Associated Banc-Corp (ASB) 2014 Q2 法說會逐字稿

Good afternoon, everyone. Welcome to Associated Banc-Corp's second-quarter 2014 earnings conference call.

(Operator Instructions)

Copies of the slides that will be referenced during today's call are available on the Company's website at associatedbanc.com/investor. As a reminder this conference call is being recorded.

During the course of the discussion today, Associated 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 see 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. Good afternoon, everybody. Welcome to our second-quarter earnings conference call. Joining me today, as usual, are Chris Niles, our Chief Financial Officer, and Scott Hickey, our Chief Credit Officer.

Highlights for the second quarter, outlined on slide 2 -- our solid results were driven by strong loan growth, particularly in the commercial businesses and our focus on managing expenses. Average loan balances increased 3% from the first quarter to $16.6 billion. And, in addition, we purchased the participation in our existing customer credit card portfolio on June 30.

We grew net interest income $4 million or 2% from the first quarter, despite net interest margin compression of 4 basis points. Core fee-based revenues grew $3 million from the first quarter, although decreases in other fee categories resulted in total non-interest income declining $1 million. Non-interest expenses were essentially flat compared to the first quarter. Taken together this drove EPS and net income higher for the quarter.

During the second quarter we repurchased 1.7 million shares of common stock. And, in addition, we executed an accelerated share repurchase of an additional 1.6 million shares on July 1. And our Tier 1 common equity ratio remains strong at 10.72%.

Turning to slide 3, let me share some of the detail on the main drivers of our second-quarter earnings. Average loans increased $482 million from the first quarter to $16.6 billion. This represents a 3% quarter-over-quarter growth rate and a 6% increase year-over-year.

Growth during the second quarter continued to be driven by strong results in our commercial businesses and commercial real estate, which were up $398 million or 4% combined. Retail loans increased $84 million during the second quarter, as growth of $151 million in mortgage balances partially offset by continued run-off in home equity and installment loan portfolios.

Commercial and business lending average portfolios grew by $338 million or 6% during the quarter. Within this group Mortgage Warehouse lending increased $119 million from the first quarter, as line utilization, which had been trending lower recently, picked up again in the second quarter.

As reported by the Mortgage Bankers Association, first-quarter mortgage volumes were at a 14-year low, and extreme winter weather was singled out as a significant factor. As a result, this pent-up demand translated to increased loan outstandings in the second quarter.

In addition, the funding mix has shifted toward more purchase activity, accounting for 73% of the total volume in the second quarter compared to 47% last year. We expect that Q3 volumes will remain relatively in line with Q2. And we anticipate a decline in the fourth quarter as the traditional home-buying season ends.

General commercial loans grew by $97 million or 2% during the quarter. And our oil and gas and power and utility balances both grew during the quarter. Average commercial real estate loans grew by $60 million or 2% during the quarter to $4 billion. Multi-family loans continue to make up the largest segment of this portfolio.

Our average residential mortgage loans grew by $151 million or 4% in the second quarter driven by strong ARM production. Our mortgage production mix has changed from 45% variable in late 2013 to 60% this past quarter. And in addition the mix has shifted to 70% purchase of new construction from 30% earlier in 2013.

We continue to sell substantially all of our 15- and 30-year production. During the second quarter, our mortgage banking unit originated $276 million of loans for sale to the GSEs compared to $204 million in the first quarter. The gain on sale of mortgage loans sold dropped to 1.9% compared to 2.1% last quarter. Home equity and installment loans continued to decline although the pace of paydowns and payoffs has slowed.

Turning to slide 4, in addition to increased line commitments across all of our commercial segments, our commercial clients increased their line utilization in the second quarter. Commercial and business line usage went up almost 3% including the increase in Mortgage Warehouse outstandings. Commercial real estate line utilization of 62% fell from the first quarter; however it's up about 1% from last year. We expect utilization to grow during the summer as construction projects fund.

On slide 5 I'll share some of the details around our recent credit card receivables purchase. We've always offered Associated Bank-branded credit cards to our customers.

