Associated Banc-Corp (ASB) 2007 Q4 法說會逐字稿

Good afternoon ladies and gentlemen, and thank you for standing by. Welcome to the Associated Banc-Corp fourth quarter 2007 earnings conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS) This conference is being recorded Thursday, January 17, 2008.

I would now like to turn the call over to Paul Beidman, Chairman and Chief Executive officer. Please go ahead sir.

Thank you, Eric, and thank you all for participating in the call this afternoon.

As you can see from the press release, we earned $0.51 in the fourth quarter and there were several items that were unique to the quarter that were listed and summarized in the press release. I have to say I feel pretty good about the progress that we're making in our core businesses in what is really an extremely challenging economic and credit environment. Our net interest income was actually up slightly from the third quarter levels and the margin was flat at 362. This was stronger than I anticipated it to be as a result of some really solid loan growth, especially in December. and that growth occurred in our C&I and home equity portfolios primarily; and also importantly stronger loan spreads.

Deposit pricing really does remain challenging in the market but we've been able to successfully neutralize the negative effects of the deposit pricing phenomenon with expanded loan spreads and we feel good about that, and in the second half of the year, you can see that our net interest income levels are really up measurably, and that we've been saying for the last year, literally I guess, that we'd like to see the trajectory of our loan growth in our C&I categories really begin to improve and start to take hold in the second half of the year and it's done that. And we're really happy with that and we're happy with the way our bankers in a competitive environment are managing to capture loan spreads.

Core fee income, I think, evidenced good growth both quarter-over-quarter which is how we really look at the comparison, and year-over-year. Core fees are up just about 9% on a year-over-year comparison basis which is quite strong. We've been showing some momentum there and that momentum continues. Expenses were essentially flat with the exception of the items that we mentioned in the press release that were sort of unique to the quarter and importantly, I think our investment portfolios are stable given their conservative composition and I think very importantly in this environment, our capital ratio is strong at 6.59 at the end of the quarter.

As it relates to credit and I'll spend a few minutes on this--really on a variety of variables. I have to say that three months ago, I have felt more confident really than I do now given everything that's going on in the market conditions. Importantly, our strategies and our approach are the same, however we're seeing, I think really at a macro level and in our market the deterioration in real estate sectors that really is affecting overall market conditions and it leads us to be more concerned about where credit metrics are going or could go in the first half of 2008.

Let me talk really specifically about a few things that we do know that are facts and not speculation. At the end of the first quarter we're well reserved. Our processes around credit metrics and credit management are sound. I believe we've been proactive in identifying and exiting distressed credits and we've developed strategies across each of our businesses to identify those credits and to be proactive. We have confident people who know what they're doing and we've tightened our underwriting standards really over the last couple of years to be proactive at managing credit risk.

The result of all these initiatives have really had some positive effect on some important credit metrics. If you look at our non-performing loans, they have shown some escalation really in the first half of the year. In the fourth quarter, our commercial non-performing loans are up about $4 million in the quarter, and the remaining increase that you see there is from our consumer sectors, home equity and in mortgage.

But importantly, year-over-year, if you look at a 12-month comparison, our commercial non-performing loans are flat and our consumer non-accruals are up just right around $20 million, and that $20 million is on a $5.5 billion portfolio home equity loans and mortgages. Quite frankly I'm very happy with those numbers. In the environment that we're seeing $20 million increases in non-accrual loans in those portfolios I think is reflective of, again a relatively conservative nature of them.

However, chargeoffs in the fourth quarter were at $15.5 million which is really at an elevated level by our historical standards, but I think it's reflective also of some of the deteriorations that we're seeing. It's really very difficult at this time given all these dynamics to predict with precision how the market dynamics are going to impact us going forward, but I think it's safe to say that it's possible that we're going to--that we could experience increased levels of non-performing loans and elevated chargeoffs until these market conditions begin to stabilize.

So those are the general comments that I'd like to make about our performance and I'll be happy to answer any questions that you may have and Joe is here and Lisa Binder is on the phone with us as well.

Thank you, sir.

Ladies and gentlemen, we will now begin the question and answer session. (OPERATOR INSTRUCTIONS)

Our first question comes from Scott Seifers with Sandler O'Neil Asset Management. Please go ahead.

Good afternoon, guys.

Hi, Scott.

Just a couple of questions. First as you can imagine, credit is front and center on everybody's minds, I guess. Maybe, Paul, if you could talk in a bit more detail about your expectations for chargeoffs. Just sort of clarify, I guess, because the chargeoff level right now is kind of elevated by your guy's standards when you made the comment about elevated chargeoffs did you mean sort of elevated beyond where they are now or elevated meaning stay where they are?

Well, I'm saying--I guess I'm saying it's difficult to predict. If you ask me right today about how I'm thinking about it, I would like to suggest that elevated is the levels that we're talking about here, but it's unpredictable. There can be incidents that occur, there can be further deterioration that can occur and it's--it's really very inexact.

If you think about it on a portfolio basis to some extent, our risk is going to be around--predominantly around commercial real estate and how those portfolios behave. As I said earlier, I feel really pretty good about where we are in our consumer portfolios. We're going to see some deterioration there, but I think it's on a relative basis, it's going to be pretty small.

I feel good about our C&I portfolios generally speaking. Commercial real estate is where the issue is. We've been developing exit strategies and to this point those strategies have afforded us well. We've been able to keep up with what we've seen as distressed credits and manage our relative level of non-performers pretty successfully. I'm just--it's uncertain right now as to how that is going to play out over the next six months.

