we're the largest bank headquartered here, and we are out in front of the communities. So I'm really pleased that we're getting uptick across the footprint. That's a good sign that we don't just need to win in one place. It's also a good sign for us because we continue to have these investments and these non-solicitations roll off. Those non-solicitations start in Milwaukee, Chicago, and then expand into Minneapolis. And then when you go, of course, Kansas City, the farthest out. So that bodes well for us as those start to expire and we're out in the market with quality people that have been in the market for a long time and know the key businesses in the market. With regards to compression or competition, I would say probably the place that we've seen that a little versus 12 months ago, for instance, would be probably CRE. It's not a major area. We don't expect explosive growth in that particular area, but that's probably where there's been a little more compression because people have been on the sidelines in that business and have kind of gotten a little bit of renewed interest as they have a vision of what the market might look like. But so far, so good. We like the balance sheet remix with the type of CNI business that we're bringing in. And I'll also note that the thing I'm particularly excited about is the size of the deposit pipeline that corresponds with that, which, frankly, will ultimately drive ROE for us.

Thank you.

Thank you. Thank you. Next question today is coming from John Armstrong from RBC Capital Markets. Your line is now live.

Thanks. Good afternoon. Hey, John. Derek, maybe start with you on the non-interest income, just to get to a starting point. Capital markets is the first quarter activity about an appropriate run rate. Would you think fourth quarter was a little abnormal?

Yeah, it was really good, abnormal good. Yeah. But yeah, there were a lot of syndications and capital markets. We had a great production and great fee income that went with that. So you see us softening from that, reverting to more of a trend that we saw last quarter, but I mean the other three quarters of last year. So yeah, I think you've read it right.

Okay. And then pull out the mortgage portfolio loss and BOLI probably, hard to predict, but probably drops back down and that's a good starting point to use.

Yeah, I think that's right.

Okay. Pat, a question for you. I may have missed this. I was studying my Packers draft selection card when you were going through the changes. But you had the commercial real estate NPLs went up and commercial NPLs went down in the quarter. Is there anything to call out when you kind of get into the details?

No. We've seen some resolution in the C&I stuff. And I think it's just generally normal course of business. Real estate, there's one particular deal, but not out of the ordinary, and we feel comfortable where we sit with it right now.

Okay. To be clear, John, Pat, for clarification, Pat looks more closely at the Bears draft pick than the Packers.

All right. You better be sitting tonight at Lambeau, Andy. You better be out there with business cards. All right. One thing I wanted to ask you, you brought up the non-solicitations expiring and you completed the commercial expansion, but how do you measure progress in the commercial expansion and how do you think the profitability of that expansion looks today relative to the rest of the company? I'm just trying to think about it feels like the sunk cost is already there and maybe the revenues aren't quite there yet. How should we think about that?

That's exactly how we think about it, is that it takes a period of time in the first 12 months in an investment. You don't really get it back. We started to see just with our existing RMs, they're still doing a vast majority of our production. So everything that we're going to get out of, and this is expected. So we're right on track with what we expected. And when you see baked into our overall growth for the year. It looks like an ambitious number, but all it really says is as we go through the year and people get six to 12 months into the role and start producing, we see that exactly happening. So if 75% of the production comes from the existing base, maybe it goes down to 65 and 50 as we go along. throughout the year and the end of the year. That's why we feel like we have kind of tailwind momentum there. And then, you know, we'd have to do the math on the $1.3 billion in growth, and then you'd have to take the deposits that come with that, the stickiness of the treasury management. But for us, what's interesting is we have an HSA business that's 12th or 13th in the country, and our cross-sell under that is significant. So every time we're bringing it in, we're introducing our HSA business business into it we're introducing our private wealth business into it so it goes beyond the commercial line of business and for the thing I'm most excited about in quarters to come is we think that we'll have a steady revenue of deposit growth it will be the lag effect first you have to wait for the loans for six to twelve months you start booking that then you start booking deposits then you're booking ancillary business and we're seeing that trend and slowly develop. But I think each time we do that, we start to change return profile.

Okay. All right. Fair enough. Thanks, guys. Appreciate it.

Thank you. Thank you. Next question today is coming from Casey Hare from Autonomous Reliance. He's now live.

