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

Good afternoon, everyone. We have Associated Banc with us this afternoon. This is our 25th Annual RBC Capital Markets Financial Institutions Conference. And I'm happy to have my friends from Green Bay here today and the region. We have Phil Flynn, the President and CEO; Chris Niles, the CFO. We also have Dave Stein, who's the EVP and Head of Consumer and Business Banking; and John Utz, who's EVP and Head of Corporate Banking and Wealth Management. So we have the team here. And as I was -- we were talking beforehand, we've had more genuine interest in the space. Normally, I wouldn't have Phil do the 30,000-foot view of the company to describe it, but I think it's worth it for people because we have more people that are signed up and interested in the bank. So Phil, don't you give us a quick overview of Associated and let me move into some of the Q&A.

Great. Thanks, Jon, and appreciate you hosting us here today. Welcome, everybody. Just a quick overview of Associated Banc. Associated is going to celebrate its 160th year in existence this year. So we've been here in Northeastern Wisconsin for a very long time. The headquarters of the company here is in Green Bay, Wisconsin. As of the end of the year, we had about $33 billion in assets, $24 billion of loans, $26 billion of deposits, about $4 billion of equity. We are a well-balanced bank in that something under 40% of our loan book is comprised of commercial and business loans; a like amount of consumer loans, mostly residential mortgages and about 25% of our book is in the commercial real estate space. Our deposits are largely centered in Wisconsin, more than 70% of our deposits are here. The other 2 states where we have a branch footprint, Illinois makes up about 20% of our deposits; Minnesota, a little under 10% of our deposits. In addition to branches throughout that 3-state footprint, we have loan production offices in another 5 states. We are the largest bank, by far, headquartered in the state of Wisconsin. We have something over 4,000 employees. We service about 1.3 million customer accounts and serve 120 communities. And we've been the largest mortgage lender in Wisconsin for many years in a row. Much of our deposit accounts are tied to sports affinities. So we've been the bank of the Green Bay Packers since 1919 when the Packers came into existence, and we offer Packers Check. But we're also involved with Milwaukee Brewers, the Wisconsin Badgers and a few other affinities as well. So that's a very quick overview of the company, Jon.

Okay. Thank you for that, Phil. You filed an updated guidance slide last night. And I think we all looked at and we saw it. It looks like credit's a little bit better. But maybe, Phil, just describe a little bit about how your view of the world, the environment has maybe changed over the last few months.

Sure. Thanks. So it is almost exactly 1 year to the date that we started sending people home when COVID first came to everybody's awareness. Kind of quite a remarkable year that we've been through. If you roll back the clock a year, banks had just set up CECL. Many banks have taken substantial CECL day 1 provisions to add to their reserves, including us. But we really didn't know a year ago what was going to happen with this pandemic. The credit cycle that we were looking at, at that time was one that was very unusual. It impacted entire swathes of the business. We were immediately in a mode of granting deferrals, mostly to our consumer loan holders, but also to commercial and commercial real estate customers. So it was a very uncertain period a year ago. We substantially increased provisioning in the first and second quarters, but it started to become more clear as we got toward the end of last year that things were going to turn out to be much better than we might have feared a year ago. Part of that has to be the actions of the government with all the stimulus money that's been poured in the economy. So as we got toward the end of last year, you saw us starting to moderate our views of where credit might go. In our last guidance that we provided in January was that we expected something less than $70 million of provisioning in 2021. As we've continued down the path, it's become clear to us that we're just not getting new problems emerging in the book. And the problems that we had identified 6, 9 months ago are resolving themselves in a much more favorable way than we had anticipated. So as we sit today, the new guidance that Jon is referring to, we believe we're going to have a pretty fair-sized negative provision in the first quarter, and we believe that provisioning for the balance of the year will be somewhere between $10 million to $20 million per quarter over quarters 2 through 4, probably with a bias toward the lighter end of that, frankly. So we're sitting with not much new problems emerging. Resolutions coming along quite well. And in addition, as with many banks, we tie some of our CECL work to the Moody's financial forecast and that continues to be very bullish on the economy as they update that from month-to-month. So that's probably the big news, Jon. We tweaked a few other items of the guidance, but that will make a substantial difference on the bottom line EPS number for us this year.

