Associated Banc-Corp (ASB) 2012 Q3 法說會逐字稿

Good afternoon everyone and welcome to Associated Banc-Corp's third-quarter 2012 earnings conference call. My name is Mike 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 call is being recorded.

During the course of the discussion today, Associated 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 Form 10-Q. These factors are incorporated herein by reference. 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 Mr. Philip Flynn, President and CEO, for opening remarks. Please go ahead, sir.

Thank you, Mike. Good afternoon and welcome to our third-quarter conference call.

Joining me today are Chris Niles, our Chief Financial Officer, and Scott Hickey, our Chief Credit Officer. Highlights from the quarter are outlined on slide 2. Our results were in line with expectations, as we delivered another quarter of strong performance. We continue to see opportunities to capitalize on disruptions across the footprint as we remain focused on growing our Business and strengthening our franchise.

We reported net income available to common share holders of $45 million for the third quarter or $0.26 per share and that compares to net income of $34 million or $0.20 a share a year ago. Return on Tier 1 common equity for the quarter was 9.7%, which was up from 7.8% a year ago.

Loan balances grew as expected by 2% during the quarter with particular strength in the commercial and residential mortgage portfolios. Total loan balances have grown by $1.5 billion or 11% from a year ago. Average deposits increased by 4% from the second quarter to $15.6 billion and are up $1.2 billion or 8% from a year ago. Net interest income increased by $2 million compared to last quarter while the net interest margin was 3.26%, which was in line with guidance. Credit quality continues to improve across board and we recorded $0 provision for loan losses this quarter. On October 1, we redeemed $150 million of Trust preferred securities and we intend to call the remaining $30 million of Trust preferred during the fourth quarter. We remain focused on deploying our capital in a disciplined manner and our Tier 1 common equity ratio remains strong at over 12%.

On slide 3, loans continue to grow during the quarter. Net growth of $267 million grew drove a 2% quarter-over-quarter increase and an 11% increase year-over-year. Total commercial loans grew 3% from the second quarter, and now account for about 60% of our total loan book. We experienced continued growth in our specialized lending portfolios and commercial real estate books, but only modest net improvement in middle market lending. Oil and gas and power and utilities lending now collectively represent 4% of the total loan portfolio, up from 3% in the second quarter.

We would note that during the third quarter, we transferred $75 million of balances that were in investor commercial real estate to the owner occupied category in order to better reflect their nature. This had no impact on total commercial growth. Construction loans declined slightly from the prior quarter. While we continue to be very active, new production was essentially offset by the pay down of completed projects. While there is some seasonality in our construction book, we remain optimistic for loan outstandings in coming quarters.

Residential mortgage loans grew by $125 million or 4% during the third quarter and are up 13% from a year ago. We continue to portfolio predominantly in [footprint] hybrid ARMs and expect to maintain about a $1.2 billion of 15-year fixed-rate mortgages on the balance sheet. We have been disciplined on our new portfolio origination pricing and we are holding the line at around 3% with respect to mortgages we put on our balance sheet. We continue to sell 30-year production to the agencies through our mortgage banking operations. The retail loan portfolio, which includes home equity loans, was down $101 million from the second quarter. Home equity balances continue to experience runoff as many of our consumers have considerable equity and are in a position to refinance into new first lien fixed-rate mortgage loans at lower pricing. 55% of our current home equity book is in a first lien position and we expect this portion of the portfolio to continue to show elevated levels of pay downs into next year.

Average deposits at $15.6 billion on slide 4 were up 4% from the second quarter and have grown by $1.2 billion or 8% from a year ago. We continue to believe a strong deposit base is the hallmark of a strong banking franchise. Gathering additional commercial deposits is the primary focus of our enhanced treasury management offerings. We are seeing encouraging signs from our increased cross-selling efforts to current and prospective commercial clients.

Period-end noninterest-bearing account balances are up $446 million from the second quarter and have grown by 16% from a year ago. Notably, commercial accounts represent more than 50% of the growth during this period. Growing core deposits allowed us to further reduce use of brokered CDs, federal home loan bank advances, and repurchase agreements during the quarter. Brokered CD balances are down over 83% from a year ago.

Other time deposits also declined by over $100 million during the quarter, consistent with our disciplined deposit pricing strategy. Time deposits are down over $500 million or about 20% from a year ago. We are pleased with the relatively stable, low-cost core funding we currently enjoy. We look forward to the expiration of the TAG program at year-end and expect, along with other larger banks, to be a net beneficiary of the elimination of the TAG program.

