Philip Flynn – President and CEO Joseph Selner – CFO Scott Hickey – Chief Credit Officer

John Astrom [ph] – RBC Capital Emiline Harmon [ph] – Jefferies Tony Davis – Stifel Nicolaus David George – Robert W. Baird Scott Siefers – Sandler O'Neill Erika Penala – Bank of America/Merrill Lynch Terry McEvoy – Oppenheimer

Thanks, and welcome to our second quarter conference call. Joining me today are Joseph Selner, our CFO, and Scott Hickey, our chief credit officer.

This afternoon, I'll provide you with our results for the quarter along with an update on our strategic priorities and steps we're taking to grow our core businesses. I'll begin by pointing out a few highlights from our second quarter results on slide three and four.

As we reported, net income, the common share holders was $26 million or $0.15 per share. This compares to net income of $15 million or $0.09 per share for the first quarter.

Pretax income was up $13 million and net income to common shareholders grew by $10 million over the prior quarter. Our loan portfolio grew 3% to $13.1 billion during the quarter with the most significant growth in the C&I segment.

The commercial real estate loans and residential mortgages also grew as we began to see the benefits of the investments we are making in these areas. As a result of our strategies to grow loans and improve credit quality, interest earning loans, that is total loans net of nonaccrual loans, grew by nearly $1 billion on a year-over-year basis to $12.6 billion from $11.6 billion a year ago.

Total deposits and customer funding of $16.1 billion was up $184 million. We continue to optimize our funding cost by driving non-customer network transaction deposits and brokered CDs down another 10% this quarter, while growing in savings and interest-bearing demand deposits.

As you know, we completed a $300 million debt offering in late March and used a portion of the net proceeds to repay half of our TARP. Despite the added interest expense, our net interest margin was 3.29%, down only three basis points from last quarter.

We expect to repay the remaining TARP during the third or fourth quarter and will do so in a shareholder-friendly manner as possible. We continue to be pleased with the ongoing improvement in our credit quality indicators including a 4% decline in nonaccrual loans this quarter.

Nonaccruals of $468 million are at the lowest level in six quarters and represent 3.6% of total loans down from 3.9% last quarter and a high of almost 9% during the first quarter of 2010. Importantly, potential problem loans declined to $213 million or 23% from the first quarter.

We recorded a provision for loan losses of $16 million, left the net charge-off to $45 million. The lower provision and reserve release were driven by the ongoing improvement in the credit quality of our loan portfolio.

Our capital ratio has remained very strong with Tier 1 common ratio of 12.61% and a total capital ratio of 17.5% at June 30th. If you go to slide five, you'll find some information about our regional economy.

The upper Midwest continues to be a positive place for business and banking. Jobs, output, and the outlook for growth are all moving in the right direction.

The unemployment rate in each of our Midwestern states remains below the national average. In fact, most major metro areas in our footprint posted significant job gains year over year and year to date.

What we are seeing in terms of loan growth is consistent with recent news about improvements in unemployment and a pick-up in manufacturing in the Midwest. If you move to slide six, I can talk about our loan portfolio which grew to $13.1 billion at June 30th.

This was up $434 million from March 31st. Our goal is for the portfolio to be roughly balanced in thirds.

Today, it's somewhat overweighted on consumer assets and somewhat underweighted on the commercial side with 30% in commercial real estate and construction loans and 25% in C&I loans. For the quarter, we had new C&I production and line draws of more than $500 million.

This growth was partially offset by about $300 million of runoff and paydowns resulting in $230 of net C&I portfolio growth. From a line of business perspective, our specialized financial services initiatives contributed more than 120 of this net portfolio growth or about 50% of the net increase.

From a geographic perspective, Chicago was our largest metro area contributor accounting for a little less than $50 million of the net growth. Wisconsin continues to be our largest state market with over $80 million of net portfolio growth.

Overall, utilization rates remain low, but they're up slightly at 45% compared to 43% in the first quarter. In commercial real estate, we're starting to see return on our investments for growth.

