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

Good evening, and thank you, everybody, for staying. I know you're all waiting for [indiscernible], but in the meantime, with us this afternoon, I have Andrew Harmening from Associated. Thank you for joining us. My name is Brandon Berman, I am a research analyst at Bank of America on the bank's research team. And so thank you, guys. We also have Derek, the CFO; as well as Ben, the Head of Investor Relations here in the audience if you have any additional questions.

Typically, Ebrahim, who's been hosting a lot of these talks about sentiment. I'm more interested in the strategy at Associated, right? You had this big announcement back in September '21, and now you're shifting gears to your digital strategy. Where are you guys investing? And where do you really think it's going to drive either revenue or therefore, efficiency savings?

Well, I like the question. I listened to the last session for a little while, and I thought I'd start out differently. I want to talk about Aaron Rogers first. We're from Green Bay. He is in a 4-day dark period. We don't know exactly what that means, but he'll reemerge and possibly be the quarter back to the Green Bay Packers. So in September of '21, we launched some strategic initiatives. So I think it's important to give a little context to talk about where we're going next. And for us, we had 3 primary objectives. We wanted to drive positive operating leverage. We wanted to close the gap to peers on financial performance, and we wanted to drive efficiency, pretty straightforward goals. But we wanted to do that with an eye towards credit discipline, expense discipline and risk management. So fast forward in 2022. We added about an increase of about 21% to our commercial RMs. Now the question is, did you just add them? Or did you do anything with them? We also then added an increase of 57% new names, meaning that we hired quality relationship managers from across the industry. And these folks, they drove loan growth, but that's the first taste that we got to start driving deposit growth in a market that wasn't necessarily growing. At the same time, we launched 3 new lending verticals. Now, the goal of that was not just to have explosive loan growth. We happen to have very good growth last year. But the goal of that was to give us optionality. We wanted to be able to control a margin, invest in higher-yielding assets as we went through the year, and we go through the future. And so we've done exactly that, adding equipment finance, asset-based lending, auto lending to what we already had on top of that having commercial RMs on the ground in our footprint. So I think of that as Phase 1. Phase 1 is really more focused on the commercial side. At the same time, we launched Phase 1, we already had plans on Phase 2. Phase 2 is the consumer side, the deposit acquisition, trying to fund what we're going to do. We had to start those projects a little bit early because you think about what those are, the digital platform took a year to launch that. We launched that in September. And because we changed our methodology to Agile, we quickly followed that 60 days later with the launch of our account opening platform. That is kind of table stakes to what is coming now where there's a focus on acquisition. Acquisition of new customers on the consumer side and primarily deposit acquisition. We hired a new Chief Marketing Officer and Chief Product Officer, somebody that had worked with in the past, had an expertise on customer research, what makes somebody switch, had an expertise on deposit gathering. We knew we needed to fund our balance sheet. So we brought in Bryan Carson 7 months ago. So as part of this phase, deposit acquisition will have a mass affluent launch, which is a deepening strategy, so you bring them in, you deepen, you also deepen existing customers. They will change what our marketing spend is, go more towards acquisition away from sponsorship. And then we will have each quarter of 2022, sorry, 2023, each quarter of 2023, we'll have a new consumer product launch that is consumer-friendly. So you bring them in, you grow your customer base, you grow your deposit base. This is something that we knew we needed to do and that I would consider Phase 2. And Phase 3 is really knowing you have a digital platform that's cloud-based, that is open architecture, where you can continue to think about how you serve your customer because there's a clarity that the consumer is going to digital, the most used channel. And we have that in place for future leases each quarter of '23. And then finally, what I would say with all that Phase I and Phase II, I'd want to emphasize the credit quality that the company has worked on with a nod to Phil Flynn, our prior CEO, really a 10 to 12-year period of time of derisking the balance sheet. That's a big deal. Somebody asked me recently, so you're growing into a recession. I'd say we're adding high-quality assets into recession, but we spent 12 years changing the balance sheet and getting away from speculative high-risk loans, which we think will serve us well. And then also a reminder that we're in the upper Midwest, where housing prices don't go way up. They don't go way down. It's more moderate. So we're left with a book of roughly $7 billion in residential real estate that's prime and super prime in a market that doesn't go up and down that quickly. So we think we're pretty well positioned. And I feel like this leadership team is developing the ability to execute in a pretty significant way.

That's great. And so let's start with the last part of what you just said about the concern from investors about growing into a recession. Can you tell us from your perspective what the client sentiment is? Has the decline in the ISM manufacturing index at all impacted client sentiment, borrowing demand, et cetera?

