Associated Banc-Corp (ASB) 2017 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to Associated Banc-Corp's Second Quarter 2017 Earnings Conference Call. My name is Daren, and I will be your operator today. (Operator Instructions) Copies of both slide decks 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.

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 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.

Thank you. Welcome to our second quarter earnings call. Joining me today are our Chris Niles, our Chief Financial Officer; Jim Simons, our Chief Credit Officer; and Randy Erickson, our General Counsel. We'd like to begin by providing a brief second quarter update before discussing the acquisition we announced this afternoon. The standard earnings deck has been included, but in the interest of time, we won't walk through the slides individually.

Highlights for the quarter include higher revenues, continued expense discipline, improving efficiency and reduced credit costs, all of which contributed to a 16% increase in earnings per share from the year-ago quarter.

Average loans grew $449 million in the second quarter to $20.5 billion, driven by our on-balance-sheet mortgage retention strategy. Average commercial and business loans were up 2% from the first quarter, primarily driven by growth within our specialized verticals, led by increases in mortgage warehouse and Power and Utilities. Average commercial real estate loans were down 1% from the first quarter but up 7% from the prior year. We've been limiting multifamily and retail production, so growth within these property types was muted during the quarter.

As a note, within the $1.2 billion commercial real estate retailer portfolio, our largest tenant exposure is less than 5%, spread over 5 loans to a national investment-grade grocer.

In line with our historical practice, in June, we resumed selling most of our longer-dated mortgage production to Fannie Mae and Freddie Mac. Our overall loan mix has not materially changed, and we remain on track to meet our full year 2017 loan guidance of mid- to high single-digit growth.

With respect to deposits, our loan-to-deposit ratio increased seasonally to 96% at the end of Q2. As a reminder, we tend to see deposits build in the back half of the year.

Shifting to income and margins. Net interest income of $184 million was up $4 million from the first quarter and up $7 million from a year ago. Total commercial loan yields were up 17 basis points quarter-over-quarter and 40 basis points from the year-ago quarter, reflecting the asset-sensitive profile of our largely LIBOR-based commercial portfolio.

Our cost of interest-bearing deposits increased 9 basis points from the first quarter, primarily reflecting the repricing dynamics of our network transaction deposits. Pricing on our retail savings and money market products has not moved.

Our overall NIM expanded by 2 basis points from the year-ago quarter, and we continue to expect an improving year-over-year NIM trend.

Second quarter noninterest income was up $3 million from the first quarter and improved modestly from a year ago. Growing fee-based revenue drove quarter-over-quarter growth, which benefited from a 10% increase in card-based and other nondeposit fees. On a full year basis, we continue to expect to see lower mortgage banking revenue, partially offset by higher net interest income.

With respect to expense, noninterest expense of $176 million was up $3 million from the prior quarter and up $2 million from the year-ago quarter. Personnel expense of $105 million was relatively unchanged from the prior quarter but up $3 million from the prior year, driven by increased health insurance costs.

Our overall expense guidance remains unchanged. We expect expenses to increase 1% from the prior year. Our efficiency ratio has improved by over 200 basis points year-over-year, driven by the company's continued investment in solutions that drive automation and processing improvements. We continue to expect our efficiency ratio to improve over time.

Moving to taxes. Our second quarter effective income tax rate was 26%, down from 30% in the year-ago quarter and 27% for the first quarter. The lower rate this quarter was driven by partial release of reserves related to a favorable state tax court ruling. For the third and fourth quarter, we expect the effective tax rate to be in the low 30s, contributing to a full year effective tax rate in the high 20s.

Switching to credit. Potential problem loans and nonaccrual loans both declined from the prior quarter and prior year. The total allowance for loan losses decreased to 1.35% of total loans from the first quarter.

Net charge-offs of $13 million increased from the prior quarter, driven by charge-offs in the oil and gas portfolio. Otherwise, net charge-offs remained very benign.

Turning to the oil and gas portfolio. The period-end oil and gas loans were $601 million, down $24 million from the prior quarter and down $155 million from the prior year due to lower line utilization and continued resolution of problem credits. At this point, nearly 40% of commitments were originated since the downturn in the oil and gas prices. At quarter-end, our allowance was 5.4% of the oil and gas loans.

We'd also like to highlight for the fourth consecutive quarter, we've delivered double-digit returns on both tangible common equity and CET1.