We opened two new own offices; one in Indianapolis and the other in Cincinnati during the first quarter. We closed our first field in Indiana and Ohio this quarter.

In total, the CRE and construction portfolio grew by $50 million to $3.9 billion. Based on market feedback and what we're seeing today, the quality of our commercial real estate book appears to stabilize.

As I mentioned in the past, we believe C&I and commercial real estate will be key drivers of our loan growth in 2012. While the markets became more competitive, we continue to see good opportunities.

On-going improvements to our sales process and better sales management tools are aimed at helping our commercial and business banking teams. Our bankers follow a discipline calling effort with support from marketing to capitalize on what we believe will be a continued disruption as a result of the acquisition of M&I.

We expect these efforts along with the new talent we've hired will serve us well in the long term as we continue to actively pursue market share. We hired 80 M&I employees during the past two quarters.

More than half of them are in customer-facing and sales-oriented roles. Competitive pressures increase throughout the footprint contributing to the decline in our average yield for commercial loans, which was down 13 basis points from the prior quarter.

We continue to be price competitive where we see an opportunity to extend the client relationship through the offering of other products and services. The consumer loan portfolio grew $157 million, or nearly 3% to $5.9 billion at the end of the quarter.

In spite of the soft mortgage market, we saw a slight increase in mortgage banking volume due to the lower than anticipated rate environment and steps we're taking to position our residential lending business for greater growth. We anticipate a similar pace of growth for the second half of the year based and part on the rate environment, but also filled by several mortgage origination initiatives.

While we're pleased with our lending activity this quarter, we expect a slightly slower pace of growth, somewhere in the range of 2% to 3% for each of the next two quarters. If you move to the deposit slide on slide seven, our funding strategy continues to emphasize retaining core customers while deemphasizing broker and network funding.

We purposely increased our use of low cost customer repo funding as we continue to have access security's collateral. None of our repo balances at June 30th were with banks or brokers.

We will continue to evaluate our funding strategy in light of the repeal (inaudible), the new FDIC assessment rules and the continued low interest rate environment. However, we do not expect to see significant further expansion of either repo or FHLB balances.

Total customer deposits and funding levels grew by over $300 million during the quarter, pretty much evenly split between transaction balances and term balances. During the period, we also further reduced our network and broker funding by 10% or $120.

Net interest income is detailed on slide eight. We had net interest income of $154 million which was up modestly compared to the first quarter.

Overall deposit interest expense declined during the quarter as we continue to aggressively manage our funding cost, excluding brokerage CDs, the cost of interest-bearing deposits filled by five basis points. Our net interest margin was 329 basis points down 3 from 332 for the previous quarter.

As we've pointed out in the release, our net interest margin was impacted by higher interest expense related to the March debt offering which resulted in a nearly eight-basis-point reduction this quarter. This reduction along with the impact of lower loan yields was partially offset by the previously mentioned lower rates on interest-bearing deposits and a higher than expected return in our investment portfolio.

For the balance of the year, we believe the margin will be impacted by the current rate environment loan growth and a net effect of funding for the expected TARP repayment. We believe this will result in modest pressure on the net interest margin over the balance of the year.

On a linked-quarter basis, core fee-based revenue of $61 million was relatively flat. Service charges on deposit accounts at $19 million were also relatively flat, and we believe that's likely a run rate going forward.

Regarding Durben [ph], we expect the fourth quarter impact will be about $4 million, and we anticipate the annualized gross revenue impact from the final decision will be $17 to $19 million. And like other banks, we're exploring ways to mitigate the impact of these regulatory changes.

Second quarter trust fees were $10 million up to 2% from last quarter. We're making great progress on several initiatives including program and product enhancements aimed at driving organic growth in the wealth business.

In addition, we're beginning to see better collaboration between our commercial bankers and our private bankers as we continue our work to enhance the flow of referrals between the areas. As pointed out in the release, fee income was impacted by a $6 million reduction in the value of mortgage servicing rights primarily due to declining mortgage rates during the quarter and a $4 million evaluation expense related to credit exposure on customer interest rate swap transactions.