Yes, absolutely. Okay. [Operator Instructions] And we'll get to this later, Phil, but Phil has also announced his retirement. And I don't want to -- I'm not sure if you're a reflective guy, Phil, but I do want to ask you a couple of questions about some of the things you're most proud of and we'll get to that later. But I want to keep it tied into some of the recent trends. Your guidance is good, really actually pretty good for the year relative to others. You brought the company in really good shape. But one of the things that stands out a bit is just more loan growth. You've talked about this 2% to 4% commercial loan growth. How confident are you in that? And is this the second half growth that a lot of the other banks are talking about but you have some really visibility into that.

Sure. Why don't I have John Utz take that question since most of the growth that we're forecasting is in his area or in commercial real estate.

Yes. So sure, Jon, I'll talk about that. I mean, our core manufacturing base specialty-centric and we're seeing low utilization rates right now. But I mean, we've been actively in market calling with clients and you could see folks running inventories at low levels, a lot of pent-up demand on capital projects that haven't been deployed. I would say it's definitely -- as we move into the late second quarter, I think it's going to show up third and fourth. There's a lot of optimism from our client base and what they're looking at doing and we're looking at, hopefully, putting some of our capital to work and seeing that utilization rate jump up based on the conversations. Our CRE book continues to remain strong. I mean backlog is roughly $1.7 billion, and we're continuing to fund a lot of build-to-suits and medical projects across the footprint. Our Power and Utilities Group continues to grow. They're strong. And there's a lot of mostly renewable, a lot of solar, a lot of wind projects in that pipeline that we do across our footprint as well as across the U.S., and we expect with the current administration, that will only continue to have increased demand despite some of the stuff that might have happened down in Texas. And then, lastly, the Mortgage Warehouse group has really gotten off to a strong start as everybody is probably seeing. We forecast that to have some reduction in demand as we go later into the year and as expectation -- as long-term rates rise. But really in the late half of last year into this year, we've expanded our existing client base and added a bunch of new clients that we felt comfortable with as well as expanded the existing relationships. So we're seeing a lot of utilization and demand coming out of the Mortgage Warehouse side. So overall, we're very optimistic that we're going to be able to deliver on the commercial loan growth, I'd say, especially just given the conversations I've had in market with clients over the last 6, 7 weeks.

Okay. There's this narrative development that there's the shortages of materials. The supply chain is a little bit messed up. It's difficult to get orders filled. Maybe even labor is becoming a little bit tight. Any thoughts on that?

Yes. I would say that, that -- I would agree with all of those statements. That being said, I think guys are running as quickly as they can to get things done. We've seen a reduction in inventory levels. The guys have been running very lean and I think they're starting to -- with the difficulty of seeing some of the raw materials, how do you get that -- how do you serve your clients right. The windows of delivery are expanded out. I think most people are starting to get used to it even if they don't like it. But I think that gives us optimism on looking at our guys. It's been a delay of folks not wanting to spend capital and you're starting to have those discussions more as well as guys really starting to use their working capital lines to build up inventory, which we really haven't seen over the course of 2020 that you're looking at the buildup now, and hopefully, that carries into the back half of the year where we see some more pickup.

Okay. Good. And the difference between the lower end and the higher end of that range is just mostly driven by economic activity, the speed of recovery. Is that fair?

Yes.

Yes. Okay. Other side of this, maybe PPP, talk a little bit about some of the trends you're seeing in PPP, some of the forgiveness and any notable activity in the most recent round?

Sure. Dave Stein has been overseeing all that for us. Dave?

