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Edited Transcript of ASB earnings conference call or presentation 25-Jul-19 9:00pm GMT

Q2 2019 Associated Banc-Corp Earnings and Acquisition of First Staunton Bancshares Inc Conference Call

Green Bay Jul 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Associated Banc-Corp earnings conference call or presentation Thursday, July 25, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher J. Del Moral-Niles

Associated Banc-Corp - Executive VP & CFO

* Philip B. Flynn

Associated Banc-Corp - President, CEO & Director

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Conference Call Participants

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* Christopher Edward McGratty

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Jon Glenn Arfstrom

RBC Capital Markets, LLC, Research Division - Analyst

* Michael Masters Young

SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst

* Robert Scott Siefers

Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research

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Presentation

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Operator [1]

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Good afternoon, everyone, and welcome to Associated Banc-Corp's Second 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 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 any 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 Page 19 of the slide presentation and to Page 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.

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Philip B. Flynn, Associated Banc-Corp - President, CEO & Director [2]

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Thanks, Tim, and welcome to our second quarter earnings call. Joining me today are Chris Niles, our Chief Financial Officer; and John Hankerd, our Chief Credit Officer.

In the first half of 2019, several positive trends continued, driving first half earnings per share up 10% versus the same period last year and up 39% versus 2 years ago. We saw solid commercial and business lending loan growth and we also grew our deposit franchise as we completed the Huntington branch acquisition and system conversion. We finished the quarter with record average deposit levels and believe the First Staunton acquisition that we just announced will further enhance our franchise value. Thanks in part to the increased scale we've attained and to our cost containment efforts, our efficiency continued to improve and we reduced our first half 2019 adjusted efficiency ratio by over 400 basis points from the same period in 2017. We maintained our strong capital position while continuing to return capital to shareholders through higher dividends and $70 million of share repurchases.

Turning to Slide 4. Our second quarter GAAP earnings were $0.49 per share, driven by increased commercial and business lending, a return to growth in commercial real estate and higher fee income. Excluding Huntington acquisition-related costs, our earnings were $0.51 per share for the quarter. We had strong growth in our mortgage warehouse vertical and also had solid performance in general commercial lending. As we anticipated, a robust commercial real estate loan production outpaced payoffs and we saw a modest increase in our commercial real estate book in the quarter. We expect continued commercial real estate growth over the remainder of the year.

In order to mitigate net interest margin pressure, we actively managed both our investment positions and our funding positions in the second quarter. We sold almost $500 million of securities and paid down a like amount of Federal Home Loan Bank advances. Aided by the Huntington branch transaction which closed in late June, we increased our period-end low-cost checking and savings deposits by over $750 million. These portfolio and funding actions helped us hold margin compression to just 3 basis points in the quarter despite a challenging interest rate environment. Our fee income increased, driven by higher mortgage banking income and capital markets fees. We repurchased $40 million of common stock in the quarter, leaving $142 million on our current authorization.

Loan details for the second quarter are shown on Slide 5. Total loan balances increased more than 1% from the prior quarter driven by growth in commercial and business lending, which was up 3% from the first quarter and up 12% year-over-year. The increase from the prior quarter was led by growth in our mortgage warehouse business and we had solid performance in both general commercial lending and in our power and utilities specialty vertical. Our residential mortgage portfolio was stable as ARM payoffs were replaced by new originations during the quarter.

You will notice that oil and gas loans declined in the second quarter. This was purposeful and the result of an assessment of this vertical we have undertaken over the last several months. With the advent of new technology, the dynamics of the upstream industry have changed. Drilling is more capital-intensive and production rates are more volatile and harder to predict. Of late, the capital markets have been largely shut to the industry, making the disposition of reserves and their valuation challenging. Given these realities, we will remain active in the business but have chosen to de-risk our portfolio by decreasing our exposure to higher-levered borrowers. We expect to further reduce our oil and gas exposure over the rest of the year as we seek a better risk/return equation.

Turning to Slide 6. Despite the decline in the oil and gas portfolio this quarter, commercial and business lending has grown over the last year as you can see in the left graph. The oil and gas book comprises less than 3% of total loans, so we expect only a moderate headwind from the planned reduction. Our commercial and business lending pipeline remains solid and we anticipate that overall commercial lending balances will increase through the remainder of the year, in line with our guidance. As we anticipated and discussed on previous calls, production in commercial real estate outpaced pay down activity in the second quarter, leading to modest growth in the CRE portfolio.

