Philip Flynn - President and CEO Chris Niles - CFO John Hankerd - Chief Credit Officer.

Dave Rochester - Deutsche Bank Michael Young - SunTrust Scott Siefers - Sandler O’Neill Ebrahim Poonawala - Bank of America Merrill Lynch Terry McEvoy - Stephens Nathan Race - Piper Jaffray.

Good afternoon, everyone and welcome to Associated Banc-Corp’s Third Quarter 2017 Earnings Conference Call. My name is Darren and I will be your operator today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session at the end of this conference.

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

As outlined on Slide 2, during the course of the discussion today, management may make statements that constitute projections, expectations, beliefs or similar forward-looking statements. Associated’s actual results could differ materially from the results anticipated or projected in any such forward-looking statements.

Additional detailed information concerning the important factors that could cause Associated’s actual results to differ materially from the information discussed today is readily available on the SEC website in the risk factors section of Associated’s most recent Form 10-K and any subsequent SEC filings.

These factors are incorporated herein by reference. For a reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please refer to 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 and welcome to our third quarter earnings call. Joining me today are Chris Niles, our Chief Financial Officer; and John Hankerd, our Chief Credit Officer. Turning to Slide 3, this quarter’s results were driven by growing interest income, improving credit dynamics and efficiency gain.

We recorded our highest quarterly earnings and return on capital since 2008. Loan details for the third quarter are highlighted on Slide 4. Highlighted in green, average residential mortgage loans increased 5% from the second quarter and 1.1 billion from the prior year.

Third quarter's growth was primarily driven by growth in 5/1 and 7/1 adjustable rate mortgages with a lesser contribution from on balance sheet, mortgage retention strategy that concluded in June. We expect residential mortgages to continue to grow at a reasonable pace during the fourth quarter.

Residential mortgages now represent 35% of our average total loan outstanding. Highlighted in blue, we saw incremental C&I growth from Q2 within most of our specialized verticals.

While C&I commitments have increased 2% from the prior quarter and 7% from the prior year, we saw generally reduced line utilization with total C&I utilization falling to 49% in Q3 from 52% last year. Notably mortgage warehouse utilization which typically rises during the summer was much lower than expected.

As a result, our C&I portfolio was flat but seemingly in line with industry reported C&I trends. However, we're pleased with the growth we've seen in our REIT's outstanding. Our CRE trends are presented in Orange.

We've been moderating our growth within our commercial real estate portfolio as we’re mindful of the approximately 1 billion in commercial real estate exposure will be assuming when the Bank Mutual acquisition closes. Bank mutual exposure is highly concentrated in the upper Midwest and specifically was constant.

We have relationships with many of Bank Mutual's existing customers, so we're being deliberate about the incremental CRE exposure we're assuming. We expect Q4 commercial real estate outstanding to be muted as we position for the integration of the Bank Mutual portfolio in 2018.

Nonetheless, we remain on track to deliver at least mid-single digit annual average growth in line with our 2017 loan guidance. On Slide 5, we highlight our quarterly deposit trends. We believe an important measure of the successful bank is its ability to gather, retain and grow core deposits.

Per recently released FDIC data, we're pleased to report that we've grown our deposit market share across our footprint. Average deposits increased 918 million or 4% from the second quarter and 1 billion or 5% from the prior year.

Over the course of the year, we've increased our net customer deposits and funding by a 1.5 billion which translates to an 8% annual growth rate in customer deposit activity while reducing our more rate sensitive network transaction deposits by 1.1 billion. As a reminder, we have a pronounced seasonal deposit pattern.

We see outflows during the first half of each year with significant in flows during the back half of the year. Many municipalities received funding for their new fiscal year during Q3, while we tend to see private sector balances increase in Q4.

During Q3, we strategically shifted our funding mix away from network transaction deposits and into public fund time deposits. We manage the mix of our funding and borrowings with these seasonal dynamics in mind and continuously see the most cost effective way to fund our growth.

Turning to Slide 6, net interest income of 190 million was up 6 million from the second quarter and 12 million from a year ago. Net interest margin was 2.84% in the third quarter, up 1 basis point from the second quarter and up 7 basis points from the prior year.

Over the last year, we funded nearly 20% of our earnings assets with non-interest bearing demand deposit. As the Fed has increased rates, the benefit of these non-interest bearing demand deposits is expanded by 8 basis points. This benefit which is known as the net free funds benefit was a key contributor to our margin expansion.

