Good afternoon, everyone and welcome to Associated Banc-Corp's Second Quarter 2018 Earnings Conference Call. My name is Hector 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 Web site at investor.associatedbank.com. As a reminder, this conference call is being recorded. As outlined on Slide 2, during the course of today's discussion, 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 Web site in the risk factors section of the Associated's most recent Form 10-K and any 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 the slide presentation and to Page 10 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 Philip Flynn, President and CEO for opening remarks. Please go ahead, sir.

Thank you and welcome to our second quarter earnings call. Joining me today are Chris Niles, our Chief Financial Officer and John Hankerd, our Chief Credit Officer. Turning to Slide 3, we had earnings of $0.53 per share excluding acquisition-related costs. Please note that the second quarter marked the first full quarter of Bank Mutual contributions to our financial statements. As a reminder, the acquisition closed on February 1 and the first quarter of 2018 only included two months of Bank Mutual results. The transfer of Bank Mutual accounts to Associated systems was completed over the weekend of June 23 and 24. I'd like to take a moment to recognize our team for their tremendous dedication and thousands of hours of diligent work. Average loans in the quarter were up over $900 million from the first quarter driven in part by an additional month of Bank Mutual balances and solid loan growth in the commercial and business lending segment. Average deposits were essentially unchanged from the first quarter and reflected our usual seasonal pattern of outflows during the second quarter. We benefited from higher fee revenue with both insurance commissions and card based fees showing growth during the quarter. We recorded $7 million of bank mutual related acquisition costs bringing our total merger related costs to $28 million. While our second quarter expenses were elevated as a result of running two branch networks, our expense control efforts continue to be effective and excluding acquisition related costs, our efficiency ratio continued to improve. We repurchased nearly $7 million of stock this quarter at an average price of $26.52 and we paid a dividend of $0.15 per share. Our return on average tangible common equity was 15%. Loan details for the second quarter highlighted on Slide 4, average loans grew by 4%…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Scott Siefers with Sandler O'Neill. Please proceed with your question.

Good afternoon, guys. First question is just on the margin, just want to clarify and make sure I understand the nuances. So it sounds like for the third quarter and the fourth quarter each year expecting about a 3% reported margin and the nuance behind that is simply rising core margin offset by moderating [Pas] [ph]. Is that the right way to look at it?

It is and the wildcard of course is prepayments that will probably come along and drive it up a little bit higher.

Okay, perfect. And then, I think you began to or at least touch on it a little -- in your comments, Phil just the expense guide. No you reiterated the full -- a full year $825 million reported based, but just as you look at the fourth quarter guidance particular just up a little was wondering if you could just chat a little about what drives that change versus 90 days ago?

I don't think it changed. I think we were always targeting around 195 in the fourth quarter.

I think we had a range of 191 to 197. And then, now we've got a range of 194 to 198. So it's fine tuning the range.

Okay. And okay that's just a function of 90 days more experience, so would have a better idea of what's going on or what why?

We know exactly which people we kept through the conversion. We know exactly which contracts we've terminated and which ones are going to keep rolling et cetera. So we've had a little finer tune on it. And we moved the upper end of the range up by $1 million and the average move by less than $1 million.

Yes. So -- yes, I agree midpoint not much of a change but nonetheless the delta so I just wanted to make sure I knew that the fine tuning of it. So okay, perfect. I think that's it. Thank you very much.

Thank you.

Our next question comes from the line of Dave Rochester, Deutsche Bank. Please proceed with your question.

Hey, good afternoon guys.

Good afternoon, Dave.

So you had some great C&I loan growth this quarter and it sounds like your pipeline is pointing to more strong growth next quarter. Are you guys thinking that 1% to 2% you mentioned is just primarily going to be driven by the C&I and you will continue to have some run-off in the CRE maybe construction stabilizes based on what you're talking about with the commitments?

We feel really good about the C&I growth, CRE has a very strong pipeline, has a lot of unfunded construction loans and they've booked more than $1 billion of new commitments to-date this year. The little bit of wild card with CRE is how much prepayment we get out of the Bank Mutual, but particularly in the multifamily space which frankly is okay with us. As you know, we've been very focused on our overall exposure to multifamily. We did the Bank Mutual deal knowing that that was going to add a significant amount, to see a better balance, but we're assuming there'll be a certain amount of continued unscheduled run-off on the multifamily. But even with that, we should be comfortable in that 1% to 2% range. We also can turn the dial on the residential mortgage book if we feel like it. I think we talked before about the fact that with slack commercial loan growth in the back half of last year and the first quarter we ended up somewhat in our view over weighted on the residential mortgage side. And that's why we chose to rebalance that this quarter by essentially selling the production that we put on.

