Associated Banc-Corp (ASB) 2005 Q1 法說會逐字稿

Good afternoon. My name is Patrice, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Associated Banc-Corp first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer period. [OPERATOR INSTRUCTIONS ] I would now like to introduce to you President and CEO, Mr. Paul Beideman. Please go ahead.

Thank you, and good afternoon, everybody. As you can tell from our press release, our earnings for the first quarter were $0.59 a share, up 11% over a year ago, and net income was 77.5 million which was up 30% over that period, largely as a result of the significant contribution that First Federal being in the quarter for the full term brings to the table. The press release is a little thicker than it usually is and I think there are several components of the first quarter performance that require a little clarification so that you can get as clear a picture as possible regarding our prospects going forward. So if I can, I'll make a few comments about the performance in the first quarter and then we can open it up for your questions.

First of all, the lion's share of our activity in the first quarter was really dominated by focusing on a successful integration of First Federal. The system's conversion, as you will recall, did occur in mid-February, and much of our time during the quarter was spent on training, communication with customers, and supporting a successful transition of employees and customers to a whole set of new operating platforms and we had hundreds of Associated retail people in First Federal branches before, during and after the conversion to assure smooth transition and also to help customers through their questions in terms of how things changed. And our business bankers spent a significant amount of their time calling on customers that we wished to retain to establish new working relationships with new people. We think the integration has been very successful in the sense that we have retained really a lion's share of First Federal's customers and balances and we feel good about it and as a result our prospects now that the dust is clearing and we can sell our broader product line to First Federal customers and have this enhanced market position we've talked about before.

If you look at our fee income in the quarter, we think it was quite strong. That's reflecting certainly the positive leverage of bringing First Federal's customer base into our fee structure. Some minor pricing changes that we've made but also some sales successes, especially in areas around brokerage insurance and wealth management. Our asset quality in the quarter we think was incredibly strong with only $2.2 million of chargeoffs, which is about 6 basis points, and with non-performing loans, even after bringing in a 3 billion dollar plus or minus loan portfolio from First Federal decreasing down to .74% of total loans from .83. We did experience a non-recurring $4 million gain as a result of sale of the Pulse ATM network and we also experienced $3 million of non-recurring expenses that are specifically attributable to the First Federal integration.

A second on deposits if I can. You can see that they were down in the first quarter, and the decline is really a result of a couple of specific things. First, seasonal trends, most notably escrow deposits which are disbursed at the end of the year and then as you know rebilled through the year. The absolute dollar decrease was slightly larger than we would have seen in past periods because of First Federal's escrow balances coming in but the other components of seasonal flows really compare very favorably to what we've seen in first quarters before.

The second factor impacting deposit flows relates to municipal and institutional deposits. And we experienced a significant increase in municipal and institutional deposits in the fourth quarter of '04 and withdrawals then in the first quarter of '05 to the tune of about $300 million, and I guess my point is this. If you compare third quarter '04 balances to first quarter '05 balances in terms of municipal and institutional deposits, the first quarter '05 balances are higher than the third quarter in '04, but there was a significant spike up of those deposits in the fourth quarter and then a reduction of those deposits in the first quarter of '05 which exacerbate the flow from year-end '04 to the first quarter of '05 but if you connect the dots six months out reflect a nice sort of steady line of growth.

Margin decline of about 6 basis points and that's a function of the flat yield curve continuing to basically offset the effects of short-term interest rate movements coupled with a continuing very aggressive loan pricing environment where companies are out there fighting for the A-quality credit and we're going to be as aggressive as we can be within our discipline standards at A- quality credits but we're not going to sacrifice on price for lower quality credit. But it's a competitive world and we're seeing deposit prices move slightly more aggressively in the first quarter than in the second half of 2004.

