Good afternoon, everyone, and welcome to Associated Banc-Corp's First Quarter 2020 Earnings Conference Call. My name is Molly and I'll be your operator today. [Operator Instructions] We will be conducting a question-and-answer session at the end of this conference. Copies of the slides that will be referred during today's call are available on the company's website at investor.associatedbank.com. [Operator Instructions] 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 subsequent SEC filings. 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 the Page 21 of the slide presentation and to Page 8 in 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.

Thank you, and welcome to our first quarter 2020 earnings call. Joining me today are Chris Niles, our Chief Financial Officer and Pat Ahern, our Chief Credit Officer. As you can see from our materials Associated continued to meet the needs of our customers, grow and generate net profit during the first three months of the year. We continue to benefit from a resilient core funding base, a strong market presence and a high quality lending portfolio. But I'll start by discussing our response to the radically changed environment, we are now experiencing. The past two months were extraordinary, let me highlight the actions we've taken to help our customers and protect our colleagues. We closed our branch lobbies on March 17th becoming one of the first banks to transition to drive through and by appointment only service. Our branch operations and IT teams have responded wonderfully to meet the needs of our customers. We began to send people to work remotely on March 13th, and now have about 70% of our colleagues performing their jobs from home. We are continuing to pay all of our colleagues, including those whose jobs were curtailed by our social distancing measures. We are also quick to offer our own COVID-19 relief program providing customers, waivers of certain fees and deferrals of loan and mortgage payments. Through Tuesday, approximately 1,450 primarily consumer and small business loan customers have been granted some form of payment or fee relief. From a financial perspective, we were ready to meet all of our customers' needs with both lending availability and transactional liquidity as our core deposits increased even faster than loans. Our loan to deposit ratio strengthened during the quarter. In addition, since quarter-end, we've continued to support our small business customers through the SBA Paycheck Protection Program,…

At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Casey Haire from Jefferies. Please proceed with your question.

Sorry, about that. Yes, thanks guys. So I guess, focusing first on the energy reserves to 17%, it sounds like you guys do present. Do you expect to prolong depressed pricing here or can you just give us a little bit more color there? Can we expect more reserve build or do you feel like you have adequate reserves at 17%?

Pat, you want to take that question?

Sure. So I think in general, time will tell what we end up doing as the year goes on. We feel like radically reserved right now. However, with the kind of unprecedented environment we're doing with oil and gas, we're going to follow this closely as we get into the second quarter. Right now our oil and gas portfolio has been reduced almost 40% from a year ago and as we've mentioned, it now represents about less than 2% of the total portfolio. The portfolio as it sits today is about 60:40, oil to gas and we feel good about the fact that about 70% of the portfolio is hedged. For 2020 and almost 50% hedged or 2021. We are just kind of starting into the spring redetermination season right now. We've got about a third of our loans have been -- they've got results on that redetermination, so we're seeing some reductions in borrowing base by almost 20% to 25%. And our average loan commitments have been reduced by about 20%, so...

Okay, very good. And on the forbearance front, I think you mentioned or deferral $733 million. Apologies if I missed this in the script, but is that still trending up or is that stabilized just getting some color on the pace there?

There is more to come clearly, those are the deferrals that we've already granted, there is some more to come. They're not going -- go at the same pace, I wouldn't think that we saw over this past four weeks or so.

Okay, great. And just couple of follow-ups on the NIM, the LIBOR disconnect with Fed funds. It sounds like you guys expect that to sort of normalize, I guess a little bit towards the end of this quarter. Just what is sort of baked into your guide, just for the quarter, guys, so we can just track that?

Yes. So, clearly it was elevated in March, it's step down that delta, it was north of 80 basis points, step down to 60 basis points and we have a stepping down. The long-term average is closer to an eight, we're not actually going to get to an eight necessarily much before the end of the year, but we certainly would see it getting down into that much narrower range, as we move to the end of the third quarter.

Okay, and just last one on the deposit costs at 57 in March. How much more -- how much more room do you have going forward from that level?

So, we mentioned it fell into the 30s in April, and it will probably likely fall further slightly given CD rollovers and other repricing dynamics that we'll contribute to that. So probably be again less than it will be in the '30s in the second quarter and falling and likely less than that in the third quarter unless environment shifts.

We slashed our deposit pricing at the same time that the Fed took their last big whack at rates and so you'll see the full impact of that as we go through the quarter. But even as early as we are today in the second quarter, we've dropped another 20 basis points overall.

Got you. Okay, thanks very much.

And our next question comes from Scott Siefers from Piper Sandler. Please proceed with your question.

