ASSOCIATED BANC-CORP(ASBA)Q3 2025 法說會逐字稿

Good afternoon, everyone, and welcome to Associated Banc-Corp's Third Quarter 2025 Earnings Conference Call. My name is Diego, and I will be your operator today. 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 the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please refer to Pages 24 through 26 of the slide presentation and to Pages 10 and 11 of the press release financial tables. Following today's presentation, instructions will be given for the question-and-answer session. At this time, I would like to turn the conference over to Andy Harmening, President and CEO, for opening remarks. Please go ahead, sir.

Well, good afternoon, everyone, and thank you for joining us for our third-quarter earnings call. This is Andy Harmening. I am joined once again by our Chief Financial Officer, Derek Meyer; and our Chief Credit Officer, Pat Ahern. I'll start with some highlights of the quarter. Derek will cover the income statement and capital trends, and Pat will provide an update on credit quality. Over the course of 2025, we've been squarely focused on execution and delivering on the strategic growth investments we've made across our company. Nine months into the year, we continue to see several trends that are both leading to strong current results and positioning us for future performance. We're proving that we can grow and deepen our customer base organically. We've posted net household growth each quarter so far in '25 and are on pace to deliver our strongest year for organic checking household growth since we began tracking a decade ago. We're also proving that we can grow and remix our balance sheet simultaneously. On the asset side, we've added nearly $1 billion in high-quality C&I loans year-to-date while working down our mix of low-yielding, low-relationship value residential mortgages. On the liability side, we added over $600 million in core deposits in the third quarter, enabling us to work down our wholesale funding mix. As this mix shift continues, it enables us to drive stronger profitability after delivering quarterly net interest income of $300 million in the second quarter, a record for our company. We posted another record of $305 million in Q3. With this enhanced profitability comes enhanced capital generation. We added another 13 basis points of CET1 capital in Q3 and have now added 30 basis points year-to-date. This capital generation enables us to support our growth while continuing to execute on our organic strategy. Now I'll remind you, just because we're growing assets doesn't mean we're stretching. Credit discipline remains foundational to our strategy, and our growth is focused on high-quality commercial relationships and prime/super-prime consumer borrowers, which is consistent with our conservative credit culture built over the last 1.5 decades. We continue to manage our existing portfolios proactively and meet with our customers regularly to stay on top of emerging risks. As we look at the remainder of 2025 and '26, Associated Bank has strong momentum that continues to build. While we continue to monitor risks tied to the macro uncertainty, our growth strategy puts us in a position to grow and deepen our customer base, take market share, remix our balance sheet, and improve our return profile without having to rely strictly on a hot economy or a perfect rate environment. With that, I'd like to walk through some additional financial highlights on Slide 2. In Q3, we reported earnings of $0.73 per share. Total loans grew by another 1% versus the prior quarter and 3% versus Q3 of '24. Adjusting for the loan sale we completed in January, we've grown loans by 5.5% over that same time period. C&I lending has continued to lead the way as we deepen relationships across our markets and see noncompete agreements from our new RMs expire. We grew nearly $300 million of C&I loans and we've now grown C&I loans by nearly $1 billion year-to-date. Shifting to the other side of the balance sheet, seasonal deposit positive inflows came back as expected during the quarter, with our core customer deposits up 2% or $628 million from Q2. With that said, we're seeing more than just seasonal strength; core customer deposits were also up over 4% or $1.2 billion relative to the same period a year ago. Moving to the income statement. Our Q3 net interest income of $305 million set a new record as the strongest quarterly NII we've seen in our company's history. Our NII was up 16% relative to Q3 of 2024. We also saw strong quarterly noninterest income of $81 million in Q3, a 21% increase from the prior quarter. The increase was driven primarily by capital markets revenue, wealth fees, and a one-time asset gain of approximately $4 million tied to deferred compensation plans. Total noninterest expense was $216 million in Q3, up $7 million