We do not see any pressure to raise deposit pricing, but aside from CD runoff and renewals, we also see limited opportunities to meaningfully reduce our deposit pricing from current levels. Net interest margin grew by $2 million or 1% quarter-over-quarter. Nearly all of this benefit arose on the liability side as lower cost deposit and checking balances funded net asset growth. Net interest margin for the quarter was 326 basis points, down 4 basis points from the prior quarter. Over the past year, yields on earning assets have compressed by 15 basis points while we have effectively repriced interest-bearing deposits down by 23 basis points, enabling us to defend the margin a fairly tight band.

We will continue to be disciplined in our deposit pricing strategies and will also manage other liability costs lower during the fourth quarter. As reminder, in mid-September, we issued $155 million of senior notes with a coupon of less than 2%. We are using the proceeds from that offering plus cash on hand to redeem all of our $180 million of trust preferreds, which had a weighted average cost of approximately 7%. These redemptions will be accretive to net interest income and net interest margin. However, we also expect additional compression on asset yields going forward. Nonetheless, we expect to be able to continue to defend the margin during the fourth quarter at around these current levels.

Total noninterest income for the quarter was $81 million, up $5 million from the second quarter. The mortgage business continued to perform strongly during the quarter with mortgage loans originated for sale of $715 million. Production was down slightly from the elevated level in the second quarter but was still up over 50% from a year ago. Mortgage banking continued to outperform our expectations delivering nearly $16 million in revenues for the quarter. While mortgage banking income was down slightly from the second quarter, we expect current activity will support a reasonably strong fourth quarter, as well.

We saw increases in trust service fees, service charges on deposits, card-based fees, and capital market fees during the quarter. We believe our depository account-based revenues bottomed out last year and will continue to improve as we grow our customer base going forward. However, these improvements were offset this quarter by lower mortgage banking revenues and insurance commissions. We also recognized a $3 million increase in our net gains from the sale of investment securities relative to the second quarter, which we would characterize as nonrecurring.

Total noninterest expense for the quarter increased by $4 million. Personnel, occupancy, and equipment expenses were up $2 million and legal and professional fees also increased by $2 million, largely driven by continued costs related to ongoing BSA enhancements. Other expenses were relatively unchanged from the prior quarter.

On slide 5, we are very focused on continuously improving our core operations. Given the challenges of this historic prolonged low-rate environment, we are making a few changes in our Business in order to drive efficiencies. For example, on the retail side, we have been refining our branch network over the last several quarters. Specifically, this week we announced the further consolidation of 12 branches and a pilot reformatting of 4 additional branches. These changes come on top of the favorable experience which followed the consolidation of 21 branches earlier this year. We have continued to retain over 90% of the deposits since the consolidations were completed over six months ago.

We also eliminated the Assistant Manager role in the branches during the third quarter and expect that along with the branch consolidations, these actions will support cost containment going forward. Also on slide 5, we noted a few other examples of the recent changes we are making.

Credit continued to improve during the quarter as detailed on slide 6. Net charge offs of $18 million are down 26% from last quarter, and are 42% lower than a year ago, and they now stand at the lowest level since the first quarter of 2008. At 47 basis points annualized for the third quarter, net charge offs are in line with our expectations for the portfolio and within our expected range through the cycle of 40 to 60 basis points. Charge offs within the commercial portfolios continue to decline while charge offs in the home equity portfolio remain elevated given the general lack of recovery in the economy.

Potential problem loans declined to $404 million from $660 million a year ago and were relatively flat from the prior quarter. The level of nonaccrual loans to total loans continued to improve to 1.9% from 2.2% at the end of the second quarter. Total nonaccrual loans of $278 million were down from $318 million in the second quarter and $403 million a year ago. The allowance for loan losses now equals 211 basis points of loans and covers 113% of nonaccrual loans. And the provision for loan losses for the quarter was $0.

On slide 7, our capital ratios continue to remain very strong with a Tier 1 common equity ratio of over 12%. We are well-capitalized and well in excess of the proposed Basel 3 expectations on a fully phased-in basis. These strong capital levels will allow us to continue to deploy capital in a disciplined manner. Our priority for capital deployment continues to focus on organic growth. We will revisit the -- I'm sorry, we will revisit the dividend policy during the fourth quarter and we will continue to evaluate other opportunities to optimize our capital structure over the balance of this year. We continue to work towards delivering double-digit returns on Tier 1 common equity.