Good afternoon, guys. Thanks for taking the questions.

Good afternoon, Scott.

Hey, I guess first question I wanted to ask was on the reserve to sort of stress losses. I think Phil, you said 54%, which is obviously a pretty healthy number. I guess, if I back into what the reserve is relative to the last time you guys said publicly disclosed stress tests, it would have been closer to 55%. I mean, also very healthy, but just curious if you guys can maybe walk through what has changed in either the portfolio complexion, loss assumptions, what have you that would allow that reserve to, kind of, look better these days?

Sure, Scott. So I think you can do the math and infer, yes, that our total stress losses in the severely adverse scenario from our last public disclosure to our last internal run did come down several $100 million. The drivers of that as Pat mentioned a little bit and part where the more than $400 million reduction in the oil and gas book. And then the general mix of our portfolio, which has become more overall mortgage-centric, which has a lower loss content in our models in general, and the continued low levels of risky asset classes in the severe scenarios, such as single-family construction lending or foe-sale housing construction lending and condo-related activity. Now our models, we're obviously geared and tied to the realized the outcomes of the prior results. So what will be the outcomes -- next time can shift, but based on the models that we've had those numbers as we continue to mix the portfolio away from those higher risk classes and to steadier loan categories have moved. The total expect loss -- potential loss down, and obviously, we moved the reserve up.

Okay, perfect. That's good color and I appreciate that. And then just wanted to ask one question just on capital, so common equity Tier 1 is still very solid and then I guess what's a little unique about the way this cycle seems to be panning out is, whereas TCE ratio was like the all-important ratio last time around. Presumably, this time it's got to have much less weight, given that you would get penalized on the TCE for PPP loans, but those are kind of invisible from the standpoint of regulatory ratios. I guess in your guys, how does the TCE factor into your thinking in the way you, sort of, manage thing this time around?

Well, we've always said that we wanted to keep it at about seven or above. And as you recall, as we're building toward CECL implementation, it had run up. So we expected CECL. We had first time and come in what we didn't expect is to have a $1.5 loans flow on to the balance sheet at the end of March. So that took it down to the $6.9 that you see. But, you know, if you exclude the PPP loans that will be sitting here, although they're completely funded by the Fed it should creep up from here. With PPP, if you leave that in, of course, it will be lower. Because we'll end up with -- we've got, I mean we have funded 900 as we sit here today. We have about another 100 in the queue, give or take, and we've opened up our inquiry page already in anticipation of Congress and the President signing the extension. So I don't know where it will end up. It will be higher than where it is.

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

And our next question is from Terry McEvoy from Stephens. Please proceed with your question.

Thanks, good afternoon. First off, I was wondering -- just wondering are you seeing, I mean, experiencing higher modification activity and drawdown activity among those commercial portfolios that you highlighted in the presentation today?

Sure. So the REITs have drawn their backup lines. As you know, I'm just trying to get to that page that as it's Page 8. So, yes, so the REITs have drawn and kind of just general C&I not necessarily called out on Page 8, Terry. It has drawn some and of course, we had a run-up in mortgage warehouse, but that's to be expected.

So, Terry, I guess I would add, and I follow, I was looking at Page 6, so to Phil's comments just now you can see the general commercial loans was where the draw and the mortgage warehouse and the REIT, that was all at the end of the quarter. And since then, which is what we've tried to highlight on the right hand side of Page 6, we really haven't seen incremental activity. So the drawdown and liquidity driven activity we saw in the last three weeks of March really abated when we move past April 1st and we really haven't seen any further of that activity here in the second quarter.

And then just as my follow-up question, do you have any sense for the average fee on your PPP loans, it looks like your, kind of, average size is skewed a little bit larger than others, which could impact that or would impact that fee?

Yes. I think we're figuring it's -- to be 3% plus. We've got a lot of smaller stuff in the queue. Like a lot of banks, I mean, we process the loans on our first come first serve basis, but a lot of larger companies with professional finance staffs were ready to go upfront. So it tended to skew larger at the beginning and as we wounded down, leading up to the money running out the loans tend to get much smaller and what's left in our queue and what's coming in now tends to be smaller as well. So it will probably be like 3-ish, 3-plus.

Okay. That make total sense. Great, thank you.

And our next question is from Jon Arfstrom from RBC Capital Markets. Please proceed with your question.

Thanks. Good afternoon, guys.

Hi, Jon.

Back on Slide 6. Just following up on Terry's question, it's probably a good sign that you haven't seen more line draws in April, but curious how long you expect some of those draws to hang around? Can we see those come back down? Any thoughts on that?