Okay, and then you made the comment about loan spreads being a little more favorable as well. Maybe if you could talk about pricing generally, and I guess if you could talk about maybe the better pricing, is that something that you're enforcing or you're actually seeing more rational pricing competition, just maybe anything you could allude to there?

Okay, I think it's a combination of things. First of all the conduits are out of the market, rational pricing is really settling into the markets generally. The aggressive pursuit of transactions by price is much less acute than it has been in the past for obvious reasons and I think that's good.

As interest rates come down, even though absolute yields might be coming down, the opportunity to capture greater spreads against your funding costs are real in any cycle where short-term interest rates are coming down and a curve starts to come back into play and we're working very--and then the other piece is management. We're working very, very hard to make sure that our bankers understand that dynamic and fight to capture it. So we're doing a lot of disciplined planning, pre-calling and that sort of thing to make sure that we understand and appreciate the dynamics, and we're very happy with how that's been going over the last few months.

So as interest rates come down it creates an opportunity that didn't exist before and with these other market conditions and sort of the conduits being off the table and that sort of thing, and some of the small banks starting to get a little more rational, all of the competitive pressures start to ease. On the deposit side, in this environment, deposits are capital almost. Their liquidity and if companies are feeling constrained, Countrywide was a big example, they're gone now as a competitor from that point of view, but others still feel the same kind of pressure so I think that's going to keep deposit rates sticky, but again we've been able to sort of manage that and that's been a pleasant surprise as well. The loan growth we're feeling pretty good about in the third and the fourth quarter and we've been talking about that and getting our businesses positioned. We're glad to see that and we're glad to see the discipline around pricing and that's starting to come through the numbers.

Okay, and then I guess the last question I had was on overall non-interest income, if you X out the branch sales, the number was down sequentially. I guess I would like to just get a better sense for how much, if any of that, was due to not having those branches anymore and you made the comment about feeling pretty good overall, maybe if you could just expand upon that a bit.

Sure. There are a series of seasonal thing that's effect the fourth quarter that we've seen before. Last year's fourth quarter fees were a little bit--well on a comparative basis, they would have been slightly stronger in a couple of categories because we had made some pricing changes that too took effect last fourth quarter that we didn't do again this quarter. The fees were pretty much where we thought they were going to be, maybe a little weaker in a couple of categories, but we feel good about our fee prospects going forward and do not--are predicting that we're going to see another close to double digit kind of a fee income lift.

The one area where we had trajectory of fees that were disappointing from my point of view was in the insurance business, and we've talked about that before. That strengthened a little bit in the fourth quarter and we think it's going to be a little stronger next year than it was this year. So in terms of trust, core deposits, card-based fees and brokerage fees, we feel just as confident about them as we have for some time.

Okay. Perfect. Thank you very much.

Sure.

Our next question comes from Terry McEvoy with Oppenheimer & Company. Please go ahead.

Good morning.

Good morning.

The first question is on some of these expenses. The $2.3 million of severance, could you talk about the benefits in the future from whatever decision went into generating those expenses and then the $3 million elevated levels of various other expenses, would those be one offs or more so on a recurring basis and if their one off maybe again talk about the decisions that were made and the potential benefits later done the road?

Sure. In relation--in relation to severance, I'd say it's multi-faceted. To some extent we're going to be more efficient as a result of those actions and that would imply fewer staff dollars in the run rate.

Secondly, it's redeployment of resources. So there is an investment being made in market A and a dis-investment in market B, so around the corporate--commercial initiatives that we've been talking about so we may be hiring someone in one market but reducing staff in another.

Thirdly, it's about performance and effectiveness in making sure we've got the right seats in the right chairs. So you put all of those things together -- I mean it's not going to--it doesn't imply a [substanate] reduction in core staff expenses. Some, because the run rate will be effected positively by it, but mostly it's about getting resources positioned properly and getting the performance management continuing to be enhanced and that sort of thing.

The other expense category, the Visa one is obvious, the other is a whole series of things. For example, there is some relocation expenses in those numbers that are--we've made some key management hires and those things come to roost in the fourth quarter so those are non-recurring and the vast majority of the rest of it I would categorize as non-recurring as well. And if you think about it third quarter to the fourth quarter, if you take that out, the expenses are flat and I think about it that way.

If you took $6 million of expenses out of the fourth quarter number, it's the same number as the third quarter. So it's a whole series of some legal expenses that came through and that sort of thing.

Okay, and then just one last question. The C&I growth that you've had over the past couple quarters, is it organic growth or is it simply winning, stealing customers from your competitors and if it's the latter, can you talk about what's changed at Associated today versus prior years when that growth just didn't happen and commercial customers weren't coming to Associated?

I would love to talk about that. That's really one of the things we've been focusing on for some time. It's about getting the resources positioned against the right opportunities and the right market. Lisa has been spending a lot of her time building sales management and calling management disciplines in those businesses.

We've significantly invested in a group of business development officers at the low end focusing on a dedicated basis to generate deposit and loan growth at the segment that would be most aligned to the branches. So those people become, to some extent, wholesalers, helping and supporting the branches in driving their business and in driving business in their own right. So I attribute it to increased management and sales effectiveness and marketing effectiveness within the organization and getting the resources positioned to take advantage of the potential that are in those markets that we've been investing in and it's taken us 18 months of serious work to get it there. We said it was going to start to show up here in the fourth quarter and I think that it has.

Thank you.

Our next question comes from Andrea Jao with Lehman Brothers. Please go ahead.

Good afternoon, everyone.

Good afternoon.

What kind of loan and deposit growth are you targeting for 2008? Will you keep your securities flat so that loan growth will drive [balancing] growth?

