Good afternoon, everyone, and welcome to the Associated Banc-Corp's Fourth Quarter and Full Year 2018 Earnings Conference Call. My name is Dana, 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 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. For a reconciliation of non-GAAP financial measures to the GAAP financial measures mentioned in this call, please refer to the slide presentation and to Slide 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, and welcome to our fourth quarter and full year 2018 earnings call. Joining me as usual are Chris Niles, our Chief Financial Officer; and John Hankerd, our Chief Credit Officer. On Slide 3, 2018 was a year of great progress for Associated Banc. The momentum we've built over the last several years continued and provided great bottom line results. Collectively, these improvements drove earnings per share to $1.89, which is a 33% increase from 2017 and a 50% increase from two years ago. The bottom line was driven by solid top line growth coming from higher revenue in both our loan portfolio and our fee businesses. We also grew our deposit franchise as we completed the Bank Mutual acquisition and system conversion. We finished the year with record deposit levels and believe that the recently announced Huntington branch transaction will further enhance our deposit franchise value. Our credit metrics continued to improve, and we finished the year with zero provision for credit losses. Our progress in this area reflects our commitment to disciplined underwriting standards. We maintained our strong capital position while increasing the amount of capital we return to shareholders through higher dividends and $240 million of share repurchases. Turning to Slide 4, we summarize our 2018 results. We're pleased that our final reported results have been consistent with our 2018 guidance. Average loans were up over 10% from 2017, with growth across most of our lending classes, and our net interest margin increased 15 basis points benefiting from our inherently asset-sensitive commercial loan mix. We continue to grow our fee-based revenue year-over-year, driven by strong markets and further boosted by our acquisitions of Whitnell, Diversified Insurance and Anderson Insurance. As we projected our cost control efforts and the cost savings achieved from the Bank Mutual acquisition, there'll…

[Operator Instructions]. Our first question comes from the line of Jon Arfstrom from RBC Capital Markets.

A question for you guys on loan growth. The loan growth guidance is 3% to 6%. So I think I didn't catch all of it, but you talked about maybe, I think, commercial and general business as the key drivers. Give us an idea of what gives you confidence there and kind of an idea of where and what you think will pull through.

Sure. So our confidence in our loan outlook is really based upon the activities that we've seen over this last quarter or so. We have a lot of momentum building up in our general commercial lending business as well as the specialty verticals. The pipeline is strong. We had a number of commitments closed during the quarter, which will begin to fund up. And in addition, while we still think that we're going to see some paydowns through this first quarter in commercial real estate, the pipeline and the closings and the fundings that will come from those closings of the commitments in commercial real estate are going to start to kick in and generate positive growth in that loan segment as well. Last year, the commercial real estate folks, for example, closed $2 billion of commitments approximately, and a lot of that hasn't funded yet. So the combination of continued strong growth in the general commercial area, specialty verticals as well as, as we get a little further into the end of Q1 and into Q2, we'll start to see net growth in commercial real estate again. That gives us confidence that we should get to that 3% to 6% range.

Okay, good. That's helpful. And then the margin guidance - but you have the phrase in there, "based on continued upward Fed rate action." Can you help us understand what that means and what that might mean if that continued upward Fed rate action does not happen?

Sure. So we're calling for stable to improving NIM to expand as Fed continues to guide higher rate, continue to set higher and the curve continue to steepen out, we'll have positive margin momentum. To the extent the Fed stops cold or pauses and that momentum gets lost, we'll take actions to defend the margin, we'll be more likely to be stable.

Yes. I was just going to ask that. What type of actions? Give us an example of what that might be, Chris.

Sure. Clearly, if the Fed pauses, one of the reactions will be - well, if we're going to think about our investment portfolio options and we think about our deposit pricing strategies. So on the world of continuously rising rates, we're taking actions on deposit side to price ourselves in anticipation of a couple more rate hikes. If that's not the case in the marketplace, then clearly, we assume that competitive pressure will diminish and we'll be able to manage our funding and liability costs more optimally.

Our next question comes from the line of Scott Siefers from Sandler O'Neill.

I guess first thing I wanted to ask is just to go back to that loan growth guidance. So do you think that the first quarter will be loans actually increasing? Especially, we've had a couple of quarters of flat or down loan. And I guess just the way things sort of entered to project with you guys and based on what you're saying, it really only leaves a couple of quarters of what would have to be really strong growth to get to even though the lower end of the range. So I guess, we've got the CRE headwind in the first quarter, then you guys typically have down loans in the fourth quarter. So it kind of feels like it only leaves the middle part of the year. I'm just trying to - sort of similar to the last question, can we establish confidence as to - with respect to how we get there?