While there's certainly been some noise in the first quarter numbers as a result of having First Federal in there for the full year, a couple of conclusions from my point of view that is that the core value of First Federal is there. I talked about seasonality of deposits before. If you look at our consumer demand deposits, which in my mind is probably the best proxy for success and retention at First Federal base over the long run, those balances are virtually flat from the end of the fourth quarter to the end of the first quarter, and that to me shows the solid performance in terms of the overall conversion. Loan growth when you normalize for First Federal is about 6% on an annualized basis. We expect that -- we generated about 10% loan growth last year and we feel that over the long haul, that's where we want to be. Asset quality was very, very strong. Fees we thought were positive, and we feel pretty well positioned as a result of that successful First Federal conversion for the rest of the year. I believe we'll continue to see many of the same trends that have been affecting the margin in the second quarter in terms of where interest rates are and the competitive environment that we're in. As we look at it, we belive that there could be some slight additional deterioration there as we go forward in the short term, but we anticipate that those factors will stabilize and create some momentum around the margin in the second half of the year. So those are my comments and I'll be happy to answer any questions that you have and Joe is here as well.

At this time I would like to remind everyone if you would like to ask a question, press star, then the number 1 on your telephone key pad. Your first question comes from Kevin Reevey.

Good afternoon. Congratulations on a nice quarter.

Thank you.

Question, do you happen to have a break out on linked quarter growth in non-interest income and non-interest expenses were ex -the First Fed deal so that we can just compare apples and apples?

It's difficult for us to do that now that the conversions have formally occurred. We can estimate it to some extent.

Kevin, this is Joe. Let me try to give you a shot at it. What we tried to do is just say if we had one more month in the fourth quarter of last year for those two categories what would the increase have been so let me just try to give you that perspective. The non-interest income was reported up 12 million. It would be about 7 million with the impact of First Federal. And on expenses, we said they they would be up 11 million, and without First Federal, would have been up 2 million, so in that helps you.

That's helpful. And then with respect to the cost savings from First Federal you talk about in your press release, you expect cost saves to be realized throughout the year. The bulk of that, where would we see the bulk of those savings?

There's several things going on. We've implemented some of the cost saves, in fact, before we got to the systems conversion in a variety of areas where we could. Then after systems conversion, so literally right now, there is the reduction of back office expenses going on since there was no longer any need for those redundant resources. But again, there will be some residual costs associated with that such as benefits and that sort of thing that won't play through until the end of the quarter and then there's some branch actions now that the systems have been converted that will play out over the next three to four months. So when we first announced the merger, we said that we would work towards getting the run rate of those cost savings in place between now and the end of '05 so that it would be fully in place by the end of '06. Some of it has been done even in the fourth quarter of '04. I think we'll start to see some movement in the numbers next quarter, but it's not going to be off a cliff, if you will, to a whole new base. It's going to phase itself in as we go.

So would it be safe to say it will be -- we can look at it equal per quarter over the next three quarters?

I think that's a reasonable way to think about it. But I would hesitate to suggest that at the margin $30 million of expense run rate changes between the second quarter now and '06 because there's lots of moving parts. We gave everybody a 3 percent raise on average coming into '05 and changed some of our bonus plans and incentive plans to increase sales. We've invested in other things so there's ups and downs that are going on in the numbers all the time.

Great. And then can you also talk about the First Fed acquisition in terms of how people are working together, how the First Federal employees are meshing with your employees in order to basically row the boat in the same direction?

Sure. There's several aspects to that. I'll try and be brief on it, but they bring a very strong retail culture to the bank. And I think it meshes very nicely with what we're trying to accomplish. And as I said earlier in my comments, we've had lots of people back and forth between the two systems both from a training point of view and a customer service point of view, and I believe that on the retail side, things are meshing together very well. On the commercial side, it's largely our people and our business and our approach and on wealth management, that's the case as well. In the in-store system, we're working with their management, the management that we brought over to build we we think a more fulsome, if you will, strategy in terms of how we want to be selling in the supermarkets but the people they bring to the table and their sales capability are really quite strong. I don't see really any issues from a cultural point of view among the people. There were certainly adjustments to a different set of operating systems, so you've got to learn things new and so that takes some time and learn a new set of products so that you can sell them effectively and frankly we're still finishing up all of that.

