Associated Banc-Corp (ASB) 2007 Q1 法說會逐字稿

Good afternoon. I will be your conference operator today. At this time, I would like to welcome everyone to the Associated Banc-Corp's first quarter 2007 conference call. All lines have been placed on mute to prevent any background noise. [OPERATOR INSTRUCTIONS] After the speaker's remarks, there will be a question-and-answer session. Thank you. It is now my pleasure to turn the floor over to your host, Mr. Paul Beidman, Chairman and Chief Executive Officer. Sir, you may begin your conference.

Thank you very much, and good afternoon, everyone, and thank you for participating in our call. As usual, Joe Selner is here with me and Lisa Binder is also on the phone at a remote location. Let me just make a few comments about our first quarter, if I can and then we'll be happy to answer any questions that you may have. As you saw in our press release, our earnings for the first quarter were $0.57 a share compared to $0.57 in the first quarter and $0.60 in the first quarter of '06. You will recall in '06 there was a fairly significant adjustment to our tax rate as a result of some settlements that we had reached with the state entities that impacted earnings fairly significantly in the first quarter of '06 at a rate of $0.06. Let me make a couple of comments about the balance sheet. There's some moving parts to consider in the first quarter, so to provide some clarity, if I can.

First of all on a general basis, and much easier on deposits and loans, but our deposits are up about 3% year-over-year and demand deposits on an annual basis compared to the end of the first quarter of '06 are up over 4.5%, which we feel pretty good about, and that's been a core part of our strategy, as you know. We did experience the normal seasonal decline in commercial demand deposits in the first quarter that have affected certainly margin and net interest income and they're at levels that have been comparable to the levels that we have seen in the past. On the loan side, which maybe requires a little bit more elaboration, loans are down year over year by about 4.5%, and you'll recall that in the fourth quarter of '06, we announced a sale of about 300 million of mortgages that closed in the first quarter, which did have an affect on our run rate there, and we sold $30 million of student loans late in the first quarter of '07 as well. The other components of that are a decline in commercial real estate lending, which we have been talking about really for the last 18 months and consumer mortgages, while we've seen increases in C&I loans and the construction phase of real estate at about 6% in each of those categories.

In the quarter, loan balances were essentially flat to the fourth quarter. The affect of the sale of the mortgages impacted average balances adversely in the first quarter by about $240 million, since they were there for the whole quarter in the fourth quarter and for a short period of time until closing in the first quarter. So if you extract that sale of mortgages, loans were essentially flat. C&I loans in the quarter grew at a decent rate, around 4%, with construction loans showing some point-to-point growth and then with some declines again in commercial real estate. When you put it all together, we were essentially flat. I'll talk about this when we talk about the general business dynamics going forward, and it's probably difficult for you to see, but we feel pretty good about what we've been seeing in the last several weeks of the quarter and frankly, spilling over into the early weeks of the first quarter in terms of momentum around our C&I initiatives and the volumes that it's generating and we're hopeful that we're going to be able to start to see some traction from those initiatives, admittedly, at a smaller stint maybe in the second quarter than in the first half of the year, but some positives signs, at least in these late stages and early stages of the second quarter.

In our discussions, we've been saying that these investments were really going to start to pay off for us, we thought, in the second half of the year. We'd feel good if we could start to see some momentum as early as in the second quarter. A couple of comments on the margin, if I can. The margin has been pretty stable, only declining by two basis points from the fourth quarter rates, and that can be attributed entirely to the decline in demand deposits and having that affect. The interesting thing that we're seeing is that loan yields and deposit costs, the movement of those things over the last couple of quarters really have stabilized. In the first quarter, loan spreads improved by 10 basis points and deposit costs deteriorated by seven basis points. Those dynamics are very different than they were a year ago or six months ago and we feel good that we've been able to strike a position of stability there and hopefully that can ease some of the pressure that we've been experiencing through '06 in terms of margin compression.

