Associated Banc-Corp (ASB) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Carlie, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Associated Banc-Corp second quarter 2007 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)

It is now my pleasure to turn the floor over to your host, Mr. Paul Beideman, Chairman and CEO. Sir, the floor is yours.

Thank you very much, and thank you all for joining our call this afternoon.

Earlier today we announced our earnings at $0.59 per share in the second quarter, and what I would like to do is just make a few comments as is our norm about a few components of those earnings and put a little color to it, and then Joe and Lisa Binder is here as well and I would be happy to answer any questions that you might have about any issues.

First of all, in terms of net interest income and margin, net interest income was down slightly from the first quarter, and the margin declined by 9 basis points. You will recall that at the end of the first quarter, we were estimating a decline more like 3 to 5 basis points. If you consider what I will call the core dynamics of deposit and loan volume, migration and pricing, the decline was about 5 basis points.

The remaining 4 basis points are attributable to the impacts of the two accelerated stock repurchases, each of 2 million shares, one in the first quarter and one in the second quarter, and then a combination of other factors such as lower prepayment fees, and lower recovery of non-accrual interest in the quarter as compared to the first quarter. Those things we forecast and we project but obviously because of the nature of them are variable and fluctuate from quarter to quarter, so about half the effect of the decline is core loan pricing and deposit rates in the competitive environment and deposit migration, and the movement of rates on loans and deposits and the rest is those other sources that I summarized for you briefly.

In the third quarter we would anticipate that many of those factors at this point remain in place and that we could see, and I will say again about a 3 to 5 basis point decline with some stabilization then as we go through the remaining part of the year, and if you think about it from our perspective the biggest single factor is really the impact of margin in this environment really is going to be the level of demand deposits, and then the second most important factors would be loan volumes, but many of the variables that contribute to margin compression are going to continue in terms of core deposit pricing on the interest-bearing components and the pressures and the competitive pressures associated with loan pricing in this flat yield curve environment. So really demand deposit levels in the second half of the year become paramount in terms of how that margin is going to perform.

You also know that in our history just from a seasonal point of view, demand deposits are stronger in the third and fourth quarters than they are in the first and second quarter because of seasonal factors and that we've talked many times about our strategy in regard to growing demand deposits, and I will talk about that in a second, but we are seeing some momentum there. So that's going to be a major factor in terms of how the margin but also absolute levels of net interest income perform in the third and fourth quarter.

In terms of the balance sheet that affect net interest income, we are seeing growth in our C&I, construction and home equity lending portfolios which I am happy to say is the result of us gaining some traction, I believe, in some of the strategic initiatives thatwe've been talking about. Hudson is in the numbers, they came in in June, so it is a relatively small effect, it is a small bank with only one month effect on the balance sheet, but if you look at the average balances, you can see that they're up, especially in the C&I categories, and I am not cherry picking, but to be illustrative in the point to point numbers you see a substantive change in home equity, and frankly there's very little home equity loans from Hudson.

What I am suggesting there is is that we've begun to see some later in the quarter positive momentum coming back into our home equity lending that is a result of some of the things that we've been doing in our retail banking system which we feel pretty good about, and that's generated some solid point to point volume that isn't reflected in the average balances, but you can see it in the point to point because it is later in the quarter. So we feel pretty good about that and would like to think that at least through the third quarter we can see some of that momentum continue.

DDA growth is showing some momentum in an environment that can only be categorized as incredibly challenging and that really pressures customers to move away from demand deposits to money market accounts and on the commercial side to the sweeps, but we've been able to generate some levels of growth there which in this environment are just vital to getting the net interest income numbers to grow. I have been saying for the last couple of conversations that we've had and in individual conversations that we expect to see some loan growth in the second half of the year and into '08 and continued improving DDA flows.

We've begun to see some of that loan growth now in the second quarter, and would like to think that those kinds of volumes can continue. And we would like to exceed the DDA flows that are showing some momentum to continue to improve as well as the commercial initiatives and the consumer initiatives that we've talked about really begin to take hold.

Having said that, we are sticking very rigorously to our conservative position regarding commercial real estate pricing and underwriting, and until we can get adequate ROEs and the risk dynamics in those segments of business changed, we're going to continue to focus on that. So we're going to work hard to try to drive positive net interest income momentum but manage rigorously with as much discipline as we can the aspect of risk around those cyclical segments of our business which we're all seeing impacting the entire industry.