In recent years, these accounts have been owned and serviced by Elan, a division of US Bank. On June 30 we purchased a 45% participation in this portfolio for $108 million. The purchase price premium will be amortized over five years. This is a high-quality portfolio with historical credit and fraud losses below industry averages.

The transaction allows us to participate in the growth of this portfolio while we build equity value in the assets over time. The bottom-line earnings impact will not be material until this growth occurs. Historically, the whole portfolio has had double-digit growth per year for the last four years.

Turning to deposits, average deposits of $17.2 billion increased $183 million from the first quarter. Growth in money-market and savings accounts were partially offset by the continued decline in time deposits. Checking average balances were essentially flat from the first quarter, with growth in NOW accounts largely offset by a decline in non-interest-bearing demand deposits.

If you turn to slide 6, net interest income increased $4 million from the first quarter and was up $9 million from a year ago. Net interest margin for the second quarter was 3.08%, down 4 basis points from the prior quarter. Year-over-year, NIM is down 8 basis points, which is in line with our expectations of modest compression each quarter.

Total asset yields declined 5 basis points from the first quarter as we see continued compression of loan yields, particularly in our commercial portfolios. We continue to aggressively manage our liability funding costs lower. Period end FHLB and other short-term fundings increased by over $1 billion from the first quarter as we kept interest-bearing deposit costs below 20 basis points.

In addition, we lowered other borrowing costs by 9 basis points in Q2, leading to an overall 2 basis point reduction in our total cost of liabilities. While we continue to reduce the average cost of our CD portfolio, it's becoming more difficult to manage money-market costs lower, with over $7 billion in balances at only 16 basis points.

Non-interest income is highlighted on slide 7. Total non-interest income for the quarter was $72 million, down $1 million from the first quarter and down $12 million from a year ago. The decline from last year is driven by lower mortgage banking income related to less refinance activity.

Mortgage banking income of $5 million declined $1 million from the first quarter and is down $14 million on a year-over-year basis. Last year's second-quarter mortgage banking income of $19 million was a record for us.

Core fee-based income increased $3 million from the first quarter, as all categories were up. It was a particularly strong quarter for insurance and service charge revenue with each increase in $1 million from the prior quarter. We also continue to see progress with our retail brokerage business as these revenues have increased 23% from last year.

Turning to slide 8, total non-interest expenses of $168 million were flat to the first quarter. Personnel expense of $98 million was flat to last quarter but was down $2 million from last year. FTEs continued to decline when at our lowest level since mid 2010.

Occupancy expense declined by $2 million from the first quarter related to the seasonal decline in removing snow. Technology spend increased $2 million from the first quarter as we continued to invest in solutions that will drive operational efficiency. Our efficiency ratio remains a key focus and improved a bit from the first quarter.

Turning to slide 9, potential problem loans increased $68 million this quarter related to the downgrade of a few of our shared national credits. At $288 million this balance is 7% lower from a year ago. Net charge-offs of only $3 million were down $3 million from the prior quarter, driven by recoveries in our commercial portfolio.

Total non-accrual loans were essentially flat from the first quarter. And the ratio of non-accrual loans to total loans continued to improve to 105 basis points from 108 basis points at the end of the first quarter.

Our total allowance for loan losses equals 159 basis points on total loans and covers 152% of period end non-accrual loans. The provision for credit losses was $5 million for the quarter and was primarily driven by loan growth.

Our capital ratios continued to remain strong with a Tier 1 common equity ratio of 10.72%. We are well capitalized and are in excess of the Basel III expectations on a fully phased-in basis.

Our priority for capital deployment continues to focus on organic growth. We will ensure that our dividend stays in line with earnings growth. And we will be opportunistic and disciplined in evaluating other ways to optimize our capital structure.

On slide 11, we would like to discuss the outlook for the second half of 2014. We've updated our annual average loan growth target to 8%. We expect mid single-digit average deposit growth, with slightly higher other fundings. We continue to expect gradual margin compression while growing net interest income.