Turning to Slide 7. Our CRE lending pipeline remains strong with over $1.8 billion in commitments at the end of the quarter. Almost 90% of these commitments are for construction loans that we expect we'll fully fund, and we anticipate that we'll continue to show positive CRE growth over the remainder of the year.

Turning to Slide 8. We reduced our investment securities to $6.5 billion in the second quarter as we used securities as a source of funds to pay down higher-cost institutional funding and began repositioning our portfolio for a stable to declining rate environment. We sold some of our lower-yielding taxable mortgage-backed securities, reducing positions by $455 million from the first quarter. Losses on the securities sales were offset by the partial recognition of the fair market value of our Visa class B shares as reflected by the increase in equity securities on our balance sheet. We continue to hold 77,000 Visa B shares and expect additional upside upon final resolution of the Visa litigation.

We continue to build out our book of tax-exempt municipal securities as we grew this portfolio by $98 million from last quarter. By adding higher-yielding and longer-duration munis while selling prepayment-sensitive mortgage-backed securities, we defended current net interest margin and better positioned our balance sheet for a lower rate environment. Going forward, rather than reinvesting the runoff from the taxable portfolio, we will use this cash flow to continue paying down our higher-cost funding while holding our tax-exempt securities balance stable. We're targeting an overall securities portfolio level of 17% to 18% of total assets and anticipate that we'll reach this level in the fourth quarter this year.

Turning to Slide 9. Average deposits were up over $500 million from the first quarter. We focused on repositioning our funding during the quarter and we improved our deposit mix. Driven by the Huntington branch transaction, our low-cost checking and savings balances increased by over $750 million from the end of the first quarter. Aided by funds from investment securities sales and runoff, we also reduced higher-cost money market and time deposits, along with FHLB advances and network transaction deposits, by over $1.2 billion.

Going to Slide 10. The reduction in FHLB advances and network transaction deposits in the quarter continues our long-term strategy to reduce these higher-cost sources of funds. With the reduction of higher-cost funding, low-cost checking and savings now represent 52% of our deposit mix, up from 49% at the end of the first quarter. The increase in overall deposits resulted in a loan-to-deposit ratio of 92%, which is lower than we've had at the end of any second quarter since 2014.

For the remainder of the year, we expect to further improve our funding mix with seasonal deposit inflows and cash flows from our securities portfolio. These inflows, along with the relatively low loan-to-deposit ratio, will significantly mitigate the risk of downward margin compression and should position us to have a stable to improving margin trend going forward despite expected Fed rate cuts later this year.

Turning to Slide 11, we discuss our net interest income. Net interest income was $214 million, a decrease of $2 million from the previous quarter, and our net interest margin was 2.87%, down 3 basis points from the first quarter. The lower net interest income was caused by several factors. On the asset side, average 1-month LIBOR in the second quarter decreased almost 6 basis points from the first quarter, negatively impacting CRE and commercial and business lending yields. Additionally, long-term interest rates decreased, which incented our customers to refinance their mortgages and accelerated prepayments in our residential mortgage portfolio. This, in turn, caused a reduction in expected servicing income that's part of the mortgage yield calculation. Looking ahead, we expect that asset yields will continue to be pressured by persisting LIBOR compression and lower mortgage portfolio yields.

On the liability side, our average interest-bearing deposit cost increased 5 basis points despite the late quarter positive mix shifts that came with the Huntington transaction. However, we anticipate the funding cost pressures we experienced in the second quarter will be relieved over the second half of the year by several factors.

First, we'll receive the full benefit of our improved deposit mix. The Huntington transaction closed in late June, consequently only had a small impact on our second quarter results. Second, our loan-to-deposit ratio remains relatively low, enabling us to grow the loan book without paying up for funding. Third, the securities portfolio will remain a source of funds for the third quarter, allowing us to further reduce higher-cost funding and deposits. And finally, any Fed rate action appears to be biased, of course, toward a rate cut, which would reduce our index-based funding costs.

