Associated Banc Q1 2024 Earnings Report

Associated Banc EPS Results

• Actual EPS: $0.52
• Consensus EPS: $0.49
• Beat/Miss: Beat by +$0.03
• One Year Ago EPS: $0.66

Associated Banc Revenue Results

• Actual Revenue: $322.84 million
• Expected Revenue: $325.00 million
• Beat/Miss: Missed by -$2.16 million
• YoY Revenue Growth: -3.90%

Associated Banc Announcement Details

• Quarter: Q1 2024
• Date: 4/30/2024
• Time: After Market Closes
• Conference Call Date: Thursday, April 25, 2024
• Conference Call Time: 5:00PM ET

Associated Banc (NYSE:ASB), through its primary subsidiary Associated Bank, N.A., is a regional financial services company headquartered in Green Bay, Wisconsin. The bank operates more than 200 branches across the Midwest, offering community-focused banking solutions for individuals, small businesses and commercial clients. Its emphasis on personalized service and regional decision-making supports long-standing customer relationships.

On the consumer side, Associated Bank provides checking and savings accounts, residential mortgages, home equity lines of credit, auto financing and credit card products. For business clients, the company offers commercial lending, treasury and cash management, equipment financing, foreign exchange and capital markets services. Wealth management, trust administration and insurance products are delivered through dedicated private banking and investment advisory teams.

Established in 1861 as Third National Bank of Green Bay, the institution has grown organically and through select acquisitions to serve Wisconsin, Illinois and Minnesota, with specialized commercial banking operations extending into Arizona and Florida. Over its history, Associated Banc has maintained a focus on supporting local economies, partnering with civic organizations and investing in community development initiatives across its footprint.

The bank’s leadership is headed by President and Chief Executive Officer Loren M. Hansen, who oversees strategic planning, digital innovation and risk management. Hansen is supported by an executive team responsible for finance, operations, technology and client experience. Under their guidance, Associated Banc continues to prioritize regional expertise, customer-driven solutions and sustainable growth.

Associated Banc Q1 2024 Earnings Call Transcript

Key Takeaways

• Core customer deposits grew 2% in Q1 and $1.4 billion since mid-2023, reducing reliance on wholesale funding.
• Period-end loans rose $278 million in Q1, driven by prime super-prime auto and emerging C&I, supporting a balance-sheet remix and higher yields.
• Net interest income increased 2% quarter-over-quarter with a 10 bp margin expansion to 2.79%, and full-year NII growth guidance of 2–4% was reaffirmed.
• Management reaffirmed 2024 targets of 4–6% loan growth, 3–5% deposit growth, and 2–3% non-interest expense growth, assuming three Fed cuts starting in June.
• Although asset quality remains stable, deposit cost pressures have not fully subsided and non-interest income is expected to compress by up to 2% in 2024.

Presentation

[Operator]

Good afternoon, everyone, and welcome to Associated Banc-Corp's Q1 2024 Earnings Conference Call. My name is Paul, and I will be your operator today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session at the end of this conference. Copies of the slides that will be referenced during today's call are available on the company's website at investor.associatedbank.com.

[Operator]

As a reminder, this conference is being recorded. As outlined on slide one, 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.

[Operator]

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 here and by reference.

[Operator]

For reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please refer to pages 24 and 25 of the slide presentation and to pages eight and nine of the press-released 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.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Well, good afternoon, everyone, and welcome to our Q1 Earnings Call. I'm Andy Harmening, and I'm joined this afternoon by our Chief Financial Officer, Derek Meyer, and our Chief Credit Officer, Pat Ahern. I'll kick things off by sharing some highlights from the quarter. From there, Derek will provide a few updates on our margin, our income statement, and capital trends, and Pat will cover an update on the credit.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Now, as we entered 2024, we've had two key themes in mind. First, the resilience of our local markets in the face of macro uncertainty, and then our continuing to drive our strategic plans by acquiring customers, deepening relationships, and enhancing our return profile. While recent economic data has clouded the macro outlook over the remainder of the year, we're encouraged by the resilience we've seen in our Midwestern footprint.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Our unemployment levels in Wisconsin and Minnesota remain at or below 3%. The consumer remains relatively healthy despite rising prices, and our commercial customers continue to explore investments in their businesses while remaining vigilant about the challenges posed by the current environment. Also giving us confidence is our disciplined approach to credit.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

We've anchored ourselves in stable Midwestern markets, and we've developed a diversified CRE portfolio with limited exposure to key pressure points such as rent-controlled multifamily or downtown office properties. Given the pressures from elevated rates, we have continued to see signs of normalization in the portfolio, but it has been on a case-by-case basis. We have yet to see any meaningful negative trends concerning specific asset classes or geographies.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

With that said, our team has remained disciplined, methodically reviewing our portfolios on a regular basis to ensure we're rating appropriately and staying ahead of any issues that may emerge down the road. All of these factors have enabled our company to remain front-footed on executing our strategic plan. Since I joined the company three years ago, we've generated significant momentum. We've bolstered our leadership team with several key hires across the bank.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