Yes, that's the idea. We do not want to be levering ourselves up by any stretch of the imagination and we believe that we're going to see improved core asset growth coming out of our core commercial businesses and I believe--well I don't believe, we have been clearly showing in our home equity book a whole different trajectory of growth really for the last three quarters. And economic conditions always have an effect on those things, and certainly economic conditions are probably weaker now than they were six months ago and maybe weaker over the next few months and those things always have an effect but I feel very good about our relative position in terms of ability to generate that growth.

So, yes, it's core business. We believe that we can change the trajectory of growth towards what we're seeing here in the second half of this year and are going to work to sustain it and it's our expectation that we're going to sustain those kinds of loans.

Okay. So for growth projections in 2008, you feel we can take fourth quarter trends, even in home equity, do not you think that's going to slow?

Well it's been slowing for some time but ours has been hanging in there, and I've said to each of you and at meetings with investors and analysts that it's better sales and better marketing. If conditions in the economy continue to weaken and the housing sector continues to weaken, then, sure, it's not going to be as high as it can be, but if you think about it, all things being equal, if you think about it over an intermediate term, we feel pretty good about things.

I would look at average balances too, not--there is things that happen at the end of the year, both in terms of deposit balances and loan balances that are really very--that are non-recurring and do not have a substantive--a substantive effect on average balances or on earnings because some large customers execute transactions that last for a very short period of time. I mean we're--we're in mid-single digits, high single digits kind of an area in terms of our expectations around those things, and that is different for us. It's sort of unfortunate if the economic conditions do continue to weaken and that's somewhat frustrating since we do think we've gotten ourselves well positioned but it is what it is.

And on the deposit side?

I think we've been showing some improved trajectory in terms of demand deposit growth. You have to take the $250 million of deposits that we sold out of the equation and that affects all the lines a little bit but we've been showing good progress there, the investments we've made and the business development officers and those capabilities I was talking to Terry about before. And the strengthening about our whole commercial business bodes well for trying to generate some better growth there and we're seeing some--another point, as interest rates come down, pressure on redeployment of demand deposit balances lessens as well so it becomes less of a challenge to some extent as interest rates--as short-term interest rates come down to grow demand deposits.

When when in the quarter did the $250 million block come off?

December. A large piece of it--well, it came up in a couple of tranches, so I would say in the middle of the quarter. I would think about it that way.

Last question. So it sounds like you will not be buying back shares in 2008?

In this environment right now--I wouldn't say that, but 2008 is a long time. It goes by in a flash but it's a pretty long period of time. Right now, capital is king in a whole variety of ways. We like having a capital ratio where ours is today and we're going to work preserve it and maintain it in this type of environment where credit is creating more significant risks for organizations, and I mean, I think people are going to look at banks and evaluate them on two or three key components and capital levels is certainly going to be one of them so we're going to be less prone to be buying back stock than we would have been in the past in these credit environments.

Okay. Thank you so much.

Our next question comes from Ben Crabtree with Stifel Nicolaus. Please go ahead.

Yes, thank you. Good afternoon. A couple of questions. Perhaps a follow-on a little bit in terms of the all interrelated buyback and investment portfolio. If you're loan growth is kind of mid-single digits--I guess, let me back up and say my question would appear to be is that your capital ratios on my model end up going up and I'm trying to figure out that if loan growth is a little less than you expected would your first choice be to buy back stock or can you actually make some decent spread by putting investments on the balance sheet at the moment?

Fred, this is Joe.

The investment world isn't real attractive at this point and to continue to grow the investment portfolio would not be our first choice. We would probably--if you're scenario was true and if your model is developed that way, we would consider either just carrying more capital or potentially using it to buy back stock.

Okay.

Hopefully what happens is the balance sheet does grow and the capital is absorbed and that's where my mind is.

Right. And maybe just a little follow-on for that is any differentiation within your geography in terms of where the strength in loans has seemed to be coming from in the fourth quarter?

Yes, we're seeing good performance in (inaudible - technical difficulties) which is a positive for us. We've been investing a lot there in terms of our resources. And in the Chicago proper market where we've had the State Financial System there for some time are getting that thing repositioned, and in terms of the retail growth, we're really starting to see it across the board. And that we like because we've got a good branch system in a whole series of key markets. We're being a little more circumspect ourselves quite frankly in the Minneapolis market where things are a little more frothy.

Yes, right.

So we're --

Is that the euphemism?

Yes, okay.

I guess the last question is--relates to your comment about the commercial real estate being the area where you're watching for the potential for the risk--where the risk tends to be concentrated, and I'm trying to get a sense of maybe digging just a little deeper on that. Are you speaking particularly in terms of residential-related or can we think in terms of--I'm not aware of a lot of overbuilding of office buildings in the markets you're in, things like that, so what is it--where the problems seem to be the most worrisome?

Clearly in residential areas where there is housing development and condo development, to the extent that we have exposure there, we're concerned. And less so in office but I'm--I'm concerned that this can spill over into the commercial sectors that deal with support--anything that is supporting around consumer behaviors, shopping center kinds of things and those kinds of things can very logically be adversely effected if conditions around the consumer continue to weaken, or if the building has been too aggressive.

Has that been an area of significant growth for you recently, the retail related?

It's been an area of some growth for us, sure, but this is an area where we've been trying to sort of back off a little bit in any event. But it's undeniable that we've got a fairly decent size exposure to the commercial real estate sectors, and --

I'm sorry, go ahead.

No, go ahead.

I was just going to say that we--I think really trying to say that it's--that it really is--is difficult to predict is the right place to be. I don't want to create the impression that everything is under control in this environment and that things cannot deteriorate because I just do not think that's the case. But I also do not want to say the whole thing is going to tip over either, it's just that it's--and I do not think it's a surprise to anybody that things in the economic environment right now and how they could effect commercial real estate are very, very uncertain and that nobody can sit here and say that gee, we think things are stabilizing.

