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Executives

Philip Flynn - President & CEO

Chris Niles - CFO

Scott Hickey - Chief Credit Officer

Analysts

Dave Rochester - Deutsche Bank

Ebrahim Poonawalla Bank - America Merrill Lynch

Scott Siefers - Sandler O'Neill

Emlen Harmon - Jefferies

Jon Arfstrom - RBC Capital Markets

Chris McGratty - KBW

Terry McEvoy - Sterne Agee

Steve Geyen - D.A. Davidson

Associated Banc-Corp, Inc (ASBC) Q2 2014 Earnings Conference Call July 17, 2014 5:00 PM ET

Operator

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 associatedbank.com/investors. As a reminder, this conference call is being recorded.

During the course of the discussion today, Associated’s 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’s website in the Risk Factors section of Associated’s most recent Forms 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 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.

Philip Flynn

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 our the second quarter are 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. In an addition we purchased a participation in our existing customer credit card portfolio on June 30th.

We grew net interest income $4 million or 2% from the first quarter despite net interest margin compression of four 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 1st. And our Tier 1 common equity ratio remained 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 a 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 has 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 outstanding 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. In addition the mix has shifted to 70% in new construction from 30% earlier at 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 sales to the GSEs compared to 204 million in the first quarter.

The gain on sale of mortgage loan sold dropped to 1.9% compared to 2.1% last quarter. Home equities and installment loans continue to decline although the pace of pay-downs and pay-offs have slowed.

Turning to slide 4, in addition to increase 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 will share some of the details around our recent credit card receivables purchase. We have 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 U.S. Bank. On June 30th, 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 and the assets overtime. 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 to 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.

We 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 was down 8 basis points which is inline 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 cost lower, period end FHLB and other short term fundings increased by over a 1 billion from the first quarter as we kept interest bearing deposit costs below 20 basis points.

In addition we lowered other borrowing costs at 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 and only 16 basis points.

Non-interest income is highlighted on slide 7, total non-interest income for the quarter was 72 million down a 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 a million from the first quarter and is down 40 million on a year-over-year basis. Last year’s second quarter mortgage banking income of 90 million was a record for us.

Core fee based income increased 3 million from the first quarter as all categories were up. Those were particularly strong quarter for insurance and service charged revenue with each increase in a 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 a 168 million were flat to the first quarter. Personal expense of 98 million was flat to last quarter was down 2 million from last year. FTEs continue to decline, we’re now at our lowest levels 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 continue 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 charges off 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 as total loans continue to improve to a 105 basis points from a 108 basis points at the end of the first quarter.

Our total allowance for loan losses equals a 159 basis points on total loans and covers a 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 continue to remain strong with the 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’ll ensure that our dividend stays inline with earnings growth. And we’ll 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 have updated our annual average loan growth target to 8%. We expect mid-single digit average deposit growth to 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 inline 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.

And with that we will open it up to your questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Thank you. Our first question comes from the line of Dave Rochester with Deutsche Bank. Please proceed with your question.

Dave Rochester - Deutsche Bank

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 4Q at this point?

Philip Flynn

Well our pattern as you know has been to over these last quarters have been to buyback 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.

Dave Rochester - Deutsche Bank

And regarding your guidance on the non-interest income. I know you have guided a 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 is anything one time in there that we can strip out?

Chris Niles

There were some onetime charges related to some customer reimbursements that we reviewed and evaluated and paid out, those are adjustments there. Those were $10 million [ph] and we have the (multiple speakers).

Dave Rochester - Deutsche Bank

And with the strong loan growth you guys 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 a 100%?

Philip Flynn

Well we would like that to remain below a 100% so we will continue to focus on growing core deposits. The goal here is to keep it close to a 100 --

Chris Niles

It's somewhat of a seasonal pattern in deposits, and therefore 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 deposits growth in the second half.

Dave Rochester - Deutsche Bank

Just one last one Chris, you guys had bought some securities this quarter. I was just wondering what you’re buying in the yields on those if you have those details?

Chris Niles

We’re buying very much inline with the general mix and I don’t have a specific detail but if you look at the interest income tables you will see that the relative yield in the entire investment portfolio really did do much at all. So essentially it's very much inline with the mix and the yields of what we have had already.