I think that's a national survey. I'll start with that, and I'll say let's talk about Wisconsin, Minnesota, very healthy states, unemployment below the national average. We also have a 21% increase in commercial RMs that have just gotten going. So what I would say is the pipeline on the commercial side is fairly even to a year prior, but there's intangibles to that, that you can only get a talking to our Head of Commercial Banking yesterday. And as you're getting forecast by quarter. And I'll say, look, the pipeline is strong, but the enthusiasm from customers, I can tell you, they're more cautious. And so a year ago, I would say people say, well gosh, we're short on employees. We've got to get them. We've got to hit this. We've got to increase revenue. Now it's -- you know what, something's coming. We know something is coming. We want to add employees. We want to do the project. But there's not -- it's not as aggressive. So I think that's an early sign of something and everyone can prognosticate on what that is. So that's changed a little. And certainly, commercial real estate demand is down as we head into the new year.

Got you. And then thinking about that a little bit, I guess, taking from a credit risk perspective, are there any areas of focus that you guys are stressed at all about? And where do you see sort of reserves playing out over the course of 2023?

You can ask about any CEO, and I think they'll tell you the same thing. You don't see any cracks. You don't see a deterioration anywhere. Again, I had a call with our Chief Credit Officer yesterday, and the conversation is, can we get behind the numbers and the things that the numbers aren't telling us? In other words, what are the individual conversations? How are we reviewing every customer that we go talk to on a quarterly basis. And we're not even seeing it from those customers that begin of deterioration, asking a preset level of questions about supply chain impact, customer impact, interest rate impact. there are no discernible trends that I see on the credit side at this point. Now if you're asking me if I'm concerned about credit, I think we're in the lending and risk business. And we have to always be proactive there. Commercial real estate is an area that I want to understand very clearly what's happening in the office space. That, to me, is kind of a slow burn, though as patterns have changed. So the answer is across all portfolios. I do not see a negative trend emerging anecdotally. We get down to the granularity of substandard credits and the individual conversations we're having on those, the portfolio is so clean. And we're still seeing paydowns on some of those that have maybe gone to the bond market even as of yesterday. So nothing to speak of on credit trends yet. What do I expect? I expect that credit is cyclical, and we are at a low. We know that. I would expect it to return to a 2018, 2019 level. It doesn't seem to me that it is evidence that you're going to see a large spike in credit issues as maybe a slow gradual move, starting with the most vulnerable classes, the subprime, nonprime customer, and then over time, gently moving up is what it looks like right now.

And is there an indicator that you are most focused on? I know Brian Monahan had mentioned he works at the initial jobless claims. Is there anything that you are most focused on with respect to your portfolio?

Well, you have to look at jobless claims and you have to look at unemployment. And the consumer is strong from that perspective. They're even stronger, I'm happy to say in the upper Midwest right now, and that's a good thing. Of course, you're going to want to look at the FICO portfolios. We're going to want to look at loan to value in indirect portfolios. We're going to want to look at delinquency and card delinquency. I mean those are some of the common areas that you say, is there an early indication of something going the wrong way. And that's why when I look at every single one of those categories, I don't yet see that.

Got you. Switching gears, a big theme, I guess, this entire earnings season as well as at this conference about deposit growth and funding gaps in this entirety. You guys grew core customer deposits 2% last year, and you guys are expected to grow that same cohort by 3% to 5%. That seems to be one of the more competitive areas to grow deposits. What gives you the confidence that you're able to grow that without pressuring your RM more than necessary?

Well, we've created an investor deck for this meeting. The question is how many levers do you have? And so when I look at Phase I that I talked about and we say the commercial RM portion of this, the commercial piece is largely what helped us grow in 2022. And so as we finish that up, those RMs aren't going away. The balance scorecard is not going away. The incentive for holistic relationships is just heightening but we're adding to that. So we have the lever of what our branding is. We are live in the market. We have the best account opening process we've ever had as a bank. In fact, the satisfaction numbers is above what our target was 90 days after launching, we'll have to raise the target. So there's a place to send them. We have a strategy on the kind of the more you have, the more you get and mass affluent. And then you launch products that you've already done customer research on that customers say we want that product. And so that's what gives me confidence as I've gone through this process before. You listen to the customer. There are some things that are tried and true. And frankly, we're underpenetrated in our customer base in terms of dollars. So whereas some have already maxed out what the average mass affluent customer would have we can see the numbers what's average where we are and see that just bridging that gap brings us significant dollars back in. So marry that Phase 1 of the commercial side with the Phase 2 of the consumer side, which has already begun in a tough. I mean who knew that we would celebrate 2% deposit growth. It is definitely a challenged market. And it will be challenged, at least through the first half of the year, we'll see what dampening loan growth in the industry means for deposit demand in the second half. It's not static. But we feel like, based on our current positioning relative to peers and dollars per customer and the sheer number of initiatives we have across different lines of business, we're set up pretty well.

