Good afternoon, everyone, and welcome to Associated Banc-Corp's Second Quarter 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 the conference. Copies of the slides that will be referenced during today's call are available on the Company's website at investor.associatedbank.com. As a reminder, this conference call is being recorded. As outlined on Slide 1, during the course of the discussion today, management may make statements that constitute projections, expectations, beliefs or similar forward-looking statements. Associated's actual results could differ materially from the results anticipated or projected in any such forward-looking statements. Additional detailed information concerning the important factors that could cause Associated's actual results to differ materially from the information discussed today is readily available on the SEC website in the Risk Factors section of Associated's most recent Form 10-K and subsequent SEC filings. These factors are incorporated herein by reference. For a reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please refer to Pages 30 through 32 of the slide presentation and to Pages 10 and 11 of the press release financial tables. Following today's presentation, instructions will be given for the question-and-answer session. At this time, I would like to turn the conference over to Andy Harmening, President and CEO, for opening remarks. Please go ahead, sir.

Well, thank you Paul, and good afternoon. I'm Andy Harmening and I'm joined once again by our Chief Financial Officer, Derek Meyer; and our Chief Credit Officer, Pat Ahern. I'd like to start off by sharing some highlights from the quarter and then from there, Derek will provide a few updates on our margin, income statement and capital trends, and Pat will provide an update on credit. Midway through 2024, we have remained squarely focused on supporting our markets while continuing to execute on our plans to grow our customer base, deepen our relationship and enhance our profitability. In the context of the broader U.S. economy, we remain pleased with the stability and resilience of our upper Midwest footprint. Several states, including Wisconsin and Minnesota, remain below 3% unemployment. Our prime, super prime consumer base has largely taken inflation in stride and our commercial clients have remained upbeat while navigating a challenging rate environment. With these trends as a backdrop, our credit performance remains solid here in the second quarter. Delinquencies, criticized loans and net charge-offs all decreased versus the prior quarter, and we've steadily added to our provision over the past several quarters. To date, we have yet to see any meaningful negative trends that are concerning with regards to specific asset classes or geographies. This stability is a reflection of our home markets, but it's also a reflection of our disciplined proactive approach we've taken as a company. We've anchored ourselves in familiar Midwest markets and we've developed a diversified CRE portfolio with limited exposure to downtown office properties and other key pressure points. And while we're pleased with the results we've seen to date, our experienced team remains vigilant, methodical in reviewing our portfolios on a continual basis to ensure we're staying ahead of any issues that…

Thanks, Andy. I’ll start on Slide 10 with some color on our asset liability yield trends. While the target Fed funds rate has remained stable since July of last year, we’ve continued to see asset yields inch higher in most major loan categories, including C&I, auto and mortgage here in Q2. We also saw investment yields increase 14 basis points during the quarter as we’ve continued to benefit from the securities repositioning we completed last year. With that said, our overall Q2 earning asset yield was also negatively impacted by 2 basis points [indiscernible] these yields mentioned previously, our earning asset yields increased by 1 basis points and landed at 565% during the first quarter or second quarter. On the liability side of the balance sheet, we’ve continued to see lingering funding cost pressures due primarily to elevated wholesale funding costs. We’ve actually seen both our cost of total interest bearing deposits and cost of total deposits decrease slightly in Q2, but these trends were more than offset by the addition of higher cost wholesale funding during the quarter. All in, our cost of total interest bearing liabilities increased 5 basis points to 3.6% for the quarter. On Slide 11, the trends I just described netted out to 4 basis point decrease in our quarterly net interest margin, with 2 basis points impact coming from the quarterly swing in recoveries on the asset yield side and the other 2 basis points attributed to higher funding costs. Despite this pressure on NIM, our net interest income has remained stable. The $257 million we posted in Q2 was down just $1 million from Q1, and it was higher than our NII in the third and fourth quarters of last year. Based on our latest expectations for balance sheet growth, deposit betas and…

