Good afternoon, everyone and welcome to Associated Banc-Corp’s Second 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 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 Chris Niles, our Chief Financial Officer, Jim Simons, our Chief Credit Officer, and Randy Ericsson, our General Counsel. We would like to begin by providing a brief second quarter update before discussing the acquisition we announced this afternoon. 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 reduce credit cost, 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 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 have 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 five 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 billed in the…

[Operator Instructions] Our first question comes from Jared Shaw of Wells Fargo Securities. Please proceed with your question.

Hi, good morning or good afternoon. 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 timeframe 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 are not sure exactly when in the first quarter we will close, but we certainly believe that within a quarter or two following that we will be fully effective and able to begin the implementation during the third quarter and so we are fully assuming we will have the opportunity to realize at least the quarter of the synergies during the full fourth quarter, but obviously the sooner we can close and the sooner we can get rolling on, 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 are 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 will 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 are correct that Bank Mutual has pound for pound, more commercial real estate than we do. But when we rolled 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 on our own books. We have been doing that for some time and that will continue. But if you are curious, we believe that the combination of the two companies will still have commercial real estate well below the OCC guidance of 300%, we think we will be under 210 with the combination and all of that is really because Bank Mutual’s loan portfolio is less than a tenth 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. I am just trying to get a gauge of kind of where it’s going to be heading directionally?

No, as you are aware, deposits have a very profound seasonal factor in them and a second quarter is the low point. So, 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 would expect to see those borrowings come down and the margin expand, since we borrow 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.

Okay, great. Thank you.

Our next question comes from Scott Siefers of Sandler O’Neill. Please proceed with your question.

Good afternoon, guys. First congrats on the deal, it probably took out, it looks like you got one. Couple of questions though. First one, on a standalone basis, I just want to follow-up on the previous margin question. So, is the way – the probably way to think about it maybe this quarter than just kind of seasonally artificially deprived, can we get – I am just trying to figure out order of magnitude of expansion so now that we have sort of re-priced the liabilities and have a heftier borrowing base that will come down. Does that sort of turbocharge the sequential improvement? Could we expect something similar to or greater than what we saw in the first quarter in terms of margin expansion?

Well, I think if you compare year-over-year, clearly, the year-over-year and third quarter, third quarter will be a very nice comparison just given that our third quarter last year was the best. 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 have talked about it before of 6 to 8 week lag in the re-pricing of the LIBOR-based loans, because there are tagged to the first of the month. And since the Fed tends to raise rates in the middle the month, we don’t see the asset re-pricing in the same month of the Fed effects, but the liabilities are indexed to Fed Funds and they tend to hit us right away. So in that last weeks we see the hits and then in the next 6 to 8 weeks, we see the lift. And so I think we will 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 your original questions, so how long are you anticipating them to have between when the merger closes and when you begin the integration. I guess that’s what caught me a little off-guard like we closed in the first quarter, why would we only begin integration in the third quarter? I think you said begin integration in the 3Q. So, I just want to make sure I am sort of tight on what’s going on there?

Well, let’s kind of separate terms. The integration planning will start – has started. As soon as we close, there will 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 till the third quarter. That’s when the rubber really hits the road. Our 25% assumption could be a little bit light we will just have to see how quickly we get approvals and how quickly we can get conversion done.

Okay. So I guess in planning more in abundance of caution than I think that you see that would sort of spend the time between close and converting that?

No, there is nothing special here that gives me positive. It’s going to take us longer than somebody else. We are not big overpromisers around here.

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

The dollar amount – we have previously disclosed that we thought the benefits in the state tax will be a couple of million bucks and then they have been a little bit more than that.

Okay, $1 million more, 2 million more?

1 million and change more, yes.

Okay, perfect. Well, thank you again and congrats on the transaction.

Thank you.

Our next question comes from Ken Zerbe of Morgan Stanley. Please proceed with your question.

Great, thanks. I guess first question I just had for you just in terms of Slide 11 on the deal, just want to make sure I understand why is it dilutive to our earnings in 2018 excluding all the one-time merger costs if I read the footnotes correctly?

We are going to be absorbing carrying their operating costs for the better part of the first three 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. And from a loan growth perspective, how does this ultimately change your ability to grow loans, because – and I am thinking specifically of their big CRE portfolio. I totally get that is a smaller percentage 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 it change your longer term loan growth goals? Thanks.

It doesn’t. I mean, we assume that the type of growth you have seen from us as a percentage of the overall portfolio will continue even on the slightly larger portfolio we will have by observing Bank Mutual. It would be fair to say that we are 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 are not in the Bank Mutual and that the Bank Mutual customers will have a much bigger network given the Associated Bank’s bigger spread of branches is going to all be beneficial.

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

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

Got it. Conversely on the branches, okay.

Alright. Thank you very much.

The next question comes from Chris McGratty of Keefe, Bruyette & Woods. Please proceed with your question.

Hi, good afternoon. Thanks for taking the question. Phil on the deal – quick question was the deal competitively better 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 type of details. I mean, you will see all that stuff when the proxy is filed as to what the process was. And we have talked a lot – many banks have talked about the fact that consolidation is inevitable across the entire industry, including the Midwest. There is an awful lot of banks in Wisconsin and Illinois and other parts of Midwest. So, yes, I think there is going to be attractive opportunities for us and others to consolidate.

And given the relative size between the two 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 shortlist? Thanks.