Yes. We generally feel that a lot of these draws were just companies wanting to ensure their liquidity in the face of the turmoil. So things haven't calmed down yet, they've calmed down some all of the Fed actions have certainly helped a lot in the capital markets. So it's very hard to predict what's going to happen. But my guess would be that as this quarter rolls along and if things continue to stabilize, you'll probably see some of this money come back just, because people won't necessarily feel like they've got to be sitting on a ton of cash, but again, it's a little hard to predict. The fact that we didn't continue to get draws past quarter end to any great degree. Feels like there was a little bit of window dressing going on for some of the folks, who drew these funds.

On Slide 9, it's a good slide. I haven't seen CECL shown like this by category. So I think, I understand the moment of everything, but the two negative numbers, I'm assuming one is the likes of loan and the other is prepayment driven, but can you just, kind of, address those two, so we understand that?

You're correct in both cases. So, and the Day 1 CECL adoption, the negative in the commercial and business lending, excluding oil and gas is adjusting for the fact that we have -- tend to have considerably shorter loan terms a lot of 364 day type facilities etcetera, and therefore our Day 1 adoption was a reduction and the allocation of reserve to those given the term based nature of CECL. And similarly, but for different reasons as we move through the quarter and refinance rates fell and therefore prepayment rate -- expected prepayment rates increased the average life of the expected mortgages at the end of the quarter wasn't is expected to be shorter than it was at the beginning. So that resulted in a net release in the mortgage line, which is why you had a net negative reserve build.

Good, that helps. And then next one is, this is trying to get this out of you, Chris will be like trying to get the packers draft pick early tonight. But second quarter loan loss provision, what are you watching, kind of, what are the nuances for Associated? What are the things that might be a little different about how you will look at and think through the level necessary in terms of your second quarter provision?

Yes, it is going to be hard to get that and I'm on the packers port, so I do know the draft I could tell you, if you really want it.

[Indiscernible].

No, we need a new punter. Yes, obviously, we're going to be looking at, well let me think about that. So a lot like -- let's think about hotels, you know, almost all that's been deferred now. So that's probably not going to drive much in the second quarter a lot of our oil and gas buildup, we use the probable troubled debt restructuring concept, which I don't think a lot of banks have used as much, which was embedded in CECL. So if we go through continued redetermination periods and we see continued market deterioration in collateral positions you could end up with some more probable TDRs and see some build there. What else we'll be watching, obviously delinquencies and such that we haven't deferred for one reason or another.

And a change in the overall macro environment, right. So our view at the end of the quarter for CECL has a certain macroeconomic outlook and in our internal discussions, it had a fairly high and robust level of recessionary outcomes 20%-plus type or 20% GDP type drops etcetera. And it's plausible that 2.5 months from now that environment will either be perhaps different and more positive or possibly worse as we work our way there. Now, I would -- I'll remain optimistic and say, I'm hoping that things get better for the country and for all of us in which case, I think there is room that the economic outlook is a positive. In addition to the realized outcomes in our portfolio, either in oil and gas or hospitality or otherwise.

And last thing I would say is, it's certainly is more likely than not that there'll be reserve build in the second quarter, just given the environment here in the second quarter. The continued unemployment claims that we saw this morning etcetera. But fortunately, PPNR looks pretty strong at the moment, so I think we've got plenty of ammunition for that.

Okay. Yes, thanks for the help. I appreciate it.

And our next question is from Michael Young with SunTrust Robinson Humphrey. Please proceed with your question.

Hey, thanks for taking the question. Good evening. Wanted to first ask just on, kind of, balance sheet management and growth from here. How you're thinking about that? Are you, sort of, hesitant to go out and make new loans to new customers at this point, and really focused more internally? And how would you look at maybe mortgage in this environment, putting that on balance sheet versus selling?

Yes. So the first part of your question, Michael. We are absolutely here to support our customers' needs and we are well positioned to do that, we'll continue to do it. The second piece we are generally in a position where we're going to move the flow of mortgages and that's what we're doing now, off to Fannie or whomever. So we're not putting a lot of mortgages on our balance sheet on purpose. That's not necessarily, because of the run-up and loan outstanding, it's -- a lot of it has to do with you're really not encouraged through the CECL methodology to build up a lot of mortgages on your own book. So we'll be in the mode generally speaking of originating and selling those mortgages and retaining service, which is pretty much been our standard model.

Okay. So with higher prepayment speeds, maybe on the existing book on the -- on -- would you expect, I guess those two -- those balances to decline and/or would you look to replace those to maintain, I guess, the overall waiting?