Right. I guess I did have one last question and it's kind of a softer question but a lot of the last year was spent--you spent a lot of the last year kind of redeploying assets, your own, if you will, productive assets throughout your system into different markets maybe, and certainly different kind of products lines and I just wanted to get a sense from you as to how far through that process you are?

I feel that we are--that we have made tremendous progress in the last 12 months in terms of getting the management discipline, the financial discipline and performance management discipline around the performance of our--our commercial businesses, our retail businesses and our wealth management businesses. Lisa working directly with the senior managers and we've made some changes there, as you know, are in a much better place in terms of prospects really in each of those businesses than we were a year ago. I know we've made really a significant amount of progress in getting those things repositioned and the foundation in my mind is much stronger than it has been.

So would it be fair to say that going forward, less of your new loans would be offset by shrinkage in some of the areas where you were trying to get out of or trying cut back on?

Oh, I see what you're saying. Yes, well, part of the shrinkage in real estate, for example, was a direct result of the aggressiveness frankly with which many banks and conduits and third parties were driving irrational low ROE pricing and flexible underwriting. That's gone.

Okay.

Forget that, that's over. So if our--if the expectation of our commercial real estate portfolio was going to be down another $400 million because we were just going to let it continue to runoff, that's not going to happen, it's probably going to be more stable. It's not going to show significant growth, but it's probably not going to decline at the levels that we had seen maybe a year ago because of those--the economic factors and the business factors that are really just the opposite of what it is today.

Okay, great. Thanks. That's very helpful.

Next question comes from [Eric Swanson] with Morningstar. Please go ahead.

Hi, thank you.

I wanted to talk about your regulatory capital ratio. What number should I compare that to from the previous quarter because I was looking and if I'm looking at the right numbers that deteriorated pretty significantly?

I guess, I'm not sure--we haven't reported our risk-based--

Well you reported your tangible capital ratio of 6.59.

Right. 6.61 last quarter.

Okay, 6.61 last quarter. Okay.

Flat.

Okay, I just wanted to make sure I was comparing that to the right number. And then secondly, and I apologize if I missed this, could you go through what kind of--what loans made up the net chargeoffs in the quarter. What types of loans, was it loans within the construction portfolio or what area of the loan book?

Let me make sure I get this right. Joe, please jump at me if I'm wrong. Hold on.

There was about $4 million--no, this that's not right. That's not where I want to go. Chargeoffs are $15 million, $9million of it was commercial split evenly between C&I and real estate, and the remainder was a combination of home equity and mortgage, largely home equity.

Okay. All right. Was that exposure to any one particular--because I think it was the first quarter it was that was primarily related to one exposure?

Yes, I see here. In third quarter there was one large credit.

Yes.

This is much more spread across a series of smaller credits.

Okay, thank you.

There is one large credit that sticks out on the commercial size.

Okay. Thank you.

Sure.

Our next question comes from Michael Cohen with SyNOVA Capital.

Hey Paul, how are you?

Good, how are you?

Doing great.

Question--I have a few questions for you. Can you just be a little bit more specific on sort of the granularity of your commercial real estate portfolio? Just kind of give us a sense as to kind of a breakdown of what the relevant major buckets are?

Let me see what I can do for you here. Lease and [insert] are some of the categories that will be of primary interest. First off, well over 90% is our footprint. Land exposure is about $460 million. On a relative basis of the total loan portfolio it's pretty small. Single-family and condo is about $550 million, again a relatively small piece and then the rest is spread across other more industrial kinds of categories. I don't know if that helps.

Yes, no, that does. Is it logical to assume that the two categories you're most concerned about would be obviously, the land and single-family and condo development?

That's why I highlighted them, yes.

Okay, and then obviously you've kind of seen a fair bit of home equity growth over the last three quarters and is it--do you have some concern that--I don't want to say jump into the water, but it's sort of home price appreciation, home price depreciation is kind of a moving target right now, so how do you feel comfortable that you've underwritten these the right way given the shifting sands under your feet?

Okay, that's a great question. Hopefully I won't go on too long.

First of all we tightened our underwriting standards significantly two years ago and have made other additional changes to that to tighten further going forward from there. We're underwriting this stuff and we're growing it on our terms and I feel comfortable about it. In fact, to the extent that we're having any losses right now, it's stuff that we put on three or four years ago or reacquired. It's pretty tight and our LTVs are pretty conservative and our scores are pretty high so I feel good about that.

The other thing to consider is markets, and we get painted with this midwestern thing. There is a great study out from PMI and it's called--it's a risk assessment analysis by MSA--or SMA, I'm sorry, and it's something they've done over like a 10 or 15 year period and it talks about probability of depreciation of housing prices and if you look at the nationwide map there is red zones and there are some red zones in the midwest but they're in Michigan and Ohio and Indiana.

If you look at the map in terms of the MSAs in which we play, every one of them falls into the lowest category in terms of probabilities of housing depreciation. So we feel that we can compete, even though the economies are weaker and housing prices are under stress, there's no doubt about that, we feel that we can compete in those markets and generate an acceptable level of business on our terms; and we're getting better and better at doing it from a selling and a marketing point of view. So I think we're going to be able to still generate some level of growth.

Of course economic conditions are a major factor. But the perception of where we operate and the reality of where we operate around many of these stability kinds of variables I think are still misunderstood.

Okay. Thank you, and then last question. I guess if you took about an $11 million gain on $250 million of deposits, is that the right--are you essentially getting a 4% premium for those deposits? Is that the right way? Why would you sell DDA accounts for a 4% premium?

