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

Thanks, everybody. We're excited to wrap up our second day of the conference today with Associated Banc-Corp. Andy Harmening is the President and CEO. We're excited to talk about a little bit what's going on in your market. Thanks for joining us.

Yes, it's good to be here. So maybe a couple of words about what's been going in Associated. I won't go on too long on that, but it was 4 years ago at this conference where we kicked off our new growth strategy. It was during COVID and it was remote, and I've been there for 6 months. And so we fast-forward and we think about having sustainable organic growth. And we look at the things that we've done. We've essentially bolstered our executive leadership team, bringing in 9 new members over those 4 years. We've invested heavily in the commercial bank. We've built a value proposition from the product side and the digital side, in the consumer bank. We've repositioned the balance sheet twice, and we've changed the mix of what we produce on the loan side, kind of transitioning from noncustomer residential real estate to commercial banking. So you fast forward to 2025, Phase 2 of our strategic plan, we are halfway through that. We finished the investments in the first quarter, and that's mostly on the hiring front and the product front. And on the hiring front, that means that our commercial bankers are all -- have all been hired. And so as we look at what that means for us, it means that in the first half of the year, we were able to grow $700 million. We had guided to growing $1.2 billion, which looks like a very achievable number for us on the consumer side of the business. We've gone from a negative 2% household growth to minus 1% to 0% to plus 1% to plus 2% annualized this year. We have the highest customer satisfaction we've had. Fast forward to the remix, our net margin is up 29 basis points from second quarter of last year to second quarter of this year, and we finally reached the 3% margin barrier and improved our ROTCE. So then we look at credit and we look at efficiency. And really, the name of the game for us has been driving positive operating leverage, and we've been able to substantially do that in the first half, and we think we'll be able to land that plane in the second half. So getting to the second half of this year, going into 2026 with household growth, high customer satisfaction, commercial growth, expanded margin and ROTCE, feels like the best position we've been in for quite some time.

Great. As you mentioned, you've undertaken an ambitious expansion plan, hiring new relationship managers in commercial lending. As we look forward with them all on board as of March, how will these hires change the trajectory of commercial loan growth versus what you had before?

Yes, they're already changing. It is the good news. We're not betting on the comm. So when we think about double-digit C&I growth for the year, it's exciting to see that and see what it means in the second half. But when we take a deeper dive on it, what we see is only 13 -- we've increased our RMs by about 28%. But only about 13% of our production is coming from the new RMs. So as non-solicitation agreements expire every single quarter, by this time next year, we'll have -- none of them will be under a non-solicitation. Today, there's 13 of them. So we really expect a nice second half of the year, but really the momentum going into next year. We look at pipelines and they're nice, but in the absence of production, not as exciting. So we're getting the production, but the pipeline on the commercial side versus the same time last year, August to August, is up about 36%. And then trailing that because the ambition is to fund our bank with deposit growth, the deposit pipeline is up 100%. So we feel pretty good from an organic standpoint. And these kind of remixes from resi to commercial, from wholesale to core customer growth is what's going to drive -- kind of drive the continued margin expansion and return profile.

What's been the sentiment at commercial customers more recently? Have you seen any incremental hesitancy to reengage due to tariffs or just the broader economic uncertainty?

I mean it's the start/stop, right? Trump gets elected. People are excited, a pro-business President, been a lot of noise and tariffs and concern. And then the realization that we have a pretty good economy and back in it and a little bit more information comes out and concern. I think at this point, it's defaulting back to -- we have a pro-business President. There are some positives from capital acquisition. We are seeing some deals get done. You can see pipelines build, then they stall, then you get some production and it goes on. And it looks to me like the pipelines are up in the industry really for us. And then we'll pull some of that through as kind of people get to the point that say, okay, things are okay, and they're dealing with the uncertainty that might be there.

You had mentioned the success with deposit growth. Can you just give us an update on where you feel like you can really leg in and see some continued benefits from there and what the -- what your ultimate goal is for that deposit loan growth mix?