Moving to asset quality, our non-performing loans increased by just shy of 18% or about $28 million over first quarter levels. I want to point out that we have a letter of intent to purchase just over $10 million of those loans at par with a very high probability of that transaction closing in August. Quarter's end at an absolute point in time and these loans at the end of the quarter can be categorized as nothing but non-performing, these $10 million plus in loans but as I said we have a letter of intent to purchase them at par, so we believe that very early into the third quarter those doubles will come down.

Having said that, non-performing loans have increased about $50 million since year end. I wanted to spend a minute really just talking about what the composition of that increase is and how we see that segment of our portfolio. Largely these loans are small real estate transactions that have been aging and have been originated through the regional banking system at associated or had come over from the state financial acquisition.

After our analysis of collateral adequacy and after working through strategies for disposition, we believe that we are very well collateralized against these non-performing loans and have the capacity and the ability to work out of the vast majority of the problem loans. Our losses in the second quarter were 14 basis points, and they have been stable even as non-performers have been increasing, so while the second quarter losses did remain stable at that 14 basis points and flat to the first quarter, we're projecting, given this increase in non-performing loans that our level of charge-offs could begin to normalize at more traditional levels around 18 to 22 basis points given the increase that we have seen.

We've been doing some very systematic work in terms of analyzing our portfolios, and when we look at the third quarter and when we analyze really our substandard and special mention loans, we reach several conclusions. First is that issues with state financial, which really haven't been substantive but issues with state financial are largely behind us. We've been working this portfolio very hard, and frankly we've been exiting some credits from that portfolio, but we view that as largely behind us now having been working that for about 18 months.

Non-performers could increase in the third quarter, but certainly in our minds at this point not to the levels that we saw in the second quarter, and our anticipated run rate of losses in the third quarter from our consumer and our commercial portfolios appears to be relatively consistent with what we've seen in the second quarter but we're watching really literally one and perhaps two credits in the $3 million range that could impact those numbers. So from a core point of view we feel that even with the non-performer increase that we've maintained a pretty good collateral position and feel that our losses are going to stay in that more normal kind of band.

Moving on to fee income briefly, generally speaking we think that our fees were strong in the second quarter and have been strong throughout '07. The one exception area is in insurance commissions which were down slightly, about 3% year-over-year, and this reduction is really a result of softer premiums, and a shift in customer preference from our employee benefits side of the business more towards consumer driven healthcare programs which have a slightly different fee dynamic associated with them.

Our sales momentum is strong, and we believe that the second half of the year will show improved momentum from this business as compared to last year, and that the businesses will again become a positive contributor to marginal fee income growth in '08 as we sort of work through this transition period. In the other categories of core fees, trust fees are up 15%, deposit fees are up 11%, and frankly that's a pleasant surprise to us, we thought we would more in the high single digits, but a lot of good initiatives have taken place there in terms of the discipline of pricing and capturing fees we feel good about. Card-based fees are up 10%, so we feel pretty good about fees in general.

Our efficiency ratio is about 53% which has deteriorated slightly but still I think is pretty good, and our staff expenses are up a little bit year-over-year if you make that comparison slightly from the first quarter. Hudson has a somewhat of an effect on that, but we're maintaining our accruals for performance, especially those obviously around fee income performance from a performance point of view, but we also have a small amount of one time expenses associated with the Hudson acquisition and retention bonuses for people and the like and some severance expense as well that slightly inflates the staff expense line.

I guess I should comment briefly on the mortgage business, I sort of skipped over that during the fee discussion, but we did take a gain on the MSR valuation which is a function largely of external factors. If you look at six months over six months, that number is about the same as it was last year when you put the first and second quarters together. Importantly, though, our core fee income coming from the mortgage businesses is significantly better, so even in a challenging environment, the sales component of our mortgage business and then selling into the secondary market is generating, albeit now in these times small numbers, but fairly substantive increases with momentum there that we think is going to continue so that the mortgage--the core mortgage business will also be a positive double-digit growth fee contributor throughout '07.

So those are my comments. Trying to cover some of the important areas of interest, but we'll be happy to answer--I am sorry, I did want to mention one other point.

