Good afternoon, everyone, and welcome to Associated Banc-Corp's Second Quarter 2019 Earnings Conference Call. My name is Tim, and I will be your operator today. [Operator Instructions] 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 2, 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, in the Risk Factors section of Associated's most recent Form 10-K and any subsequent SEC filings. These factors are incorporated herein by reference. For reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please refer to Page 19 of 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.

Thanks, Tim 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. In the first half of 2019 several positive trends continued driving first half earnings per share up 10% versus the same period last year and up 39% versus two years ago. We saw solid commercial and business lending loan growth and we also grew our deposit franchise as we completed the Huntington branch acquisition and system conversion. We finished the quarter with record average deposit levels and believe the First Staunton acquisitions that we just announced will further enhance our franchise value. Thanks in part to the increased scale we've attained into our cost containment efforts. Our efficiency continues to improve and we’ve reduced our first half 2019 adjusted efficiency ratio by over 400 basis points from the same period in 2017. We maintained our strong capital position while continuing to return capital to shareholders through higher dividends and $70 million of share repurchases. Turning to slide 4, our second quarter GAAP earnings were $0.49 per share driven by increased commercial and business lending, our return to growth in commercial real estate and higher fee income. Excluding Huntington acquisition related costs our earnings were $0.51 per share for the quarter. We had strong growth in our mortgage warehouse vertical and also had solid performance in general commercial lending. As we anticipated a robust commercial real estate loan production outpaced payoffs and we saw a modest increase in our commercial real estate book in the quarter. We expect continued commercial real estate growth over the remainder of the year. In order to mitigate net interest margin pressure, we actively managed both our investment positions and our funding positions in the second quarter. We sold…

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

Good afternoon, guys. Thanks for taking the question. I guess first one is just kind of a ticky-tack one. Just in the tax benefit from the donation, what was the size of that?

The size of the donation was a $1.7 million tax benefit.

$1.7 million, perfect. Thank you. And then just looking at the loan portfolio, Chris, can you just remind us the mix of fixed versus floating rate loans in the portfolio in aggregate?

Sure. So the commercial book of roughly $14 billion is predominantly a LIBOR-based loan book and the residential mortgage book is roughly two-thirds ARM. So the overall loan book obviously has a lot of variabilities to it. Obviously, the ARM won't reprice immediately, but the majority of our LIBOR-based book will, in fact, reprice in line with market. Those are mostly one month LIBOR.

Okay, perfect. Thank you. And then last question, just on the deposit side, the network transaction accounts. The long-term strategy is to continue to sort of enrich in the deposit mix, which presumably means lessening reliance on those. But by the same token, they have some of the best betas right now. So I was just hoping you could spend a moment talking about where you see that roughly $2 billion of network transaction accounts going over near and longer-term as well.

Sure. So clearly, we – the view we have in the short run, a very positive beta profile because their betas are close to one and they'll adjust downward. If not one, perhaps even more in a downturn, a down rate environment. However, we'd also note that substituting 2% plus funds with core deposits at 1% or lower, as we do with Huntington and we expect to do with Staunton, is an even more positive improvement. So our strategy here is to, as much as we can, optimize our core deposits, hopefully at a lower borrowing cost, and continue to reduce any reliance on wholesaler institutional funding.

Yes. I mean I would just follow-up by pointing you to Slide 10, which, as you can see, we reduced our network and FHLB advances from about $7 billion a year ago to about $4.5 today. So over the long haul, that's the goal.

Yes. Okay, perfect. Thank you guys very much.

Our next question comes from the line of Chris McGratty of Keefe, Bruyette, & Woods, Inc. Please proceed with your question.

Great, thanks. Chris, maybe a capital question. Obviously, the deal is fairly small. I think you said $142 million less on the buyback? Is that right? $142 million?

Correct.

How should we be thinking about future buybacks, given stock levels, deal pending and then with the CECL at the beginning of the year? I think 7% in the past was your floor, but can you just walk us through how you're thinking about timing? Thanks.

Sure. We continue to believe 7% tangible common equity is a reasonable baseline for us and we have proceeded down this acquisition with the intent of using the capital we have today in order for the end of the second quarter, that was at 7.42%, so we have a little bit of room. We have fully taken into consideration our expectation. We haven't formalized those yet, but we've had a range of values for CECL and our thought process here is we should be able to continue to be an investor in our franchise. We should be able to continue to do meaningful accretive acquisitions and still potentially have dollars left over to reduce our shares outstanding over time. And we think we continue that pace throughout 2019 and still absorb Staunton and CECL in the first quarter of 2020, without going below 7%.

Got it. Great, thank you.

[Operator Instructions] Our next question comes from the line of Jon Arfstrom of RBC Capital Markets. Please proceed with your question.

Thanks, good afternoon, guys.

Good afternoon, Jon.

That pause means that I guess to ask a bunch of questions, okay.

We are ready for it.

Phil, just you seem more optimistic on commercial real estate like you were last quarter. Curious to what you're thinking for potential growth out of commercial real estate and then also the commercial and business lending when you exclude the warehouse?

Yes, I mean the pipeline for both of these is pretty compelling. If I take you back to Slide 7, our commercial real estate lenders have been very active in transacting new business and we have a significant amount of unfunded commitments that we'll fund up over the balance of this year and into next year. Offsetting that is the payments that you always get on a construction-heavy commercial real estate book, which is perfectly fine. As we've been discussing over the first half of the year, we anticipated that the originations would begin to outpace payoffs in the second quarter and, in fact, we saw that. So we had a modest uptick. And we expect to see continued growth in CRE then over the back half of the year, given this significant unfunded commitment pipeline as well as other new business that will be booked over the next six months as well. Our general commercial pipeline continues to be strong and our verticals – several of the verticals continue to be strong as well. Mortgage warehouse obviously had a pretty big second quarter driven by the mini refi boom that occurred that was rate-driven, and our power and utilities vertical did very well and we expect that to continue, too.