Great. Thanks. Good afternoon, guys. Wanted to touch on loan growth. Apologies if I've missed this, but just wondering why The loan growth guide is still four to six. You guys are off to a pretty good start here. And if I remember correctly, I think you were saying in January that the loan growth was going to be back half-weighted in the second half of 25. So just wondering what's keeping you at four to six here.

I think we're at five to seven, aren't we, Derek? Or five to six, Derek, aren't we?

Sorry, five to six, yeah.

Yeah, we actually said we'd get out of the gates pretty well. And we thought we would because we'd had additional hires, so we thought we'd have a good first half of the year. Secondly, there's puts and takes to it. We'll continue, we think, with the quality of people we have and how long their tenure is here. We also think there's questions about the economy in the second half, and then we think that payoffs on CRE are likely to emerge at a little bit higher level than we've had it, and we've forecasted that in. So we forecasted low GDP, we forecasted increase in CRE payoffs, and we forecasted in the effects of continued each quarter moving forward with more tenured people getting off of their non-solicitation. So that's how we think about the five to six, and that's why we have some level of confidence in a market that is a little bit noisy right now.

okay fair enough um and then derek on the on the cds you know the eight billion that's coming there i hear you that it's it's the the benefit is gonna flatten out a little bit but just wondering what the your new rates are uh versus that 433 level here in the first quarter yeah well the the

The CDs that matured first quarter were a lot higher, you know, most of them had a five handle on it. And to go to the market rates that we were going out with and the competitors were at were around four. But as you would expect, probably about halfway through this quarter for most of the industry who stayed short, at least where we're competing in our markets, about halfway through the quarter, the rates that are maturing, it will have dropped some. And depending on whether the Fed cuts or not this quarter, we would expect market rates to start dropping, and we participate in that. But as Andy mentioned earlier, it's not clear that the difference between the maturing rates and the market rates will be the same, quite as wide as they were earlier this quarter. Hope they will. We feel optimistic about our guide, and we've seen rational pricing, and I hope that continues. It bodes well for us in a market where we've got superior loan growth, and there might not be as much broad-based demand for deposits, which should help pricing.

Great. Thank you.

Thank you. Thank you. Next question today is coming from Terry McEvoy from Steven, your line is now live.

Hi, thanks. Good afternoon. Just one question left on my list here. I didn't see the Oreo expense in the release. I think you said it was $4 million. So I guess my question is, is that included in the up 3% to 4% for the full year guide? And if so, does that suggest kind of expenses flat to maybe even down a little bit on a quarterly basis?

Derek, do you want to take that?

Yeah, sure. It is included in the guide, and it does suggest that this is a pretty high quarter. Relative to the guide.

Okay. And it was $4 million, the order expense? Correct. Yes. Okay. Okay. That was it on my list. Thank you for taking the question.

That was easy. Thank you. Thank you. Next question is coming from Chris McGrady from KBW. Your line is now live.

Oh, great. Thanks. Derek, in terms of the guide, I mean, it feels like the NII could trend to the high end. Any reason not to midpoint everything else? I guess that's question one. And question two is if some of this often in the economy does happen, can you speak to any kind of flex on the expenses you could pull? Thanks.

Yeah, I'll start with the expenses. I mean, it's still only if in the year. I think we've got pretty good line of sight into the expenses. You'll even see personnel expense dropped fourth quarter to first quarter. Now, that's some of that you'd expect anyways with comp and benefits in fourth quarter. But I think we feel confident about that. I think the rest of the guidance, we really don't want to be too cute with it. We've got a lot of confidence about the first quarter and how that turned out. We've got a lot of confidence in the endpoints and what we brought to the table with regards to loan growth, deposit growth, and capturing the margin expansion from the repositioning. We have good pipelines. We hear some uncertainty from customers, but I think getting overly aggressive on the guidance above what we had, given all the uncertainty, just doesn't seem like a plausible way to really talk about our expectations going forward. Our core performance feels really good. The macro environment really feels uncertain.

Understood. Thank you.

Thank you. We reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.

Well, I'll be brief and just say thank you for your interest in Associated Bank. Your questions are all the things that we're thinking about, and we appreciate you following us.

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