Q1 2025 Associated Banc-Corp Earnings Call
Kevin: Good afternoon, everyone and welcome to Associated Banc-Corp's first quarter 2025 earnings conference call. My name is Kevin and I'll be your operator today.
Kevin: At this time, all participants are to listen on remote. We'll be conducting a question and answer session at the end of the conference.
Kevin: Copies of the Slides that will be referred to during today's conference are available on the company's website and investor dot associated bank dot com. As a reminder, this conference call is being recorded.
Kevin: 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.
Kevin: Associated Actual Results could differ materially from the results anticipated or projected in any such forward-looking statements.
Kevin: Additional detailed information concerning the important factors that could cause Associated actual results different from the information discussed today is readily available on the SEC website and the risk factor section of Associated's most recent form 10K and subsequent SEC filings.
These factors are incorporated herein by reference.
Kevin: For reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please refer to pages 29-31 on the slide presentation and to pages 8-9 of the press release financial tables.
Speaker Change: Following today's presentation, instructors will be given for the question and answer session. At this time, I'll let you turn the conference call over to Andy Harmaning, President and CEO for opening remarks. Please go ahead, sir.
Speaker Change: Well, good evening, everyone. This is Andy Harmening, and in addition to this being our first quarter earnings call...
Speaker Change: It is also opening night of the draft here in Green Bay, so...
Speaker Change: Pretty exciting time for us. I'm joined on our call by our Chief Financial Officer, Derek Meyer, and our Chief Credit Officer, Pat Ahern. I'll start off by sharing some highlights from the quarter and from there, Derek will cover the income statement and capital trends and Pat will share an update on credit.
Speaker Change: And while the macro picture has been cladded by talk of tariffs and trade negotiations, we've continued to see stability in our home midwestern markets. Unemployment in Wisconsin, Minnesota, and several other midwestern states, remains below the national average of 4.2%.
Speaker Change: Our largely super prime consumer business has remained resilient and our commercial customers continue to plan for the long-term while taking steps to protect their businesses against short-term volatility in the market.
Speaker Change: During the first quarter, we hit several key milestones in phase two of our strategic plan and the hiring, the product launches, and all other major investments of phase two have now been completed.
Speaker Change: In Q1, we completed the expansion of our commercial banking team and re-interned promising new market with the looked out of three counted RMs in Kansas City.
Speaker Change: We continue to bolster our consumer value proposition that is quickly becoming best in class by adding family banking to our product suite.
Speaker Change: and we completed the sale of $700 million in residential mortgage loans that we announced in late 2024 as part of a balance sheet repositioning.
Speaker Change: As we've continued to drive momentum with our strategic plan, that momentum is carried to our financial results.
Speaker Change: In Q1 we saw over $500 million in loan growth, over $500 million in core customer deposit growth, 16 basis points of margin expansion, and only 12 basis points of charge-offs.
Speaker Change: In addition to growing our balance sheet in Q1, we also added 10 basis points of CET-1 capital. Thanks to our enhanced profitability profile, we are now able to deliver balance sheet growth and capital accretion simultaneously.
Speaker Change: Looking ahead, there's no denying that tariffs have injected uncertainty into the economy.
Speaker Change: We're proactively meeting with customers and monitor our portfolios on a daily basis to stay on top of any emerging concerns.
Speaker Change: But today, we have not seen any material changes in customer activity, line utilization, or credit quality. With that being said, our focus has remained squarely on what we can control, and we feel well positioned for 2025, regardless of macro picture.
Speaker Change: Record-High customer satisfaction scores, an expanded commercial team voice to take market share, and an enhanced profitability profile.
Speaker Change: As we've done for over 160 years, we stand right to serve the financial needs of our clients.
Speaker Change: With that, I'd like to walk through some highlights from the quarter-beginer on slide two.
Speaker Change: For the first quarter, we've re-reported gap earnings of $0.59 per share. Total loans grew by $526 million during the quarter, highlighted by another $352 million in C&I loan growth, as our
Speaker Change: Funding our loan growth primarily with court customer deposit, growth continues to be a key priority of our plan.
Speaker Change: In Q1, we saw $502 million in core customer deposit growth while our quarterly customer deposit flows are typically boosted by seasonality in Q1, core customer deposits were still up 4% compared to Q1 of 2024.
Speaker Change: Shifting to the Income Statement. Our net interest income increased $16 million from Q4 to 286 million. While our margin increased 16 basis points to 2.97%.
Speaker Change: As anticipated, we realize most of the benefit from our balance sheet repositioning in Q1, but we've yet to realize roughly three basis points of incremental NIM impact, do the timing of a loan sale which closed in late January .
Speaker Change: We expect a full quarterly benefit of repositioning to flow through in Q2.
Speaker Change: In Q1, we post a gap non-interest income of $59 million, inclusive of a $7 million loss recognized upon closing of the loan sale as we accounted for the FAS 91 impact and slight valuation adjustments.
Speaker Change: Total non-interest expense finished at $201 million for the quarter, but that number also includes the impact of a $4 million or OREO right now that we wouldn't expect to be a recurring item. Stayed discipline on expenses remains a foundational focus for our company.
Speaker Change: We also continue to closely manage credit risk. In Q1, our delinquencies, charge-offs, and provision all decreased versus Q4.