We are anticipating or we have closed--we have announced the sale of 23 of our branch locations over the last couple of months that are generally categorized as small low growth branches in rural markets with relatively small contribution to the Company overall, but we've been able to generate deposit premiums that really got our attention there, and was a good transaction from our point of view and probably for the community bank purchasers of these buckets of branches. We've sold them really to six different purchasers, 23 branches, and we anticipate generating a deposit premium on about $275 million worth of deposits of around $15 million largely to be received in the fourth quarter and maybe some in the first quarter of 2008. We are working through a series of alternatives right now to determine how best to utilize that capital.

So we'll be happy to answer any questions that you have, and again, Joe, Lisa, and I are here at your disposal.

(OPERATOR INSTRUCTIONS)

Your first question is from Scott Siefers from Sandler O'Neill.

Hi, Scott.

Hey, good afternoon, guys. I guess the first thing I wanted to ask about, just given the deterioration in the margin, Paul, you gave a lot of good color around the various moving parts there, but I was curious if you might go into any changes you made kind of tactically on the pricing front, if--either on the loan or the funding side if that had much to do with things?

Well, there is so many moving parts there, and over the last literally four or five quarters our margin has sort of been lock step stable, and deposit migration and rates have moved pretty much in tandem with each other the last few quarters. In this quarter, I mean again, you're talking 1 or 2 basis points worth of movement, but deposit pricing--deposit cost was slightly higher than loan yields in this quarter.

If you're asking me if that's going to continue, I think all the factors that contribute to it are certainly going to be in place from an external point of view and the competitive environment in this kind of an economic and interest rate environment really don't take the pressure valves off. I think the key comes down from our perspective to how much C&I growth and how much core deposit growth and the accompanying fees that go along with that can we achieve, and that's a mantra that we've been preaching now for some time, and around that dynamic really is the difference.

Okay, and then jumping over to credit, I think first just sort of a housekeeping question. You made the comment that non-performers could increase in the third quarter, but previously you'd talked about the net $10 million or so that you might purchase at par, so when you purchase those, those will come off non-performer, is that correct?

Yes , yes, they will be refinanced out.

Okay, and then--so then would the addition to or the net--or I guess the increase in non-performers, would that be net of those 10 million?

No, I was suggesting that it wouldn't be near or at the levels of the gross numbers that we were talking about. In terms of how we're evaluating the loans today.

Okay, and then I guess as I think about your non-performing levels, I think you've given some good color on why or where you think charge-offs are going, but if you take a step back, the non-performers that you've got right now are basically as high as they peaked in the last cycle around, so I guess I am curious what gives you confidence that your charge-offs will kind of peak at that 18 to 22 basis point level, in other words, why wouldn't they go to say 30 or 35 before settling down at around 20?

All right, well the word I used wasn't peak, the word I used was normalize.

Okay, fair enough.

And there can always be incidents that occur, but when we look at our core portfolio, I mean we have sliced and diced our substandard and our special mention loans above $500,000 loan by loan we've looked at every one of them that are categorized in those troubled categories at this point, and when we evaluate our collateral position and our guarantees against the exposure, we feel pretty good that the quality of underwriting that we have been using for a long time has us in pretty good stead.

You can always have incidents and you can always have an individual credit, and I said there is this $3 million credit that we're staring at in the third quarter that could jump up and cause us a problem or it might not, it all depends on how successful we are at working through it. So let's say on a portfolio basis we try to estimate as best we can how these loans could deteriorate and so that leads us to the conclusion about the levels of non-performing that I am talking about, and then we try to look at from a scenario planning point of view what are we going to do if they do, and then we also mount as we speak exit strategies on credits so that we--as early as possible get ourselves out of the exposure.

If it is a real estate-oriented transaction, and it is deteriorating, your best option is to get out. If you--if it goes non-performing, and non-accrual, and you're holding it, in most cases your only option is to manage the real estate until you can sell it, and you're almost always going to take some level of loss if you do it that way. The insightful, smart, aggressive way to manage it, especially in this environment is to get out, and so we're focused to try to predict as well as we can on those loans above $500,000 how we can get out if we think the thing is starting to deteriorate.

Okay.

That's the art in all of this.

Yes.

Half the time your lender wants to preserve it, the customer wants to preserve it, so somebody with a smart, objective, no nonsense view of the macro issues has to look at it and say forget it, we're out, and so you put all that together, and you make some estimates about where you think you are.

