Welcome to Associated Banc-Corp's Second Quarter 2016 Earnings Conference Call. My name is Chris and I will be your operator today. [Operator Instructions]. During the course of the discussion today Associated Management may make statements that constitute projections, expectations, beliefs with 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 actual results to differ materially from the information discussed today is readily available from the SEC website and the risk factors section of Associated's most recent Form 10-K and any subsequent SEC filings. These factors are incorporated herein by reference or reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call please see page 10 digit 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 Phil Flynn, President and CEO for opening remarks. Please go ahead, sir.

Thank you and welcome to our second quarter earnings call. Joining me today as usual our Chris Niles, our Chief Financial Officer and Scott Hickey, our Chief Credit Officer. Our second quarter results reflect the strength and diversity of our franchise with strong growth in both our lending and fee based businesses. Despite continued market volatility, we delivered growth, stable margins and improved earnings. We summarized our progress against our 2016 priorities on slide 2 . We're committed to providing customers access to our services when and how they choose. For example, mobile deposits were up 50% from the prior-year quarter and over 45% of all our non-ACH deposits and withdrawals transactions were executed electronically. In addition, we recently opened a modern private banking office in Milwaukee, a new branch in La Crosse and new retail mortgage lending officers in Milwaukee and Chicago to extend our penetration in those markets. The average loan growth was up $790 million from the first quarter, average loans have grown by more than $1 billion during the first half of the year. We have a diverse lending business and the ability to partner with a broad set of consumers and companies. Our growth this quarter was particularly well-balanced amongst all our loan classes. We're focused on being a full-service banking partner for our customers and we're pleased with our growing fee base revenue streams. We recorded $22 million in insurance commissions up 10% from the year ago quarter. Expenses were a $174 million flat to the prior quarter. We continue to drive expense discipline across the bank and we're on pace for a fifth straight year of improved efficiency. We remained prudent capital managers, return on average common equity Tier 1 was 9.9% and we paid out 35% of second quarter's net income through…

[Operator Instructions]. And our first question comes from the line of Chris McGratty from KBW. Please proceed with your question, sir.

Phil or Chris on the guidance, I just want to make sure I got this right. The flat for the second half, you're basically saying to 80 for the back?

As far as NIM goes?

That's right. A – Phil Flynn: Yes, we think that if you look at the last four quarters, it's pretty much flattened out at this point. So that is our best guess.

And then the fee income guidance, there was a modest change in the release this quarter to quarter but you are not changing the messaging with security gains in the quarter? That’s just flat year-over-year? A – Phil Flynn: Correct. We’ve already got some security gains so it [indiscernible] the point, but yes.

Okay. On capital, can you remind us the amount of buyback that you have left under authorization how you're thinking about it at these levels? A – Phil Flynn: Sure. I guess from a broader perspective, we have remaining authorization. What we saw is you saw us execute against that in the first quarter but we're really targeting the target capital level and our target capital levels for Tier 1 are kind of in that range that we're comfortable with maintaining at this point in time.

Okay. And maybe the last, Chris. Can you quantify the MSR mark in the quarter? A – Chris Niles: The combined MSR and pipeline marks were roughly $2 million for the quarter.

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

The loan to deposits now are as high as they have been under the new management regime. Understanding there is an element of seasonality this quarter, is there a point where you get a little bit more aggressive with deposit pricing and you hear a lot of banks talking about wanting to keep that under a 100%. Is there a threshold for you? A – Phil Flynn: Yes. We will keep it under 100%. We made some purposeful decisions and in the second quarter to actually price out some deposits because we could fund ourselves more effectively with short term FHLB advances. We fully anticipate that we will repay those advances as deposits flow in during the back half and if you look at our history, we have a pretty well-defined seasonal pattern of outflows first half, inflows second half.

And then did see that you increased the allowance on funding commitments this quarter. Could you specify whether that was within the energy book? Is that an increase on credits that are partially drawn? I guess maybe just give us a sense on the protection in terms of covenants that you got on those loans.

This is Scott, $2 million of the $3 million was really to one C&I loan that we had put on non-accrual so we got to have a reserve against that. So it's kind of an anomaly but no it was not related to oil and gas.

