Associated Banc-Corp (ASB) on Q1 2021 Results - Earnings Call Transcript
Operator: Good afternoon, everyone, and welcome to Associated Banc-Corp's First Quarter 2021 Earnings Conference Call. My name is Devin, and I will be your operator today. Copies of the slides that will be referenced during today's call are available on the company's website at investor.associatedbank.com. As a reminder, this conference call is being recorded. As outlined on Slide 1, during the course of the discussion today, management may make statements that constitute projections, expectations, beliefs, or similar forward-looking statements. Associated's actual results could differ materially from those results anticipated or projected in any such forward-looking statements.
Philip Flynn: Thank you. Welcome to our first quarter 2021 earnings call. Joining me today are Chris Niles, our Chief Financial Officer; and Pat Ahern, our Chief Credit Officer. Before discussing our results for the first quarter, I should note that this will be my last time leading the quarterly earnings call for Associated. Next week, I'll be passing the baton to Andy Harmening, who will be stepping in as President and Chief Executive Officer on April 28. Andy is a highly regarded banking leader with more than 25 years of experience and a track record of driving profitable growth and operational excellence, improving customers' experience, and spearheading innovative digital products. I'm proud of the progress the Associated team has made as we pursued our vision of becoming one of the Midwest's premier financial institutions. And I'm highly confident that Andy will take Associated to our next phase of success and continue our profitable growth trajectory. I look forward to working with Andy as he takes over and serving in an advisory capacity to support the company. Let me now turn to our first-quarter results. It's almost trite to say that the past 12 months have been unlike anything we've experienced before. But during the first quarter of '21, we've seen steadily increasing availability of COVID-19 vaccinations throughout our markets. Businesses have started to reopen. And encouraged by these trends, our frontline teams are back in front of clients and working directly with our customers. We've also continued to invest in and deploy technologies to meet our customers' banking needs when and where they need us. With the economy showing signs of improvement, credit dynamics have continued to improve across all of our portfolios. Our customers remain liquid, continue to pay down their credit lines and are positioning themselves for the expected economic recovery later this year.
Operator: Our first question comes from the line of Scott Siefers with Piper Sandler. Please do with your question.
Scott Siefers: Good afternoon, guys. Thank you for taking the question. And I guess before we get started, so Phil, best of luck. I will miss on the conference calls. And best wishes in whatever you choose to do in the future.
Philip Flynn: Thank you, Scott.
Scott Siefers: So I guess -- yes, you bet. First question, just the sort of the nuance of the factors in the fee improvement. I think just doing the math, it looks like a lot of the improvement we kind of already captured it in the reported first-quarter numbers. Just curious how you guys are thinking about the remainder of the year. Is there any sort of core improvement to the way you're thinking things will trend? It certainly sounds like mortgage will stay strong at least through the second quarter, but just sort of on a go-forward basis, curious how you guys are thinking about that fee momentum.
Philip Flynn: Yes. So mortgage banking is going to remain strong for a while, as you said. Our capital markets business should continue to perform very well. We think that consumer spending is going to drive debit and credit. We already saw record levels, and I would imagine we're going to start breaking records month after month going forward. We, of course, do think that we're going to have significant loan demand in the back half, and that will add some fee income as well. So we feel very good about our noninterest income outlook, which is why we raised that guidance by $30 million for the year.
Scott Siefers: Okay. All right. Perfect. And just one on -- pardon me, PPP. Do you guys have the remaining PPP fees from both last year's rounds as well as the most recent round and how those would be sort of bifurcated?
Chris Niles: Yes, Scott. So those are presented on Slide three of the tables. There's $18 million at the end of the year, roughly $6 million from the first two rounds and $12 million from the new round here in Q1.
Scott Siefers: All right. Perfect. Thank you, guys, very much. Appreciate it.
Operator: Our next question comes from the line of Lan Zanger with Jefferies. Please do with your question.
Casey Haire: Hey. Good afternoon. And best of luck, Phil, on the next chapter. This is Uzi on for Casey Haire. I just wanted to touch on auto. What kind of credit box are you looking at for this product? Maybe can you tell us a little bit about the FICO and potential loss rates? And I appreciate, I think you mentioned $200 million by the fourth quarter -- or in the fourth quarter. As you build out to get to make this a several billion-dollar item, kind of what are you thinking for 2022 for this product?