We believe our deposit costs have reached an infection point and anticipate that third quarter deposit costs will be lower than the 1.35% we had in the second quarter, even without the benefit of a Fed rate cut. Driven by lower deposit costs, we anticipate our net interest margin to improve from current levels over the second half of the year. As it now seems likely the Fed may cut rates 2 more times this year, we now expect the full year 2019 margin to be about 2.9%.

Turning to Slide 12. Second quarter noninterest income of $96 million was up $5 million from the last quarter and $3 million year-over-year. The increase over last quarter was primarily due to mortgage banking income from loan sales. Additionally, we had higher capital markets fees, driven by trading account revenue and international banking income. These gains were offset by somewhat lower than anticipated insurance commissions in the second quarter versus the previous quarter. We continue to expect our full year noninterest income will be in the range of $360 million to $375 million.

Moving to Slide 13. Noninterest expense of $198 million was up $6 million from the first quarter. The increase was driven by $4 million of acquisition-related expenses from the Huntington branch transaction and $1 million of severance expense related to other internal efficiency initiatives. Our adjusted efficiency ratio was 59.9% in the quarter, the lowest it's been in over 9 years. This accomplishment is a testament to the diligence and hard work of our colleagues here at Associated.

Given our success at controlling expenses in the first half of the year and our expectation for continued cost discipline, we're lowering our full year expense guidance to a range of $790 million to $795 million. Additionally, we're confident we will exceed our initial estimate for efficiency improvement and now expect our full year adjusted efficiency ratio to improve up to 200 basis points.

On Slide 14, we detail our quarterly credit quality metrics. Overall, the bank's credit quality remains strong and our credit metrics are generally in line with recent quarters, excluding some items related to the reassessment of our oil and gas portfolio. Specifically, reassessment actions impacted our nonaccrual loans, which increased $11 million to $167 million in the second quarter but were down $37 million year-over-year. Net charge-offs were $13 million in the quarter with $10 million coming from the oil and gas portfolio. Excluding the oil and gas-related items, second quarter charge-offs were in line with the previous 3 quarters. We expect that charge-offs may again be elevated in the third quarter due to oil and gas loans but will return to a more typical level in the fourth quarter.

Potential problem loans decreased $76 million in the quarter to $166 million, with oil and gas representing only $4 million at quarter end. The decrease in potential problem loans was largely due to 3 non-oil and gas credits that were paid in full through the workout process.

The aggregate allowance for loan losses was 1% of total loans, essentially unchanged from the previous 3 quarters. Our provision for credit losses was $8 million, up $6 million from last quarter but still small in relation to a $23 billion loan book. While we continue to de-risk our oil and gas exposure, we've already provided for and reserved against the risks we currently see in that portfolio. As such, we believe future oil and gas loan losses will be manageable and within our historical patterns of normal provisioning.

On Slide 15, we update our outlook for 2019. We continue to expect 3% to 6% average loan growth for 2019. We believe C&I growth will remain solid and that our commercial real estate portfolio will grow modestly in the second half of the year. Given expectations for 2 Fed rate cuts and persistent LIBOR Fed funds compression, we now expect our full year net interest margin will be approximately 2.9%. We continue to expect our fee-based revenues will improve year-over-year.

Given our lowered expense forecast of $790 million to $795 million, we've also increased our outlook for adjusted efficiency ratio improvement by up to 200 basis points. In the second quarter, we received a onetime tax benefit from the contribution of a portion of our Visa class B shares to our charitable trust. Looking ahead, we expect our full year 2019 tax rate to be approximately 21%.

As we've previously discussed, we view accretive, nonorganic M&A activity as an effective means of growing our core deposit franchise and an efficient use of capital. In evaluating bank M&A opportunities, we have focused on in-market, efficiency-driven opportunities. Today's announcement of the acquisition of First Staunton Bancshares is consistent with that focus and strategy and is summarized on Slide 16.

First National Bank in Staunton has a rich 85-year history of serving customers in Southern Illinois. Under 3 generation of the Oltmann family stewardship, First Staunton has grown from $23 million in assets in 1976 to over $540 million in assets today. We are pleased to announce the merger of our 2 institutions.

Consideration for the transaction will be $76 million in cash. Subject to regulatory approvals, we expect to close the transaction and begin the conversion process in the first quarter of 2020. We believe this merger is in line with our strategic priorities and is similar to other transactions we've done, most recently the Huntington branch acquisition.

