Associated Banc-Corp
Q4 2020 Earnings Call Transcript

Published: 21 Jan 2021

[Operator:]

Good afternoon, everyone, and welcome to Associated Banc-Corp Fourth Quarter 2020 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 one, during the course of the discussion today, management may make statements that constitute projections, expectations, beliefs or similar forward-looking statements. Associated’s actual results could differ materially from the results anticipated or projected in any such forward-looking statements. 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 and the Risk Factors section of Associated's most recent Form 10-K and subsequent SEC filings. These factors are incorporated herein by reference.

[Philip Flynn:]

Thanks, Diego. And welcome to our fourth quarter 2020 earnings call. Joining me today are Chris Niles, our CFO; and Pat Ahern our Chief Credit Officer. Before discussing our results for the fourth quarter and full year, I'd like to say a few words about the CEO transition we also just announced. After 11 years with Associated, I announce my plans today to retire at the end of 2021. I've been thinking about this for some time, and in consultation with the Board, we agreed this is the right time to initiate our succession process. As noted in the press release, I will continue as President and CEO until my successor is in place, at which time I'll step down from both of those roles and from the Board. I'll be available to the new CEO in an advisory capacity thereafter to assure a smooth transition for our customers and colleagues. The Board has commenced a search for a permanent successor and will consider our internal as well as external candidates. As you can appreciate, we cannot speculate on the timeline for that search. But the Board and I are highly confident that we will name a strong successor who will take Associated to its next phase of success, continue our profitable growth trajectory. I look forward to working with my successor to ensure a smooth and seamless transition. But now let me turn to our fourth quarter and full year results. This was a year unlike any of us has experienced. In the midst of incredible challenges and uncertainty, the commitment of our colleagues shone through. COVID-19 changed every aspect of life, including how people and businesses bank. In navigating the unknown, it was essential that our customers were able to connect to count on us and that our teams were safe and well positioned to provide their support. As businesses and schools shut down, we found new ways to support both the health and financial well being of our customers and communities. Through the efforts of our colleagues, we were able to support our customers with over a $1 billion of PPP loans, and adapt our branch services as our customers shifted to remote banking.

[Operator:]

Thank you. Our first question comes from Jared Shaw with Wells Fargo Securities. Please state your question.

[Jared Shaw:]

Hi. Good afternoon, everybody. Can you hear me?

[Philip Flynn:]

Yeah. How are you?

[Jared Shaw:]

Great. Thanks, Phil. Congratulations. I hope you get to really enjoy your last full winter up in Green Bay and get the most out of it. Congratulations on the next step. And we look forward to working with the rest of the team. I guess, you know, maybe starting with the margin, I think that your guidance is pretty good. It's better than what we're seeing out of most. And would love to hear, I guess where are you seeing the new loan yield? You talked about getting better spreads and putting in some LIBOR floors. Where are we seeing new loans coming on right now? And do you think that that's going to be sustainable for the next quarter or so?

[Philip Flynn:]

Yeah. Thanks for the question. Jared. I'll let Chris answer that. But just to what you said, yes, winter was cooperating. It was 8 degrees here yesterday. So I am still enjoying that. Chris, you want to take the NIM question?

[Chris Niles:]

Yeah. So Jared, we would point you to both the slides and the margin page in the deck, page seven in the table. It would say that the core commercial and business lending spreads have widened. And it's the combination of the strategy to have floors inserted in loans. So years ago, it started to sort of phase those out. And we've been reinserting them through the course of the year. And that started to basically lift our core yield on the loans. The spread impact doesn’t change, just the baseline, those strong LIBOR in the teens to something like LIBOR at 50 basis points, or 100, dependent upon the type of loan. And we're seeing a good maintenance of the spreads in commercial real estate lending. So not necessarily widening, but not compressing either. And the new loans aren't resulting in material shift to that. And so the combination of the new stuff coming on at reasonable spreads in commercial real estate, the slightly better mix of construction to total real estate, and the LIBOR floor strategy is really the contributing factors to the expansion you've seen in that commercial loan yield. And then as you mentioned, or as Phil mentioned on residential mortgages, we've really been holding the line and we're not terribly excited about putting 2 handle mortgages into the portfolio. And so we've been selling most of that production to the agencies. And so the book that we're left with isn't growing, but at least it has something in the neighborhood of a 1% yield.