Yes. We have 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 is more of those type of opportunities out there. As far as how long will this take? We will be very focused on making sure this transaction goes well. It’s integrated well. It’s the first one we have done for a long time and we are very focused on doing it exactly right for all of our stakeholders. So who is to say how long that’s going to take, we are certainly in a process now where we will be working on getting transaction the closed, going through the regulatory approval process. We have assumed we will get the closing in first quarter. We will see what happens after that.

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

No material adjustment.

Great. Thanks for taking the question.

Our next question comes from Dave Rochester of Deutsche Bank. Please proceed with your question.

Good afternoon, guys. Congrats on the deal.

Thank you, Dave.

So it sounds like there is a lot that you like in Bank Mutual, I was just wondering if there is any segment in the loan book on the funding side that you plan on winding up shortly after the close. Is there anything you don’t want?

As we have known Bank Mutual for a long time course. We all live together here to stay at 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 have built is in many ways very similar to ours. They don’t have the same spread of products. They are not in some of the business we are in, but they are not in any businesses that we don’t like or that we are 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 are effectively done with portfolio-ing the 30 years at this point?

That is correct. That’s why I want to make sure everybody heard that. Thanks for asking the question. We have sold our bucket and we went back to our normal method of selling the 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 gain on sales spreads these days, there is any additional color there? I think historically you have kind of been in that $5 million to $10 million range with any kind of expectations there will be great?

Yes. I mean, just as far as activity we 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 $100 billion. So, volumes are pretty decent what do you think about the gain on sale, do you have any color on that, Chris?

Yes. I mean, obviously we saw the same amount of pressure on that during the quarter, but what remains to see how the third and fourth quarter play out. And certainly, we have certainly 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 wide range feels reasonable.

Okay, great. And then I noticed in the securities bucket, there is a little movement and look 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 identified securities that we are 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 moving 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 a quarter. Any details on that the rate on those and maybe the timing in the quarter?

Sure. Those are largely floating rates. The Federal Home Loan Bank of Chicago has a program where you borrow basically on a 5-year term looking to repay after 6 months. So, there are 5-year long dates, but repayable in 6 months and they are all indexed that floating rate structure is right around effective plus or minus a few basis points driven off the Federal Home Loan Bank, the Federal Home Loan Bank discount rate.

Okay, great. Thanks, guys. Appreciate it.

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

Hi, thanks. Good afternoon. 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 have seen from some other banks so far, any commentary about activity in your markets in the second quarter and how you are feeling about the second half of the year?

Yes. So, we are still reiterating our guidance that we have 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 are hopeful that, that will pickup, but time will tell, there is 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 the topic discussed earlier, what is the reason again why the deal is expected to close two or three quarters out that you can’t go through the system consistent conversion on day 1 or shortly after. Is there something with a contract and breakup causes 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 am not going to sit here and overpromise cost savings in 2018.

Okay. And then just last, earlier you talked about deploying excess capital and you have said that for a while 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.

Perfect. Thank you.

Our next question comes from Emlen Harmon of JMP Securities. Please proceed with your question.

Hi, good evening guys.

Good evening.

Looking at the expenses what maybe a little elevated this quarter anything in there that they mean not necessarily one-time but perhaps unusual. Like I noticed, for example, the professional expenses looks like they are up a bit potentially with the acquisition forthcoming, I don’t know if there is anything in there?

That wasn’t acquisition driven. There is – the mortgage activity has been high. So that drives a little bit of expenses, but we have been running at 175 give or take a quarter, for quarter after quarter after quarter we are at 176. That’s not elevated. One thing we can look at this 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 and markets also a larger bank recently. Are you seeing any opportunities from that either on kind of individual borrower basis or potential some themes or anything that did help you guys out a little longer upfront?

You are saying disruption in the marketplace that’s creating opportunities for us.

I am not to be perfectly honest I am trying to scratch my head as to what bank you are talking about?

FirstMerit had essentially no market share in Wisconsin, I mean, not to be blunt but that’s just the fact.

Yes, okay, so nothing in Chicago. Alright, thanks.

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

Hey, guys. All my questions are asked and answered, but just one follow-up in case I missed it. The seasonal sort of drop that we have seen in the non-interest bank deposits in the second quarter should we expect similar magnitude of rebound in 3Q as we have seen in the last few years?

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

And just since I had to – any sort of update on like the deposit betas and what you are 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 the network transaction deposits at 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 in retail money and market deposits with the green and orange lines have been flat as the board and the lift you see in overall money markets really only driven by the network deposits. So, we think that’s consistent with the story we have been telling you. We also highlighted for you on the left hand side the network of transaction deposits as a percentage of the total deposit base of the last several years and it’s been in that 12% to 15% range and we will likely stay in that range.

Got it. So, I guess you have seen no real pushing in for the orange line going forward in the back half of the year?

Not today.

Understood. Thank you very much.

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

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

No, I can’t say that you 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 big demand. There is actually transactions are slowing. You are starting to see developers sell properties. We are pretty late cycle in real estate. So the amount of transactions there are coming down a bit on top of that as we have talked about we are monitoring closely our own multifamily exposure. So, that’s probably the biggest impact on that line.

Okay, great.

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

Hey, guys. Good evening. Just one question from 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 runoff on the order of magnitude of about 10% and then we are looking to grow deposits thereafter into 2019 and beyond. That’s on deposits. We are not assuming anything on loans. That is on loans. We have assumed 10%. Hopefully, it won’t be that, but that’s what we modeled.

Got it. All my other questions have been answered. Thank you.

Thank you.

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 will keep you informed next quarter on how we are doing in the process. And we remain on track towards this year growing revenues, improving the margin, improving our efficiencies, expanding the bottom. We look forward to talking to you again in October. 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.