And so how would you expect that portfolio to trend going forward, will that grow at all or are you still looking to kind of keep that stable here?

It'll grow -- it can grow whenever we feel like it, if we get the floating rate loan production from commercial and commercial real estate that we're expecting then we will probably portfolio some of the residential mortgage production.

Got it. And then, on the -- I guess the securities book that will -- the direction of that will just depend on the magnitude of deposit growth from the back half. Is that fair?

That sort of the plug at the end.

Yes. Got it. Just switching to capital real quick if I could. The pace of the buyback and as it slowed a little bit this quarter, but you guys are definitely sitting well above the capital target range you talked about previously, maybe if you just update us on that target and how you're thinking about that differential and how to use it going forward?

I think you can expect us to continue to look for opportunities all of the Bank Mutual transaction. And we want to be in good shape capitalize as we look around the landscape out there. But we will also continue to be opportunistic if those things present themselves with current buybacks stock, you could see we jumped in and bought some.

Great. And then just one last one on the NIM. After the June hike, have you guys seen any broad based deposit pricing adjustments in the market or just the pickup in CD competition you guys talked about?

We've seen it on the time deposit side not too much elsewhere.

Okay. Great. Thanks guys.

Thanks.

Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Proceed with your question.

Hey, thanks. Good afternoon.

Good afternoon, Jon.

Hey just thinking on the deposit topic, I know you talked about how you get a little bit more flow back into the bank this quarter and that's more seasonal, but were you more optimistic or most optimistic in terms of gathering core deposits?

In our core markets, I mean I think the core base of the seasonal flows and -- inflows and outflows are in our core Wisconsin, Illinois marketplace. And that's where those larger non-interest bearing DDA relationships have resided and that's where we see the volatility. So that's where we'll see the inflow of the effect.

Okay.

I mean that said, it's fair like almost every bank to say that it's difficult to gather new retail deposits. The competition from the big three national retail players is a real thing.

Okay. And is the plan, do you feel like you have the ability to continue to run down those network deposit?

Yes. I mean that is certainly on our mind since the data on those are quite high. So we're looking for other opportunities to replace that funding.

Okay. On loans we talked about this last quarter and you kind of hinted at it, but can you talk a little bit about, call it the core C&I mood of your borrowers, it sounds like it's better. I'm just curious if you feel like it's better than it was last quarter?

Yes. I actually think it's the optimism that we're hearing in our conversations with our commercial customers has picked up which is interesting. We would have thought that would happen a while ago. I didn't necessarily explain why it took so long. And that's even in the face of the potential trade issues that are out there which over the long-haul could have a real impact in this part of the country and how it plays out.

Okay, good. And then just last follow up here on M&A. How active is the marketplace, would you say it's becoming more active and you're seeing more opportunities or not much of a change?

I think post [indiscernible] become more active and you've seen several transactions announced of decent size and there is conversations going on.

Okay. And you remain very interested in that I would assume?

We could find more transactions like Bank Mutual, we are really interested.

Yes. That's okay.

All right. Thanks for the help.

Our next question comes from the line of Chris McGratty with KBW. Please proceed with your question.

Hey thanks for taking the question. Chris or Phil, on loan pricing, interested now six months removed -- 16 months removed from the tax bill, have you seen any narrowing of credit spreads or loan pricing either by yourself or competitors based on competition?

Yes. So far the banks have not traded away their good fortune that I can tell. We'll see how that plays out over the long-haul. But, you can see by our own results. We're not experiencing any loan yield pressure at least at this point. I mean we're very disciplined about what we put on our books too. So I think I made a comment earlier that we are seeing in some of the commercial real estate space some pricing instruction that we don't like but we simply pass on that. So there is a little bit of that.

Okay. Thanks for that. And if I could -- following up on Jon's question, I mean you mentioned I think twice in your remarks if you could find a Bank Mutual type of deal, you will be game. What about larger deals given [indiscernible]. What's the appetite for either something transformational?

We are very focused on creating shareholder value here. If we think that a larger transaction makes sense we would pursue that. However, when you look at the multiple we paid for Bank Mutual versus some of the multiples of recently announced transactions. It may who but still look at smaller deals that aren't going to be subject to no wild bidding frenzy which we've seen lately as far as I'm concerned. So I think it's very difficult to overpay for a bank, we will never recover from that.

Okay, great. Thank you very much.

Our next question comes from the line of Nathan Race with Piper Jaffray. Please proceed with your question.

Hi, guys. A lot of my questions have been asked and answered, but I guess I had one question on your REIT exposure growth was kind of flat this quarter and we've seen a huge amount of M&A in capital raising that space. So just curious if you can update us on kind of the underlying health of some of your customers in that space?