With that as a summary update for the quarter, I'd now like to turn to the acquisition we announced late this afternoon. There's a separate investor presentation with details of the transaction.

As we've previously discussed, we view accretive nonorganic M&A activity as an effective means of capital deployment. In evaluating bank M&A opportunities, we have focused on situations where we can apply our learnings from the recent branch consolidations we've had here at Associated. This has led us to focus on in-market, efficiency-driven M&A opportunities. Today's announcement is wholly consistent with that focus and strategy.

Bank Mutual has a rich 125-year history of serving customers in Wisconsin. Under 3 generations of the Crowley family stewardship, Bank Mutual grew to become the third-largest banking institution headquartered in Wisconsin and the largest independent franchise in Milwaukee. We are pleased to announce the merger of our 2 institutions.

Turning to Slide 5 of the acquisition deck. The merger calls for an all-stock transaction with a fixed exchange ratio of 0.422 ASB shares to be issued for each BKMU share. Based on yesterday's closing prices, this values the transaction at $482 million. We've invited Mike Crowley to join our board upon consummation of the merger, and Dave Baumgarten, the CEO, has signed on to help us through post-closing integration. Subject to regulatory approvals and the approval of BKMU shareholders, we expect to close the transaction in the first quarter of 2018 and begin the integration process in Q3 2018.

This transaction was will significantly enhance our market presence in Western Wisconsin and deepen our roots in Eastern Wisconsin. We will strengthen our #3 deposit market share rank in the state and further enhance our #3 deposit market share rank in Milwaukee. We don't expect this transaction to trigger any significant divestitures, and we're fully committed to maintaining our presence in all of the low- to moderate-income markets currently being served.

We see the business model of Bank Mutual as highly complementary. As a result of the combination, Associated will be in a position to absorb Bank Mutual's current commercial real estate portfolio while maintaining a strong capital and liquidity profile. While the transaction significantly enhances our franchise in certain markets, it does not alter the make-up of our geographic exposures or business mix in any material way. We will remain a Midwest-centric deposit gatherer and lender.

Our deposit mix will benefit from a slight lift in retail time and savings accounts, which we expect will fit in well with our existing consumer product set. This is a deposit franchise-enhancing deal that will help us build scale and garner efficiency in our core footprint while serving over 120,000 more customer accounts.

We also expect the transaction to allow us to bring a whole new set of our products to Bank Mutual'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.

We see this merger accelerating our 2017 strategic priorities. And from our perspective, this transaction checks all the boxes, as highlighted on Page 12.

We've been diligent on how we approach this opportunity. While Associated Banc has not done a bank merger in some years, the company DNA was built on mergers. And most of the management team has experience driving M&A and consolidation efforts and have the necessary expertise to execute a seamless transition for our customers, employees and stakeholders. We believe we know how to execute on a lower-risk, in-market, efficiency-driven opportunity.

We see the market overlap and business mix similarities as risk mitigants and believe we have priced and structured the transaction attractively for our shareholders. We have developed a detailed integration plan, spanning from transaction announcement through closing, conversion and post-conversion time periods.

From a financial perspective, we expect the combined organization to have meaningful operating efficiencies. Approximately 50% of Bank Mutual branches are within 1 mile of an Associated branch, and we share several significant technology vendors, including our core banking platform provider. As such, we see significant potential for cost savings. Specifically, as noted on Page 10, we're buying in at about 1.6x tangible book and about 12.5x synergy adjusted earnings. We've assumed we will realize about 45% cost savings measured against Bank Mutual's current run rate.

This will result from both back-office and administrative savings as well as frontline and branch operations efficiencies. Given the time line for approvals, we're expecting to realize approximately 1/4 of the potential savings in 2018 and the remaining savings in 2019.

We expect to incur $40 million in restructuring costs as a result of the combination, largely from transaction costs, contract and lease termination costs and severance charges. We expect to realize most of the restructuring costs by year-end 2018.

At closing, we expect tangible book value per share dilution of approximately $0.07 or less than 1% dilution and fully phased-in EPS accretion of approximately $0.03 or 2% in 2019. Accordingly, we see tangible book value per share earn-back of less than 3.5 years using the crossover method, and we expect an IRR in the high-teens.

So with those comments, let me pause and open the call for questions.

(Operator Instructions) Our first question comes from Jared Shaw of Wells Fargo Securities.