As a result of the credit card portfolio transaction, we expect card-based income to decline slightly. However, total second half non-interest income should be in line with the first half.

We continue to expect 2014 non-interest expenses to be flat to last year. And, finally, our provision for credit losses will be based on loan growth and other factors.

With that, we'll open it up to your questions.

(Operator Instructions)

Dave Rochester with Deutsche Bank.

Good afternoon. Sorry if I just missed this but on the accelerated share repurchase, I was just wondering, are you planning to continue to purchase additional shares this quarter or are you done until Q4 at this point?

Our pattern, as you know, has been to, over these last quarters, to buy back about $30 million worth per quarter. So, we have executed on that already. Whether we do something else or not is yet to be seen.

Okay. And regarding your guidance on the non-interest income, I know you've guided similar levels here in the back half of the year, as you've had year to date. But that other income trend this quarter and the other income line looked a little weak this quarter. I was just wondering what drove that decline and if there's anything one-time in there that we can strip out.

There were some one-time charges related to some customer reimbursements that we reviewed and evaluated and paid out. Those are adjustments there. Those are less than $1 million.

And we had the civil money penalty, $0.5 million.

Got it. And with the strong loan growth you had this quarter I noticed that the loan to deposit ratio ticked up a little bit. It's about 99% now. I was just wondering how you expect to see that trend going forward, and if we should expect to see that remain below 100%.

We would like that to remain below 100%, so we'll continue to focus on growing core deposits. The goal here is to keep it close to 100%.

And we have somewhat of a seasonal pattern in deposits, and therefore that has seemed to have been slightly lower deposits through the first half, moving to higher deposits generally in the second half of the year. So, we do expect to see deposit growth in the second half.

Got you. And just one last one. Chris, you had bought some securities this quarter. I was just wondering what you were buying and the yields on those, if you have those details.

We're buying very much in line with the general mix. And I don't have the specific details, but if you look at the interest income tables you'll see that the relative yield in the entire investment portfolio really didn't move much at all. So, essentially, it's very much in line with the mix and the yields of what we had already.

And is the plan still to grow the book in line with overall asset growth or should we expect to see that stabilize here?

I think we want to make sure we get the deposit inflows. And, so, as the deposit inflows come in we'll consider if we add to the portfolio, but it will be a function of deposit inflows.

Great, thanks.

Ebrahim Poonawala with Bank of America Merrill Lynch.

Good afternoon.

I was wondering if you can elaborate on the margin outlook, be it for some compression this quarter. As we look out into the back half of the year should we expect similar compression, when you say few bps, about similar to Q2 for the back half of the year. And as a follow-up to that in terms of if you can talk about what the new origination yields on the commercial loans are in the second quarter.

Sure.

On the NIM, I think that the better course for you, as you try to predict NIM, which is, of course, hard to predict, is to not look quarter to quarter but look back over time. One of the reasons why we point out that NIM compressed 8 basis points from the same quarter last year, I think is a reasonable way of thinking about this.

It's very difficult to say whether it's going to go down 2 basis points or 3 basis points, or 4 basis points in any given quarter, but it's been generally trending down at a couple or so per quarter for quite a long time now. Chris, do you know what the yields are?

Yes, Ebrahim, what I'd point you out, on to page 7 of our press release tables, you can look back and see what the commercial loan yields were a year ago versus where they are now, and where they were a quarter ago versus where they are now. And you can draw an impression as to the amount of compression we're seeing.

The corollary to that is I would also highlight for you that since more than 80% of our commercial loans reset or reprice or mature within a one-year period, essentially the bulk of our book has repriced or reset already from last year. And at 3.32 gross yield on the commercial and business lending book is a reasonable approximation for the blended average of what we do on a regular basis today.

Got it. And, separately, what is the size of your SNC portfolio at the end of the second quarter? And how much did SNC contribute to Q2's loan growth?

Go ahead, Scott.

The SNC book that went through the Shared National Exam was $3.6 billion.

And what was the second part of the question?

How much did that grow in the second quarter relative to Q1?

We would point out that a good amount of that is in our power, utility and oil and gas books. And those are largely participations, many of which end up being categorized as SNCs, yes.