Okay, and then I guess just one final question on capital. You guys have been pretty consistent on the accelerated plans over the course of the last two years or so, but just looking at your tangible levels, the tangible equity, the tangible asset numbers right down around 6% or so, just curious where you're comfortable to take that, how you envision your capital management activities over say the course of the next year?

I was going to say it is more like 6.25%, 6.30%, but it is a little lower than it has been, but in this quarter it is a combination of the two buybacks that we have done plus Hudson.

Yes.

So you throw all those things together and in this one quarter, and it is probably a little lower than we would like it to be, but I still believe we have some flexibility as we generate cash flow to continue to look at buyback options if we're still not happy with the ROE and the risk dynamics around some of the lending issues.

Okay.

But it is a little lower but it is because we had both of those things in the same quarter.

Yes, okay. That's great. Thank you very much.

Thank you. Your next question is coming from Andrea Jao from Lehman Brothers.

Good afternoon, gentlemen.

Hello. How are you?

Pretty good thank you.

With respect to the 23 branches that you're selling, just thinking about, okay when do I see the $225 million in deposits come off and do I see most of the gains in the fourth quarter and just residual in the first quarter of '08?

Yes. It is very dependent upon the buyers ability to convert operating systems, and being small community companies, they're usually dependent on third party vendors. So I would guess at this point, well, an educated guess, that the majority of the premiums would be in the fourth quarter, and some could spill over into the first quarter, and the effect of the deposits would be comparable to that.

From an earnings point of view, we estimate that really the impact would be quite small, around $0.01 on the whole thing. So from our point of view it is a good trade.

Okay, and how much in expense saves would we see?

I don't have that number sitting right here in front of me, but it is very easy to get for you.

Okay, but there would be a decrease, a noticeable--modest decrease or a modest decrease?

I would suggest it is pretty modest.

Okay, good. Now deposit service charges ramped up pretty nicely in the second quarter. How much of that was Hudson and how much of that was organic and is this sustainable into the third and fourth?

It is all organic. Hudson is nothing, doesn't even register hardly, and we believe it is sustainable. The clearest comparisons from my point of view are always year-over-year.

So when I say we grew demand deposit fees 11% year-over-year, that's the comparison that I am looking at all the time, but there is some real--there was some lift first and second quarter, and there is seasonal effects that come through there as well, but we believe that the momentum is there. It is not going to--we don't see the number falling from where it is, and we would like to think it can continue to grow. I don't believe you can grow deposit fees a sustained basis year in and year out double-digits these days, but we're happy with the fact that we've been able to thus far.

Are there any particular initiatives or changes that you've made that you can attribute this to?

Thousands of things. More checking accounts first of all which is probably the key single driver bringing much more and--this is what Lisa has really been focusing on for the last six months, bringing a lot more discipline to the sales process and the pricing process with customers so that we're leaving much less on the table, non-sufficient funds fees and that sort of thing are holding up, and part of that is more checking accounts, so it all feeds on itself. The more demand deposits you generate, the more transaction accounts you generate, the more fees you generate.

Okay. Perfect. Thank you very much.

Sure.

Thank you. Your next question is coming from Terry McEvoy from Oppenheimer.

Hi, Terry.

One follow-up on the expense side associated with the deal. Do you have the dollar amount of more the one-time costs, the severance and some of those expenses you don't see repeating themselves in the third quarter?

Yes. In round numbers, they're a little over a $1 million, between $1 million and $1.5 million.

Okay, and given your response to Scott's question about proactively working through non-performers, you said you would sell $10 million. Should we expect over the coming quarters more of those types of sales should you see the opportunity that's presented itself?

Yes. Well, we're investigating a half dozen different things, and certainly looking at the opportunity to dispose of non-performing loans through a variety of channels whether the loan gets refinanced away from us by someone else or by selling it at acceptable terms. We haven't done that before, and this transaction I am referring to here really is sort of a special one-off kind of thing, but we were looking at all those kinds of options and I think--I would imagine most everybody is in terms of how to manage that risk with the least amount of shareholder impact. So, yes, we would certainly look at all those kinds of options.

Insurance commissions down this year, you discuss what's going on, it sounds like in your marketplace or within the industry, what are you doing internally to position the Company to better sell the product that you're seeing the growth in so we can see that revenue but get back on track?