It's actually Timur Braziler filling in for Jared. I guess the first question is with the deal expected to close in the first quarter of '18, why such a long time frame to realize all of the cost savings? I guess that 25% expected cost save realization in 2018 seems a little bit on the low end.

Yes. So we're not sure exactly when in the first quarter we'll close, but we certainly believe that within a quarter or 2 following that, we'll be fully effective and able to begin the implementation during the third quarter. And so we're fully assuming we'll have the opportunity to realize at least 1/4 of the synergies during the full fourth quarter. But obviously, the sooner we can close and the sooner we can get rolling, the better the transaction results could be for us.

Okay, great. And then looking at just the loan composition of Bank Mutual, it seems like they're a little bit more CRE-heavy than legacy Associated. How does that change the broader strategy once you bring them on board as far as CRE concentration and what your appetite might be in that asset class and how that potentially changes your appetite there?

Sure. That's a good question. If you look at Page 8 of the acquisition deck, you'll see Associated, Bank Mutual and then pro forma for the combination. Quickly looking at that, you can see that the mix of the pro forma bank versus Associated today is not very different. You're correct that Bank Mutual has, pound for pound, more commercial real estate than we do. But when we roll their existing book into our commercial real estate book, it really doesn't change very much as a percentage of our overall loan book. We have been, as I mentioned, closely monitoring the amount of new multifamily commercial real estate. We put it in our own books. We've been doing that for some time, and that will continue. But just if you're curious, we believe that the combination of the 2 companies will still have commercial real estate well below the OCC guidance of 300%. We think we'll be under 210% with the combination. And all of that is really because Bank Mutual's loan portfolio is less than 1/10 or so of ours.

Okay, that's great color. And one more for me, if I could. Just looking at the second quarter margin, clearly it was impacted by some borrowings that were taken on during the quarter. And looking at the ongoing trend here, just given the full impact of the borrowings in the third quarter, can we actually see that margin continuing to move down a little bit on a linked-quarter basis? Just trying to get a gauge of kind of where it's going to be heading directionally.

As you're aware, our deposits have a very profound seasonal factor in them and the second quarter is the low point. You can see that in the loan-to-deposit trend in the earnings deck. It's a repeating factor for the last several years. So we take on incremental borrowings or network deposits in Q2 to fund some of that outflow. And we have seen for the last several years persistent inflows over the back half of the year. So we expect to see that trend repeat itself, and we expect to see those borrowings come down and the margin expand. Since we borrow at the margin in the second quarter and since there was an additional Fed hike in the second quarter, that cost us a little bit of margin in June. We think that will moderate, and we expect to continue to see the net interest margin expand over the third and fourth quarter.

Our next question comes from Scott Siefers of Sandler O'Neill.

First, congrats on the deal. I think probably it took a while, though it looks like you got one. So congratulations. A couple of questions. So first one, on a stand-alone basis, I just want to follow up on the previous margin question. So is the way -- probably the way to think about it maybe is that this quarter is then just kind of seasonally artificially depressed. Can we get -- I'm just trying to figure out order of magnitude of expansion. So now that we've sort of repriced the liabilities and have a heftier borrowing base that it will come down. Does that sort of turbo charge the sequential improvement? Can we expect something similar to or greater than what we saw in, say, the first quarter in terms of margin expansion?

Well, I think if you compare year-over-year, clearly the year-over-year third quarter to third quarter will be a very nice comparison just given our third quarter last year was depressed. But yes, we expect to see the margin continue to move upward on a fairly consistent basis. Scott, one thing I would ask you to reflect upon is we do have, and we talked about it before, a 6- to 8-week lag in the repricing of the LIBOR-based loans because they are mostly tagged to the first of the month. And since the Fed tends to raise rates in the middle of the month, we don't see the asset repricing in the same month as the Fed effect. But the liabilities are indexed to Fed funds and they tend to hit us right away. And so in that last 2 weeks, we see the hit, and then in the last 6 to 8 weeks, we see the lift. And so I think we'll see that lift come through in the third quarter and carry into the fourth quarter.

Okay, perfect. That's good color. I appreciate it. And then just moving to the transaction, I also kind of want to follow up on one of the original questions. So how long are you anticipating then to have between when the merger closes and when you begin the integration? I guess that's what caught me a little off guard. If we close in the first quarter, why would we only begin the integration in the third quarter? I think you said begin integration in the 3Q. So I just want to make sure I'm sort of [tight] on what's going on there.

