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

Great. Well, good morning, everybody. Thanks for joining us. We're excited to have Associated Bank joining us today and kick off the mid-cap bank fireside chat sessions. Andy, thanks for joining us, Derek and Den.

Maybe just to start, there's been some significant changes over the last 3, 4 years that Associated -- since you all have joined. Maybe just give us an update on where we are and what your primary focus is as you look out over the next few years?

Yes. Well, thank you, Jared, and thank you for having us. Interestingly enough, when we kicked off Phase 1 of our strategic plan, it was -- I was going to say right here at the Barclays Conference, but is in September of 2021. And that was during COVID. So we kicked it off virtually at the Barclays conference and fast forward to where we are today, completed that Phase 1, and it has been very foundational for us. And now we've launched at the end of November a Phase 2 of our strategic initiatives. So what -- how we're thinking about the world right now really comes down to a couple of things. First, you have to be cognizant of credit. So where are we from a credit standpoint? And then, because we've had some pretty solid stable results on credit side of the business, what's that mean for growth, whether that's growth of customers, deposits, loans. And so those are the two pieces. On the credit side, we've had quite a bit of stability. And if you look at our portfolio, we have $10 billion of super prime loans. On the consumer side, that's residential, and that's auto, FICOs from 760 to 780 between the auto and the residential real estate. And then on the CRE side, we are well diversified foundationally in Midwest markets, not dealing as much with hobbyists as much as real estate professionals, and we've avoided some of the pitfalls of rent control and large city center portfolio. So that is an important piece of the book that I know a lot of people are looking at right now. There has been with rates a little bit higher, a bit of a stabilization, return reverting to prepandemic levels on some of the key buckets. However, that has stabilized as well. And so -- the position on credit for us is pretty solid where we can be impacted just like anybody else with the economy, but we like the position that we're in, when you go to growth. And then when we look at Phase 1, whether that was the digital platform we put in place, products that we put in place, segmentation strategy with mass affluent or commercial RMs. The first phase went pretty well for us. And we evidence that by the fact that we are now #1 in customer satisfaction in the footprint, that we operate in the upper Midwest. That matters because that lowers attrition of customers. Then we see that we have household growth for the first time in a decade. We went from negative 1% to 2% to 0, and now we're at a 1.5% to 2% household growth clip. So you see what that stability has been for Phase 1. And now we get into a Phase II scenario. And the question is, can you build on that and it is a bit of a continuation. On the consumer side, it is offering the key products and features that can compete with anybody. And for us, we did outside research. There's 14 key points skill that you want to have in your consumer book. 2 years ago, we had three of those. Now we have 10 of those. We're moving to 12 of those. And those are the type of products and services that allow you to compete with major banks with the fintechs, because you want to be able to grow that base. And as we've grown that base, we've also improved the amount of dollars that each customer is bringing to us. So more acquisition, less runoff and more dollars per customer. On the commercial side, it's a battle for talent. And we've had in our key -- the key growth markets that we have, we'll hold serve in Northeast Wisconsin Green Bay. But we said we need to grow in Milwaukee. We've hired a banker that came to us from a large super regional with 19 years' experience they're strong banker. We just hired a new head of corporate banking out of Minneapolis, who is running 12 markets for the bank that he was with, large super regional. That person brought in another major player in the Minneapolis market that was running five states on portfolio management for them. So on the commercial side, off to a good start, we're going to increase the commercial RMs by about 26% to 28%, and we expect most of that hiring will be done by the end of the first quarter of '25, about halfway there already. So in essence, Phase 1 was successful, but is the foundation for Phase 2 and Phase 2 is well on its way.

So when you look at the expansion of personnel in the targeted geographies, do you expect them to really be contributing the most of growth in '25? Or how long will it take for those RMs to really get the traction on the pipeline and drive the growth as we look out over this next year, is it more solidifying the gains you've taken?