Yes. So the good news on the deposit front is we don't have all our eggs in one basket. So the big piece of it for us is household growth. That's kind of the piece that's not spoken about in the industry a lot. But household growth for banks right now, regional banks is just 0% to 1%. And so when we look back and see a negative 2% household growth 5 years ago versus a positive 2% household growth now, if you think that it's $100 million to $150 million per percent, which we do, and a differentiated deposit growth, you're talking about in the neighborhood of $500 million just in organic growth from 5 years ago to where we are today. So that's a good start. But then you get more quality from every customer, which we've started to do because of the product and you have a segmentation strategy on mass affluent, which brings it in. We will ultimately have an upstreaming strategy to private wealth in the near term. We have an HSA business that's growing at double digits, which is a deposit franchise. That's just on the consumer side, and that's where the biggest piece of growth is. So we have not had a tailwind going into the next year frankly, since I've been here. 1% is nice. 2% feels like a tailwind. 2.5% to 3% would feel even better. So that's the consumer side in which lion's share of the deposits come on. The commercial piece of it, there's no doubt that, that will be a story for us in 2026. We have a deposit vertical, HOA, title business that will come onboard in the fourth quarter of this year. And just the existing pipeline, even with a modest pull-through will show improvement for us. So -- and you kind of close that out with customer satisfaction for us being as high as it's ever been, meaning it's stickier. So really the feeling of being able to compete quite well. If loan growth is there, which we think it is, then we fund that loan growth with lower cost deposits. If loan growth is lower, then we just substitute in wholesale funding and benefit that way.

How are you looking at your markets geographically? You did a bigger push into Milwaukee that was very successful earlier on. You're growing into Chicago in the newer markets a little further west. How are you looking at the geography and the geographic composition of growth from here?

Yes. Well, that's a great question because when we look at our home markets, they are our strength, but they are also some low growth markets, so 0% to 1% growth. So we have to take market share. You can do that for quite some time when you're a little bit lower. We'll be able to do that for a few years we think in Milwaukee, for instance. Chicago, you can grab market share for years and years. It's a very big market. Interestingly enough, if we think of Wisconsin as the foundation, we're actually growing Northeast Wisconsin at kind of twice the rate of the market. So these are good things, but we're going to have to get into -- get a little bit bigger in some existing markets. Minneapolis, with absolute certainty, is one that we need to grow in. And as we do that for the next couple of years, we'll have plenty of growth. Then we're going to have to think about -- we just hired a team, a lift out of a team in Kansas City. They've hit the ground running. And it's a very strong team, which shows that you actually -- if you get strong lenders that you know in a market that you're not deep into, you can still do quite a bit of business. So I think of that core footprint, Milwaukee, Chicago, Minneapolis, as places where we can grow over the next couple of years. We'll think outside of that geography and contiguous markets, as time goes by, if we can go from a 0% to 1% growth market to a 1% to 2%, 2% to 3%, we've shown that there's a playbook in the major metropolitans, and we think that whether that's in Omaha, Kansas City, Denver, things of that nature going a little farther west could be in the cards in the future for us.

If we end up getting the rate cuts the market is expecting over the next few months, how does that impact your expectations for the performance and growth of commercial real estate from here? And does it change your appetite?

Yes. Well, so commercial real estate, we forecasted some -- we have 3 cuts forecasted in our growth. So our forecast takes into account a decrease in rates. And the impact on CRE, we would think would be really pegged to the 10-year. And we do expect that will come down at some point and payoffs will increase a little bit. That's in our forecast. It's a book that we expect to grow kind of in line with the overall portfolio of the bank. Really, the question, I think, comes into the industry of what happens with deposits and deposit pricing. Most people think that, that will be a quick pivot and will be a lever for people to be able to manage deposit pricing. And we're relatively neutral on the asset sensitivity side. So one cut, 25 basis points, we'll be able to absorb that with kind of maturing CDs and market-linked CDs. So from the CRE standpoint, I think it's -- really, it's just good hygiene to get some of those into the permanent market, put a little bit on the books. And if the payoffs bring that down a little, we're not over-indexed in CRE, and we think that we still will hit the guidance that we've provided on loan growth.