We've continued to add talented commercial RMs throughout the footprint, and we have significantly elevated the customer experience for our retail and small business customers by deploying several product upgrades and modernizing our customer-facing digital experiences. These efforts are driving results across the company. Our customer satisfaction scores have continued to improve to historically high levels, and earlier this month, we were recognized by J.D. Power, who named us number one for retail banking satisfaction in the Upper Midwest.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Our colleague engagement scores have also improved as we've advanced our plans. We were recently named a winner of the 2024 Top Workplaces in the USA Award while also winning five Energage Awards for Cultural Excellence. We believe the foundation of a successful company starts with happy customers and happy colleagues, and we can see evidence that we're on the right track.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Importantly, though, our efforts have also translated to results that have direct impact on our bottom line. Here in Q1, we saw positive household growth across the bank after several years of downward trends in organic numbers, and we again delivered broad-based loan growth and core customer deposit growth for the quarter, both of which enable us to remix our balance sheet and improve our return profile over time.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

To build on this organic growth momentum, we're hard at work executing phase II of our strategic plan, originally announced in November. With several key hires, product launches, and other initiatives already completed in the past 180 days, we remain on track with our plans. We expect the full impact of these actions in phase II to be realized in the second half of 2024 and into 2025.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

As we look forward, we're encouraged by the early results from our plan, but we expect to make additional progress as we move throughout the year. While macro question marks remain, we feel well-positioned due to our foundation discipline around credit and expenses, tailwinds from growth initiatives already completed, and incremental momentum from phase II. We're on track towards providing a stronger future for our company and, importantly, our key stakeholder group as well.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

With that, I'd like to walk through some of the financial highlights for the Q1, beginning on slide two. On a diluted GAAP basis, we posted earnings of $0.52 per share here in Q1, demonstrating the underlying strength of our core earnings profile in what has been a challenging operating environment for the industry. We continue to remix both sides of the balance sheet by executing on initiatives that help us lower our funding costs and improve our liquidity position while also improving earning asset yields.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

On the funding side, we're focused on driving core customer deposit growth, and here in Q1, we accomplished that by adding customer deposits for the third consecutive quarter. Specifically, core customer deposits grew by 2% during the Q1. These results were boosted somewhat seasonally, but the growth was also a reflection of the momentum we've generated through our organic growth strategy.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Across the bank, we've now added $1.4 billion of core customer deposits since the midpoint of 2023. This emphasis on core customer funding sources has also enabled us to draw down on our wholesale funding by another 5% during Q1. During the quarter, we also grew period-end loans by $278 million, led by steady growth in our Prime/SuperPrime Auto portfolio and emerging C&I growth.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

We continue to build high-quality balances in these segments to diversify and strengthen our earning asset mix over time, and we're encouraged by these initial results in what is typically a seasonally slow loan growth quarter. Moving to the income statement, improving asset yields were boosted by the full benefit of our Q4 repositioning to drive a 2% increase in net interest income and a 10 basis point increase in our margin for the quarter.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Deposit cost pressures have not yet fully subsided as of Q1, but the pressures continue to abate as the mix shift in our backbook has slowed and the competitive environment has stabilized. Our non-interest income of $65 million was up $3 million from the same period last year, and while we feel confident about the stability of our non-interest income in the short term and about our ability to grow this category down the road, we continue to expect non-interest income to compress slightly in 2024.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

While we continue to invest in people, products, process, and technology, expense discipline remains a foundational focus for our company. Our Q1 non-interest expense of $198 million included another $8 million in FDIC special assessment costs to replenish the deposit insurance fund. We will continue to diligently manage our run rate expense level as we execute our growth strategy throughout the year.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Our conservative credit culture also continues to be a foundational component of our strategy. In Q1, we did see our non-accruals and net charge-offs tick higher, but these trends were balanced by decreases in delinquencies and total criticized loans. Taking a disciplined and consistent approach to reviewing loan risk rating provides a good view of the credit risk in our portfolio by both segment and geography. We will continue to monitor asset quality closely so we can stay ahead of the curve.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Now, we've generated significant momentum as a company over the past three years, and as shown on slide three, the benefits of these efforts are starting to come through in a number of ways. Since announcing our initial strategic plan back in 2021, we've added key talent in leadership positions across the bank. We've grown our commercial RM base.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

We've upgraded the customer experience, implemented a successful Mass Affluent Program, and amplified our brand presence throughout our footprint. In each case, this progress started with listening; listening to our colleagues, listening to our customers, and by delivering what these stakeholder groups have asked for, our efforts are being recognized. We've used customer feedback to steadily improve the bank experience through digital upgrades, product launches, and service enhancements.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

These efforts were recognized earlier this month when we were named number one for retail banking customer satisfaction in the Upper Midwest by J.D. Power. We've also used colleague feedback to enhance collaboration and provide them with the tools they need to do their jobs better. Just this week, we were named winner of the 2024 Top Workplaces USA Award and also won five Culture Excellence Awards. Importantly, though, our efforts aren't just winning awards; they're transforming our financial profile.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Here in Q1, we saw net growth across the board in consumer, business, wealth households reversing a steady trend of net decreases over the past several years. As compared to the same period a year ago, our consumer household acquisition was up 26%. Our consumer household attrition rate was down 9% over the same time. Customer growth with quality accounts will provide a tailwind financially over time.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

