Associated Banc-Corp (ASB) Q1 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the Associated Banc-Corp First Quarter 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Phil Flynn. Please proceed.

Thanks and welcome to our first quarter earnings call. Joining me today are Chris Niles, Chief Financial Officer and Scott Hickey, our Chief Credit Officer. Just as a reminder, we have slides on our website if you need to look at those. So turning to Slide 2, overall our first quarter results reflect higher revenues, lower expenses, a growing loan book and stable margins. We are encouraged by several positive trends in the quarter including particularly strong commercial loan growth and record insurance commissions, which have helped us navigate the continuing low interest rate in volatile energy market environment. Our progress against our 2016 priorities are on Slide 2. We are committed to enhance customer experience and we are pleased to report improving branch customer satisfaction trends as we continue to invest in our retail deposit franchise. We saw average loan growth accelerate to $380 million in the first quarter, up from $90 million in the fourth quarter. This time last year, we closed on an insurance brokerage acquisition to further diversify our revenue stream. This investment contributed to record insurance commissions of $21 million for the quarter. We continue to monitor the energy portfolio closely and we increased the energy related allowance to 6.5% at quarter end. I’ll discuss this in more details during the call. Expenses decreased $2 million and the efficiency ratio improved to 67% in the first quarter. This was down from 69% in the fourth quarter. We continue to drive expense discipline across the bank. We remain prudent capital managers and retuned about 90% of first quarters' net income to shareholder through repurchases and dividends while maintaining the strong capital profile. Bottom line we delivered $40 million of net income available to common equity or $0.27 per common share in the quarter. Loan details for the first quarter are highlighted on Slide 3. Average loans grew $380 million to $18.9 billion. This represents our strongest quarterly growth in a year. Average commercial and business loans were up 3% and accounted for the majority of quarter's growth. The increase was driven by strong growth in our power and utilities and real estate investment trust lending areas. Commercial and business lending line utilization increased modestly to 53%. On the horizontal bar chart we’ve highlighted our REIT lending activity. During the first quarter average REIT loan balances were up over $90 million. Over the past year, average REIT loans have grown by about $300 million. Generally we are participant in REIT loans in a primarily investment grade credits and still have lower yields than our general commercial portfolio. Our goal has been to initially grow the business through line, participations and then build on the relationships through cross-selling project financing, commercial deposits and capital market solutions. We saw general commercial loans increased by less than 1%. Competition in this space has not let up. We are pleased with growth in our other commercial categories and this highlights the diversity of our lending businesses and our ability to organically grow our balance sheet while passing on deals that don’t provide attractive risk adjusted returns. Moving on to commercial real estate, average CRE loans were up 2% from the fourth quarter driven by balance growth across our regional offices. CRE lending is up 9% year-over-year. We have been growing this book at a steady clip for some time now. Commercial real estate line utilization remains in the mid 50s. Residential lending was up $75 million reflecting slower first quarter purchase activity. Our home equity and other consumer portfolios continued to decline modestly. Our loan mix changed only slightly, CRE is now up to 24% from 23% and both C&I and consumer represent 38% of total loans. Overall, we are pleased with the growth across our diversified lending businesses. I'd like to provide a few comments on deposits and funding. Our loan to deposit ratio remains at 93% comfortably below a 100%. During the first quarter, we saw a normal seasonal deposit outflows and average total deposits decreased slightly by $41 million. Money market and time deposits our most expensive deposit categories declined about $150 million and this was partially offset by increases to average interest bearing and non-interest bearing demand deposit accounts. On Slide 4, we summarize credit quality trends of both energy related loans, as well as the rest of the portfolio. We saw several trends emerge this quarter but only one significant