Total commercial loan yields were up 24 basis points quarter-over-quarter and 64 basis points from the year ago quarter, reflecting the asset sensitive profile of our LIBOR-based commercial portfolio.

Our cost of interest-bearing deposits increased 31 basis points from the prior year and reflects the deposit data of approximately 0.4, primarily driven by the re-pricing dynamics of our network transaction deposits. We continue to see modest competitive pressure in deposit pricing within our markets.

We have begun to see customers shift balances to time deposit for locking in higher rates. We have also seen a modest amount of pricing pressure in our money market accounts. We continue to monitor the competitive situation we believe were appropriately priced to continue to grow customer deposits in our core markets.

We continue to expect in improving year-over-year net interest margin trend. Turning to Slide 7, third quarter non-interest income of 86 million was up 3 million from the second quarter, but down 9 million from the prior year. As expected, mortgage banking income decreased from the prior year, reflecting last year's portfolio loan sales.

Mortgage banking income increased 2 million from the second quarter as we resumed our historic practice of originating loans for sale in the secondary market. As a reminder on a full year basis, we guided that non-interest income will be down about 20 million prior year with some of that shortfall offset by other revenue line items.

Bank owned life insurance income was up 3 million from prior and year ago quarters driven by increased policy payouts. Over the last five years, our annual after tax BOLI income as a range between 10 and 16 million which is reflected in our income statement.

Since BOLI income is tax exempt, our effective BOLI income during the same period was equivalent of 16 million to 27 million in taxable income. At quarter end, our BOLI and COLI investment totaled nearly 590 million.

We haven’t bought any new BOLI policies since 2008, so we expect to see increasing policy payouts based on the increasing edge of our insurance overtime. As a result, we expect BOLI income will continue to be a recurring revenue stream over the coming years, but with some volatility of course as a result of the timing of policy payouts.

Turning to Slide 8, non-interest expense of $177 million was up a $1 million from the prior quarter and $2 million from the year ago quarter. We continue to invest in solutions that streamline operations, as evidenced by year-over-year improvement in our efficiency ratio.

Business development and advertising increased to 1 million from the prior quarter and 3 million from the prior year, on expanded fall advertising campaigns related to our partnership with the Green Bay Packers and our latest J.D. Power recognition. Associated's contact center operations were recognized for the second consecutive year by J.D.

Power for providing an outstanding live phone channel customer service experience. Occupancy expense decreased 1 million from the prior quarter and 3 million from the prior year driven by our ongoing internal consolidation efforts.

We remain on track to deliver less than 1% expense growth year-over-year including the impact of the recent Whitnell acquisition. Our year-to-date effective tax rate was 28% compared to 30% in the comparable period last year reflecting a change in accounting standards related to stock compensation and a recent favorable tax court ruling.

We expect the effective tax rates to be in the low 30s in the fourth quarter contributing to a full year effective tax rate in the high 20s. On Slide 9, we detailed our quarterly credit quality trends which include the results of the Q3 SNC examination.

Credit quality metrics improved in Q3 with net charge-offs, non-accrual loans, potential problem loans, all improving from the prior quarter and prior year. The total allowance for loan losses decreased to 1.32% of total loans from the second quarter.

Net charge-offs of 11 million for Q3 were largely driven by charge-offs in the oil and gas portfolio, otherwise net charge-offs continue to remain remarkably benign. Provision expense decreased to 5 million from 12 million in the prior quarter and 21 million from the prior year.

I'd like to provide you with a quick update on the status of the Bank Mutual acquisition and the completed acquisition of Whitnell. As you know in July, we entered into an agreement to acquire Bank Mutual.

We have filed our merger applications with our regulators and we anticipate we'll receive regulatory approvals to allow us to close the transaction in the first quarter of 2018. Bank Mutual will be holding its special shareholder meeting next week to vote on the acquisition.

We also continue our integration planning and we remain on track with the timeline we outlined during the last earnings call. We look forward to closing the transaction and welcoming Bank Mutual's customers to Associated early next year.

Turning to Slide 10, earlier this month, we completed the acquisition of Whitnell an Oak Brook, Illinois based family office services firm centered around financial planning and wealth management for affluent Mid-Western clients.

The acquisition enhances Associated's existing Chicago-land private banking presence and our ability to provide comprehensive financial services related to tax, charitable and estate planning solutions to our existing client base. Whitnell adds 28 talented professionals and adds approximately 1 billion of assets under management.