Speaker Change: We remain committed to staying ahead of the curve by taking a disciplined, consistent approach to long-risk ratings so we can better understand our credit risk and our portfolio by segment and bi-geography.
Speaker Change: Movie to Slide 3. Our company is in a better position to drive organic growth.
Speaker Change: We announced in March that we've completed the expansion of our commercial team through a looked out of three counted RMs in the Kansas City market. That announcement marked the completion of all major investments in phase two of our strategic plan.
Speaker Change: And while we've already seen tailwind start to emerge across the bank in the back half of 2004, 2025 is about monetizing our investments.
Speaker Change: We're in a great position to do so in commercial where we've added top talent to our leadership team, increased commercial rms by nearly 30% and added specialty verticals that help us deepen relationships with our clients and diversify our business.
Speaker Change: These actions position us to take market share in key metros like Milwaukee, Chicago, Minneapolis, St. Louis, and Kansas City,
Speaker Change: We also have a consumer value proposition that competes with anyone in the industry, which is translated to record high customer satisfaction, positive household growth, and higher quality households.
Speaker Change: The investments we made in talent, products, marketing and technology have positioned us to attract and deepen customer households sustainably over time.
Speaker Change: As we mentioned last quarter, each percentage point increase in our household numbers represents approximately 150 million incremental deposits.
Speaker Change: Ultimately, we expect our efforts to translate to growth in lower-cost, core customer-deposit categories that enable us to further decrease our reliance on wholesale funding sources.
Speaker Change: We've also provided ourselves with additional capacity to grow and work profitable, relation driven lending categories to take several acts and to reduce our concentration of low yielding non-customer residential mortgage loans.
Speaker Change: We've reduced our rezzy loan concentration from 29% in Q3 of 23 to 23% in Q1 of this year.
Speaker Change: As we think about what comes next, we're going to continue to invest in our business and our leadership team as plans to sit down together later this quarter to line on with the next wave investments might look like.
Speaker Change: In the meantime, Phase 2 has put us in a position of strength for 25 and beyond, and we look forward to building on that momentum.
Speaker Change: on Slide 4. We highlight our long trends to the first quarter.
Speaker Change: Total average quarter of the owns decreased slightly during the quarter, with the decreased primarily driven by the recognition of the $695 million mortgage loan sale that settled in January .
Speaker Change: Total Period End loans, which exclude the impactable loan sale, increased by 2% or 526 million dollars point to point.
Speaker Change: Segme Gross was led by CRA Investor Category, but this was once again heavily influenced by the completion of construction projects during the quarter. As a whole, the commercial real estate category increased by $196 million.
Speaker Change: The limited production we've seen is lower risk. Underwritten at today's higher interest rates and expenses and lower leverage, with highly experienced and tested seary clients.
Speaker Change: We continue to expect elevated payoffs in the coming quarters, but payoff activities remain limited in Q1.
Speaker Change: As mentioned previously, the commercial industrial category continued to perform strongly adding another $352 million in Q1. We do not have reason to believe this number is inflated meaningfully by preemptive inventory built, line draws, or other activity tied to tariffs.
Speaker Change: Line Utilization Levels, Health Study, and Q1, and have remained below pre-COVID levels.
Finally.
Speaker Change: Auto Finance Bounce is grew by 69 million in Q1 as we've continued to diversify our consumer portfolio. We expect auto to continue growing at a decreasing rate in future quarters as the portfolio matures. We're going to be able to do this in the future as the portfolio matures.
Speaker Change: and we continue to expect commercial industrial loan growth of $1.2 billion and total bank loan growth of 5% to 6% for the year.
Speaker Change: Moving to slide five, total deposits and core customer deposits both increased 2% for the quarter while wholesale funding sources, including network and broker deposits, decreased 2%.
Speaker Change: After adding over $600 million of core customer deposits in Q3 and nearly $900 million in Q4, we added another $500 million in Q1.
Speaker Change: As was the case in prior years, I'll remind you that our first quarter deposit flows are impacted by some seasonal customer inflows that typically flow back out in Q2. But that being said,
Speaker Change: Court customer deposits were up 4% in Q1 of 25, as compared to Q1 of 24. Over that time, we've added commercial RM's and we've grown our customer base.
Speaker Change: These trends give us confidence in our growth outlook for the year, and as such, we continue to expect core customer deposits to grow by 4% to 5% in 2025. With that, I'll pass it to Derek, discuss our income statement of capital trends.
Derek Meyer: Thank you, Fendi. I'll start with our asset and liability yield trends on slide six.
Derek Meyer: In Q1, earning asset yields decreased by just one basis point during the quarter, with anticipated decreases in our floating rates, CRE, and CNI portfolio largely being offset by an increase in investment yields following the securities repositioning that was completed at the end of Q4.
Derek Meyer: On the other side of the balance sheet, total interest bearing liability cost decreased by 23 basis points.
Derek Meyer: We remain pleased by our ability to reprise the deposits downwards, each of the past two quarters, and after seeing interest bearing deposit costs decreased by 23 basis points in Q4, they fell by another 19 basis points in Q1 landing at 2.91 for the quarter.