It was higher than that. The deposits that were sold in the fourth quarter were only about $200 million, in fact maybe less. The 250 was a series of sales that occurred over the third and the fourth quarter. If I lumped those together and implied they were in the fourth, that was mistaken.

Okay, but I mean, 11% on $200 million is still not that high a number either, right? It's maybe 5% and core DDA accounts are somewhat valuable now. What was the rationale behind selling these?

You're assuming that we sold all core DDA accounts and I would just view--and again, I don't have the statistics in front of me, but when we looked at the analysis they were substantially CD accounts sold in those branches. But again we went through a process that said, okay what would we need to break even on these sales and we were very pleased with the premiums we got and every branch is different, and I'm not going to argue with your numbers, I would have to go back and reconstruct that stuff but we were feeling very good that we actually did very well.

We know that deposits are precious and we didn't do it just to get a gain. We did it because we think strategically it's the right thing to do. The markets were markets that we didn't think we we could grow in. But again, the premium number that you're quoting seem low to me based on my recollection of what I remember deal by deal, but remember, there's a fair number of deals here and as Paul said they went over two quarters.

Okay, I can follow-up offline. It's not a big deal. Thank you both so much for your time.

Sure.

Our next question comes from Kenneth James with Robert W. Baird. Please go ahead.

Hi, good afternoon.

Hi.

I have a question on the margin last quarter. You alluded to the fact that kind of a dislocation in the LIBOR rate helped you by three bips and that was pretty much the same situation for all of the fourth quarter; so I'm wondering if that played a role this quarter, to what extent that could go away next quarter, and also kind of just a general outlook for the stability of the margin going forward.

Sure, it did help us in the third quarter. It helped us but to a much lesser extent in the fourth quarter. The spreads did come down at the end of the quarter. It's really--it to me, it's much more volume and loan-spread driven. If you can move that loan spread on billions of dollars over a period of time, that really is where the effect is.

It could have a one or two basis point effect maybe in terms of run rate going forward if LIBOR were to completely normalize, which frankly it's begun to show a little bit of that, but in January it didn't--or for the January rate settings for loans it didn't. If you think about the margin going forward, the first quarter has seasonal effects as does the fourth quarter and demand deposits do go down in the first quarter and that puts some pressure on the margin. But we--I feel good that the--or confident that the absolute level of net interest income in the first quarter is going to be noticeably better than it was last year, all things being equal, unless we get surprised by some dynamics, and that the margin could come off a few several basis points based upon what we know for some--because of some of those reasons.

But if loan growth holds up and it keeps on going, and again that can be muted somewhat in the first quarter as well, we feel pretty good about that and also, I mean, what the fed does in a couple of weeks will have a major effect on that too. But yes, there will be some pressure on the margin in the first quarter.

Okay.

But net interest income, a growth would put pressure on the margin in terms of the percentage. But it can add value in terms of net interest income which really is what the prime measure is.

Okay. If I think about the course of the whole year as these better spreads cycle through more and more your portfolio and deposit costs are obviously going down, best yield curve we've had in several years, maybe getting better, is it a stretch to assume that for a full year margin in '08 you're going to show improvement over '07?

I believe we'll show improvement in net interest income. It's hard for me to predict the margin 12 months out, I mean we have an expectation and a view. I think it will probably come down a little bit especially if we get the growth. But if we were to get significant DDA growth that would push it back the other direction and it's hard to say how many more iterations the fed's going to give us. All of those dynamics come in play.

But think about it this way. Because of a lot of external factors in our growth trajectories for a variety of reasons, net interest income was down for us this year, probably in the neighborhood of almost $30 million over--year-over-year comparison. In the fourth quarter it was only down two.

So because of all of these dynamics and because of growth and price and LIBOR, and the whole thing and rates coming down, it has chewed into the unfavorable run rate very significantly and that's what we've been saying for the last couple of quarters. If we can get that dynamic to begin to move and our fees hang in there, then--and from a core earnings point of view, we should expect to see that momentum begin to build in a positive direction. Credit in this environment is the wild card.

Okay, and touching on credit for a second. Can you maybe give any kind of insight ahead of the call report on delinquency trends in the home equity mortgage portfolio. I know heading into this quarter they were very low. I think if I did my math right about 1% of the combined home equity mortgage portfolios which is pretty far below the average right now.

Right.

Did that deteriorate marketably this quarter or pretty stable?

I can't give you a number off my head but it deteriorated a small amount, and reflective of those non-accrual numbers. We had a small up-tick of consumer non-accrual loans but it's small based upon what is going on in consumer lending and in mortgage lending at a macro level, the deterioration that we're talking about is incredibly small.

Okay, and what about the residential portfolio, the construction portfolio you referenced, the $550 million, if I did my math on that right it was about 5% delinquencies in that portfolio heading into this quarter, 2% of that was on non-accrual. Is that kind the same picture we're looking at, you're just nervous about the headlines and the way things are moving or did you see significant deterioration in those metrics as well?

The metrics that we're looking at the end of the fourth quarter reflect the metrics that we're seeing. When I'm talking about the prospects, I'm--on a much more subjective level, trying to give you some insight in terms of how we're seeing the world and how we're seeing our portfolio. We're seeing more deterioration in terms of customers that we have dealt with for a long time that are well capitalized, that are well experienced in what they're doing. We're seeing more stress and strain around the dynamics. So that's--and that shouldn't be a surprise to anybody.

No. No, not at all. I was just looking to see if you saw any or could give any concrete numbers there.

Yes, it's really impossible--the one thing I know is if I gave you a specific number, it would be wrong.