Philip Flynn: Yes. So a little early to give you that much specific detail yet. I can tell you that given our own credit appetite, that you're probably familiar with or Casey is, that we're going to be operating in the higher credit quality area in the prime and near-prime ZIP code. We've hired, as I mentioned, the team from KeyBank, and we've also actually brought -- bought some of the intellectual property from KeyBank to be able to jump-start this business and operate within what was their, we think, relatively conservative and successful credit box. So more detail to come as we get this going. We still have work to do on systems to be able to stand up the business, but we'll give you updates as the year goes on. As far as what -- where we're going to be next year, probably a little too early to give you that information, but we'll certainly share that as the year goes on.
Casey Haire: Okay. And separately, just on capital, you're still well above your CET1 ratio. I guess what's holding you back from maybe doing a little bit bigger buybacks going forward?
Philip Flynn: Well, nothing is necessarily holding us back. We have a significant authorization still remaining from the Board. And as you know, we have a new CEO starting next week. So how we implement future buybacks will be reviewed. And as always, we will be thoughtful about how we deploy that capital, doing it in an opportunistic way. And beyond that, we also never tell anyone exactly when we're going to do it.
Casey Haire: Okay. Fair. Thank you.
Operator: Our next question comes from the line of Chris McGratty with KBW. Please do with your question.
Chris McGratty: Hey. Thanks for the question. Maybe, Chris, for you, I'm kind of interested in more on the outlook for NII. And maybe I missed it, but given the downward draft in margin, I guess, excluding the PPP, how should we think about the trajectory of net interest income from current levels? Do you think it's the bottom?
Chris Niles: Yes. So we do think the quarterly NII has bottomed. We do believe, and if I draw your attention to Page 7, the net interest walk-forward dynamics, we believe the mortgage refinance-driven dynamics will abate and turn from the strong negative they were this quarter to, with the sort of decrease in premium amortization and origination cost amortization, move to a better level. We believe the commercial and business lending volumes will drive that to a more positive place. Obviously, we'll have a few more days in future quarter-day counts. And we continue to believe we will manage the interest expense lower as we move through the year. And you sort of bring that all together and we see a positive bridge to Q2 and a further positive, in particular, the bridge into Q3, when we expect we'll see more of the loan growth, particularly on the commercial side. I would note that our commercial and business core customers are at decade-low line utilization levels. And so what you have is a mix going on where our traditional core-yield and spread customer base is at a low point. And we think as we move certainly into the third and certainly into the fourth, they will return to the more normal high borrowing levels, maybe not normal immediately, but they will start to normalize. And that spread will start to reemerge, which is what we typically would see during the recovery or expansion cycle.
Chris McGratty: Okay. That's great color. And on the provision, just given where we, I guess, started, how negative it was and the constructive comments, I hate to parse words, but nominal provision would suggest that there's a meaningful positive provision. And I'm just trying to get a sense of the element of conservatism.
Philip Flynn: Well, what I said was very nominal. So I -- look, credit has improved dramatically. And from CECL day one through the first two quarters, we were ramping up our reserves. You've seen us start to release now in the fourth quarter and the first quarter. We're getting remarkable outcomes in credits that we were concerned about. Stuff that we thought we had lost content in has been fully repaid. We've seen that now twice just in the last month, sizable credits. So the provision is going to be very low. How is that?
Chris McGratty: Okay. That's fair. And then can you just -- I probably have it in my notes, but the day one CECL reserve, what was that percentage? I just don't have it in front of me.
Chris Niles: Yes, it's shown on page 10 of our deck of 1.55%.
Chris McGratty: Got it. Thanks, Chris.
Chris Niles: Yes.
Operator: And our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please do with your question.
Jon Arfstrom: Good afternoon. A couple of follow-ups, just on the debit and credit spend. What do the numbers look like in January and February versus March?
Philip Flynn: Yes. We were up in March over February, I believe, 20% on transaction volume and 20% on dollar volume. So a dramatic step-up in March.
Jon Arfstrom: And then you may have touched on it, I think I missed it, but on Slide 4, the general commercial decline, what was the driver there?