We're also seeing our strategy translate to net growth on both sides of the balance sheet in what has been a challenging growth environment for the industry. Here in Q1, we again saw broad-based loan growth and core customer deposit growth. These are just a few examples of how the work that has been done across the company is setting us up to become a stronger company over time.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

As we move to slide 4, we want to share a few more recent examples of how we're building on our momentum. Since announcing phase II of our organic growth strategy back in November, we've stayed on offense, achieving several milestones in our second wave of organic growth. In some cases, these efforts are already having an impact, but we expect to see the full impact ramp up over the course of the year and into 2025.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Now, I've said before, we're not looking to just fill seats at Associated; we're looking to add talent. The success of any strategy hinges on having the right people in the right places, and we've made significant strides in bolstering our senior leadership team with top talent from across the Midwest. We expect that trend to continue when we add Mike Levins to our commercial team in Minnesota next month.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Mike joins us from Wells Fargo, where he spent over 20 years in commercial banking, most recently serving as a division portfolio executive for six states, including Wisconsin and Minnesota. We also need to ensure we have the right folks on the front line to help us drive towards our goals. As such, we're continuing to invest in training for our branch bankers to handle mass affluent relationships. We're continuing to add commercial and small business RMs throughout the footprint.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

And just last week, we enhanced our commercial banking team by adding three senior RMs in Madison, Milwaukee, and Chicago. There is a growing perception in the Midwest that Associated Bank is an employer of choice, and that's both internally and externally. On the right side of the page, we've continued to make progress with various digital product and marketing enhancements designed to support organic growth.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Taken with the enhancements we've already made, these actions bolster our efforts to attract new customers and deepen relationships. As the impact of each of these initiatives ramps up over the course of the year, we expect them to have an increase in impact on our financial results. This gives us confidence that we are on track with our strategic plan, and as such, we continue to expect total loan growth of between 4 and 6%, total core customer deposit growth of between 3 and 5%, and total net interest income growth of between 2 and 4% for 2024.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

So with that, I'd like to highlight a few balance sheet trends for the Q1, beginning on slide five. As mentioned, we added $557 million of core customer deposit growth in Q1, representing a 2% increase from the prior quarter.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

While these results were boosted by seasonality, the growth was broad-based across several subcategories, reflecting stabilization of the mix shift we've experienced over the past year. Over the past three quarters, we've now added $1.4 billion in core customer deposits to our balance sheet. This core growth has enabled us to steadily decrease our reliance on wholesale funding sources, and we brought down our total wholesale funding by another 5% here in Q1.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Deposit flows continue to be lumpy by nature, and the environment remains competitive, but we remain confident in our growth prospects based on incremental boosts we expect to receive from our initiatives over the course of the year. And as such, we continue to expect to drive core customer deposit growth between 3% and 5% for 2024. Moving to slide six, we highlight our loan trends through the Q1.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

On a quarterly average basis, loan balances decreased by $583 million in Q1, which is a direct reflection of the $969 million mortgage loan sale that settled toward the end of December. On a period-end basis, however, loans grew by $278 million in Q1. As expected, the overall loan growth trends were led by steady growth in our Prime/SuperPrime Auto book and the commercial and industrial bucket.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

We've continued to emphasize these areas as a way to help us remix our balance sheet over time to decrease our reliance on low-yielding, low-relationship asset classes, and to enhance our return profile while still maintaining our solid credit standards. Across our broader portfolio, we continue to seek selective growth that emphasizes full banking relationships, quality credit profiles, and diversification to deliver improved returns.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Taking into account the current lending environment and the anticipated impacts of our initiatives, we continue to expect to drive total loan growth of 4%-6% in 2024. With that, I'll pass it to Derek to walk through the income statement and capital trends. Derek.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

Thanks, Andy. I'll start with our asset and liability yield trends on slide seven. While the target Fed funds rate has remained stable since July of last year, we continue to see asset yields inch higher through the back half of 2023, and that trend has continued into Q1 of this year as a sizable portion of our loan book is repriced and remixed over time. This trend has been led primarily by the C&I, CRE, and auto categories. Total earning asset yields increased by 13 basis points over the prior quarter and landed at 5.64% here in Q1.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

Like others in the industry, we've seen our funding costs increase over the past year due to a combination of rising rates, liquidity pressures, and a mix shift in our customer deposit base. However, after seeing these pressures stabilize over the back half of 2023, the rate on total interest-bearing liabilities flattened out at 3.55% from the Q4 to the Q1.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

This flattening was largely driven by the paydown of FHLB that we completed as part of our balance sheet repositioning in Q4, but it's also a function of ongoing stabilization in the deposit environment and our efforts to strengthen our funding profile through organic core customer growth, deposit growth. Moving to slide eight, you can clearly see the impact of these recent trends on both our net interest income and our margin.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