Yes. Thanks, Phil. So I'll talk maybe first about Round 3 originations and then touch on the forgiveness that we've seen so far. So really, the common theme on both funds is they're growing a little slower than we had anticipated. I think that's pretty consistent with the rest of the industry. To date, we've originated about $220 million in Round 3 PPP loans on behalf of our customers. That's running a little softer than what we had anticipated. There's certainly plenty of funding available, not as much demand as we had assumed. And what we've seen on the origination side is with the rule changes, et cetera, that our average loan size is less than half of what it was for the originations we did in 2020. On the forgiveness front, we were live in September seeking forgiveness for our customers. You will recall, we originated over $1 billion of loans in 2020 through Rounds 1 and 2. To date, we've received forgiveness on about 40% of those balances. And we've got, quite frankly, some loans that are kind of in the pipeline right now that are sitting, again, a common theme. Particularly the larger loans, the loans above $2 million, we have enough to receive, on behalf of our customers, forgiveness on that -- those loans through the SBA. So we've got a good 1/3 of our 2020 originations that are in process right now waiting for the SBA to run their decisions. We did implement with the streamlined forgiveness process for loans less than $150,000 changes here over the last week, and that's going very well. That will help a lot on the numbers, but not so much on the dollar amount of the loan.

Okay. Okay, Good. On the margin, maybe just one for you, Chris. You have a range of 2.55% to 2.655 that you've talked about for the year. Steeping into the curve, how does that impact Associated? Is it good for the company? Does it bias your margin higher? Just help us walk through some of the puts and takes there.

So generally speaking, we're asset-sensitive and we benefit from a rising total curve. What I would note about the very short end of the curve here since year-end is LIBOR has actually come down. So when we think about where 1-month LIBOR was at the end of December, it was at roughly 15 basis points. Since most of our commercial loans are tied to 1-month LIBOR, they reset in January at the roughly 15 basis point level. We saw that come down in February for the reset at the beginning of February and it stayed down at the sort of 11 basis point range here in March. So the reality is while we've seen the 10-year back up and we'll get to the benefits that provides, the short-term effect has been LIBOR has actually come down and that's had a negative effect and is weighing on the first quarter's dollar NII. Because we've seen compression there, that wasn't necessarily expected. So you've got the LIBOR margin compression effects and then you've got sort of a secondary effect, which we all know and is in everyone's numbers, but just to remind everybody, there are fewer days in the first quarter and this is not a leap year. So that year-over-year comp effect will show both of those factors sort of come together. So then let's move to sort of where are the upsides. So the upside from the back up in 10-year is real and it comes through to us in term loans and in mortgage loans. The short-term effect of that, however, has been people have seen rates back up on the 10-year. They've seen mortgage pricing start to move higher. It didn't move a lot higher initially, but it's moving higher right now. And what we're going to see and what we've seen already is increased pull-through here February into March because everybody who was perhaps going to think about it again is now just going to push ahead and close on their rate that they got locked in 30 days ago or 15 days ago. And so what you're really going to see is a step-up in refis, which will hurt the sort of premium amortization on the existing commercial loan book because -- the residential mortgage book because that's where that sort of runs through. So there would be a small downtick to that. The positive will be, and it won't show up in net interest income, but it will show up in mortgage banking income, we're going to close more loans. We'll have more mortgage banking income. And because we are not a mark-to-market -- sorry, we're not a hedged MSR shop, ours are marked to market, our MSR will reprice higher and we'll see a benefit there in the MSR. So we'll win a little bit on fee income, which should offset whatever we see as a downtick on the mortgage income side in NII. Bottom line will be balanced, the geography will be different. We'll have less NII, more fee income.

Okay.

But I would remind you that the LIBOR compression that we've seen if that persists, that will be sort of an ongoing continuing weight as we move forward. As we sit here today, we don't conduct a permanent state of affairs. So we think the LIBOR probably normalizes that sort of mid-teens level again, which is why we're not changing our guidance for the year.

Okay. Fair enough.

We'll be lighter in the first quarter, but we're not changing the guidance for the full year.

Okay. You touched on mortgage, and maybe you answered it, but it feels like you're seeing some acceleration, higher mortgage banking early in the year, TBD later in the year? Is that fair?

Yes. And maybe I'll let Dave provide a little more color.

Yes, I think that's fair, Jon. The story for mortgage is strong production because of the refi market that Chris mentioned. We did record production last year and that's certainly carried through the first part of Q1 here. But for us, that manifests itself more in fee income than it does balance sheet growth. Majority of what we've seen, over 60% is refi, lot of 30-year and our philosophy has been to sell that onto the secondary market. So you'll see our mortgage portfolio remain flat to slightly down. But as Chris said earlier, you'll see the net benefit on the fee income side of the equation more so than on net interest income.