Philip Flynn: It's line utilization. We're sitting right now, Jon, at about 32%, which is the lowest it's ever been. We would normally run in the mid-40s. So I mean, If nothing else, since things tend to revert back to where -- to the mean, there's a significant amount of untapped outstandings there that I believe you're going to start to see come on pretty hard as we get into the later part of the year. With the business activity that we're seeing and the conversations we're having with our customers around the Upper Midwest, inventories are going to have to start to build, receivables are going to start to be generated, and that stuff is going to have to be financed. So we do believe that line utilization alone is going to drive significant pickup in C&I as we get into the year.
Jon Arfstrom: And I guess it ties to the next question. The period-end noninterest-bearing savings and money market growth, so much higher than your averages. And every bank has experienced it, but do you expect that to come back down when the line utilization starts to pick up? Or do you expect this stuff to stick around for a while?
Philip Flynn: Well, a lot of it's sitting in retail accounts, of course, with all the stimulus money that went out. So I expect consumers will start to spend money and that those dollars will come down. Our commercial borrowers aren't sitting on all that money. It's mostly out on the retail side.
Jon Arfstrom: And then just a random one, but you talked about the J.D. Power ranking.
Philip Flynn: Yes.
Jon Arfstrom: Where were you in the past? I mean we don't have to go back to 2009, but what...
Philip Flynn: We were kind of average. I mean we were -- we did fine, but we weren't a standout on that measure. And we've made huge efforts over the years to really become a customer-facing and customer-centric organization. And I have to tell you, that on my last earnings call, it's kind of gratifying to be able to say that we're going to be #1 in the Upper Midwest for retail customer satisfaction.
Jon Arfstrom: Yes. I remember the first call. I think it was January 2010. And it's kind of a mess. So this is something to be proud of, Phil, for sure. So well, thanks for everything, Phil, good luck.
Philip Flynn: Thank you. And it did snow a little here yesterday, but we didn't have to plow or anything because it melted.
Operator: Our next question comes from the line of Terry McEvoy with Stephens. Please do with your question.
Terry McEvoy: All right. Good afternoon. And I remember that call in 2010. It was a mess, to Jon's point, and the bank is significantly healthier today, on your last call, Phil. So I enjoyed working with you.
Philip Flynn: Thank you, Terry.
Terry McEvoy: I guess just circling back on the indirect auto, and I apologize, my phone line broke up a little bit when you were talking about that business. Could you just run through, I guess, did you evaluate any other lending verticals? Or was this the team presented itself and you had an interest? The incoming CEO of the -- his bank has a strong history in that business, did that come into play? And then just the last part, the expenses, and I appreciate the update. Will there be incremental expenses next year that we should contemplate as we model out 2022?
Philip Flynn: Yes. Great questions. Probably a little early for me to give you much guidance on '22 expenses. But I can tell you that -- and as we talked about, we have built a conservative credit book here for many years, which also is a relatively low-yielding credit book. I mean those things obviously go hand in hand. We've been looking for another asset class to enter that we were comfortable with that has higher yields attached to it. And so we settled in on the indirect auto lending business because after home lending, in its various forms and the credit card biz, it's the next asset class for consumers that makes a difference, just based on the size of the market and the size of those purchases for the average household. So we had actually settled on pursuing this business. The KeyBank team presented itself fortuitously as we were thinking this through. And so we went after that aggressively. And all of that was under way actually before the Board hired Andy. So it's fortuitous but coincidental that he's coming from a bank that does have a large presence in the indirect auto space.
Terry McEvoy: That is great. That is it on my list. Thanks, everyone. Thanks, Phil.
Philip Flynn: Thank you.
Operator: Our next question comes from the line Michael Young with Truist. Please do with your question.
Michael Young: Hey. Thanks for taking the question. Sorry for another follow-up on the indirect auto. But first of all, will that be a regional book and really kind of cross-sell within the core customer base initially and then walked out further? Or how do you kind of look at that?
Philip Flynn: Actually, our intention is to be active in originating this indirect auto paper from the Northeast, all the way through to our footprint. So that's the initial footprint that we're looking at. And that lines up basically with the team that we've hired from Key.