Yes, it's a good question. So the answer is yes, we do expect that growth in '25. And we have a little bit of a running head start because we're growing the customer base in major markets now. So we look at Milwaukee, we look at Minnesota on the consumer side. Now we're adding on to that on the commercial RM side and feel very good about the pipeline growth Milwaukee is a little bit ahead of Minneapolis right now, but where we sure are encouraged with what we're seeing in Minneapolis. So we expect to hold serve in Green Bay with Wisconsin in Northeast Wisconsin to be the major bank that we are in the state of Wisconsin, but we also have to compete in major metropolitan areas. You do that by adding your digital platform. And you do that by adding top commercial talent. And on both fronts, we're pretty well positioned.

When you look at the growth that's going to come from these newer markets, how are you balancing loan and deposit growth? Are you leading with one over the other? Are you looking for these markets to be self-funded?

The way that we look at the funding part is on the consumer side of the business, you grow households a little faster than peers. You also then use segmentation, get a large share of wallet from them. On the commercial side, you use a balanced scorecard. And so filters put a very disciplined approach to deposit acquisition out in front. We've added capabilities on the product and portfolio side on the back end of the business. So it is a full relationship model, and we continue to get better at deposit acquisition. The market has been difficult for banks as you see money funds, dollars going up and bank deposits going down, but we believe that levels off as rates decrease a little bit.

Yes. When you look at commercial real estate near concentration is relatively low versus peers, what's your thoughts on growing CRE here as a component of these new markets? And if so, are there specific areas that are more attractive?

Yes. So with CRE, we won't force it. We'll stay with the disciplined underwriting guidelines that we've had on the way in, the disciplined portfolio management that we've had. As rates come down a little bit, some of our dollars get taken on the permanent market. That's a normal course of business. So we expect that a little bit. In 2025, where we have -- the question will be, will we have growth in commercial real estate. And we think we'll have very low single-digit growth. But the people we've dealt with for a long time, people that are slightly back into the market. But we'll only take what the market gives us, and we have to think of that from a credit standpoint and from a regulatory standpoint.

Will that be hopefully or appears at the beginning of some rate cuts? What is your view of sensitivity of loan growth if we get 4, 6 or 8 rate cuts over the next year? And how is that impacting? How is the rate expectation impacting the conversations with commercial borrowers?

Well, rate is one factor, but really the market reacts to certainty. And so the question is, where is the economy? As soon as the customer -- the business customer has a strong sense of where the market is going, then they take advantage of a lower interest rate. And it certainly will help on the CRE side, just from a cost funds on the short term. But from a new borrowing standpoint, I think you'll need to see several cuts. It will be a slow -- a little bit of a slower motion. You're probably talking first quarter, second quarter, where you may see that increased demand. However, if you see significant cuts indicating that there's more trouble in the economy, I'm not sure that the interest rates will have as big of impact.

Okay. Maybe shifting to the funding side. You've been investing in several client-facing enhancements that seem to be improved, they're aimed at improving the value proposition for depositors. Can you talk through the high-level philosophy behind this? And which investments you expect to have the most material impact to the funding base?