Derek Meyer: Whenever we benefit in is time deposits, costs on time deposits decreased by 23 basis points in Q4 and by another 27 basis points in Q1. With nearly $8 billion in CD's scheduled to mature over the next 12 months, we expect additional repracing opportunities in 2025.
Derek Meyer: Moving to slide 7, our total net interest income grew to 286 million in Q1, a $16 million increase versus the prior quarter, and a $28 billion increase versus Q1 of 2024. Our net interest margin expanded by 16 basis points to 2.97%.
Derek Meyer: Both the increases were largely driven by the balance sheet reposition announced in December . However, we also saw approximately two basis points of organic NIM expansion during Q1.
Derek Meyer: Due to the timing of the loan sale, which settled in late January , we have not yet fully recognized a full quarter's benefit of the balance sheet repositioning. On a pro-former basis, we estimate that the loan sale would have had an approximate of three more basis points to our Q1 net interest margin had the transactions settled on December 31, 2024.
Derek Meyer: Based on our latest expectations for balance sheet growth, deposit betas, and Fed action, along with the enhanced profitability from our balance sheet repositioning, we continue to expect to drive net interest income growth between 12 and 13% in 2025.
Derek Meyer: This forecast assumes four rate cuts in 2025 versus two rate cuts previously.
Derek Meyer: On Slide 8, we provided a reminder of the proactive steps we've taken to get a more neutral asset sensitivity position to protect our balance sheet in a falling-grade environment.
Derek Meyer: We've maintained received fixed-notional swap balances of approximately $2.85 billion.
Derek Meyer: and we have emphasized shorter duration contractual funding obligations to maintain repricing flexibility.
Derek Meyer: Taken together, these actions have reduced our asset sensitivity over time, with a down 100 ramp scenario representing about a 0.6% impact to our NII as of Q1.
Derek Meyer: This is reduced from the 2.3% impact we were modeling in Q1 of 2023. Our goal is to maintain this modestly asset-sensitive position going forward.
Derek Meyer: Shifting the slide 9, our securities book increased to $8.7 billion on a period and basis as we continue to modestly build AFS securities in proportion to asset growth.
Derek Meyer: We also bolstered our liquidity position during the quarter bringing our securities plus cash to total asset ratio to 23% for the quarter. We expect to manage the ratio in the 22 to 24% range throughout 2025.
Derek Meyer: On slide 10, we've highlighted our non-interested income trends for the quarter. As Andy mentioned, our first quarter gap results included a 7 million pre-tax loss, primarily driven by the FAS 91 impact from the loan sale that settled in January .
Derek Meyer: Aside from that non-recurring item, our first quarter non-interest income trends were largely consistent with the same period a year ago. On a quarterly basis, capital markets fees were $5 million lower due to elevated syndication revenue recognized in the prior quarter. On a quarterly basis, the same period a year ago, the same period a year ago, the same period a year ago
Derek Meyer: Wealth, service charges, and card-based fees also take down from the prior quarter, but these are quarterly decreases, we're partially offset by $3 million in increase in bully income.
Derek Meyer: In 2025, we continue to expect non-interest income to grow by 0-1%. After excluding the non-recurring items that impacted our fourth quarter of 2024 and our first quarter of 2025 results from the balance sheet repositioning, we announced in December .
Derek Meyer: Moving to slide five, first quarter expenses of $211 million were impacted by a $4 million dollar Oreo write down recognized during the quarter, which is not something we'd expect to impact our run rate going forward.
Derek Meyer: Within our core expense base, quarterly decreases of $2 million in personnel costs, $1 million in business and development and advertising, and $1 million in legal and professional fees were partially offset by $1 million dollar quarterly increase in occupancy, FDSC, and
Derek Meyer: While we continue to invest in people and strategies to support our growth plans, we've also remained squarely focused on managing our overall expense run rate on an ongoing basis.
Derek Meyer: On slide 12, we once again saw capital ratios increase across the board in Q1. Our TCE ratio increased to 7.9% in Q4, which represents a 14 basis point increase relative to Q4 and an 88 basis point increase relative to Q1 of 2024.
Derek Meyer: After climbing steadily in 2024, our CET-1 ratio now sits at 10.11% as of Q1, a 10 basis point increased relative to the prior quarter, and a 68 basis point increased versus the same period a year ago.
Derek Meyer: Also in Q1, we continue to see a reduction in the ALCI impact during the quarter with a CET-1 plus ALCI ratio coming in at 10.01% representing just a 10 basis point gap versus our standard CET-1 ratio.
Derek Meyer: Based on our expectations for growth in 2025 and current market conditions, we continue to expect to manage CT-1 within a range of 10 to 10.5% for the year.
Derek Meyer: I will now hand it over to our Chief Credit Officer, Pat Ahern, to provide an update on credit quality.
Pat Ahern: Thanks, Derek. I'll start with an allowance update on slide 13.
Pat Ahern: who utilized the Moody's February 2025 baseline forecast for a Cecil forward-looking assumptions.
Pat Ahern: The Moody's baseline forecast remains consistent with a resilient economy despite the high interest rate environment.
Pat Ahern: The Baseline forecast contains no additional rate hikes, slower but positive GDP growth rates, a cooling labor market, and continued deceleration of inflation, with continued monitoring of ongoing market developments.