Net interest income is down year-over-year, and there's a couple of factors I think worth noting there. One is just the impacts of compression through the period, but the biggest single factor really, and we thought it was worth pointing out is the $3.5 million affect of the stock buyback. Last year, we bought back -- plus the first quarter this year, we bought back about 10 million shares and the costs of that funding are somewhat significant and have impacted net interest income by that $3.5, $3.6 million quarter-to-quarter, year-over-year, and we thought that was worth mentioning. And while we will continue to use buybacks as a weapon, the unique size of the buybacks in 2006 driven by balance sheet restructuring really did have a substantive impact on net interest income, but obviously when you package that whole thing together, the margin is stronger and the EPS affects have been accretive for shareholders because of the buybacks themselves.

The seasonal affects in the first quarter versus fourth quarter certainly are entirely that, about $1 million of the buybacks are affecting us quarter-to-quarter. Certainly, the DDA balances are a substantiative impact, number of days, all the things that affect the seasonal aspects of first quarter-to-first quarter or fourth quarter to fourth quarter are driving that margin compression. Moving on to fees briefly, we really feel good about our [FanCom] position and again there are seasonal things that affect fees in the first quarter on a variety levels as they do deposits, but when you compare first quarter to first quarter, our core fees were pretty strong, trust fees are up 16%, deposit fees up 10%, card-based fees, up 15%. The one area where we felt weakness in core fees was in commissions, and that's reflecting really a lower level than we would have liked to see in terms of annuity sales, some weakness in brokerage in the first quarter, but mostly weakness in insurance premiums. So that really was somewhat of a disappointment. We don't like that coming in flat, but the other categories are quite strong.

When you aggregate it all and put it together and compare fourth quarter '05 into first quarter '06 and fourth quarter '06 into first quarter '07, even with that sort of flatness in retail commission, overall core fees did perform more strongly in the first quarter of '07 than they did in the first quarter of '06. So to me there's momentum there and if you look at the second quarter affects last year compared to first quarter, we believe very strongly that there's that same kind of momentum, maybe even a little better in the fees going into the second quarter from a much stronger base. So we like how fees have been moving for the last year, basically. If you look at it first quarter to first quarter, we feel real good about it and we're looking at the performance of these fee businesses and we think with some weakness in the insurance sector, but overall we're going to see some of the same kind of lifts that we've seen in prior years and even on a commission line comparing first quarter to second quarter, we expect to see the same kind of lift there.

Mortgage banking. Obviously, we sold some servicing in the second quarter -- or the in the first quarter and basically we continue to evaluate those businesses and are continuing to try and right size our MSR asset to our origination, maintaining that natural hedge that we've used for years to keep those things in-line and to minimize volatility. We were also able, I think, to get a very good premium for that service. We frankly had looked to try and sell it in the fourth quarter and we did much better by waiting into the first quarter in terms of the execution of that transaction. So we feel pretty good about that. From an expense point of view, staff expenses were up about $4 million compared to the fourth quarter. The run rate, if you go back, they're about the same as they were in the second and third quarter of 2006. It's up for a couple of reasons. One is the basic resets that do occur in the first quarter. Again, another one of the seasonal affects, but on Social Security, health benefits, and the like, but also importantly, we've reset our incentive payments. We had talked in the fourth quarter about the variability of these portions of our compensation and that we had reduced incentive payments fairly substantially in the fourth quarter of last year, reflecting the lack of growth that we were seeing on the balance sheet. And we've reconstituted those incentives, and that's part of the deal in terms of getting at the core growth from our commercial banking initiatives and many of the initiatives that we've set out for ourselves in retail. We want to make sure that we've got the reward mechanisms there to incent the right behaviors. Going forward, if that growth comes, then the end of the staff expense levels will be as you see them and that's a bargain. If not, then we do have variable capabilities on those staff lines.

Virtually every other category of expenses were down, eating into that staff. So we think we've got expenses fairly well controlled. Loan losses were $5.1 million compared to $7.1 in the fourth quarter, so that's pretty good and about the same a year ago. So 5.1, 14 basis points of loss, nonperformer increased by about $10 million in the quarter and reserves maintained at about 137 basis points, which is flat to the fourth quarter levels. So that pretty much describes the performance. With a little bit of alliteration, but just a couple of general comments, if I can.