That's the bulk of all of our SNC growth over this last couple years, has been in those two categories.

Understood. And if I may, one last question. In terms of the guidance on deposit growth, we took it down a little bit. Is that just because of the way the first half has spanned out? Or has anything changed in terms of your view around deposit growth in the back half of the year, as well?

It hasn't really changed. We did take into account a little less growth this quarter in tempering our expectations. We were also working very hard to optimize our liability costs, and looking for other ways to fund to try to maintain the net interest margin. Clearly, if we were willing to pay up for deposits, we could grow deposits. But we are trying to minimize our cost of liabilities in this low-rate environment.

Thank you very much.

Scott Siefers with Sandler O'Neill.

Good afternoon. I just have a couple questions on the credit card portfolio acquisition. What was the rationale on purchasing the roughly half participation as opposed to doing the entire thing, just as you looked at the tactic itself?

We're not in the business of managing a credit card portfolio. We've outsourced that for years now to Elan. We don't necessarily want to build all the infrastructure that's required to do that.

Yes, I would have thought there might be an option to purchase the whole thing but have Elan basically service, administer, et cetera.

We like this arrangement where we think we have a very good service and we've been very happy with Elan for years. They continue to do a good job of managing our portfolio. And they have skin in the game this way and we like that dynamic.

Okay. And then can you give just maybe a little bit of a sense for what percent of your retail customers currently have an Associated-branded card? And maybe broad brush strokes of goals of where you might like to see that in, say, several years?

Sure, there's about 160,000 card holders. We have roughly 1 million consumer-customers, so arguably it's something like 1 in 6. Within that 160,000 cards, that card, balances within that, we would note, is 80% consumer balances and 20% commercial balances. So, our commercial customers are also active in the program.

Yes. We've done a good job of growing this book. We've been incented through fees from Elan to do that. We are now incented to grow it by having a piece of the book, which ultimately we will make more money on as we grow it.

So, we will certainly be putting efforts in to continue to get cards in the hands of our customers, within the credit parameters that we've had. This has been a high-quality portfolio. We intend on keeping it that way.

Okay, that's good color, and I appreciate it.

And the only reason we really talked a lot about this is because we haven't had this asset class. The truth is, it's $99 million, so it's not so much today.

I understand. But appreciate the color, nonetheless. And then, Scott, maybe this is best for you. Do you mind -- I think I missed a couple of numbers that you gave on the SNC. I think you said $3.6 billion total SNC portfolio. What was the $288 million number that you quoted in your prepared comments?

That's our potential problem loans. So, that number back in the bad old days was about not quite 10 times that number, but somewhere in that vicinity.

Then if I could qualify my statement, the $3.6 billion I gave you was really our commitments, if you will. Outstandings are closer to about $2.6 billion.

And probably, what? -- almost half of that now is our oil and gas and power and utilities book.

And then mortgage warehouse sometimes.

We have some mortgage warehouse, so it's primarily those two asset classes.

Okay, perfect. And then, just given that the down grades came from the SNC portfolio, and then the bulk of that sounds like it was in the national businesses, can you just maybe broadly give us a sense for how credit trends in the national businesses you've developed over the last few years are compared to of the core in-footprint book?

Sure. Generally speaking, these are relatively young portfolios who have been in the business two or three years. So, they really haven't matured. These are probably the first couple of downgrades we've seen in those books. So, when you look at them relative to the portfolios we've had on the books for quite a longer period of time, up until now they've performed much better.

They continue to perform much better. These are only really three credits out of that whole book, so it's a relatively small number of credits on a really small base of potential problem loans.

Okay, perfect. I appreciate the color. I think that's it for me, so thank you.

Emlen Harmon with Jefferies.

Good evening. So, we got two quarters in a row now of C&I line improvements. Could you just give me a sense of what's the tone from your commercial borrowers? Are you starting to see them make capital investment today? And what's the business outlook you're hearing from them?