from the prior quarter. The quarterly increase was primarily driven by performance-based incentive programs; delivering positive operating leverage continues to help us post strong quarterly operating results and is a primary objective as we execute our plan. Managing credit risk is also a top priority, and we remain pleased with asset quality trends. In Q3, delinquencies were flat and nonaccruals were just 34 basis points of total loans. Net charge-offs were also flat at 17 basis points and our ACLL decreased 1 basis point to 1.34%. And finally, we posted a return on average tangible common equity of over 14% in Q3, a 250 basis point improvement from Q3 of last year. On Slide 3, we provide a reminder of how our strategic investments are transforming our return profile and setting us up for additional momentum over the remainder of this year and into 2026. First, we're positioned to take market share in commercial lending and deposit acquisition, thanks to a strategy predicated on hiring talented RMs in metro markets where we're underpenetrated. We've already seen results from our efforts. Through the first 9 months of the year, we've added nearly $1 billion in C&I loans to our balance sheet with pipelines remaining strong, and several more noncompete agreements set to roll up between now and the first quarter of next year. We expect our momentum to carry through 2026. As those relationship C&I balances come onto the books, they're replacing lower-yielding, nonrelationship resi mortgage balances that are rolling off, positioning us to diversify our asset base more profitably without changing our conservative approach to credit. This mix shift is driving enhanced profitability. Over the past 2 quarters, we saw our margin climb above 3% and posted back-to-back quarters of record NII. As we continue to grow and remix our asset base and support it with low-cost core deposits, we see additional opportunity ahead. On Slide 4, we highlight our loan trends through Q3. On both an average and period-end basis, quarterly loans grew by 1% versus Q2. That growth was once again led by the C&I category. On a spot basis, C&I loans grew by 3% or nearly $300 million versus the prior quarter. After adding nearly $1 billion in C&I balances to our balance sheet year-to-date, we feel very well positioned to meet or exceed the $1.2 billion growth target we originally set for ourselves in 2025, thanks to the strength of our pipelines and the additional lift from newly hired RMs as our noncompetes expire. Auto balances also grew by $72 million in the third quarter as we've continued to selectively add prime and super-prime balances to our book. Total CRE balances grew slightly for the quarter but decreased by $160 million on a quarterly-average basis. We expect elevated CRE payoff activity in the coming quarters as rates continue to fall. Overall, we continue to expect total bank loan growth of 5% to 6% for the year. Shifting to Slide 5. Total deposits and core customer deposits both bounced back as expected in Q3 following Q2 seasonality. Core customer deposits increased by over $600 million point-to-point with gross spread across most key categories. Relative to the same period a year ago, core customer deposits were up 4% or $1.2 billion. And growth in our core deposit book has enabled us to work down our wholesale funding balances. Here in Q3, overall wholesale funding sources decreased by 2% versus Q2. Based on our latest forecast, we now expect core customer deposit growth to come in towards the lower end of our 4% to 5% growth range for the year, but we remain confident in our ability to grow granular low-cost core customer deposits over time for 2 key reasons. First, our consumer value proposition stacks up well against any bank or fintech in the industry, and we have additional product upgrades planned for late Q4 of '25 and into 2026. This gives us an engine to attract deep and retain checking households over time, and it's already driving results. After posting the strongest organic primary checking household growth numbers we've seen since we began tracking a decade ago back in Q2, we followed that up with another quarter of solid growth in Q3. Second, we've refined our focus on commercial deposits by moving to a balanced scorecard, hiring relationship-focused RMs, launching a new deposit vertical, and most recently, hiring Eric Lien as our new Director of Treasury Management. With pipelines growing and several noncompete agreements set to expire in the coming months, we feel very well positioned for growth in 2026. We continue to expect that our efforts to drive growth in lower-cost core customer deposit categories will enable us to further decrease our reliance on wholesale funding sources over time. And with that, I'll pass it to Derek to discuss the income statement and capital trends.

