Good afternoon, everyone, and welcome to Associated Banc-Corp Third Quarter 2020 Earnings Conference Call. My name is Diego and I will be your operator today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session at the end of this conference. 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 one, 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 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 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 pages 21 and 22 of the slide presentation and to pages 10 and 11 of the press release financial table. 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 third quarter 2020 earnings call. Joining me today are Chris Niles, our Chief Financial Officer; and Pat Ahern our Chief Credit Officer. Goes without saying that this has been a challenging and unusual year. We pivoted in March in response to the pandemic and have been retooling our delivery channel since to best meet our customers' needs. We deployed ourselves to seamlessly interact through virtual channels and have seen an accelerating shift to mobile and online banking. With a likely very low interest rate environment facing us for an extended period, it became critical to respond in areas we can control. Let's start with the actions we took during the third quarter. On slide two, we have detailed our optimization efforts and the restructuring of our securities and real estate lending subsidiaries. During the third quarter we announced the sale and planned consolidation of 22 of our branches. We also announced the strategic streamlining of several corporate managerial and back-office functions. As a result of these actions, we incurred $16 million of pre-tax charges in Q3, but we expect these changes to drive a $40 million per year reduction in our run rate expenses, as we move into this quarter and 2021. We also deployed about half of our excess liquidity position to repay $950 million of FHLB advances. This prepayment resulted in a $45 million Q3 pre-tax expense. However, we expect this to improve annualized net interest income by $20 million, beginning in Q4 2020, continuing through 2021, with diminishing but continuing savings through 2022 and into 2023. Finally, we were able to unlock capital losses through the restructuring of our securities and real estate lending subsidiaries and this resulted in a $49 million after-tax benefit during the quarter. Turning to slide three.…

Thank you. [Operator Instructions] Our first question comes from Michael Young with Truist Securities. Please proceed with your question.

Thanks for taking the question. I wanted to ask about loan growth. You mentioned the commercial construction pipeline with -- I think you said $1.9 billion yet to be funded. So it sounds like that's a pretty nice tailwind or potential bridge to return to stronger loan growth. Is that the right way to think about that? Or are there some other offsets that we should be thinking of in some of the other commercial categories?

Yes. Thanks Michael. So yes, certainly commercial real estate as you've seen throughout the year will continue to provide loan growth based upon the backlog we have. And there is some amount of new business being done in that area as well. Our specialty areas Power & Utilities, the mortgage warehouse business continue to show good growth. And we expect certainly the Power & Utilities area to keep growing. Mortgage warehouse will depend upon refinance activity. The mortgage business still has some tailwind and we may choose to retain some of our mortgage production going forward. General commercial lending probably somewhat slow. We don't have great visibility into that line item into next year yet, but we expect to have more information on that as we get through the fourth quarter and get to the January call. So there are certain areas that continue to show good growth. There are areas that continue to have the backlog like CRE that will fund up. But general activity in the commercial lending space needs to show some more growth going forward and we'll see what happens as we go along.

Okay. And just maybe on a core basis as we're thinking about the margin for next year, is really kind of loan growth the main driving factor to upside from kind of what you've already talked about in terms of just the funding costs coming down?

So we expect our liabilities to continue to grind lower. We took the actions on the FHLB prepayment, which is a significant improvement to NII next year. We are getting decent traction on imposing floors on our LIBOR-based loans, which is the bulk of our loans. We'll continue to work on that. So the combination of winding liability costs down, the FHLB prepayment, LIBOR floors and then transitioning to new indices should provide stable to growing NIM as we look forward, but we'll have better guidance for you in January on that.

Okay. And if I could just sneak in one last one. Just on the commercial deferrals, I understand obviously those have come down a good bit. But I guess are there some that have been modified? Is there a large portion that's maybe paying interest-only or some other modification has been made that's maybe not captured in that deferral number?

Yes. So we're down to 1.4% of the total commercial and commercial [Technical Difficulty] that have requested some additional deferral. Pat, do you have a little more color on that for Michael?

Yes. I would say on the commercial book, it's really case by case how we're looking at those. There's definitely a mix where we've got clients that have moved to maybe an interest-only. We have some -- hotel industry obviously is going to need some more time. So those modifications are a little more customized to kind of bridge them for at least the next year plus. So there's a lot of nuances to kind of go with each credit from that standpoint.

Is there an amount that's just been modified? I mean, would it be -- would it closely match kind of that initial $800 million? Or is it more like $600 million? I don't know if there's any way to kind of ballpark that?