Okay, no problem. And then in terms of kind on your expenses, I know you had a small acquisition and a lot of non-recurring stuff in the numbers, up 7% or 8% on a stated basis, if I strip everything out to come up with a core number over the last couple of year it looks like expenses were up about 7% in '07 which seemed high for you guys especially given the way kind of revenues were growing. In terms of expense growth in '08, do you think it would be a flat year? I imagine the belts are pretty tight. If you can give me any outlook there.

I think we'll see some increase in expenses. Of course we're going to be trying to manage things as tightly as we can. We are taking some severance actions to try and drive efficiency through the organization and we'll continue to look at that. We do that all of the time. We look at where we can disinvest or where we can redeploy our assets as well, so obviously we'll try to be as conservative there as we can be.

On the staff lines I think we'll see a small amount of increase. We want to make sure that we're driving revenue growth, and the more revenue growth we create, if we're successful at it, the valuable components of staff expense could increase and to me that's good news, if that's what happens. The core operating expenses of the Company are going to be basically pretty much flat, but we're going to be looking at some level, I hope, of increased staff expenses driving successful performance to the businesses.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS)

Our next question comes from Heather Wolf from Merrill Lynch.

Hi there.

Hi Heather.

Just a couple of--sort of detail oriented questions to follow-up. On the $4.5 million roughly of commercial real estate chargeoffs, were those all construction?

I'm going to look at Joe. I can't give you the specifics on that.

No. No, they were not all construction, and again, my recollection is they were evenly split, but I have to get a piece of paper here, Heather. Go ahead and ask your next question and I'll answer it as soon as I find it.

Okay, I'm wondering since Paul, you mentioned some concerts regarding retail and strip malls, can you give us your total exposure to that area?

I don't know if I have it broken down sitting right here in front of me at that level of detail but I can get it for you.

Okay, and then the construction portfolio, can you give us a rough feel for a geographic breakdown?

Within footprint or in versus out? It's virtually all in footprint. Well over 90% is in footprint except for maybe a couple of small things that we might have with customers in other markets. All right, if I look--I can give you a number on the entire CRE portfolio. I would have to again do a little more--wait a minute, let me see what we have here.

50% of all of our CRE loans period are in Wisconsin, 14% are in Minnesota. So I cannot be specific about Minneapolis, but I guess it's logical to assume that a large chunk of it is in that market. But I can--I'm sure we can be a little more specific around the $400 million of land loans and divide that up for you for the construction. I just do not have it that clearly dissected sitting here in front of me.

Okay, that's fine. I'll follow-up with you. Thanks so much.

Sure.

Our next question comes from Peyton Green with FTN Midwest. Please go ahead.

Hi, good afternoon, Paul.

I was wondering if you could talk a little bit about what opportunities you see emerging and with your focus kind of on retrenching and really trying to scour the credit over the past couple of years, do you think you're in better position to take advantage of it now than you've been?

I think we're in better position. We've--just in the last six months we've exited around $150 million worth of credit which is great from my point of view. The organization has been very responsible and we've attacked that aggressively. There comes a time in some of these thing when you can't and if the deterioration continues then there is new credits that you ought to be looking at as you go.

So, it certainly has afforded us well and as I tried to say earlier on, I think it's reflective in the metrics that we've seen in terms of our level of non-performers and relative basis on chargeoffs even though they're escalated for us over the last six months' but the economic conditions really cause you to be even more circumspect about it looking at the uncertainties going forward.

Do you think there is still more widening of credit spreads before--?

Oh, yes.

Okay.

If rates keep coming down--well if you go back in history and look at other cycles, if interest rates continue to come down, the opportunity to capture those spreads continues to increase. Of course you get to a point where competition precludes any further expansion, but there is no doubt that those spreads have been declining over the last few years and it's moving in the other direction now if you're smart enough to capture it or aggressive enough to capture it and that's the key. The individual banker can give it back if you're not really working very, very hard because it is still competitive out there, but the environment creates the opportunity to really create value.

Okay, and then a question maybe on an area that might be an opportunity. Is there any opportunity to go into the jumbo residential market in your markets with resets that are coming up and book good credits that have wider spreads and been good carry on them? Is that something that you think there's going to be more of an opportunity for you all in '08 than in the past?

Yes there is, and there is opportunities to think about in the jumbo area and even in the non-jumbo market, to actually create asset value in terms of being able to book more transactions as long as we're underwriting them to our conservative standards that we have. Those opportunities are clearly there.

Very interestingly--and well it's too early to jump on any band wagon, but as interest rates have come down here, our--very early on we're seeing really positive movements in December and early into this year in terms of mortgage originations that are much more like they were several years ago even in this environment where it is seasonally off. And it's all very early on but as interest rates move, those things can often happen.

The dynamics are very different because of the effects of subprime mortgages and supply and demand and all of that, but I think there's going to be potentially there can be a refinance sort of initiative that takes shape here, that is certainly isn't going to be reflective of what went in in 2002 or 2003, but creates a new dynamic in that business too as interest rates come down.

Okay, and I guess if the fed cut 100 over the next month, what happens to the repricing in your balance sheet?

Peyton, we're neutral from a repricing perspective. It's all about the behavior of the market place in terms of what happens and whether you can actually push it through to deposit side.

What's your best feel on the deposit side?

I think if it cuts 100, I think it's going to take a while, because deposits are pretty sticky right now.

Okay, all right. So you've not seen any easier deposit environment in terms of pricing?

Not yet. It will happen, but it's going to be--it's going to be longer in this cycle than it has been in prior cycles because of some of the liquidity squeezes and that sort of thing that you're seeing on some financial institutions and capital constraints and all of that. Deposits almost--well they basically become liquidity in capital and are a cheap source of it against intermediate funding even at some escalated levels above and around fed funds so that's going to put pressure on.