Thanks, Derek. I'd like to start our credit portion with an allowance update on Slide 16. We utilize the Moody's 2024 Baseline forecast for our CECL forward-looking assumptions. The Moody's baseline forecast remains consistent with a resilient economy despite the high 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 another $2 million in Q2 to finish the quarter at $390 million, with increases in CRE construction and other consumer categories partially offset by decreases in commercial and business lending, CRE investor and resi mortgage. Our allowance continues to be driven primarily 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 1.32% here in Q2, up 1 basis point versus Q1 and up 6 basis points compared to the same period a year ago. Moving to Slide 17, we've continued to see solid performance in our core credit quality trends, with credit metric changes reflective of the continued theme of normalization within the portfolio. At the top of the pipeline, total bank wide delinquencies have decreased for the second consecutive quarter, with $37 million in total delinquencies in Q2, this figure represents a $14 million improvement from the prior quarter and a $4 million improvement from the same period a year ago. Delinquencies often serve as an early warning sign of stress in the portfolio, so we've been pleased to see the improvement in these numbers despite a challenging macro environment in 2024. Further down the line, total criticized and classified loan trends also improved slightly for the third consecutive quarter. While we did see…

Thanks, Pat. I'll wrap this up by reiterating a couple key points from our presentation on Slide 19. First, our strategy emphasizes quality relationship focused loan growth that decreases our reliance on low yielding non-relationship balances and enhances our profitability profile. While we continue to expect tailwinds from our initiatives in the back half of the year, we now expect total loan growth to land at the lower end of our original range of 4% to 6% due to current market conditions and previously mentioned increase in CRE payouts. On the other side of the balance sheet. We’ve been pleased with the momentum we’ve seen from leading indicators such as household growth, quality of accounts and customer satisfaction scores, which are foundational for growing your customer base and delivering quality deposit growth. We’re also encouraged by our ongoing cadence of product, service and marketing enhancements expected to help build on that and we expect that to help build on our momentum in the coming quarters. Due to current market conditions, we now expect core customer deposit growth to finish 2024 at the lower end of our 3% to 5% range that was given previously. On the income statement. We’ve adjusted our most recent forecast for balance sheet growth, deposit betas and rate environment. Our latest forecast assumes two Fed rate cuts beginning in September. And taking these factors into account, we now expect net interest income growth of between 1% and 3% in 2024. We continue to feel encouraged by the durability of our non-interest income in a challenged environment. And as such, we’ve updated our full year 2024 growth guide to plus or minus 1%. And finally, our disciplined approach to expense remained foundational for the company. And with this in mind, we continue to expect non-interest expense growth of 2% to 3% in 2024, after excluding the impact of FDIC special assessment expenses in Q4, Q1 and Q2. So with that, let’s open it up for questions.

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Daniel Tamayo with Raymond James. Please proceed with your question.

Thank you. Appreciate it. Good afternoon, guys. Yes. Maybe first just to start on the net interest income guidance. Just back of the envelope, as I look at what you guys have done in the first half and the guidance for the full year, it looks like there’s some solid NIM expansion that that would assume or bake in the back half of the year guidance. Am I thinking about that right? I think I heard you say the NIM expansion you’re expecting by the end of the year, not sure if we should think about that as kind of stable in the third quarter and then more meaningful in the fourth quarter. Maybe you can help me just in terms of how I’m thinking about the dynamics for the rest of the year.

Yes. So this is Andy. I’ll start this off and then turn it over to Derek. I’d say what I’d emphasize is we expect deposit growth and we expect loan growth in both the third and the fourth quarter. So with that, we’re expecting a steady expansion of our NIM throughout the second half of the year. And so maybe Derek put a finer point on that.

Yes, I think you’ve got it right. The NII, we expect to sequentially increase both third and fourth quarter and margin expansion in both quarters, handful of basis points each one.

Okay. All right. Great. Thanks for that help. And then maybe looking at the expense guidance, seems like – well, I guess just first a clarification. The adjustment related to the FDIC assessment in the second quarter. Was that a negative adjustment? So the operating number was higher than the reported number or – I just want to make sure that I have that right.

That’s correct. It was $2 million unwind of an accrual based on receiving the actual bill from the FDIC.

Okay. All right. That makes more sense with the guide then. It still implies a little bit of a pickup, I guess, in expenses in the back half from what you guys have done in the front half. Is that – should we think about that being kind of personnel driven with the hirings that you guys have been making?

It is personnel driven. And then there is investment in actually acquiring accounts and marketing and segmentation to support account acquisition. So some of it you would see as – some of it you’d see as eventually contributing to the – all the RM hires that we’ve identified, and then some of it would just be seasonal.

Okay. All right, terrific. Well, thanks for the color. I’ll step back.

Thanks, Daniel.

Thank you. Our next question is from Scott Siefers with Piper Sandler. Please proceed with your question.