Well the modified loans Pat correct me if I'm wrong are included in the $227 million that you see Michael.

Right. The bulk of those have rolled off and don't need any further assistance or modification.

Okay. So they've fully captured that number. Thank you. Appreciate it.

Yeah.

Our next question comes from Scott Siefers with Piper Sandler. Please state your question.

Good afternoon, guys. Thanks for taking the question. First one, hopefully it's a pretty basic one. I'm just -- given all the moving parts, I just want to make sure I understand sort of what you guys think the run rate cost base is in the third quarter. So I'm just trying to square what's on slide 14 with the commentary in the text. So, if we just take the $109 million and the $69 million that would give us somewhere around $178 million in core expenses. So you have the $50 million of restructuring costs, which I think is the FHLB as well as the real estate. Where exactly do the $10 million of severance costs -- where do we see those? Is that the first...

That $10 million is embedded in that $109 million, so you can take it out of there too Scott.

Yes. Okay. Perfect. So then we're talking about a core number of somewhere in like $167 million range. Is that a fair way -- fair approximation?

For that quarter yes.

Yes. Okay. Perfect. Yes sorry for a kind of basic one there. Just trying to get through all the moving parts.

That's okay.

All right. Perfect. And then...

Well you thought there were moving parts really?

Yes. And then more just a top level one on how the credit cycle kind of plays out. It seems like every 90 days we sort of push out the time until we see more accelerated loss migration. I guess with the benefit of at least a bit more clarity vis-à-vis say 90 days ago, Phil maybe how are you thinking about when we should expect losses to begin to accelerate at some point in 2021? Is that like a mid or even later 2021 event? Or how are you guys preparing for things?

It's always hard to tell. You can see that our reserve build is moderating to being pretty flattish at this point.

Yeah.

I think so much depends on is there more stimulus, what's the economy look like as we get into next year. But there's a -- from here there's probably -- putting aside oil and gas, but from here you're probably a couple 3 quarters out before you kind of push this lump of troubled credits through the pipeline and see what comes out. So, I think there's a lag to go. And of course, you saw in our oil and gas that we've done I think a good job of winding that down and getting that behind us. So, we still have the fall re-determination period to come. We're about a third of the way through that without any issues. But, we're still holding significant reserves in the event that we have of additional troubled credits there.

Okay. Perfect. All right. Well, thank you guys very much. I appreciate it.

Yeah.

Thank you. Our next question comes from Terry McEvoy with Stephens. Please state your question.

Hi. Good afternoon, guys. On your capital slide, you typically prioritized your usage for excess capital. I didn't see it this quarter. I was wondering if you could kind of run through how you're thinking about excess capital, specifically the buyback just given where the share price is relative to tangible book value.

Sure. So that leaving out the chart caused a question. We haven't changed our level of priorities, but it is more than fair to say when we're trading at a discount to book, which frankly we don't understand why we are given all of our actions and given our outlook. But when we're trading at that type of level, share buybacks, certainly become interesting to us. It's probably still a little bit early, but as we get into next year, Terry, clearly as we sit with growing capital and depending on where we're trading at, share buybacks become a great interest.

Thanks. And then, just as a follow-up. The $1 billion-plus of retail and shopping centers, how much of that is just what I'll call, typical -- your typical mall, which was may have been struggling pre-COVID and we just haven't seen charge-offs at all just for the whole bank. What are your thoughts there in terms of when the deferrals run out? What's the most susceptible? Is it that traditional mall? And if so, how big is the portfolio? And do you have any kind of stats average LTV or something like that to give us some color on the portfolio?

Sure. Pat, do you want to give some color on the mall-based that we were...

Sure. In general, the stuff that we're seeing that continues to struggle is all going to be the enclosed mall kind of space, where you just -- with the social distancing, et cetera, people are struggling to get into. Our -- majority of our retailers are in that, what I'll call neighborhood strip center mall, net lease space. And those have all seen rent collections come back almost to normal levels, 85%, 90%. A lot of those have come off deferral. We feel pretty good about them. There is still a handful that we're dealing with. And then in terms of -- we really only have a handful one or two maybe other enclosed mall exposures to public REIT that have been -- so far those remaining ones have been performing well other than the two Phil mentioned earlier with the non-accrual. So right now, we feel pretty -- we have a pretty good trajectory on the retail client base.

Thank you, Pat. Thank you, Phil as well.

Thanks.