Here in Q1, our NII landed at $258 million for the quarter, a $4 million increase from the prior quarter. Our NIM increased by 10 basis points to 2.79%. As we shift to slide nine, I want to take a moment to discuss how the various elements of our strategic plan are shifting the mix on both sides of our balance sheet and driving us towards an enhanced profitability profile.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

On the asset side of the balance sheet, we've already taken several steps to diversify our loan mix in a way that enables us to decrease our reliance on low-yielding, low-relationship lending strategies while still maintaining our solid credit standards. We've meaningfully grown our commercial RM base over the past 3 years while also changing the incentive structure to emphasize holistic relationships, including deposits and other services.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

We've steadily grown a Prime/SuperPrime indirect auto portfolio to diversify our consumer lending business at higher spreads. Last year, we exited the low-relationship, low-yielding TPO mortgage business, sold nearly $1 billion in mortgage loans, and moved to an originate-to-sell model.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

Here in the Q1, you can see the results of these changes in our loan growth figures, where we added $215 million in auto balances to a portfolio with an average yield of over 5.5%, added $127 million in C&I balances to a commercial and business portfolio with an average yield of over 7%, and held balances flat on a mortgage book with an average yield of below 3.5%.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

On the liability side, we've talked extensively about our efforts to attract, deepen, and retain core customer relationships as a way to decrease our reliance on wholesale funding. You've seen that come to life as we've added significant core customer deposit balances for three straight quarters while taking steps to decrease our wholesale funding over the same time period. As you can see, all of this is not happening by accident.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

We're taking purposeful actions that are changing the makeup of our balance sheet and the return profile of our company for the better. The early results are promising, but we're still working to make sure we stay on track to meet our medium-term goals. Based on our current expectations for balance sheet growth, deposit betas, and Fed action, we continue to expect net interest income growth of between 2%-4% in 2024. This guidance assumes 3/25-basis-point Fed rate cuts throughout the year, beginning in June.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

On slide 10, we've continued to manage our securities book to remain within our 18%-20% target. With the benefit of rising rates and our securities repositioning, the average yield on our securities book has now risen by 67 basis points from the same period a year ago. After adjusting our CET1 capital ratio to include the impacts of AOCI, this impact would have represented a 64-basis-point hit to CET1 in Q1.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

The spread of this impact grew slightly versus the prior quarter, largely driven by rising interest rates. As a percent of total assets, our investment securities and cash position held firmly at roughly 21% at the end of the quarter. Over the remainder of 2024, we will continue to target investments to total assets of between 18%-20%. Moving to slide 11, we highlight our non-interest income trends through Q1.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

Our non-interest income came in at $65 million for the quarter, which was down $5 million relative to our adjusted Q4 number but was up $3 million from the same period a year ago. Our Q1 results were driven by a $2 million increase in service charges and deposit account fees and a $1 million increase in mortgage banking.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

After posting a $6 million gain on sale of Visa B shares in Q4, we also booked another $4 million gain on the sale of Visa B in Q1. As of March 31st, we had no Visa B shares remaining. These figures were partially offset by a $5 million decrease in capital markets fees, which stemmed from quarterly decreases in syndications and trading account revenues.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

While we feel well-positioned on the durability of our non-interest income in a challenged environment, we continue to expect non-interest income to compress by 0%-2% as compared to our adjusted 2023 base of $264 million. Moving on to slide 12, we continue to make targeted investments to support our initiatives, but maintaining a discipline on expenses continues to be a foundational focus for the company.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

Our Q1 expenses of $198 million were up 5% relative to Q1 of 2023 but were down 17% from the GAAP number we reported in the Q4 of 2023. After booking $31 million for the FDIC special assessment in Q4, we booked an additional $8 million in FDIC special assessment expense in Q1. This was partially offset by a $3 million refund in other FDIC assessment costs.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

On an adjusted basis, our efficiency ratio landed at 57.2% for the quarter, which is the lowest we've seen since Q2 of 2023. Our non-interest expense to average assets ratio also fell back below 2% for the quarter, which demonstrates our ability to keep expenses in check while investing in our growth strategy. With that in mind, we continue to expect total non-interest expense growth of between 2% and 3% for 2024 off of our adjusted 2023 base of $783 million.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

These figures exclude the FDIC special assessment expense in Q4 and Q1. We also continue to expect annual operating leverage of between -1% and 0% in 2024. Shifting to slide 13, we saw a three-basis-point net decrease in our TCE ratio during the quarter, finishing at 7.08%. This net decrease was driven by a nine-basis-point hit from AOCI due to higher long-term rates.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

After falling to 9.39% as a result of our balance sheet repositioning in Q4, our CET1 rebounded in Q1, ending the quarter at 9.43%. Both our TCE and CET1 remain well within our 2024 target ranges as of Q1. Given current market conditions and the expectation for short-term rates to remain elevated in the near term, we expect TCE to remain in the range of 6.75%-7.75% in 2024. We also expect CET1 to remain in the range of 9%-10% for the same time frame. I'll now hand it over to our Chief Credit Officer, Pat Ahern, to provide an update on credit quality.