Pat Ahern: Our ACLL increased by another $4 million in Q1 to finish the quarter at $407 million.
Pat Ahern: with increases in the commercial and business lending, CRE investor and mortgage categories, partially offset by decreases in the CRE construction and other consumer categories.
Pat Ahern: The uptick in commercial stem from a combination of loan growth plus normal movement within respirating categories.
Pat Ahern: Altogether, our reserves to loan ratio decreased by one basis point from the prior quarter and increased three basis points from the same period a year ago to 1.34%.
Pat Ahern: Moving to slide 14, we maintain a high degree of confidence in the quality of our long portfolio, but continue to review our portfolios closely, giving emerging uncertainty in the macro picture and recent trade policy announcements.
Pat Ahern: In Q1, our portfolio continued to perform well. Total delinquencies decreased to $47 million in Q1, a $33 million decrease from the prior quarter, and $4 million lower than the same period a year ago.
Pat Ahern: Total Criticizing Classified Loans increased slightly from the prior quarter. The majority of this increase was driven by a migration within the CRE and CNI categories.
Pat Ahern: Similar to the past couple quarters, we do not feel this increase as an indication of a significant shift in the credit profile of the portfolio, nor does it represent an increased risk of loss. [inaudible]
Pat Ahern: but rather as a reflection of conforming to industry guidance and our proactive and conservative approach relative to credit changes.
Pat Ahern: We continue our ongoing portfolio deep dives and don't see a systemic shift in our commercial portfolios. We continue to see resolution with some of our more stress credits and liquidity remains present in the market in terms of both payoffs and loan remargin.
Pat Ahern: After three consecutive quarterly decreases, total non-accural balances increased slightly to $135 million in Q1, with increases in CRE and consumer partially offset by a decrease in CNI.
Pat Ahern: We remain comfortable with this level of not accrual loans which has reflected the normal course of business activity. To that point, Q1 not accruals were down $43 million or 24% from the same period a year ago.
Pat Ahern: Finally, we booked just $3 million in net charge-off during the quarter and $13 million in provision. Both numbers have continued to trend downward for the past several quarters. Our net charge-off ratio decreased by 4 basis points to 0.12%.
Pat Ahern: In summary, our credit metrics continue to give us confidence that what we've seen to date is a handful of credits migrating within our rating system and not necessarily a sign of broader issues coming down the road in future quarters.
Pat Ahern: Overall, outside of these specific situations, we remain comfortable in the normalized level activity we've seen across the bank.
Pat Ahern: Finally, I'd like to provide a few reminders as to why we feel well positioned as a company in the face of an uncertain macro backdrop on slide 15.
Pat Ahern: We've discussed CRE and detail on recent quarters, but our consumer book is strong as well.
Pat Ahern: In fact, 94% of our $10.8 billion consumer portfolio is prime or better. Mortgage represents our largest category with $7 billion in balances at a weighted average cycle of $7.87 as of Q1.
Pat Ahern: In Auto, 99% of loans that have been booked with prime or super prime of FICO's in the origination of FICO in March with $7.96.
Pat Ahern: Credit cards are a small part of our business at less than 1% of total loans, but those customers also have FICO's north of $7.90. Simply put, we do business with people who pay you back.
Thank you.
Pat Ahern: While it remains truly to come to any final conclusions.
Clients have been planning for tariff changes for some time.
Pat Ahern: and we feel comfortable with their positioning of strategies and their ability to execute when more clarity exists. Going forward, we remain diligent on monitoring other credit stressors in the macroeconomy to ensure current underwriting reflects the impact of ongoing inflation pressures.
Pat Ahern: and shifting labor markets to name just a few economic concerns.
Pat Ahern: In addition, we continue to maintain specific attention to the effects of elevated interest rates in the portfolio, including ongoing interest rate sensitivity analysis bank-wide.
Pat Ahern: We expect any future provision adjustments will continue to reflect changes to risk rates, economic conditions, loan volumes, and other indications of credit quality.
Andy: With that, I will now pass the back to Andy for closing remarks.
Andy: Thank you, Pat. In summary, we'll continue to closely monitor impacts to the economy and our customers as trade negotiations evolve, but we feel well positioned as a company thanks to the emerging momentum of our strategic plan.
Andy: Based on a good start to the year, growing commercial pipelines, stable credit trends, appropriate expense management, and emerging impacts on the economy in the second half of the year. We've affirmed our forward-looking guidance for balance sheet and income statement expectations.
in 2025. With that, let's open it up for questions.
Speaker Change: Certainly, when I'll be conducting a question and a session, if you'd like to be placed in the question Q, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question Q.
Speaker Change: 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 star one.
Speaker Change: Our first question today is coming from Timur Braziler, from Wells Fargo, so Curtis, your line is not live.
How are you? Good afternoon. Hi, Timur. Thank you.
Speaker Change: Trying to gauge the second quarter NII, it looks like there's quite a few tailwinds that you guys are benefiting from.
Andrew Harmening, Patrick Aherning, Patrick Aherning, Patrick Aherning, Patrick Aherning,
Speaker Change: Sure. So, when we think about second quarter, I agree there are some clear tailwinds going into it, whether that's that, you know, sail fully apart of the way through and the increase that we've seen through the quarter.