From our perspective, this transaction checks all the boxes as highlighted on Slide 17. The merger will improve our branch density and scale in Southern Illinois as we expand into new communities and serve an additional 30,000 customers. The deal enhances our core deposit franchise. Our deposit mix will benefit further from First Staunton's lower deposit costs in 2020.

We also expect the transaction to allow us to bring a whole new set of products to First Staunton's customer base. While our acquisition analysis did not rely on any revenue synergies, we expect to be able to deliver trust, insurance, private banking, cash management and other services to our new customers over time.

From a financial perspective, we expect the combined organization to have meaningful operating efficiencies. We've assumed we'll realize about 35% cost savings resulting from back office and frontline branch operating efficiencies.

At closing, we expect tangible book value per share dilution of less than 1% and fully phased-in EPS accretion in 2020. Accordingly, we anticipate tangible book value per share earnback of less than 3.5 years using the crossover method.

And with all of those comments, I'll open up the call for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Scott Siefers of Sandler O'Neill.

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Robert Scott Siefers, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [2]

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I guess first one is just kind of a ticky-tack one. Just in the tax benefit from the donation, what was the size of that?

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Christopher J. Del Moral-Niles, Associated Banc-Corp - Executive VP & CFO [3]

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The size of the donation was a $1.7 million tax benefit.

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Robert Scott Siefers, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [4]

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$1.7 million? Perfect. And then just looking at the loan portfolio, Chris, can you just remind us the mix of fixed versus floating rate loans in the portfolio in aggregate?

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Christopher J. Del Moral-Niles, Associated Banc-Corp - Executive VP & CFO [5]

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Sure. So the commercial book of roughly $14 billion is predominantly a LIBOR-based loan book and the residential mortgage book is roughly 2/3 ARM. So the overall loan book obviously has a lot of variability to it. Obviously, the ARMs won't reprice immediately, but the majority of our LIBOR-based book will, in fact, reprice in line with market. Those are mostly 1-month LIBOR.

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Robert Scott Siefers, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [6]

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Okay. Perfect. And then last question, just on the deposit side. The network transaction accounts, you note the long-term strategy is to continue to sort of enrich in the deposit mix, which presumably means lessening reliance on those. But by the same token, they have some of the best betas right now. So I was just hoping you could spend a moment talking about where you see that roughly $2 billion of network transaction accounts going over near and longer-term as well.

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Christopher J. Del Moral-Niles, Associated Banc-Corp - Executive VP & CFO [7]

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Sure. So clearly, we agree with you. They have, in the short run, a very positive beta profile because their betas are close to 1 and they'll adjust downward, if not 1, perhaps even more in a downturn -- a down rate environment. However, we'd also note that substituting 2-plus-percent funds with core deposits at 1% or lower, as we did with Huntington and we expect to do with Staunton, is an even more positive improvement. So our strategy here is to, as much as we can, optimize our core deposits, hopefully at a lower borrowing cost, and continue to reduce any reliance on wholesale or institutional funding.

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Philip B. Flynn, Associated Banc-Corp - President, CEO & Director [8]

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Yes. I mean I would just follow-up by pointing you to Slide 10, which, as you can see, we reduced our network and FHLB advances from about $7 billion a year ago to about $4.5 billion today. So over the long haul, that's the goal.

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Operator [9]

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Our next question comes from the line of Chris McGratty of Keefe, Bruyette & Woods, Inc.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [10]

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Chris, maybe a capital question. Obviously, the deal is fairly small. I think you said that $142 million left on the buyback? Is that right? $142 million?

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Christopher J. Del Moral-Niles, Associated Banc-Corp - Executive VP & CFO [11]

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Correct.

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Christopher Edward McGratty, Keefe, Bruyette, & Woods, Inc., Research Division - MD [12]

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How should we be thinking about future buybacks given stock levels, deal pending and then with the CECL at the beginning of the year? I think 7% in the past was your floor, but can you just walk us through how you're thinking about timing?