Okay. Good. Good. Makes sense. I get a few questions on this, it might be annoying to all of you. But just the fee strategy for the company, the Benefits move, the Wealth Management move. What's the overall philosophy on the fee businesses outside of mortgage at Associated?

Sure. I'll take that, Jon. So for those not that familiar with the company, last year, we sold our fairly sizable insurance brokerage business, Associated Benefits & Risk Consulting to USI. We sold that for a very substantial gain. We did that because when -- the insurance brokerage business tends to be a slow-growing business from an organic point of view and it runs at a very high efficiency ratio. We pay a lot of broker commissions in that business, so does everybody. So given that USI had been looking to buy this business from us for some time and given the uncertainties around the pandemic, we felt like it was a good time to monetize that. Likewise, we recently sold a very small business we had, a family office, high -- ultra-high net worth company called Whitnell. The Whitnell and ABRC strategies had been tied together because our intention was to try to sell Whitnell services to ABRC customers. So it made sense to sell that business as well. What that did for us is continue to improve the efficiency of the company overall. While we gave up fee revenue, particularly with ABRC, the actual bottom line contribution of ABRC was relatively modest. Going forward, we still have a number of fee strategies in place. Of course, everything that Dave does in the deposit gathering and mortgage business generates fees. John oversees our capital markets business, which does syndications, customer interest rate derivatives, swaps, et cetera, and we're anticipating very strong results from that business this quarter, in particular, and perhaps going forward as well. So yes, we gave up a lot of fee revenues. We didn't give up a lot of bottom line income with the sale of ABRC.

Okay. Got it. On expenses, it's been incredible what you've all achieved on expenses over time. And you're talking about the $675 million number for the full year. What are some of the puts and takes on that? Where are you spending money? Where are you finding opportunities to trim? And maybe the bigger question, do you feel like you're able to keep up? From a technology point of view, there's this narrative that a small- and medium-sized bank can't keep up and I think you might have a different answer to that. But how do you feel on that as well?

Yes. It's certainly a challenge as a mid-$30 billion bank to continue to spend the money we need to on customer-facing tech and customer-facing digital solutions. But we've managed to do that and I think we've done it very well these last 10 years or so. We continue to make substantial investments in that business, and that's going to have to continue in order to remain relevant. I mean we're starting down the path just since I got here back at the end of 2009 to redoing our mobile platform and going for the third time to a new platform over this next 1.5 years or so. So that continues. We've been very disciplined about allocating capital and deciding where we're spending money. You've seen us continue to very diligently looking at our distribution network. We constantly are looking at the opportunity to trim branches as the world moves to more digital, and we've done that and we did quite a bit of that here again at the end of the year. So yes, I think we can keep up. You don't have a lot of room for error at our size. You have to make the right decisions. You have to invest in the right digital solutions. But so far, we -- I think we've done a very good job at that. And our anticipation with the expense guidance we gave you is we'll have sufficient investable funds to continue on that path, Jon.

Okay. Okay. Can you remind us of the branch count decline numbers? I forget what they are, but it's fairly notable, if I remember correctly.

Yes. Dave, you would know off the top of your head as we kind of started.

Yes. Since Phil joined in 2010, we've reduced down about 1/3 of our branch network. The majority of those have come through legacy reductions, but we've made 3 not insignificant acquisitions during that time frame. And as we're integrating some of those acquisitions, we trimmed branches as well. We announced and have now executed on in the last 6 months the closure or sale of 22 more branches. I think you'll find that we haven't -- we've done it pretty methodically and consistently every year, every other year. We don't go for 5 years and then take a big bite, it's been a constant trimming of our network over time.

And while we've done that, we've continued to grow our deposits and we've continued to increase the deposits per branch, of course, and gained efficiency along the way.

Okay. I want to touch on credit and capital before we end this, but I don't know if this is frustrating or not to you, but you clearly built the bank to outperform in a credit downturn and we didn't get it this time around. It seems like the loss curve has been flattened and pushed out. I don't know if that's frustrating or makes you happy. But it seems like a bit of a -- it's mixed emotions on it. But have you been surprised at the resilience and the strength of some of your borrowers and how this stimulus has gone through the economy?

