Associated Banc-Corp

Good afternoon, everyone, and welcome to Associated Bank Corp's second quarter 2025 earnings conference call. My name is Alicia, and I'll 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 will be referenced during today's call and 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 may 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 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 the conference call, please refer to page 24 through 26 of the slide presentation and to pages 10 and 11 of the press release financial tables. Following today's presentations, instructions will be given for the question and answer session. At this time, I'd like to turn the conference over to Andy Harmoning, President and CEO for opening remarks. Please go ahead, sir.

Thank you, and good afternoon, everyone. We appreciate you joining our second quarter earnings call. This is Andy Harmoning. I'm joined once again 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. From there, Derek will cover the income statement and capital trends, and Pat will provide an update on credit. Throughout the first half of this year, we've remained focused squarely on landing the plane with regards to our strategic plan. And the momentum from actions we've taken over the past several quarters has continued to transform our company in several important ways. First, we're leveraging a best in class value proposition to grow and deepen our customer base organically. In Q2, we posted the best organic checking household growth we've seen since we began tracking nearly a decade ago. Second, we're driving loan growth while remixing our asset base. With over 700 million in CNI growth in the first half of 25, we're well on our way to exceeding the $1.2 billion target we set for the year. These balances are replacing lower yielding resi balances as they roll off the balance sheet. This ongoing mix shift is driving stronger profitability. Our quarterly net interest income of 300 million was the strongest number we've seen in our company's history. And finally, Our enhanced profitability profile enables us to accrete capital while still supporting balance sheet growth. We added another nine basis points to CET1 capital in Q2 and have added 19 basis points of CET1 so far this year following the completion of our balance sheet repositioning. As always, credit discipline remains a focus for us given the uncertain macro backdrop. We continue to proactively manage our portfolios and meet with customers to stay on top of any emerging risks. We remain well positioned to play offense in the back half of this year, thanks to the stability of our markets and the building momentum of our strategic plan. We also remain well positioned to play defense if necessary, thanks to our disciplined approach to credit. With that, I'd like to walk through some additional highlights for the quarter beginning on slide two. For the second quarter, we reported earnings of 65 cents per share. Total loans grew by 1% quarter over quarter and by 3% versus Q2 of 2024. Adjusted for the loan sale we completed in January, total loans in Q2 were up by nearly 6% versus Q2 of 2024. Our loan growth has been led by commercial as our middle market expansion continues to gain momentum. We added another 356 million of CNI loans in Q2, and we've now grown CNI loans by over $700 million through the first six months of 2025. As expected, Our Q2 deposit levels were impacted by seasonal outflows, but compared to the same period a year ago, core customer deposits were up 4.3%. We remain confident in our full year outlook for customer deposit growth, thanks to our steadily improving household growth trends, our commercial RM hires, and the seasonal inflows we typically see in the back half of the year. Moving to the income statement, our Q2 net interest income of $300 million was the strongest mark we've seen in company history and was up $43 million, or 17%, versus the same period a year ago. We also posted non-interest income of $67 million during the quarter, which was up 3% versus Q2 of last year. Total non-interest expense finished down slightly from the prior quarter at $209 million here in Q2, driving positive operating leverage and continuing to be a primary focus as we execute our plans. We also continue to monitor credit quality closely. In Q2, our non-accrual loans were down 16%. We booked 17 basis points of net charge-offs, and we added $18 million in provision. And finally, we posted a return on tangible common equity of 12.96% in Q2, a 62 basis point improvement from Q1. Moving to slide three, the strategic actions we've taken have put us in a position to enhance our profitability. by growing and remixing both sides of our balance sheet. And we're doing just that. You can see it in commercial where CNI balances have grown by over 700 million year to date with pipelines continuing to build and several more non-competes from recently hired RM set to expire in the coming months. We expect our momentum to carry into the back half of the year and into 2026. These higher yielding relationship focused CNI loans are replacing lower yielding resi mortgage loans that have historically been concentrated on our balance sheet. And as those balances continue to roll off, we've been able to decrease that concentration and diversify our asset base. This dynamic sets us up to drive more profitable growth without sacrificing our disciplined approach to credit. In Q2, our net interest margin climbed above 3% and we posted record NII. We see additional opportunity ahead as we continue to grow and remix our asset base while supporting that growth primarily through lower cost customer deposits. On slide four, we highlight our loan trends through the second quarter. Total average quarterly loans increased by nearly $400 million versus Q1, and while total period loans increased by 1% or $300 million point to point. In both cases, this growth was led by CNI. CRE construction loans grew by $140 million during the quarter, but this growth was more than offset. by $227 million in net outflows in CRE investor bucket. After a light first quarter of payoffs, we saw payoff activity in CRE pick up towards the end of the second quarter, and we expect this activity to remain elevated over the remainder of the year. Finally, auto finance balances grew by $91 million in Q2 as we've continued to diversify our consumer book. As such, we continue to expect total bank loan growth of 5% to 6% for the year. Moving to slide five. Total deposits and core customer deposits both dipped slightly during the quarter due to seasonality we typically see in the spring. However, both total deposits and core customer deposits are up more than 4% as compared to the same period a year ago. This reflects our efforts to attract and deepen customer relationships with a best-in-class value proposition. It also is a reflection of the RMs we've hired and our sharpened focus on whole relationships in commercial. We're confident in our ability to grow core customer deposits in the back half of the year for three reasons. First, our consumer value proposition gives us an engine to attract and deepen customer relationships sustainably over time. In fact, here in Q2, we just booked the strongest organic primary checking household growth numbers we've seen since we began tracking a decade ago. Secondly, our sharpened focus on commercial deposits is gaining momentum. With pipelines growing, RM non-competes expiring and the addition of a new deposit vertical. And finally, as we saw in 2024, our annual deposit growth is historically weighted towards the back half of the calendar year. Ultimately, we expect our efforts to drive growth in lower cost core customer deposit categories that enable us to further decrease our reliance on wholesale funding sources over time. Recent pipeline and household trends give us confidence in our growth outlook for the year, And as such, we continue to expect core deposit growth by 4% to 5% in 2025. And with that, I'll pass it to Derek to discuss our income statement and capital trends.