Speaker Change: We benefited as have many from deposit markets that we've been able to reprise in.
Speaker Change: I would think that the repricing, you'll be able to continue that, but there'll be a little bit lesser gain on that across the industry as those.
Speaker Change: Those CDs that come in at a little bit lower rate, even though you're pricing down at a little bit lower rate, the mix is just slightly different, similar volume.
and for us, you know, we've seen cyclical-
Speaker Change: Growth on the deposit side, but we have a lot of deposit levers that we pull overall, so we feel good about deposits but that
Speaker Change: We won't have as big of uptake possibly in the second quarter. So all in all, we do have momentum going into the second quarter. We do think that translates into NII for the second quarter. We're in.
Speaker Change: and that we think we're in a relatively good position. When you balance loan growth, deposit growth, margin, reposition of pricing, customer growth, you add all that together, we think we're in a relatively good position, heading into Q2.
Speaker Change: Okay, and then I guess just in terms of deposits, can you maybe box in the magnitude of the seasonal law flows that you're expecting in 2Q and are most of those coming out of that B.E.A.
Speaker Change: No, the non-interest bearing seems to have leveled off for us, and what I would say is...
Speaker Change: It's easier to think of what the impact on the positive is when you think of frankly your first question with the balance of multiple pieces coming together and offsetting that because if I think strictly of deposits, you think of the fact that you're growing your customer base, you have a very big HSA business that's...
Speaker Change: has double digit customer growth for us right now. We have a commercial vertical that the pipeline is significantly higher. Sorry, a commercial team that's added 25 plus people that the the verticals higher.
Speaker Change: Expanded Mass Affluent Offering and Expertise in the Branch and Private Well. So I don't have Timur, we don't give quarter by quarter in advance growth numbers on deposits, but my confidence in our ability to grow deposits to fund ourselves.
Speaker Change: Largely from the Cusper Base is good because of the word.
that we've had and then-
Speaker Change: On top of that, you think about attrition improvements. Our net promoter score was 55 in the first quarter, which is the highest our companies ever had. That's great because of the product offering and the service.
Speaker Change: But then you retain your customers more. So, again, I'll say we're in a pretty good position heading into Q2. I think it translates as we go out during the year as well.
Speaker Change: Great, thanks for that. And then just looking at the commercial loan growth in particular, how much of that is somewhat insulated from the macro just given the hiring and bringing over the backblocks? Thank you very much.
Speaker Change: I guess just on the thought of long growth here, just talk to us about, you know, building out and accelerating some of that growth into some of this macro uncertainty.
Speaker Change: Yeah, no, that's a great question. And it's a great question because we started our initiative in the fourth quarter of 23, as you remember. And so, you know, 15 to 18 months later, we have real momentum. So we've hired people. We were not relying on a big GDP.
Speaker Change: We believe we can grow commercial loans in a low GDP market with really good customers by taking market share.
Speaker Change: The way that I think about that is you bring someone on it takes six to 12 months to get up and running but it takes 12 months for non solicitations to expire. So we look at non solicitation exploration by quarter.
Speaker Change: and we have a lot more people every quarter that that is falling off for them.
So that will be completely gone.
Speaker Change: in the first quarter of 26. But, for instance, we had four people, their non-slicitation expired in the fourth quarter of 24. We have four more in the first half of 25. We have six more in the second half. So we continue to believe that
Speaker Change: The commercial, the fact is, we have more people quality lenders that know the market. So even if you see a decrease in GDP, which we think is somewhat likely, we still think that we grow by taking market share.
Great. Thank you for the call, Alex.
Speaker Change: Thank you. Thank you. Next question today is coming from Daniel Tamayo, from Raymond James, the wine is alive.
Thank you. Good afternoon, guys.
Hey, Daniel.
Speaker Change: Yeah, I guess my first question, you guys talked about it, you know, it's in the slide deck, but the balance sheet looks like it's really close to neutral now. You know, we've talked about the impact being relatively muted, but we should should we think about.
Speaker Change: Nim impact from each 25 basis point cut at this point to be mostly hedged out.
Speaker Change: Well, I'll start that and pass it to Derek. The first simple answer is yes, we are way more neutral than we've been in the past. Certainly when I got here four years ago. Derek, do you want to speak to what that looks like then?
Yeah, so 125 basis point cut.
Speaker Change: would cost us about 500,000 per quarter. So it really is very neutral and the deposit mix, the CD repricing and the asset growth all of which to the earlier set of questions looks really strong are bigger drivers than how many rate cuts are left in the year. [inaudible]
Thank you.
Okay, great.
Speaker Change: And then the second question on capital, I know you're utilizing capital for growth and you still got plenty of growth here and you just kind of entered the bottom of the range for your stated.
Speaker Change: Target Capital, CET-1, but given the level of the share price, the depressed level, just curious if there have been any thoughts to kind of capitalizing on that with buybacks in the near-term.
Speaker Change: Derek doesn't usually let me answer that, but I'm going to.
Um...
Speaker Change: This is Andy. The answer is that we feel pretty strongly about the...
The use of capital to help build this company.
and if we think that's the best used right now.
Speaker Change: For us, when we grow, and we think about balance sheet shift, we're going to continue on with that and...