Well, let's kind of separate terms. I mean, the integration planning will start -- has started. As soon as we close, there'll be efforts around the integration and things will start happening. System conversion is something that you have to be very careful with. That probably doesn't happen until the third quarter. That's when the rubber really hits the road. Our 25% assumption could be a little bit light. We'll just have to see how quickly we get approvals and how quickly we can get conversion done.

Okay. So it would be, I guess, in planning, more an abundance of caution than anything that you see that would sort of extend the time between close and conversion then.

No. There's nothing special here that gives me pause that it's going to take us longer than somebody else. We're not big overpromisers around here.

Yes, that makes sense. Okay, I appreciate that. And then just one final question. Chris, just on the tax benefits in the second quarter here, what was the dollar amount from that benefit?

The dollar amount, we previously disclosed that. We thought the benefits from the state tax would be a couple of million bucks, and it ended up being a little bit more than that.

Okay. $1 million more? $2 million more?

$1 million and change more, yes.

(inaudible) $2 million.

Okay, perfect. All right. $2 million more. Okay, perfect. Again, congrats on the transaction.

Our next question comes from Ken Zerbe of Morgan Stanley.

I guess first question I just have for you, just in terms of Slide 11 on the deal, I just want to make sure I understand. Why is it dilutive to earnings in 2018 excluding all the onetime merger costs, if I read the footnotes correctly?

We're going to be absorbing and carrying their operating costs for the better part of the first 3 quarters of the year on a separate basis. And they have a lower profitability level/higher efficiency ratio than we do. And the sooner we can get it closed and the sooner we can get it converted, the sooner we can get rid of the duplicative costs.

Got it, okay. I think the lower earnings, lower profitability answers the question there, okay. From a loan growth perspective, right, like how does this ultimately change your ability to grow loans? Because I'm thinking specifically of their big CRE portfolio. I totally get that it's a smaller percentage when -- on a combined basis. But are you going to be sort of facing the headwind of commercial real estate runoff from their existing portfolio? I mean, how does that change your longer-term loan growth goals?

It doesn't. I mean, we assume that the type of growth you've seen from us as a percentage of the overall portfolio will continue, even on the slightly larger portfolio we'll have by absorbing Bank Mutual. It would be fair to say that we're highly focused upon adding new customers and gaining the benefits of efficiently serving them as well as, even though we haven't modeled it into these numbers, we believe that our bigger product set, the fact that we will be entering effectively new markets that we're not in that Bank Mutual is in and that the Bank Mutual customers will have a much bigger network given Associated Banc's much bigger spread of branches, is going to all be beneficial.

Got you, okay. And then just last question for you. In terms of the 45% costs saves, how much of that relates to things like regulatory or any tech spending that they were doing versus branch consolidation and headcount reduction on the branch side?

It's the latter. It's not really the former.

Got you. Okay, mostly on the branches, okay.

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

Phil, on the deal, quick question, is it -- was the deal competitively bid? Or is this kind of a one-off transaction? And then maybe more importantly, is this the sign of kind of more opportunities presenting themselves for Associated to consolidate in the Midwest in the coming years?

Yes. So the first question, I really can't get into those types of details. I mean, you'll see all that stuff when the proxy is filed as to what the process was. And we talked a lot. Many banks have talked about the fact that consolidation is inevitable across the entire industry, including in the Midwest. There's an awful lot of banks in Wisconsin and Illinois and other parts of the Midwest. So yes, I think there's going to be attractive opportunities for us and others to consolidate.

And given the relative size between the 2 banks, I presume this won't preclude you from looking at other opportunities over the next 6 to 12 months. And if so, would there be markets outside of Wisconsin that would be kind of on the short list?

Yes. We've always talked about doing the type of transactions that this represents. Lower risk, efficiency driven, which usually means in your footprint, right? So we think there's more of those types of opportunities out there. As far as how long will this take, we'll be very focused on making sure this transaction goes well, it's integrated well. It's the first one we've done for a long time, and we're very focused on doing it exactly right for all of our stakeholders. So who's to say how long that's going to take? We're certainly in the process now where we'll be working on getting the transaction closed, going through the regulatory approval process. We've assumed we'll get the closing in the first quarter. We'll see what happens after that.