The acquisition increases both AUM and related run rate revenue by more than 10%. The transaction will not have a material impact on our 2017 earnings, but it is expected to be modestly accretive to 2018 earnings.

I'd also like to mention that following the public announcement of the Bank Mutual acquisition, we repurchased 1.6 million shares of common stock at an average price of $23.59. So with those comments, let me open up the call for questions..

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Dave Rochester of Deutsche Bank. Please proceed with your question..

I just want to start on expenses real quick. You guys done a great job obviously keeping expense growth fairly constrained this year.

I was just wondering, if you see anything on the horizon that you think will prevent you from achieving a similar level of expense control next year on an organic basis?.

On an organic basis, we would expect to manage expenses very tightly. We will be consolidating Bank Mutual on top of that. So when we get to January, we will give you an estimate..

Okay. Great. On the loan side, we're just wondering how the pipeline in C&I looks heading into 4Q. It sounds like resi pipeline looks good.

How are you expecting utilization rates to trend in C&I, any color there?.

Really hard to forecast the utilization, it’s been somewhat surprising really all year, really industry-wide, around commercial loan outstandings. I hear from our folks that our pipeline is starting to build a bit, so we will see how that goes.

Likewise, we are looking at some significant scheduled pay downs in commercial real estate, but I hear that the pipeline there is starting to grow as well. So whether or not that helped us very much in the fourth quarter is yet to be seen, but I would guess that we would be starting the new year with a decent pipeline..

Okay, great. And just switching to deposits real quick. You guys have talked about the network deposits declining. I know that’s largely driven by the seasonal inflows you guys have had and probably will have again next quarter.

Has it ultimately reduced that source of funding overtime? Or are you planning on maintaining those balances?.

We find those to be a nice steady source of ongoing funding. We’ve had longstanding relationships with many of those providers and I think we view those as a very sticky and stable source of funding for us overtime.

And particularly given that we have some volatility in our core markets, we would see that coming up and down as the ebb and flow of our core volatility occurs. That having been said, we've been rolling core customer deposits at a much faster clip. So probably, it won’t be a growing piece of the overall pie, but a steady source of funds for us.

And given our choices, we would rather fund the whole place with very small sticky retail deposits. But since we don’t have that choice, we are always looking for stable funding at the best price possible, and the network deposits fit into that mosaic..

Got it. Understood. I appreciate that. And I guess as we’re -- you've mentioned the deposit pricing market has been somewhat competitive.

I guess on the retail side, commercial side, how are you thinking about what the next rate hike means for the margin just given the dynamics you are talking about now? Are you thinking that you will have a little bit of upside potential or you’re more asset neutral at this point?.

So, we continue to be modestly asset sensitive, as we have been. So, we would benefit from the next rate hike. There is always the lag period that we’ve talked about before. As far as the competition for deposits, we are just seeing a little bit around the edges, a little bit in the money market space.

But it’s not turning into a free for all by any means in this market whether that changes its rates continue to move up, assuming they continue to move up, we will have to see..

Our next question comes from Michael Young of SunTrust. Please proceed with your question..

Hey, good afternoon. Wanted to start with maybe just capital return, share repurchase obviously was nice to see this past quarter.

But wanted to get your thoughts around kind of just magnitude and timing going forward, especially with Bank Mutual closing and some of the blocking and tackling on that? Does that pull you from the market for a time?.

We've often talked about our priorities for capital usage and buying that share is always fourth in mind out of four. We have remaining board authorization to buy back shares and if we determine that was something that made sense for us managing the overall capital position, we would do that..

Okay so no specific plans to continue that it's just opportunity?.

Yes. Mike, even if I had plans to do, I probably wouldn’t tell you on the phone right now to be perfectly honest. But, yes, we have a lot going on as you referencing your question. I mean we have the Bank Mutual transaction to close and that's obviously a big priority for us right now..

Okay, great. And then maybe just going back to the expense side obviously the occupancy expense take another leg down here of $1 million on a run rate basis.

Is that sustainable and are there other opportunities? Do you think that can continue to move lower or we kind of reaching a bottom on that trend?.

Well, I think it's important to recognize that in combination with Bank Mutual, we expect there will be a different trend we absorb the incremental branches. Obviously, there will be some immediate branch closures, which we already publically disclosed in our merger application.