Yes, first and foremost is to make sure that we recognize and understand upfront how customer preferences are changing, and the customer here in virtually all the cases is middle market, privately held companies who are wrestling with healthcare issues and they're moving from more traditional healthcare conscious services to more consumer driven healthcare kinds of services and that changes the sales dynamic and earnings dynamic associated with that.

The other thing we do is continue to work to have our commercial businesses feed those insurance businesses so that we can maintain the sales momentum growth in absolute terms regardless of what the product mix is, so we work on--we're working on both of those things, and we feel--when we look out at what's going on from a forecasted business point of view, we feel better about it than what we've seen with some soft--slight softness here in the last six months. This thing which we've owned now for 3.5, 4 years, has been a double-digit contributor every quarter year in and year out here, so we've hit a little bit of a soft patch, and we think it will get back on track.

And could you just talk--you've discussed this in the past what the Chicago market means to Associated today and probably more importantly how do you see the importance of that city in that market changing at all at some point in the future?

Well, we've had a position in Chicago for a long time, and it is largely a private banking kind of a thing with just a few locations, and it grows very nicely as we focus on middle market companies and private banking business that's affiliated with those companies and the people in them, and that's where we've been. Our foray into the suburban Chicago market with State Financial we feel pretty good about because of the attractiveness of those branch locations and what we can bring to the table. We've been able to do some good hiring down there, and we would like to think it is going to be a contributor to some of this core C&I growth and some retail lift that I have been talking about.

For us to do small deals in Chicago, I don't know that they would be noticeable and the risk levels would be pretty high, so we are very conservative in terms of our view of the Chicago market in terms of what it might mean to us in the future. We never do anything in Chicago to get bigger? No, I can't say that. It is a very attractive place to be, everybody wants to be there, but given our current position, it is hard for me to think of a de novo strategy that would work and it is hard for me to think of how a small acquisition would change the nature of our business down there unless we could just get some more attractive branches right directly over top of the State Financial footprint to get denser in those suburban markets.

Thanks, Paul. Appreciate it.

Thank you. (OPERATOR INSTRUCTIONS)

Your next question is coming from Heather Wolf from Merrill Lynch.

Hi, there.

Hi, Heather.

Quick question for you on the securities gains. They seem sort of elevated this quarter. What was that?

It was the sale of--as it turns out we own a fairly meaningful piece of Sallie Mae stock that we've just had on our books forever that we got in an acquisition, and given what's going on there, we felt here in the second quarter it was prudent from our point of view, first of all given the reality of the macro transaction, but then also some of the uncertainty around it that it was an intelligent thing for us to do for our shareholders to dispose of a portion of that ownership, and it looks as though that was at least in the short run here a pretty good trade.

Okay, and then just to follow up on the increase in the MPAs, when you say, I think you said largely small real estate transactions originated through the branch network, what does that mean exactly? Are they all home builders or are there some just commercial mortgages in there.

Yes, it is all over the map, and it is stuff that has aged for some time, but if you were to look at the customer list, you would see a couple of small development things, you would see some apartments, you would see a couple of strip centers. I mean, things like that, and it is not really through the branches it is through the regional commercial banking system that was the core Associated Bank's approach to doing business, and we have a fairly decent size real estate portfolio, but if you look at how we've seen some of these things deteriorate, I mean this is why you have to be very, very conservative in this environment and why for the last, almost couple of years now we've been saying, gee we have got to really deemphasize that kind of lending and when we're doing construction, real estate lending to do it for very well established customers out of our corporate real estate business by professionals that understand all the intricacies of this and systematically move the core banking franchise of Associated to target at the C&I segments which is where the ROEs are and the fees and the deposits. So that's been the change that we've been articulating for some time.

Do you think that most of the deterioration is--do you think they're related to the sort of declining residential real estate markets or do you think this is more just a function of kind of a sluggish economic back drop in your footprint?

I have to give you personal opinion, but I believe it is the former. I think the customer drives everything, and that when the--and if you look at past cycles, the consumer goes first, then perhaps employment starts to go a little bit, and then commercial real estate follows, and the first things that follow are the smaller projects that are directly linked to the consumer.