Great. Thank you.

Your next question comes from Ben Crabtree.

Good afternoon. You had mentioned that the loan growth kind of extracting First Fed was a little over 2% and if I look in the breakdown, the period-end stuff, it looks like that occurred in several places, but there was some -- a notable weakness in some other areas, particularly I guess home equity which kind of caught my eye. I guess I'm wondering, Paul, if you think it's likely that you can return to something approaching a 10% loan growth trend by the second half of the year, or is there something going on that's going to cause this to be a sub-par year in loan growth?

Not at all. In fact, I'm glad you brought that up because that was one more piece of noise that I should have mentioned and didn't and there's a little fine print footnote in there. As a result of the system's conversion, Ben, we reclassed about $150 million out of home equity into residential mortgage. So that minus 6.5% growth rate that you're seeing there really should be a positive, about that same amount.

Okay.

So it's just a function of where we thought they were when we were doing due diligence and where they really were when we finally got to the systems conversion.

So the numbers you're showing there before don't reflect that adjustment in the historical numbers?

Correct. The December '04 numbers had them in the different buckets and the March numbers have them in the correct bucket.

Okay. But commercial real estate showed a decline too. I'm just wondering if there's some implications there that maybe there might have been some stuff at First Fed that you are not terribly comfortable with or is this payoffs or what's kind of going on here?

We exited some First Federal credits very consciously in the commercial and commercial real estate section. And we're very happy to have done that, and I think it positions us better going forward given where we want to keep our asset quality, and some of that occurred in the fourth quarter. Some of that occurred in the first quarter. You're right.

And it's pretty well done by now, so now we've got a good solid base to go forward from?

Absolutely.

Thank you.

Your next question comes from Eric Grubelich.

Hi, good afternoon. Couple questions for you just to follow up on the loan portfolio mix. You had another quarter of -- well, you had a good quarter, it looks like, in real estate construction. Anything new you're doing there, or was it just a good quarter?

I think in that category, we just were, you know, this quarter we were successful in that category. We really aren't changing our approach to the market at all, and the period end comparison can be -- well, the quarter ended on April 4 instead of March 31, these numbers would probably look different. The averages show about 6% growth, and given the focus we had on conversion and that sort of thing, I can understand in my own mind why the growth levels in the first quarter aren't going to be what we hope they are going to be going forward. We fully expect that we're going to grow in the low double digits in terms of our growth overall for the year. I'm comfortable that we're going to see home equity growth and some improved growth trajectories in those -- in the commercial loan categories. As Ben said, with the dust having cleared around some of the issues around exiting some of those credits and having a more stable basis on which to build and then not having the diversion of the impacts of the conversion itself on people's time.

Sure. That makes a lot of sense. I've got two more questions, and these are probably for Joe. Joe, you had what looks like to be a pretty decent MSR recovery. What do you have left in that balance sheet account that you can recover through the rest of the year? Is there much left there?

Give me a moment.

Okay. And then while you're looking at that, I'll just mention my other --

11 million.

So you've got 11 million left at least as it stands now in recoverable valuation reserve?

Correct.

Okay. Perfect. Going back to the margin for a moment, you're obviously suggesting that there's going to be a little bit more pressure maybe next quarter. If you looked at your margin, you're at 368 for the quarter. Where did it end up in the last month of the quarter in March?

There was some more erosion from the average, so it's slightly down from that.

Slightly down? Okay. Great. Thanks very much.

[ OPERATOR INSTRUCTIONS ] Our next question comes from Marsella Martino.

Good afternoon. Looking at service charges on deposits, I know we've heard from several banks on that pulling back a little bit. You guys got some good growth, I'm assuming some of that's from First Federal. Can you just talk about what you're seeing there? I know you did mention that you did some pricing changes.