Finally, our outlook for the second half of the year remains largely unchanged. We had approximately 2% of loan growth this quarter and we expect around 2% to 3% for the fourth quarter as previously guided. We will remain focused on disciplined deposit pricing and will continue to monitor current loan pricing dynamics in the market. We expect to continue to defend the margin around the current level for the fourth quarter. Capital deployment will continue to be a focus and we will remain disciplined in deploying it to drive value for shareholders. And with that, we will open it up to your questions.

Thank you, sir.

(Operator Instructions)

Dave Rochester, Deutsche Bank.

So, you've outlined a lot of efficiency initiatives on the slide 5, which look like some will flow through this quarter or in 4Q, and then the rest in 1Q. Are you thinking that with these cost saves and lower cycle costs in 2013, that you could potentially offset the reinvestment that you are doing, and keep expenses flat year over year?

Yes, we haven't fully finished looking at next year for our expenses. But our goal obviously in this environment is to be as efficient as we can, and we are making some of these hard decisions right now in order to try to achieve that. But you do recognize, as you just mentioned, that we do have a number of investments we've made over the last couple of years, which are flowing in to our expenses in the form of depreciation on investments that we've made.

Yes. Okay. And just drilling down into one of the line items, just with the BSA expenses going forward, do you think you peaked on those legal and professional expenses at this point, and when do you think those will start to trend down?

I think the peak will probably be this quarter. And after that, it will trend down.

Okay. And just lastly, on the competitive landscape, I know you've talked about how competitive the middle market is. And I was just wondering if you are seeing more competition on loan structure these days, as well as on pricing -- where it's coming from? And if you think you can ultimately end up taking more share and spur growth in that bucket going forward?

Yes, it very much varies by geography and market segment. In particular, of late we've noticed that leveraged transactions, equity-sponsored transactions, such terms are getting more aggressive clearly. In the general commercial space, in the general commercial real estate space, and in some of our specialty groups, structure is holding up pretty well.

Okay. Great. Thanks, guys.

Emlen Harmon, Jefferies.

Good evening. Just wanted to hit quickly on the deposit growth. In your prepared comments, you noted -- on the commercial side of things at least, it's partially a function of the treasury management roll-out and improving that product. Was there anything in particular in that program this quarter that drove the outsized commercial deposit growth, or can you give us just a sense why we saw a steeper ramp this quarter?

As we've been talking about, growing our commercial deposit bases is a key strategic initiative for us. We made a lot of investments over this last couple of years. We've hired a lot of people, and I would say that we are starting to see early signs of traction there. So, it was an awfully good quarter, and we are very encouraged by that.

Got it. Okay. And then, maybe just drilling down on the expenses a little bit, did notice just a little bit of a tick-up in the personnel line. Could you give us a sense of what was driving that increase? And then also just a quick one on that topic -- what's the total BSA compliance cost that's in the expense number at this point?

Well, we haven't given a specific number on the total BSA cost. Although I think we did mention, in the first quarter it accounted for more than $4 million of the first quarter. It was material and meaningful, in both the second, to a lesser extent the third. This number here is also meaningful. So, I think you can draw some conclusions that it's several million per quarter. And again, I think I still said, we expect this to be the last quarter of significant outsized BSA expenditures, and we hope it will tail off after that.

With regard to the tick-up in personnel expense, it's a variety of factors, including some bonus accruals that we made for the year. And then severance for our Assistant Managers that was recorded in connection with eliminating that position.

Got it. Thanks. And then, just one quick last one, if I could. Phil, you talked about re-addressing the dividend policy in the fourth quarter. Could you maybe just give us an update on how you are thinking about capital deployment generally and the preference for dividend versus buyback versus keeping some of that capital in your coffers for something down the road? And if that's changed over the course of the quarter?

No. Our priorities of supporting organic growth, supporting the dividend, looking for accretive acquisitions, and share buybacks remain intact. Obviously, we are paying out somewhat less than some of our competitors at this point in the form of a dividend, and we are going to be addressing that this quarter. Acquisition activity has been generally slow, although around the industry we see things starting to pick up. So, perhaps something will come along that we'll be able to deploy some capital that way. But given that we are trading under book, a share buyback program is something that we are also taking a look at.