I know it's difficult for you to see, because it's late in the quarter. We have been able to see some momentum around our C&I growth late in the quarter and we believe that the commercial banking initiative is beginning to take hold. It's early. My commitment was that we are going to be focusing on seeing that lift beginning in the third and fourth quarter, but it would be great from my point of view if we can begin to see some of that now. Fee income should continue its momentum into the second quarter and if you look at historical levels, we think that that kind of lift is reasonable. Obviously, we're not going to sell servicing again, but it would be good if the fee income increases that we're talking about at the core level can come in at about that same kind of level of performance in terms of fees in the second quarter. And it's an incredibly challenging environment and it remains so.

We feel good that the margin was stable, but we're going to continue to feel pressure on loan pricing, certainly, and we believe that we can keep the margin in a band, some place between where it is and the high 350s. My bet would be that we could see some small amount of deterioration, maybe, in the second and the third quarter and maybe as those fee balances kick up and other dynamic take a hold, we could start to expand again later in the year. But we're going to stay in a much tighter band than the risk profiles perhaps would have led you to conclude last year.

So we'd like to see the momentum begin to kick in in the second half of the year from our commercial banking initiative and also from a whole series of other initiatives that we're undertaking around execution in our Retail and our Wealth Management businesses, but the big lever probably is that commercial initiative and we're hopeful that we can begin to see some of that in the second quarter. So those are my comments. We'd be happy now to open up for any questions that anyone might have for any of us.

Thank you. [OPERATOR INSTRUCTIONS] Thank you. Your first question comes from Andrea Jao with Lehman Brothers.

Hi, Andrea, how are you?

Good afternoon, everyone.

Hi.

On credit quality, I know you remain very comfortable there, but maybe you could give us a bit more detail as to what's been driving the increase in the MPA ratio?

Yes.

I acknowledge that charge-offs are low, but the NPA ratio's been steadily but slowly going up.

I don't know if I'd use the word comfortable, but certainly our charge-offs have been quite strong and hanging in there. The creep we're seeing in nonperformer, is I think, a function of the reality of the economic conditions we're seeing out there. We've seen some slight increase in consumer and we talked about that before, with much of it coming from the aging of some of the acquired portfolios that we've seen, and then some smaller types of real estate transactions that have been there for some time that have deteriorated or become more challenging. We feel good about our ability to manage through those things. Another factor, frankly, is the denominator. Since the loans have declined slightly and we've sold some of these things, that pushes the percentage a little bit too. But there's no doubt the absolute numbers of loans have been increasing. We think the consumer side is stabilizing and will continue to do that, so well like to see that start to strengthen and we -- just the nature of the economy, I believe, will be that we'll see some additional levels of deterioration in some of these credits that are in sectors that are challenged. That's been one of the reasons why we've been pulling back from real estate, especially the land development kinds of things over the last couple of years. We see real strength in our larger loans and our larger corporate real estate businesses and in our corporate banking businesses. It's some of the smaller onesie, twosie kind of things that we're going to continue to have challenges with. That's sort of the flavor, at this point.

That's helpful. What do you think this implies about future losses, though?

I'd like to think that we could stay in a band between where we are now and where the fourth quarter was, in that 5 to $7 million range, but there can always be an incident that occurs, as it did in the fourth quarter, that you have to deal with online realtime. So an average, we like to think we can be in that kind of a range. I don't think we can stay at 4 or $5 million quarter in and quarter out, but we have, so --

Right.

It would be great if we could continue to do that, but given the fact that non performers deteriorate a little bit but I think some of that will pass through. But I do believe consumer losses, again, are going to stabilize and decline somewhat. Maybe that -- I don't know if that's counter cyclical to what you're hearing from others or from the industry in general, but I think the nature of our exposure and our analysis of it is what leads us to that conclusion for ourselves.

As a last question, maybe you can elaborate on that. What gives you confidence that consumer loss is stabilizing or going down?

Well, we've sliced and dice the thing 800 ways and we understand where the deterioration is coming from, so it's controlled, it's understood, and it's being managed. You can always get surprised, but in terms of the large pieces of the portfolio, both in terms of the characteristics of it and the geography of it, we know where the losses are coming from and it's containable.