Yeah. We made a few pricing changes. We have found some areas where we can just improve our performance in terms of managing at the details of some of these things more effectively. Really a major lever point for us is converting First Federal's deposit base to our fee structure. And there's pick up there, and I don't believe we really -- well, by definition we haven't recognized at all because we didn't really begin to see the effects until March from a February conversion, and I don't know that we even saw the full effects in March after statements are rendered and that sort of thing. So there's some leverage, if you will, for us given how our fees compare to theirs.

And then I notice your trust assets under management have risen nicely over last year. Some of that's market, but can you kind of talk a little bit about what you've been doing as far as your sales efforts and when do you expect those to continue?

Sure. First of all, we've made a lot of -- a significant investment in people, and we've brought in both in our brokerage side of the world and in our asset management side of the world some new people. And we've been investing just recently in additional sales capacity around our now enhanced distribution system in markets such as Madison and Minneapolis and the like. We are studying much more aggressive performance standards creating overt revenue generation cross-sale goals between our commercial bankers and our wealth management sales force, so it's not a matter of "Gee, I hit my referral target," every business banker in the system has holes for revenue creation, so it's got to be closed business in the wealth management from the contacts that they have. So it's a combination of those kinds of things.

Great.

Marcella, the absolute numbers of assets under management went up from 4.56 billion to 4.68 billion. So we did have a nice increase, and that's both market and sales efforts, as Paul has indicated.

At the margin, that's an important strategic initiative for us. It's not going to be a straight line, but we think that there's going to be a steady positive focus there in terms of generating additional revenue, all things being equal in the market, as these sales initiatives can continue to mature.

Great. And then just turning a moment to the competitive nature in commercial in the pricing front, I know you've mentioned this before. Is there anyone out there that's being overly aggressive, or is it just --?

Who's not?

Yeah.

I guess overly is the key word. I think there's a premium for quality credit, and in this environment right now, it's very intense.

Okay. Great. Thanks a lot, guys.

Your next question comes from Scott Siefers.

Good afternoon, guys. Just a question on credit. Your chargeoffs have come from, they started out at pretty low levels then if you look over the last three quarters, it's gone even much lower than that. I'm just wondering how you're thinking about that dynamic. Do you see anything on the horizon or anything that would lead you to believe that these kinds of levels aren't sustainable or how would you recommend we think about sort of a normalized level for you guys?

We can always get surprised. In the very short run, we think it's going to remain quite strong. Certainly I wouldn't think about it at these kinds of levels over the intermediate or long term, but we'd like to think about ourselves over the long run at 20 basis points or below. Right now we're just in rock solid shape because of a whole variety of factors. We try hard to be very disciplined underwriters and issue is a credit so maybe our growth rates are always going to be a little lower than some others, and I think the history of Associated is that even though we have some problem credits like everybody does, we do a very good job of working them out and we're hopeful that over the long run, as a result of that, we can keep our chargeoff levels lower than our peers on a sustained basis.

Scott, we don't like talking about them because we might jinx it.

Fair enough. All right. Thank you very much.

Your next question comes from Mike Plodwick.

Good afternoon, guys. I'm just curious if you're seeing any variations in loan demand amongst your various market?

I think it's much stronger in Milwaukee, Madison, and Minneapolis, and we're seeing growth trends picking up there. I think in some of our traditional more meat and potatoes markets like Green Bay, it's sort of been steady and has been steady for some time. Markets like Chicago for us where we're more of a private bank and a middle market bank, we see great demand for what I'll call the lower end of our corporate lending businesses. So it really is different place to place.

Okay. Thank you.

Your next question comes from Brad Ness.

How are you guys doing?

Good.

Few questions here. Point of clarification with I believe the statement with the loan growth being 6% on annualized basis without the First Fed acquisition or when that's normalized. Do you get to that number when you say that you let some of those loans, commercial real estate loans roll off the books? Is that how you get that 6% number?

That number includes the effect of that. What we tried to do there was put a balance out the effect of First Federal to the extent that we could.