No. I would guess that our mix, I mean, our mix already shifted quite dramatically at the end of the first quarter. So I think you could expect the mix of our loan book to be less mortgage, more C&I, more CRE as the year progresses. So we're not going to do anything extraordinary to maintain those mortgage balances, because they're being offset by other -- by growth in other categories. And actually strategically we had talked about this before that we felt like our mortgage book was creeping up to us too high of a level against our overall loan book and as things have turned out that's changed rather more rapidly than we thought it would, and it will probably continue to evolve at a much slower pace throughout the year.

Thanks. And one last one maybe just on loan to values, I think that's something that a lot of other banks have brought up relative to their CRE book, and I guess trying to give confidence to investors that they don't see a lot of loss content there. Do you have any of that level of disclosure maybe by sector or anything like that?

Sure. I think, the number that you'd be most interested in if you go back to Slide 8, where you see our exposure to retailers, which is our largest sector of interest. The loan to values in the term book for retailers and most of it is term is 57%.

Okay. And would that be consistent though with, I guess, other areas will be higher, maybe 70%, 75%. Any color is going to be...

Well, it's going depend -- yes, it would depend very much on the individual categories, but on this page where we called out, you know, industries, which have been impacted by COVID-19, which are 9% of our total loan book. Almost 3% of that is in the category, I just talked about. Obviously retail REITs are a different animal, because they are all a basket of projects. So the LTV there isn't as germane. Oil and gases, you know, depends on their re-determinations, and then the rest of the exposures get pretty limited in a hurry. So we focused in on what's the LTV on these retail-oriented commercial real estate projects and it turns out, it's pretty reasonable.

Okay, thanks.

Sure.

[Operator Instructions] Our next question is from Chris McGratty from KBW. Please proceed with your question.

Hey, guys.

Good afternoon, Chris.

Chris or Phil, just looking at Slide 18, the guide on the fee income isolating the mortgage component. Can you provide a little bit more perspective on the magnitude of pressure from some of the actions you're taking to waive fees and also kind of the market impact on your wealth business?

Sure, so I mean the issue with wealth asset management -- under management we disclose that number and you can see it on Page 3 wealth AUM came down by more than 15% from quarter -- year-end to the -- end of the first quarter. So that will have a drag on those fees as we move through the year. Now some of those fees are on a lag, so they'll basically take effect here in the second quarter. Based on the downdraft we saw in the first quarter, so it's going to be an impact. With regards to the waivers and fee charges, we partially disclose that on the slide with the dynamics we're doing for our customers and that's already over 400,000. And it will likely become more as we continue to go through the quarter. As I asked earlier, we would expect there to be probably additional request for waivers and such over the course of the quarter, and so that will likely increase.

Now, there is the potential that a lot of this -- maybe all of it will be offset by the fees we ultimately collect from the PPP program, depending on what those turn out to be. I mean, that they're likely to be somewhere in the range, I'm guessing of $30 million to $40 million fees that of course we hadn't -- they weren't even a figment of our imagination in the start of the year, so that should offset, I'm guessing quite a bit of our concern about wealth, as well as some of the waivers.

Yes, and just for clarity for geography those fees will show up in net interest income over the course of the next six months. Likely assuming the loans come off, not in fees. Just for clarity.

Yes. Got it, got it. Maybe one more if I could. So obviously dividends are a big topic in Europe and making it way to the US. Your payout ratio is not glaringly, it's about 60%. Just thoughts on dividend sustainability given this -- given the sharp change in the macro?

Sure. So I'll give you the Jamie Dimon [ph] answer, which is we fully expect to continue to pay our dividend, we feel comfortable that we should be able to. But if we end up in a severe prolonged recession, almost anything is on the table for almost any company.

Great, thanks.

And we have reached the end of our question-and-answer session. And I will now turn the call back over to Philip Flynn for closing remarks.

Great. I appreciate you all joining us today. I do want to take a moment, because I know a lot of my colleagues listen to this call to thank them for the extraordinary job, evolving doing during this difficult period. People have gone above and beyond, whether it's processing $2.5 billion, more than twice, what we had this time last year. From home, standing up the PPP program, 300 or 400 people spending enormous hours including all night to get things through the SBA portal; it's been an incredible effort by everybody and I just want to tell everyone how much I appreciate it. I mean, I just like to finish by saying that Associated remains strong and stands ready to help our customers through these challenges and into the recovery that is certain to follow. So we look forward to talking with you all again in July. If you have any questions in the meantime, give us call. And as always, thank you for your interest in Associated.

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