[Operator Instructions] Our next question comes from Jon Arfstrom with RBC Capital Markets. Please state your question.

Hey, thanks. Good afternoon.

Good afternoon.

Can you talk a little bit about the timing of the expense reductions for the branch optimization project? How we should roll that in?

Sure. So the consolidations, internal will be done this quarter. The sales in Peoria and of two branches in Southwest Wisconsin will complete this quarter. We expect them to complete this quarter. And the remaining one branch, which we're selling to a third-party, will close sometime in the first quarter. So you should expect to see everything clean starting January 1, with a very minor exception of one branch.

Okay. And so the message is similar to your commentary on net interest income with the $5 million. You're saying that it could be as simple as just putting an extra $10 million -- taking $10 million out of expenses for Q1. Is that fair?

Well, the -- Chris, what's the -- I think we have all the charges through in the fourth quarter, right?

Correct. Yes. So, as you said 2021 should be a clean from January 1. So Jon, I think you're thinking about it the right way.

Okay. Okay. Good. Thank you for that. Any comments on the service charge rebound, the magnitude of what you expect? Or is that just -- I know there's a bit of a bounce back, but any commentary there?

Yeah. So we expect to see continued growth there. As you know, at the start of the pandemic we gave quite a bit of relief to customers. That is now completely rolled-off as we get into Q4. And rightly or wrongly, economic activity has picked up, particularly in the Wisconsin footprint. And so we're seeing more activity there as well. So our guidance that we expect to see fee income continuing to grow into the fourth quarter is based on those factors.

Okay. And then one more maybe not an easy question, but you've had some really good deposit growth the last few quarters. And do you all think about how much of this might be permanent versus temporary if things return to normal?

Chris, do you have a view on that you want to express?

Yes. So, Jon, I think if you had asked us a couple of quarters ago certainly we would have said we saw it all as surge. As we sit here moving into October and the balances have stayed through the entire third quarter, they're staying as we move into the fourth quarter, we're starting to feel that the balances are a lot stickier, which is part of the reason we are comfortable repaying the $950 million of Federal Home Loan Bank advances, because we think a good portion of this is sticky. And the dollars that we're still continuing to see come in, we think will continue to be sticky as we move forward. So as we sit here today, it feels a lot stickier than we would have expected and it feels like we have room to move things around.

Okay. All right. Thanks for the help guys.

Yes.

Our next question comes from Chris McGratty with KBW. Please state your question.

This is actually Kelly Motta in for Chris. Thanks for taking my question. I guess, you've talked a lot about what we've done on the funding side with prepaying that FHLB borrowings and you're still repricing to be lower. Just wondering if you could give us color on reinvestment yields of securities and how new loan yields compared to what you have on book right now.

Chris, do you want to handle that?

Sure. So on the reinvestment securities I think one thing to keep in mind is we're not aggressively growing the balances. And so what you're seeing is essentially relatively stable level to what you'll see reported for the third quarter averages and not a lot of net movement, because of incremental significant investment activity. So I don't expect there to see the continuing drift downward because there just isn't a lot of net new that we're expecting to put into that portfolio. On the commercial loans, I think we've showed the trends on the slides. And again, we started to highlight monthly trends. So if you take a look at the slide, page 12, you'll notice that commercial loan yields actually bottomed in June and that's for the commercial and business lending. And we've been working with our lending business on spread and floors in order to sort of bounce that back up a few basis points and hold that line above 250 on the commercial book and as a whole over the last several quarters and that seems to have gone successfully, and that reflects the activity we're doing on new. You can also see that commercial real estate has held steady. And again, what we're holding in portfolio is holding steady on the residential book as well. So I think those month-to-month trend lines give you a good indication of sort of where the new volume is coming in.

Great. Thank you. And then last question for me. On tax rates with potentially tax rates going up again and from Washington. Is there any differences on how we should think about it? Or is kind of looking at it what happened in 2018 so kind of a valid proxy? Thank you.

Well, your guess on what happens is as good as ours, but our best guess right now is that we've got tax rates in that 15% to 17%-ish range, but that can all change.

All right. Thank you.

Yes.

Ladies and gentlemen, there are no further questions at this time. I'll turn it back to Philip Flynn for closing remarks. Thank you.

Thanks. Well everybody please stay safe. Thanks for joining us today. We look forward to talking to you again in January. And as always if you have any questions give us a call. And thanks as always for your interest in Associated.

Thank you. This concludes today's conference. All parties may disconnect. Have a good day.