So there will be a different run rate post merger and then we will probably let that digest. Let our customers adjust the sort of the incremental locations and the new opportunities. And then we will probably look to that sort of make sure that we got the right run rate toward the end of '18 into '19..

Next question comes from Scott Siefers with Sandler O’Neill. Please proceed with your question..

First something, maybe you could go through kind puts and takes on how you see overall reserving needs and credit cost? And you guys have clearly started to bring down the oil and gas reserve over the last couple of quarters, which gives you a little breathing room on overall credit cost.

What as you think about of it will be the appropriate reserve ultimately in that portfolio? And then just as you think about the dynamic in the rest of the portfolio, which is still very, very strong, how should we think about overall providing and reserving needs for the portfolio of large?.

Sure, Scott, this is Phil. So if you look at Slide 12, we have a little bit of update on oil and gas. I would still tell you that there is still a few credits to complete the work out process on, and we're holding a relatively high level of reserves against the whole book at more than 5%.

So we believe we'll reserve to take care of the remaining old credits that are quickly resolving at this point. So, yes, you're right it's likely the oil and gas allowance will come down over the next couple of quarters. We just -- we don’t see any credit stress in the rest of the book.

And if that other than oil and gas, we really had essentially no credit stress for several years at least. If you wiped out the oil and gas charge-offs we have which have been quite extraordinary, we will have almost no charge-offs on a $20 billion plus loan book. So it's been quite amazing. We all know that this isn’t normal.

And at sometime point, we will start to revert back to a normal credit posture, but we don’t see that immediately on the horizon. So, it's not unlikely that provisioning for at least the mediate future it's going to stay fairly low, but we will have a better sense of that when we give guidance in January..

And then, Phil, either you or Chris, maybe if you can talk or speak to near-term margin expectations, I get what you said about the year-over-year being higher, which looks like it should be in pretty much slam dunk down given where you were or where you would have been a year from now or a year ago I should say.

But just given perhaps the lag on re-pricing in your asset base, could we expect absent any Fed move maybe actually a little additional catch up in the margin? Or would be expected to say kind of stable with where we are here in the 3Q?.

I'll take the easy answers, so I'll let Chris answer that one. So absent any Fed action, we would expect a modest uptick.

However, I think the [fours] are projecting very confidently a December Fed action and assuming there is a difference for Fed action that would way against us for the -- and through that period in December which would flatten that out..

That would be the third year in a row for that within December. What was the second? 2nd December….

The 2nd December..

Yes, we've had this lag at the end of each year for the last couple of years. We haven't anticipated that yet, right..

Okay..

It happens in the last months of the period. It tends to flatten out the benefit of the prior rate up..

Yes, okay. That makes sense. Thank you. And then one final just a piggyback question, Phil, you had noticed that BOLI will be part of the ongoing stream but perhaps more elevated level.

Maybe just a little help on, is 6 million the right level now? Or are you suggesting hey, might bounce down to 3 but could be up 6 or more just going to be a lot more volatile? Or is this an actual steady phase that’s going to be higher?.

Yes, I think the reason why I talked about BOLI which we never talk about is, if you just look at the history, there is a recurring BOLI revenue stream. There is sort of a base level that comes along from the investment earnings.

And then, there is payouts from the debts of the insured, which are of course hard to predict, but they do happen and we have a lot of BOLI and we have a lot of insurance. And since we haven’t bought any BOLI since 2008, the insured pool is starting to get older.

So the point was just for all of the analysts who are thinking about trying to model this, it's difficult to model such a volatile revenue line, but there is a stream of revenue that’s going to be flowing to our income statements for years and years to come with volatile spikes up..

Maybe we are still kind of at or slightly above -- I don’t want to put words in your mouth, but at or slightly above.

What was going to that 3 million-ish run rate on a quarterly basis, but expect some of these volatile pops periodically?.

We took a look at the last five years and even with some volatility there is clearly a trend upwards..

Our next question comes from Ebrahim Poonawala of Bank of America Merrill Lynch. Please proceed with your question..

I just had a question in terms of mortgage loan growth. Phil, you mentioned it's up to 35% of total loan book.

Is that a target which you want to get to in terms of how big that portfolio should be? And is that a bigger sort of ALCO strategy around that? We've chosen to add these or buying NBA securities, but what's sort of driving the growth strategy on the mortgage book?.