charge-off. The trends are largely being driven by ongoing volatility in the energy markets and the recent introduction of new regulatory guidance which has prompted us to reclassify a number of oil and gas credits. Potential problem loans increased about $100 million this quarter, due to risk rating migration on a handful of general commercial and energy related credits. First the quarter non-accrual loans of $286 million were up $108 million due primarily to downgrades in the oil and gas portfolio. The level of non-accrual loans to total assets increased to 1.49% and it is up from 97 basis points a year ago. Generally the loans that are migrated to non-accrual status are current and the customers are performing all loan obligations as outlined in their loan agreements. We expect to see some level of continued negative migration in ratings as we work through the spring borrowing base redeterminations. At quarter end, none of our outstanding oil and gas credits were delinquent. Outside of energy non-accrual loans were relatively flat from the fourth quarter and down $17 million or about 10% from year ago. Net charge-offs of $17 million included a $13 million charge from a single credit in the energy portfolio and outside of the energy book, we continue to see very low levels of net charge-offs. The total allowance for loan losses was stable at 1.44% of total loans compared to 1.48% a year ago. So let me elaborate on our energy portfolio on Slide 5. This business represents 4% of our total loans and remains focused on meeting the financing needs of upstream, independent exploration and production companies. We have no midstream, downstream or service company exposure. We generally lend to small and medium sized companies and our exposure is diversified across all the major U.S. producing basins. The book is comprised of 53 credits and we are participant in nearly all of those. Looking at the chart, period end loan outstanding have modestly increased to $756 million. During the quarter, we originated two credits with high quality opportunistic buyers. Our commitments were down 5% year-over-year and we held roughly flat at about $1 billion of commitments. We could see further reductions in commitments as we complete the spring redetermination process. Utilization levels for oil and gas have been stable over the last several quarters. At the end of the first quarter, utilization was in the low 70s. As this cycle has persisted, borrowing base redeterminations have reduced the credit lines of our deteriorating credits to a point where most distressed credits have little or no capacity remaining. We are nearly 30% through the spring borrowing base redeterminations and expect to be that – to see that completed by late June. At this early stage, we are seeing both borrowing based reaffirmations and decreases, the decreases have seen a reduction of about 20% on average. The chart also illustrates our reserve levels against this portfolio over the past several quarters and as I said the reserve level now stands at 6.5%. Turning to Slide 6, we will provide some additional detail on portfolio credit trends and the energy related reserves. The top table reflects risk rating migration over the past several quarters, the recent non-accrual changes were largely driven by new regulatory guidance. I would like to highlight two key changes from that new guidance. First, it requires that all debt be analyzed for future repayment in a reasonable timeframe not just senior secured debt in which we participate. Second, it outlines very specific leverage ratios relative to regulatory risk ratings. Frankly the guidance takes some of the judgment out of the risk ratings and to some extent makes it more transparent and consistent. The middle table pulls out the energy portfolios potential problem loans from the commercial and industrial portfolio, potential problem loans increased by $26 million in the first quarter. And the bottom chart reflects the build-up of the energy reserve over the past five quarters. I would like to provide a little additional information around $13 million energy charge-off in the first quarter. We originally extended a $26 million loan secured by non-operative working interest in numerous producing wells. The wells are operated by a third party, this is a common structure in the industry. Over time, half of our loan has been repaid. However a dispute between the operator and our borrower resulted in the operator with holding distributions to our borrower leading to extensive litigation. This litigation is likely to be protracted and combined with the lack of cash flow where borrower cause it to decide the charge-off the balance of loan in the first quarter. This is a unique situation in our portfolio. The total