Good afternoon, everybody. Thanks for taking the question. Derek, maybe if we could walk through the idea of margin expansion in the back half, maybe just add a little more color on what you expect the puts and takes to be that would allow for a few basis points of expansion in each of the next couple of quarters. I guess the background is – the context is we’re starting at a little bit of a lower base. And I thought the real juice for the margin would have been the sort of the lingering benefits of the securities portfolio restructuring. So I guess base question is, what is it that allows the margin to expand from here? Is it Fed rate cuts or is it just sort of richer balance sheet mix with the net-net of loan growth as well as core deposit growth? How do those dynamics all play out?

Yes, it's more mix driven, although we rerun this obviously with the rate cuts each time, that matter is less and less. Now we have two rate cuts assumed one in September, one in November. But more of it is continued trickling up of the investment portfolio, the auto book. Both of those happened and a little bit of the resi, both of those happened regardless of a lot of movement from the Fed. And then as we expect to see these RMs bring in C&I growth at rates that you saw sort of at the end of Phase 1. Those that should help us replace some of this lower yield in resi as it rolls off. And then you have two levers. But clearly, the mix on the deposit piece as we expect deposit growth, you expect the mix on the wholesale piece to drop. But then if you also look at the quarter-over-quarter change in our interest-bearing deposits, we already sort of telegraph those costs coming down a little bit. And we expect with a rate cut that will allow us from a customer perception standpoint to be a little bit more efficient on that front also.

Okay. All right. Thank you for that. And then Andy or Derek, just on the lower loan growth expectation. I guess I'm hoping you can unpack a little more just sort of as you weigh how much of this is lower demand versus how much is sort of profitability within the existing growth aspirations? And then the company-specific nuance that you've always had is the new hires. I imagine they're producing as hoped? But I would just love to hear your color on sort of the umbrella of all three of those things.

Yes. So this is Andy. I'll take that one. The first thing I'd say is it's the lower end of the range. So we're staying within the range that we forecasted or gave guidance on at the beginning of the year. Then there are a few puts and takes within that. We've been proactively managing our CRE book, and we've had some payoffs, and we're fine with that. So that takes it down a little bit. It puts us in a pretty good position credit-wise. We've seen the auto industry. It's the – the application volume has slowed a little bit in that part of what we do. But the market has some influence on that, however, we see our pipelines are up. And so Derek and I were just discussing this last week. We compare Phase 2 of our plan with Phase 1. And so if you look at that, we're adding about 26 RMs in Phase 2. We added roughly 20 in Phase 1 we are seeing very similar impact in the first six months of that. Remember, it's the first six months of that. So by the time you hire them, they take an application, you don't start closing anything or book anything until third, fourth quarter. And so we see a very similar – we see a very similar result in that period of time. Derek, I don't know if you can show – highlight kind of where we were in Phase 1 and what we grew to just to give an idea on the timing.

Yes, yes. So I think right before I started, Andy was here and then in September or third quarter of 2021, rolled out Phase 1. And so I looked at the June before that June 30. And our C&I loans were about $9.2 billion. That's $11.1 billion now. And really, you grew about $1 billion that first year or really the back half of the first year and then another $1 billion the following year. And we're sort of seeing the same thing where you maintain the portfolio you have. And then as the new hires come in, the pipeline builds slowly and then we're all eager to see the pull-through on that and expect the same thing to happen.

And so Scott, if you wanted the short version versus the Reader's Digest, we're still within the forecast. We're slightly low end of that just because auto is a little bit shorter and then CRE is a little bit down.

Yes. Got it. Okay. Thank you very much. Appreciated.

All right. Thanks, Scott.

Thank you. Our next question is from Timur Braziler with Wells Fargo Securities. Please proceed with your question.

Hi good afternoon. Yes, I'm just wondering of the 28 planned or 26 planned hires, how much of that hiring has already taken place?

Yes, it's a great question. We are at 10 net. So net meaning if somebody leaves, we actually have to replace that, too. And so we’re at 10 of 26. And I expect that we’ll be at 100%. My estimation target is by the end of the first quarter of 2025 will be at all 26.

Okay. And then I guess just maybe going back to the growth expectations for both loans and deposits in the back end of the year. I mean, both of them imply kind of a meaningful ramp. I guess on the loan side, and I get RMs coming in, bringing over their books of business environment does seem soft. Like is the expectation that CRE paydowns slow that auto demand intensifies. I guess what’s giving you confidence that loan growth is going to materialize in a more meaningful capacity in 2Q seeing as, the landscape is still a little bit soft here?

