Associated Banc-Corp

Good afternoon, everyone, and welcome to Associated Bank Corp's third quarter 2025 earnings conference call. My name is Diego, and I will be your operator today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session at the end of this conference. Copies of the slides that will be referenced during today's call are available on the company's website at investor.associatedbank.com. As a reminder, this conference call is being recorded. As outlined on slide one, during the course of the discussion today, management may make statements that constitute projections, expectations, beliefs, or similar forward-looking statements. Associated actual results could differ materially from the results anticipated or projected in any such forward-looking statements. Additional detailed information concerning the important factors that could cause Associated's actual results to differ materially from the information discussed today is readily available on the SEC website in the Risk Factors section of Associated's most recent Form 10-K and subsequent SEC filings. These factors are incorporated herein by reference. For reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please refer to pages 24 through 26 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. At this time, I would like to turn the conference over to Andy Harmoning, President and CEO for opening remarks. Please go ahead, sir.

Well, good afternoon, everyone, and thank you for joining us for our third quarter earnings call. This is Andy Harmoning. I am joined once again by our Chief Financial Officer, Derek Meyer, and our Chief Credit Officer, Pat Ahern. I'll start out with some highlights of the quarter. Derek will cover the income statement and capital trends, and Pat will provide an update on credit quality. Over the course of 2025, we've been squarely focused on execution and delivering on the strategic growth investments we've made across our company. Nine months into the year, we continue to see several trends that are both leading to strong current results and positioning us for future performance. We're proving that we can grow and deepen our customer base organically. We've posted net household growth each quarter so far in 25 and are on pace to deliver our strongest year for organic checking household growth since we began tracking a decade ago. We're also proving that we can grow and remix our balance sheet simultaneously. On the asset side, we've added nearly $1 billion in high-quality C&I loans year-to-date while working down our mix of low-yielding, low-relationship value resi mortgages. On the liability side, we added over $600 million in core deposits in the third quarter, enabling us to work down our wholesale funding mix. As this mix shift continues, It enables us to drive stronger profitability. After delivering quarterly net interest income of $300 million in the second quarter, a record for our company, we posted another record of $305 million in Q3. And with this enhanced profitability comes enhanced capital generation. We added another 13 basis points of CET1 capital in Q3. and have now added 30 basis points year to date. This capital generation enables us to support our growth while continuing to execute on our organic strategy. Now I'll remind you, just because we're growing assets doesn't mean we're stretching. Credit discipline remains foundational to our strategy, and our growth is focused on high quality commercial relationships and prime super prime consumer borrowers, which is consistent with our conservative credit culture built over the last one and a half decades. We continue to manage our existing portfolios proactively and meet with our customers regularly to stay on top of emerging risks. As we look at the remainder of 2025 and 26, Associated Bank has strong momentum that continues to build. While we continue to monitor risk tied to the macro uncertainty, Our growth strategy puts us in a position to grow and deepen our customer base, take market share, remix our balance sheet, and improve our return profile without having to rely strictly on a hot economy or a perfect rate environment. With that, I'd like to walk through some additional financial highlights on slide two. In Q3, we reported earnings of 73 cents per share. Total loans grew by another 1% versus the prior quarter and 3% versus Q3 of 24. Adjusting for the loan sale we completed in January, we've grown loans by 5.5% over that same time period. CNI lending has continued to lead the way. As we deepen relationships across our markets and see non-compete agreements from our new RMs expire, we grew nearly $300 million of CNI loans in Q3, And we've now grown C&I loans by nearly $1 billion year-to-date. Shifting to the other side of the balance sheet, seasonal deposit inflows came back as expected during the quarter, with our core customer deposits up 2% or $628 million from Q2. With that said, we're seeing more than just seasonal strength. Core customer deposits were also up over 4% or $1.2 billion relative to the same period a year ago. Moving to the income statement. Our Q3 net interest income of $305 million set a new record as the strongest quarterly NII we've seen in our company's history. Our NII was up 