Associated Banc achieves record $305 million net interest income in Q3, driven by strong C&I loan growth and strategic balance sheet remixing.

OPERATOR - (00:01:18)

Good afternoon everyone and welcome to Associated Bancorp's third quarter 2025 earnings conference call. My name is Diego and I will be your operator today at this time all participants are in a listen only mode. We will be conducting a question and answer session at the end of this conference. Copies of the slides that will be referenced during today's call are available on the company's website at investor.associatedbank.com 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 included is readily available on the SEC website in the Risk Factors section of Associated's most recent Form 10K 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 2024 through 26 of the slide presentation and to pages 10 and 11 of the press release Financial Tables following today's presentation, instructions will be given for the question and answer session. At this time I would like to turn the conference over to Andy Harmoning, President and CEO for opening remarks. Please go ahead sir.

Andy Harmoning - President and CEO - (00:03:13)

Well, good afternoon everyone and thank you for joining us for our third quarter earnings call. This is Andy Harmoning. I am joined once again by our Chief Financial Officer Derek Meyer and our Chief Credit Officer Pat Ahern. I'll start out with some highlights of the quarter. Derek will cover the income statement and capital trends and Pat will provide an update on credit quality. Over the course of 2025, we've been squarely focused on execution and delivering on the strategic growth investments we've made across our company. Nine months into the year, we continue to see several trends that are both leading to strong current results and positioning us for future performance. We're proving that we can grow and deepen our customer base organically. We've posted net household growth each quarter so far in 25 and are on pace to deliver our strongest year for organic checking household growth since we began tracking a decade ago. We're also proving that we can grow and remix our balance sheet simultaneously. On the asset side, We've added nearly $1 billion in high quality C&I loans year to date while working down our mix of low yielding, low relationship value resi mortgages. On the liability side, we added over $600 million in core deposits in the third quarter, enabling us to work down our wholesale funding mix. As this mix shift continues, it enables us to drive stronger profitability. After delivering quarterly net interest income of $300 million in the second quarter, a record for our company, we posted another record of $305 million in Q3 and with this enhanced profitability comes enhanced capital generation. We added another 13 basis points of CET1 capital in Q3 and have now added 30 basis points year to date. This capital generation enables us to support our growth while continuing to execute on our organic strategy. Now I'll remind you, just because we're growing assets doesn't mean we're stretching. Credit discipline remains foundational to our strategy and our growth is focused on high quality commercial relationships and prime super prime consumer borrowers, which is consistent with our conservative credit culture built over the last one and a half decades. We continue to manage our existing portfolios proactively and meet with our customers regularly to stay on top of emerging risks. As we look at the remainder of 20, 25 and 26, Associated bank has strong momentum that continues to build while we continue to monitor risks tied to the macro uncertainty. Our growth strategy puts us in a position to grow and deepen our customer base, take market share, remix our balance sheet and improve our return profile without having to rely strictly on a hot economy or a perfect rate environment. With that, I'd like to walk through some additional financial highlights on Slide 2. In Q3, we reported earnings of $0.73 per share. Total loans grew by another 1% versus the prior quarter and 3% versus Q3 of 24. Adjusting for the loan sale we completed in January, we've grown loans by 5.5% over that same time period. C and I lending has continued to lead the way as we deepen relationships across our markets and see non compete agreements from our new RMs expire. We grew nearly $300 million of C&I loans in Q3 and we've now grown C and I loans by nearly $1 billion year to date. Shifting to the other side of the balance sheet, seasonal deposit inflows came back as expected during the quarter, with our core customer deposits up 2% or $628 million from Q2. With that said, we're seeing more than just seasonal strength. Core customer deposits were also up over 4% or $1.2 billion relative to the same period a year ago. Moving to the income statement, our Q3 net interest income of $305 million set a new record as the strongest quarterly NII we've seen in our company's history. Our NII was up 16% relative to Q3 of 2024. We also saw strong quarterly non interest income of $81 million in Q3, a 21% increase