Yes. The good news for us is we've been investing in for the last 2.5, 3 years in the digital side and the product side. And what's interesting, just for an example, if you have credit monitoring, which we do, if you have an event, then you have to get your credit fixed, that is a component of it. If you want pay early on EasyPay, we have that. If there's an overdraft, there's a gray zone. So these products are helpful to us. But when you launch them, you don't get the benefit on day 1. You launch them and then the customer uses it when they need it. So now, if you have 10 of these, you have 12 of these, there's a bigger chance that a customer is going to use 1, 2, 3 of these. Also, over time, people appreciate that your sight is up. But if you're at a 99.9% uptime in your digital site, people don't say, gosh, that's great day 1 or day 2 or second month they experienced that for a year and say, "You know what, they're just usually up. So as time goes on, this is a long answer to a short question, but what happens is you retain more customers, you build a loyalty. You get high net advocacy, you get high customer satisfaction. You have a product strategy to deepen those relationships. So that's what's been happening for us. So on the consumer side, with what's already baked in there, we're seeing more acquisition, better retention and more deepening. What happens with that next is that ultimately flows up to your wealth business. So on the wealth side of the business, Jane Lidio joined us just under a year ago. And Jane also had the mass affluent in influence segment for 26 states for a company that she was with before. So upstreaming those customers that have had a good experience with mass affluent into private wealth will be the next step that we'll start to see more of each sequent quarter. So the consumer side, we're in pretty good we're in a pretty good glide path. On the commercial side of it, what your mix is and how you attack the markets will matter. And for us, that meant, we decreased our exposure on government banking a little bit over the course of 12 to 18 months, about $1 billion decrease. That's now leveled off. So we don't have any headwind there. So now when we grow in commercial, which we are seeing that in the core commercial growth, we're already seeing that. So as you add a 28% increase in RMs, you're going to get additional business. So I would say first is consumer, we're there on consumer. We're starting to see the upstream to wealth. As we get commercial, we also will see an upstream for wealth. So I'd say right now, we're probably hitting on 1.5 cylinders out of 3, but we expect that to continue to grow in the second half of this year and into 2025.

You touched on mass affluent a little bit. That's been a big area of focus over the past year. Maybe just spend a little bit of time specifically on how the penetration of mass affluent is going and how you're able to control the cost of bringing in those customers?

Yes. So maybe we'll just start, mass affluent deposits in a bank are typically about 70% to 75% of your consumer bank deposits. That's why it matters. What experience they have, how they deal with the banker, what product there is influences them bringing additional dollars to your company. So we have now trained 60 mass affluent bankers throughout our footprint. That cost us a little bit more. They're higher trained, higher level colleague. But by and large, we're operating in the same framework, the same delivery as we had before. The product offering will be set towards that customer. So in the first year that you launched mass affluent, you naturally get additional dollars from your customer base. right now, as we're growing customers, the reason that we're up 26% in dollars we get in the first year from customers is because we're having a conversation with them about what the value proposition is. So mass affluent has been wildly successful. The cost -- incremental cost is somewhat marginal, but we've also paid for that by cutting to invest. And that's been the theme for us the last 3 years. What can we do a little bit less of, so we can do the most important aspects that are most important to the customer? We've closed a few branches in our network, not a lot, but a few and that's paid for both our digital strategy and our mass affluent strategy.

When you look at the network and broker deposits, that's been relatively stable around the 16% to 17% of total deposits over the last year, 1.5 years. How are you viewing those types of funding longer term? And how high of a priority is that for you to pay down as you see growth in the other core funding areas?

Yes, kind of two different questions. How big of a priority are our core deposits? Very, very big. Right now, what we expect is that our core deposit growth will fund our loan growth. That has to happen, and that is our expectation. We have a lot of different strategies. It's not a strategy of hope. There are a lot of different strategies in there. With regards to our level of wholesale funding, over time, ideally, we drive that down. But what I would say is if, let's say, in the next year, we grow deposits 4% and the loan market is soft, and it's only a 2% growth. We can immediately use that to pay down wholesale funding. Also, on the loan growth side of things, we've deemphasized the portfolio noncustomer residential real estate. That's a portfolio with the lowest return profile, and replacing it with a little bit higher return of commercial loans. So on both sides of the balance sheet right now, whether it's wholesale funding, whether it's the loan side of the book, we have dynamics that we think improve our our return profile over time.

Maybe let's turn to the audience. We have a few questions for you. We know it if you were able to use the BlackBerry like device to reply and then we can open it up to see if there's any audience questions as well. First question is what's your current position in the shares associated overweight, market rate, under rate or not involved? Just try to get a gauge of where people are?

I'm one on that one.

You can answer as if you want yes, I think -- biggest, not involved. It seems to be a theme that we've seen with most of the new cap banks yesterday, and so far, it seems like a lot of people looking at the space, maybe not quite there yet, which is good and then a pretty even split between long short. So that's interesting to you. Second question? So we haven't asked you this yet, but we can get to this after. But where do you see auto loan balances peak as a percentage of total loans? And right now, they're just under 9%. So 10%, 15% or 20% or higher, which seems, maybe a little high?