provision for credit losses was $20 million for the quarter approximately 75% of which was energy related. We increased the energy related allowance from $42 million to $49 million which was driven by risk rating migration. And that incremental build as I said puts the energy allowance to 6.5% of total energy loans and remember that those energy loans are all reserve secured. Outside of energy, credit quality was solid in the first quarter. We are still seeing very low levels of stress and loss. We have robust internal management controls to ensure we grow loan exposures in a balanced and diversified manner. And lastly, it is important to mention lower energy prices generally benefit the other 96% of our loans. Turning to Slide 7, net interest income was up from the fourth quarter and it was up nicely from a year ago. Net interest margin for the first quarter was $2.81 down one basis point, and we’ve seen a relatively stable margin trend over the past several quarters. The yield on interest earning assets was up two basis points this quarter. This was the first increase we have seen in sometime. The increase was driven by higher loan yields specifically higher commercial loan yields and offset by lower securities reinvestment rates. The cost of total interest bearing liabilities increased 4 basis points, interest bearing deposit cost increased 8 basis points reflecting the impact of the December Fed fund rate increase. This was partially offset by lower long term funding cost as we retired $430 million of senior notes late in February. Absent additional Fed rate increases, we expect the net interest margin dip into the 275 to 280 range over the balance of the year and that’s going to reflect the higher impact of higher non-accrual balances. Turning to Slide 8, first quarter non-interest income was $83 million flat to the prior quarter, up $3 million from the prior year's quarter. Insurance commissions were up $3 million. This increase was primarily related to annual property and casualty insurance commissions and as a reminder our insurance business is seasonal, commissions are expected to be higher during the first half of the year. Mortgage banking income decreased $4 million from the fourth quarter due to lower volumes and negative interest rate marks. Mortgage loans originated per sales decreased to just under $200 million down from over $300 million in the fourth quarter. However, at the end of the first quarter our mortgage pipeline was up about $300 million higher than year end so that bodes well for second quarter closings. Other non-interest income categories were up due to higher bank and life insurance. We’re focused on enhancing our fee business for diversified recurring revenue streams. We restructured the brokerage and annuity business last year and were pleased to see modestly higher revenues in the first quarter. Capital market fees also saw an uptick. Turning to Slide 9, non-interest expenses were down $2 million in the fourth quarter and flat from the year ago quarter and our efficiency ratio improved to 67% with FTE trends steady. An increase in personnel expense was more than offset by decreases in other expense categories including declines and occupancy and loan expense. Our technology and equipment spend has been generally stable over the past several quarters. In the first quarter, we expanded our relationship with the Milwaukee Brewers for additional in-stadium signage and additional marketing rights and debit and credit cards which complement our brewers checking product. We also put more emphasis on our Minnesota wild partnership. Together these marketing efforts contributed to higher business development and advertising expense of $8 million for the quarter. However we expect this amount to moderate over the balance of the year and our expense guidance remains unchanged. Our first quarter effective income tax rate of 31% was down from 32% in the year ago quarter. On Slide 10, we’d like to update our 2016 outlook. So, we continue to expect high single digit annual loan growth. We expect to maintain the loan to deposit ratio under a 100%. In the absence of Fed action, we expect NIM to modestly dip to the 275 to 280 range reflecting the impact of non-accrual loans. Non-interest income is expected to be approximately flat to 2015 adjusted for $8 million in investment security gains. However our trust and brokerage fees may come under pressure given market volatility. Non-interest expense is also expected to be approximately flat to 2015. We will continue to deploy capital to our stated priorities. Finally the loan loss provision is expected to be dependent on loan growth and changes in risk rate or other indications to credit quality. With that, we'll open it up to your questions.