Brad, what we did is we tried to take the loans we purchased on the acquisition date and take one month's worth of that average and add it to the fourth quarter average and compare those two averages. That's what we did, so it really wasn't real sophisticated, but we think that's representative of what the last quarter would look like, the fourth quarter would look like, if they had been there for the full quarter, so we think that's a reasonable way to approach it, and as Paul said, with that everything that happened at First Federal or Associated is in that 6% number.

And it was run off in both quarters, so maybe sort of neutral.

Okay. And can you guys quantify the recovery you took in the quarter?

4 million.

4 million? Lastly here, with the merger kind of skews a lot of the comparisons. Are there any other trends, whether positive or negative, that you noticed that we should be aware of?

I think we tried our best to describe it in the press release and Paul's comments. No, I don't think there is anything else that I can think of that we can share with you

No. Those are, I think, the important ones.

Appreciate it guys.

Your next question comes from Peyton Green.

Hi, good afternoon, couple questions. What was the duration of the investment portfolio and do you have any idea what the sensitivity would be, up 200 or down 100?

The duration last quarter was about 2. It's about 2.4 this quarter. What would be the extension risk if we went up 200? I don't have an exact number, but it's not double. It's something less than double. I think the number would be something around four years, if I remember the analysis we did.

Okay. And then any idea if rates came in, how much cash flow you'd get off of it or what the duration would do, rather?

It would shorten some, but not a lot. I think it's around 1 and 3/4. Again that I'm less comfortable with because I'm more about the other side and I've been watching that number

Sure. Okay. And then in terms of the wholesale funding, if you look at the wholesale borrowings to your total non-equity funding, it's gone up a couple hundred basis points over the last year. What is your appetite or capacity or when would you say okay we're going to allow the securities cash flow to shrink the balance sheet some? I guess where do you start to --

We're considering all those thing right now. I think we are at that point. As we look at where we want to be on the curve in terms of investments, and where the funding is, if we're going to try to go out on the curve because what's happening on our balance sheet, there is discussion right now about allowing some of the investment portfolio just to go to cash and pay off borrowing. Again, there isn't a one strategy fits all. This is all a balanced approach, and we're thinking about all of these things, and we've actually started to think along those lines on a small basis.

Okay. And then what do you expect the securities cash flow to be this year?

I have that number in my office, but I don't have it here. I think -- again, I think it's right under a billion. If I'm wrong, can I call you back ? I think it's right under a billion.

Then seems like you all dipped your toe in the water in buying the stock back in the quarter. What's your appetite going forward?

Again, we've been trying ing to buy to offset the option exercises that have been occurring. Clearly because of State Financial, we're going to have a problem buying back because once we issue the S-4 for them, the proxy, we're going to end up not being able to buy so we're going to be a little bit constrained. Our policy has been -- not our policy -- our practice has been to try to cover the option exercises so we might be a little bit restrictive over the next couple of quarters

Okay. What is the timeline now for State Financial that you expect?

We're working on the applications as we speak. Obviously we had to to get through the quarter because those would be the base as quickly as we can get them filed and get regulatory approval so again, we had said late summer and I think that's still our time line.

And we would like to get the systems converted before the end of the year.

Okay. Great. Thank you very much.

Our next question comes from Terry Mcevoy.

Good afternoon. I believe you acquired about 50 supermarket branches in the First Federal acquisition. Could you just comment on the performance so far versus expectations with regards to those branches?

It's probably too early to make some conclusions because we've been so focused on converting them. And the systems conversion really does take a lot, both before and after, it takes a lot of internal effort just to make sure that everything is working the way it's supposed to. I think there is really significant potential to increase the sales trajectory of core demand deposits and core consumer loan products from that source and as I mentioned earlier, we're doing some things to look at what we need to do to help from a training and marketing point of view to increase the trajectory of sales from that business. In a traditional store, 98 % of the people you're talking to are your existing customers and in an in-store, 90+% of the people you're talking to are not your customers and it's a whole different sales process and sales opportunity. And First Federal was pretty good at it, but they were more focused on certificate money market kinds of sales products, interest bearing deposits, and I think there's a big opportunity for demand deposits and consumer loans over the intermediate run.

