Associated Banc-Corp (ASB) Earnings Call Transcript & Summary

Thank you, and good morning, everyone, joining us as our next speakers, we have the management team from Associated Banc. From Associated, I'd like to welcome Phil Flynn, our President and CEO; Chris Niles, CFO; John Utz, Corp. -- Head of Corporate Banking; and David Stein, who heads Consumer and Business Banking for Associated. So thank you, gentlemen, for joining us this morning.

Thank you, Ebrahim.

And I guess to just kick it off, Phil, Chris, would be great. You're obviously seeing mixed kind of headlines around the economy on one hand, we've seen COVID cases rising to record highs when you look at the data. But at the same time, you're not seeing the same level of negative impact on the economy. Give us a sense of what you're seeing in your markets in terms of the drag that you've seen in the last month or so, often the cases have gone up.

Yes. Ebrahim, thank you for having us this morning. Wisconsin has been an interesting case because generally throughout the pandemic, it's been wide open. We all know about sort of the in fighting between the governor and the republic legislature and the Supreme court there. So what that's meant is the economy has done relatively well. Unemployment is significantly below the rest of the country. Minnesota has done fairly well as well, not for necessarily the same reasons, Illinois, not as much. But that's also meant that, unfortunately, in the upper Midwest, particularly in Wisconsin, we've had a real surge in COVID positivity. All of that said, businesses continue to operate. Our customers seem to be doing pretty well. We've had to adjust a bit of late. We went back to drive-thru, lobby by appointment only a few weeks ago in Wisconsin, and we're doing the same actually starting today in Illinois and Minnesota. But we've been able -- we've found out to -- we've been able to serve our customers even under those circumstances quite well.

Got it. And when we think about the outlook in terms of the business sentiment, I think even the vaccine announcement yesterday, a lot of this is psychological and how both businesses and consumers react to it. Just talk to us around given the clarity, assuming sort of the election results hold, the implementation of the vaccine. What are your customers telling you in terms of the outlook, both in terms of investment, hiring? How they're thinking about 2021?

Yes. So as we were thinking about and our thinking about what next year is going to look like and working on our own budgets for our Board presentation coming up, things kind of changed yesterday. We are recalibrating our thinking about what demand may look like. We've had strong demand, as you know, in the commercial real estate space-based on a backlog of construction loans funding up. We've had a very robust residential mortgage business, including our mortgage warehouse business. Some of our other specialty groups have done well. General commercial lending has been somewhat muted. We're looking at 35% outstandings against lines of credit, which is very, very low. But we think that given the optimism that burst onto the scene yesterday, probably we're going to recalibrate what we think things will look like going forward. David and John may have a couple of comments on what you're seeing specifically with customers right now. John, you want to give a view on that?

Yes, I would say, Phil, your comments on what we're seeing on the commercial side is true. I mean there's just been gap in demand even though we're increasing commitments and adding new clients and just the utilization on those have not been what they have been at historic levels. I think, with the rollout of this potential vaccine and the efficacy of it, it will be interesting to see the conversations we have with our clients going forward. Now with kind of a different slope of when are we going to build back inventory, some of the projects from new plant, new product line that they've been holding off on and just taking excess profits and paying down debt might have a new trajectory. So we're going to be pretty interested in conversations that we have here over the next 30 days.

On the retail side, we continue to have strong loan demand, $3.5 billion of originations through the third quarter, which is a strong year for us. Certainly buoyed by refi opportunities, it's about half of the volume we've done year-to-date, but we have a pretty good purchase and construction on the rest of the lending side as well.

Got it. I think what you said, Phil, was interesting in terms of things changed yesterday when this announcement came through. And I'm just wondering, the one concern that we had through the summer was, is there going to be a second round impact from the pandemic in terms of white collar job losses next year and what that might mean for the economy and from a credit quality perspective for the banks. Do you think that changes in terms of how -- not just Associated, but your customers and larger corporations think about hiring and planning and even cost-cutting for next year?

I do. With what Pfizer announced yesterday, companies all plan quarters ahead. And so I do believe that people are looking through to vaccines being more widely distributed by the time we get, say, halfway through next year. And I think decisions and investments will be made accordingly, I believe, fairly soon.

That's interesting. And when you say fairly soon, it seems like there's a positive bias to in terms of how companies might behave as opposed to 3 days ago?

Yes. I mean it's that big a news, right? I mean, all of a sudden, there is hope on the horizon that we're going to be able to get through this. And the time lines that everybody has been speculated about seem to become more real. Now we have to make sure that distribution actually works. But I don't know if you saw the 60 minutes thing the other day, we had a 4-star general. Tapped his chest and say if it doesn't go well, it's my problem. We don't get to hear a lot of that normally and that was kind of refreshing.