Dave Rochester - Deutsche Bank

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

Philip Flynn

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

Operator

Thank you. Our next question comes from the line of Ebrahim Poonawalla with Bank of America Merrill Lynch. Please proceed with your question.

Ebrahim Poonawalla Bank - America Merrill Lynch

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 sort of similar compression when you say few bps about similar to 2Q for the back half of the year and as a follow-up to that in terms of if you can sort of talk about what the new origination yields are on the commercial loans in the second quarter.

Philip Flynn

Sure. So on the NIM, I think 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 overtime. So one of the reasons why we plan out that NIM compressed 8 basis points from the same quarter last year. I think it's a reasonable way of thinking about this. It's very difficult to say whether it's going to go down 2 or 3 or 4 at any given quarter but it's been generally trending down at a couple or so per quarter for quite a long time now. And Chris do you know what the yields are?

Chris Niles

Yeah points throughout on the 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 correlated to that is I would also highlight for you that since more than 80% of our commercial loans are reset or repriced or mature within a one year period. Essentially our bulk of our book has repriced or reset already and from last year and at 332 gross yields on the commercial business lending book is a reasonable approximation for the blended average of what we do on a regular basis today.

Ebrahim Poonawalla Bank - America Merrill Lynch

And separately what is the size of your SNC portfolio at the end of second quarter and how much did SNC contribute to 2Qs loan growth?

Scott Hickey

So the SNC book that went through the shared national exam was 3.6 billion.

Philip Flynn

And what was the second part of the question?

Ebrahim Poonawalla Bank - America Merrill Lynch

And how much did that grow in the second quarter than in 1Q?

Philip Flynn

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 mix, yes. So that’s the bulk of all of our SNC growth over this last couple of years has been in those two categories.

Ebrahim Poonawalla Bank - America Merrill Lynch

Understood. And if I may one last question, in terms of the guidance on deposit growth I guess we took it down a little bit. Is that just because 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?

Philip Flynn

It hasn’t really changed. I mean we did take in new account a little less growth this quarter in tempering our expectation. We’re also working very hard to optimize a liability cost and looking for other ways to fund, to try to maintain the net interest margin. Clearly if we’re willing to pay up for deposits we can grow deposits. But we’re trying to minimize our cost of liabilities in this low rate environment.

Operator

Thank you. Our next question comes from the line of Scott Siefers of Sandler O'Neill. Please proceed with your question.

Scott Siefers - Sandler O'Neill

Can you just -- I just have a couple of questions on the credit card portfolio acquisition. I guess what was the rationale in just purchasing the roughly half participation as opposed to doing the entire thing just as you look at the tactic itself?

Philip Flynn

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

Scott Siefers - Sandler O'Neill

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

Philip Flynn

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

Scott Siefers - Sandler O'Neill

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 gold of where you might like to see that say several years.

Chris Niles

Sure. There is about a 160,000 cardholders, we have a roughly a 1 million consumer customers so arguably it would 1 in 6. Within that 160,000 cards balances within that we would note is 80% consumer balances and 20% is commercial balances. So our commercial customers are also active in the program.

Philip Flynn

Yes so we have done a good job of growing this book. We have been incented through fees from Elan to do that. We’re 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 -- to get cards in the hands of our customers within the credit parameters that we have had. This has been a high quality portfolio, we intent on keeping it that way.

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

Scott Siefers - Sandler O'Neill

I understand I appreciate the color nonetheless. And Scott maybe this is best for you, do you mind -- I think I might have missed it, a couple of numbers that you gave this -- I think you said 3.6 billion total SNC portfolio, what was the $288 million number that you guys quoted in your prep comments?

Scott Hickey

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.

Chris Niles

Then if I could qualify that statement the 3.6 I gave you was really our commitments if you will, outstandings are closer to about 2.6.

Philip Flynn

And probably about almost half of that now is our oil and gas and power and utilities book.

Scott Hickey

And then mortgage warehouse sometimes.

Philip Flynn

We have some mortgage warehouses, primarily those two asset class.

Scott Siefers - Sandler O'Neill

And I guess just given that the downgrades 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 kind of the core in footprint kind of book?