Thanks, Andy. I'll start on Slide 6 with our yield trends. In the third quarter, total earning asset yields remained flat at a 5.5% and interest-bearing deposit costs also held flat at 2.78%, while total interest-bearing liabilities ticked up 1 basis point to 3.03%. Within our major asset categories, slight decreases in commercial, CRE, and auto yields were offset by slight increases in mortgage and investment yields. While total interest-bearing deposit costs were flat compared to Q2, they were down 55 basis points from Q3 of 2024. Moving to Slide 7. Third quarter net interest income of $305 million was up $5 million versus the prior quarter and $42 million versus Q3 of 2024. In Q3, net interest margin held firmly above 3% at 3.04%, which was flat compared to Q2 but 26 basis points higher relative to Q3 of 2024. Based on our latest expectations for balance sheet growth and mix, deposit betas, and Fed action, we continue to expect to drive net interest income growth of between 14% and 15% in 2025. This forecast assumes 2 additional Fed rate cuts in 2025. Given the potential for additional rates, we've provided a reminder of the steps we've taken to dampen our asset sensitivity on Slide 8. Over time, we put ourselves in a more neutral position to minimize interest rate risk. We've maintained repricing flexibility by keeping our funding obligations short; we've protected our variable rate loan portfolio by maintaining received fixed swap balances of approximately $2.45 billion, and we built a $3 billion fixed rate auto book with low prepayment risk. While we're still modestly asset sensitive, a down 100 basis point scenario now represents just a 0.5% impact to our NII as of Q3. We expect to maintain this relatively neutral position going forward. Moving to Slide 9. Total securities increased to $9.1 billion in Q3 as we've continued to modestly build our AFS book. Our securities plus cash to total assets ratio climbed to 23.4% for the quarter. We continue to target a range of 22% to 24% for this ratio. On Slide 10, we highlight our noninterest income trends for the quarter. In Q3, total noninterest income of $81 million was up 21% relative to both the prior quarter and the same period last year. The increase in Q3 was primarily driven by strength in capital markets and wealth fees, with an additional boost from nonrecurring asset gains. In the capital market space, in particular, the increase was due to an elevated level of activity in our syndications and swaps businesses. The asset gain booked during the quarter was approximately $4 million for deferred compensation valuation adjustment. Given the strong quarter, we now expect total 2025 noninterest income to grow by 5% to 6% relative to 2024, after excluding the nonrecurring items that impacted our fourth quarter 2024 and first quarter 2025 results from the balance sheet repositioning we announced last December. Moving to Slide 11. Third quarter expenses of $216 million were up $7 million versus Q2, with much of the increase attributed to performance. The increase came in personnel where we booked $4 million of additional expense for the same deferred compensation valuation adjustment that was recognized as a gain in our noninterest income. Another large component was a $4 million increase in variable compensation expense, the result of strong execution against our strategic plan. During Q3, the personnel bucket was also impacted by approximately $1 million of incremental healthcare costs relative to Q2. Outside of personnel expense, we also saw quarterly increases in technology, business development, and advertising expenses, offset by decreases in legal and professional fees, loan and foreclosure costs, and other noninterest expense. As we've stated previously, we continue to invest to support growth, but driving positive operating leverage remains a top priority. Here in Q3, our efficiency ratio decreased for the third consecutive quarter coming in below 55%. Based on our latest forecast, we now expect total noninterest expense growth of between 5% and 6% in 2025 off our adjusted 2024 base.