And I think folks should go back and watch it if you've not seen it. I think it was very reassuring, actually, watching that interview. But I guess, just moving on, I think the one thing I want to spend some time on maybe assuming the worst of credit is potentially behind us and we'll hit upon credit. But talk to us about growth. Like I do think from an investor standpoint, when I talk to investors, as a bias towards owning banks, which have a growth story attached to it as opposed to just cost-cutting, stock buybacks. Talk to us in terms of how you think about the bank today sort of in terms of how it's wired for organic loan growth? And where that should come from?

Sure. So as I mentioned, we have a booming residential mortgage business. That's got legs on it and we'll continue, like we believe, in the next year. The specialty businesses, as I mentioned, the same. But John, you might talk a little bit about what activity you're seeing in the commercial space and what our folks in the field are doing.

Yes. So it's been interesting in our footprint. So in Wisconsin, which has been pretty open, we've been actively still dialoguing and meeting with companies in a socially appropriate way in Wisconsin. It's not as easy to do that in Illinois and in Minnesota. But starting with the PPP and our ability to execute for our existing client base as well as clients that we now have as a result of that PPP has added to our number of clients in the roster and what we're looking at is as those clients start looking at growth CapEx, investments and inventory buildup, new product lines that as you move that 35% current fund rate to a more historical average. I mean, there are substantial legs behind that as well as, I think our performance in this downturn has positioned us, especially in our core markets as kind of the bank of choice. So we're seeing a lot of movement from, I'd say, the larger banks to a bank like ours, and you talked about relationships all the time. But I think it takes difficult circumstances to prove out relationships. And I feel like our team has done that, and you're starting to see the benefits of that and hopefully carry on as we go into a more understood 2021. Beyond that, mortgage warehouse continues to be really robust. Our Power & Utilities business is very robust, and commercial real estate continues to perform quite well. I say you're very optimistic with the news yesterday, talking to the team, just seeing what we've been able to do in the COVID environment. And then I think everybody is pretty gung ho to get going in a non-COVID environment.

That's helpful. And John, if I could, in terms of the mortgage warehouse, just talk to us around how you're looking at the business? I think the normal -- the consensus view is, we start seeing some slowdown next year as refi activity drops off. But one, talk to us in terms of the pipeline of still remaining loans that could actually refi at a much higher rate? And just how you're thinking about the business into next year?

Yes. So we take a -- I mean, we only lend to mortgage warehouse providers that are primarily Freddie, Fannie. We do a small jumbo, sub 10%. We're not looking at taking risk in that portfolio. That being said, I mean, the volumes have clearly been spectacular. And we had budgeted for next year on our initial run, and I think, as Phil alluded to, we're relooking at where we were after yesterday. With the slowdown kind of following the mortgage banker association guidance, we were ramping that up a little bit in the first quarter promo rate came out. I think there's a little bit of more reality that there's just more demand in there on refis that will continue through the first quarter. We expect a little slowdown with the natural slowdown in purchase activity, but this is mostly driven by our refi market and then expect to pick up in the second quarter with the kind of continuation of the refis probably slowing down a little bit, new purchase home activity picking up. And then third, fourth quarter probably goes to a lower year-over-year rate, but still pretty robust in that space. And I think you're seeing the same thing that Dave could alluded to on our own resi mortgage book.

Got it. I guess, and just moving a little bit in terms of credit outlook. I think you updated numbers yesterday, Chris, in terms of deferrals down below 1% as of October 31. Just talk to us in terms of where you are in terms of -- one, let's just talk about CECL and loan loss reserving as we -- to some extent, the confusion which a lot of management says, when do we start seeing rereleases, so we've gone very quickly to build to release. Just talk to us in terms of how you're thinking about it? What should we be looking at when we think about provisioning ex any loan growth that's going to land provisioning or reserve build going forward?

Phil, do you want to perhaps on that question?

No, you go ahead, talk about CECL and where we are.

So I'll start with CECL. So Ebrahim, as you're aware, we've open to this year, we took a very -- we think appropriate, but perhaps some a comparative view to CECL earlier in the year and built reserves nicely. We followed that up with additional reserves in the first and second quarter, responding to the environment. And as you're aware, the net reserve build came down fairly sharply in the third quarter, and we're hopeful that it's a tapering trajectory as we move forward in time. And so I think it's early days to say yet when does the taper turn negative, which is the implied reserve release question, but I think the trajectory is certainly one of tapering, and we are optimistic that the conversation we just had about loan growth in the economy and stability will come through into reserving levels at an appropriate time next year. And when we move through a quarter or 2, certainly we expect a [indiscernible] shift positively.

Yes. And when you look at the deferral information, which is on the 11th and 12th pages of the deck that we put out for this meeting, that's gone extremely well as you can see. We've got a few problems that we've identified in the commercial real estate space, but we just don't see a big train of those coming at us. So yes, at some point, given the level of reserves that we already have, it's possible you'll see some reserve releases. I'm not going to try to time that for you though.

Got it. Fair enough. And talking about the deferrals or just credit migration, one, talk to us in terms of, do you expect any of these customers falling into where you will provide a modification under the CARES Act that extends into 2021? And secondly, do you -- should we start expecting some credit migration kick in starting the fourth quarter?