But that would be very high. If you pick 3, what we can talk after that.

Question getting 10%, so not a huge amount of growth from here than in the second 2015. Third question, so on credit, global 2025 charge-offs be? Will they be higher than 2024, lower than 2024 or unchanged? So, have people think that we still have little harder to go on normalization and pretty split between what and unchanged. It feels like that follows a broader sentiment or on credit. We can get into that a little bit. And then our fourth question? So where will we see promo rates be by mid-2025 as we go through the cycle? Less than 4%, 4% to 4.5%, 4.5% to 5% or so greater than 5%. We'll see what people say 100% in the 4% to 4.5% range.

Surprised on that one.

Yes. And then our final question, which would have the most impact on improving associated valuation above peer loan growth, better relative margin performance, stronger fee growth, better expense control, credit quality outperformance, more active share repurchase or an accretive bank acquisition? 100% better relative than genome. So continue with the blocking and tackling and getting good growth. Let's see if there's any audience questions, happy to open the floor now -- right now. Okay. So we can move on, I guess, on the credit, your credit has been solid, pretty even split between expectations if we see a little higher if we see stable. What parts of the C&I book have been the most impacted by higher rates? And what are you watching more closely compared to 2 years ago?

Yes. So our commercial team has what we call the no surprises to her. And so I could flippantly say we're looking at all of them, because we are. And so we're really focusing across the portfolio. We haven't seen a weakness in a particular geography, and we haven't seen a weakness in a particular asset class. I think interestingly, you can read about manufacturing, and we're in the manufacturing belt, and we have focused on equipment finance and asset-based lending. But historically, we haven't been overweight in manufacturing. And so that is not -- we've not seen a slowdown in there. In addition to that, in the markets Wisconsin's unemployment rate today, I believe the last number was 3%. Maybe it's 3.2% in Wisconsin. So right around 3% to 3.2%, the economy is quite strong. In addition, we've seen delinquencies actually come down in the last 2 quarters on our consumer portfolio. We watch that as a leading indicator. So really, we don't see a geographic concentration. We don't see an asset class deterioration overall. We think it's been a bit of a slow reversion to the mean and that reversion is stabilized. We haven't given guidance for next year, but it sure seems like the credit side of things has gotten back to kind of historic levels, where we'd expect to be.

I guess maybe tying into the auto question. Your performance in auto has been strong and deliberately targeting, as you said, that's super prime. How does that give you confidence to potentially expand auto lending, whether that's expanding your geo-network? Or are you happy with the size and contribution of auto today?

I think the people that answered 10% or 15% are both right, we'll probably be in that 10% to 15% range. That's a book that really serves several purposes for us. It hedge the risk as we exited third-party origination on mortgage, and we exited noncustomer mortgage loans on construction. But it also fills that gap as we get ramped up on commercial. And the commercial piece takes you 90 to 180 days to higher, than it takes 90 to 180 days to get production. So we forecast an additional $750 million in commercial growth by the end of 2025. As the auto book gets larger, exclusive of expanding into additional markets, the growth rate is going to get smaller. We've liked what's happened with that. In fact, there's been unusually wide margins. It's a segment that I've known for a number of years. We'll stick in the super prime segment of that, and we're getting margins well above what our forecast was. So it's been a good business for us there. But it's also been a natural hedge to asset sensitivity. So putting on $2.5 billion plus of fixed rate loans, in a time when rates are coming down has been a positive. So it served a few purposes for us, but we don't intend to get overweight in auto.

That's probably a good segue to discussing interest rate sensitivity. How are you viewing your interest rate sensitivity today? And what are you looking to do? Or how are you incorporating the forward curve, I guess, into your strategy over the next few years?