All right. Good, thanks for that. Chris, a question on the margin outlook. Your guidance is better than most and I think we understand why with some of the things happening on the deposit side. But can you give us an idea of what a 25 basis point decrease in Fed funds does to your margin because it seems like, on a core basis, there's some maybe natural lift that's happening here?

Yes. No, fair enough. Just for clarity, we are assuming two Fed rate cuts over the balance of the year, one here in July and one in September, of 25 basis points each. Obviously, to the extent the Fed is more aggressive than that, our guidance would have to adjust accordingly. To the extent there is no Fed action, actually I think there's upside to our margin as we've previously stated, but we are assuming at this point in time the two 25 basis point cuts. And what was said to you previously is we expect that our up and down side movement essentially is on the order of magnitude of about 3 basis points per Fed cut. So that's baked into our 2.90% overall guidance is that there'll be effective compression. However, as you've noted upfront in your question, the liability actions that we took and the investment portfolio actions that we took, and the addition of the late in the quarter Huntington deposits all give us a cushion that allow us to absorb that as we look at the balance of the year and keep our margin relatively stable.

Okay, good. That's helpful. And then just last one. Phil, can you maybe give us an idea of what you have in St. Louis? I see the dots on the map but maybe describe for us Associated Bank in St. Louis, what you have there?

Sure. Yes. So we have one of our community markets down in Southern Illinois on the east side, Metro area of St. Louis. And we have about 350 million as I recall, I think of deposits down there today. We also have our oldest loan production office in St. Louis proper in Clayton, which is actually quite a sizeable loan production office. So adding the First Staunton franchise to this gives us well in excess of $1 billion of footings in the greater St. Louis Metro area.

All right. Okay. Thanks guys.

Thank you, Jon.

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

Hey, good afternoon. Thanks for the question. I wanted to start just on the fee income side with mortgage, obviously seeing the seasonal strengths there, but can you just let us know if there's anything kind of one-off there in terms of higher gain on sale or MSR revaluation, et cetera?

No, Michael actually it is a relatively straightforward quarter. It was all driven by the incremental volumes. I think if you look at page four of our press releases, you'll see that the originated for sale production was up quite strongly from the first quarter and obviously that certainly continued into July.

Okay. And then maybe on the insurance side, you noted that was a little bit lighter maybe than expected as there've been any shifts in term of that business going forward?

No, I think it was more of a question of the timing of the contingency fees and so we got a nice level of contingency fee received and that's received and recorded on a cash basis in the first quarter and it was a little less in the second quarter. So we probably received some of those just a little earlier in the year. Overall that this is fairly stable business, so it's not going to be a business that grows dramatically and the incremental that comes in the first two quarters is largely driven by the contingency fee factors.

Okay. So a little bit of pull forward to the fees as opposed to something being pushed out of 3Q that we should model higher?

Correct. Yes. Don't model 3Q later. It'll follow the normal seasonal pattern.

Okay. And then just the last one on the oil and gas book, it sounds like based on all your commentary that you've sort of already put in place the provision and credit kind of allocations that you need there to move some of the loans out. But can you just maybe give us a little more color around how quickly you think you can move these are they mostly Shared National Credits and how liquid that market is right now?

Sure. So first of all, you've seen a number of other banks during this earning season discussing their oil and gas books. The industry, as I mentioned has undergone a lot of change and valuations for reserves for a stressed customer are weak, driven both by the desire of other E&P companies to focus on their own properties as well as the fact that the capital markets, both private and public are largely shut to the industry and have been for awhile. What we've been doing over the – this first half of the year, during the normal borrowing base redetermination periods is focusing on higher leverage credits and either reducing or exiting those credits during the borrowing base redetermination periods. So other banks have taken up essentially our positions in these credits. This is very much a club or Shared National Credit type of business almost all of these facilities have multiple banks in them from a handful up to 20. So, what we're seeing effectively is what everybody's seen and depending on the bank, I think some are choosing to reduce exposures and some are not. We're choosing to do that, we saw – over the first half of this year reduced our outstandings by more than 100 million and we expect that we'll probably reduce, outstandings by another 50 million to 100 million by the end of the year, but we'll be doing that in the same way as we have the opportunities to exit or reduce that, that's what we'll be focused on. But we're still going to remain active in the business. We're not an active lender to new names at the moment, until we get a little more clarity on what the risk and reward ratio for a senior lender in this space looks like. And hopefully that will become more apparent as the banking industry adjust to the dynamics of the oil and gas lending business, which I think it's going to need to do.

Okay. And one last one just on that, do you have kind of a weighted average coupon on the oil and gas book?

Not at the top of my head. Sorry, Michael.

Well, I would guess it's probably in the zip code of where the commercial real estate yields are, somewhere around there.

Okay. Thanks. Appreciate all the color.

Sure.

At this time, there are no further questions over the audio portion of the conference. I would now like to turn the conference back over to management for closing remarks.

Thank you. Pleased, with this quarter's commercial loan growth and the return to growth in our commercial real estate portfolio, we're optimistic that the funding changes we made will have a positive impact on our net interest margin in the second half. We look forward to welcoming First Staunton to Associated early next year and to talking to you again in October. So if you have any questions in the meantime, please give us a call. And as always thank you for your interest in Associated.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time. Have a wonderful rest of your day.