Thanks for taking the questions. Appreciate it.

Scott Siefers, Sandler O'Neill.

Actually I think most of my questions have been answered, but maybe, Phil, could you touch on overall sentiment among your commercial customer base? There has obviously been quite a bit of chatter the last couple of months about slowdown in overall commercial demand -- pick your reason -- fiscal cliff, election, et cetera. Maybe you could just provide a little color there, please?

Sure. Well, a month or six weeks ago or whenever, we did tell everybody that we thought our loan growth was going to slow into the third quarter. We have been running at, give or take, a 3% clip pretty steadily for some quarters. We ended up at about 2%, and the general commercial business really didn't grow this past quarter. I talked to a lot of customers. Pick your reason, but the general theme of uncertainty is making a difference, I think, as far as our commercial customers' willingness to borrow money and invest in the companies at the moment. So, I think that some of the slowing that we are seeing is attributable to this general uncertainty. So, once we get through the election, and hopefully if we resolve the fiscal cliff issue, perhaps some of that uncertainty will be lifted.

Okay. That's helpful. I appreciate it. And just one, kind of ticky-tack question -- did you guys have any impact from the OCC guidance on consumer loans? Did that hit your NPAs or charge-off base at all?

Just a really small amount.

Okay. Great. Thank you very much.

Stephen Geyen, Stifel Nicolaus.

Maybe just one question on the potential problem loans. It was relatively flat quarter to quarter. Just curious if maybe you saw slower workouts, or the inflows were a little bit higher this quarter, or what trends are --?

No, I think you have to realize that as the numbers start to get to be pretty low, they are going to start to flatten and maybe move up or down a bit quarter to quarter. Recall that between the first and second quarter, our nonperforming loans really didn't move down very much, and then we had a nice movement down from the second to the third. Likewise, we had a big drop in potential problem loans first to second, and then it was flattish this past quarter. So, I wouldn't attribute it to anything other than, at $400 million, that's about 20% or less than the peak only 2.5 years ago or so. So, it's come down a lot, and it's coming down to the point where it's going to be pretty flattish, I think, and trend down more slowly and maybe be a little more volatile.

Okay. And maybe just a follow-on, just curious about the reserves that you have against maybe TDRs and potential problem loans, and what might that mean for the reserve ratio going forward?

Sure. Scott, do you have those numbers?

Well, yes, if you just look in general, we are seeing an overall improvement in the portfolio. But the specific reserves we're taking against those credits are less and less than they were a year ago because the loss severity is less. So, that's why you see the reserve trending down, if you will, just because of the lessened severity on all the asset classes.

Okay. Thank you.

Jon Arfstrom, RBC Capital Markets.

Just a couple of follow-up questions, but on the branch manager elimination, did every branch have an Assistant Manager?

No. It was only our larger branches had Assistant Managers. And to be clear, we haven't eliminated every single Assistant Manager. But we did eliminate the positions of about 60-plus Assistant Managers.

Okay. Got it. And then on the branches still, some of the reformatting or upgrading you have done to some of your branches over the past few quarters, have you seen any performance changes or improvements from those branches, or would you consider that just necessary upgrades that needed to happen?

Well, they were certainly necessary upgrades that needed to happen one way or the other. If you are in the retail business, you can't have facilities that are literally rusting away. But we have, in fact, seen lift. We saw lift very initially when we re-signed all of our branches. We had old and faded signs, some with not very good visibility. So, that was done very early on in the program, and we saw initial lift from that. And as we have gone through and done everything from freshening up the branches to actually relocating branches, we are seeing pick up and lift from that as well.

And then importantly, during the course of the past several quarters, we have reduced the overall number of branches we have by 10% or more. And we are retaining, as we sit here today, more than 90% of the deposits from the consolidations we did back in January. So, that's significantly helping our efficiency in the branches.

And while we are very pleased that our treasury management efforts on the commercial side are yielding benefits, we are also very pleased that despite having fewer branches today than we had a year ago -- and we are seeing growth in checking accounts on the consumer side as well. And so, essentially we are pretty sure that the investments are yielding some incremental return because they are driving more activity in the remaining branches.

Right. And whether you attribute that to what we put into the branches or promotional activity or the competitive environment around us and dislocation of some banks around us, it's hard to really pin down exactly what it is, but at this point we feel pretty comfortable that it's working.