[Jared Shaw:]

Okay. That's great. And then I'm assuming that, that margin guidance assumes the benefit from this initial PPP loans, but anything coming out of the newest round is not included in that, is that correct?

[Chris Niles:]

We've given a full-year guidance for the 255 to 265, that's sort of the good indicator for the entire year. But yeah, what I just walked you through on our spreads is all excluding PPP. We break out commercial PPP as a balance, and as a yield and is spread independently for you on all of our tables and materials.

[Jared Shaw:]

With the newest round that's coming out, I guess, what should we be thinking volume could look like on that compared to what we saw earlier, and call it, third quarter peak?

[Philip Flynn:]

Now, I'll take that, Chris. As we sit right now, we've already received more than a 1,000 applications for $150-ish million. I don't know. It's hard to prognosticate how much there's going to be. We did $1.1 billion in the first two rounds last year. The rules are a little bit more difficult this time around. So certainly be something less than that, but it's kind of hard to hazard a guess.

[Jared Shaw:]

Okay. All right. Totally get that. And then just shifting to the core loan growth. Looking at your guidance, expecting 1% to 2% increase in C&I, you also talked about utilization improving and giving that one to two benefit, so is that really - you're not expecting a lot of necessarily core C&I growth other than an improvement in utilization, is that the right way to look at it?

[Philip Flynn:]

Yeah. I think you're going to see most of our growth from the big backlog of commercial real estate fundings that will come and we're sitting at the end of the year at almost $2 billion and there is additional new business there. Commercial utilization, as you know from looking at other banks and across the industry, is very low. So we certainly think as the economy picks up, we'll get more utilization, 1% to 2%, maybe a little bit conservative, it's just - it's hard to know what the general commercial borrower or when the general commercial borrower is going to feel comfortable stepping up. I think growth will be perhaps stronger in the second half.

[Jared Shaw:]

Okay. And then, I guess, just finally for me. Looking at the allowance and the CECL impact, looking at the allowance ex-PPP of 182 is really strong, I guess, given the overall quality backdrop. How much did you have to rely on qualitative overlays this quarter to get there? And is that maybe a reduction of qualitative overlay is going to be the driving factor behind the provision guidance or is that not a change?

[Philip Flynn:]

Chris, do you want to take that one?

[Chris Niles:]

Yes.

[Jared Shaw:]

Did you get the question?

[Chris Niles:]

I think - yes. Jared, in our modeling, it was not so much the qualitative overlays. It's the qualitative overlays that kept the reserve level, because we try to think about reserve as being countercyclical. And so with an improving forecast that captured and driven some of the numbers here in our modeling, we – I think your question is, as we think about that level of provision guidance that we've given you, does that imply, perhaps, the total reserve level is coming down over time? The answer to that is yes.

[Jared Shaw:]

Great. Thank you.

[Operator:]

Thank you. Our next question comes from Terry McEvoy with Stephens. Please go ahead.

[Terry McEvoy:]

Hi. Good evening. And Phil, congratulations on the retirement news. It's - I can't believe it's been 11 years, but congratulations.

[Philip Flynn:]

Thanks, Terry.

[Terry McEvoy:]

I'll start just on page two, I'm looking at the personnel expenses, which have come down all year and we've seen that in the expense line. My question is how much of that kind of fell to the bottom line last year and how much of it was kind of reinvested in the business, I know, in the past and maybe I missed it, there was kind of a technology spend slide and maybe a few others?

[Philip Flynn:]

Yeah. Going forward, much of this is falling to the bottom line. We've been able to maintain a fairly stable tech spend, although we continue to spend significant dollars on that. So this change in personnel costs is really benefiting the bottom line.

[Terry McEvoy:]

And then as a follow-up, kind of your COVID watchlist portfolio, slide 20 here. I'm wondering if you could provide some updated thoughts on some of the larger portfolios, particularly kind of the retailers and the retail REITs that you've discussed in the past?