[Operator Instructions] Our first question comes from the line of Chris McGratty of KBW. Please proceed with your questions.

Good morning or good afternoon guys. So a question on - looking at Slide 4, maybe a bit of color - I’m looking at the potential problem loans, about $100 million. Looks like about quarter of it’s related to the energy book, any color on the kind of the allocation of the potential problem that have moved the other way.

Sure. Scott, do you want to answer that question?

Sure. Chris, so if you look at the other, it’s really diversified, we’ve got a non-energy commodity company, a construction company, transportation chemicals, so there is no common theme there, it is just a variety of credits.

Okay, great. Maybe one for Chris, in the release it talked about an MSR, was there an MSR adjustment in the quarter and if so what was it?

Yes, it is $1 million downward valuation adjustment.

And maybe last one of housekeeping, does the buyback that's left under authorization any plan to continue to use it, that would be great. Thank you.

So we have authorization capacity remaining of $88 million and obviously we don’t disclose our plans in advance.

Thanks, Chris.

Our next question comes from the line of Ken Zerbe of Morgan Stanley. Please proceed with your question.

Great. Thank you. I guess first one just in terms of energy, so you made a comment that your - I know you’re 30% of the way through the spring redetermination process but there is a comment there that said that you expect more ratings migration as you go through the process. And I mean is it fair to say that whatever deterioration we saw this quarter is only 30% of what's to come or how do you guys think about forecasting deterioration that you haven’t yet seen for this spring process?

Sure. No, I certainly wouldn't take what you saw and multiply it. What you've seen was to a great extent driven by the new guidance that the regulators put out and that has been a common theme throughout all the calls that you have listened to and all the banks with energy that - energy exposure that was recorded, everybody has seen some migration and in particular I think everybody that has looked at has had non-accruals run up because of the new tests that are very prescriptive in the new guidance. As far as the spring redetermination, we have a pretty decent sense for where we sit, we are applying at least a little more steady stable oil price and gas price outlook. What we need to get is updated engineering and production reports, we don’t expect huge changes with that. But I would caution that this has been very volatile, everybody feels a little bit better with $40 plus oil but we all know that could change in weeks. So it’s very hard to prognosticate where all of this ends up, at 6.5% reserve against a reserve secured book, I feel very comfortable with where we sit today. I certainly don't anticipate reporting three months from now wildly run up non-accruals or other risk migration at this point.

Okay, that helps. I just want to make sure I understood what you meant by that.

The big driver was the new guidance.

Yes, we have seen that across the board for all the banks with energy exposure, so that is absolutely fair. The other question I had the trust income in your guidance, it sounded like that was sort of the one area that you may have - you don’t have a lot of visibility on. The trust business so far I mean it looks like it was down a little bit this quarter, what are the trends that you’re seeing sort of into April, I mean is this something where we should actually be thinking about fee income under incremental pressure?

No, it's been actually getting better in the latter half of the quarter but let’s not forget where we were at the start of the quarter. So we’ve had a significant amount of volatility in the stock market which drives some of these fees of course. We are just pointing out that we had unusual volatility in the market and that does have an impact. But as we sit here with the recovery we have seen, I’m not trying to tell you that these fees are going to fall off, in fact they are trending up.

Got it, understood. And then just one last question for you, at the very beginning you were talking about the REIT loans, how you are trying to cross-sell into these borrowers once you get the loan. Do you have any data or stats that help us understand how successful you have been in terms of the cross-sells just to assess whether this is, has been a sort of viable strategy?

Yes, it's fairly new area. We hired a couple of folks who used to work with us at the other bank. They’ve done a great job of penetrating the REITs but it has only been about a year and a half. So we have built the portfolio of line participations and they are getting some success on cross-selling deposit products and other things but it’s little too early to declare victory on that. We are disciplined about getting appropriate risk adjusted return on capital. So, to the extent as we go through the rest of this year and into next year to the extent we're not penetrating some of these companies with cross-sell opportunities then we would exit the lines at the appropriate time.

Perfect. Thank you very much.

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

Thanks. Good afternoon. For just a follow up on REIT, as long as the REIT team - as long as you are just talking about it. Why the strength now? Is it just maturation of the business, I think it's the first time that you’ve singled this business out as a big growth driver, so just kind of curious of what's happening?

Yes, we did want to single it out because we haven’t mentioned it before and it is something where we had generated commitments and outstanding over this past five quarters or so. So we just wanted to draw some visibility to it, that's all.

Okay, good. Chris, on the repurchase we’ll try it a different way, would you say the $20 million repurchase was just opportunistic during the quarter given what happened to bank stock prices there is just - is this just a longer term plan where you committed to continue to buy back stock?

