Philip Flynn - President Chief Executive Officer Chris Niles - Chief Financial Officer John Hankerd - Chief Credit Officer

Good afternoon, everyone, and welcome to Associated Banc-Corp's, First 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 two, during the course of the discussion today, management may make statements that constitute projections, expectation, beliefs or similar forward-looking statements. Associated 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 filing. 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 pages 13 and 14 of the slide presentation and through page eight 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. Welcome to our first quarter earnings call. Joining me today as usual are Chris Niles, our Chief Financial Officer; and John Hankerd, our Chief Credit Officer. Turning to slide three, our first quarter earnings were $0.50 per share driven by growing commercial and business lending along with improving expense trends. We had growth of over 5% in our general commercial lending business and signed creases across most of our specialty verticals. This loan growth contributed to a $6 million increase in net interest income on a year-over-year basis. Our non-interest expenses decreased 1% from last quarter, due in part to the elimination of the FDIC surcharge. We experienced our typical seasonal deposit flows and we repurchased $30 million of common stock in the quarter, leaving $181 million on our current authorization available. Loan details for the first quarter are shown on slide four. Total loan balances increased more than 1% from the prior quarter due to growth in commercial and business lending, which was up over 4% from the fourth quarter of ‘18 and up to 15% year-over-year. The increase from the prior quarter was led by growth in our general commercial lending business and we also saw gains in our specialty verticals particularly in power & utilities. Our C&I loan pipeline remains solid and we expect balances to increase through the remainder of the year. As anticipated, our commercial real estate loans declined in the quarter due to continued elevated pay-down activity. However, we believe we are nearing the inflection point and we expect that this portfolio will begin to show positive growth in the second half of the year as we begin funding our construction lending commitments. We currently have over $1 billion in unused commitments and expect that we'll fund $500 million of those over the…

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

Good afternoon, guys. Thank you for taking the question. Guess I was hoping to just delve a little into the loan payments for the core. I guess just as you look at thing, you know is that something that's going to approve transient, in other words would we expect that to go up to somewhere between call it 5 and 10 basis points a quarter of benefit to the reported margin or is this lower, you know kind of two basis points level sort of the new run right and I guess if so, why or why not?

Sure, so Scott if you recall we closed on the bank mutual acquisition. And if I draw your attention to page seven in our slide, we noted we had not planned for the accretion when we closed on that transaction and the way it came in was probably a little lumpier than we had anticipated. So you'll notice the dark orange bars on that cart sort of bounce around between 7 and 13 basis points over the last four quarters. We think we've run through most of the big rocks. Essentially that would have come through that. That’s not to say there won’t be more, but it's very hard to predict. But at this point in time we think a larger part of the equation, if you sort of look at our Press Release table you will see we started off with $34 million of net unaccreted discounts, we are down to 16 now. So it's very clear to say more than half of it is run through, so to use – you threw out 5 basis points, that seems in the high end, because these numbers from last year would be at probably cut in half just by definition because half the balances are gone and what's left is likely to pay off on a more steady basis. So I would say it’s going to be hopefully a little more than two basis points, but probably not more than five. But again it’s lumpy and if it comes to us in lumpy terms, it’s hard to predict.

Yeah okay, that’s helpful color, so I appreciate it. But it sounds like maybe this newer level is sort of better based to go off of, so I appreciate that color.

Well, we've tried to make that point Scott along the way and went through some trouble to present this slide so that you can really see what the core NIM is in that dark green bars.

Yeah, and then…

Which is actually rising?

Yeah, exactly. And that is the perfect segway into what I was going to ask as sort of a follow-up. As we look at sort of the flat to down slightly guide for the reported margin for the full year, are we sort of saying that the core margin may actually keep increasing a bit, while there is PAAs.

That is our expectation. We believe because of what we are seeing on the commercial loan growth side on the one hand and because of the anticipated flow back in of our normal seasonal deposits, and the addition of the lower than market costs, Huntington deposits, we think we will have positive tailwinds for ourselves on the margin in the next several quarters, on the core margin.

Yeah perfect, thank you very much. And if I could slip one, a separate one, I appreciate the comments about the roughly $7 million one-time cost related to the Huntington transition. I know the sort of steady state or ongoing costs in that transaction are already embedded into your guidance for the full year expense number, it was about $800 million. Would you be able to share roughly what the ongoing cost from those branches are expected to be?

We haven't detailed that in general, but the costs of running a branch you know kind of tend to be several hundred thousand, $400,000-is per branch I would assume and there will be some operational back office customer service costs on top of that for processing transactions.

Yeah, okay. Alright, that's perfect. Thank you guys very much, I appreciate it.

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

Great, thanks. Chris maybe another question for you on the deposit costs. Many of your competitors and I think you're sending the same message, have talked about less promotional activity in your markets. So I’m interested in some comments there and also relative to the 1.3% average cost of interest bearing deposits in the quarter, do you have any spot rate as of March 31?