[Philip Flynn:]

Sure. Pat, do you want to take that?

[Pat Ahern:]

Sure. Right now, we're seeing some stabilization there. The issues we had in the past have all been kind of circled in large part put behind us. So I think we're seeing in our portfolio a lot of these retail centers are collecting more, they're seeing an increase in rents, so that's been a positive. The other one that stands out in terms of real estate is hotels. Obviously, we have a pretty small exposure there relatively speaking. And I would say we've kind of, again, circled all the issues and we've kind of put actions in place to continue to monitor those and get those hopefully through the next 6 to 12, 18 months.

[Terry McEvoy:]

Thank you.

[Operator:]

Our next question comes from Scott Siefers with Piper Sandler. Please state your question.

[Scott Siefers:]

Good afternoon, guys. And Phil, I wanted to add my congratulations as well. Enjoyed working with you and look forward to this final year, but wish you the best and it's well earned. I wanted to…

[Philip Flynn:]

Thank you, Scott. I'm not done yet though, so you probably haven't done - you're not done talking with me yet.

[Scott Siefers:]

Yeah. No. Fair enough. Fair enough. That's a good point. I guess just on the search and just sort of the timing on announcement, was there any thought to wait to announce until you kind of gone through the search? I mean, obviously, it's a kind of dicey thing with disclosing stuff, but any sense for why now? And then M&A has become another topic in the industry has gotten a lot more frothy more recently, does the search for a new CEO, does that sort of put you guys off from looking at any transactions yourself? And then I guess conversely, I guess one way to find a new CEO would be to partner with someone else and source the CEO that way. Just maybe any broader M&A thoughts you could offer?

[Philip Flynn:]

Sure. So bunch of questions in there. First of all, on timing, I've been discussing this with the Board for some time. And as you point out at some point, this is material and should be disclosed, which is why we're doing it now. Secondly, I really think that we are very well positioned at this point with all the actions we took last year to really participate in the economic recovery. So making this announcement now in the face of what we think is a improving '21 and improving results for us to make some sense. As far as M&A, as you've seen us been active over the last few years in acquisitions, we will continue whether it's me sitting here or perhaps someone else to look at those kind of opportunities, and if we think they’re in the interest of our shareholders to pursue them. And, as always, as far as doing something more strategic, the Board with their responsibility to look out for shareholders is always open to looking at something like that.

[Scott Siefers:]

Okay. All right. Perfect. Thank you. And then maybe switching gears a bit, I guess, for Chris, probably most appropriate for you, but as it relates to PPP, would you mind sort of trying to embed that into what total loan growth will look like for the year, inclusive of the PPP ebbs and flows between all these myriad rounds that are in there? And then same thing on the margin, how much will PPP forgiveness contribute in your existing guidance?

[Chris Niles:]

Sure. So I think, Scott, if you take a look at the transcript, when you go back to what Phil articulated that we really expect the bulk of the PPP that fares today just go away. So that's the better part of the remaining portion and the large portion of round 3. So PPP on balance sheet will sort of be a non-material number probably by the time we get to the end of ‘21 in the grand scheme of things. The fees that are remaining for 2021 from the 2020 round, we disclosed as $12 million. So there is $12 million of unamortized fees that we're largely assuming we're going to receive next year and again, as Phil alluded to, we'll figure out how much the new is. But it's not going to be on the same order of magnitude as the round 1 and round 2, right. So it will be a smaller number and it will mostly run through the year. So it will be a little over $12 million plus whatever happens for round 3 is what's basically assumed in the budget.

[Scott Siefers:]

Okay. Terrific. All right. Well, thank you both very much. I appreciate it.

[Philip Flynn:]

Thanks, Scott.

[Operator:]

Our next question comes from Jon Arfstrom with RBC Capital Markets. Please state your question.

[Jon Arfstrom:]

Good afternoon.

[Philip Flynn:]

Hey, Jon.

[Chris Niles:]

Hi, Jon.

