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

All right. Good morning. Thanks for showing up early this morning, and we're excited to start off our second day of the conference. This morning, we're starting with Associated Banc-Corp and Andy Harmening, President and CEO, coming in from Wisconsin to join us. So thanks.

Yes. Thank you, Jared. So this was the first conference we ever did 5 years ago when I started, and it was during COVID, and it was remote, and we launched our first strat plan. And the world has changed since then. Our bank has changed since then. And so we're wrapping up 2026. And from a consumer standpoint, what's happened for us as a different bank is we've gone from shrinking customer base to growing kind of minus 2% to plus 2%, expanded product set, spent a lot of time and energy on digital segmentation, some specialty businesses on the consumer side. And then the commercial side, we've grown roughly $6 billion on a $7-plus billion portfolio in those 5 years, including $1.2 billion in C&I growth in the first half of this year and $1.2 billion last year. So we've made a lot of progress. But right now, how I'm thinking about the company is really 3 ways. One, we have to continue with organic growth, and we did in the first half of the year, whether that be customer growth, deposit growth, C&I growth. So we're in a pretty good position there. We have the American National Bank integration that's right in front of us. Pleased with where we are to date, finding the marks are coming right in where we expected. The cost saves are a little bit ahead of schedule, and we've gotten through mock 2 conversion. So the final conversion should occur here in the next 3 weeks. So excited about getting that. And then we'll roll out a new strat plan at the beginning of the year, which we're a couple of passes into. And we think that we'll be able to continue to expand margin, expand ROTCE, and we think we'll be able to grow additionally on the household growth that we've had so far. So that's our story. We're sticking with it.

Great. Well, thanks for that overview. As you mentioned, it's now been several months since the American National acquisition closed. As you moved from diligence into actual operating the business, what's gotten better than expected? And what's been more challenging? And I guess, what would you have learned about the organization that you really didn't know before?

Well, you think you know what it is. And every time there's a deal, people say the cultures align. And what's really nice is when they do. And so what we've found is we've done surveys of our colleagues and their colleagues side by side. And using the 3 words to describe the companies, both sides use the same 3 words in the survey. And then you get in and you meet with folks and the attention to detail with customer satisfaction, the attention to detail on credit. They're what we had hoped for when we're looking at it. But then we had held open some positions in some key areas and kind of done, hey, the best athlete wins. And we have been able to fill a lot of positions with American National colleagues, particularly in the risk group. Of course, we have people in the field finance. And so we've actually gotten better from a colleague standpoint. So that's been really encouraging to me. And I think what you learned going through integration is it's a lot of work. And so I'm really pleased with the Associated colleagues on our side, being able to continue to grow the bank, grow our funding base, grow the loan side of it, while we get through the integration. So that's what we've seen so far. And frankly, we're chomping at the bit to get this integrated and move forward.

Along those lines, when you announced the transaction, the goal wasn't just to get larger. It was really to create a stronger platform for growth. As you sit here today, what areas of the business excite you the most now that you've had time to operate as a combined company?

Yes. If you think about the fact that we've gone from negative 2% household growth to positive 2%, that is starting to create a tailwind really for the first time for our company. And then we think about Omaha, where they have 20 branches, and we're going to be able to layer in our marketing acquisition tools, our consumer product set, which is quite strong on the deposit side. And now we're talking about as a company, how we go from 2% growth to 3% growth. So that's a hard jump. But we think Omaha is the fastest-growing major metropolitan market in our footprint. And then you pair on top of that, the Twin Cities, that's the second fastest growing, and we're getting branch networks in both of those. In Omaha, on the commercial side, the commercial team is strong. With American National, the leadership is very good, but we have capital markets syndications capabilities that they just didn't have. And we have a little bit bigger balance sheet. And so when we look at consumer and commercial, there's opportunity on both sides. And then we run a pretty decent-sized private wealth business. They don't have that offering today. So we'll launch a private wealth offering in Omaha right after systems conversion.

Great. Maybe looking at on the commercial side, at the beginning of the year, you targeted 9% to 10% organic C&I growth and really effectively reached that goal by midyear. What's driving the momentum you're seeing today? And why do you think it can continue?