16% relative to Q3 of 2024. We also saw strong quarterly non-interest income of $81 million in Q3, a 21% increase from the prior quarter. The increase was driven primarily by capital markets revenue, wealth fees, and a one-time asset gain of approximately $4 million tied to deferred compensation plans. Total non-interest expense was $216 million in Q3, up $7 million from the prior quarter. The quarterly increase was primarily driven by performance-based incentive programs. Delivering positive operating leverage continues to help us post strong quarterly operating results and is a primary objective as we execute our plan. Managing credit risk is also a top priority, and we remain pleased with asset quality trends. In Q3, delinquencies were flat and non-accruals were just 34 basis points of total loans. Net charge-offs were also flat at 17 basis points, and our ACLL decreased one basis point to 1.34%. And finally, we posted a return on average tangible common equity of over 14% in Q3. a 250 basis point improvement from Q3 of last year. On slide three, we provide a reminder of how our strategic investments are transforming our return profile and setting us up for additional momentum over the remainder of this year and into 2026. First, we're positioned to take market share in commercial lending and deposit acquisition thanks to a strategy predicated on hiring talented RMs in metro markets where we're underpenetrated. In fact, we've already seen results from our efforts. Through the first nine months of the year, we've already added nearly $1 billion in C&I loans to our balance sheet. With pipelines remaining strong and several more non-competes set to roll off between now and the first quarter of next year, we expect our momentum to carry through 26. And as those relationship C&I balances come onto the books, they're replacing lower yielding, non-relationship resi mortgage balances that are rolling off. positioning us to diversify our asset base more profitably without changing our conservative approach to credit. This mix shift is driving enhanced profitability. Over the past two quarters, we saw our margin climb above 3% and posted back-to-back quarters of record NII. As we continue to grow and remix our asset base and support it with lower cost core deposits, we see additional opportunity ahead. On slide four, we highlight our loan trends through Q3. On both an average and period end basis, quarterly loans grew by 1% versus Q2. And that growth was once again led by the CNI category. On a spot basis, CNI loans grew by 3%, or nearly $300 million versus the prior quarter. After adding nearly $1 billion in CNI balances to our balance sheet year to date, we feel very well positioned to meet or exceed The $1.2 billion growth target we originally set for ourselves in 2025, thanks to the strength of our pipelines and the additional lift from newly hired RMs as their non-competes expire. Auto balances also grew by $72 million in the third quarter as we've continued to selectively add prime and super prime balances to our book. Total CRE balances grew slightly for the quarter, but decreased by $160 million on a quarterly average basis. We expect elevated CRE payoff activity in the coming quarters as rates continue to fall. Overall, we continue to expect total bank loan growth of 5% to 6% for the year. Shifting to slide five, total deposits and core customer deposits both bounced back as expected in Q3 following Q2 seasonality. Core customer deposits increased by over $600 million point to point, with growth spread across most key categories. relative to the same period a year ago, core customer deposits were up 4% or $1.2 billion. And growth in our core deposit book has enabled us to work down our wholesale funding balances. Here in Q3, overall wholesale funding sources decreased by 2% versus Q2. Based on our latest forecast, we now expect core customer deposit growth to come in towards the lower end of our 4% to 5% growth range for the year. But we remain confident in our ability to grow granular, low-cost core customer deposits over time for two key reasons. First, our consumer value proposition stacks up well against any bank or fintech in the industry, and we have additional product upgrades planned for late Q4 of 25 and into 2026. This gives us an engine to attract, deepen, and retain checking households over time, and it's already driving results. After posting the strongest organic primary checking household growth numbers we've seen since we began tracking a decade ago back in Q2, we followed that up with another quarter of solid growth in Q3. Second, we've refined our focus on commercial deposits by moving to a balanced scorecard, hiring relationship-focused RMs, launching a new deposit vertical, and most recently, hiring Eric Lean as our new Director of Treasury Management. With pipelines growing and several non-compete set to expire in the coming months, we feel very well positioned for growth in 2026. We continue to expect that our efforts to drive growth in lower-cost core customer deposit categories will enable us to further decrease our reliance on wholesale funding sources over time. And with that, I'll pass it to Derek to discuss the income statement and capital trends.

