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

Good afternoon, everyone, and welcome to the Associated Banc-Corp's Strategic Update Conference Call. My name is Matt, and I'll be your conference operator today. [Operator Instructions] Copies of the slides that will be referenced during today's call are available on the company's website at investor.associatedbank.com. As a reminder, this conference call is being recorded. As outlined on Slide 1, during the course of the discussion today, management may make statements that constitute projections, expectations, beliefs or similar forward-looking statements. Associated's actual results could differ materially from the results anticipated or projected in any such forward-looking statements. Additional detailed information concerning the important factors that could cause Associated's actual results to differ materially from the information discussed today is readily available on the SEC website in the Risk Factors section of Associated's most recent Form 10-K and subsequent SEC filings. These factors are incorporated herein by reference. For a reconciliation of these non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please refer to Page 12 of the slide presentation. Following today's presentation, instructions will be given for a question-and-answer session. At this time, I'd like to turn the conference over to Andy Harmening, President and CEO, for opening remarks. Please go ahead, sir.

Well, good evening, and thank you for joining our strategic update call. I'm Andy Harmening. I'm joined by our Chief Financial Officer, Derek Meyer. We are now 3 years into our organic growth strategy that combines targeted investments with our legacy strengths as we look to grow our customer households, take commercial market share and improve profitability. We've made significant progress over this time, and the momentum continues to build. A primary focus of our strategy has been to enhance our profitability by remixing both sides of our balance sheet. On the asset side, in particular, we're growing in diversified asset classes that emphasize better returns and decreasing our reliance on low-yielding assets with low relationship value, all while staying true to our conservative approach to credit risk. Since launching Phase 1 of our strategy in 2021, we've made meaningful progress towards these goals. We grew total commercial loans by $3.4 billion and added $2.7 billion of prime and super prime auto loans from Q3 '21 to Q3 '24. We shifted our mortgage strategy by exiting the third-party originated mortgage business and pivoting to originated to sell model. These changes position us to increase fee income and reduce the amount of long-duration assets on our balance sheet with negative convexity. And late last year, we sold $1 billion in ARMs to shed a portion of the low-yielding noncustomer mortgage loans that were already on our balance sheet, freeing up capacity for strategic growth in other areas. Through actions like these, we diversified our balance sheet, enhanced our profitability profile and decreased our residential real estate concentration from 32% when I got here to 26% as of the end of Q3. We're pleased with the progress to date, but we also remain bullish on our future growth prospects, as we continue to execute on Phase 2 of our plan. As such, we've taken several actions to support and accelerate our growth strategy here in the fourth quarter. We started by raising over $300 million in capital through an issuance of 13.8 million new shares of common stock last month. And today, we're putting a portion of that capital to work by announcing a reposition of our balance sheet that enables us to offload another batch of low-yielding assets and high-cost funding from our books. The components of this repositioning are similar in nature to the repositioning we completed last year. First, we've agreed to sell approximately $700 million in low-yielding mortgage loans, primarily single product relationships. We've also sold $1.3 billion of AFS securities. The proceeds of these transactions will be used to pay down FHLB advances and reinvest in approximately $1.5 billion of securities at a weighted average yield of 5.08%. The actions we've taken in Q4 combined to drive several attractive benefits. First, our margin improved substantially. By selling low-yielding assets, paying down wholesale funding and reinvesting in securities at higher rates, the repositioning adds 19 basis points to our Q3 net interest margin and approximately $16 million to our quarterly NII on a pro forma basis. Secondly, our pro forma capital position improves and our ability to generate capital going forward also improves. Based on the combined impacts of the common stock offering and the repositioning, our pro forma CET1 increases by a net of 39 basis points relative to Q3. And our improved earnings profile sets us up to create additional capital over time as we continue to drive momentum with our organic growth strategy. Third. While we're enhancing our capital position, we're also driving a higher return on capital. The transaction represents an 83 basis point pro forma improvement to our ROATCE giving us additional traction as we work to achieve more peer-like returns. And finally, the repositioning further reduces our exposure to low-yielding longer-duration assets and provides us with the added capacity to drive more profitable asset growth through our organic strategy. In summary, this repositioning serves as a strong complement to an organic strategy that has already generated significant tailwinds for our company and is still gaining steam. The actions we've taken here in Q4 boost our profitability, strengthen our capital profile and provide added capacity to support future growth. But importantly, our broader strategic plan also sets us up to drive better returns on our capital as we continue to grow. We're excited about our momentum heading into 2025, and we look forward to sharing additional updates in the coming months. And with that, I'll open it up for questions.

[Operator Instructions] First question here is from Chris McGratty from KBW.

Great. Maybe, Derek, a question for you on the loss between the bonds and the loan sale. I'm just trying to peg the tangible book value impact. Could you isolate or allocate the mark between the bond book and the loans sold?

Yes, the after-tax loss on the mortgages will be about $104 million. The after-tax on the security is about $135 million, and there is a few million that we expect to pay in prepayment penalties on FHLB when we pay that off.

Okay. And then, I guess, broadly, looking at the $60 million of NII annual benefit, pretax. I guess, how did you -- when you looked at this trade, was it an earn back? Was it getting, Andy, to your mid-teens ROATCE target quicker? I guess, [indiscernible] kind of in the thought process?

Yes. Well, it was a lot of things. I mean the most important thing is we actually have a strategy to remix our balance sheet organically. So we want to make sure that we have appropriate capital to do that. We fixed that with the issuance that we have. And we want to make sure that we have enough room to go forward. It helps our liquidity position as we pay off the FHLB. And so those pieces go into what we're thinking. We want to put a cap on the payback at 5 years. That was the maximum length that we wanted to go. But we think that as we look at our return profile and we're improving every key area, we are not forgetting that our organic strategy also is leaning into the overall return that we're going to see in '25 and 2026. Derek?

No, I think that's right, 5-year payback, and we wanted to accrete earnings over and above the dilution from the offering. And I think we checked the box on all of those.

Okay. And if I just could squeeze one in? If I'm looking at the -- 1 of the slides that talked about the $0.03 quarterly earnings pickup. If I think of that as an annual basis with the shares and the actions, it feels like roughly net 5% year ahead in terms of earnings. Is that about how you're thinking about it as well?

So it's in that range. That sounds about right.

[Operator Instructions] There are no further questions. I'd like to turn the floor back to management for any closing comments.

Well, first of all, I just want to say thank you for all of you to get on this call at short notice. I think the second thing that I would say is I've not been more bullish on our bank situation in the 3 years that I've been here. The transaction certainly helps. Product development certainly is already making an impact. Our RM hires, we've actually had 4 accepted offers in the last 2 weeks and 5 accepted offers since our last earnings call. Our customer satisfaction was industry-leading and improving this quarter. The yield curve helps us going into next year. We have momentum on household growth going into next year. And frankly, our leadership team that's in place right now is, a vast majority, 2-plus years with the company. But as of January, no one will be less than 1 year. So from an operational and execution standpoint, Phase 2 is well underway. This is a lever that we're pulling in conjunction with our capital raise, but really, the story of our company, I believe, is going to be execution in 2025 and '26. With that, I'll just say thank you for joining the call.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.