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Christopher J. Del Moral-Niles, Associated Banc-Corp - Executive VP & CFO [13]

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Sure. We continue to believe 7% tangible common equity is a reasonable baseline for us and we have proceeded down this acquisition with the intent of using the capital we have today. At the end of the second quarter, that was at 7.42%, so we have a little bit of room. We have fully taken into consideration our expectations. We haven't formalized those yet, but we've got a range of values for CECL. And our thought process here is we should be able to continue to be an investor in our franchise. We should be able to continue to pay a reasonable dividend. We should be able to continue to do meaningful accretive acquisitions and still potentially have dollars left over to reduce our shares outstanding over time. And we think we continue that pace throughout 2019 and still absorb Staunton and CECL in the first quarter of 2020 without going below 7%.

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Operator [14]

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(Operator Instructions) Our next question comes from the line of Jon Arfstrom of RBC Capital Markets.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [15]

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Phil, just you seem more optimistic on commercial real estate like you were last quarter. Curious what you're thinking for potential growth out of commercial real estate and then also the commercial and business lending when you exclude the warehouse?

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Philip B. Flynn, Associated Banc-Corp - President, CEO & Director [16]

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Yes. I mean the pipeline for both of these is pretty compelling. If I take you back to Slide 7, our commercial real estate lenders have been very active in transacting new business and we have a significant amount of unfunded commitments that we'll fund up over the balance of this year and into next year. Offsetting that is the payments that you always get on a construction-heavy commercial real estate book, which is perfectly fine.

As we've been discussing over the first half of the year, we anticipated that the originations would begin to outpace payoffs in the second quarter and, in fact, we saw that. So we had a modest uptick. And we expect to see continued growth in CRE then over the back half of the year given this significant unfunded commitment pipeline as well as other new business that will be booked over the next 6 months as well.

Our general commercial pipeline continues to be strong and our verticals -- several of the verticals continue to be strong as well. Mortgage warehouse obviously had a pretty big second quarter driven by the mini refi boom that occurred that was rate-driven, and our power and utilities vertical did very well and we expect that to continue, too.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [17]

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All right. Good. Chris, a question on the margin outlook. Your guidance is better than most, and I think we understand why with some of the things happening on the deposit side. But can you give us an idea of what a 25 basis point decrease in Fed funds does to your margin because it seems like, on a core basis, there's some maybe natural lift that's happening here?

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Christopher J. Del Moral-Niles, Associated Banc-Corp - Executive VP & CFO [18]

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Sure. Yes. No, fair enough. Just for clarity, we are assuming 2 Fed rate cuts over the balance of the year, 1 here in July and 1 in September of 25 basis points each. Obviously, to the extent the Fed is more aggressive than that, our guidance would have to adjust accordingly. To the extent there is no Fed action, actually I think there's upside to our margin as we've previously stated, but we are assuming at this point in time the 2 25 basis point cuts. And what we've said to you previously is we expect that our up and down side movement essentially is on the order of magnitude of about 3 basis points per Fed cut. So that's baked into our 2.90% overall guidance is that there'll be effective compression. However, as you've noted upfront in your question, the liability actions that we took and the investment portfolio actions that we took and the addition of the late in the quarter Huntington deposits all give us a cushion that allow us to absorb that as we look at the balance of the year and keep our margin relatively stable.

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Jon Glenn Arfstrom, RBC Capital Markets, LLC, Research Division - Analyst [19]

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Okay. That's helpful. And then just last one. Phil, can you maybe give us an idea of what you have in St. Louis? I see the dots on the map, but maybe describe for us Associated Bank in St. Louis, what you have there?

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Philip B. Flynn, Associated Banc-Corp - President, CEO & Director [20]

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Sure. Yes. So we have one of our community markets is down in Southern Illinois on the east side metro area of St. Louis. And we have about $350 million as I recall, I think, of deposits down there today. We also have a -- our oldest loan production office in St. Louis proper in Clayton, which is actually quite a sizable loan production office. So adding the First Staunton franchise to this gives us well in excess of $1 billion of footings in the greater St. Louis metro area.

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Operator [21]

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

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [22]

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I wanted to start just on the fee income side with mortgage, obviously seeing the seasonal strength there. But can you just let us know if there was anything that was kind of one-off there in terms of higher gain on sale or MSR revaluations, et cetera?