[Patrick Ahern, EVP and CCO at Associated Banc-Corp]

Thanks, Derek. I'd like to start our credit portion with an allowance update on slide 14. We utilized the Moody's February 2024 baseline forecast for our CECL forward-looking assumptions.

[Patrick Ahern, EVP and CCO at Associated Banc-Corp]

The Moody's baseline forecast remains consistent with a resilient economy despite the higher interest rate environment. The baseline forecast contains no additional rate hikes, slower but positive GDP growth rates, a cooling labor market, and continued deceleration of inflation. Our ACLL increased by $2 million during the quarter to $388 million, with increases in the commercial, CRE investor, and other consumer categories, partially offset by decreases in CRE construction and residential mortgage.

[Patrick Ahern, EVP and CCO at Associated Banc-Corp]

Our allowance continues to be driven by loan growth in select areas such as auto, nominal credit movement, and general macroeconomic trends that reflect the stability of our Midwest footprint. As such, our reserves-to-loan ratio landed at 1.31% in Q1, a one basis point decrease versus the prior quarter but a six basis point increase from the same period a year ago.

[Patrick Ahern, EVP and CCO at Associated Banc-Corp]

Moving to slide 15, our portfolio has continued to hold up relatively well with limited migration through the pipeline, as evidenced by our core credit quality trends. At the top of the funnel, our delinquencies came down meaningfully in both the 30-89-day and the 90+ day buckets during the Q1. As we look further down the line at our total criticized and classified loans, the substandard accruing and non-accrual buckets tick higher, but these increases were more than offset by a $61 million decrease in the special mention category.

[Patrick Ahern, EVP and CCO at Associated Banc-Corp]

Netting the difference, total criticized loans actually decreased slightly for the second straight quarter. We remain encouraged with the stability of total criticized assets and the decrease in these credits showing early stress. Within the non-accrual bucket, we continue to see puts and takes in Q1, consistent with our normal course of business.

[Patrick Ahern, EVP and CCO at Associated Banc-Corp]

This includes one new $25 million credit in which recent and pending improvements may provide a path forward for a quick resolution. Outside of that one particular credit, non-accruals would have remained relatively stable for the quarter, which we see as another sign of overall credit stability. Finally, we booked $22 million in net charge-offs during the quarter and a $24 million in provision.

[Patrick Ahern, EVP and CCO at Associated Banc-Corp]

While net charge-offs rose from the prior quarter, they in part reflect an opportunity the bank had to accelerate a credit resolution earlier than expected. The overall net charge-off rate still remains within the 2024 expectations. Taken together, this picture gives us confidence that the increase we saw in non-accrual loans and net charge-offs during Q1 represent a handful of credits migrating through our rating system and not necessarily a sign of broader issues coming down the road in future quarters.

[Patrick Ahern, EVP and CCO at Associated Banc-Corp]

Overall, we remain comfortable in the normalized level of activity we've seen across the bank. As we've done over the past 12-24 months, our ongoing quarterly portfolio deep dives and risk-rating analysis remain a focus and a key tool to stay ahead of credit concerns given the uncertain macro outlook noted earlier. As we look into the year, we remain diligent on monitoring credit stressors in the macroeconomy to ensure current underwriting reflects ongoing inflation pressures, labor cost, to just name a few economic concerns.

[Patrick Ahern, EVP and CCO at Associated Banc-Corp]

In addition, we continue to maintain specific attention to the effects of elevated interest rates on the portfolio, including ongoing interest rate sensitivity analysis bankwide. Going forward, we expect any provision adjustments to continue to reflect changes to risk grades, economic condition, loan volumes, and other indications of credit quality. Finally, we've provided a refresh of key CRE metrics on slide 16.

[Patrick Ahern, EVP and CCO at Associated Banc-Corp]

As a reminder, our conservative approach to credit has been optimized over the course of the past several years as we've built a diverse portfolio of high-quality commercial loans across our portfolios and a focus on Prime and SuperPrime consumer portfolios. While CRE continues to be cited as an area of risk in the industry, we feel well-positioned given the conservative approach we've applied across the bank. In building our CRE portfolio, we've focused on partnering with well-known developers and build a portfolio predominantly in stable Midwest markets.

[Patrick Ahern, EVP and CCO at Associated Banc-Corp]

Over two-thirds of our CRE portfolio is based in the Midwest with an emphasis on multifamily and industrial properties. We do not have any exposure to the rent-controlled New York City real estate market. Office loans represent just 3% of our total loans as a bank, and within that portfolio, we are weighted towards Class A properties in non-urban environments.