Yes, so, we are the largest mortgage lender and have been for many years in Wisconsin and we have a significant presence in other states in the Midwest in our footprint. Our stated goal for the asset disposition of the balance sheet is to be in rough thirds between C&I, commercial real estate and residential mortgage.

So we're a little bit over that in commercial, little bit under that commercial real estate, sitting right about there in residential mortgage. So we'll continue to grow that book. We would hope that our other asset classes would grow.

Certainly, once, Bank Mutual is integrated, commercial real estate will step up and the overall percentage of residential mortgage will step down a little bit most likely. So, we continue to look to grow all these books, and we don't feel like at this point we're out of proportion on any of them.

And a reminder, we did as you know keep some 30-year mortgage production but we stopped doing that in June. And so, largely other than CRE loans and some private banking loans what are putting on the balance sheet are adjustable rate mortgages going forward..

Understood.

And is there a strategy to actively cross-sell to these clients who are coming in, in terms of deposits other products? Or is it just a one product relationship?.

We actually try to cross sell, but the reality is any bank that tells you they're doing a lot of cross selling to their mortgage customers, they're trying to but it often turns into a one product sell that's just the reality. People don't necessarily shop for mortgages, but they don't necessarily bank with their mortgage provider..

Fair enough, understood. And just moving to something you said in terms of not seeing pickup in the mortgage warehouse balances in this quarter.

Was that due to price sensitivity where you decided not to compete after a given point? Or was there something else that didn't lead to grow this quarter?.

No, our pricing is the same it's been, so I haven't seen a lot of industry data yet. But previously some other competitors report big numbers in mortgage warehouse. That having been said, we didn't change our pricing. so perhaps other way they got cheap….

Award pricing..

Perhaps that would explain some spreads, but….

No, that makes sense, understood. Thanks for taking my questions..

Our next question comes from Terry McEvoy of Stephens. Please proceed with your question..

Thanks good, afternoon. I was wondering if you could comment on the insurance business, third quarter was down a little bit year-over-year, if I'm looking at the numbers correctly. And then also could you just remind us of the seasonality you typically see in that business..

Sure, so just for clarity, third quarter insurance commissions were actually up a little bit, 2% year-over-year looking at page three of the table. But you're right, it was a very small amount and it was certainly down quarter-over-quarter.

There is seasonality in the quarter-over-quarter so we do expect the third and fourth quarters to be slightly less than the first and second. But we were more hopefully that we see year-over-year lift over the back half, and it’s been a little muted.

I think the market place is in sort of a soft pricing market, and so it hasn't necessarily benefited us in the way we hoped it would have. But we continue to make good headway with clients and looking to cross-sell more and more of that business within our commercial book..

And we continue to look for opportunities through acquisitions to grow the business..

And then as a follow-up.

Do you have an updated view on the Bank Mutual systems conversion? I asked my question really thinking about when the cost saves from the conversion then would fall to the bottom-line?.

The time line that we laid out when we announced the transaction on the last earnings call was still the time line that we are looking at..

And then just lastly.

Mortgages you are putting on the portfolio, was there enough in market 5/1 and 7/1 ARMs to support the growth? Or are you building out some of that portfolio with out of market mortgages?.

No, it’s almost all in the market. There is -- we have some big cities in our market Chicago, Minneapolis, et cetera. So, there is plenty of room..

Our next question comes from Nathan Race of Piper Jaffray. Please proceed with your question..

Guys, I was just curious in terms of the timing of the outflows of brokered CDs and network deposits in the quarter obviously was in the context of thinking around 4Q of funding costs?.

Yes, so I don’t know that we would necessary see a significant outflow. We’ll obviously look to see what comes in on the core customer deposit side and manage between our network deposits, federal home loan bank advances, and other borrowings to optimize our total cost for the quarter.

But I don’t think we have a plan to push “any of our network deposit providers per se”..

If there are no further questions at this time, I would like to turn the call back over to Mr. Philip Flynn for closing comments..

Well, thanks. Thanks everybody for joining us today. In closing, we were pleased with the quarter’s expanding bottom-line, improving credit, efficiency dynamics and increased return on capital, and really pleased that we announced our highest level of earnings and returns since 2008.

We look forward to providing you with our full year results in January, and we’ll roll out our guidance for the year ahead at that time. So, if you’ve any questions in the meantime as always give us a call. And thanks again for your interest in Associated..

This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..