[Jon Arfstrom:]

Phil, I'm more interested in the Lambeau weather report for Sunday?

[Philip Flynn:]

Mid 20s and likelihood of light snow.

[Jon Arfstrom:]

Okay. All right…

[Philip Flynn:]

Won't care, but the rest of their team isn't going to like it.

[Jon Arfstrom:]

I was just going to say, similar to Foxborough. Well, good luck with that. I'll congratulate you after - probably Q3 earnings. But just a question back on the C&I piece of it. Those balance has been coming down over the last several quarters and just I'm curious if you're starting to see signs of life there? It sounds like you're a little more bullish on that later in the year, but are you starting to see some of those balances trough?

[Philip Flynn:]

We've had some really good success, particularly in the fourth quarter with some new customers and some new closings and the pipelines are encouraging. I mean, that said, low utilization has kind of masked that. So I think it's still a little early yet, but we believe that vaccines are going to become much more widely available here and as the population starts to be able to access that, it's going to have a pretty big impact on growth. So, as I said, the 1% to 2% is our forecast now, but I would think that there is a decent likelihood that that's conservative. But you're probably going to see it more in later quarters after the first quarter.

[Jon Arfstrom:]

Okay, good. And then on the interest bearing demand growth, if you guys had to put your finger on what's really driving that, is it environmental, is it you and how sticky do you think these balances are longer term?

[Philip Flynn:]

Chris, do you want to take that?

[Chris Niles:]

Sure. I mean, I would note that the rate on those is blending out at 8 basis points. So they are not being attracted by rate. So we're not - it's not a rate opportunity. But I think it is generally the liquidity broadly across our commercial customer base and across, in particular, for these accounts the municipalities and various government entity level groups that have balances that have just nowhere else to go with the money in the short run. There aren't investment options that make too much sense either and 8 basis points is better than zero. And so I think, perhaps, that's generally the math that those customers are doing there in these types of accounts.

[Jon Arfstrom:]

Okay. And then resuming the repurchase program, I'm just curious, in your mind how attractive is that for you and how aggressive would you like to be? Thanks.

[Philip Flynn:]

Yeah. So all we can really say on that is, we have - well, we have about $100 plus million of authorization right now. And even though the stock has somewhat recovered, we're still trading at what would, to us, seem an attractive level of repurchasing stock at. So not going to signal too much about what we're going to do in the first quarter other than we're going to resume.

[Jon Arfstrom:]

Okay. Well, you issued stock when you showed up and now you're buying it back, right, 11 years later, so that's good.

[Philip Flynn:]

Well, we've been buying it back for a while. So…

[Jon Arfstrom:]

All right. Thank you.

[Philip Flynn:]

Thanks, Jon.

[Operator:]

Our next question comes from Michael Young with Truist. Please state your question.

[Michael Young:]

Thanks for the question. I'll follow-up on Jon's. Well wishing, Phil with Packers won their Super Bowl back close to when you started there, so hopefully, they'll bring one home for the Greenberg l lead. And…

[Philip Flynn:]

That would be a good - that would be a good book end to this thing, because I got here at the end of '09 and they won the '10 Super Bowl, so, yes, that would be perfect.

[Michael Young:]

Yeah. The timing could be unique. Well, anyways, maybe just following up on that, kind of starting with just a high level question, you've been here for 10, kind of 11 years and just curious with what you've done in terms of credit cleanup and then efficiency improvement, technology, adaptation and roll out for the company through your career and I'm sure I've missed some things that you accomplished along the way. But what do you see as kind of the core needs for the franchise going forward from here and just anything that we should be expecting maybe on a go-forward basis?