Speaker Change: We're talking about a balance sheet that at its height had 36% resi in it, and today has 23% and now we have the commercial engine moving for us. I'll be a little...
Andrew Harmening: You know, challenge like everyone else with the economy but still moving quite well for us. That gives us a position to continue that makeshift each quarter and each year and we think that's the best thing for long-term investors.
Understood, yeah.
Speaker Change: and if I could squeeze one last one in, just on the reserves.
Um...
Speaker Change: You know, if we went into a more recessionary type of environment,
Just curious kind of...
Speaker Change: If there's any offsets in the offsets belly, in terms of qualitative reserves or something that you could use that are already in reserves rather than having to build reserves in that type of scenario where the economy would be worsening.
Pat Ahern: Pat, why don't you speak to the overlay that we use on the model?
Pat Ahern: Sure. Right now we're really comfortable with our coverage right now, but we've taken kind of a conservative approach and we've included overlays for economic uncertainty for several quarters. So I think that gives us a strong starting position to handle changes within the market.
Pat Ahern: Obviously, we'll watch for more clarity as we get into the balance of the year and decide what steps are appropriate, whether it's Q2 or beyond.
Okay, I appreciate the color, guys.
Thank you. Thanks for the questions.
Speaker Change: Back to the next question. Today's coming from Scott Siefers from Pepper Sandler. Your line is now live.
Speaker Change: Thanks for taking the question. And you had suggested customer activity hadn't really changed in the first quarter. And do you have any sort of updated thoughts just based on conversations through April and other adapters that all this terror uncertainty really started and has been having and flowing? What broadly are your customers thinking as they deal with this stuff?
Speaker Change: Every standard renewal has a discussion of that, every outbound call has a discussion of it, and what we've found is a lot of preparation.
Speaker Change: On the CRE side, what we found is people had already looked for alternatives to China. What we found is when we go line by line on a credit or construction deal that they understand if they have a 20% tariff, what that translates into overall project costs.
Speaker Change: So that was heartening for us. They're ahead of the game. They anticipated this in some respects.
Speaker Change: Maybe not the magnitude, but they certainly had planned for it.
Speaker Change: There's no question that it brings to light the idea of...
Speaker Change: of you right now. And frankly, I've been pleased with what we've heard. In fact, I'll be with customers and hide-and-ask in the same question. I know that they do like to talk about what's going on with their business and we get really good insight. So I'd say cautious, cautious, however,
Very aware and in many cases, plan full.
Speaker Change: Perfect. Okay, appreciate that color. Thank you very much. And then it's just a broader question. You added the...
Speaker Change: Kansas City Commercial Talent. I think another branch in St. Louis as well. Maybe if you can just sort of speak to the top level aspirations in sort of that lower. Good work, good work.
Speaker Change: Part of the Midwest, you know, kind of outside that upper part that you're known for so well.
Speaker Change: Yeah, thank you. I think of it in this way. Green Bay is such a source of strength for us. Our customer base has been very loyal to us for a long time. So we want to make sure we're holding in serving Green Bay.
Speaker Change: We wanted to prove that we could grow our business in Milwaukee, a major metropolitan area. We are growing our households faster in Milwaukee than anywhere else in our footprint. And that is from a product set, a marketing strategy, a digital strategy, a commercial strategy.
We can carry that on, we think next to Minneapolis.
Speaker Change: We're doing that in Chicago. These are some major markets. And then the question, if you can do that in those markets, you have a recipe to succeed in others. And so from a product, a marketing, a digital, and a commercial perspective.
Speaker Change: We think that we have an overlay that works in other major metropolitan markets.
Speaker Change: So over time, and we want to grow organically in land phase two and monetize it, but over time if we get into markets that have a little faster population growth
Speaker Change: or Economic Growth. We think that could put us in a really good position because right now we're growing in market set that are are a little bit.
slower growing than something maybe west or south.
Yes. Okay. Perfect. Good. Thanks again for the details.
Thank you.
Speaker Change: Thank you. Next question is coming from Jared Shaw from Barclays, your line is not live.
Hey, good afternoon.
Hey Jared
Speaker Change: How much more growth should we be expecting from that, or how much should that be contributing to growth going forward? Was that more opportunistic this quarter, or is there something more there that's going to sustain that for a little longer?
Speaker Change: It's a little, but it's a couple things, and I'll have Pat Phil in the details, but it's really properties transitioning into income producing from construction, so there's actually a stability in that type of property where it's hitting some thresholds.
Speaker Change: and then paydowns have been a little bit slower than we had expected based on the market but that still allows us to convert those into amortizing loans. Pat, do you want to put a little more color on that?
Pat Ahern: Yeah, I think that the positive point that Andy's bringing up is that the loans that are moving out of construction have met hurdles, have continued to meet their original underwriting, and they're staying with us in the income-producing investor bucket.
Pat Ahern: So we're comfortable with that. We like that the sponsors have lived up to what we originally had both underwritten and you know we like. I'm certain they would like to you know use the markets to to go with long term financing but right now they fit our underwriting criteria and their solid loans that we want to keep.
Pat Ahern: Jared is Derek. If you look at slide 22, we've got the trends.
Pat Ahern: where we feel extremely good about it. You'll see we finished first quarter last year, 7.3 billion at 7.4 this year. If you add up all the categories in that bucket, it's pretty flat.