There was one or two pennies of expenses associated with integration in conversion activity. Was that in line with expectations? Should we expect any more in Q2?

There could be some small amounts in Q2, but I don't think anything of that size.

Thank you.

Your next question comes from Dan Hassan.

Good afternoon, gentlemen. Can you -- just a couple of modeling, housekeeping questions. The Pulse transaction, the $4 million gain, that shows up in other non-interest income so that accounts for the difference, the $4 million gain in quarter-over-quarter?

Correct.

Okay. And you talked about retail commissions and there was some talk in there that it was up 2 million bucks and there was some talk that part of that might have been seasonal. I was wondering if you could help me out on sort of thinking about a run rate on that line instead of stripping out the seasonality. It wasn't clear that the entire $2 million gain was seasonal.

No. I wouldn't say that it is. We have been experiencing some fairly consistent growth in that category, and it's coming from a couple of sources. One, the insurance businesses that we've purchased over the last year and a half, and that sort of gets normalized now as we go through the second quarter, so you're not going to see things that weren't in the first quarter last year that are in the first quarter this year. But really the big lift in that category going forward and that's been a contributor over the last several quarters is the enhanced selling effectiveness within our brokerage organization and the licensed branch employees in the branch system in terms of fixed annuities. And our expectations are that we can generate double digit percentage growth in those categories year-over-year for some time. And again, not a straight line, but our expectations are to continue to treat these areas sort of the margin as growth businesses and that we've got the potential as we keep investing in it and improving our selling effect in this to generate that kind of lift.

Is 14.7 kind of the right base to use going forward then?

It has in it maybe half a million or so of some one-time things in the insurance business that occur each year in the first quarter, so it's probably a little lower in that in terms of a base, but generally yes. So maybe it's 14 instead of 14.7.

Great. Then can you remind us, just two more quick ones. Can you remind us, getting back to the cost saves for the remainder of the year. What's the total target number for the rest of the year? I didn't quite hear, did you say that you can kind of think about it spread evenly through the remaining three quarters or if you could just clarify a little bit, please.

Let me try in this fashion. We had said when we announced the First Federal deal that we would get $30 million in cost saves from their projected expenses in 2005. And again so that was in early 2004 when we started that exercise. So some of those, as Paul said, some of those cost saves actually occurred because part of their expense run rate would include additions to staff, new initiatives they were doing. So some of those occurred even before we closed. Then we also said that during 2005 because the conversions were going to be delayed, we expected $18 million of actual cost saves this year. So we were going to get 60% of them. So again, as we look at this process, we're saying all of that's occurring and we are getting these savings and that we're trying to make sure you don't think that all of a sudden we're going to see this great drop in expenses because we've got them integrated. We're going to be getting these benefits, but it's going to be gradual now as we go forward because some of these have already been gotten last year. Some were occurred because they didn't spend the money and some of it's occurring this year.

Is the $18 million, however, just to clarify is the $18 million similar -- is that as of -- should I think about that as of Q1 going up in extra quarter or has some of the 18 million already been realized in Q1?

Some of it has but the majority of it after the conversion obviously because that's what most of the cost saves were going to be, but some folks from First Federal actually left late fourth quarter, end of the year kind of time, some folks early in January, but most of it's coming beyond there, yes.

Got it. Okay. Last question just real quick on the net interest margin. If you could just clarify as well I think your comments were expect that kind of, you know, 5 to 7 basis points compression in Q2. I think you just said similar to what we saw in Q1 and then stabilizing in the second half. Did I hear that correctly?

I don't think I said 5 to 7. I think there's an opportunity for some deterioration. You tell me where the interest rate curve is going to be and we can be a little more precise. But I think there's still room for some deterioration in the margin through the second quarter, and then we anticipate, again based on what we think interest rates are going to look like, that it's going to stabilize and start to increase slightly as we go through the rest of the year.