Thanks, Derek. I'll start with an allowance update on Slide 13. Our CECL forward-looking assumptions utilized the Moody's August 2025 baseline forecast. This forecast remains consistent with a resilient economy despite the higher interest rate environment. It contains no additional rate hikes, slower but positive GDP growth rates, a cooling labor market, continued elevated levels of inflation, and continued monitoring of ongoing market developments and tariff negotiations. In Q3, our ACLL increased by $3 million to $415 million. This increase was primarily driven by an increase in commercial and business lending, which largely stemmed from a combination of loan growth plus normal movement within risk rating categories. Our ACL ratio decreased to 1.34%, down 1 basis point from the prior quarter. On Slide 14, we continue to review our portfolios closely given ongoing uncertainty in the macro picture, but we maintain a high degree of confidence in our loan portfolios and continue to see solid performance in Q3. Total delinquencies were flat at $52 million in Q3. These delinquency trends are largely in line with the benign trends we've seen for the past several quarters. Total criticized loans ticked higher in Q3 with an increase in substandard accruing, partially offset by decreases in the special mention and nonaccrual categories. With the current industry guidance, as a reminder, we do not feel that recent trends in this category are an indication of a material shift in the credit profile of the portfolio, nor has there been a corresponding risk of loss. In fact, we continue to see resolution with some of our more stressed credits and liquidity remains present in the market in terms of both payoffs and loan re-margin. Nonaccrual balances decreased to $106 million in Q3, which is down $7 million versus Q2 and down $22 million from Q3 of 2024. Finally, we booked $13 million in net charge-offs during the quarter and $16 million in provision. Our net charge-off ratio held flat at 0.17%. All 3 of these numbers remain squarely in line with the figures we've seen over the past several quarters. In response specifically to tariffs and ongoing trade policy negotiations, we remain in contact with clients as the trade policy discussion continues. I would note that clients have been planning for tariff changes for some time, and we feel comfortable with the positioning of their strategies and the ability to execute when more clarity exists. Going forward, we remain diligent in monitoring other credit stresses in the macro economy to ensure current underwriting reflects the impact of ongoing inflation pressures and shifting labor markets, to name just a few economic concerns. In addition, we continue to maintain specific attention to the effects of elevated interest rates on the portfolio, including ongoing interest rate sensitivity analysis bank-wide. We expect any future provision adjustments will continue to reflect changes to risk rates, economic conditions, loan volumes, and other indications of credit quality. And finally, given the recent industry news surrounding nondepository financial institutions or NBFIs, I'd like to provide a brief update on where we stand. NBFI balances represent a minimal part of the bank's total loans, largely comprised of REITs, mortgage warehouse lines, and insurance company lending. These facilities have historically performed very well with relationships that average over 10 years with the bank. With that, I will now pass it back to Andy for closing remarks.

Thanks, Pat. In summary, we're really pleased with the results, both in the third quarter and year-to-date over the first 9 months. We feel very well positioned based on the actions we've taken and believe that the enhanced strength and profitability profile, solid capital position, and disciplined approach to growth will serve us well going forward. With that, we'll open it up for questions.

And our first question comes from Timur Braziler with Wells Fargo.

C&I growth has been and remains pretty impressive here. I guess I'm just wondering what happens when the remaining RMs come off of their noncompete? To what extent should we expect that growth rate to accelerate? Is the expectation that growth rate accelerates from the area as they come online?

Yes. Well, good question. Look, we still have quite a bit of lag, we think, left in this. There are a couple of things that I look at, specific to this initiative I look at what is our production this year? Well, that production is up 12%. What does our pipeline look like? Our pipeline is up 31%. That's on the loan side. So as we head into the end of the year and you start to see some of the nonsolicitations and about half of them are already off. So we're getting up to that point where production, we would expect it to go up just a little bit next year. You may have a little more amortization because your portfolio has grown. What we believe though is we're set for a strong C&I growth above the market in 2026, probably as exciting and something we don't talk about. We thought there would be a lag effect to deposit production on commercial, and it's panning out the way that we thought we're adding some very good new names on the deposit side. But when we pull up our deposit production right now, our deposit production is up 23%. Now that's not seasoned, and we'll roll that into our seasonality and be able to forecast very clearly. But it's a very good omen because the pipeline itself is also up 46%. And I've been asking continually each quarter to our Head of Commercial Banking. When will we see that production start to catch up with the pipeline? And the answer is right now.

That's good color. And then looking at fees this quarter, obviously very impressive. The guide does imply a pretty large step down in Q4. Can you just maybe talk through some of the success you saw in Q3 and what the expectation is for decline in the coming quarter?