from the prior quarter. The increase was driven primarily by capital markets, revenue, wealth, FEES and a one time asset gain of approximately $4 million tied to deferred compensation plans. Total non interest expense was 216 million in Q3, up 7 million from the prior quarter. The quarterly increase was primarily driven by performance based incentive programs. Delivering positive operating levers continues to help us post strong quarterly operating results and is a primary objective as we execute our plan. Managing credit risk is also a top priority and we remain pleased with asset quality. Trends in Q3 delinquencies were flat and non accruals were just 34 basis points of total loans. Net charge offs were also flat at 17 basis points and our ACLL decreased 1 basis point to 1.34%. And finally we posted a return on average tangible common equity of over 14% in Q3, a 250 basis point improvement from Q3 of last year. On slide 3 we provide a reminder of how our strategic investments are transforming our return profile and setting us up for additional momentum over the remainder of this year and into 2026. First, we're positioned to take market share in commercial lending and deposit acquisition thanks to a strategy predicated on hiring talented RMs in metro markets where we're under penetrated. In fact, we've already seen results from our efforts through the first nine months of the year. We've already added nearly $1 billion in C&I loans to our balance sheet. With pipelines remaining strong and several more non compete set to roll off between now and the first quarter of next year. We we expect our momentum to carry through 26 and as those relationship C and I balances come onto the books, they're replacing lower yielding non relationship resi mortgage balances that are rolling off, positioning us to diversify our asset base more profitably without changing our conservative approach to credit. This mix shift is driving enhanced profitability. Over the past two quarters we saw our margin climb above 3% and posted back to back quarters of record NII. As we continue to grow and remix our asset base and support it with lower cost core deposits, we see additional opportunity ahead. On slide 4 we highlight our loan trends through Q3 on both an average and period end basis. Quarterly loans grew by 1% versus Q2 and that growth was once again led by the C and I category. On a spot basis, C and I loans grew by 3% or nearly $300 million versus the prior quarter. After adding nearly $1 billion in C and I balances to our balance sheet year to date, we feel very well positioned to meet or exceed the $1.2 billion growth target we originally set for ourselves in 2025 thanks to the strength of our pipelines and the additional lift from newly hired RMs as their non competes expire. Auto balances also grew by 72 million in the third quarter as we've continued to be to selectively add prime and super prime balances to our book. Total CRE balances grew slightly for the quarter but decreased by 160 million on a quarterly average basis. We expect elevated CRE payoff activity in the coming quarters as rates continue to fall. Overall, we continue to expect total bank loan growth of 5 to 6% for the year. Shifting to slide 5 total deposits and Core customer Deposits both bounced back as expected in Q3. Following Q2 seasonality, core customer deposits increased by over $600 million point to point with gross spread across most key categories. Relative to the same period a year ago, core customer deposits were up 4% or $1.2 billion, and growth in our core deposit book has enabled us to work down our wholesale funding balances here in Q3. Overall wholesale funding sources decreased by 2% versus Q2. Based on our latest forecast, we now expect core customer deposit growth to come in towards the lower end of our 4 to 5% growth range for the year. But we remain confident in our ability to grow granular, low cost core customer deposits over time for two key reasons. First, our consumer value proposition stacks up well against any bank or fintech in the industry and we have additional product upgrades planned for late Q4 of 25 and into 2026. This gives us an engine to attract, deepen and retain checking households over time and it's already driving results after posting the strongest organic primary checking household growth numbers we've seen since we began tracking a decade ago back in Q2, we followed that up with another quarter of solid growth in Q3. Second, we've refined our focus on commercial deposits by moving to a balanced scorecard, hiring relationship focused RMs, launching a new deposit vertical and most recently hiring Eric Lean as our new Director of Treasury Management. With pipelines growing and several non compete set to expire in the coming months, we feel very well positioned for growth in 2026. We continue to expect that our efforts to drive growth in lower cost core customer deposit categories will enable us to further decrease our reliance on wholesale funding sources over time. And with that, I'll pass it to Derek to discuss the income statement and capital trends.