Yes. The simple answer to that is we've had a lot of hires on the commercial side. We've had a lot of hires on the relationship manager side. But we've also moved into some major metropolitan markets. And the question for us is we're headquartered in Green Bay. We're growing nicely in Milwaukee. Can we grow in Chicago, Twin Cities, Kansas City, now Dallas? And the answer is yes. If you get the right people, you get experienced bankers that have been in the market for a long time, you have a process that makes sense, you can grow. And then we've launched a franchise vertical. We've expanded into Dallas and already are booking deals. We continue to benefit from asset-based lending, equipment finance. So we've launched multiple verticals at the same time, and we've gotten the right people in the right chairs. And so we think it's a formula that works. And what's kind of interesting, if you think about the go forward is Kansas City, for example, when we rolled out the new team there, the question mark, can you hire a team of experienced bankers and grow in a responsible way. When we did that, another team immediately came available and we doubled the size of that team and kept going. So that model worked. We've carried that model to Dallas and hired our first relationship managers and leaders there, and they're already putting deals on the books.

When you look at those new initiatives, whether it's the geographic expansion you talked about, treasury management is another, where do you think you've seen the strongest returns? And where would you be willing to invest more capital at this point?

Yes. A little bit of a rinse and repeat, but -- excuse me. So we'll be able to continue to add on the relationship manager front. That has worked for us. But when I look at treasury management, that's a really exciting one because we're up significant double digits in treasury management sales. And what goes with treasury management sales is primacy. And when you get primacy, you get deposits. And when you get deposits and you get treasury management, you typically get the low-cost deposits. And that's happening for us at a pretty good rate right now. But if I look out over the next 3 years at our opportunity to layer on top of the 50 RMs that we've added, treasury management capabilities that can compete with any regional bank or even super regional. If you layer on those capabilities, you see a runway on the funding side. I see a runway on the funding side for us that will be significant over 12, 24, 36 months.

On the competition side, competition remains intense across both loans and deposits. How would you characterize the current competitive environment? And where do you think Associated has become more differentiated than it was a few years ago?

Yes. Well, when you're shrinking your customer base for an extended period of time, not good. And so when you want to grow it, you go out and you build products by listening to the customer and you basically -- you create attributes that they care about. So whether they're getting a paycheck early or they're able to see the credit monitoring easily in the customer experience, I would say for banks our size, we're pretty developed on the product capability. We're developed on the digital capability, but we just hired a new Head of Digital that a very short period in, I was with her last week and her ideas on what we can do to improve the digital ecosystem married with the product is really impressive. So when you look at competition, the question is, what are you offering? How are you offering? What's the ease of use? What are the characteristics of the product set that makes somebody buy? And then do you have new ideas. And so our point in our team is always to be challenging kind of what your status quo is and making sure you have new attributes because what worked last year will work a little bit less than next year and the next year. And so literally just reviewed 7 new capabilities that we think will launch over the course of 2027 that will continue to keep us ahead of the game. And when we get that done with that, we'll come up with 7 more. And so when you're thinking about the household game and the industry is at a net zero and you start to get to 2 and you want to get to 3, that is the door to your funding capabilities. And then when you create segment management, you're able to deepen. And so for us, yes, the competition is real. You have to -- it's not a set it and forget it, it's constant. But that's on the consumer side. The commercial side, we're opening our HOA title business. We didn't put a deal on the books in the first year because we had to build out our digital capabilities. Well, now we have. And lo and behold, right when we launched the digital capabilities, we had our first large couple of customers. The upside there is significant for us because they know the industry. And so we look at treasury management capabilities spread across. So all of these pieces for us on the competition side, a lot on the funding has been built over an extended period of time. And then the commercial side of it is really making sure that you have a good process and making sure that you have folks that are local that know the markets.

Along those lines, as you speak with commercial customers today, what are you hearing regarding business confidence, investment plans and hiring intentions? Is the uncertainty around rates, tariffs and policy causing businesses to become more cautious? Or are they looking to invest?

Both. It's interesting. I do a CEO roundtable probably every single month in a different city, then Chicago roughly 3 weeks ago. And it's incredible what you learn from the CEOs about what's happening with trade, what the impact on cost is. And for all the reasons you listed, there is a feeling of caution in the marketplace. And there's a feeling of confidence within their own business. So it's a bit of a bifurcated situation. We've seen that over the last couple of years as people hear about global tensions, they see what's happening in the economy, they'll pause for a moment, and they'll look around and say, wait a second, everything seems okay. I think the economy, generally speaking, is pretty solid. And then they get back in the game. And so you'll see a lull in growth and an increase. And what's interesting that I see right now is the confidence in their own company and our commercial pipelines are up from August to August, over 30%. However, the pull-through has slowed for a period of time while people are looking at what's happening, kind of, in the greater world and the country.