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Christopher J. Del Moral-Niles, Associated Banc-Corp - Executive VP & CFO [23]

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No, Michael. Actually, it was a relatively straightforward quarter. It was all driven by the incremental volumes. I think if you look at Page 4 of our press releases, you'll see that the originated and sold production was up quite strongly from the first quarter. And obviously, that certainly continued into July.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [24]

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Okay. And then maybe on the insurance side, you noted that was a little bit lighter maybe than expected. Has there been any shift just in terms of that business going forward?

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Christopher J. Del Moral-Niles, Associated Banc-Corp - Executive VP & CFO [25]

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No. I think it was more a question of the timing of the contingency fees. And so we had a nice level of contingency fee received, and that's received and recorded on a cash basis in the first quarter and it was a little less in the second quarter. So we probably received some of those just a little earlier in the year.

Overall, that's a fairly stable business, so it is not going to be a business that grows dramatically. And the incremental that comes in the first 2 quarters is largely driven by the contingency fee factors.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [26]

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Okay. So a little bit of pull forward on the fees as opposed to something being pushed out of 3Q that we should model higher?

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Christopher J. Del Moral-Niles, Associated Banc-Corp - Executive VP & CFO [27]

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Correct.

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Philip B. Flynn, Associated Banc-Corp - President, CEO & Director [28]

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Yes. Don't model 3Q higher. It will be -- it will follow the normal seasonal pattern.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [29]

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Okay. And then just the last one on the oil and gas book. It sounds like, based on all your commentary, that you've sort of already put in place the provision and credit kind of allocations that you need there to move some of the loans out. But can you just maybe give us a little more color around how quickly you think you can move these? Are they mostly Shared National Credits? And how liquid that market is right now?

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Philip B. Flynn, Associated Banc-Corp - President, CEO & Director [30]

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Sure. So first of all, you've seen a number of other banks during this earnings season discussing their oil and gas books. The industry, as I mentioned, has undergone a lot of change and valuations for reserves for a stressed customer are weak driven both by the desire of other E&P companies to focus on their own properties as well as the fact that the capital markets, both private and public, are largely shut to the industry and have been for a while. What we've been doing over the -- this first half of the year during the normal borrowing base redetermination periods is focusing on higher-levered credits and either reducing or exiting those credits during the borrowing base redetermination period. So other banks have taken up, essentially, our positions in these credits.

This is very much a club or Shared National Credit type of business. Almost all of these facilities have multiple banks in them, from a handful up in -- up to 20. So what we're seeing effectively is what everybody is seeing. And depending on the bank, I think some are choosing to reduce exposures and some are not. We're choosing to do that. You saw us, over the first half of this year, reduce our outstandings by more than $100 million and we expect that we'll probably reduce outstandings by another $50 million to $100 million by the end of the year, but we'll be doing that in the same way as we have the opportunities to exit or reduce, that's what we'll be focused on.

We're still going to remain active in the business. We're not an active lender to new names at the moment until we get a little more clarity on what the risk and reward ratio for a senior lender in this space looks like. And hopefully, that will become more apparent as the banking industry adjusts to the dynamics of the oil and gas lending business, which I think it's going to need to do.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [31]

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Okay. And one last one just on that. Do you have kind of the weighted average coupon on the oil and gas book?

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Christopher J. Del Moral-Niles, Associated Banc-Corp - Executive VP & CFO [32]

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Not at my fingertips.

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Philip B. Flynn, Associated Banc-Corp - President, CEO & Director [33]

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Not off the top of my head. Sorry, Michael.

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Michael Masters Young, SunTrust Robinson Humphrey, Inc., Research Division - VP and Analyst [34]

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Would it be higher than the portfolio?

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Philip B. Flynn, Associated Banc-Corp - President, CEO & Director [35]

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Well, I would guess it's probably in the zip code of where the commercial real estate yields are, somewhere around there.

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Operator [36]

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

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Philip B. Flynn, Associated Banc-Corp - President, CEO & Director [37]

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Thank you. I'm pleased with this quarter's commercial loan growth and the return to growth in our commercial real estate portfolio. We're optimistic that the funding changes we made will have a positive impact on our net interest margin in the second half. We look forward to welcoming First Staunton to Associated early next year and to talking to you again in October. So if you have any questions in the meantime, please give us a call. And as always, thank you for your interest in Associated.

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Operator [38]

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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.