Land development, small strip centers, small business centers, and the businesses that are supported by them. And it is the larger, more substantive borrowers with a diverse risk across a variety of geographies and a variety of different projects that really can survive and sustain at least the early stages of it more successfully.

Okay.

It is both, I guess, but I see it as being very--I see it as being very consumer driven.

Okay.

When housing starts to go, then the small real estate starts to go.

All right. That it is very helpful. Thank you.

Thank you. Your next question is coming from Ben Crabtree from Stifel Nicolaus.

Hi, good afternoon.

Hi, Ben.

A couple questions. I know first national isn't a huge part of the bank at this point, but was--did they account for a significant part of the increase in non-performing loans?

No, virtually none.

Okay, and is that a lower margin bank than yours or is their margin more or less in line with yours?

It was a little higher, like 10, 12 basis points, so a couple $100 million it is not going to have a massive effect.

Right, and then a little maybe discussion of obviously you talked about going through and scrubbing and looking at your portfolio. What could you tell us about the trend in the watch list, the riskier categories? What are the volumes looking like there in the trend?

In terms of loans that have moved into substandard and special mention and the like?

Yes, what's moving in and what's moving out. Is the total relatively stable? Is the total still going up?

Okay. The total moved up slightly but not--I wouldn't say at alarming levels, and over the last few quarters it has been pretty stable into those categories, and again as part of this systematic analysis that I was talking about before, we've actually taken a few loans out that we felt were actually--it is hard to upgrade loans in this environment, but we actually felt in some cases we were actually being a little too hard on a few transactions and moved somehow. I would categorize it as stable but we did see a small amount of deterioration in the second quarter.

Okay, and any geographic concentration or overweighting of that within your footprint?

I mentioned State Financial because it was a noticeable portion. After that, no.

Okay.

And if you think about it, it is, what, 20 some credits for a million average size, about a million two. It is not massive large numbers of credits moving here, it is a lot, a few little ones. And when we get rid of the--frankly, the $10 million is two credits, so which actually skew the average size.

Right, right. Okay, great. Thank you.

Thank you. Your next question is coming from Andrea Jao from Lehman Brothers.

Hello again.

Yes.

You mentioned earlier that you expect loan growth to pick up in the back half of '07 and into 2008. Could you talk more about that? What are you doing, what your pipelines look like, and what gives you the confidence that you could get good loan growth in the back part of the year?

Yes. Well, we're seeing some momentum in the categories in which we're focusing upon here in the first or in the second quarter. Home equity if you look at the point to point balances and whether it is point to point or average balances in the C&I components.

We are doing a whole array of things differently from a product point of view to a sales management and marketing point of view on the retail side of things, and it is really this systematic focus or refocusing of commercial resources which we still need to get better at and more effective at in terms of the more attractive markets where the C&I growth in small business, middle market, and large corporate can be generated, and are really investing in each one of those three segments.

We hired a fellow to come in and manage a cadre of BDOs targeted at small businesses that we really didn't have before at all, moving away from generalists to targeted BDOs who really don't have a big loan--don't have lending as their core background but are good salespeople and can go out and mine opportunities, and then so that will generate more deposits per customer, we hope, and we've got plenty of capable people who can make the loan. We continue to invest in our branch managers capabilities to deal with small commercial customers using a more--a better engineered central underwriting process for that, and we're investing by hiring corporate bankers and core C&I lenders in some of our attractive markets. So we're doing all of those things, and then it could become sound execution.

The other wild card is how do we feel about the real estate loans and how do we predict the level of attrition which we can continue to see in the numbers regarding our permanent commercial real estate portfolios and mortgage portfolio, so they're both of those dynamics are playing out here. I would like to think that the home equity business and the cross-selling that can occur from that and the core C&I business and the cross-selling that can occur from that over time is significantly higher value than the ROEs and price that we would have to put this real estate stuff back on our books for. So even if there is a trade in volume there, there is an increase in value over time. But it is difficult to predict where those real estate volumes are going to go in terms of, in fact where we want them to go as time goes on there as well.

Great, that was very, very informative. One housekeeping question. What would be a good run rate for amortization expense in coming quarters?

I am sorry, for?

Amortization--tangible amortization?

John?

Tangible amortization. Let me look here quickly. About the same as what it was this quarter, 1.7 million.

Okay, perfect. Thank you very much.