Fair enough. This is very helpful. Thank you.

Your next question comes from the Terry McEvoy with Oppenheimer and Company. Please go ahead.

Hi, Terry.

Good afternoon. Could you talk about expected earning asset growth throughout 2007? Do you foresee additional loan sales throughout the year that might put pressure on earning asset growth?

That's a good question. The sales are in the mortgage side of the business and in terms of the impact on net interest income, it's virtually negligible because of the value of those mortgages. From our point of view, it was a no-brainer to execute that transaction. So having done that, we don't foresee executing any other types of substantiative divestitures of loan portfolio. Perhaps if interest rate dynamics were to change a little bit or the mortgage -- if we found a tranch of mortgages that we would want to sell, it would affect the optics, but it's not going to affect the financial performance very much. In fact, if you look at the spreads on mortgages, you can see that the spread has increased substantially. Some of that's just the quality of the small amount of loans we're putting on the small portfolio, but the fact that we got rid of some lower yielding assets and the value has increased. I like to think about it this way, earning assets are critically important to us going forward. We've shown that we can manage fee income expenses and asset quality and focus on those fee businesses, I think the thing we've got to do and the thing we're attacking is growing that net interest income, and the key of that is going to be demand deposit lift and core assets. Believe me, this is not guidance in any way, but let's call it aspiration, if you will.

We like to see, if we could, to start to see net interest income move positively in the second to see net interest income move positively in the second quarter as a result of some of these initiatives. If we could even show $1.5 million, $2 million worth of lift in net interest income, given the rest of the challenging environment that would be great. Then you do a little better than that in the third quarter and a little better than that in the fourth quarter and you start to see 3 or $4 million worth of lift because you can generate this core asset growth, then you start to look at 2008 and given what is happening in fees and these other categories, you have substantive improvement. And the nature of our strategy is designed to do that. It's steady progress. I don't know if that answers your question, but that's how we're thinking about it. To get at that, you'd have to generate in round numbers towards three quarters of a billion, $1 billion worth of loan growth between now and the end of the year.

The decline in the commercial real estate loans, is that a reflection of the markets in Q1 or is it just a continuation of how you've decided to avoid and shrink that portfolio on purpose?

The first half of last year, construction lending was very strong and with established customers and we were going that pretty nicely and it was the latter, it was the payoffs. This year the demand for commercial real estate lending is off somewhat. We're not going to see the core demand even from our well-established customers that we would have seen in the past, I don't think and to some extent the payoffs are declining along with that. Maybe all those customers that were motivated to do so have been doing it, but I think as long as interest rates stay the way they are, there's going to be incentive to go out and get low ROE types of terms with very flexible underwriting and we're not going to match them.

So in order to get to where we need to be, it's got to be the home equity lending that the market will give you and the redeployment of our resources at the attractive markets to drive the core C&I growth. I like our response to the market conditions. Anybody that's sitting there today and saying, gee, we're going to depend on real estate to grow, it's just not going to happen, it's not there. And you wouldn't want it probably if it was, to a large extent. So I think we're after the right things, it becomes a matter of execution, and that's really our focus is for the next nine months.

Just one last quick question. Can you remind me when you see the seasonal inflows of commercial non interest bearing deposits?

It starts again in the second quarter. The first quarter is a negative and then it begins to grow, but then it really starts to pick up more aggressively as you get into the fourth quarter.

Okay.

But we're about -- within the retail system, the small business system, and our middle market corporate customers driving a different trajectory of our creation of demand deposits in addition to those seasonal things. In retail, demand deposits actually grew in the first quarter. That's good. Now they'll go down a little bit in April and May because everybody pays their taxes, so there's seasonality in demand -- in consumer, it's counter cyclical, but the commercial stuff will begin to start to build now and it's a function for the whole industry of how customers are deploying their money and then how well you do at retaining your customers and growing new ones.

Your next question comes from Eric Grubelich with KBW. Please go ahead.

Hi, Paul, Joe.

Hi, Eric.

Hey, Eric.