Yes. We have the benefit of seeing our pipelines. And so we’re able to track kind of where they were this time last year. We can do it by same quarter prior year and those pipelines are up. And typically, when you see pipelines grow, the loan production and the loan balances follow on that. We also think that we’ve had, we’ve monitored pretty closely what we’ve seen in the CRE paydowns, and we expect that net number for CRE won’t be quite as negative in the second half as the first half. So when we look across the board, the loan growth doesn’t have to be heroic, just has to be a little bit better than it was in the first half. And frankly, those 10 people that we have hired will really start to get benefit from them in the second half of the year. So there’s additional dollars there. On the deposit side of it, the balance sheet, we can look at annual trends and we see the back half trend for the company for the last two years. We have significantly improved our capabilities on the consumer side. And we’ve added RMs on the commercial side. And frankly, our wealth business is doing quite well in deposit acquisition. So both sides of the balance sheet, we feel that we’ll be able to fund pretty equally, fund our loan growth in the second half, what we’re looking at on the loan number and then funding it on the deposit side.

Okay. And then I guess just a corollary on the deposit side. What’s the implication for noninterest bearing demand? How is that progressing? Is that pace of pressure line item maybe abating a little bit? And then just wondering if the loan growth is somewhat dependent on the deposit growth manifesting or if that deposit growth doesn’t manifest, would you continue funding that loan growth with wholesale funding?

So a couple of things. I think we talked about the last two quarters, the noninterest-bearing deposits bottoming about 5.8 billion. I think it bottomed about 5.7 billion. We still have the same view and bottoms up forecast telling us it’s going to grow a few hundred million between now and the end of the year. So I think that is largely intact. One of the things – and so we have contemplated your other question we did in the fourth quarter about loan growth and deposit growth. Our loan growth right now is not and strategies is not dependent on deposit growth, but we feel confident in both of them. We grew deposits quite a bit the second half of last year and outperformed our expectations. The first quarter this year and a little bit of the second quarter is rebounding from that. So we have confidence in the tactics, but also we don’t necessarily want to put the brakes on our go-to-market strategy with the commercial relationship managers who are tasked with getting both. And what I mean by that is when we repositioned our securities and sold for the resi real estate, that improved our profitability, but it also freed up capacity and funding so that if loan opportunities get ahead of the pace of deposit growth, we have flexibility there as long as it’s profitable because the setup for this is driving growth and profitability, and that gives us the flexibility to do that.

I’ll tag on to that. We have to think of what our funding sources and the downside scenario of not hitting your deposit numbers are. But make sure you understand that a majority of our growth on the deposit side, we expect to come from consumer. We have executed on every consumer strategy that we had in the plan. Every time we've launched a new piece of it, we've seen an improvement in retention, we've seen an improvement in customer satisfaction, which typically leads to people staying. So remember, the growth is dependent on people staying and adding to it. The second part of that is you can start to see what your tactics are and seeing the households accelerate, which we have each of the last three months, including in this month. When that starts to accelerate, they bring quality deposits and we measure what the quality of those customers are. So between the decreased runoff, the improvement from even year-end in customer satisfaction, leading to decreased runoff and then acquiring new customers that are starting – that are higher quality than the year before. While we do have a contingency plan to fund and have loan growth regardless of deposit growth, that combined with what we've seen in the trend in the last two years gives us the confidence that we'll be able to fund the loan growth vis-à-vis or deposit growth.

Great. And if I can just sneak one more question in just for the remainder kind of planned hiring, I'm just wondering how much of that from an expense standpoint is going to be able to be mitigated with maybe further enhancements, reductions on other expenses. You guys have done a really nice job kind of keeping the line on expenses over the last four quarters while adding new people. Is there still capabilities to maybe offset some of the hiring spend, or should we see a greater pull through from these expected hires into the expense base?

Well, you're making my job easier right now because I assume our leadership team is listening and we go into every single year saying where do we cut to invest? Those conversations have started already, trying to get out in front of that and so we expect we'll find areas that we can decrease expenses to invest in where the world's moving. Part of where the world's moving for us is to be local and add to the commercial RM's, although adding 16 people won't make or break our budget all by itself. So that is our approach to business. Of course, everyone's battled expense growth and inflation and what that means, but that conversation has happened as recently as this morning in meetings that I've had as recently as yesterday with our entire FP&A team, and we have meetings already scheduled with our executive leadership team to have the same conversation. So it is the way that we do business. Yes? And we expect to manage our expenses in 2025 in a very similar type of fashion. Great. Thank you for the questions. Appreciate it.