Maybe shifting to the deposit side. A few years ago, investors primarily viewed Associated through the lens of funding constraints. Today, the conversation seems much different. How would you describe the evolution of the deposit franchise and why you believe the growth you're seeing now is sustainable?

Yes. Several reasons that I'd mentioned. So on the core customer funding, we kind of did an end of June to end of June comparison for the last 3 years, and it was 2% growth and 4% growth and 6% growth. And it's not because the markets got easier and got hotter, it's because we got better. And that is both on the consumer side and that is on the commercial side. And so if you start to grow your customer base, the next logical question is, are they bringing deposits to you? And so are you growing low balance accounts or are you deepening those? And if you can do both those things, you can end up in a pretty good place. And so that is segment management. So you bring them in through acquisition marketing, product set and then you deepen them through what your capabilities are and kind of the more you have, the more we get. So the quality of our account has gone up. At the same time, we've grown the customer base faster. So that makes it pretty durable. And that's kind of going from mass market to mass affluent. And the next step in that evolution will be private wealth for us. And so that's why I like the trend we're on, but there is still opportunity. And you'll hear about that more from us in 2027 and 2028 as we build our plan, it's just a funnel that goes up on that side. On the commercial side, that, again, we have the HOA title vertical, which will be helpful to us. But the productivity from the relationship managers and our level of penetration is going up, our level of being the prime bank on deals has gone up. TM sales has gone up and our product is going to get better. And so when you see that trend, that's pretty encouraging. So it ends up being 3 things. You get the consumer going, bringing customers deepen, you get the commercial going with treasury management and primacy and then they meet at private wealth. And so we wanted to get 1 and 2 right. And now we'll start investing in the experience more heavily on the private wealth side.

As the bank grows, how would you like investors to think about the future deposit mix? Is the larger opportunity just gathering more deposits overall, improving the mix, increasing the operating accounts that you talked about? Or all of the above?

That's an all of the above. When I first got to the bank, they said, well, what do you want? Do you want to grow accounts? Or do you want to grow deposits? And the answer is yes. And that's how I would feel about all those things. If you want to be a survivor bank, you cannot be a one-trick pony. And that to me the secret is there are a lot of pieces that go into success right now. And you have to have it across all of your lines of business. There has to be participation on the product, the digital, the customer experience, the workflow, the outbound marketing, the communication and the coordination and collaboration between the teams. And when I think about all of those pieces, the question that I've had coming into this role is, can you be great individually within these groups and then actually have a team that cares about working with each other. And as you get some wins, people seem to be more willing to collaborate. So yes, I would say all of the above.

I guess one of the biggest surprises in the second quarter was the strength of the margin outlook. Despite the runoff of some purchase accounting benefits, you still expect margin expansion in both the third and fourth quarters. What gives you confidence in that trajectory?

Yes. I think back to kind of the low point as I was coming in when we had like a 2.39% margin, and now we're heading towards the 3.20s percent. And the first answer is yes. I do expect margin expansion even in the face of the accretion impact that we'll see. And again, it is a number of fronts, but on a very basic level, we continue to run off low-yielding resi, and that has been a strategy. Our correspondent banking, we eliminated that, but it had a little tail on it. We've gone from at our peak, 36% of our balance sheet was residential real estate. Today, it's 18%. So the balance sheet mix is real. We'll continue to have that -- we'll do residential loans, but the portfolio will be a runoff portfolio for a period of time, and we'll put on higher-margin commercial business that's supported by deposits. And so really, you're talking about remixing the loan side of the balance sheet. But now when I look at June to June, you can see our noninterest-bearing deposits rising. That has not been the case for quite some time. And it's in line with your household growth. And so that creates a funding opportunity for you. And deposits can get more competitive. But if you're also getting the noninterest and nominally interest-bearing deposits, which we are, it can offset that from a competitive standpoint. And that's why, relatively speaking, we're in a pretty good position, and it's why we think we'll be able to continue to slowly each quarter, move the margin up a little bit.