We have the impression, and it's anecdotal, that people are becoming more confident in the economy. You could see on slide 4 with the line utilization continuing to tick up now into the second quarter. We had a conversation in the first quarter about last year we saw a tick up in the first quarter, it went down this time, it continued to go up.

Now, some of that is the Mortgage Warehouse. But we get the impression that there's some more inventory in receivable financing going on. Don't know if that's translated into a lot of capital investment yet, still a little early for that. But I think the tone out there is, let's say, slightly more optimistic.

Got it. Fair. And then you have given us the expense guidance for the rest of the year. Could you help us think about just trends within the individual buckets? Noticeably this quarter the FTEs are down again. So, just trying to get a sense of the salaries and benefits versus occupancy versus some of the other lines, just the way those expense lines are trending.

Generally, we are bending down all of our expenses other than the technology spend. We're spending more money on technology and less money, generally speaking, on other stuff. We've had a significant decline in total FTEs. There's been a reasonable amount of severance noise in our quarterly numbers now for awhile. Occupancy probably the rest of the year is flattish. We finished digging snow, so we don't have to do that anymore. What else comes to mind, Chris?

Losses on loans and foreclosure expenses have been continuing to trend slightly lower. And although we saw the pick up and tick up in potential problem loans, generally speaking OREO and other aspects of that will continue to be probably on a favorable trend for at least another couple quarters. So, we expect those to trend lower. And, of course, we remind you that we do our big advertising push in the fall, and this won't be an exception. We will be a strong supporter of our good partners, the Packers, in our advertising push. And there's a seasonal effect to our advertising.

Hopefully you don't have to buy any tickets this year. And then just a quick one on the OCC AML charge. Was that actually in the other fee line as opposed to one of the expense lines?

It was in other expenses.

It was in other expenses. Okay, got it. Thank you.

$0.5 million is in there.

Jon Arfstrom with RBC Capital Markets.

Thanks. Good afternoon. As long as you brought up the Packers, Phil, best of luck in your upcoming vote, your Packer Board vote.

Thank you. I don't want to be the first person not to have been voted in. So, if you have a ballot please send it in. (laughter)

I'm not a shareholder. Just a few follow-up questions. Scott, just to clarify on the potential problem loan increase, if you exclude those three credits, it would be down -- is that correct?

No. Those three credits were probably 75% of the increase, so there would have been a modest increase without those three credits, but very modest.

Okay. And that is Shared National Credit related or core book related?

Those are three Shared National, that came out of the Shared National.

The rest of it was just other odds and ends here. But just keep in mind that, whether you look at potential problem loans or non-accruals or charge-offs, we are at such low levels that, as we've been saying, I think, for a couple quarters, a few balances on a few loans look like they make a big difference. But we're talking about very small numbers.

Okay, makes sense.

But we do try to be transparent so we're showing you what we got.

Okay. Chris, just to follow-up on the non-interest bearing, I see the Q1, Q2 down in the previous year and then up in Q3, Q4. Can you just remind us what drives that, the non-interest bearing balances?

On the checking balances, we tend to see inflows at year end, and we tend to see inflows in our book in the first quarter and the third quarter. And, so, the second quarter tends to be a period of relative outflows, and there's a couple of reasons for that.

In the third quarter it's public funds funding because many entities are on a September fiscal year end and we see a bunch of funding that comes in to our balances. The other is we also are the tax collector for a number of municipalities and we see property tax payments come in, which happen to, in many of our districts, be March and September. So, those are two reasons we get popped there.

And then at year end we see a pop because of essentially, I'll call it, corporate window dressing, but corporate balances. Companies like to make sure their cash is pretty liquid usually at year end.

Okay, that helps. And then maybe for you, Phil. Just if you take out maybe the Warehouse, if you had to characterize the percentage of the growth that would be the national or specialty businesses versus in the footprint, is there a way to characterize that?

Remember, when we talk about oil and gas and power and utilities, the footprint for those businesses is nationwide. There aren't a whole lot of oil and gas wells in the state of Wisconsin. So, yes, we've had significant growth there. If you look at slide 3 --.

Just trying to gauge the footprint.