And again I don't want you to think that doesn't mean rates aren't going to come down, we're just saying relative speaking to everything else that is going on, and secondly, Paul talked about it earlier, we're spending a lot of time in trying to get more core accounts in the bank, core relationships which, of course, mitigate all those pricing pressures. So there is a lot of leverage you can try to pool and we're trying to do that.

Sure, no, and then I guess the last question is kind of the migration through the watch list. I mean it sounds like a lot of the problems that you all charged off in the quarter were things that you've known about for a while and probably identified some time ago and it was just a matter of getting out of credits and you can't get out of all of them.

Correct.

But how many more surprises are there that showed up on the watch list this quarter versus last or is it still just kind of an orderly migration through credit grades?

That is sort of--that's the concern that we're talking about. While it hasn't personified itself into substandard credits and non-performing credits and losses, we're just watching. As it goes on, we're more concerned about that being a potential reality than we have been in the past and we've talked about how we're attacking the problem and we've been seeing the concrete positive effects to some extent and non-performers and that of our attacking of the problem, so we're feeling pretty good about it.

The macro economic kind of dynamics that are going on out there, the deterioration that we're seeing in the housing industry, all of the factors and then when you start to look at really solid customers on a case by case basis that begin to deteriorate it causes you to be more circumspect about it and think about it maybe differently and the potential is there to see real deterioration over time depending upon--if the fed lower rates and things begin to get traction, if there is an economic stimulus package that puts a net under some of this, then the dynamics can shift and they can change. Right now I think those things are very necessary because of the response that we're seeing that is impacting some of our long-standing core customers.

And I guess going back to kind of the weakness in some of the long-standing core customers, if the fed cuts 100, does that help them? Does that give them enough of a life line or does that not necessarily matter, they have more of an in-demand problem?

I think it helps everybody. If it puts a net under the consumer, and the consumer's patterns begin to stabilize, that's one variable that can occur. Tax stimulus, businesses might be a little bit more willing to put some money back into their business and begin to grow. If financial institutions are feeling a little more stable, they're willing to put funding into a situation where today maybe there is no chance that's going to happen. All of those things play out.

How long is the housing inventory going to sit out there and how long is demand for new homes going to be weak and how long does it take to get through the obvious over-building that's occurred in different markets. All of those things have to settle down at some point.

Okay, all right. Great. Thank you.

Our next question comes comes from Andrew Marquardt with Fox-Pitt Kelton. Please go ahead.

Hi, guys.

Can you talk a little bit more about credit quality in the sense of reserve adequacy? You seem like you're fairly cautious around near term outlook, perhaps losses remaining elevated, perhaps greater migration and watch list credits, yet we didn't see a reserve build; and on top of that you're also talking about loan growth that is still okay so we're seeing reserve coverage come down? Can you talk about why we shouldn't see reserve build?

I would suggest that it's possible that we could see reserve build. At the end of the quarter, and when you look at the matrix--the matrix of all of our variables and put it all together and look at where we are, our reserve level is adequate, it's solid. At 129, 130, it's down from the low 130s because of the growth in the fourth quarter. Even after people have taken some fairly significant actions, they're just beginning to come back to approach the levels where we already are.

So if things are stable, then, we're in good shape. It's hard to predict all of those dynamics in terms of where it's going to go in the future, but what I know is at the end of the quarter it's reflective of the facts and of the conditions that are in place.

Okay, but did I hear you correctly that you said initially that perhaps one could anticipate reserve build, perhaps for migration and for loan growth?

What I said was that it's difficult for me to predict is going to happen in the future given all of these dynamics but I wouldn't preclude it.

Okay, all right. Thanks.

My other question was--

I can't responsibly sit here and say, geez, no, that's not going to happen. I don't think anybody can responsibly say that in this environment.

Okay, right. Thank you.

My other question was on capital and the use of capital. You have excess capital and can walk through the priorities of either preserving the capital or using it for loan growth, supporting the dividend, buying back stock and also what you're seeing or hearing out there in terms of M&A as well as your appetite near term, longer term?

I believe maintaining a very conservative capital ratio is the only responsible thing to do in this environment. So we're going to primarily focus on that as the top single priority at least in the short, intermediate run until we see things getting more stable. Acquisitions, there is going to be an incredibly high hurdle for people to do any real acquisitions at this point. It better be virtually risk-less and there better be some strategic, compelling reasons for it. So I think the acquisition market at this point is really going to be constrained.

Buying back stock versus holding capital, as Joe said earlier, we far prefer to deploy against growth. We've been buying back stock over the last couple of years which again I think was a logical thing to do against the alternative of low ROE, low yield, to flexibility underwritten real estate loans so there was a good trade being made there. I don't think the trade now in terms of buying back stock versus growth or preservation of the capital is a good trade.

So we're--preservation of capital at this point at least in the short run is critically important and we're all ready I think on a relative basis at a pretty strong place, but in this environment, can't have too much.

Okay, thank you.

Our next question comes from Andrea Jao with Lehman Brothers. Please go ahead.

Hello again.

Hello.

With respect to non-interest income you had the different drivers just kind of take a dip in the fourth quarter versus the third, but earlier you said this was expected. So in terms of a quarterly run rate for 2008, can we expect to bounce back? Could you remind us about seasonality in the first quarter?

In the fourth quarter versus the first quarter, there are all sorts of different seasonality variables that come into play and as I said before we had put a pricing thing in place last year. Trust fees are usually weaker in the first quarter, there is just less business done--new business done, anyway. We think that those things are going to get stronger.