Well, we've been working on our interest rate strategy for the last 2 to 3 years. And when I got here at least 2 to 3 years ago, we're very asset sensitive. And we wrote that up as rates went up. But at the same time, over the last couple of years, we've put some cash flow hedges on. We've put on a large fixed rate auto book, and we've taken down the asset sensitivity significantly, for the bank in terms of -- I believe we're about 100 basis -- 100 points down, 100-point shock. We're about 5% [indiscernible] 5%. Now we're at negative 1%, which puts us, I think, pretty close in range with most of the peer banks.

Do you think that there's -- are there any additional plans for hedges as some of these are rolling off? Or do you think that some of the organic changes of the balance sheet have helped you get to where you want to be?

Well, we'll have to look at that schedule. The good news is it's kind of laid out on an extended period of time. So we'll probably add some hedges in the second half of this year. We expect for that to happen, the management of interest rates and what we expect, we've gone very short on CDs. So kind of those laddered maturities will be coming up, which decreases the risk, largely in the 7-month bucket over the last few months. So feel pretty well positioned. We've hired on the commercial side, some portfolio specialists that we are pretty familiar with from past lives to understand and manage the pricing on the the commercial book. So I like where we are with respect to multiple different pieces of that. I think the biggest piece, though, is what does the market do for deposits. In other words, is the banking industry, does it flatten out? Which is what we think will happen. If that happens, that's not going into the year with a headwind and perhaps a little bit less competitive on the pricing side, which we would expect a little bit of that to occur as we head into 2025.

If we saw a 50 basis point cut instead of 25, would that be -- how would you feel that, would that be a net benefit compared to 25% or just accelerate some of the pressure?

It's hard to say, because you have to look at the entirety of the curve. The question right now maybe is the 5-year tenure, a little bit lower than it will be. And if the short-term rates come down and you actually stop having an inverted yield curve and midterm, long-term rates go up a little bit, that is a difference to what the impact is going to be. I would wonder what happens right after that 50 basis point in the next cycle. Does it go 50-50, because if it does, then you start to say, "Gosh, there's a panic. There's a concern about the economy. I don't see that there's so many different numbers. We can talk about every headline that you read. But the fact is they're not all bad, and the economy is not bad, and typically seeing large multiple rate cuts like that would signify that we're trying to get back in the game. And I think that's less likely than a measured decrease over time. One rate cut, I think, would be -- my real question would be what's that mean for the rest of the curve for us?

And then on the fee income side, especially mortgage banking and capital markets, how sensitive is that to the rate environment at this point versus some of the initiatives you've been doing?

Yes. Well, it's certainly dampened the opportunity in the marketplace on both capital markets and on residential real estate. A few rate cuts and depending on where the curve goes over time in 2025 could impact it, there's one rate cut. Fee income doesn't change in 2024. But the combination of a little bit lower rates. And for us, having a little bit -- I'm trying to take market share with the key hires that we make, I think, could put us in a relatively good position, midway through the year in 2025 on the capital markets front.

Great. And maybe shift to expenses. You've talked about the hiring you've done the investments you made in personnel and so at the same time, you've been able to pay for those investments with some cuts on other areas of expenses. How are you positioned going into 2025? Is there an opportunity for positive operating leverage? Or is that going to be really more dependent upon the traction from the new hires.

So our goal -- and I think you followed us through most of this, our goal over the last 3 years, and this will not change is what do we look at in expenses that we can cut to reinvest an opportunity for growth? And so that's the view. The goal is to have positive operating leverage. And that is the challenge that we'll put in front of our team as we're going through the budget cycle right now. We'll layer on top of that what we expect to happen on the forward curve, what we expect in rates, what we expect in deposits and loans. And we'll get a lot better vision of how fast we ramp up the pipeline in order to achieve that. It's interesting. NIM was number one, there has to be some loan growth in there, and there has to be some deposit growth. If you can get both those sides for us, you start to win on the funding side. And you start to change the mix of what you have on the books. So for us going into next year, the challenge to the team will be -- show us a plan that gets us to positive operating growth, but we're working through that process right now with more relevant real-time numbers that we'll start to get here in the next month or two.