All right. Thank you.

Thank you. Our next question is from Terry McEvoy with Stephens Inc. Please proceed with your question.

Hi. Good morning – good afternoon, everybody. Maybe could you start and talk about the $81 million of office CRE loans that matured in the first half of the year in terms of updated appraisals and if those loans remain on the balance sheet today. And I asked the question because I think you've got another 230-ish set to mature in the back half of the year?

Yes. I would say in terms of the first half of the year, it was definitely a mix of some we kept. If they met underwriting criteria, we've had others that paid off via sale or refinance. So it's probably a fairly even mix amongst the three. And that's kind of how we would look at the rest of the year as well. Anything that stays on the books that we're looking to renew, really, it's got a – we're looking to resize to updated underwriting standards, et cetera, and work with clients on that.

Thanks for that. And then as a follow-up, page six, complete sense, improving the returns involves decreasing wholesale funding sources. And I've had a couple of investors reach out to me over the last hour and just, just to cite the increase in the FHLB borrowings, which kind of goes against that slide. So looking beyond the next couple of quarters, where would you like to see wholesale funding FHLB advances be as a percentage of your balance sheet?

Yes. So we include in our, for the purposes of managing the firm, in our definition of wholesale funding we also include brokered CDs. So we generally try and keep that under 15% or below those three buckets combined.

Great. Thanks for taking my questions.

Terry. I just tack onto that by saying that's why I've emphasized that we're funding the balance sheet with deposit growth in the second half. But to me, looking at the second quarter versus first, looking at the first and second quarter in combination is important because we were able to take steps on wholesale funding in the first quarter when we had deposits longer than we expected. So that kind of went up, then came down. Our absolute intent is to have budgets and expectations where we are growing our deposits at the same rate as our loans. And so that's what I was trying to highlight in the expectation in the second half. If you just simply look at that one quarter, it doesn't tell the story. That's the other reason that we tried to show from the fourth quarter average to the second quarter average. It's pretty much. It's pretty much flat. It's a good question. Thank you.

Yes. Thanks, Andy.

Thank you. Our last question is from Jon Arfstrom with RBC Capital Markets. Please proceed with your question.

Hey, thanks. Good afternoon.

Hey, Jon.

I did have a question on that trend that Terry just asked, but just to clarify, I mean, it's late July. You're starting to see those deposits rebounding already, is that fair? I understand the first quarter to second quarter normalization, does that rebound starting to happen?

It has. I mean, it would be a difficult story to tell if we hadn't seen that already in June heading into July as well. And frankly, it's followed the trend and the forecast that we've had internally. Yes.

Okay. Any thoughts on what could push you to the higher end of the net interest income range? Is it as simple as loan growth or is it something else?

Yes, it's loan growth. I think if we saw fewer payoffs than we currently have rolled up in our forecast on CRE and we saw the pipeline mature, as the pull through come in quicker than what we've currently got penciled in, those would both drive it. We've seen the pipeline grow as a result of adding all these people that Andy was talking about. But at the same time, we saw pull through as deals booked slow down a little, largely because of high rates. So that could easily reverse itself. The economy itself is strong, so we don't see that the softening in terms of demand driven by GDP growth. We don't see that as a factor that's slowing anything down in our markets.

Okay, so it's possible that lower rates could be a catalyst for some loan growth. Is that fair?

It's possible or it could be the both lower rates or slower payoffs than what we've got planned.

Okay. And then just one, Andy, you cited a little softer demand in the auto dealer network. Any idea on the cause of that? Is that just a blip or persistent? What do you think?

Yes, I think the captives have tried to kind of enhance the sales of auto. And so they have some offers out there that are pretty, that have been fairly aggressive. We absolutely won't get out of the prime/super prime business. So we're not going to flex on that we like it as a business for us and it's one that actually helped the gap, the attrition that we plan for on the residential real estate. So we don't need to reach there. And the average FICO – Pat, what’s the average FICO in June of deals we’ve got.

We're pushing like 785, 790.

It was actually over 790 the whole quarter.

Yes. So this is truly a super prime book. So it slowed a little bit, will that increase in the second half? Perhaps a little bit. But we won't press the accelerator on auto, so to say.

Yes. Okay. All right. Thanks for the help. I appreciate it.

Thank you.

Thank you. There are no further questions in queue.

Well, we appreciate everybody's interest and we look forward to executing on Phase 2 as we head into the second half of 2024 and into 2025. Have a great evening.

This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.