Eric, am I still allowed to talk to you?

(laughter) Yes, you are, Paul.

Just kidding.

It's okay. Where was I? Yes. To follow-up on that statement you made, did I understand you correctly, Paul, did you say you're going to need to generate three quarters of a billion to $1 billion to generate commercial-type lending this year?

Of lending.

Yes.

And I'm not trying to provide guidance, I'm trying to let you understand aspirational how we're thinking about it.

Okay. So that would be what you would like to do to offset some of the softness on the real estate side?

I'm being serious about that. We try hard to do what we're going to say to do. I can sit here and lead with my chin, but we, I think mostly we've done what we've said we're going to do. We're going to fight to get at that kind of thing, but obviously that's a shift from where we have been.

The growth rate is certainly more --

Right. It's a timing thing, too. It's, when are we going to get there? It could be a little slower than I would like or might even be a little quicker.

Given your confidence in the better credit quality, the larger loans, is it going to be there or more on the smaller and middle market side? I thought you had talked about that sometime ago, about growing the smaller end of the customer base on the commercial side?

It's at both ends and it's a focus on a different segment, much less real estate focused than Associated bank has traditionally been and on the traditional end markets. We've just hired a new head of small business to come in and really try to upgrade our capability there at the branch and at the 2 to 10 segment, if you will, the smaller end. That's where the deposit are going to be. The loan outstandings, to your point are probably going to be at the middle market and corporate end.

Okay. The other questions I had were, I guess, as you indicated in your prepared comment, the retail commission line was a little bit weak this quarter, I mean, flat year over year, it was a little low in my estimate.

Yes, it was, in mine too.

Two things, one, do you anticipate getting in the second quarter the -- I forget what you call them, the insurance company rebates?

Yes, the contingency fees.

Yes, so that should kick the numbers up next quarter?

And it's logical to assume our broke rackle and annuities would be stronger than they were in the first quarter too, because we're really getting after that.

Okay.

The first quarter weakness is a function of selling weakness and price pressure in the second half of last year, that's how it plays through.

Okay. But that should be -- those rebates should be additive to the second quarter, correct?

They should be, but there's a risk they could come in at slightly lower levels because the sales were lower.

Okay, okay, I got you. That's fine. And with regard to that type of income, the fee income and the others, are you still looking at maybe low to mid-teens growth in those categories?

Depends on which one you're looking at, but from an asset management and brokerage, yes. Insurance, obviously, this year that's not going to happen.

Okay.

Deposit fees aren't going to grow in the teens, but they're going to be strong.

I don't think you had ever talked about the deposit fees.

They're going to be in the mid-single digits.

Okay. If we could just move down to the expense line for a minute, certainly on the compensation side, so in fact you did accrue bonuses in the first quarter in addition to the normal FICA and seasonal resets?

Yes.

Okay. If for some reason the revenues don't track, you've got leeway to dial a track back the rest of the year?

We have some, some leeway.

I know you had done that in --

Recognize that the fourth quarter was quite aggressive.

Right, yes. I know you had, what, a little less than $2 million worth of severance in the fourth quarter also.

Not much less than that.

Yes. Okay. I think that was it. Thanks a lot.

Sure.

Okay.

Your next question comes from Scott Siefers with Sandler O'Neil. Please go ahead.

Good afternoon, guys.

Hi, Scott.

I guess I just had a question or two on the expense side as well. Just trying to get a sense for what the fair base is off what we should be going. I was a little surprised by the magnitude of the increase. You've had quarters in the past where you've actually shown link quarter declines, so I guess second part of that -- maybe the first part would be, how did you feel really about expenses where they came in versus where you might have been expecting them. And secondly, you typically have some drop-off in the second quarter on an absolute basis. How much of that do you think is realistic to bake in as we look forward?