Yes. I mean, the fee income in some categories can be a little lumpy. We did have a one-time benefit through a portfolio asset gain, so that's not likely as repeatable at that level. However, when I look towards 2026 versus the fourth quarter, so it was a little bit higher in the fourth quarter but some of the underlying benefit that we're getting in capital markets, commercial production is up. Rates are trending down and likely to continue. That makes fixed rate conversion more attractive. Pipelines are up. With fixed rate likely to be more popular in 2026 and production trending up, we think that bodes pretty well for the forward view. The linked quarter-over-quarter is not likely to be quite as high for the reasons that I mentioned in Q4.

Okay. And then just last for me. ROTCE, 14% this quarter continues to grind higher, 15% seems to be in striking distance. I guess how are you thinking about further improvement here in these next couple of quarters with rate cuts? Is there an ability here to continue grinding that higher? Or does that trend maybe take a step back a little bit as you digest these hikes or these cuts?

Yes. Thanks, Tim. Yes. I think the opportunity is there. I think, again, I was just going to come back to the market's response to rates vis-a-vis deposits because obviously, the big — we had a nice uptick in fees we expect the hiring to help that continue, but it will still be choppy. So I see the opportunity on the margin side in the long run still being the bigger lever. Based on what we saw the first couple of weeks after the rate cut in September and the response to how we rolled out our deposit back book rate cuts and what we're seeing in the market response, the outlook is pretty good. So I think we have the ability to continue to grind that higher. I think it's going to bounce around quarter to quarter while we do that. But it feels like everything is on track.

Maybe just to follow up on the deposit side. You talked about the momentum you have there, certainly evident in the numbers. We did see deposit costs overall up a bit in the third quarter. Is there a read-through there on an increase in competition? Or something unusual? I'm just curious what you saw in the third quarter that drove those costs modestly higher?

Yes. I don't think there's a lot to read you there. Part of our benefit, I know you remember the first part of the year and then the last year, we have seasonality that's in addition to account acquisition that affects the rates. What happens this quarter is some of that seasonality is in accounts that are at the higher end of pricing. So as those things came back in, they came in at the higher rates relative to the back book and put a little bit of pressure on the overall yields. But I don't think we're uncomfortable with what we netted out altogether. Again, why my early canary in the coal mine read on deposit pricing is what happened when we went and looked at the $11 billion, $12 billion of managed rates we had to reprice right when the Fed cut and where were we able to execute on it and what was the response from the customers, and that went very well.

Great. That's helpful color. Appreciate it. And then maybe for you, Andy, on the hires. You talked a lot about the solicitation agreements that those folks will be coming off. They are coming off and more coming. Just curious in terms of additional incremental hires, the pace around that timing if there's the time of the year when that tends to happen.

Yes, I feel like we're open for quality relationship managers year-round. We've shared with our Head of the Commercial Bank that if there is a team that is well known in a market, that has a following that is interested in joining us, we'll consider that any quarter of the year. We don't have a stated plan to increase off of what we have because we know that what we have will lead to pretty solid growth next year. But we'll be opportunistic in a market where we see disruption and dislocation. When you see the M&A activity in the world, that usually leads to opportunity for those banks that have a good reputation in the space. I'll say, as you start to track talent as you start to do deals, you get a reputation that's positive. What I would say to that, Daniel, is we will be opportunistic; we won't have a stated number of new RMs, but should that opportunity arise, and I suspect it will during the year, we'll take advantage of that.

Let's see. So Andy, I just wanted to follow up a little on the loan growth discussion. I mean like the C&I really speaks for itself. Maybe just a thought or 2 on where we stand with some of those areas that have been more of headwinds on total growth, like residential real estate rundown, the CRE payoffs. I know you mentioned those in particular will likely stay elevated in coming periods. But any reason that either of those or are there any recent headwinds would either accelerate or decelerate in coming periods? Just trying to get a sense for the likely interplay between the momentum in C&I and the things that have held back even stronger net growth.