That's great color. And then, Chris, was there an MSR adjustment in the quarter? And if so, could you quantify it for us?

No material adjustment.

Our next question comes from Dave Rochester of Deutsche Bank.

It sounds like there's a lot that you like in Bank Mutual. I was just wondering if there's any segment in the loan book on the funding side that you plan on running off shortly after the close? Is there anything in there that you don't want?

No. It's -- as we -- we've known Bank Mutual for a long time, of course. We all live together here in the state of Wisconsin. But when we had the chance to really look at it, their way of doing business, the way they think about credit, the portfolio they've built is, in many ways, very similar to ours. They don't have the same spread of products. They're not in some of the business we're in, but they're not in any businesses that we don't like or that we're not in.

Okay, great. And just switching to a comment you made earlier on resuming resi loan sales, I just want to make sure I heard that correctly and that you're effectively done with portfolio-ing the 30 years at this point.

That is correct. That's why I wanted to make sure everybody heard that. Thanks for asking the question. We've filled our bucket, and we went back to our normal method of selling long-dated mortgages starting in June.

Perfect. And I know this is tough to predict. It all depends on activity levels in general. But how should we expect that line to trend going forward? Where are gain-on-sale spreads these days? Just any additional color there. I think historically, you've kind of been in that $5 million to $10 million range. Any kind of expectations there would be great.

Yes. I mean, just as far as activity, we've moved into a purchase and new construction market more than a refi market. And the backlog for the last few quarters has been hanging right around just under $1 billion. So volumes are pretty decent. What do you think about the gain on sale? Do you have any color on that, Chris?

Yes. Obviously, we saw a fair amount of pressure on that during the quarter. But we'll -- remains to see how the third and fourth quarter play out, and it certainly will be subject to any Fed action that might or might not occur. But at this point in time, certainly within that range that you outlined, which is a nice light range, feels reasonable.

Okay, great. And then I noticed in the securities buckets, there's a little movement that looked like maybe between available for sale and held to maturity. Any big purchases, sales, anything moving from one bucket to the other there?

No. We took a look through our portfolio and identified securities that we're really holding for CRA purposes and decided that in the long run, those probably should be held in the held-to-maturity bucket, and that's most of the movement you see.

Perfect. And then just one last one, if I could. On the borrowings you mentioned earlier, it looks like you grew longer-dated borrowings by about $500 million in the quarter. Any details on that, the rate on those and maybe the timing in the quarter?

Sure. Those are largely floating rate. The Federal Home Loan Bank of Chicago has a program where you borrow basically on a 5-year term but can repay after 6 months. So they're 5-year long date but repayable in 6 months. And they're all indexed to floating-rate structures, right around Fed effective plus or minus a few basis points, driven off the Federal Home Loan Bank discount rates.

Our next question comes from Terry McEvoy of Stephens.

First question on the quarter, the general middle market C&I loan growth was a little bit soft in the second quarter based on what we've seen from some other banks so far. Any commentary about activity in your markets in the second quarter and how you're feeling about the second half of the year?

Yes. So we're still reiterating our guidance that we've had all year of mid- to high single-digit growth across the book. I would agree that general commercial-type lending is not terribly robust. We're hopeful that will pick up, but time will tell. There are some decent backlogs in our commercial business, particularly in the Twin Cities and around Chicago at the moment. So hopefully, some of that will manifest itself.

And then just to go back to a topic discussed earlier, what is the reason again why the deal is expected to close 2 or 3 quarters out that you can't go through the systems conversion on day 1 or shortly after? Is there something with a contract and breakup clauses that make it just prohibitive from a financial perspective? Or is it just being conservative on just taking your time and getting the transaction done correctly?

It's the latter. We are going to certainly move expeditiously. We don't have any big impediments in the way. We haven't done a transaction in a while. I'm not going to sit here and overpromise cost savings in 2018.

Okay. And then the just last -- your last -- earlier, you talked about deploying excess capital, and you said that for a while. And as I look at just Slide 11, it looks like pro forma, the common equity Tier 1 goes up a little bit on a pro forma basis. Will this deal be accretive to your return on tangible common equity in 2019?

Yes.

Our next question comes from Emlen Harmon of JMP Securities.