So we have a few questions for the audience through our ARS and then happy to see if you have any questions. Maybe we can pull the ARS questions up. So first question is, what's your current position in Associated shares? Number one, overweight or long. Two, market weight. Three, underweight or short. Or four, not involved. It's probably a better way than not interested.

Mine's a one.

Most people in the room are owners. Let's see.

We've got one that got the wrong room.

Second question, which would have the largest impact on improving the relative valuation of shares of Associated, one, better relative margin performance; two, above-peer loan growth; three, better expense control; four, credit quality outperformance; five, more active share repurchases or six; accretive bank acquisitions? So most in the room are looking for loan growth as a differentiator, a little bit by margin. We can get into that. Any thoughts?

Well, I don't know if you remember last year, not a single answer that wasn't NIM. So apparently getting 29 basis points and starting to move that upward has been a positive for us. And we feel pretty confident we'll deliver on number 2. And I'm a little bit surprised on 6. That's not always the case from the investment community, but what I like.

It's a bank merger week.

All right.

I'll see number 3. What will organic loan growth be at Associated in 2026? One, 3% to 5%. Two, 5% to 7%. Three, 7% to 9%. Or Four, 9-plus percent? It seems like I was thinking about 3% to 5%.

Like we have an outperform opportunity.

Yes. Although one looking for 9-plus percent. We'll see, yes. Let's see our last question. To what do you attribute the current valuation discount relative to peers? Concerns over deposit base stickiness or price sensitivity, uncertainty around long-term growth, general asset quality concerns or weaker profitability relative to peers? So a little bit on the growth, but mostly the profitability. So it feels like you're focused on that as well.

Yes, Derek wanted to add a fifth one on that, and it was not yet. We know it's coming.

I guess sticking to the -- or moving to credit, there was an uptick in credit migration into criticized and classifieds. Can you walk us through some of the drivers of that? And what's your outlook on broader credit trends from here?

Yes. I mean overall credit has been pretty solid, pretty stable for us. I mean if you take into account, we have $11 billion of super prime, high prime consumer on the books. That's a good start point and delinquencies have been very steady there. Criticized/classified, we've been a little proactive on early identification. We didn't want to get caught off guard. So taking that as a kind of a conjuncture with that fire alarm.

I think it's in an elevator.

Just raising the degree of difficulty. So you look at crit/class, that's a category that we made decisions on to be a little bit more proactive. But when you see the pull-through on nonaccrual, really a pretty flat story. When you see the story on charge-offs, a pretty good story. So crit/class has creeped up a little bit self-induced. We think it's a little bit more cautious approach, and we've been a pretty conservative bank, as you saw the 0 answers on credit quality. We think that's about the right range. We're in pretty good shape, and we're very proactive about the portfolio. That's been a staple for us going forward. So I support that approach to kind of early identification, but I'm not seeing it pull through on the loss or provision side.

We've seen a market uptick in M&A activity across really the mid-cap bank space, with an expectation for more deals as the regulatory environment remains friendly. How are you looking at capital deployment more broadly now? And should we expect Associated to be a participant?

I thought you were going to ask, if you'd sell at 3x tangible book? All right. What was the final question here, Jared? I was just thinking about that. So how do we think about M&A and capital deployment?

Yes.

Yes. The answer has been largely the same. So we've had pretty good relative peer TSR over the last 3 years. And we've done that by having organic growth strategies. So we had a Phase 1 with organic growth strategies. We've had a Phase 2 that we're halfway through. We are not nearly deeply penetrated enough in some of the larger markets that we have. So number 1 and 2 would be continued organic growth strategies, dividend payout. I would say the third is, if you can find a deal at the right time, at the right price, with the right culture and the right geography, that would be interesting at some point. But really for 2025, it continues to be the same message. It's organic growth, and we want to land the plane with a strong year.