Total non-interest expense for the quarter was down $5 million or 3%. Personnel expense was consistent with what we saw in the first quarter and a $3 million increase in foreclosure and OREO cost was offset by decreases in other expense categories including a $3 million seasonal decline and occupancy expense and lower expenses for unfunded commitments and litigation reserves.

Moving on to credit, nonaccrual loans of $468 million decline at the lowest level we've seen in six quarters, and that was with no bulk loan sales during the past two quarters. Slide nine shows the significant improvement in our key credit metrics.

The ratio of nonaccrual loans, the total loans continue to improve to 357 basis points from 386 at the end of the first quarter. Our overall level of reserve remains strong at 3.25% of total loans at June 30th and with coverage of nonaccrual loans at 91%.

On slide ten, potential problem loans dropped to $699 million during the quarter. This is $213 million or 23% decline from $912 last quarter.

An increasing number of loans migrated off our problem loan list and the inflow of new problem loans slowed dramatically. Our loan 30-89 days past due remained below 1%.

And on slide twelve, the key drivers of the provision extends this quarter were net charge-offs at $45 million. The accruing TDR allocation increase $2 million due to higher balances.

We released $9 million of FAS 114 reserves on nonaccrual loans and an additional $22 million in reserves related to a decrease in the FAS 5 allocation due to deposit of asset quality migration within the portfolio. We expect provisioning will continue to decline and net charge-offs will remain at around these levels throughout the balance of 2011.

We are very encouraged by the overall improvement in credit, which we believe is an indication that things are improving for our customers. Our capital ratios are on slide thirteen, and they remain very strong, well in excessive regularity benchmarks and what will be expected under Basel III.

And you may have seen some local press coverage about another one of our initiatives, our branch and signage upgrades. We're about six months into our four-year effort to upgrade and strategically invest in our branches around our footprint.

Eleven branch remodels and currently underway around schedule. Forty-eight additional remodels are in various stages of planning and design.

Installation of new signage in St. Louis and central Illinois market is complete and we're on track for completion in Milwaukee and other parts of Wisconsin by the end of the year.

Renovation of the branch in our very first location, Neenah, Wisconsin, is in process as we prepare for Associated Bank's 150th anniversary later this fall. Finally, we're pleased to announce that Jay Williams has joined our Board of Directors.

He brings a wealth of banking experience to the Board with 37 years of commercial banking experience in our markets. Jay lives in Milwaukee and he's very active in the community.

So with that, I'd like to open it up to your questions.

Thank you. Good afternoon.

Hi, John.

And congratulations to Jay in joining your Board. He's a big help in Milwaukee.

Thanks.

Just a question on Milwaukee, specifically you talked about the 80 new hires, is that the expense in the run rate or how do we think about that rolling through expenses?

It's largely in the run rate. We've been hiring people pretty consistently throughout the last six months.

It hasn't been a big rush at the end of the last quarter. So, I'd say most of those expenses you've seen in the first consecutive quarter and you can see that our personal expenses have been pretty flat.

So, although we're adding these folks, other people are leaving in other places.

And is it safe to say there's more to come in Milwaukee? Would you feel like you're essentially there in terms of who you need?

We are not just in Milwaukee, but across the footprint, eager and anxious to hire folks who can help us grow the company. And we continue to do that.

Okay. And then just on the C&I growth, you talked a little bit about where you're seeing some of the growth geographically, but seriously, if you could comment on market share gains versus new relationships.

And on the new relationships, there's a common theme?

It's really hard to do that because it's all anecdotal, John. We've had a little bit of line pick-up, which is probably indicative of lift in the market, lift from the economic activity.

The bulk of what we're doing is typically in the commercial side, in the region taking some share from someone else. But it's pretty early days to try to equate that to some sort of market share gains.