Yes. So we expect net growth in the first quarter and then we expect it to accelerate as the CRE net growth starts to kick in more forcefully.

Okay, all right. So a kind of acceleration basically through the next three quarters of the year, I guess, is what does it, right?

I think that's right.

Yes, okay. And then I know you said on the expense guide for the year, that includes the impact of the Huntington branches. Is the same true of the fee guide as well? And is there anything meaningful that you would expect from those branches within your total guide there?

Yes. So right, the expenses include our anticipated costs for completing the transaction. The fees that are being picked up are not terribly meaningful, but it does include those.

Okay. I appreciate that. And just on that expense fee specifically, I might have missed the one you originally disclosed or announced the transaction, but cost that we would, like from the outside, consider sort of one-time, given amount that would be included in that number from the Huntington transaction.

Yes. We're anticipating, give or take, $7 million.

Our next question comes from the line of Jared Shaw from Wells Fargo.

I guess, just sticking to the loan side for a minute here. If we look at the CRE paydown activity that you're anticipating for first quarter, do you think that the benefit to prepayment penalties will be similar in magnitude as we saw in fourth quarter?

We do not. We think a lot of the prepayment accretion that came out of Bank Mutual has mostly played itself out.

Okay. So even though we may see the impact in the CRE balance headwinds, we won't necessarily get that same - that benefit on the prepayment side?

We think the pace of paydowns is slowing and we think the pace of new fundings will be consistently growing, and we expect those lines to cross sometime later in this quarter and then accelerate into the rest of the year.

Got it, okay. And then on the specialty lines, do you anticipate bringing on new teams or hiring there to help keep the pace of growth consistent, especially with the bigger balance sheet? Or do you think that the change you have in place are sufficient to keep that growth going?

In the specialty verticals, we're very well-staffed with very high-caliber bankers. Most of the additional staffing we've done in the commercial space has been in the various regional offices focused on general, corporate and commercial lending. So a lot of those folks came on this past year. We've seen results from that, but we actually anticipate improving results as this year goes on as these folks get up to speed.

So we could see those specialty lines maybe a bigger percentage of C&I as we go through the year?

No, no. Maybe you misunderstood. So the specialty lines are fully staffed and have been for a while with the same folks. They'll continue the strong performance they've had. We anticipate that our general commercial area, where we have added staff, will actually probably do more proportionally than what we've seen over the last couple of years.

Our next question comes from the line of Terry McEvoy from Stephens.

Just first question, starting on the outlook slide where you talked about the margins stable to possibly higher. Are you using the, I'll call it, core margin, excluding some of the accretion in interest recoveries as the basis behind that statement? Or are you looking at the GAAP margin throughout the last four quarters?

We're looking at the 2.97% full year 2018 GAAP margin, so stable improvement from that level.

Okay. And then let me just ask you, the digital channel, you've made a fair amount of investments. Can you just talk about the traction with the Bank Mutual customer and then how your digital offerings and platform compare to the Huntington customers that are about to come over, whether it's comparable at all?

Great question. So when I first had the opportunity to talk to the CEO of Huntington about this, one of the first things we went and looked at was how does our online and mobile offering compare because we were concerned about potentially moving customers from a larger bank to a smaller bank and making sure that we didn't have an inferior product. And it turns out that we believe our offerings in the online and mobile space are quite comparable to what those customers are used to. So that was actually one of the first items of diligence that we took a look at before we moved much further. Our uptake in particularly the mobile arena continues to grow steadily. If you go to the App Store and looked at the ratings of our mobile offering, it's approximately 4.5 stars, which is a pretty big improvement from the previous app that we offered. So we're quite happy with the trend that were on there. We'll be rolling out Zelle here very shortly this quarter, and the app allows us to routinely and conveniently provide upgrades to our customers. So we feel very good about where our offering is today.

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

Just going back to the discussion around loan growth and commercial hires. There's obviously been a lot of M&A in some of your footprint, particularly within the Twin Cities and Chicago. So just curious what the opportunities look like to continue to add commercial lenders in those markets to kind of solidify or take market share in the wake of some of those transactions?

Yes. In fact, we've been hiring in both of those regions as well as around Wisconsin. And there is a certain amount of disruption. Recognize, of course, that those are both fairly large markets with some fairly large players. So yes, there is some disruption, but you have to put it in the context of a place the size of Chicago.

Got it. And changing gears, thinking about the deployment of the Huntington liquidity. Chris, any thoughts on just how we can expect that deployed into the securities out of the gate and obviously over time, you won't redeploy then to loans but just kind of any help in terms of the kind of yield that you expect to get on those deposits out of the gate?