Great. I guess when we look at the rate environment, the expectation for a few cuts, how are you thinking of the dynamics of margin and I guess, more specifically on the deposit side going through the rest of the year and pricing?

Yes. I think the deposit -- I think of margin in the rest of this year, going through next year. And what we have going on is a constant shift remix of our balance sheet. So if you think about substituting in commercial, if you think about funding sources being a little different and you think about the runoff of a really low-yielding correspondent resi lending, just by virtue of that and being somewhat neutral in asset sensitivity, it feels like over the course of a quarter, all things being equal, we'd probably pick up a couple of basis points a quarter for the next several quarters. Deposit pricing, of course, if that is irrationally high or irrationally low, could swing that a little bit. It looks like right now with a likely 25 basis point cut, we would expect some repricing on the deposit side of the balance sheet. Does that help or hurt us? It depends on how far and how aggressive people go. The way that we model it is that it's going to be fairly neutral and that we're going to be fairly neutral and we don't pick up any basis points in the coming quarters from this mix shift. So we try to forecast fairly conservatively. If the market gets a little bit hotter, we're clearly in a position with the commercial lending. If the deposit rates will go our way, we're in a position where we could outperform what we have guided to. But frankly, at this point, we've guided to a 14% to 15% net interest income increase year-over-year. So we feel like we've been pretty on point to that. We feel pretty good about achieving that guidance. But things could move in a direction that could be beneficial for us, I guess, the rest of the year potentially.

Any questions in the audience? Happy to open it up. There's one if you'll just wait for the microphone or I can repeat it. Go ahead.

I wonder if you can comment on [Technical Difficulty].

Yes, so changes by competitors, Green Bay, Milwaukee, Chicago, Minneapolis would probably be the ones that Madison would come to mind. For us, we've had some big -- we had some large players that we've been able to have some very key strategic hires in the marketplace. In Wisconsin, BMO has been a very, very good competitor for a number of years, and we've been able to hire our key leader in that market there. U.S. Bank and Wells Fargo have been very good competitors in Minnesota, and we've hired two folks, one to lead our commercial business overall and one to lead the Minneapolis market. They were both former market presidents in that market. So they kind of know every single name in the market. So really, what we've been able to do is add people that are very familiar with on the commercial side in particular, the names. On the consumer side, the question is, how do you grow 2% or 3% in a market that's 0% to 1% growth. And it's not just banks anymore. And what I would say is, 40% of new deposit accounts, consumer deposit accounts, transaction accounts are now fintechs. And so that's a startling number. 10 years ago, that number was 30%. So you have to have a product set that appeals to their consumer, whether they're banking at Chase or U.S. Bank or BofA or Johnson Bank or Chime or Dave. And so what we do is we look at the attributes that people need to see in order to switch. And so when we understand those and there's 15 of them, then we basically categorize that with every major bank and every fintech and see how we compete. And right now, we have as many positive attributes of that 15 as any bank in the country or any fintech in the country. So -- and that's been on purpose. So we built those out. I don't remember the number that we had when I started. It was less than 5 and now it's 11 or 12 out of 15. So you have to consider everyone on the consumer side, fintech, large bank, small bank, credit union and deliver something that they care about, we have. And that's been very helpful on that side. And on the commercial side, you have to hire people that are familiar with the market, and we've been able to do that.

Andy, just going off of your reaction to the survey, it does seem like you think maybe your growth rate, it can be better than what the majority of people responded on that slide. So I would love to hear a little bit more about just the specific opportunities you see, both from a market perspective and a hiring perspective that can kind of bring you into that sustainable growth rate as kind of similar to this year?