Yes, the hybrid ARM business continues to be very strong. The Mortgage Warehouse we expect will continue to be strong into this quarter and then probably abate. Our general commercial business at $100 million of growth, we're happy with that.

Commercial real estate was a little less than what we've seen. But I think as we've talked about before, that business is beginning to mature, and they will have more churn in the book as projects are completed, stabilized and go out to permanent financing. So, that growth will slow a little bit, as we would expect in that business.

We're happy with the balanced growth we're getting across the whole thing. Notably, our home equity and installment book had been paying off to the tune of $100 million-plus for a long time, and that seems now to be slowing, so that will help. That's been offsetting some of the residential mortgage growth, so that will slow down and we'll get more net growth there.

Jon, this is Scott. I'd just add, our Mortgage Warehouse book, although that is a national business, a fair amount of that is in our footprint.

Right, okay, makes sense. Just last question, can you give us an update on your acquisition thinking? Is there a decent flow of viable ideas, or not so much?

There is a decent flow of viable ideas. I think you know us well enough. We are conservative, conscientious and diligent about what we do. We have discussions going on. When they will come to fruition, or if, is still to be determined.

The environment is, I think as everyone knows, difficult as far as getting a deal done and then getting it approved and closed. So, we're very cognizant of that and making sure that whatever we do we're going to be confident we can get to the finish line.

All right, thank you.

(Operator Instructions)

Chris McGratty with KBW.

Good afternoon. Chris, on your comment on the margin, how should we be thinking about, as we get into next year, the transition if you believe that rates may or may not go up towards the back half of the year? Can you talk about how your models suggest the margin will behave in that transition period? Will there be a lag, presumably, when rates begin to move? Any color would be great.

As we said before, the bulk of our loan portfolio is in commercial assets, and the bulk of the commercial assets are tied to LIBOR. And, in fact, the most prominent index that we tie to is one-month LIBOR. So, we will be marginally benefiting when the one-month LIBOR rate starts to move, which would be relatively early in whatever tightening cycle occurs.

Following back up on the comment I made earlier, you can see that the average yields have come down from last year. And since the majority of our book reprices or resets or matures on a yearly basis, we think that a lot of the previous-period discussion about caps and floors and different adjustments that might have made a difference to the yield at one point in time two or three years ago has all burned off. The amount of adjustment there is pretty de minimus at this point in time. And, so, we think we are relatively primed to participate as rates rise.

That having been said, there's a question of how will deposit pricing move along with it. So, we have positioned ourselves, and we believe and we stand by the thought that we are modestly asset sensitive because we do expect a fair amount of our asset book is going to reprice, and reprice higher, and fairly immediately. But we have $7 billion of money-market deposits at 16 basis points, and there's a risk that some of that starts to move pretty quickly, too. So, there's going to be a balance there. That's why we believe we are modestly asset sensitive.

Okay. Just to follow-up the M&A comment, in terms of there hasn't been a ton of activity in your market. There's been a couple transactions in Chicago. Is the lack of deals more a function of price -- because we have seen some higher-price deals when they do get done -- or is it a function of the regulatory environment?

I think it's always specific to whatever the transaction might be. But I think it's fair to say that the regulatory environment is challenging. We've seen that in a number of transactions that are taking an awfully long time to get to fruition.

There's always price issues. Those seem to, as compared to a couple years ago, it seems like the bid-ask is tighter than it used to be. But depending on the view of the seller as to the value of their franchise that can always come into play, of course. I'd say that, to me, the overall outlook for anything of any size, I think the regulatory environment is pretty challenging.

Thanks.

Terry McEvoy with Sterne, Agee.

Hi, thanks. Good afternoon. A question for Chris.

I know you're not going to talk about 2015 expenses, but you have talked a lot about what you're doing with the branches in terms of the number and the size. And we've seen the employees come down about 7.5%, if I'm looking at slide 8 here correctly. But we also haven't seen really much of a decline in the personnel expenses, and really the non-personnel expenses, as well. When are you going to start to see the benefit of what you're doing on the consumer and retail side? Or is it simply being offset by regulatory costs, et cetera?