Our insurance business was weak. Those things frankly were lower than we expected. In aggregate, having core fee income grow at right around 9%, from my point of view was a good level, so when I said expected, that's really what I'm talking about. When you look at year-over-year, the fee income growth was solid.

When we look at the business dynamics around checking account growth, around our decisions that we anticipate making regarding pricing, around the momentum in our wealth management and brokerage businesses, we feel that in 2008 we can generate that same type of fee income growth. So I do not see anything in the fourth quarter that causes us to significantly change what has been a relatively favorable outlook for these categories of core fee income.

Perfect. Thank you so much.

Our next question comes from Josh Peters of Morningstar. Please go ahead.

Good afternoon. Actually my question was regarding the reserve adequacy at the end of the quarter and I think you've already covered that fairly well.

Okay.

So I won't prolong the call.

Okay. Thanks.

(OPERATOR INSTRUCTIONS)

Our next question comes from Richard Lane with Broadview Advisors.

Hey, Paul. I'm almost to tired to ask you a question, but I will.

I'm still hanging in there to answer it, and the football game doesn't start until Sunday so we can go--

That's true, we have 48 hours.

On the commercial real estate X construction, you had mentioned at the onset that you're more concerned about the commercial real estate or actually the real estate, how do you feel about the CRE non-construction portfolio?

Well, it's--

I guess let me phrase it differently.

I'm trying to think about where to start.

As an example, what would the mix between, let's say, owner occupied versus investor?

I think the owner occupied, and again, I have to go get a piece of paper.

Just ball parkish.

I think it's in the 30% to 40% range.

The which part is 30 to 40.

The owner occupied.

The owner occupied. Okay, and--because you had mentioned that you feel relatively okay about the C&I portfolio from a credit quality standpoint. I would guess that you would, if you feel that way about the C&I, I would think you would feel even better about the owner-occupied CRE portfolio just because you have superior collateral there, so it would be ostensibly the investor side of the equation that would be of concern so maybe that's a starting point.

No, I think that's very fair. In fact, that probably sums it up in a nut shell. I think that's right. I think the other part I would just like to make about this whole credit discussion and the dynamics, is that I believe we have been disciplined underwriters over the long term and who is to say where values ultimately go and how--if there's a recession, if there isn't, where do values go and where they do not go; and in these portfolios, non-performance doesn't necessarily mean massive loss either.

Absolutely.

And so there is different dynamics around all of that as well. I still believe that on a relative basis when you look at what is going on in the world on a relative basis I like where we're positioned but just given the dynamics that are occurring through these portfolios it's clearly a greater concern that it has been recently and again, I do not think that's a surprise.

No, and just on the construction side, just the way interest reserves and the way that whole accounting issue can mask problems until the last second.

Right.

Can you offer any color there?

Well, it's a matter of how well you manage the relationships and how close you are to the customers and how well you understand what's going on there and what they're doing with the money and how it's being deployed and what the ultimate revenue coming in on the other side is--looks like. So it's being very--and it's a different level. It was easier, it was easy four years ago, three years ago, it's a whole different level of involvement, it's a whole different mindset on the part of the relationship manager. It's almost--it's not a workout mentality but it's a mentality of understanding in great detail what is happening around the dynamics of the Company.

I guess just from a different standpoint though, some of your competitors, the way it's been phrased on the conference calls, it's a bit laughable to me, but "we reviewed 30% of our construction credits and low and behold, there were some issues that we discovered and thus we had a chargeoff rate of X and our reserve levels are Y, blah, blah, blah". It's like, oh, well I assume that you were doing that on an ongoing basis like a portfolio manager discovering a stock that he'd forgotten about and this portfolio manager--his portfolio had had a problem, that's kind of ridiculous.

Well that's not going to get the job done. If I look at our commercial banking operation, the regional banking component of all this that has C&I and commercial real estate in it, large number of loans.

Absolutely.

We've got our regional CEOs and our bankers and at these loans and reporting to the credit side of the organization. First of all, we went through basically every loan of any size and earmarked it whether it's going to be a retention, an exit, a work, whatever, and then we're managing it on a weekly basis.

I sit in a meeting on a weekly basis talking about--with our chief credit officer and some senior managers in the organization and Lisa--to be precise, either Lisa or I are doing that, and we're looking at how they're succeeding at exiting the loans and in each region we can track it, we can say down to the $10,000 rounding, this is the bucket of loans being exited and every week a new loan comes into it and loans come out of it and exited can be upgraded because the things work successfully. We've got the portfolio sliced and diced.

We're doing the same thing in in the corporate bank. The dynamics are different between the corporate bank and the regional bank in terms of how customers behave and what the market is like and the capability to exit the nature of the credits, the whole thing; but we're trying to do the same process there to understand in great detail so that the senior managers of that organization can sit with us and describe in detail how basically each loan of any size is categorized and if there is a disagreement, credit wins.

If the line thinks they ought to keep it and credit thinks it ought to go, it goes. That's how we're thinking about it and have been trying to attack it for the last six months. And that's why we can sit here and look at it and say, gee, we're really seeing some deterioration here in some of these core customers and that's different than it was three months ago. So I mean it's not a positive, happy story but it's best to understand reality as it is and trying to deal with it as aggressively as you can.

Yes, okay. Thanks for the color, guys.

Sure.

At this time I am showing no additional questions in the queue. I'd like to turn the call back over to management for any concluding remarks they may have.

I'm finished, thanks.

Thank you very much.

Ladies and gentlemen, this does conclude the Associated Banc-Corp fourth quarter 2007 earnings conference call. You may now disconnect, and we thank you for using ACT conferencing.