Derek Meyer - Chief Financial Officer - (00:13:32)

Thanks, Andy. I'll start with I'll start on slide 6 with our yield trends in the third quarter, total earning asset yields remained flat at a 5.5% and interest bearing deposit costs also held flat at 2.78% while total interest bearing liabilities ticked up 1 basis point to 3.03%.. Within our major asset categories, slight decreases in commercial CRE and auto yields were offset by slight increases in mortgage and investment yields. While total interest bearing deposit costs were flat compared to Q2, they were down 55 basis points from Q3 of 2024. Moving to Slide 7, third quarter net interest income of 305 million was up 5 million versus the prior quarter and 42 million versus Q3 of 2024. Q3 net interest margin held firmly above 3% at 3.04, which was flat compared to Q2 but 26 basis points higher relative to Q3 of 2024. Based on our latest expectations for balance sheet growth and mix deposit betas and Fed action, we continue to expect to drive net interest income growth of between 14 and 15% in 2025. This forecast assumes two additional Fed rate cuts in 2025. Given the potential for additional rate cuts, we've provided a reminder of the steps we've taken to dampen our asset sensitivity on slide 8. Over time, we put ourselves in a more neutral position to minimize interest rate risk. We've maintained repricing flexibility by keeping our funding obligations short. We've protected our variable rate loan portfolio by maintaining received fixed swap balances of approximately 2.45 billion, and we built a $3 billion fixed rate auto book with low prepayment risk. While we're still modestly asset sensitive, a down 100 ramp scenario now represents just a 0.5% impact to our NII as of Q3, we expect to maintain this relatively neutral position going forward. Moving to Slide 9, total securities increased to 9.1 billion in Q3 as we've continued to modestly build our AFS book. Our securities plus cash to total assets ratio climbed to 23.4% for the quarter. We continue to target a range of 22 to 24% for this ratio. On Slide 10, we highlight our non interest income trends for the quarter. In Q3, total noninterest income of $81 million was up 21% relative to both the prior quarter and the same period last year. The increase in Q3 was primarily driven by strength in capital markets and wealth fees with an additional boost from non reoccurring asset gains in the capital markets space. In particular, the increase was due to an elevated level of activity in our syndications and swaps businesses. The asset gain booked during the quarter was approximately $4 million for deferred compensation valuation adjustment. Given the strong quarter, we now expect a total of 2020. We now expect total 2025 non interest income to grow by 5 to 6% relative to 2024 after excluding the non recurring items that impacted our fourth quarter 2024 and first quarter 2025 results from the balance sheet repositioning we announced last December moving to slide 11, third quarter expenses of 216 million were up 7 million versus Q2 with much of the increase attributed to performance. The increase came in personnel where we booked 4 million of additional expense for the same deferred comp valuation adjustment that was recognized as a gain in our non interest income. Another large component was a $4 million increase in variable compensation expense, the result of strong execution against our strategic plan during Q3. The personnel bucket was also impacted by approximately $1 million of incremental health care costs relative to Q2. Outside of personnel expense, we also saw quarterly increases in technology, business and development and advertising expenses offset by decreases in legal and professional fees, loan and foreclosure costs and other non interest expense. As we stated previously, we continue to invest to support growth, but driving positive operating leverage remains a top priority here. In Q3, our efficiency ratio decreased for the third consecutive quarter coming in below 55%. Based on our latest forecast, we now expect total non interest expense growth of between 5 and 6% in 2025 off our adjusted 2024 base on Slide 12. Capital ratios increased across the board once again in Q3. Our TCE ratio of 8.18% in Q3 was up 12 basis points versus the prior quarter and 68 basis points versus Q3 of 2024. Our CET1 ratio increased to 10.33%, a 13 basis point increase relative to the prior quarter and a 61 basis point increase versus the same period a year ago. Based on our expectations for growth in 2025 and current market conditions, we continue to expect to manage CET1 within a range of 10 to 10.5% for the year. I'll now hand it over to our Chief Credit Officer Pat Ahern to provide additional updates on credit quality.

Pat Ahern - Chief Credit Officer - (00:18:47)

Thanks, Derek. I'll start with an allowance Update on Slide 13. Our CECL forward looking assumptions utilize the Moody's August 2025 Baseline Forecast. This forecast remains consistent with a resilient economy despite the higher interest rate environment. It contains no additional rate hikes, slower but positive GDP growth rates, a cooling labor market, continued elevated levels of inflation, and continued monitoring of ongoing market developments and tariff negotiations. In Q3, our Allowance for Credit Losses (ACLL) increased by $3 million to $415 million. This increase was primarily driven by an increase in commercial and business lending, which largely stemmed from a combination of loan growth plus normal movement within risk rating categories. Our ACLL ratio decreased to 1.34%, down 1 basis point from the prior quarter. On Slide 14, we continue to review our portfolios closely given ongoing uncertainty in the macro picture, but we maintain a high degree of confidence in our loan portfolios and continue to see solid performance. In Q3. Total delinquencies were flat at $52 million in Q3. These delinquency trends are largely in line with the benign trends we've seen for the past several quarters. Total criticized loans ticked higher in Q3 with an increase in substandard accruing, partially offset by decreases in the special mention and non accrual categories. Much of this increase was driven by migration within cre as we maintain a proactive and conservative approach relative to credit risk ratings, aligning.

- (00:21:16)