Philip Flynn

Sure. So generally speaking these are relatively young portfolios, we have been in the business two or three years. So they really haven't matured. So these are probably the first couple of downgrades we have seen in those books. So when you look at them relative to the portfolios we have had on the books for quite a longer period of time, up until now they have performed much better. They continue to perform much better. These are only really three credits that out of that whole book so it's a relatively small number of credits on a really small base of potential problem loans.

Operator

Thank you. Our next question comes from the line of Emlen Harmon with Jefferies. Please proceed with your question.

Emlen Harmon - Jefferies

We have got two quarters in a row now of kind of C&I line improvements. Could you just give me a sense kind of what’s the tone from your commercial borrowers? Are you starting to see them make capital investment today and just kind of what’s the business outlook you’re hearing from them?

Chris Niles

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 in the second quarter. We had a conversation in the first quarter about last year we saw a tick up in the first quarter and it went down this time and continue to go up. Now some of that is the mortgage warehouse but we get the impression that there is some more inventory 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.

Emlen Harmon - Jefferies

And then you guys have given us the expense guidance for the rest of the year. Could you help us think about just kind of like trends within the individual buckets, so noticeably this quarter the FTEs are down again. So just trying to get a sense of how -- the salaries and benefits versus occupancy, versus some of the other lines just the way those expense lines are trending.

Philip Flynn

Generally we’re bending down on all of our expenses other than technology spend. We’re spending more money on technology and less money generally speaking on other stuff. We have had a significant decline in total FTEs. There has been a reasonable amount of severance noise in our quarterly numbers now for a while. Occupancy probably 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?

Chris Niles

Losses other than loans and foreclosure expenses have continued to trend slightly lower and although we saw that pick 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 of quarters so we expect those to trend lower. And of course I will 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 of packers in our advertising push and there is a seasonal effect to our advertising.

Emlen Harmon - Jefferies

And 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?

Philip Flynn

They are other expenses, 0.5 million is in there.

Operator

Thank you. Our next question comes from the line of Jon Arfstrom with RBC Capital Markets. Please proceed with your question.

Jon Arfstrom - RBC Capital Markets

As long as you brought up the packers, Phil best of luck in your upcoming vote, your packer board vote.

Philip Flynn

Thank you. I don’t want to be the first person not to have been voted in.

Jon Arfstrom - RBC Capital Markets

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?

Scott Hickey

Those three credits were probably 75% of the increase so there would have been a modest increase without those three credits but very modest.

Jon Arfstrom - RBC Capital Markets

And that is shared national credit related or core book related?

Scott Hickey

It came out as shared national.

Philip Flynn

The rest of it was just other odds and ends here.

Scott Hickey

Let’s just keep in mind that whether you look at potential problem loans or non-accruals or charge offs we’re at such low levels that as we have been saying I think for a couple of quarters, a few balances on it, few loans look like they make a big difference but we’re talking about very small numbers.

We do try to be transparent so we’re telling you what we have got.

Jon Arfstrom - RBC Capital Markets

Chris, just a follow-up on the non-interest bearing. I see this -- the kind of 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, yes.

Chris Niles

On the checking balances we tend to see the inflows at year end and kind of see inflows in our book and the first quarter and the third quarter and so the second quarter tends to be a period of relative outflows and there is a couple of reasons for that. The third quarter public funds funding because many entities are in 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 I guess pops there and then at year end we see pop because of a close corporate window dressing but corporate balances and companies like to make sure their cash is liquid usually at year end.

Jon Arfstrom - RBC Capital Markets

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?

Philip Flynn

Well remember when we talk about oil and gas and power and unities footprint for those businesses is nation-wide. There aren’t a whole lot of oil and gas wells in the State of Wisconsin. So yeah, we've had significant growth there. I mean if you look at slide 3.

Jon Arfstrom - RBC Capital Markets

Just trying to gauge your assumption of the footprint.

Philip Flynn

Yes. The hybrid ARM business continues to be very strong. The mortgage warehouse you know we expect will continue to be strong into this quarter and then probably abate. Our general commercial business at a $100 million a growth, we’re happy with that. Commercial real estate was a little less than what we have seen but you know I think as we have talked about before that business is beginning to mature and it 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. So we’re happy with the balance growth we’re getting across the whole thing. Notably our home equity and installment book had been paying off to the tune of a 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 will get more net growth there.