[Philip Flynn:]

Yeah. It's a great question. Appreciate that. We've positioned ourselves well from a credit point of view as you pointed out. We have a very disciplined credit culture. I think, if you look back to March of last year, it was very hard to forecast how this is going to turn out, but it appears at this point that this is going to be a very mild credit cycle. We charged off about 40 basis points of loans last year. We expect something in a similar zip code to that and compared to what we were thinking in March, it's pretty mild. Now, perhaps not every bank will have those results, but we have relatively modest and broadly diversified exposure. So yes, I think we're in good shape on credit. We've invested a lot in tech. Thank goodness we did that, because when we had to handle our customer's remotely, we've had a mobile app that works, online works, we've invested a lot of money in this. And, importantly, we still have 3,000 people working from home and we've been able to do things like handle a record amount of mortgage volume and such. Going forward, the challenge for us is the same challenge as the whole industry faces. We've got a basically zero interest rate environment stretching out for a couple of three years. So it behooves us to continue to work hard on finding efficiency, so that we can grow our bottom line in that very difficult macro environment. Fortunately, the economy to us looks like it's going to improve and that will give us some tailwind as we get into the year, but doing things well, doing them efficiently is the biggest challenge we have in this rate environment.

[Michael Young:]

Okay. I appreciate that perspective, Phil. And maybe just following up on kind of the loan growth outlook, I think you mentioned still resi is not super attractive at these yields, although maybe better than securities. But it seems like the swing factor and kind of growth for 2021 outside of just the macro lift in commercial is the ability to start stabilizing and or growing kind of the residential book. So at what point would the long end of the curve kind of ticking up, would you be interested in putting that paper on the balance sheet?

[Philip Flynn:]

Chris, what do you think? I mean, you…

[Chris Niles:]

Yeah.

[Philip Flynn:]

Securities, I think, get a little more attractive, hopefully, right.

[Chris Niles:]

We would hope so. Yeah. And the resi and mortgage book, we've been sort of focused in - if you look at this quarter's yields, for the fourth quarter, the resi book had expected yields of 3% and that's probably a reasonable level that for us to be adding to that book and certainly a much better yield relative to other security choices that might be available and it wouldn't require much of a backup in some products to get back to those levels. So that would certainly be the level we'd probably start to add some back to the balance sheet.

[Michael Young:]

Okay. Thank you. I appreciate it.

[Operator:]

Thank you. Our next question comes from Chris McGratty with KBW. Please state your question.

[Kelly Motta:]

Hi. This is actually Kelly Motta on for Chris. Thanks so much for the questions. Most of what I had has been asked and answered already. But on - maybe on liquidity and liquidity management. You've heard that there will - from a lot of banks that there's still going to be a drag from an influx as PPP is forgiven and potentially we get more stimulus. How should we be thinking about that over the course of 2021 and the size of the balance sheet? Thank you.

[Philip Flynn:]

Sure. I'll take that, Chris. If you noticed the quarterly trend, obviously we and everyone have been awash in liquidity, but you'll also notice that we've taken some actions to reduce that liquidity. So we prepaid, as you know, in the third quarter of the FHLB advance, that took a significant amount of cash off of the balance sheet. And this past quarter, we decided to go ahead and repay the Fed PPP facility that took another $1 billion off. So we've done some significant things to improve, i.e., reduce the amount of cash we've had. Now as the next round of stimulus rolls out and customers get PPP loans, liquidity perhaps will build, but we'll continue to look for opportunities to manage the cash on our balance sheet. Do you want to add anything to that, Chris?

[Chris Niles:]

No, I think you've covered it. Yeah, I think we've reduced, as Phil alluded to, not only the $950 million of FHLB advances that we repaid in the third quarter, but year-over-year over $1.5 billion. So we've really put a lot of that - when you look at the total year-over-year, deposits are up $2.7 billion and we repaid $1.5 billion of Federal Home Loan Bank and has lead to another $1 billion of PPPLF. So we're really sort of put the money out to offset other liabilities in an effective way.

[Kelly Motta:]

Thanks a lot.

[Chris Niles:]

Looking for those opportunities.

[Operator:]

Thank you. There are no further questions at this time. I'll turn it back to management for closing remarks.

[Philip Flynn:]

Great. Hey, thank you and thanks for the kind words. I appreciate it. But I do look forward to talking to you in April, which is most likely. If you have any questions in the meantime, give us a call, as always, and thanks again for your interest in Associated Banc. And go Pack on Sunday.

[Operator:]

Thank you. This concludes today's conference. All parties may disconnect. Have a great day. Thank you.