Well, I would say absolutely we felt the purchase opportunity presented itself and we are glad we executed when we did. And secondly we’d say that we remain with $88 million of capacity and we will be prudent in managing our capital as we move through the balance of the year.

Okay.

But, Jon we would take you back to our stated capital priorities which we talked about a lot and the first one is the support organic growth. We had point to point loan growth of more than $500 million and we do need capital to support that kind of growth. Q – Jon Arfstrom: Okay, good. Couple of things to, just oil and gas lending appetite you talked about the couple of credits and obviously we're very focused on that given out the small piece of your business but I’m guessing you are seeing some opportunities, I’m just curious where your appetite is.

We are - I’ll give you little color on that because I was talking to my team in Houston yesterday. Philosophically our goal at Associated Banc is to support our customers and support the industries we’re in and to be in a position of strength throughout cycles. One of the ways that you build a reputation and a place in any industry particularly special industry, specialized industry is not to open the doors and shut the doors depending on what’s going on. So, we are still actively looking for opportunities obviously there are little fewer and further apart. But pricing on these two transactions is up significantly and structure is extremely favorable. It's the new guidelines that the SEC has. Both of these deals had more than 50% equity put into them. Obviously we are lending at a time of relatively low hydrocarbon prices so this is the time for us to continue to be steady participants in the business. I heard that give or take there has been about 50 banks participating in the oil and gas business in the U.S. and as best we can determine at least my experts in the field probably only 15% are open for business today that's where I want to be.

Okay, good. And then just one on - back on the migration question. If we see some more migration which I don’t think would surprise people, do you expect that to correspond with required higher loan loss provisions or reserves or do you feel like most of that has been captured by the new guidance.

It’s hard to say, it’s so dependent upon where prices go and its dependent upon production profiles from the various companies that we lend to. So, to the extent there is an lot of drilling activity, you can start to see declines and production now are borrowing basis don’t plan on new production typically so, that shouldn’t hurt us but, price volatility is the big deal. And even though we and much of the banking industry of course is senior secured, there is quite a bit of junior capital in these deals that's going to have to get resolved over the coming year and some of that is as we all know going to get resolved in bankruptcy at the back end of all of that as the senior lender you should come out pretty well. But there is a lot of restructuring that is going to have to occur in the industry over the course of this year.

Okay. I guess one of the things I’m trying to get at is, you did mention the growth and you guys had decent quarter except for the $20 million provision and we understand the negative migration that's going on. But if 75% of the provision is energy related, lot of it is - maybe a piece of it, it is out of your control maybe part of it is the charge-off. Yes my assumption is the provision comes down pretty materially next quarter is that the right way to think about this?

I’m not going to help you with forming that opinion. I just can’t sit here and tell you that I have perfect visibility into the oil and gas markets over the course of the rest of this quarter, I’ll let alone later into the end of the year. So I can’t tell you that the provisions is coming down.

Okay. But what you have said essentially, with your prepared taxes $5 million of the provision was for the rest of the book and you feel comfortable with the rest of the book and we can make our own guesses on energy, is that fair?

I think that is very fair. We just aren’t seeing a lot of pain here, I mean absent oil and gas this sort of been a pretty strong quarter. Q – Jon Arfstrom: Okay. All right. Thank you.

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

Hi good afternoon. Just on the energy side, could you show us what your stress test scenarios are for oil and gas prices?

Yes, things have start to change but the guidance, so one of the things that's very different is the guidance now when you’re testing your portfolio at quarter end and instruct banks to use the NYMEX Strip at that point in time, the NYMEX Strip as we said here today is about $10 north of our current internal price deck for how we will blend. So things change rather dramatically today the SEC put out that new guidance. Our slide deck is fairly low right now.

Okay. And when you are looking at determining your or setting your reserve, you're using the NYMEX Strip or are you using your own internal pricing?