Scott Hickey

I will just add, our mortgage warehouse book although that is a national business, a fair amount of that is in our footprint.

Jon Arfstrom - RBC Capital Markets

Okay, 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?

Philip Flynn

There is a decent flow of viable ideas. We’re thinking those well enough, we are conservative, conscientious and diligent about what we do. So 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.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Chris McGratty with KBW. Please proceed with your question.

Chris McGratty - KBW

Chris on your comment on the margin, how should we be thinking about as we get into next year, the kind of 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 kind of in that transition period? Will there be a lag presumably when rates begin to move? Any color would be great.

Chris Niles

So as we said before -- the bulk of our loan portfolio is in commercial assets and the bulk of the commercial asset are tied to LIBOR and in fact the most prominent index that we are tied to is one month LIBOR. So we will be marginally benefitting when the one month LIBOR rate starts to move which will be relatively early in whatever tightening cycle occurs. Following back up on the comment I made earlier you can see that the average yield has come down from last year and since the majority of the 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, 2-3 years ago is all burned off. The amount of adjustment there is pretty deminimus at this point in time. And so we think we’re relatively prime 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 that we’re 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 is a risk that some of that starts to move pretty quickly too. So there is going to be a balance there. So I believe we’re modestly asset sensitive.

Chris McGratty - KBW

Just a follow-up on M&A comments. So in terms of there has been a ton of activity in your market, there has been a couple of transactions in Chicago. Is the lack of deals more of 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?

Scott Hickey

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 have seen that in a number of transactions that are taking a long time to get to fruition. There is always price issues, those seem to as compared to couple of years ago. It seems like the bid ask is tighter than it used to be but depending on the view of the seller is as to the value of their franchise that can always come into play of course. So I would say that to me the overall outlook for anything of any size I think the regulatory environment is pretty challenging.

Operator

Thank you. Our next question comes from the line of Terry McEvoy with Sterne Agee. Please proceed with your question.

Terry McEvoy - Sterne Agee

A question for Chris, I know you’re not going to talk about 2015 expenses but you’ve talked a lot about what you’re doing with the branches in terms of the number and the size and we have 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 it's being offset by regulatory costs et cetera?

Chris Niles

I think they are sort of two different areas. On the occupancy and the branches I think we’re 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 consolidation as we did 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 will see occupancy as Phil mentioned earlier, spend lower. I think you will start to see other expense non-interest items bend lower and we have had some noise in sort of a personnel level. I think you will start to see that bending 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 will see that in the run-rates as we move through the rest of the year.

Terry McEvoy - Sterne Agee

And just one other question, the SNC portfolio how much would you classify as leverage loans and leverage loans -- was that behind the small increase in the potential problem loans?

Scott Hickey

The leverage loans were not part of the potential problem loan in the SNC. Well again 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 meaningful part of the book.

Operator

Thank you. Our next question comes from the line of David George with Baird. Please proceed with your question.

Unidentified Analyst

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?

Scott Hickey

No, we were not the agent on any of those and I would so no it doesn’t necessarily reduce our appetite. What the learning is, is as you know every year there is a different issue with the regulators on what they want to tell the banks about. So we have 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.

Unidentified Analyst

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?

Scott Hickey

Yes. I certainly can’t speak to others but we do not play in that market at all. We’re kind of a 3 and 4 times lender, so the lofty levels that the OCC references aren’t areas we play in at all.

Operator

Thank you. Our next question comes from the line of Steve Geyen with D.A. Davidson. Please proceed with your question.

Steve Geyen - D.A. Davidson

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?

Philip Flynn

We have had a 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 has worked out well so far for us and our clients.

Steve Geyen - D.A. Davidson

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.

Philip Flynn

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

Operator

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.

Philip Flynn

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 have higher core fees, we had stable core expenses. And we remain optimistic and committed to building shareholder value to our long term strategy for growth here at Associated. So, thanks again for your interest. And if you’ve any questions, as always give us a call. Thank you.

Operator

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.

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Source: Associated Banc-Corp's (ASBC) CEO Philip Flynn on Q2 2014 Results - Earnings Call Transcript

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