But we're happy with more than $400 million of net outstanding loan growth and we're recently optimistic about the rest of the year. So, whether it's a combination of picking up market share, economic recovery, or the entry into some new businesses through the specialized financial services area, our momentum is really starting to pick up.

Okay. I have just one real detailed question, is there any story behind the foreclosure expense?

I know you have that every quarter, but it was a little higher than I thought it would be.

Not that I'm aware of. I recall that we had a sizeable property tax issue that we had to pay.

But there wasn't anything particularly exciting there.

Okay. All right.

Thanks for the help.

Good evening. Could you talk about the disposal plan for MTA at this point?

I know you guys have, obviously, halted kind of the bulk sales the past couple of quarters. Could you give us a sense on some of your higher plan to work things down in going forward?

That's a great question. We obviously had a consorted sales effort throughout the latter part of last year where we dramatically reduced the MPAs.

The MPAs that we have left, we're working in the old-fashioned way, if you will. So, we're not indulging in both loan sales anymore because we really don't need to.

We had a reasonable amount of MPA reduction this quarter. We expect probably some acceleration in that through the rest of the year.

We have a couple of sizeable non-performing loans which we think will reach resolution this quarter or next. The truth is most of the big MPAs are gone, and what you see left is pretty granular.

So, it doesn't really land itself to the bulk sales that we did previously. So, we'll continue to work on that.

Scott Hickey and I were talking just today about thinking through plans to reduce some of the MPAs as we get through the year. But with the economic recovery that we're seeing here in the Midwest, a lot of these companies are getting healthier without any extraordinary effort on our part.

Got it. Okay.

Thanks. And then, this is the second question, could you maybe give us a little bit more color just on where you are with specialty lending initiatives and just kind of what the progress on growth there has been?

Sure. So, about half of our net C&I growth came from the specialty units.

Joe helped me with that, $80 million of growth in the mortgage banking business. We had about 60 or so in the oil and gas base and the rest was scattered around some of the other units.

So, we're starting to get nice lift from these new businesses that we put in place over the last six to nine months.

Okay. Great.

Thanks for taking my questions.

Sure.

Good afternoon, Phil and Joe. Just on that same thing, are you now fully stayed and specialized and any thoughts on where that portfolio in terms of size in the year?

We're still looking for a few folks, but we're largely staffed in those areas. I think on the last call or somewhere publicly, we had talked about trying to grow that portfolio to around a billion dollars or so.

We didn’t think we're…

Is that how you say that, in commitment?

In commitments, yes, not outstanding. So, we put on in that new 120 this quarter.

If we could do the same over the next couple of quarters in each quarter, that would be great. And that would probably put out outstandings at three quarters of a billion, give or take.

Great. Phil, continuing with C&I, what do you say (inaudible) Scott has got on this too?

What are you seeing in terms of recent credit spread, the price competition? I guess too across loan sizes and if there's any geographic dispersion around what you see in terms of competition?

Yes. Again, it's anecdotal clearly yields on new loans are coming down because it is competitive.

I would say it's probably most competitive in the market that you would get. It would be most competitive, which is Chicago.

Right.

We continue to be pleased that a lot of our renewals are able to retain their floors. But clearly, that new business that we're up competing, rarely, we're going to get a floor based on that new transaction.

Yes.

So, yields are coming down on the new stuff due to competition. On the other hand, as I've said, we intend on being very price competitive.

We have a very attractive overall cost of funds at this company. And if we're doing a job cross-selling our other products and services, it's always worth to be competitive on the pricing of a commercial loan.

Okay. Joe, roughly, $145 in security cash flows, I know the residential mortgage bulk is continuing to grow, what are your thoughts here at this point in a way of challenging that?

Well, we're seeing somewhere in the neighborhood of $300 million, $350 a quarter of cash flow coming off the investment portfolio. We're reinvesting about $150 million of it and using the rest of it to grow along.

That's been our strategy. And clearly, the investment yields our goal [ph].