Just looking at the expenses, looked maybe a little elevated this quarter. Anything in there that's maybe not necessarily a onetime but perhaps unusual? Like I noticed, for example, the professional expenses look like they're up a bit, potentially with the acquisition forthcoming. I don't know if there's anything in there.

That wasn't acquisition driven. The mortgage activity has been high. So that drives a little bit of expenses. But we've been running at $175 million, give or take, a quarter for quarter after quarter after quarter. We're at $176 million. That's not elevated. One thing we can be proud of is managing our expenses around here. I don't mean to be defensive, but that's not elevated.

Fair enough. And then reverting back to M&A, a different bank, but have seen one of your peers in markets, also a larger bank recently. Are you seeing any opportunities from that, either on kind of individual borrower basis or potentially some teams or anything that could help you guys out on the loan growth front?

You're saying disruption in the marketplace that's creating opportunities for us?

Correct.

To be perfectly honest, I'm trying to scratch my head as to what bank you're talking about.

From FirstMerit, Huntington.

FirstMerit has essentially no market share in Wisconsin. I mean, not -- don't mean to be blunt, but that's just the fact.

Okay. So nothing in Chicago.

Our next question comes from Ebrahim Poonawala of Bank of America Merrill Lynch.

All my questions are asked and answered. But just one follow-up in case I missed it. The seasonal sort of drop that we've seen in the noninterest bank deposits in the second quarter, so do we expect a similar magnitude of rebound in 3Q as we've seen in last few years?

Yes, we have no reason to think that this seasonal pattern that we've seen for the last 2, 3 years won't repeat itself.

And since I have you, any sort of update on like deposit betas and what you're seeing in terms of retail deposit pricing pressures within the market?

Yes. Actually, Ebrahim, we included a slide this time in the back of the earnings deck, and we encourage you to take a look at it, on network transaction deposits, Slide 12 in the earnings materials. And I think we tried to highlight there and bifurcate for you essentially the impact on the cost of the network transaction deposits as separate from the retail money market deposits. And as you can see, our savings and retail money market deposits, the gray and orange lines, have been flat as a board. And the lift you see in overall money market is really only driven by the network deposits. So we think that's consistent with the story we've been telling you. We also highlighted for you on the left-hand side the network transaction deposits as a percentage of total deposit base over the last several years, and it's been in that 12% to 15% range and will likely stay in that range.

Got it. So I guess you've seen no real push even for the orange line going forward in the back half of the year?

Not to date.

Our next question comes from Michael Young of SunTrust.

I just wanted to ask 2 quick questions on the fee income side. First, maybe just with all the back and forth on health care in Washington, have you seen that have any impact, either positively or negatively, within the customer base and demand thus far this year, and maybe any outlook to the second half the year?

No. I can't say that we can speak directly to any change in customer demand. Most of our customers are employers. Employment trends have been reasonably well and costs in general have been rising. That having been said, we do have a seasonal booking to our business, which is heavy in the first and second quarter. So we would remind you that we would expect those numbers to both step down in the insurance commission lines in the third and fourth quarter.

Okay, great. And then just on the capital market side as well, I know a piece of that is kind of the smaller multifamily originations. Have you seen any change in product availability to syndicate or demand from those that are buying that paper?

It's not a matter of bank demand. There is actually -- transactions are slowing. You're starting to see developers sell properties. We are pretty late cycle in real estate. So the amount of transactions are coming down a bit. On top of that, as we've talked about, we are monitoring closely our own multifamily exposure. So that's probably the biggest impact on that line.

Our next question comes from Nathan Race of Piper Jaffray.

Just one question for me. Are you guys baking in any growth or attrition within Bank Mutual's deposit base or loan portfolio into your 2019 accretion guidance?

Yes. We have assumed there would be runoff in 2018 and that we would sort of see that run off on the order of magnitude of about 10%. And then we look to grow deposits thereafter, into 2019 and beyond.

That's on deposits. We're not assuming anything on loans. Static on loans. We've assumed 10%. Hopefully, it won't be that but that's what we modeled.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to Mr. Philip Flynn for closing remarks.

Okay. Well, thanks, everybody, for joining us. We'll keep you informed next quarter on how we're doing in the process. And we remain on track towards this year of growing revenues, improving the margin, improving our efficiencies, expanding the bottom line. We look forward to talking to you again in October. If you have any questions in the meantime, please give us a call, and thanks for your interest in Associated.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.