But I guess I would have suggest that if you wanted to put a number on it , those are as good as any number we could give you.

Certainly that gives you confidence about the second half of the year. Is that based on a forward curve or is that based on a forecast of the FED?

It's based on a whole combination of things. For example, the refunds recover and start to grow. So that has a major effect on the margin. How we anticipate our loan growth coming on and the spreads at which it comes on, and then, yes , interest rate forecast certainly play a role in that as well.

Thank you very much. I appreciate it. Nice quarter.

We have a follow-up question from Eric Grubelich.

Paul or Joe, could you just give us a little bit of color in some of your main markets, maybe Milwaukee, Madison, Green Bay, the deposit competition. Where is it worse? CDs? Special CDs? Core deposits? What do you make of that?

We're seeing interest rates move now at rates that are greater than they did in the third and the fourth quarter last year. And a lot of it -- I think a lot of the stability across the industry that we saw in margins last year was a reflection of a very competitive lending environment that was being offset by the fact that institutions were able to hold deposit rates. Now you've got the same lending environment but you don't have the same luxury of being able to hold deposit rates because of competition. So, yes , in certificate areas, in certain premium priced promotions around money market accounts and the like, you're seeing a lot more competition now than maybe six months ago. So in those categories, it's gotten more aggressive. We continue to compete there, and will do so, but we want to make sure that we're focusing on those areas of demand deposit growth too that we've been talking about where we on a relevant basis have had an opportunity to work on improving our performance in terms of relative sales and that sort of thing so we're going to focus really hard on those demand deposit categories but certainly going to compete in the interest bearing deposit categories which are important to us as well.

Okay. Thanks very much.

Your next question comes from Mark Keyhoe.

Good afternoon, everyone. In terms of -- I want you to give me percentage of your loan book that is linked to the prime rate.

To the prime rate? Just a minute. The prime rate? About 30 percent.

How much is fluctuating?

Upper 60s is the floating rate. Prime per se because a lot of it's tied to LIBOR and other [industries]. 67, 68% is floating.

Your next question comes from Peyton Green.

Just to follow up on the credit side. You all historically have had very low chargeoffs through the cycle and they did increase a bit over the last couple of years and have come back down over the last year but what does the watchlist tell you in terms of your comfort going forward? Thanks.

Right. Going forward over the short-term, the watchlist, the performance in our non-performers and that sort of thing, tell us to feel pretty good about where we are. Again, you can always get surprised, but I think we've been able to successfully work through several large credits that we've been working for some time, and much of the issues now that we're focusing on are down into the smaller credits, which is really a great luxury in its place locally we can work those credits pretty aggressively. So in the short run, looking at where we are, our trends continue to get a little stronger it seems each quarter with fewer problem credits to work with and the trends are holding in there pretty stable.

So it's not unreasonable to think that chargeoffs could be in the 10 to 15 basis point range?

We'd sure like to think that that's possible.

Great. Thank you.

Peyton, I was able to step out of the room and call Lloyd Francis, our treasurer, and my cash flow number for the investment portfolio was a little light. He said it's closer to 1.5 billion for this year and he confirmed my duration of 1 3/4 year on the downside so just to clarify those two points.

Okay. Thank you very much.

We have a follow-up question from Kevin Reevey.

Joe, is it possible you could break out the $3 million non-recurring expenses related to the First Fed integration? Is the bulk of that mainly in other operating expenses?

Yes. Kevin, it's spread over in small increments a large some number of expense categories. It's data processing. It's supplies. It's pay bonuses. It's a variety of little things like that.

So it's basically immaterial in the other categories but the bulk being in other operating expenses?

Correct.

Great. Thank you.

At this time there are no further questions. Are there any closing remarks?

No. Thank you all for participating.

This concludes today's conference call. You may now disconnect.