They're in a 2% range and we're trying to be in a market steadily, but it's really not a very attractive place to be at this point.

Well, I guess your thought is hitting into the (inaudible) environment here, guys, net pricing and what are you expectations are in your market.

We'll see what other banks star doing. We really don't have any news on that yet.

Okay.

However, we believe, as we've been saying consistently, that given that's the vast bulk of our commercial borrowers are already on analysis, we don't think this is going to be a particularly noticeable impact if we do start paying interest to, say, small businesses or the odd commercial account that might not be analyzed today.

Okay. Thank you very much.

Thanks for taking the question. A question on capital, obviously, job one, as you think sell about deploying access capital overtime given the fact that you've been profitable for a few quarters now.

When you think more intermediate to longer term, is there a Tier 1 common kind of (inaudible) three number that you think about that's reasonable in managing the company in the future? Thanks.

Yes, I know the whole world would love to hear the answer to that question, not just from us but from every bank. I don't have a great answer for you right now.

We're focused right now on growing the company organically and utilizing our capital to support that growth. We're focused on retaining the balance of our TARP money in the third or fourth quarter.

After that, with continued profitability, then we now have a solid year of profitability behind us. We'll take a look at our dividend policy later this year.

And then, ultimately, we'll look at deploying capital through acquisitions and even way out there and probably not preferentially through share (inaudible). So where that all ends up and where the industry ends up then what a reasonable return on equity is going to be is still to be determined in the industry.

Sure. Okay.

Thanks for the call I appreciate it.

Good afternoon, guys. I guess my first question was on the legacy overall expense outlook.

I mean this quarter, this number, I'd say, came in better than I thought it would. So you're talking about continuing to be eager to hire more people.

I guess I'm just curious to hear how that all flushes out into the cost side.

We maintain cost discipline around this place and we've been doing well the first couple of quarters. We have a number of investments that we're making in the company, the branch remodel that I talked about, some systems upgrades for internal measurement, as well as looking to hire folks.

The people we're hiring we view as further investment in growing the profitability of the company. They will pay for themselves as well all of these things, but it will take some time.

So I wouldn't expect to see dramatic expense growth through the balance of this year.

Okay. And then (inaudible), I was hoping you could talk a little bit about sort of what the strategy is or sort of what's going on with the core deposit base.

I appreciated the color on the total base and some of the areas you're trying to sort of push some money out. But the core deposit base, at least as I would definite, hasn't grown very robust and, in fact, has been declining for a few of the last couple of quarters.

I know you got the TAG issue last quarter. But just what are the main dynamics that play there?

Yeah. The way we view our core funding from customers is not declining.

It's growing. We've made some purposeful decisions, which I know are somewhat different than what some others in the industry have done, to utilize the collateral we have with the expiration of the TAG program to push some of our customer funding in repos.

We're very focused on pushing net worth in brokers, i.e. non-core deposits out, and we've been doing that very consistently now for quarters.

We're also very focused on growing the regular core deposits of the company and we continue to work hard to do that. We're investing significant amount of time, energy, money and people into improving our treasury management offerings to grow our commercial deposit base.

The outcome of that will be felt in coming quarters. We haven't seen that yet.

So we're really focused on growing customer deposits.

And then last question. So in pretty much all the credit metrics, we're moving in the right direction, but the one that's kind of still going the other way is the occurring restructures, which are going up in kind of double digits pretty consistently.

I wonder if you could just sort of talk about the strategy there.

Yeah. I mean the accruing TDRs, we're doing less and less really restructurings in the residential side than we did probably in the last six months.

So that piece of it is probably going to level off. The new accounting that comes in second half of the year, we're looking at all the TDR book as well relative to the new accounting.

And so we'll have to see how that all sorts out as we get through the whole book.

But, Scott, the other thing that's impacting is you're doing AB notes which in fact TDR is also (inaudible).

Yeah, but we're not doing nearly as many of those as we bought.

No. But that is affecting some of the growth.