[Patrick Ahern, EVP and CCO at Associated Banc-Corp]

We continue to take a proactive approach to CRE office credits, with the majority of those loans maturing for the remainder of 2024 already having strategies in place, whether that be refinance, sale, or qualifying for extension at prevailing underwriting standards. While we feel well-positioned given our business model approach and the markets we operate in, we continue to monitor this and all of our portfolios closely. With that, I will now pass it back to Andy for closing remarks.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Thank you. I'd like to wrap up by reiterating a couple of key points from our presentation on slide 17. First, our strategy emphasizes quality, relationship-focused loan growth that decreases our reliance on lower-yielding, non-relationship balances and enhances our profitability profile.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Based on recent progress against our plan, incremental momentum we expect over the remainder of the year and the current macro outlook, we continue to expect total loan growth of between 4% and 6% in 2024. On the other side of the balance sheet, we've been pleased with the momentum we've seen from three straight quarters of core customer deposit growth.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

This gives us confidence we're on the right track with our initiatives, and we expect to benefit further over the next several quarters as our phase II initiatives start to have a full impact. As such, we continue to expect core customer deposit growth of 3%-5% in 2024. On the income statement, we've adjusted our most recent forecast for balance sheet growth, deposit betas, and rate environment. Our latest forecast assumes three Fed rate cuts beginning in June.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Taking these factors into account, we continue to expect net interest income growth of between 2% and 4% in 2024. And lastly, our disciplined approach to expenses remains a foundational focus for our company. With this in mind, we continue to expect non-interest expense growth of 2%-3% in 2024 after excluding the impact from the FDIC special assessment expense in Q4 and Q1. With that, we'll open it up for questions.

[Operator]

Thank you. We'll now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Thank you. Our first question is from Daniel Tamayo with Raymond James. Please proceed with your question.

[Daniel Tamayo, Director at Raymond James]

Thank you. Good afternoon, everybody.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Hey, Dan.

[Daniel Tamayo, Director at Raymond James]

Maybe first starting on the margin guidance. So you reiterated the guidance from the prior quarter, but you removed three rate cut assumptions, and now it seems more likely that we get the later two cuts than the June cut. So should we think about that range as more toward the upper end, or was there more pressure than anticipated in the Q1 that we should still be thinking kind of middle? And then how does the lack of June cut play into the guidance?

[Patrick Ahern, EVP and CCO at Associated Banc-Corp]

Well, I'll start that, and I'll let this is Andy. I'll have Derek finish that. I think you should be thinking squarely in the range of what we had before.

[Patrick Ahern, EVP and CCO at Associated Banc-Corp]

I wouldn't go low, and I wouldn't go high. The reason I say that is because assuming that it's higher for longer, you have an impact on your funding costs, whether that be CD renewals or wholesale funding. However, we're slightly asset-sensitive, so we have a benefit there. When I look at three rate cuts or one rate cut, and as you get towards the second half of the year, I just see it being less and less material to us.

[Patrick Ahern, EVP and CCO at Associated Banc-Corp]

I think it's fairly neutral between three and one rate cut. As we look at it today, we'll have to see how the deposit environment progresses with pricing, but we're assuming that it'll be a little bit more expensive. We think that still lands us squarely in the range and the forecast that we had before.

[Patrick Ahern, EVP and CCO at Associated Banc-Corp]

And then remembering, on the asset side, we're generating assets at a little bit higher yield, and we had decent loan growth in the Q1, and we continue to expect that we're going to be in the range on loan growth for the rest of the year and those loans bringing a higher yield with them, Derek.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

Yeah, I think we expect NIM to widen by the end of the year, and we expect sequentially NII to go up. I think the behavior of the deposits is really the key, and I don't think anyone's been terribly confident that that's completely settled down. So we feel really good about the quarter. We felt good about last quarter on the deposit performance. I just don't think we want to get ahead of ourselves.

[Daniel Tamayo, Director at Raymond James]

Okay. I appreciate that.

[Daniel Tamayo, Director at Raymond James]

The other thing is kind of a similar question, but we've seen nice progress. You've seen nice progress on the deposit base, had pretty good growth in the non-interest bearing in the quarter. Maybe you could talk about where that was coming from and if you have an idea in budgeting or as you think through this of what is a new normalized range either through the cycle or when we get to kind of a more normalized time period for what the non-interest bearing would be as a percentage of the deposit base.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

So last time, I think last quarter, we shared that we expected non-interest bearing deposits to floor out at about $5.8 billion-$5.9 billion, and that's still what we think. This came in as expected. We have a lot of seasonality the first part of the year, which makes that number move around quite a bit.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

It came in because it came in as expected. We feel good about it and expect it to creep up closer to $6 billion by the end of the year. So our expectation is that it doesn't, in nominal dollars, decrease, and most of our focus is then growing on interest-bearing deposits and trying to make sure that we optimize that so that we can keep a lid on the amount of wholesale funding we use. And that's really driving the puts and takes on our margin going forward.

[Daniel Tamayo, Director at Raymond James]

Understood. Okay. Well, thank you for all the color. I'll step back.

[Operator]

Thank you. Our next question. It's from Jon Arfstrom with RBC Capital Markets. Please proceed with your question.

[Jon Arfstrom, Managing Director at RBC Capital Markets]

Hey, thanks. Good afternoon.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Hey, Jon.

[Jon Arfstrom, Managing Director at RBC Capital Markets]

Hey, just kind of a follow-up on that. On slide five, you guys had good savings and money market growth. Can you talk a little bit about what drove that, and do you feel like that's a repeatable-type trend?