This is Scott. We’re using both actually. To the extent it’s an impaired loan, we will use the current NYMEX Strip to do to a collateral analysis to the extent it is not an impaired loan, we will use our price deck and the risk rating that comes out of that. So it is really both.

Okay. And then when you look at the 6.5% reserve level at this point, does that incorporate the expectation of the redetermination on the whole portfolio or was that with what you got through thus far at the end of the quarter?

Yes, that is our estimate at the end of the first quarter.

Okay. So as more go to -

Now there is some as I would say - there is some unallocated portion of that $49 million, how much is that Scott?

It is about $12 million.

$12 million, so there is about $12 million that is not specifically attributed to specific credits. So yes there is some - significant portion of that 49 is available if you will for further deterioration I think is a fair way to say that.

Okay, all right. And then finally just on that $13 million charge-off this quarter on the energy portfolio. Was there a specific reserve established for that at all before this quarter or is this go back really quickly?

Now that loan was on non-accrual previous to this quarter and about half of that exposure had already been specifically reserved. So the impact this quarter was about half of that contained.

Okay, great. And then just finally separate from energy as you look at the rest of the lending book and your opportunities in the current pipeline, is the pipeline strong on the rest of lending going into second quarter?

It is. We had really strong loan growth throughout the first quarter and it continued afterwards. So - and it is fairly widespread across all of our categories. So yes loan growth looks pretty solid right now.

Great, thank you.

[Operator Instructions] Our next question comes from the line of Scott Siefers of Sandler O'Neill. Please proceed with your question.

Good afternoon, guys. Outside the kind of unusual energy charge-off you talked in detail, I mean it looks like there is basically no actual loss content in the energy portfolio but I guess make sense given the nature of it but what in your mind, what it takes for you to start seeing some actual loss or it is simply a function of price wins dipped down again materially say there or what are the main factors you are seeing there?

Well clearly price has been driving all of this for the last year and half. So that's certainly the most important thing. But beyond that like I said earlier a lot of these oil and gas companies have junior capital, it is going to have to get resolved and so when you go to the courts, bank or senior lenders but there is always the possibility that you don’t come out whole at the backend. So a combination of price and then the individual work out nature of these loans will drive future loss content.

Perfect, all right, thank you. And then Chris can you talk a little bit about what's going on with your funding cost specifically deposit cost. It seems just as I look some of your numbers that you guys are experiencing a bit more pressure on your funding cost than most of the other things, just curious if there are competitive dynamics to play or what is causing your funding cost to go up perhaps little more than others?

Sure. And I will draw your attention to Page 7 of our financial tables and we break out for you what we did with our network deposits, and you will see with that over $3 billion of network deposits and those are deposits that are either institutional, governmental or related to larger financials conglomerates. And those deposits tend to be index to active Fed funds or other market industries and those reprised on us pretty directly. So, that portion of our deposit book essentially has – say close to one and less deposit that you can see anything you look back to Page 6, we get no moment on this traditional saving accounts. So it is just essentially the network deposit really the driver of that and that accounted for most of the 8 basis point increase you saw natural - accounts deposits. Overall that still a data of about 0.3 which I think is very much in line with what we expected.

Okay. And then so basically these network deposits - I mean that just won’t change again basically until the Fed - until end if I guess the Fed raises right, that’s already now fully backed into the run rate right?

Correct and if there is big -

Exactly. All right, good. Thank you, guys.

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

Hi, thanks good afternoon. Seemed like there was a slew of announcements last quarter in terms of your investments in Milwaukee including a big building that was purchased fair like $60 million. Could you just talk about what you're doing in that market in any financial impact as you think about real estate and reallocating the resources down in that market.

