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.