Michael Young: Right. Okay. And then maybe just a philosophical question there. We've seen a lot of banks exit that business or get out back when losses were a little higher a couple of years back, and there were some worry or concern there. So is there anything that you all view differently when you were kind of reviewing it, whether it be a scale issue or CECL impacts, anything like that, that kind of led you to believe this was a good business to be in, whereas others have kind of exited at different times?
Philip Flynn: Yes. As I was describing to Terry a moment ago, we do feel the need to seek some asset classes with higher yield and something that could make a difference. We think that conservatively and properly run, this is a perfectly fine business that will generate appropriate RAROCs. But critical to making that decision was finding an experienced team with a proven track record of success to run it for us, and that's what we were able to find with the KeyBank team. If you think about the history of this bank expanding outside of its footprint into other areas, for example, our loan production offices that have focused on commercial real estate in places like Dallas and Michigan and Ohio, and other places, we are always very careful to make sure that the most important aspect was find the right leadership team to run those operations with experience in those markets. And it's a different asset class than commercial real estate, but the same philosophy applies here. We have found a great senior leadership team, and we have found they have the ability to bring along a significant amount of the rest of their team with us. So we're not trying to, as novices, get into this business. We're bringing experienced people on to help us do that. It's also true that many of us here, whether it's myself or Dave Stein or others, in previous organizations have been involved in the business. So although I wouldn't certainly call any of us experts compared to the people that we brought on, we have significant familiarity with it.
Michael Young: Okay, And maybe one last one, if I could sneak it in, just on kind of the potential infrastructure bill. You talked about the positivity and kind of outlook in commercial and I guess, ramping production. Have you had a lot of just anecdotal conversations, where people are getting prepared or ramping up supplies and et cetera, for that already? Or are people kind of taking a wait-and-see approach?
Philip Flynn: No. Our borrowers who are in that space, for example, we have a decent-sized portfolio of heavy civil contractors that we run out of Minneapolis. They're, of course, eager and willing and anxious to get going, and we're there to support them. So yes, I mean, our customers are gearing up. I mean this is still -- it's still conversation right now in D.C. We would certainly expect to see something happening, and our customers expect it to happen as well.
Michael Young: Okay. That is all for me. Thanks. And congrats, Phil, on your time.
Philip Flynn: Thank you. Appreciate it.
Operator: Our final question comes from the line of Scott Siefers with Piper Sandler. Please do with your question.
Scott Siefers: Hey, guys. Just a couple of follow-ups. First, so looking at the guidance, I think it implies costs are going to actually come down from the first quarter run rate. So are the auto buildout costs already embedded in there? Or like where are the -- I guess, where are the savings coming from that would allow you to have down costs through the remainder of the year vis-a-vis the first-quarter run rate?
Philip Flynn: Sure. So we've already hired more than half of that team during the course of the first quarter. So some of those costs are already in there. And our guidance, of course, takes into account all of the costs for the rest of the year. Know that our first quarter expenses usually are a little bit higher, just from compensation activity and incentive activity and such. So yes, I mean, at $690 million to $695 million, it's a little less than the $700 million run rate, but that would be not unexpected given the normal seasonal pattern of our expenses.
Scott Siefers: Okay. Good. All right. And then just on the margin guidance of 2.45% to 2.55%, are we talking there a reported margin, like including the impact of the PPP fees? Or are we thinking sort of off that sort of core base of, I have estimated around, 2.32% or so, excluding the PPP fees?
Philip Flynn: So that includes...
Chris Niles: It's a fully loaded reported number.
Scott Siefers: Okay. Perfect. All right. That is great. Thank you, guys, very much.
Operator: And with that, this concludes our question-and-answer session. And now I would like to turn the call back over to Mr. Flynn for closing remarks.
Philip Flynn: Great. Well, thank you. And in closing, I do want to thank the analysts and investors who are on the call, for the trust you've placed in me over these years. I know Andy looks forward to talking with you all later as he gets on board. And I certainly would expect that he'll continue to carry on our tradition of investor transparency and accessibility. So if you have any questions in the meantime, give us a call. You can call me until Wednesday. After that, call Niles and Andy Harmening. Thanks again for your interest in Associated Bank.
Operator: And with that, this concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.