Yes. So if you look at where we are on the residential space, we've came way down by the end of the third quarter. It has begun as we sit today. The deferrals will all be -- all the loans will have gone through their deferral period by the end of the year. And it's a very minuscule percentage that have not gone back to normal payments. So I don't think there's going to be a lot of those issues in the residential consumer space. On the commercial side, our potential problem loans actually decreased in the third quarter. And like I said, we don't seem to see a huge buildup of looming problems. That said, it's a little early, particularly in commercial real estate, to know exactly how this plays out. But I'd say that will become more clear this quarter and next quarter. We are feeling much better about credit than we were just a few months ago.

That's helpful. And I guess, when you look at the, I guess, we call it now the COVID impacted sector, that's about 8% of the loan book. Anything in there -- I mean, I think all banks isolated oil and gas hospitality, restaurants, retail, anything in there where you've actually seen the pain kind of transpire into borrowers, struggling to make loan payments and potentially defaulting?

Sure. There's been a few of those. Put oil and gas aside, which has been a story that's been going on for a couple of years. We are a participant in a couple of mall-based REITs that filed for bankruptcy last weekend. So we've got those issues they're reserved for now, but there'll certainly be some charges there. We don't have a lot of one-off -- we don't have much other enclosed mall exposure, which I think is at least in the short run, the first point of pain. And after that, there may be some individual projects. But in mass, we don't see a lot of issues. We have a small hotel portfolio, almost all of that has been restructured to give more time to the operators. So that seems to be pretty stable at this point. So it really depends on how the retailers, in general, play out over the coming couple of quarters. And again, with the optimism of a vaccine widely distributed coming you may find out that the retailers do a lot better than we were all fearing just a couple of months ago or even last week.

It's a good point. And I guess as we think about the lasting impacts of COVID, right, like I was talking to another bank yesterday, and it feels like office CRE, hotel CRE and retail as you alluded to, Phil, could see some meaningful changes in terms of just behavior, work-from-home versus in-office, corporate travel, et cetera. Just talk to us, one, what do you think are the lasting impacts from these COVID lockdowns as you think about the CRE market? And in terms of how you approach -- how you will approach lending going forward?

Sure. So to date, the office space really hasn't had any stress. Tenants have been paying their rents. And we don't really have a lot of worries there. I would say it's very fair longer term to think about what the office working environment is going to look like, and there's different views on that, as we all know. There's views that people are going to be much more spread out in these buildings. And therefore, there's a certain amount of real estate that's going to be continued to be needed to spread out. Others will say that will people be working from home in a much greater sense even post pandemic. I think it's just a little bit too early to know that. I can tell you our own experience. We are rethinking how we handle our back shops in our office space. And I would say there will be a significant number of people in our company who don't come into the office every day because we've found out that working from home works pretty darn well. Who would have thought that you could send most of a company home overnight and continue to process a historic residential mortgage boom and handle our commercial customers and everything else. It's gone extraordinarily well.

And I'm not sure if you have this number off hand, but what percentage of your employees, Phil, are in the office today versus those still fully remote?

Yes. So putting aside the fact that we've had to temporarily close our branch lobbies again, which means there's somewhat less people in the branches than there were when people are coming into the lobbies. Probably, 80% of the work force is working from home.

Well, okay. And I guess, just tied to the vaccine and the election, maybe a question for John and David. Talk to us in terms of how important is it to get another stimulus from the government? Because I think the other side of this is because of the optimism, maybe it feels like we don't need as another stimulus or maybe we don't need it to be as large. Based on what you see from -- in terms of the ground reality, from your customers. Talk to us in terms of how important it is that we get another stimulus package from congress?

Go, Dave?

Yes. So a couple of views on that, Ebrahim. So if you think about the consumer side, right now, our consumers like most across the industry are still largely flushed with cash. We have significant balances in their checking accounts, et cetera. The reality is that may not continue. Some of that's higher stimulus money that's being reduced. So I think it would be beneficial certainly on the consumer side to have another stimulus package like that. If you look at the small business side of the equation, we did about $1 billion in PPP loans. And I think, by and large, those were really needed shots in the arms for those small businesses. That said, as we got toward the end, we didn't essentially use all the PPP funding available to our borrowers. And so maybe a little more questionable as to whether another round of PPP is necessary.

Well, anything to add, John?

You're on mute, John?

Thanks, Phil. We don't feel in the commercial space that stimulus is absolutely necessary. Obviously, it doesn't hurt, but I think it's more important that we saw the virus move forward, build confidence back and get people back into more of a day-to-day routine. If you look at it from our portfolio perspective, the portfolio is doing remarkably well. I think it's less stimulus dependent than it is more of getting folks back to a routine over time.

That's a helpful perspective. I guess just in terms of bigger picture with the election outcome, again, assuming it stands as is. Talk to us, Phil, in terms of does -- how do you think in terms of this DC policymaking? How do you anticipate it will change? And how it may impact Associated?