Sure. No one really knew what it was going to look like when we started deferring large amounts of residential mortgage payments for our customers. And yet, by the time we got to the end of the year and that's continued, we essentially have almost noted we have people gone back to paying their mortgages. Some of those people didn't really need deferrals, most of them did at the time. But there's no doubt that this extraordinary amount of government support that was provided has flattened the losses for the industry and made it look and feel very different than the other credit cycle that I've seen in my 40-plus years of banking. We're not really frustrated by that. I mean I don't wish bad credit results on the industry. But it does mean we haven't differentiated, which I think we have built a very sound, disciplined, safe credit book. We've done -- we've given up some things in order to do that, and we're not going to get that differentiation because I think almost all banks, they're going to have good results here.

Okay. Okay. Good. A little bit on the buyback, it seems like you've started that back up again. And curious about how you want us to think about it and how aggressive you'd like to be longer term?

Chris, do you want to take that?

So I think, John, I think we'd like to characterize our overall approach to buybacks as being both disciplined and opportunistic. And I think what we mean by that is we've clearly been consistent returners of capital over time. In fact, I think if you look back over the last decade, you'll find that we returned about half the total capital we've generated earnings-wise in the form of repurchase. And so we've been fairly consistent at that. But opportunistic, and I think we've done it timing-wise at the points where valuations were reasonable and we could sort of deploy it in ways that we knew were to benefit the shareholders. So I think it's interesting to look at sort of the strong run-up in valuation here in the last 30 days. It somewhat tempers our outlook. But I think we've got an overall capital plan and we'll be just fine about the overall capital plan, maintaining the capital ratios at the targets and levels that we've reiterated in the debt we filed and marching towards those disciplined outcomes over time.

Okay. Good. And then Phil to put you on the hot seat. I remember when I first met you, you were a man on a mission to turn the company around. You and the team have a done a lot in your tenure. Two-part question. What are you the most proud of? Anything you'd like to do over on?

Sure. Thanks. Yes. So I came here right at the end of 2009 in the midst of the crisis and Associated was struggling back then. I was fortunate to have Dave already here, and actually, Chris and John joined me from my previous employer. So we had a good team in place. We added to that team. We were able to quickly do a large secondary offering in order to make sure we had more than enough capital to get through. We cleaned up the loan book quickly. And because we cleaned things up quickly, we were able to get back to business right away. The most important thing that we did back then, the company in '08 and '09 had become very focused on its own issues and was not doing a great job for our customers. So I think the best thing we've done over this almost 12 years now is really turning this into a customer-centric organization. And if you look at our customer satisfaction metrics that we generate weekly or you look at the recent J.D. Power results, our customers see that and they feel like Associated Bank is there for them. And certainly, kind of to bookend, from the Great Recession to the COVID situation, for me, we've been there in states for our customers all this past year and been able to meet whatever needs they had. So I think the best thing we've done is really turn this into an organization that thinks about, positions itself and is there for the customer base.

Any do-overs, Phil?

Well, I'm not a fan of oil and gas lending anymore.

I thought that might come up.

Even though I did that for a living before I got here. But things change.

It was more secular, I think, than cyclical. But any update on the CEO search and kind of your decision to put your hand up and let that run its course?

Yes. I mean, the Board is working on their succession plan, and we'll be able to report on that in due course. For me, the timing made sense. We've kind of talked about how this COVID credit cycle isn't going to turn into anything problematic. I've been thinking about retirement for a while. And once it became clear to me as we got toward the end of last year that, in fact, the company was going to be very well positioned to move forward, we've got a lot of initiatives underway and that we weren't going to have a big credit issue, it seemed like the right time to go ahead and start that discussion with the Board.

Okay. Good. We're up in just the time limit. And Phil, I'll just say even though the branch cut is down by 1/3, may you never have to think about parking lots, snow plowing expenses again in your P&L.

That was different than Southern California, for sure.

Yes. Absolutely. Well, thanks, guys. Really appreciate it. And best of luck this year being at the conference.

Thank you, Jon. Appreciate it.