Thanks, Andy. I'll start on slide six with our yield trends. In the third quarter, total earning asset yields remained flat at a 5.5%, and interest bearing deposit costs also held flat at 2.78%, while total interest bearing liabilities ticked up one basis point to 3.03%. Within our major asset categories, slight decreases in commercial, CRE, and auto yields were offset by slight increases in mortgage and investment yields. While total interest bearing deposit costs were flat compared to Q2, they were down 55 basis points from Q3 of 2024. Moving to slide 7, third quarter net interest income of $305 million was up $5 million versus the prior quarter and $42 million versus Q3 of 2024. Q3 net interest margin held firmly above 3% at 3.04, which was flat compared to Q2, but 26 basis points higher relative to Q3 of 2024. Based on our latest expectations for balance sheet growth and mix, deposit betas, and Fed action, we continue to expect a to drive net interest income growth of between 14% and 15% in 2025. This forecast assumes two additional Fed rate cuts in 2025. Given the potential for additional rate cuts, we've provided a reminder of the steps we've taken to dampen our asset sensitivity on slide eight. Over time, we've put ourselves in a more neutral position to minimize interest rate risk. We've maintained repricing flexibility by keeping our funding obligations short We've protected our variable rate loan portfolio by maintaining received fixed swap balances of approximately $2.45 billion, and we built a $3 billion fixed rate auto book with low prepayment risk. While we're still modestly asset sensitive, a down 100 ramp scenario now represents just a 0.5% impact to our NII as of Q3. We expect to maintain this relatively neutral position going forward. Moving to slide 9, total securities increased to $9.1 billion in Q3 as we've continued to modestly build our AFS book. Our securities plus cash to total assets ratio climbed to 23.4% for the quarter. We continue to target a range of 22% to 24% for this ratio. On slide 10, we highlight our non-interest income trends for the quarter. In Q3, total non-interest income of $81 million was up 21% relative to both the prior quarter and the same period last year. The increase in Q3 was primarily driven by strength in capital markets and wealth fees, with an additional boost from non-recurring asset gains. In the capital market space in particular, the increase was due to an elevated level of activity in our syndications and swaps businesses. The asset gain booked during the quarter was approximately $4 billion for a deferred compensation valuation adjustment. Given the strong quarter, we now expect total 2025 non-interest income to grow by 5% to 6% relative to 2024 after excluding the non-recurring items that impacted our fourth quarter 2024 and first quarter 2025 results from the balance sheet repositioning we announced last December. Moving to slide 11, third quarter expenses of $216 million were up $7 million versus Q2 with much of the increase attributed to performance. The increase came in personnel, where we booked $4 million of additional expense for the same deferred comp valuation adjustment that was recognized as a gain in our non-interest income. Another large component was a $4 million increase in variable compensation expense, the result of strong execution against our strategic plan. During Q3, the personnel bucket was also impacted by approximately $1 million of incremental healthcare costs relative to Q2. Outside of personnel expense, We also saw quarterly increases in technology, business and development, and advertising expenses, offset by decreases in legal and professional fees, loan and foreclosure costs, and other non-interest expense. As we've stated previously, we continue to invest to support growth, but driving positive operating leverage remains a top priority. Q and Q3, our efficiency ratio decreased for the third consecutive quarter, coming in below 55%. Based on our latest forecast, we now expect total non-interest expense growth of between 5% and 6% in 2025 off our adjusted 2024 base. On slide 12, capital ratios increased across the board once again in Q3. Our TCE ratio of 8.18% in Q3 was up 12 basis points versus the prior quarter and 68 basis points versus Q3 of 2024. Our CET1 ratio increased to 10.33%, a 13 basis point increase relative to the prior quarter, and a 61 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 additional updates on credit quality.