I don't have the spot rate as of March 31, we only look at that on a daily account basis, but you know to the broader point, if I look at page six that’s detailed sort of yield by class, we’re not doing anything with saving account rates, they are going to stay low, I’m looking at the press release table sorry. Interest bearing demand rates don't seem to have a lot of upward pressure on them nor do money market at this point in time. Network deposits are market based funding, we're going to look to reduce those, as we reduce balances over time and CDs is where all the promotional activity had been focused on for the last six to nine months, and that's probably been one of the larger drivers of our yield on interest bearing liabilities going up and that’s where we’ve seen – we would echo some of these sentiments from our regional bank peers. People have taken a look at those longer dated CD specials and they are starting to back them off. I think the FDAC data came out this week and of the 22 categories tracked, six of them had showed declines and so my expectation is we’ll continue to see longer dated CD's priced in north of fed funds continue to come off the table at many of our competitors and we are also…[cross talk]

And here.

Great, maybe one more on the securities. You mentioned in your opening remarks kind of more challenging reinvestment rates. I guess what’s the plan to either grow or shrink – our whole balance to flat in the bond book and then also kind of where are you putting on new, where is kind of new money putting on today.

Yes, so as you can see we really haven't moved the balances there much on a quarter-to-quarter or year-over-year basis. So you can surmise that we are looking to the securities book as a source of funds not a place to put new funds and that's in part because new yields are on taxable stuff in the low threes and just doesn't make sense to us to put on stuff in the low threes.

Okay, great. And then the 800…

We rather make more loans.

Totally get it, thanks. Does the 800 – can you remind me does that include those charges from Huntington as one timers or is that exclusive, I can’t remember?

They are all included.

Okay, thank you.

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

Thanks. Good afternoon.

Good afternoon Jon.

A question on the loan growth guidance, more bigger picture Phil, but where’s your head at today in terms of the range. It seems like you had a pretty good loan growth, according to you pretty optimistic. But give us an idea of kind of the puts and takes to the higher end or lower end of the range.

Yeah, I mean we had a good quarter after having watched loan balances basically shrink, we had a good piece last year. So our commercial backlog is strong, our specialty units were good. As I mentioned, we’ve done a lot of work around our commercial real-estate book to try to estimate when we are going to get that term, because we’ve been making a lot of new loans and new commitments. So in the not too distant future those lines will cross and we’ll start to see growth there. And rising mortgage will continue to bump along, but at much slower pace than we’ve seen in some years. But all in all we feel very comfortable with that range and I think it would be fair to say that probably moving towards that higher end of that range at this point as we look out.

Okay good, that’s helpful. And then I guess the other unasked question here is just on the provision, in terms of how you guys think we should think about the provision. I mean obviously you had a little bit this quarter, it was nothing a year ago, but what’s the message in terms of adjusting the risk rate and indications of credit quality and loan volume. How should we be thinking about it?

Sure. So keep in mind that last year we really didn’t have a lot of loan growth. So that weighed on the fact that we didn’t have any provisioning. We had loan growth this quarter, so that’s a piece of it. So if we continue to have the really decent loan growth that we’d expect, you know we’ll be providing along the way of course. But you know the overall portfolio for the credit point of view still looks unbelievably good, you know 10 years into a credit recovery cycle, but we are still there.

Yeah okay. Alright, that helps, thank you.

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

Hey, good evening. I just wanted to ask just on the kind of loan mix. Historically you guys have always targeted a third, a third, a third and you know commercial real estate has come down to be a pretty small percentage of the balance sheet now and you know the other commercial categories are growing and maybe in an outsized pace relative to that. So just trying to think about going forward how you are thinking about kind of the balance of the loan book.

Yeah, so good question. You know we've never tried to dial into exactly 33% for each of the three major food groups; you know they operated in a range. Certainly commercial real estate has fallen down to what, probably about 25%-ish right now, maybe a little more than that, but somewhere around there. Yeah, we expect as we get further into the year that we’ll have commercial real estate growth, but you know we in particular want to continue to grow our commercial, general commercial loan book because obviously its diverse, it covers lots of different industries. We are and have been very deliberate about growing commercial real estate over these last few years, just because we are so late in the cycle of as I was referencing a moment ago. Not to say that we're not comfortable with what we're putting on, we are very comfortable with it, but it’s a late cycle. So we are very diligent about concentrations on geographies and product types and all that kind of stuff.

Okay. And one last one just on the deposit side if I could go there. Just on the network deposits, if we're not going to see anymore rate hikes going forward, I mean is there an interest in going ahead and terming some of that out and really reducing it. I know in the past you wanted to hold it at a certain level to have that lever available, but maybe just any updated thoughts, big picture on network deposits there?

Sure. So I mean I guess the good news is assuming rates don’t go higher the expected date on this stuff will be zero for the foreseeable future and the one upside perhaps to network deposit is they also have a data of one on the way down. So essentially they are – there is a hedge there again the fed lowering rate unexpectedly on us, which has some of the consequences. But nonetheless we’ve look to continue to sort of manage that book down as you can see in our core deposits. So ideally the best answer here is we’ll continue to add and grow core deposits over the balance of the year and through the acquisitions, and as a result mitigate our need to have that market based funding there.

Yeah and putting $850 million of core deposits on from Huntington is going to be a big help there.

Okay thanks.

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

Okay, well thanks for joining us today. We are really pleased with this quarter's loan growth and lower expense trends. We are optimistic as I mentioned for continued loan growth and we expect to maintain our effective cost controls for the rest of the year. We look forward to welcoming Huntington's Wisconsin branch customers to Associated in June and to talking to all of your again in July. So if you have any questions in the meantime give us a call. As always, thanks 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!