Yes. So we're at a 5% to 6% growth rate this year. And largely, what I see in our residential book is a similar attrition. And we're planning for a slow attrition of that book over several years, and that's part of the deal. When I think about the commercial production and we think about having 13 out of our 28 new hires under a non-solicitation agreement, and we get to next year and we have 0 at the end of the first quarter, and they've been here longer and they manage that calling effort, I would see that as a significant positive. When I see a 36% increase in pipeline, you can -- we would take math to that by level and category and say, gosh, here's what the pull-through is going to be on that pipeline. So these are just from the initiatives that we have ongoing. We've been a bank that has had significant proactive change to meet the market every single year that I've been here, and it's been 4.5 years. So I think of what we have going on coming into the year, and it's more substantial than what we've had in the past. Should we find a way to invest in a vertical and a team strategically in the next 6 months, it's something we'll take a look at. And I would say, 4 years ago, I was probably involved in every single interview and trying to convince somebody what our story is. Now our story is clear on the growth side, particularly on commercial, and we have people that are calling us. So I think the recruiting side of that has become -- we've become quite a bit better, stronger in that side. So what I see going on, what I see in pipeline, what I see in non-solicitations, what I see in our community markets, what I see in small business, what I see in commercial, what I see in the vertical of equipment finance and asset-based lending, it's not just one piece that's driving this. So when you have a lot of pieces that are coming together simultaneously and our start point may be a little bit better than the prior year, that gives me hope for what that could be. We can't control the market. But what I would say would be disappointing to me if we didn't grow our commercial bank faster than the market.

Maybe taking a little bit of a shift. Looking at AI, have you evaluated AI and what it could do for the bank? Do you feel that there's some tangible areas where you can see some improvement if you're able to implement something there?

Well, there's no question that there are already tangible areas emerging. I mean people already know about call center, they know about legal, they know about risk, they know about private wealth. I think for me, part of it is how we structure ourselves to make sure that we capture new ideas, business ideas. And what I mean by that is, the AI part -- portion of it is technology, but the question is what business issue are you trying to solve for? So we put together an AI council, we're going to require every single executive to explain what their 2 or 3 top priorities are using AI, which is forcing a continual view of what that might mean for the company. And I think starting from a position of solving for a business problem as opposed to executing on technology is the way that we'll have some success. I've done this in the past on digital, where people wanted digital right now. And then the question was, wait a second, what are you trying to solve for? And so once we identified the business issue, then we could plug in the technology with process and it worked. I feel somewhat there's an overlapping similarity with AI. So I'm pretty excited about that. We're also requiring all of our executives to go through training. I've got a 2-hour session next week, and I'm sure I'll be the slowest learner in that category. But the reality is, if I'm not willing to do that, if our leadership team is not willing to do that, they're not even going to understand how to ask the right question. And so AI is real, it's powerful. Our CIO would tell you that he'll look for co-development opportunities. He'll tell me that he wants to make sure that we have a lab that we can test in. And I agree with both those things, but only if we know what business problem we're trying to solve for. So we've already executed on the legal side and the document side, and that's been a big positive. We've already executed in our call center, and that's been very helpful. I would say we've worked on governance, which I think everyone will struggle with, in the legitimized world, not the criminals, I think they'll be much quicker on the non-governed attacks that we've seen. But that will be important to try to -- how do you control generative AI by its very nature. So I'm very interested. I don't think we're behind the curve. And I think that you have to structure your company in a way that allows you to take advantage of what's to come.

Should we think of that as a Phase 3 of the strategic plan or how should we think about it in the days to come?

I don't know if that's a wisecrack about the nomenclature of our strategies being Phase 1 and 2. But we've saved money by not bringing in an outside group to name these strategies, but we'll have a Phase 3. We're now probably shamed into calling it something more dramatic, 3-plus. But yes, it could be Phase 3.

Great. Well, thank you very much for the time. It was great to hear from you as always. Thanks, everybody, for joining us again this year and looking forward to next year.

All right. Thank you.

Thanks.