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

On the new oil and gas loans that you put out, what was the yield on the new production versus what was the yield on what you saw for the payoffs in the quarter? A – Phil Flynn: I'm trying to pull up my memory from talking to my guys in Houston. But I would say we're probably getting 50 to 75 basis points better loan pricing, a little stronger fees, more equity, less leverage, etcetera. So it's a much better risk profile.

Okay. And then on the commercial real estate, as the regulators have seem to refocus the discussion on that 300% threshold for a lot of Associated smaller banks. Do you think that provides some opportunity as you look going forward to loan growth? Is there an opportunity for you to pick up maybe some better loans or better spreads that otherwise you may not have been interested in the past as the competitive dynamics may change? A – Phil Flynn: Yes. If you look at our numbers, we have plenty of room against the new guidelines, if you want to call them guidelines. So we’re actually seeing in some real estate classes prices starting to move up a bit, particularly in multifamily space. A lot of banks are getting full and so things are not as competitive from a price point view as they were. I mean that said, we remain very disciplined about having a diverse and wide balance portfolio in commercial real estate but I think generally speaking, there are some banks who have started to really pull away as they have filled up their buckets.

Okay. And then finally, when you look at the growth this quarter, how much of that was either shared national credit or out of market loan growth? A – Phil Flynn: Scott, do you have those numbers handy? A – Scott Hickey: If I look at the period and loans shared national credit was up $45 million. So I wouldn’t say it was dramatic.

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

Just a couple of follow-ups here. Just you talked, Phil, you talked about the potential problem loan increase and I know it's not big numbers. And you're also saying your charge-offs, outside of energy are at cyclical lows. Are you seeing anything that bothers you, is going to cause you to change your view at all on credit or are things very just benign at this point? A – Phil Flynn: I think, absent energy, we really are at cyclical lows, when you've got $2 million in charge-offs, we're really low. Now that said, if you look at -- what is it, slide 4, you can see, if you take energy off the top, oil and gas off the top, you've still seen a doubling of potential problem loans from $140 million to $280 million over a five quarter period.

Right. A – Phil Flynn: Recognize those are absolute very low numbers against the $20 billion portfolio. But there's a little bit of a trend there, so we will see what happens as we go forward.

Okay. But at this point, you're basically saying, you're looking for problems and you recognize that trend, but you're just not seeing anything that would alarm you or bother you? A – Phil Flynn: That's correct. A – Scott Hickey: This is Scott. I guess, said differently, Jon, there's nothing systemic in a single portfolio or an asset class that's causing us concern. These are just two or three credits per quarter that aren't really correlated at all.

Okay. On the charge-offs, the $19 million in oil and gas, was that all reserved or was that an element of the provision this quarter?

The $9 million loan was fully reserved in prior quarters. The $10 million was not.

Maybe Chris, a question for you, on a separate topic. But the headcount is up just a little bit. Where are you adding people?

It was really mish-mash across the board. We had to do a little searching ourselves to figure it out, okay.

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

The first one is just sort of a follow-up on the potential problem loan numbers. I guess, I'm just curious. Even though they've been increasing for some time, it looks like there have been basically zero pull through into non-accruals, at least in the non-oil and gas. So as you guys identify potential problem loans, I mean, is that really just conservatism thing? In other words, is it qualitative or are there quantitative aspects that are causing that--?

These are substandard accruing loans that we recognize. And you're right, I mean, we're not getting a huge amount of flow-through. We're also getting resolutions out of the nonaccrual bucket. We had $15 million-odd, $20 million-odd nonaccrual that have been sitting there for two years on a manufacturing company, service company in Green Bay that paid off last week.

Got refinanced.

So you would normally expect to see more of a migration downwards from potential problem on nonaccrual. We haven't seen a lot of that. A lot of this stuff is resolving or getting refi-ed.