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Yeah, maybe I'll take that one, Derek. When I look at what our forecast is for the year, because there's seasonality that's always involved, but when we look at the full year, we expect the vast majority of what we're going to get in deposit growth to come from consumer. So you start with the fact we're growing households, but we're growing households and getting a higher average deposit amount per household. That's a really nice combination. Secondly, on mass affluent, we've gotten hundreds of millions dollars in additional funds from this customer segment. That segment makes up 75% typically of the base of a consumer company, consumer bank.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

We've been doing that for a year and a half, and we're expanding the number of people that are considered mass affluent experts. Third, our private wealth team is accelerating its growth in two ways. One, to have a good private wealth deposit base, you have to have a good mass affluent base. Now those customers are starting to expand up into private wealth.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Secondly, under the leadership of our new head of private wealth, President of Private Wealth, Jayne Hladio, the group and the referrals internally within the different segments of private wealth, in some cases, have doubled. So we are seeing very strong growth from the private wealth side. The question of can we continue if we could continue at that rate, we'd be forecasting 8% growth. We're forecasting 3%-5%.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

And the simple reason on that is we knew the first half would be somewhat lumpy. You have bonus time, and then you have tax receipts. The tax receipts largely happened disbursement in the Q2. So we thought we'd be fairly flat in the Q2, and then we saw last year that trend of increase in the second half of the year.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

We're going to enter the second half of the year with more momentum from our foundational products, services, digital, commercial than we had last year, and a little bit less noise in the marketplace. So that's why we come in at that 3%-5%. But do we think it's sustainable that we outperform the market over an extended period of time in deposit growth? Yes.

[Jon Arfstrom, Managing Director at RBC Capital Markets]

Okay. Good. Good. So it sounds like it's core in your mind.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

It is.

[Jon Arfstrom, Managing Director at RBC Capital Markets]

Yeah, that's good. Okay.

[Jon Arfstrom, Managing Director at RBC Capital Markets]

Then on slide seven, Derek, you said something in your comments, and I think I missed it, but can you talk about the rate on new auto paper that you're getting and what kind of growth expectations you have for auto?

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

Yeah, we still think it's we haven't talked a lot about the rates, but generally, for the last quarter and past several quarters, it's north of 7%. And we expect to see roughly the same nominal dollar amount of growth each quarter. It's been a little north of $200, and that will continue. The dollar amount will slightly decrease as the portfolio grows and the runoff grows, but we're not we expanded into our footprint states, and we don't have plans to add other markets beyond that for the year or in our guidance that we've contemplated for now.

[Jon Arfstrom, Managing Director at RBC Capital Markets]

Okay. Okay. But that yield should march higher over time.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

Yeah, it would keep marching higher. And that's what's been helpful both for that book, the securities book, and even a little bit for the resi. Whether rates stay higher for longer or go up more or even drop, it'll continue marching higher for those three buckets the rest of the year.

[Jon Arfstrom, Managing Director at RBC Capital Markets]

Okay. All right. And Andy, I won't ask about the Packers' needs in the draft tonight. I'll just step back in the queue.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

I'm going to stop short of saying all you need is love.

[Jon Arfstrom, Managing Director at RBC Capital Markets]

Yeah. All right. Thanks.

[Operator]

Our next question. It's from Terry McEvoy with Stephens Inc. Please proceed with your question.

[Terry McEvoy, Managing Director at Stephens]

Hi. Good afternoon, everybody. Question on fee income. If I back out the Visa gain in the Q1, is the core run rate a bit lower? And I know you talked about capital markets and what happened in the Q1. Do you expect that business to rebound in Q2 through the second half of the year?

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

We do. It was low last year, Q1 also. So you expect I think you've got it right, actually.

[Terry McEvoy, Managing Director at Stephens]

Okay. And then the run rate, is it a bit lower, or am I just looking at one quarter in the full year? You're still confident in that range?

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

We're still confident in that range. I do not expect it to be lower than that.

[Terry McEvoy, Managing Director at Stephens]

Okay. And then I was wondering if you could provide an update on the used to be specialized lending on slide six. I think you removed it a quarter or two ago. Maybe just talk about the progress there on, was it asset-based, equipment finance, and is that just folded into commercial and business lending now?

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Yeah, it really is folded into commercial lending now.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

I mean, really, when you get into it, it's the same segment serving a similar customer, particularly with equipment finance. Those continue to be really good businesses for us. I mean, if we broke that out, we're right on the plan that we envisioned when we launched those. So we thought it was just a cleaner view just to look at that as a full view of commercial.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

But no question being able to provide equipment finance in the manufacturing belt was wise. And our asset-based lending team is just strong. They do this the right way, and they do it in a very buttoned-up fashion. And they've had nice progression on the growth in that space as well.

[Terry McEvoy, Managing Director at Stephens]

Makes sense. Thanks for taking my questions. Have a nice evening.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Thank you.

[Operator]

Thank you. Our next question. It's from Scott Siefers with Piper Sandler. Please proceed with your question.