It's really hard for me to be precise on the staff line because it is so variable now. It really depends on a lot of things. The core expenses -- the non staff expenses, they're performing at a very good rate. I don't know that I can sit here and say they're going to go down from where they are. That would be a challenge. On the staff line, we're doing a lot of different things. We're continuing to find ways to be more efficient as well. We're working on the absolute number of FTEs in the system. Lisa is here not quite 90 days, we're going to be looking at the not quite 90 days, we're going to be looking at the structure and all that sort of thing. The incentives are part of the deal to get the revenue to grow, you've got to have the -- everything's got to be in sync to get it to go, where the revenue goes has a large affect on where the staff goes. It's almost impossible for me to say, gee, it's going to be higher or lower.

Okay. Sounds good, thank you.

Your next question comes from Ben Crabtree with Stifel Nicolaus, please go ahead.

Good afternoon.

Hi, Ben.

A couple of little detailed questions. When was the timing of the buyback during the quarter?

Joe, when did we do it exactly?

In February.

So it was kind of medium in the quarter?

Right.

And refresh me, I should know this, but do you have a remaining authorization going forward, or do we think of this $2 million as being kind of buy it forward?

No, we have an authorization of $6 million.

6 million, thanks. Our capital ratio didn't decline.

Right. Quarter to quarter after having done it, so --

Right, right, right. It looks like you've got room. The sale of the servicing, you've sold like 28% of your portfolio, so it raises a couple of questions about going forward, revenues there and whether or not there needs to be or will be a cutback in terms of staff commensurate with that? How do I think about that?

There will be and has been a cutback in staff associated with it and there'll be more as the whole thing settles. So there's going to be some expense savings that go along with that.

Okay. And was there any characteristic of these, of the servicing you sold that made you want to get rid of -- you historically have always valued your servicing pretty conservatively and I was a little bit surprised to see that you kind of had to take a negative mark on it when you sold it.

What do you mean a negative mark is this.

Well, there was a reserve or something.

No, that's a different issue. The valuation reserve was valuing the MSRs for the repayment fees that occurred during the quarter. [inaudible]

Oh.

No, we had a nice gain on the sale. A very nice gain on the sale, so that's the -- where in the fourth quarter we had a positive valuation based upon where rates and prepayment fees were, we had a corresponding negative variance this quarter.

Okay.

Ben, not to get you too confused here, the actual transfer of the loans occurs later. We've actually sold them, but we are sub servicing them for the buyer until we can actually transfer them. So for a while, the expenses don't go away, we just get paid for servicing. Don't get too aggressive in terms of expense reductions.

Okay. At least over the very near-term.

Right.

Okay. Kind of a philosophical question. Paul, you've been pretty vocal about the irrational pricing in your industry. Are you seeing an increase, a significant increase in supply of potential sellers and probe just as importantly, are you seeing a willingness to notch back the asking price enough so it starts to get somewhat reasonable?

We're seeing an increase in the number of sellers, many, many more small ones, too, and you've got to think about what you're doing in terms of whether it moves the needle or not and then what the risks are inherent in that franchise, especially the smaller. Price may be getting a little more reasonable. I don't know that it's crossed towards affordable, but I think we're seeing some more reasonable kinds of discussions, but it's -- we haven't done anything.

Right. So --. Okay, thank you.

Your next question comes from Marsella Martino with KeyBanc Capital Markets.

Hi, good afternoon.

Hi.

Just a quick question on the commercial loan growth that you have seen and kind of hope to see in the future. Are there specific areas that you've seen the growth more than others in terms of geography or maybe areas that you hope to focus more on in the future?

Well, certainly we're investing and focusing in the target attractive MSAs. Minneapolis and St. Paul, Rochester, Minnesota; Chicago and the Chicago suburbs, especially from a corporate bank point of view; Milwaukee and Madison. We've seen a lot of good growth in the Madison market last year. Madison is sort of how we want to attack the other markets. It's matured faster because of the first federal acquisition. It was the first place we went to start to invest and we started to see it pay off. If the other markets can do some of the loan volume types of things that Madison has been able to do, that's going to be good. The more you focus on growth in this intensely competitive environment with interest rates the way they are, the range of the margin can move towards the lower ends of that because you've got to be more aggressive to compete. In the end you win. There's certainly a leverage point there, certainly in terms of volume and rate. But those are the markets we're focusing on. That's where we're hiring and investing and the key is how fast and how effectively we can get ourselves positioned and then how well do we execute. I'd like to see some momentum start to show here. We said it was going to start to show in the third and the fourth quarter. From my point of view, I think the strategy is logical and the things that we're laying out and undertaking from an execution point of view are logical as well. It comes down to timing. Is it going to be in the time frames we would like to see, is it going to be a little longer, could I be a little quicker, it's all in those variables.

