Associated Banc-Corp 2026 Q3 Earnings Call

Please go ahead, sir. Well, good afternoon, and welcome to our third quarter earnings call.

I'm Andy Harmening, and I'm joined by our Chief Financial Officer, Derek Meyer, and our Chief Credit Officer, Pat Ahern. I'll start with some highlights for the quarter. From there, Derek will cover income statement and capital trends, and Pat will provide an update on credit quality. Across the bank, we remain squarely focused on attracting and deepening relationships as a means to drive sustainable organic growth, remix our balance sheet, enhance profitability, and improve our return profile. Through the third quarter, we've maintained our momentum. We're improving our profitability by growing and remixing our loan portfolio. We overcame elevated payoffs in Q3 and grew relationship commercial loan balances while continuing to work down low-yielding non-relationship resi mortgage loans. Recent pipeline trends give us confidence in a sustainable growth trajectory.

We're growing our customer base and funding loan growth primarily with core deposits. We've grown our customer household base for seven consecutive quarters, and in Q3, we posted nearly $700 million in core customer deposit growth, a 2% increase versus the prior quarter. This growth helped us reduce wholesale funding during the quarter. Our ability to fund our growth with customer deposits is driving expansion of both net interest income and margin. In Q3, our net interest income increased by $7 million, while our net interest margin expanded by three basis points to 3.2%, our second-best quarter in over a decade. Our focus on relationship deepening is also contributing to emerging non-interest income growth. In Q3, we posted total non-interest income of $87 million, an 8% increase versus the prior quarter, with broad-based improvement across several fee categories.

Combined with disciplined expense management and stable credit trends, our third quarter results are a further illustration of a model that's repeatable and sustainable. As a result of our improved profitability profile, we can now support growth and contemplate other uses of capital simultaneously. With that in mind, we're pleased to return capital to our shareholders with $100 million in share repurchases during the quarter, the first major share buyback we've executed since I joined the bank in 2021. We expect to execute on the remainder of our existing repurchase authorization here in the fourth quarter. With that said, organic growth remains our primary focus. Earlier this month, we reached an important milestone by completing the systems and branch conversion of American National Corporation. With nearly 150,000 loan and deposit accounts, 33 branches, and 70 ATMs converted over the course of a three-day weekend.

Reaching this milestone took months of planning, collaboration, and care from colleagues across our bank. From preparing systems and processes to helping customers and teams navigate change, their focus and dedication made this milestone possible. I'd like to congratulate the project team and thank our colleagues transitioning from American National Bank, who have taken the change in stride. This partnership gives us a powerful lever to attract and deepen relationships in markets like Omaha to the Twin Cities and beyond. I'm excited for what we will continue to accomplish together as one Associated Bank team. As we've discussed previously, our leadership team is currently finalizing plans for the next wave of strategic initiatives to sustain our growth momentum into 2027 and beyond.

With areas of focus including growing our customer base, competing in major metro markets, outperforming in deposit gathering, driving relationship commercial growth, remixing the balance sheet, expanding margins, and improving our return profile. We look forward to sharing additional details in the coming months. In summary, Associated Banc is on an upward trajectory with a proven plan to drive sustainable growth over time. As always, our growth will be balanced with a conservative approach to expenses, credit, and risk management that serves as the foundation of our company. With that, let's walk through our third quarter financial highlights beginning on slide four. We report a GAAP EPS of $0.76 in Q3 or $0.81 after adjusting for non-recurring acquisition costs recognized during the quarter. Total loans of $36.5 billion grew by $53 million versus the prior quarter.

We were faced with elevated payoffs in our commercial business during the quarter, but pipelines remain strong, and we remain confident in both our full-year loan growth outlook and the sustainability of our growth strategy more broadly. Core customer deposits grew by 2% during the quarter, driven by a combination of organic growth initiatives and seasonal inflows. This growth in customer deposits helped us reduce our wholesale funding levels in Q3. Shifting to the income statement. Q3 net interest income increased $7 million or 2% versus the prior quarter, while our net interest margin expanded by three basis points to 3.2%. Non-interest income also increased by $7 million versus the prior quarter, led by growth in capital markets, asset gains, service charges, and deposit account fees, and other fee-based income. Total non-interest expense of $260 million decreased by $12 million versus the prior quarter.

Our Q3 expenses included $13 million in one-time expenses tied to the American National acquisition, which was down from $24 million recognized in Q2. Capital trends remain solid. Credit trends remain solid with $14 million of provision, a 2 basis point decrease in our ACL ratio, a decrease in criticized loans, and 19 basis points of annualized net charge-offs recognized during the quarter. Finally, we executed on $100 million in share repurchases during the quarter and finished with an adjusted ROTCE ratio north of 15%. On slide 5, we reiterate the core elements of our organic growth strategy and why we expect to sustain our momentum into 2027 and beyond. First, we put in more than five years of work to build an organic growth engine that focuses on attracting and deepening relationships as a means to grow and remix both sides of our balance sheet.

We bolstered leadership across all areas of the organization to set ourselves up for growth. We've modernized our digital banking experience, enhanced our product set, improved our marketing acquisition capabilities, and developed a successful mass affluent program, all of which are key to growth, particularly in major metro markets. As a result, we've turned a shrinking customer base into a net growth story, with seven consecutive quarters of net growth in customer households. As we grow these primary relationships, it's also translating into deposit growth, fee growth, and other business. In commercial, we've increased our RMs by nearly 50% in key metros, sharpened our relationship focus across the team, expanded our offering with new verticals and deposit gathering capabilities, and launched new C&I offices in Kansas City and Dallas with very promising initial results.

In addition to loan growth, we're collaborating to drive deposit growth, TM, capital markets, HSA, and other business in a steady increasing manner. As we've discussed previously, the renewed focus on relationships and collaboration across the bank presents natural connections into private wealth. To facilitate this connectivity at the local level and across the footprint, we've added several talented executives to our private wealth leadership team, upgraded our product suite, and are currently working through additional enhancements to the digital experience for wealth clients. Shifting to the middle of the page, the American National Partnership has been as advertised, serving as a natural complement to our organic growth story. Going forward, we see a significant opportunity to pair American National's strong legacy in Omaha and the Twin Cities with Associated's proven model to attract and deepen relationships in metro markets.

This gives us another lever to drive organic growth into 2027. Finally, in order to sustain our growth momentum in the future, our leadership team is currently mapping out what we want the next three years to look like for Associated. While we're still finalizing our plans, you can expect a continuation of the sustainable organic growth that has become a defining characteristic of our company. A focus on growing our customer base, competing in major metro markets, outperforming in deposit gathering and commercial loan growth, remixing the balance sheet, expanding margins, and improving our return profile. We look forward to sharing more details in the near future. On slide 6, we highlight our quarterly loan trends through Q3. Average quarterly loans grew by 1% as we continue to remix the balance sheet by driving growth in commercial categories and working down our lower-yielding non-customer resi mortgage balances.

We had previously mentioned that the torrid pace of C&I growth in the first half of the year was expected to slow somewhat in the back half. In Q3, our underlying C&I production was solid, but balance flows were impacted by an elevated level of payoffs and pay downs. We remain confident in the overall trajectory of our C&I business due to the strong trends we continue to see in our commercial pipelines, which are up nearly 40% versus the same period a year ago. CRE was a similar story, where the team drove high-quality relationship loan production that outpaced elevated payoffs during the quarter. We continue to expect elevated payoffs in CRE in the near term, but our team is among the best in the country at growing high-quality relationship business with proven players across our markets.