Okay. Good. And then, just a couple of follow-ups on lending. I don't know if this is an optical illusion or not, but you had, it looks like, relatively flat yields on your C&I portfolio sequentially. Just curious if there is anything unique to that?

No. You mean the optical illusion at the -- if I'm looking at page 8 of the net interest margin tables from 3.88% --

3.89% to 3.88%.

No, nothing -- no illusion there. That number does calc and check and double-check, and we are pretty comfortable with that number. Keep in mind that we still have more than 25% of the portfolio in commercial land, with a floor or a spread above 3%. And so, in essence, there is some compression limitations on the down side. That's down from a considerably higher level two years ago, but it's still a nice level to have, and put some downside limit on how far that will go.

Okay. That's a good thing, obviously. But the sustainability on that, you feel good about that, at least in the near term?

I won't comment on any individual line item. However, we do feel confident on sustaining the margin in the fourth quarter at around these levels.

Okay. And that gets to maybe the bigger question -- you danced around, and I don't know if I can get you to comment on it, but --

We really try not to do any dancing -- seriously. We are not big dancers here. We try to tell you what we know.

All right. Well, here it goes.

Okay.

You talked about the levers in Q4, but you also said there is very little room to improve on the deposit costs. And I'm just wondering if you would comment on 2013. Because you do have some declines obviously in some of the real estate categories, and just a realistic look at it says we will probably see some margin pressure in 2013. But I'm just wondering if there is anything I'm missing?

So, we are not prepared to comment today on 2013, but broadly speaking we would say yes, we continue to expect to see asset compression or yield compression on the asset side of the balance sheet. We do believe that our ability to have material, meaningful, additional price and, therefore, cost savings by lowering deposit pricing specifically, is becoming increasingly limited other than the CD bucket, which you will notice is the largest component of our interest expense. That having been said, you will also notice that our short-term and long-term funding costs are another sizable contributor to our periodic [interest] expense. And we continue to look at opportunities there to optimize our non-deposit funding to lower our overall cost, including through the trust redemption and through what will inevitably be refinancing of all of our federal home loan bank borrowings, which all mature within the next nine months.

Okay. Good. That's fair enough. Thank you.

Terry McEvoy, Oppenheimer.

Just questions on fourth-quarter expenses. Anything to note about the branch initiatives? Any one-time type of expenses there? And then same question for redeeming the trust preferreds in the fourth quarter. Any costs or expenses there?

So, first on the trust redemptions, there will be no extraordinary net cost in those redemptions. With regard to the branch, yes, we will have some consolidation costs to the tune of $2 million. But we would expect, as we said before, the savings, on average, to exceed $300,000 per branch. So, we are assuming that those consolidations will pay for themselves within 12 months.

Okay. And then, separate issue -- from what I've heard, the new large bank that you compete with in Wisconsin had a difficult Columbus Day weekend with some conversion activity that got a fair amount of press. Do you think others that compete with that large bank will benefit from the disruption that happened in, and actually lasted for a little bit after that weekend?

Yes, I don't really want to -- how should I put this nicely? I never like to see those kind of difficulties, and converting a bank that size is hard to do. So, I sympathize with them. We have tracked a significant spike up in customers walking across the street over this last week or so, because they've had a really hard time accessing their account information and even being able to communicate through call centers or wherever. So, it's been difficult, and we have seen some pick up. Whether or not at the end of the day that ends up being something material or not, hard to say right now.

And that just lastly, looking at the, call it, the specialty businesses, which one do you think is best positioned for growth in this slowing economy or this temporary slowdown that we are seeing?

Well, we have had really nice growth in our oil and gas, and power and utilities businesses, which are somewhat immune to some degree to what's going on generally in the economy. So, between the two of them now, we are up to almost $800 million of outstandings at the end of September, which has been nice growth over the past year-plus.

Thanks.

So, those two are probably best positioned.

Perfect. Thanks again.

Erika Penala, Bank of America Merrill Lynch.

Good evening. My first question is a follow-up to Jon's question. Chris, could you give us a sense of how much within your long-term funding bucket is maturing in 2013, and at what rate? Given what Phil had mentioned during the prepared remarks, where you were able to issue your senior -- I'm trying to figure out what the opportunities could be there for next year?