Thanks, Andy. I'll start with yield trends on slide six. In the second quarter, our net interest margin of 3.04% was driven by a five basis point increase in earning asset yields and a four basis point decrease in interest bearing liability costs. We saw a slight uptick across the board in most asset categories. This uptick was led by the commercial business category, which increased by seven basis points versus Q1. On the liability side, total interest-bearing deposit costs decreased to 2.78% in Q2, a 13 basis point decrease from the prior quarter, and a 52 basis point decrease versus Q2 of 2024. We remain pleased with our ability to reprice deposits downward over the past several quarters, particularly the high-weight categories such as CDs. On slide seven, Our second quarter net interest income of 300 million increased by 14 million versus the prior quarter and 43 million versus the same period a year ago. Our net interest margin of 3.04% expanded by seven basis points versus Q1 and 29 basis point versus the same period a year ago. Based on our latest expectations for balance sheet growth and mix, deposit betas and Fed action, we now expect to drive net interest income growth of between 14 and 15% in 2025. This forecast assumes three Fed rate cuts in 2025. Moving to slide eight, we continue to feel well positioned for any potential Fed rate changes that may materialize in the coming months, thanks to our modestly asset sensitive balance sheet. We've kept funding obligations short to maintain repricing flexibility. We've maintained received fixed swap balances of approximately 2.45 billion, and we built a $3 billion fixed rate auto book with low prepayment risk and strong credit characteristics. These actions have reduced our asset sensitivity over time with the down 100 ramp scenario now representing about a 1% impact to our NII as of Q2. We expect to maintain this modestly sensitive position going forward. On slide nine, our securities book increased to $9 billion in Q2 as we continue to modestly build our AFS portfolio. The overall yield in our investment securities portfolio increased two basis points from the prior quarter to 4.24%. Our securities plus cash to total assets ratio climbed to 23.4% for the quarter. We expect to manage this ratio in the 22% to 24% range throughout 2025. Our non-interest income trends for the quarter are highlighted on slide 10. We posted total non-interest income of 67 million in Q2, a 14% increase over Q1 that was largely driven by the $7 million loss on mortgage sale we recognized in the prior quarter. Relative to the same period a year ago, our non-interest income increased 3%. As compared to Q1, fee-based revenues, capital markets, and mortgage banking income ticked higher, and this growth was partially offset by a decrease in BOLI income. In 2025, we now expect non-interest income to grow by 1% to 2% after excluding the non-recurring items that impacted our fourth quarter 2024 and first quarter 2025 results from the balance sheet repositioning we announced in December. Moving to slide 11, second quarter expenses of $209 million decreased $1 million versus Q1. Within our expense base, quarterly decreases in occupancy, technology, FDIC assessment, and other non-interest expense were partially offset by increases in personnel, business development, and legal professional costs. Our efficiency ratio dipped below 56%, which is the lowest level we've seen since early 2023. We continue to invest in people and strategies that support our growth plans, but as we've said previously, driving positive operating leverage continues to be a primary focus for our company. Based on our latest forecast, we now expect total non-interest expense growth of between 4% and 5% in 2025 off of our adjusted 2024 base. The increase is largely attributed to variable comp, benefits expense, and OREO. On slide 12, we once again saw capital ratios increase across the board in Q2. Our TCE ratio of 8.06% in Q2 was up 10 basis points versus the prior quarter and up 88 basis points versus Q2 of 2024. Our CET1 ratio increased to 10.2% as of Q2, a 9 basis point increase relative to the prior quarter, and a 52 basis point increase versus the same period a year ago. 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'll now hand it over to our Chief Credit Officer, Pat Ahern, to provide an update on credit quality.