[Robert Scott Siefers, Managing Director at Piper Sandler]

Good afternoon, everybody. Derek, was hoping that you could speak to the expected expense trajectory. I know you had said previously that costs would come down in the Q1, but nevertheless, this quarter's core number looked quite a bit better than I would have figured. So I guess there'll be some reversion back upwards, presumably. I think you discussed the $3 million FDIC refund, if I heard correctly. Presumably, that won't repeat. But will the reversion back upwards sort of come all at once, and then expenses stabilize, or is this going to build kind of steadily throughout the year?

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

It'll pop up a little bit without the $3 million that you're talking about. And then it just slowly glides up in second and Q3. Part of it is you expect to be marketing expense.

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

Part of it is technology expense as we continue to roll out products and features. And then it's really filling out the hiring that we started last year. But continuing to this year as we add RMs into our key markets.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

I mean, if you remember, we had a reduction in force at the end of last year. At the same time, we started the hiring. So we got ahead of the hiring pretty well, and we're on track there. But it didn't happen in one fell swoop, much as the reduction in force did. So that will slowly build on revenue producers as the year goes along.

[Robert Scott Siefers, Managing Director at Piper Sandler]

Okay. Perfect. Thank you. And then, Andy, maybe just a thought or two on overall customer demand. For the industry as a whole, there's just not been the heck of a lot of loan demand, particularly on the commercial side. You all are a bit of a unique animal given sort of the buildout of the bank or the rebuildout. And then the other factor is, I guess, you just operate in healthier markets generally. But I was hoping just you could maybe provide a thought or two on overall demand and investment appetite among your customers.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Well, there's certainly awareness of the macro environment. I mean, it's impossible not to know that that's true. But what I would say is the quality of folks that we have and the quality of people that we're adding, they typically have a following. So we don't have to stretch on credit. It is simply a matter that we have more commercial bankers than we did before. On the consumer side, it's really a function that we've built out capabilities.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

But on the commercial loan side, we expect a steady growth within the team. And the quality of the folks that we're hiring, they're frankly attracting more quality. And so as we go along, it's building on itself. And we expect, based on what we're looking at right now for the next 30 and 60 days because we track very closely the pipeline of conversations we're having, we expect that to continue.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

And so as that happens, you hire somebody, they get onboarded, they have to talk to a customer, then they get a loan packet, and then they book it. And that takes time. And so that's why we feel pretty bullish about as we head into Q4 and some of those deals start to hit, and we head into Q1 of next year and Q2 and so on. So really, the momentum we've had is just a quality as opposed to quantity right now. We're going to add on the quantity portion of this, and that'll have a double effect as we head into the second half of the year, we expect.

[Robert Scott Siefers, Managing Director at Piper Sandler]

All right. Perfect. Thank you very much.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Thank you.

[Operator]

Thank you. Our next question. It's from Chris McGratty with KBW. Please proceed with your question.

[Analyst at KBW]

Hi, this is Nick Mutafik on for Chris. Good evening.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Hey, Nick.

[Analyst at KBW]

Maybe just a couple of quick ones. I saw there was 900,000 shares repurchased in the quarter. Was this just related to employee stock grants or any kind of signal you would repurchase further this year?

[Derek Meyer, EVP and CFO at Associated Banc-Corp]

It was related to equity stock grants. You've got it correct. No signal.

[Analyst at KBW]

Great. Thanks. Maybe just more broadly, we've gotten some questions on exposure to the trucking industry within the C&I book. Just questions given some of the oversupply within the industry there. I don't know if you have the actual exposure for the bank to trucking, transportation, or freight.

[Patrick Ahern, EVP and CCO at Associated Banc-Corp]

Yeah. This is Pat Ahern. It's pretty small. Call it $700 million in commitments. We actually just got done with as part of our deep dives that we're doing on a quarterly basis, we did just carve out trucking and transportation this quarter. Pretty happy with the results. Don't see a lot of emerging risk there. Certainly, the industry has seen some migration given volume changes, giving some overcapacity within the space.

[Patrick Ahern, EVP and CCO at Associated Banc-Corp]

But our clients seem to be bouncing back, resizing. We're starting to see some of the shipping rates, the spot rates, kind of bottom out here and there. So we feel pretty good about where we're at.

[Analyst at KBW]

Great. Thank you for the color. I'll step back.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Thank you.

[Operator]

Thank you. At this time, there are no further questions in queue.

[Andrew Harmening, President and CEO at Associated Banc-Corp]

Well, I want to thank everyone for their interest in our continued story. It's certainly a dynamic marketplace, macro marketplace, but we like the markets we're in. We have room to run within those markets because we're not overly penetrated. We seem to be being able to build on phase I of our strategic plan so far with phase II. So look forward to your continued interest and happy to answer any questions offline that we can. Thank you.

[Operator]

Let's conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

Participants

Executives

• Andrew Harmening, President and CEO
• Derek Meyer, EVP and CFO
• Patrick Ahern, EVP and CCO

Analysts

• Daniel Tamayo, Director at Raymond James
• Jon Arfstrom, Managing Director at RBC Capital Markets
• Robert Scott Siefers, Managing Director at Piper Sandler
• Terry McEvoy, Managing Director at Stephens
• Analyst at KBW