We have more than $600 million maturing within the next nine months from September 30 at rates generally north of 1.5% and south of 2.5%.

Okay.

We would expect to fund those with core deposit growth, basically.

Correct.

So, we aren't going to -- unlike the Trust, we are not going to go out and do a financing.

Okay.

At least that's the expectation today.

And if we, for whatever reason, didn't have that core deposit growth, we could certainly roll over short-term federal [home loan] advances, keeping in mind that these were originally four or five and some cases even longer-term advances put on back in 2008. The ability to refinance them, even in the wholesale markets would be at very low levels, probably in all likelihood below 25 basis points on a short-term basis, and certainly with core deposits it would be in that 25 to 30 basis point range.

Got it. And I apologize if I missed this during your response. But you mentioned that the loan floors are helping some of the resilience in commercial yields. Is there a component of that, that expires over the next year?

Well, they renew on a periodic basis, so they are always expiring and --

Right, but is there -- could you help us size -- I understand that you don't want to give margin guidance yet and you're in the middle of the budgeting process. We were trying to just understand the puts and takes we have to consider for next year.

We have been pleased that our commercial bankers, based on their strong relationships, have been able to sustain and roll over floors that we, in some cases, didn't expect they would be able to. So, we have been more successful in retaining floors at above the current margin levels than we thought. And we applaud those efforts, and encourage our bankers every day to have conversations with clients that highlight the value of their overall relationship, and encourage them to maintain the ongoing contractual relationships they have with us. And that's worked out well for us over the last year, and we hope it continues to work out well for us.

Remember, that these are all very granular floors. These are floors on a whole bunch of loans.

Small pieces in many cases.

Got it. And just one final question. In terms of the process for capital return next year, it sounds like for the mid-sized banks, the timing and the process is a little bit different from the CCAR banks. Maybe it's too early to ask this question, but would the implicit ceilings in terms of capital return, you think, be similar to an institution your size, especially with your level, relative level, of capital? Or do you think that these implicit ceilings are going to be fairly blanket?

I think the broad brush would be that the implicit ceilings on payouts in total will likely be applied across the board. That having been said, I think there are those institutions who have a current significant excess to the expectation levels, and there are those institutions that are below the expected capital levels, and I think both will have different dialogue with their regulators as to what that blanket means.

Got it. Thanks for taking my questions.

Chris McGratty, KBW.

Chris, on the investment portfolio, maybe I missed it, can you just help me get comfortable with the outlook for the size of the book? Should we assume a gradual decline going forward?

No, I think what we said last time was that the portfolio essentially would bottom out in the third quarter, and that from the third quarter onward you could expect to see the portfolio essentially grow in line with our overall balance sheet, as we also seek to maintain a stable and appropriate liquidity profile from an LCR perspective. So, you can expect that the portfolio going forward will essentially remain at these levels or grow with the total loan portfolio.

Okay. And on the tax rate, what should we be using going forward?

The general tax rate in the low 30%s has been a good placeholder. And we would continue to suggest that as a placeholder. Obviously, occasionally we have some tax adjustments, but we do that in concert with our filings, and our ordinary audit and review processes.

And then one for you, Phil. There was a big transaction in the midwest this past quarter. Wondering if you can talk about any potential dislocation that may be an opportunity for you guys?

Yes, the footprint up here in Wisconsin of the acquired bank is, give or take, 30 or 40 branches and about $1 billion in deposits. So, it's actually a very small piece of that overall transaction. And that company has not been very active that we've ever really seen in the commercial spaces. It seems to be mostly a retail deposit gathering effort. So, at least in the short run, we don't see any particular competitive impact from that. But obviously we are not privy to what the plans are there, once that transaction closes.

Understood. Thank you.

We always remain interested in accretive in-market consolidation opportunities though.

Matthew Keating of Barclays.

Yes. Thank you. As your asset quality metrics continue to show consistent improvement, can you talk about where you'd expect your reserve-to-loans ratio to bottom?

Yes, well, as you have seen, it's been consistently moving down as we are not replacing charge-offs basically. But that is going to come to an end. I don't know exactly when, but in the near quarters, we are going to get to that point where the improvement in the portfolio, and the reserve releases implicit because of that improvement, are not going to offset the need to provide for a loan growth and expansion in the loan book.