Speaker Change: Okay. All right. Good. Thanks. And then maybe shifting to CNI.
Speaker Change: as a follow-up to the conversation you just mentioned about the strong markets.
Speaker Change: Where is the CNI growth coming from? Is that sort of mirroring what you're seeing on the household growth? Or are there certain markets that are outperforming others right now? And along that lines, what are you seeing in terms of like spread compression and competition on the middle market, CNI?
Speaker Change: Yeah, so the first answer and this is the answer that makes me the happiest is we're not seeing it specifically in one market.
Speaker Change: We're seeing it, of course, in the major metropolitan, but we're also seeing across our community banking markets where we have a win Wisconsin strategy for instance. I mean, we're the largest bank headquartered here and we are out in front of the communities.
Speaker Change: So I'm really pleased that we're getting up tick across the footprint. That's a good sign that we don't just need to win in one place. It's also a good sign for us because we continue to have these investments and these non-slicitations roll off. Those non-slicitations...
Sergeant Milwaukee, Chicago, and then expand into Minneapolis.
Speaker Change: And then when you go, of course, Kansas City, the farthest out, so that votes well for us as those start to expire and we're out in the market with quality people that have been in the market for a long time and know the key businesses in the market.
Speaker Change: I would say probably the place that we've seen that a little versus 12 months ago, for instance, would be probably CRE.
Speaker Change: It's not a major area, we don't expect explosive growth in that particular area, but that's probably where there's been a little more compression because people had been on the sidelines.
Speaker Change: in that business and have kind of gotten a little bit renewed interest as they have a vision of what the market might.
Speaker Change: look like, but so far so good we like the balance sheet remixed with the type CNI business that we're bringing in, and I'll also note that the thing I'm particularly excited about is the size of the deposit.
Speaker Change: Pipeline. That corresponds with that which frankly will ultimately drive ROE for us.
Thank you.
Thank you.
Moderator: Thank you. Next question today is coming from Jon Arfstrom from RBC Capital Market,
Thanks. Good afternoon.
Hey, Jon.
Derek, maybe start with you on the non-interest income.
Just to get to a starting point, capital markets.
What do you think Fort Carter was a little abnormal? [inaudible]
Moderator: Yeah, it was a really good abnormal good. Yeah, there were a lot of syndications and capital markets. We had a great production and great fee income that went with that. So you see us softening from that, reverting to more of a trend that we saw last quarter, but I mean, last, the other three quarters of last year.
Moderator: So, yeah, I think you've read it right. Okay, and then pull out the mortgage portfolio loss.
Moderator: and Bowley probably, hard to predict, but probably drops back down, and that's a good starting point to use.
Yeah, I think that's right. Okay.
Thank you very much.
Pat, a question for you, I may have missed this, I was…
Speaker Change: studying my Packers Draft Selection Card when you were going through the changes. But you had the commercial real estate NPOs went up and commercial NPOs went down in the quarters. Is there anything to call out when you kind of get into the details? Yeah, I think so.
Speaker Change: No, we've seen some resolution and the CNI stuff and I think it's just generally a normal course of business. Real estate there is one particular deal but not out of the ordinary and we feel comfortable where we sit with it right now.
Okay.
Speaker Change: To be clear, Jon Pat, for clarification, Pat looks more closely at the bear's draft case than the Packers.
Andy: You better be in order to sit in tonight, it's at Lambo, Andy, you better be out there with business cards.
Andy: One thing I wanted to ask you, you brought up the non-solicitations expiring and you completed the commercial expansion, but how do you measure progress in the commercial expansion?
Andy: and how do you think the profitability of that expansion looks today?
Andy: Relative to the rest of the company. I'm just trying to think about...
Andy: It feels like the sun cost is already there and maybe the revenues aren't quite there yet. How should we figure that out?
Andy: That's exactly how we think about it, is that it takes a period of time in the first 12-month of investment, you don't really get it back.
Andy: We started to see just with our existing RMs, they're still doing a vast majority of our production.
Andy: So everything that we're going to get out of, and this is expected. So we're right on track with what we expected and when you see
Andy: baked into our overall growth for the year. It looks like an ambitious number, but all it really says is...
Andy: as we go through the year and people get six to 12 months into the role and start producing, we see that exactly happening. So, if 75% of the production comes from the existing base, maybe it goes down to 65 and...
and 50 as we go along.
Andy: throughout the year and the end of the year. That's why we feel like we have kind of tailwind momentum.
there, and then-
Andy: You know, we'd have to do the math on the 1.3 billion in growth and then you'd have to take the deposits that come with that.
Andy: The Stickingness of the Treasury Management, but for us what's interesting is we have an HSA business that's 12 for 13th in the country and our cross-zone to that is significant. So every time we're bringing it in, we're introducing our HSA.
Andy: business into it. We're introducing our private wealth business into it, so it goes beyond the commercial line of business.
Andy: and for the thing I'm most excited about in quarters to come is we think that we'll have a steady revenue of deposit growth. It will be the lag effect. First, you have to wait for the loans for six to 12 months, you start booking that, then you start booking deposits, then you're booking ancillary business and we're seeing that trend.
Andy: and slowly develop. But I think each time we do that, we start to change return profile.