And then, just as you look out just in the energy portfolio, Phil, I'm just wondering if you can give us your best guess for go forward loss content. I know, it is really anybody's guess, but there's just such a wide gap between what presumably your charge-offs. I mean, as guys you noted, your charge-off basically nothing outside the energy portfolio. So at some point presumably, there's going to be a much wider disparity, between what you're actually provisioning, versus what you would have to provide if you didn't have the loss content in the energy portfolio? So I'm just trying to get a sense for, a combination of what is the ongoing loss content as you would see it? And at what point will the provisioning needs for the Company as a whole, maybe start to decline even more materially from that, I guess, most elevated space we saw last quarter? A – Phil Flynn: Well, I have been doing this for way too long to call bottoms and prognosticate too much. But I would say that we have been working this book now for more than a year. We feel very comfortable that we have identified where things are. We have charged-off obviously, the worst of the stuff that has presented itself to us at this point. Many of these credits have been through a couple, three cycles now, of borrowing base redeterminations in a stressed environment. The new OCC guidance is so prescriptive, that most banks should be looking at things almost the exact same way. So I think we're well down the path of resolution on the reserve secured energy book. And remember, all of our stuff is reserve secured. So service companies and midstream stuff might be a little bit different. But our stuff is pretty formulaic so. I'm not going to call a bottom, but we're feeling very comfortable with where our reserves are and where we stand. I mean and you'll notice that our reserves against the book declined a little bit. Now, of course, we have taken $32 million of charges and we've refilled most of that, but not all of it. I don't know if that helps you and that was a lot of words, without answering your question, but I did it on purpose.

No, no, it does. So I appreciate the color. It seems like with ex energy, you would be maybe having to provide $1 million or so a quarter. A – Phil Flynn: Ex-energy, it would be really low. No doubt.

Yes, it seems like at some point, there will be a little more volatility in the earnings stream. But that's helpful color. And then, if I can maybe sneak one more question in, Chris, maybe for you. So just on the margin guidance, I know it's a subtle difference, but the flat versus maybe drifting down towards the 2.75% to 2.80% range. If anything, the shape of the yield curve has gotten harder in the last or tougher in the last 90 days, but the margin is holding in better and the outlook is better. So in your mind, what are the two or three factors that have changed most materially?

Look, we're seeing stability, we're seeing some better pricing in a variety of different areas. The pricing pressure that we thought we might see from some of the deposit categories, isn't there. We pushed some deposits out and we expect we'll see better deposit flows in the back half. And taken altogether, that means the 2.75% seems further away from likely and flat seems pretty much in the cards.

Okay. A – Phil Flynn: It was a purposeful decision to change that.

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

A question on expenses, as we go through the low for longer rate environment, how do you see any opportunities to bring down expenses? You're been successful for years now, just reducing the branch count and bringing down expenses. But I guess, my question is, what is left as you think about the $174 million quarterly run rate of expenses?

Yes, I think, as we're approaching five years of holding expenses flat, absent the [indiscernible] acquisition, while significantly reinvesting into the franchise, as far as branch look and feel and particularly technology investments, I don't personally think there's a lot of room to move that down. There is always efficiency projects we have going. There is always different things we can do to get more efficient. But in order to keep up with, particularly the very largest banks who are pouring a lot of money into consumer-facing applications, both online and on their mobile platforms, there's a significant spend that will be ongoing to meet that customer expectation. So I don't expect to see our expenses go up. And I would wager we're one of the few banks that's managed to hold expenses like we have, particularly of our size category. But I don't see a huge opportunity to move it down either.

And then, just a quick follow-up, the insurance commissions, as you think about Q3 and Q4, essentially that same drop as we saw last year, a couple million dollar drop in insurance commissions?

It will be lower. We know it's seasonably higher in the first and second quarters and it does seasonably dip down. Last year, obviously, we had the [indiscernible] in there. That's an indicator. We haven't had multi-years of that trend, so it's hard to give you any more guidance to that. But yes, we expect to dip down and last year is probably a good place to start. A – Phil Flynn: Our whole business has grown though too. So you can probably look at what happened last year, that's a reasonable proxy.

There are no further questions at this time. I would like to turn the call back over to management for any closing remarks.

Okay. Well, thanks for joining us today. We think that this quarter's solid loan growth is a reflection of the economies we support here in the Upper Midwest. We're here to partner with our consumers and commercial clients and we're investing in parts of the economy that are doing well in supporting commercial expansion, construction and housing. Over the past year, we've announced several initiatives, better positioned ourselves as a partner for our customers, in support of their continued growth. Overall, we believe our shareholders will benefit from our continuing focus on improving the customer experience, while building out the capabilities of our diverse businesses. So we look forward to talking with all of you again next quarter. And if you have any questions in the meantime, please give us a call. And as always, thank you for your interest in Associated Bank.

Ladies and gentlemen, this does conclude our teleconference for today. We thank you for your time and participation and you may disconnect your lines at this time. Have a wonderful rest of your day.