Thank you. (OPERATOR INSTRUCTIONS)

Your next question is coming from Peyton Green from FTN Midwest Securities.

Hi, Peyton.

Hi, Peyton, your line is live, please make sure your phone is not on mute.

Thank you. You just touched on something I think sounds pretty important in terms of how you might manage capital going forward, but in terms of managing more towards I guess maybe a little bit of a smaller balance sheet but a higher quality one, does that--as you focus on more C&I business do you think you'll see more momentum and maybe getting out of some of the real estate deals that you're trying to kind of get out of before they become problems over the back half of this year and if so, do you still view buybacks as a very reasonable way to give the money back to shareholders?

In terms of your last question, absolutely. We believe that buybacks are a very viable way to continue to look at that, and we periodically on a regular basis annually look at our dividend rates as well.

It is frustrating and disappointing from our point of view to see the core real estate portfolios decline, we don't like it. We like it see it stabilize and we'd like to see ourselves be able to get high value from that piece of business which historically has been core for the Company, but the reality of it is we think it is the right thing to do. I would like to think that the real estate or the C&I and home equity growth can continue to build, but again in this environment that's a challenge as well.

I think all things being equal, it can especially as we start to go into '08, but I can't sit here and say that the net growth especially as you look at it right into the third quarter, is going to be a substantive shift because it has to build on itself and it takes time to do that, and I don't see anything changing in the commercial real estate environment. People can still get deals at terms and prices in terms of length of time, prices and underwriting standards that we believe in this environment just can't responsibly be done, and unfortunately it looks like we're more and more being proven right. So we believe that in the long run that's the right place to go and it's the right strategy, so, yes, it is higher quality, but we know we have to build net interest income, and if you look at all the rest of the pieces of our income statement, we start to do that and things start to--all things start to shift in a positive direction, so that's what we're focused on, but we want to manage risk as we're doing it.

Okay, and then one last question. You've been at other institutions and not at Associated as long as a lot of the senior management, but when you look at the NPAs that you all report and the 90 day past dues, what percentage of that do you think would not be classified as an NPA or watch list loan at the typical bank?

I don't know how--I don't know if I can answer that.

Okay.

It's not that I don't want to. I don't know that I could predict that or to analyze it that way. I haven't thought about it that way. Is your question are we very conservative?

Yes, I am trying to assess--

Let me answer your question this way. Those $10 million worth of loans that we're going to sell in August, I hope we're going to sell in August, we have a letter of intent and looks like we're going to sell them, we could have maybe found a way to not put those loans in non-performing, we could have really worked aggressively to have them not be there and maybe we could have tried to get loans held for sale or some place else.

We felt that today their categorized as non-performing loans and I am going to talk to you guys on the phone and explain to you what it is, so we try to--we do take a conservative approach, and so if maybe there is some loans in there that are close to the edge that we say, okay, well, gee, let's categorize them as non-performing because in the long run there is no harm in that if we're trying to be transparent as we can be. I really couldn't--it is hard for me to say in a number.

I think the operative question is, in the non-performing loans how do you feel about the collateral and underwriting that protects the Company within those loans? I do believe that in that arena and that's why I am saying normalized loss levels, even with this level of non-performers that I do feel pretty good about that.

Okay, and I guess another element of that might be how many of those non-accruals are current as to principle and interest but you all have just changed-- you all are pushing the issue?

A lot of them are.

Joe can get you that number.

I don't know it off the top of my head.

Joe can get you that number before the end of the day.

That's fair enough, and then in terms of, I think something we've not seen quite as much yet at this point in the cycle is just in terms of collateral values starting to trend down, I mean how do you feel good about the collateral values in kind of a more uncertain sales price environment?

In real estate you need two ways out, so you've got to have collateral and guarantees, and you have to underwrite a loan to values that protect you recognizing that economic conditions can change.

Okay.

And generally speaking, I can't sit here and say that we don't have non-performing loans that are slightly under collateralized, but we have an awful lot of them that are fully collateralized, even with deteriorated appraisals.

Okay, great. Thank you.

Thank you. I would like it turn it over back to Mr. Beideman for any closing remarks.

Nope, I think we've covered a lot of ground. Thank you all for your time.

Thank you, ladies and gentlemen. This does concludes today's teleconference. You may disconnect your lines at this time, and have a wonderful day.