So, you don't run the loan loss reserve, as you know, with a target in mind. You justify your loan loss reserve each quarter based upon the inherent losses in the portfolio. So, I don't have a magic number for you on that, other than, as you can see compared to peer banks, we are still carrying around a fairly sizable overall level of reserves against the loan book, although our credit metrics are still a little bit elevated compared to a lot of our peers, too. It had come down an awful lot, but we are by no means the cleanest bank in the country for mid-sized banks.

Would you foresee any provision credits in the near future, or it's going to just depend on the credit quality environment?

Yes. It depends on the analysis each quarter of what the riskiness is in the loan book. I have said before -- I'm not much of a fan of negative provisioning, and I'm not even a fan particularly of seeing loan loss reserves industry-wide running down like they are right now. But we are subject to the same rules that the SEC puts out, and that our accountants enforce, as everybody else. So, we are watching the reserves slowly decline, which is not unusual in this part of the cycle. We have seen it time and again, for those of us that have been around for a while.

My final question would just be -- in mid-September you talked about plans to consolidate the corporate headquarters into downtown Green Bay. Could you talk about the timing of that initiative and --?

Sure. We actually closed on the purchase of the building about six weeks ago or so. We are in the early stages of doing the work that we need to do on the building. Being here in Wisconsin, you need to do things like take care of the roof and the parking lot before it starts snowing, so we are working on that. But over the next year, we will be remodeling the floors in that building one by one, and moving people in. So, I would guess about 9 to 12 months from now everybody will be consolidated there, out of about five different leased locations that we occupy in the southern area of Green Bay.

All right. Thank you.

(Operator Instructions)

Peyton Green of Sterne, Agee.

Yes. Good afternoon. Wondered if you all could comment on a couple of things. One, certainly you have had solid loan growth for a better part of two years now. To what degree will you focus on earning asset mix going forward, or would you want to grow the balance sheet going forward?

You saw the balance sheet expand this past quarter to the tune of $650 million or so, and that's because the securities book, as Chris was talking about earlier, is pretty much settled where it's going to be and will grow. So, as we put loans on, the balance sheet will expand. We are very cognizant of having an appropriate mix of loans on our balance sheet. And as we have said, we believe that a sound portfolio for a bank like ourselves in the areas that we operate in, and in the types of loans that we are interested in making, will consist of roughly one-third consumer-type assets, mostly residential mortgages, one-third commercial real estate assets, and one-third commercial and industrial loans. So, we are working toward achieving that mix, and we are undoubtedly going to see balance sheet expansion as we move forward from here.

Okay. And just to be clear, you would expect the investment securities and liquidity to stabilize at this level? Or would they grow to keep the same loan to earning asset mix going forward as loan growth?

We would anticipate that they will slowly grow because we need to be compliant with the LCR rules of Basel III.

Okay. Great. All right. And then also, the Other expense line was down pretty nicely and a good bit lower than it's been running over the last five or six quarters. Is that a good run rate going forward, or was it just a particularly good quarter for that line?

It's other. There is always a mix of things that's in there. If you look back over the prior four quarters, it's generally been above $14 million. It was a little bit below $13.5 million this quarter, somewhere in that range. But it's other.

We wouldn't draw a lot of conclusions from that.

Okay. And then historically, the fourth quarter has always been an uptick in expenses for you all. Is that fair to say this year, or do you think things -- beyond the branch consolidation issue, do you think you are at just a more efficient level?

Well, we continue to work hard on efficiency, as you have seen from some of the actions we have taken this year. There will be some unusual items related to some of those actions. And we continue to see the cost of the investments flow through. So, the fourth quarter will probably reflect some unusual items, as it often does.

Okay. Great. Thank you very much.

Well, it appears that we have no further questions at this time. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to Mr. Phil Flynn for any closing remarks. Sir?

Yes. Thanks for the call today, thanks for all the great questions. We appreciate it. We had, we feel, a very solid quarter with loan growth in line as to what we expected, and really solid and encouraging deposit growth, particularly on the commercial side. The balance sheet expanded. We had higher net interest income, modestly higher fee income, and we do remain optimistic that we are going to be able to continue to grow this franchise and deliver increasing value for our shareholders. So again, we look forward to talking to everybody next quarter. And if you have any questions, as always, give us a call, and thanks again for your interest in Associated.

And we thank you, sir, and to the rest of management for your time. Ladies and gentlemen, this concludes the Associated Banc-Corp's third-quarter 2012 conference call. Thank you and take care.