I think there's two different answers. On the occupancy and the branches, I think we are starting to see some of that filter in. We had facilities that we closed here just this last quarter, so you haven't seen the benefit of the consolidation that we did into this building fully in the last year. You haven't seen the benefit of the consolidations we've done in Chicago fully. You haven't seen the benefit of the consolidations we've done in La crosse yet fully. But those will start to bleed in here as we move forward.

So, I think we'll see occupancy, as Phil mentioned earlier, spend lower. I think you'll start to see other expense, non-interest items, spend lower. And we've had some noise in the historical personnel level and I think you'll start to see that spending lower, offset by the investments we're making in some new businesses, some new opportunities, which we hope will pay for themselves with new revenue.

So, that leads us to the conclusion that we'll be fairly disciplined in our management of expenses. Won't comment yet on 2015, but I think you'll see that in the run rates as we move through the rest of the year.

Just one other question. The SNC portfolio, how much would you classify as leverage loans? Was that behind the small increase in the potential problem loans?

No. This is Scott. Leveraged loans were not part of the potential problem loan increase in the SNC book. We do very little in the SNC book in leverage. And our leverage points are fairly conservative relative to the market, so I wouldn't call that a meaningful part of the book.

That's great. Thanks a lot.

David George with Robert W. Baird.

Thanks. This is Garrett from Dave's team.

Most of our questions have been asked but we had a couple more follow-ups on the SNC. Were you the lead on any of the downgraded transactions? And does the regulatory scrutiny reduce your appetite for SNC credits?

This is Scott. No, we were not the agent on any of those. And I would say, no, it doesn't necessarily reduce our appetite. What the learning is, as you know, every year there's a different issue with the regulators on what they want to tell the banks about. So, we've learned some things on how they risk rate and how they view some of these loans, that as we go forward we may or may not have appetite for deals that would have potential risk-rating risk.

Makes sense. And then just interested in your view on leverage lending guidance. How are you interpreting that? Will you get close to the 6 times debt to EBITDA threshold? And do you think competitors are closely following the guidance?

I certainly can't speak to others but we do not play in that market at all. We're a 3- and 4-times lender. So the lofty levels that the OCC references aren't areas we play in at all.

Thanks.

Steve Geyen with D.A. Davidson.

Good afternoon. I was just looking at the Elan slide. One of the bullets in here, it says the card-based fee is likely to lighten up a little bit, and a little bit better or higher net interest income, or be offset by higher net interest income. And I was just curious about the relationship with Elan. Is that near term and then further out are you going to have a deeper relationship with Elan? And I know that something you guys have been looking at is corporate services, corporate card services. Is there more to this relationship as far as building out those various services, as well?

We've had both a consumer and commercial client relationship with Elan for the last seven years. The agreement we entered into is for the next five at minimum. And based on the positive experience we've broadly had with Elan over the last seven it could go on for a lot longer. So, this could be very much long term. We do drive our merchant activity through the same program, and it's worked out well so far for us and our clients.

Okay, thank you. But as far as, there hasn't been a really big expansion to the initial program that you had in place? I'm just trying to figure out if there's additional revenue opportunities down the road.

The additional revenue opportunity is to continue to grow the overall portfolio. It's been growing at double-digit pace. And, if anything, we'll continue to put a lot of effort into that because proportionately we will share more income under this arrangement than we did previously.

Got it. Okay thank you.

We have no further questions in queue at this time. I would like to turn the call back over to Mr. Flynn for closing comments.

Okay, thank you for joining us today. Just to close, we're happy with this quarter's performance. We had, obviously, very strong loan growth, we had higher core fees, we had stable core expenses. And we remain optimistic and committed to building shareholder value through our long-term strategy for growth here at Associated.

So, thanks again for your interest. And if you have any questions, as always give us a call. Thank you.

Ladies and gentlemen, this concludes the Associated Banc-Corp second-quarter 2014 conference call. You may disconnect your lines at this time. And thank you for your participation.