Sure, so we have a lot of people in Milwaukee to some extend it’s a second headquarter for Associated. We are in lease space today and in coming years that those leases will expire. So, we've been interested in controlling our on real estate destiny in Milwaukee for quite a while and we're also making good in roads into market share there and really putting our flag into Wisconsin as the largest bank in Wisconsin and the most important bank in Wisconsin. If we’re going to be that and continue along that path, we need a big presence in Milwaukee which is by far the largest market in this space. So, this building came along as an opportunity. As we sit here today we didn’t need to own the building today, but it was available today. We thought the price was fair. It's least to the point where between now and the time that we move in, which is some years in the future. It has no material impact on our financial condition, but the lease payments more than pay for the operating costs. So it was an opportunistic opportunity to buy a good building, control our real estate destiny for a long, long time to come, and at a reasonable price that won't impact our financials.

Thanks. All my other questions have been asked and answered, thanks.

Our next question comes from the line of Emlen Harmon of Jefferies. Please proceed with your question.

Good afternoon guys. So last quarter we were expecting there was an increase in Fed funds there would be an increase in them. Didn't see that that this quarter. I suspect part of that is the non-accruals, but should we get additional Fed funds increases I think - Fed funds increases. Is it your view that - has your view on assets hasn't changed at all?

I think it's fair to say. If you look at Page 6, we've saw over 10 basis points of uptick in our commercial real estate portfolio. For that index as we expected it to. On the C&I side, we also saw an uptick, a little more muted, but I would remind you that a good portion of our growth came from the power utilities and replaces. And we know that power utility space is a higher credit base overall and the rebate as we've articulated is predominantly investment grade. So there's been slightly lower growth yielding assets than the average book. And so the new growth came on at marginally lower yields and that depressed the uptick. So when we saw 4 basis point of uptick in that category. Those are two things to keep in mind. We saw it on CRE NI side. We didn't see it on C&I side, but that's because some other growth we did was compensated generally higher credit, lower yielding piece of the C&I book. With respect to sort of what would come next in a Fed raising further, we have a very small portion of the book that's in any type of floor position is less than $600 million have any type of floor at all. And so that's really not going to be kind of hold us back. So we still expect to see the asset sensitivity come through at some point on the commercial books. And again, we've done pretty nicely holding the line on deposit cost outside of the network deposit. So we expect that there is a positive dynamic to come still.

But we're also not counting on any rate increases. And if you looked at the guidance we provided, we definitely change those words. None of us really know what's going to happen there, but we're pretty darn sure it's not going to happen three more times this year.

And the essence of that I think what we try to articulate was in the absence of any Fed increases, we'll probably continue to grow marginally and the marginal growth generally is diluted to the current book. So you'll start to see very marginal erosion quarter-to-quarter. Now, we did retire the debts at the end of February. So we'll likely see a modest uptick just because of the debt affect in the second quarter, but then it'll probably arose at some of the changes.

Got it. Thanks. I'll hop back there. Thank you.

There are no further questions in the audio portion of the conference at the time. I would now like to turn the conference back over to Phil Flynn for closing remarks.

Thanks and thank you everybody for joining us today. We are generally encouraged with the quarter's growing loan book and growing fees. We're also committed, as you noted, continuing expenses as we continue to manage through this long low-interest rate environment and the energy price cycle. In closing, I'd like to share our commitment to our customers. In the first quarter we launched new vision, values and aspiration statements. And one of the primary visions that we have is that our customers will work with a knowledgeable, capable and compassionate team focused on ensuring they have anytime, anywhere access to the best solutions for their financial and business goals. Over the next month, we're going to be highlighting that commitment through road shows with our 4400 colleagues located across the upper Midwest. So a lot of us have been traveling and will be traveling for the rest of the quarter. Success in banking comes down to great service and relationships. And we're pleased to report that 90% of our consumer customers were completely satisfied with their branch experience during the first quarter. We recently expanded our voice of the customer program to include all of our digital channels as we continue to evolve along the changes in customer behavior. Overall, we believe our shareholders are going to benefit from our disciplined focus on improving the fundamentals of our business and our customers' experience. So look forward to talking with you again next quarter. And if you have any questions in the mean time, please give us a call and thanks again for your interest in Associated Banc.

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