Are there any markets that have been surprisingly weak to you?

The weakest markets are, interestingly, I think, the community markets, the lower growth markets, where your only option is to take business from somebody else, where there isn't the core growth. We have strong physicians in those markets in many of them, and they're important to us, but you see often you see the most price competition, you see the least discipline on the part of competitors, which can often be smaller, and so that's where the biggest challenges are.

Okay, thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from Andrew Marquardt with Fox-Pitt Kelton.

Governor, -- good afternoon, guys. Is that a fair assessment? Last time, last quarter you were talking about charge-offs heading towards a more normalized rate of 18 to 22 basis points and it sounds like maybe you're felling better about that, or can you help clarify?

Last quarter, you remember I was talking about another specific credit that could drive charge-offs to similar levels in the fourth quarter. Obviously, we were successful in working through that and the lawsuits on that credit were far smaller than we feared they were going to be. So that's good, but that's tactical, that's a deal-by-deal kind of thing. I'd like to think that we could stay within this 5.7 million range. I can get proven wrong, but I would like to think that. I believe that non performers can continue to show some level of deterioration, hopefully in small percentage increments and we can work through them and net break even on that. In this environment, I think it's probably going to deteriorate for a while long. How we manage that stuff and if we can fight through it in terms of minimizing the losses, as we have been able to do historically, I guess will determine the outcome. I don't know if I feel better about it, but maybe I'm just trying to be a little more precise.

Okay, thank you. Then, my other question was on your capital levels and buybacks, should we expect additional buybacks this year?

Certainly, we're not uncomfortable in terms of using that, so it wouldn't be unreasonable to think that there could be a couple more buybacks, certainly nothing like last year, but in the same size that we've been doing outside the restructuring, that wouldn't be an unreasonable assumption, I don't think, if loan growth were to become incredibly aggressive, then that would be an use to capital.

Okay, thank you.

[OPERATOR INSTRUCTIONS] your next question comes from Andrea Jao with Lehman Brothers. Please go ahead.

Hello again.

Hi, Andrea.

Joe, I know I've asked you this before, but on mortgage, how should I think about that going forward? It's a good run rate, or perhaps for the full year, what's a good growth rate? If each quarter is a little more volatile?

A very difficult question, Andrea, because there is a lot of dynamics going on and as Ben said, there's going to be some servicing revenue that goes down, so it's a very difficult one to predict, but we believe fundamentally compared to last year, we're going to do better in the fundamental mortgage business that we believe that we have gained traction in terms of our sales efforts and our discipline and our market penetration and it should be higher than it was in a run rate last year. So I think it should be growth. I'm not prepared to give you a specific number at this point.

Seasonally, the second and the third quarter are the strong periods to that, historically. But Joe's right. And that may be counter cyclical to some of what others are seeing as well, but maybe that's because we weren't doing as well as we were in prior years, but we've got that business positioned much more strongly, we think, and I would agree with Joe that we should see some improvement there. I guess the wild card is the MR valuation and where that's going to be each quarter, but a year or so ago, we had $10 billion in servicing assets and we've got six now, so that volatility is going to be out of the -- or certainly lessened.

Okay, great. One follow-up question. Do you have a threshold for the tangible equity ratio?

Not a declared threshold, but we believe that if we're at 6.7 right now, that that's on the high end of the range and we could move down towards 6 and a quarter and even below that very comfortably.

Perfect. Thank you very much.

There appear to be no questions at this time. I will now turn the floor over to Mr. Beideman for any closing remarks.

No closing remarks. Thank you, all, for your questions and attention. If you have any other questions, please feel free to give Joe or I a call.

This does conclude today's Associate Banc-Corp first quarter 2007 earnings conference call. You may now disconnect. Have a wonderful day.