I don't have any real comment on that. We haven't seen any credit deterioration to speak of in the REIT book. So I'm sorry, I don't really have any color on it.

Perhaps in terms of underlying growth opportunities, is it more or less or is just kind of steady stay within that asset class specifically?

In the REIT book?

Yes.

We've built the book over the last, call it for years. We're very focused actually with our REIT customers and I'm expanding to other types of business with them. So a large REIT like any large corporate, the price of entry is typically participation in a not terribly well priced credit facility line of credit. And then, we look for opportunities to project financing, gain cash management depository business and in our REIT team has done a very nice job of harvesting if you will, those opportunities that we gain by participating in the first place. So I would say a lot of their focus is on that versus simply growing the overall level of weak Nathan.

Got it. I appreciate the color, Phil.

Our next question comes from the line of Terry McEvoy with Stephens Inc. Please proceed with your question.

Thanks. Good afternoon.

Good afternoon, Terry.

The dairy industry is struggling for a couple of different reasons. Could you just talk about your exposure and whether that presents a risk at all to the overall Wisconsin economy?

Yes. We have essentially very little as any exposure directly to dairies. We do finance food processors, cheese manufacturers and such. It is a threat to some degree to particularly the actual dairy producers. For us we're not directly exposed to that. And the processors are doing fine. Hang on, go ahead John.

And just wanted to add, as it relates to the impact from trade, tariff issues that we're taking a close look and evaluating the portfolio, we are in the process of looking at the portfolio in its entirety to see what type of impact our clients are going to be experiencing potentially. And focusing that analysis on risk rating of the client and our portfolio or our plant exposure and that's something in process and that obviously will include our exposure to cheese manufacturers and processors.

Okay. Thanks for that. And then just as a follow-up I had my notes last quarter, the commercial deposit platform, was going to be converted over in the fourth quarter. Is that still the case? And then, I guess another question is, will any of the cost saves be pushed out into the first quarter of '19?

Yes. We are still on track to make that conversion. And this is not a cost to play, this is improving the functionality features, getting a mobile app for commercial deposit customers et cetera. So this is not a efficiency plan. This is table stakes.

Understood. Thank you.

[Operator Instructions] Our next question comes from the line of Michael Young with SunTrust Robinson Humphrey. Please proceed with your question.

Hey, good afternoon.

Hey, Michael.

Wanted to start with a loan growth this quarter, obviously the commercial being pretty strong. Could you give us a sense of maybe how much of that was shared national credits or participations versus kind of direct originations?

Yes. [Did we miss any?] [ph]

No. The growth in the portfolio has been pretty spread out in general and we've seen growth in various areas of the commercial portfolio or specialized industries grew, our generation grew faster based lending in our conventional commercial all have shown strong growth. I would say that's as it relates to shared national credit growth that -- it really the focus has been otherwise there really hasn't been stimulated by that particular area much at all.

Okay, great. And then just as we look forward with some of the commercial real estate, I guess multifamily and retail in particular maybe moderating a little bit. What are the yields on those kind of books of business versus maybe just core commercial that will continue to grow and what impact could that have on overall commercial asset yields?

It's not going to impact it very much at all because we're going to -- we're not -- we seem to make multifamily loans where we're going to allow some run-off to occur and then we'll selectively backfill. So the portfolio will come down modestly, but in the context of $23 billion loan portfolio it's not going to move the overall yields around.

Okay. And maybe one last one, just on the residential side. I think I asked last quarter, but any plans maybe in the future to send the securitized or move a larger piece of that book off just given where the network deposit pricing is moving et cetera?

No. We don't have any plans to do that.

Okay. Thanks.

Our next question comes from the line of Jared Shaw with Wells Fargo Securities. Please proceed with your question.

Hi, good afternoon. This is actually Timur Braziler filling in for Jared. Most of my questions have also been asked and answered. Just one more, can you identify the tax benefit, the dollar amount that was booked this quarter?

Sure. If you think about the normalized tax rate for the full year at close to 20 than the number should have been closer to $20 million of taxes rather than 14 or 15. So you can say the Delta was $5 million or $6 million in aggregate relatively to where it could have been. And again, it's a variety of tax strategies related to making sure that we took full advantage of the Tax Cuts and Jobs Act.

Okay. So it's using a base of 20% not the 22% that we should expect in the back end of the year?

Well, if you use 22 that get to closer to $7 million, $8 million, right. So but the 20% will be the full year number.

Got you. Okay. Thank you.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for closing remarks.

All right. Well, thank you for joining us. Today we are very pleased with the quarter's expanded bottom line, the completion of the Bank Mutual conversion and the continued favorable credit environment. So we look forward to talking to you again in October. Do you have any questions in the meantime please give us a call and thank you again for your interest in Associated.

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