Correct.

If we do one, it is a growth.

Right.

And yet the loan is paying.

Yeah. Scott, remember that we have a pretty low base of this stuff.

So it doesn't take more than a couple of loans for you to see it.

You see a percentage change.

Exactly. Okay.

Great. Thank you very much.

Sure.

Thank you. Good afternoon.

My first question is on your loan growth items for the second half of the year. Given your commentary with regard to positive economic underpinnings in the upper Midwest and the hirings and consolidation activity in your footprint that's setting you up for taking market share, I'm wondering what you're seeing.

That loan growth is not going to be at least from what you posted in the second quarter.

It's very difficult to forecast loan growth. So we had about 3% first quarter to second quarter.

Our best look right now is that pace may come off a little bit and that's why we're guiding into the 2, 3%; I hope we beat it. But I think that's a number that we're comfortable with and that you could probably be comfortable modeling.

Is it a function of more careful commentary from your customers in terms of expanding their business at this point in the economic cycle or just...?

No, it's not.

Okay. And with regards to Durbin, we've gotten commentary from some other regional banks with regards to potential mitigation.

I'm wondering if it's also, like with you commentary and Reg Q, too early to tell in terms of how much you can make up for this.

It is, Erika. We fully intend on figuring out some way to claw back some of this revenue, whether we do it directly on the product, debit cards, or whether we change the way we think about charging for the overall of services we're still working on.

Some of the test we do is what the rest of the industry does. So it is a little early, but probably as we get into later in the third quarter, we'll have a better feel for that and we can hopefully give some color.

Okay. And lastly, I just wanted to follow up on your comments with regard to capital management.

In terms of preferring acquisitions over buybacks, are you seriously looking at anything today? I mean clearly you talked about TARP outstanding and repaying that is in a shareholder or a friendly manner as a priority.

But I'm just wondering if you're seeing specific opportunities in your footprint.

No, we're not looking at anything today and repaying TARP, of course, is the step first. So we're very focused on getting that done, as you said, in the most shareholder friendly-way possible.

So, when I was talking about deploying capital, I was thinking further out.

Okay. Thank you, Phil.

Sure.

Thanks. Good afternoon.

Could you talk about the new talent that's been hired? Has any of that been the private banking area?

A year plus ago, you talked about that being an initiative and an area of focus and it seems like there'd be some good opportunities coming out of Milwaukee.

Yes. And, in fact, we've hired some great people in our wealth business in Milwaukee as well as in some of our other metro centers including Chicago and Minneapolis.

And Phil, do you think you can keep the share count on changed as you look at the rest of the TARP repayment in the third and fourth quarter?

I hope so but we'll have to find out.

I understand. And then just the last question.

Could you just give us a level of comfort the bank in Green Bay growing $300 million in CNI loans last quarter, 60 or 80 million coming in on oil and gas, kind of some new areas for this company? Does it make you feel a little bit comfortable, the people, the decision-making and how we should go comfortable with that call to more rapid asset growth that Associated is used to?

Sure. Well, certainly the overall asset growth is not something Associated is not used to.

But specifically in the energy business, the comfort, of course, doesn't come from the legacy of Associated Banc in the upper Midwest, but I have a deep personal background in that business as do the people that we've hired to oversee the business. And the person who's doing the business is actually in Houston; Green Bay not being a hot bed of energy lending in the United States.

So we have experienced people on the ground all through (inaudible) with, frankly, including on the technical side of that business for many years in my past. So, if that helps give you some comfort, I'm pretty comfortable with it.

I appreciate it. Thank you.

Sure.

Okay. Well, I want to thank everybody for joining the call today and for all the questions.

We continue to make great progress in returning Associated's strength and health. We anticipate continued loan and earnings growth throughout the rest of the year, improving credit metrics and the repayment of our remaining TARP funds.

So we look forward to talking to all of you next quarter. And if you have any questions in the meantime, as always, give us a call, and thanks again for your interest in Associated Banc.