Yes. So our initial thoughts as we laid out is the uses of funding to offset other higher cost funding and anticipation that there's additional reaction or rate continue to move higher. We can tell that will be an effective redeployment of those funds to offset whether it's network deposits or federal home loan bank advances or other marginal funding sources mid-year.

As you could see from some of the charts, we've been diligently moving down our percentage of higher costs, high beta network deposits. We've moved down a lot in a fairly short order. We intend on using this deposit at least out of the gate for that same purpose. So we won't be levering up against those deposits.

Our next question comes from the line of Chris McGratty from KBW.

Chris, your comment on capital, 9.5%, 10% on CET1 and a 7% floor on tangible, you guys obviously have been very active at the buyback. Can you remind us what, if anything, is left? And it would seem - and correct me if I'm wrong, given that the deal closing will be a little bit of pressure. we should probably not be assuming near-term buybacks?

The deal was really small.

Yes, so two things. One, there's $111 million left on the current board authorization as of year-end, and the deal will only use about $34 million of net premium and there'll be some one-time costs. Like roll that all together, you're in the $40 million zip code. So it's not a big deployment of capital per se and it provides a lot of liquidity. So it's a very effective and efficient use of capital. And it's only coming with $100 million of risk-weighted assets or so. So it will be not a big driver to the risk weight.

Okay. So maybe I was a little bit wrong. You can still plan buying the stock given these levels and given the market weakness?

Correct.

Okay. Maybe one other question on deposit pricing. We learned from some of your Chicago peers this quarter, Midwest peers, some level of moderation in kind of the competitive environment. I'm wondering if you share that as well given what's happening and kind of rate expectations kind of going on with the market.

You saw our commercial yields have continued to move up. I don't have any anecdotes for you whether things are really moderating. We haven't noticed a big change particularly. For a decent-sized commercial loan opportunity in Chicago that's in the market, there's more than enough competitors chasing it around as usual. So I don't think there's been any tremendous moderation, but perhaps some of the folks who are solely in Chicago have a better feel for that than me.

And on the deposit side, the other part of the question, I think we took some action to be a little more ahead of the curve in Q3, and we've been able to be disciplined here in Q4. And we're hopeful we can maintain a good, disciplined outlook on our deposit pricing strategies as we move to the current year.

Our next question comes from the line of Michael Young with SunTrust.

I wanted to follow up on the network transaction deposits commentary. I know in the past, you - there was some hesitancy around taking those levels down to low or maybe a minimum threshold but you just kind of had to remain that to keep the customers, et cetera. Is there any threshold or anything that it wouldn't go below at this point?

No. I think we're thinking about optimizing the total funding stack. And clearly, we're working with some well-established and long-term relationships. But that's still a $2 billion plus number and it doesn't have to be to maintain those relationships, and we can certainly manage that in the spirit of the funding seasonality that we have. Keep in mind, we do have some seasonality in the first half. We tend to fund up a little bit, and then we tend to bring that down in the second half. And this year, given that we expect net funding to come to us from the Huntington settlement, it will be probably not as much seasonality as it. But that underlying pattern is there for our core municipal and corporate customers.

Okay, but is there a minimum level? I mean, does it go below $500 million, for instance? Or is there some level that it's got stay above just to maintain those relationships?

No. There's certainly commercial relationships and they're long term but they're transactional, underlying nature. And so yes, we can manage that to optimize ultimately our funding cost. And so no, there's no minimum. We could theoretically go to zero. Given our seasonality, that probably wouldn't be the answer for us but...

And it's probably not likely anyway.

Yes.

Right, okay. And then one quick follow up. Just Phil, you were pretty positive and optimistic, I think, on asset quality. Obviously, problem loans are at very low levels. But could you give any more color behind that? I think a lot of management teams have been hedging a little bit and providing kind of higher provision guidance, but you seem pretty confident there. So just curious for color.

I can't speak about everybody else, but we're not hedging. We had $200,000 of net charge-offs in the fourth quarter. Our criticized assets are the lowest they've been in 10 years, and we just quit looking after 10 years. So I can't tell you what everybody else is seeing, but we're seeing very, very solid credit quality.

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

Just one really quick one. Phil, you mentioned the $7 million in kind of onetime cost related to the Huntington transaction. So just so I'm crystal clear, those are included in the $800 million expense guidance, right? So in effect, we'd be looking at like $793 million of core expenses for the year?

That's correct. And then obviously, also included in the $800 million will be the additional expenses of the permanent facilities, permanent staff, et cetera, post-closing.

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

Well, thanks for joining us today. As always, we appreciate your interest in Associated, and we look forward to talking to you in April. And if you have any questions, please give us a call. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.