Yes. No, that's a great question. You characterized resi as a headwind. It's a headwind in terms of balances. It's a benefit in terms of having that run off and what that leads to, and it's purposeful, as you know. Certainly, if rates go down, they'd have to go down pretty significantly, say, 1% to 2% because of the position that those are in today to have a meaningful adjustment. But we plan for the decrease that we're seeing. So that's within the plan. The part that is maybe — I'm not sure what adjective, a little bit less predictable but expected is CRE. So on the CRE front, as rates go down, there'll be a little bit of pent-up demand for pay downs, not just with us but across the industry. We're expecting that. So does that happen in 90 days? Does it happen in 120 days? Does it happen over 180 days? It's hard to say. So it could have a short-term impact. However, we've already gone back out to market. The production on the commercial real estate side has increased versus the prior year. So we're up, for instance, about $100 million above the prior year in construction lending. Those are loans that will help offset some of that in 2026. You could see a short-term impact if a couple of rate drops and there's an opportunity for some of our customers to refinance in the permanent market. That would be a short-term thing. It doesn't worry me through 2026 because I think we've positioned ourselves with additional lending to make up for that. Probably on the CRE side, that's one where you might see it a little more quickly if rates become advantageous.

Got you. Okay. Perfect. And then separately, just sort of following up on that last question about sort of team and RM lists and stuff like that. I think during the third quarter, you made some comments about perhaps entering some new markets, I think in particular, you sort of talked about like Oklahoma, Kansas City, and Denver. I know you already — or I believe you already did the team lift in Kansas City. But when you think about adding to the footprint, are you thinking still the bias is strongly organic? Or would M&A become a possibility at some point?

Well, I mean, the bias is strongly organic. We feel like we have proved it out year, and we're 3 quarters into proving it out. We feel like we're stacking up quarters. So we're really pleased with that. But we want to do that through the fourth quarter. So that remains number one. What I would say is I've been here 4.5 years. I'm in year 5. The focus has been the same. It's been execution and opportunity. When we see things — and it has to be within our wheelhouse. It has to fit what we understand and what we know and what we can execute on. That won't change. Does that mean it's organic or inorganic? I would leave it with we continue to evaluate opportunities in a way that's very similar to everything we've done over the last 5 years.

Andy, a question for you on the pipelines. When you talk about the lending pipeline increases, is that from new hires and market share gains? Or is it borrowers expanding and becoming more optimistic? Can you just kind of separate the two?

Yes. I don't think it's from the latter. I believe the economy has been experiencing some news fluctuations and forecasts suggesting a slightly slower GDP. What we've mentioned is that whether GDP is at 1.5%, 2%, or 2.5%, we are confident in our ability to grow. This largely stems from the approach taken by the talented individuals we have added to our team. They are top performers who could find positions at any bank across the country. Bringing in this level of talent has been crucial. Additionally, we have provided them with the tools necessary to facilitate their work. However, the majority of our success is attributed to the pipeline, and I am very pleased to see production increasing now. To me, this is the outcome we have been looking for. We have observed gradual improvement each quarter, but overall, it's primarily about the people.

Yes. I think the opportunity is there. I think, again, I was just going to come back to the market's response to rates vis-a-vis deposits because obviously, the big, we had a nice uptick in fees we expect the hiring to help that continue, but it will still be choppy. So I see the opportunity on the margin side in the long run still being the bigger lever. Based on what we saw the first couple of weeks after the rate cut in September and the response to how we rolled out our deposit back book rate cuts and what we're seeing in the market response, the outlook is pretty good. So I think we have the ability to continue to grind that higher. I think it's going to bounce around quarter-to-quarter while we do that. But it feels like everything is on track.

Well, look, we leave here pleased with the third quarter. We expect to land the plane in the fourth quarter and are optimistic about the fundamentals going into 2026. As always, we appreciate your interest in Associated Bank.

Thank you. And with that, we conclude today's call. All parties may disconnect. Have a good day.