Net charge offs during the quarter and $16 million in provision. Our net charge off ratio held flat at zeroteen percent. All three of these numbers remain. Squarely in line with the figures we've seen over the past several quarters. In response specifically to tariffs and ongoing trade policy negotiations. Remain in contact with clients as the trade policy discussion continues. I would note that clients have been planning for tariff changes for some time, and we feel comfortable with the positioning. Of their strategies and the ability to execute when more clarity exists. Going forward, we remain diligent. On monitoring other credit stressors in the macro economy to. Ensure current underwriting reflects the impact of ongoing inflation pressures and shifting labor markets, to name just a few economic concerns. In addition, we continue. To maintain specific attention to the effects of elevated interest rates on the portfolio, including ongoing interest rate sensitivity analysis bankwide. We expect any future provision adjustments will continue to reflect changes to risk aids, economic conditions, loan volumes and other indications of credit quality. Finally, given the recent industry news surrounding nondepository financial institutions, or NDFIs, I'd like to provide a brief. Update on where we stand. NDFI balances represent a minimal part of the bank's. Total loans, largely comprised of Reits, mortgage warehouse lines. And insurance company lending. These facilities have historically performed very well with relationships that average over ten years. With the bank with that, Ian. I'll pass it back to and. For closing remarks. Thanks, Pat. In summary, we're really pleased with the results both in the third quarter and year to date over the first. Nine months. We feel very well positioned based on the actions we've taken. And believe that the enhanced strength and profitability profile solid. Capital, position and discipline approach to growth will serve us well going forward with that, we'll open it up for questions. Thank you. And at this time, we'll. Conduct our question and answer session. If you would like to ask a question, please press. Star one on your telephone keypad. A confirmation tone will. Indicate that your line is in the question queue. You may press star two if you would like. To remove your question from the queue for participants using speaker equipment. It may be. Necessary to pick up your handset before pressing a star keys. One moment, please, while we pull. For questions. And our first question comes from Timor Brazilr with Wells Fargo. Please state your question. Hi. Good afternoon. Hello there. CNI growth has been and remains pretty impressive here. I guess I'm just wondering what happens when the remaining rms come off of their non compete. To what extent should we expect that growth rate to accelerate? Is the expectation at that. Growth rate accelerates from here as they. Come online. Yeah, well, good question. Look, we still have quite a bit of leg, we think, left in this. There are a couple of things that I look at. Specific to this initiative. I look at, what is our production this year? Well, that production is up 12%. What does our pipeline look like, our pip? Is up 31%. That's on the loan side. So as we head into the end, of the year and. You start to see some of the. Non solicitations and about half them already off. So we're getting up to that point where production, we would expect it to go up just a little bit next year, you may have. A little more amortization because your portfolio is growing. What we believe, though, is. We're set for strong CNI growth above the market. In 2026. Probably as exciting as something we don't talk about. We thought there'd. Be a lag effect to deposit production on commercial and. It's panning out the way that we thought. We're adding some very good new names on the deposit side, but when we pull up, our deposit production. Right now, our deposit production is up 23. Percent. Now, that's not season. And we'll roll that into our seasonality and be able to forecast very clearly, but it's a very good omen because the pipeline itself. Is also up 46%. And I've been asking continually each quarter to our head of commercial banking. When will we see that production start to catch up with the pipeline? And the answer is right now. That's good caller. Thanks. And then looking at fees this quarter, obviously very impressive. The guide does imply a pretty large step down in four to you. Can you just maybe talk? Through some of the success we saw in three Q and what the expectation is for decline in the coming quarter. Yeah, I mean, the fee income in some categories can be a little lumpy. We did have a one time benefit. Through a portfolio asset G. So that's not. Likely as repeatable at that level. However, when I look towards 2026, Versus the fourth quart. So it's a little bit higher in fourth quarter, but some of the underlying benefit that we're getting in capital markets. Commercial production is up, rates are trending down. And likely to continue. That makes fixed rate conversion more attractive. Pipelines are up, and with fixed rate likely up and more popular. In 20 or fixed rates, likely more popular in 2026. In production trending up, we think that bodes pretty well for the forward view. The link quarter over. Quarter is not likely to be quite as high for the reasons that I mentioned in Q four. Okay. And then just last for me. Rossi. 14% this quarter continues to grind higher. 15% seems to be in striking distance. I guess. How are you thinking about further improvement here? In these next couple of quarters with rate cuts. Is there an ability here to continue grinding that higher? Or does that trend maybe take a step back a little bit as you digest these hikes or these. Cuts. Can you take that? Yeah. Thanks. Timor. Yeah, I think there are the opportunities there. I think, again, I was going to come back. To. The market's response to rates visa vis deposits. Because obviously. We had a nice uptake in fees. We expect the hiring to help that continue. But. It'll still be choppy, so I see the opportunity on the margin side. In the long run, still being the bigger. Lever. And based on what we saw the first couple of weeks after the rate cut in September, And the response to how we rolled out our deposit backbook. Rate cuts and what we're seeing in the market response, the outlook is pretty good. So I think we have the ability to continue to grind that higher. I think it's going to bounce around quarter to quarter while we do that. But feels like everything's on track. Great. Thanks for that color. Thank you. Your next question comes from Daniel Tomeo. With Raymond James. Please state your question. Thank you. Good afternoon, guys. Hey, Daniel. Maybe just to follow up on the deposit side. You talked about. The momentum you have there, certainly evident in the numbers. We did see deposit cost overall up a bit in the third quarter. Is there a read through there on an increase in competition? Or.