Speaker Change: Okay, all right, for enough, thanks guys, appreciate it. Thank you.
unknown: Back your next question today is coming from KC Hair from Autonomous Revive, it is now live.
Great, thanks. Good afternoon, guys.
unknown: One of the touch-on-long girls, apologies if I've missed this, but-
unknown: Just wondering why the Long Growth Guide is still 4 to 6. You guys are off to a pretty good start here. And if I remember correctly, I think you were saying in January that the Long Growth was going to be, you know, back half-weighted in the second half to 25.
unknown: So you're wondering what's keeping you at 4 to 6 here.
Derek Meyer: I think we're at 5-7 aren't we, or 5-6, Derek, aren't we?
Sorry, five to six, yeah.
Derek Meyer: Yeah, we actually said we'd get out of the gates pretty well, and we thought we would because we'd had additional hires, so we thought we'd have a good first half of the year.
Derek Meyer: Secondly, there's puts and takes to it. We'll continue, we think, with the quality of people we have and how long their tenure is here.
Derek Meyer: We also think there's questions about the economy in the second half, and then we think that pay else on CRE are likely to emerge at a little bit higher level than we've had it, and we've forecasted that in.
So, we've forecasted low GDP of GDP.
Derek Meyer: We've forecasted an increase in CRE payoffs, and we've forecasted in the effects of continued each quarter moving forward with more tenured.
Derek Meyer: People getting off of their non-suscitation. So that's how we think about the five to six and that's why we have some level of confidence in a market that is a little bit noisy right now.
Derek Meyer: Okay, Fair enough. And then, Derek, on the CDs, you know, the 8 billion that's coming to you, I hear you that it's a bit of the benefits in a flat now a little bit. But just wondering what the your new rates are versus that 433 level here in the first quarter.
Derek Meyer: Yeah, well, the CDs that matured first quarter were a lot higher, you know, most of them had a five-handle on it and they go to the market rates that we were going out with and the competitors were around four. But as you would expect, probably about halfway through this quarter for most of the industry who stayed sure at least we were competing in our markets.
Derek Meyer: The about halfway through the quarter of the rates that are maturing, it will have dropped some.
Derek Meyer: and depending on whether the Fed cuts are not this quarter, we would expect market rates to start dropping and we would participate in that. But as Andy mentioned earlier, it's not clear that the difference between the maturing rates and the...
Pat Ahern: Market Rates will be the same, quite as wide as they were earlier in this quarter. Hope they will. We feel optimistic about our guide and we've seen rational pricing and I hope that continues. It boasts well for us in a market where
Derek Meyer: We've got superior loan growth and there might not be as much broad-based demand for deposits, which should help pricing.
Great. Thank you.
Thank you.
Speaker Change: Thank you. Next question today is coming from Terence McEvoy from Steepage Relight, is there a live?
Hi, thanks, good afternoon.
Speaker Change: Just one question left on my list here. I didn't see the Oreo expense in the release. I think it said it was $4 million. So I guess my question is, is that included in the up 3-4% for the full year guide?
Speaker Change: And if so, does that suggest kind of expenses flat to maybe even down a little bit on a quarterly basis?
Derek, do you want to take that?
Speaker Change: Yeah, sure. It is included in the guide and it does suggest that this is a pretty high quarter.
Relative to the Guide.
Okay, and it was $4 million, the Oreo expense.
Speaker Change: Correct. Yes. Okay. Okay, that was it on my list. Thank you for taking the question. That was easy.
Speaker Change: Thank you. Thank you. Your next question is coming from Chris McGratty, from KBW Online. Is that live?
Chris McGrady: Well, great thanks. Derek, in terms of the guy, I mean, feels like the NII could trend to the high end. Any reason not to midpoint everything else. I guess that's question one and question two is if some of this often in the economy does happen, can you speak to any kind of reflect on the expenses you could for? Thanks.
Chris McGrady: Yeah, I'll start with the expenses. I mean, it's still only within the year. I think we've got pretty good line of sight into the expenses. You'll even see a personal expense dropped fourth quarter to first quarter. Now that's some of that you expect anyways with.
Chris McGrady: Compton Benefits in fourth quarter. But I think we feel confident about that. I think the rest of the guidance, we really don't want to be too cute with it. We've got a lot of confidence about the first quarter. Thank you very much.
Chris McGrady: and how that turned out, we've got a lot of confidence in the...
Chris McGrady: The end points and what we brought to the table with regards to loan growth, deposit growth, and capturing the margin expansion from their repositioning.
Chris McGrady: We have good pipelines. We hear some uncertainty from customers, but I think getting overly aggressive on the guidance above what we have given all the uncertainty just doesn't seem like a...
Chris McGrady: a plausible way to really talk about our expectations going forward. Our core performance feels really good, the macro environment really feels uncertain.
So, thank you.
Chris McGrady: I thank you. We reach into our question and suggestion, I determined to floor that cover for you further, closing comments.
Speaker Change: Well, I'll be brief and just say thank you for your interest in Associated Bank. Your questions are all the things that we're thinking about and we appreciate you following us.
Speaker Change: Thank you. That does include today's teleconference webcasting and disconnectroline at this time and have a wonderful day. We thank you for your participation today.