And then with respect to pricing of deposits, I know the rate paid or the beta on the savings account is lower than it was last cycle. Are you seeing any competitive pressures within your market that you feel there would be an acceleration this year or at least in the first half in deposit pricing?

It would be funny if I said we felt no competitive pressure on deposit pricing. That's the talk of the town. But I think pricing matters, but so do features that you have for the customer. So does granularity of your deposit base. So we have some nice loyal Midwestern customers. We have granularity of the under $250,000 individual depositor. So while we have a high loan-to-deposit ratio, we have a nice foundation underneath that. What I would say is the characteristics of what you bring to, do you have fair practices and products that people want, and that is what we intend to introduce throughout the year. At the end of the day, pricing does matter. Pricing matters for anybody, especially in the world of digital banking, where people can get a rate quickly. But it's not the only thing. And so we don't lead with price. We make sure that we're competitive in price. We really, really ratcheted up our pricing committee to bring discipline both on the loan side and the deposit side. It's something our new CFO put in place when he came here along with our Head of deposit products to get very granular on a very run weekly basis to understand where we're going, decisions we're making by segments of the portfolio.

Great. And there was a session in here 1 or 2 hours ago about QT and funding mechanisms. You guys did just issue a $300 million of debt. You guys have also done an amazing job recalibrating your funding structure. In this framework, what is your appetite for funding, right? Like you did just raise it. And if you're unable to fund loan growth with, I guess, cheaper deposit funding, would you slow the pace of loan growth? Or would you just sort of jump in with both feet and just bite the boat with the wholesale funding?

You asked a lot of questions there. I'm trying to decide which one to answer first. And what I would say is we won't slow the growth of core holistic relationships. That is our focus. The good news about having multiple levers out there is that we can choose where we want growth, assuming the market is with us. With regards to funding, the sub debt play was really more of a replacement of expiring sub debt and enhancement to capital. When I think of liquidity, we have many different options. So we've been in the 15% to 20% wholesale funded network deposit-funded space. Going back to 2016, the last cycle, we're at 30%. So we're starting from a little bit better place. I'm comfortable staying in that 15% to 20%. I'm okay with getting some wholesale funding. But by and large, what I would like to see is that a majority of our growth is funded vis-a-vis customer deposits. When that kind of intersects is a question of the market, but what I do know is the initiatives we have will allow us to do that over time. We will not have loan growth for the sake of loan growth. It will be profitable loan growth regardless of the funding source, and we have enough options right now that we're seeing on the return side to be able to do that.

Great. Moving back to the digital strategy. In a previous -- on the M&A panel, there was talked about where tech was the largest challenge for community banks. How do you -- what is your argument against critics, let's say, small banks can't compete with the large banks, especially in the tech funding and so forth?

Well, it kind of depends on how big you are, I suppose. We're almost $40 billion in assets, and we're just big enough to be able to launch the digital products and categories that we need. I suspect if you're $5 billion, $10 billion, $15 billion, $20 billion, there's probably a cutoff point. The second thing that I would say is my last stop at Huntington, we had a lot of success with what we did in the mobile and digital standpoint. And the success we had was partially technology-related and partially product and customer listening related. And so what I mean by that is your user experience or you have to understand for a 25-year-old that's switching, what they care about. Like, are you celebrating when you open an account you and I might not need banners and excitement, perhaps somebody that's 25 wants to know they just did it. And so you have to understand who your customers and what they want each stage and get that minute, but then also the products that you're selling have to be customer friendly. And the digital is just -- it's a pipeline. It's what is delivering something that speaks to them. And so when I talk about launching a new product every quarter, it's going to be -- it will be delivered via digital. So is that a digital product? I don't know it's a product that's delivered via digital. So what we are getting good at and we have the ability to do is understand what the customer wants and transition that, translate that into products, features and experience. And so I do think that we have a good ability to do that. With some of the larger banks, you run into complexity of legacy systems. That is not easy to navigate. And since I use almost every single one of them in some way, shape or form, so I can understand that. I've seen it firsthand. And so the confidence level to be able to get to the customer. And what we want to be able to do is have products that make sense, and we know they make sense because they told us. We can deliver those via digital. And by the way, going to the cloud, we have 99.99% availability. And you can talk about anything else you want. But if you log on to your phone or you go home and you're logging on the Internet and you actually can't log in, you could have the best experience when they log back in, they're already unhappy. So getting that stability and delivering the products through that, yes, the bank of our size can compete in that space. In fact, it also, at some point, gives you the ability to scale because you can continue to feed into that.