What other bigger investments around the horizon that you feel you need to make to continue to support this growth to continue to support market expansion?

It's a lot of pressure, Jared. I mean, there are not a lot of CEOs that are saying they're going to grow their RM workforce 28% in the next -- in this phase. But if you want to put pressure on me beyond that what our...

Systems in the [indiscernible] supports.

The reality is the RM side of it and the technology side are going to continue to matter for us. However, somebody asked me, what's Phase III? And the reality of that is Phase I was pretty clear, and stopped the bleeding on household growth, get to a positive number, do even more of that in Phase II, make sure you have a deposit acquisition machine in Phase II. Then the next question for us is we'll sit down and we will not be playing from behind as much. We've got a lot of talent in the company between who is on board when I arrived, and the key additions that we've made. So then we're going to basically start looking ahead and saying, let's go group by group and say where should the investment be made. And that's by segment, that's in -- that's by geography, that's a product. And at that point, what the bets do we want to make next. So that will happen in the first half of 2025. We don't operate in a status quo environment in this industry. In this industry right now, the fintechs, while they're not as profitable as perhaps they would want to be. They went from getting 10% to 20% to 30%. I think they're pushing 40% of all new checking accounts. You have to be aware of that. And so for us, having growth on the checking account side going from 1.5 to 2, 2 to 3, that will start to put us at the top of the industry. And then the question is what else can you do to change that and to deepen that? So we will not operate in a status quo environment. However, we've done will better execute on Phase 2 things because Phase 2 is what pays for Phase 3, Phase 2 is what improves your financial return just as it did in Phase 1.

And maybe shifting over to capital management and capital. We've seen the industry increasing capital ratios as we've come through the last few years. You've been obviously spending a lot of time and resources on building the organic growth opportunity. How are you looking at capital more broadly here? Are there opportunities for capital management? And what's potentially M&A on the table as you look at trying to get deeper in some of these markets?

Our first priority is organic growth, a teamed with a better NIM. I'm glad that that's 100% of the people care about that. I do too. If we get a better NIM and when we get a better NIM by shifting the balance sheet on both sides, that gives us a better return, that allows us to accrete capital, and that is the best path forward for us. If we were to do a deal, we would want to make sure that we accrete capital faster, that not only do you have an expense but it's in a market that you understand that you could add to the talent. But to be clear, the organic piece of it, the Phase 2 is priority one, it is priority to we could be opportunistic in the future on inorganic growth, and I really like the team that we have -- that might be able to look at it. We've had more people calling us in the last 90 days and we had in the previous 2 years. So it's an interesting market, and you've heard and seen some of the deals being struck out there. So do I think the M&A market will be more active in 2025 than it was and '23 or the first half of 24, it sure looks like it's going in that direction.

And in terms of capital ratios for you and the growth organic growth opportunity in front of you, how should we be thinking about sort of long-term capital targets?

We're all higher. I think as I said, we have -- and we've laid out internally kind of what we expect on a quarterly and an annual basis. I think in particular, you look at CET1 ratios, and you're probably wanting to head north of 10% on that, and we seem to be on that path. There's a lot of lot of movement in what's going to happen and what's going to be required starting with the largest banks in the industry as of yesterday, trying to unbundle what was actually said yesterday, I've read only a couple of articles last night. And it seems like there's a bit of a retreat on capital hold levels for the very largest banks. And then the question becomes, what does that mean for the super regionals? What does that mean for the regional? So what we do know is accreting capital on a regular basis through profitability, is good for everybody. Where that ends up and what is required? We do think we run a pretty low-risk franchise by virtue of a big portion of our balance sheet being in super prime mortgages in the Midwest and particularly Wisconsin, where you don't see this spike up and down. So we think we're on the right path. Where that ultimately needs to be and is required to be, I think we'll become more clear over the next 6, 12, 18 months.

Great. I think that was the questions I had. Please join me in thanking Andy and the team from associated for joining us today, and thanks very much.

Thank you.