Associated Banc-Corp (ASB) 2009 Q2 法說會逐字稿

Welcome to the Associated Banc-Corp second quarter 2009 earnings conference call. (Operator Instructions). I would now like to turn the conference over to Paul Beideman, Chairman and CEO of Associated Banc-Corp. Please go ahead, sir.

Thank you, very much, and thank you, all, for participating in our call today. I'd like to make a few general comments regarding performance and then Joe Selner who is also with me here today and I will be happy to answer any questions that you may have.

Certainly this has been a challenging quarter for us and we'll spend a significant amount of time talking about our provisioning and asset quality, but I also just wanted to point out here from the beginning that we believe that our pretax-preprovision earnings remain healthy and that our tangible common equity is above 6% and we'll talk about some issues around those dynamics as well.

Earlier today we announced a loss of $24.7 million for the second quarter driven largely by a provision for loan losses of $155 million. We preannounced this elevated provision on the 29th of June, as you all know, and the provision today certainly falls within that range of our preannouncement of $145 million to $160 million.

Charge-offs in the quarter were $61 million, compared to $57.6 million last quarter, which is at the low end of the range that we provided in our preannouncement.

While the level of provision that we are seeing here in the quarter is high and the migration of credits that we've seen has been significant, we believe that the actions that we have taken this quarter are appropriately responding to the risks that we've seen in our portfolio and that we believe that going forward the level of deterioration that has driven this provision will moderate. In the first quarter we saw that migration levels had been really relatively stable to what we've seen in recent quarters. And in our markets, if there's going to be any seasonal lift regarding CRE credits especially, it would be late in the first quarter and in the second quarter. And some of our expectations that we had been talking about earlier this quarter were really based on those kinds of --first of all the information and those kinds of assumptions.

However, it became really abundantly clear to us, as the quarter progressed that we were going to see little if any seasonal lift. In addition the real estate collateral values that we've been getting on appraisals were continuing to decline at rates that were higher than we had anticipated and often these appraisals that we are seeing in this market are being compared to distressed properties or properties that are being marketed in foreclosure and that really has driven the appraised values of properties quite low.

In our now (inaudible) portfolios, we were left with a group of loans where there was really no real momentum towards sales over the last few months or in the seasonal period with limited short-term prospects. Even if there were cash reserves or the projects were cash flowing, we are looking at the underwriting criteria and the prospects and our response was to downgrade, really a significant number of these credits and establish appropriate provisions against the risk that we saw in those portfolios and that's really been a main driver for the increased provision and the increased level of nonperformance that we are seeing in the quarter.

Also, our C&I customers have provided statements for us here and during the second quarter that's a period where we get a significant number of annual statements that reflect really what they are seeing as a delayed set of prospects for recovery. If their earlier projections had assumed that there was going to be recovery in mid-2009, these revised prospects for improving performance and generating increased revenue are being deferred out into the latter part of 2009 or into 2010. And that has driven some of the migration in our C&I portfolios.

The lions share of the migration that we are seeing here into the potential problem loan categories are in the construction and the CRE categories and those are being driven largely by condo with some retail composition. Our C&I nonperforming loans really are two categories really. There's two large relationships that are about 60% of the total and then a group of really smaller regional loans.

As I said we believe that we've been responsive at marking down the construction and the CRE credits in the quarter and as a result, while the losses we believe will remain at elevated levels and could likely increase slightly given those levels of nonperforming levels that we are seeing, we believe that the migration that has adversely impacted provision here in the quarter will moderate.

Another important factor to focus on here in the quarter is the margin which declined to 3.4%. And I'd like to comment a little bit about what the causes of that decline have been and then just as importantly what we plan to do to mitigate its effect on our overall performance.

First of all one of the major impacts on the margin was in the investment portfolio. And as rates declined late in the first quarter and then into the second quarter, we experienced accelerated prepayments fees as mortgage loans refinanced and new assets then were replacing them at much lower rates. Also, the premium amortization associated with those investments accelerated measurably, so we are pulling forward on that amortization. These dynamics affected the margin buy about 8 basis points in the quarter.

Obviously the increased level of nonaccrual loans would have an effect on the margin as well. You will recall over the last few quarters we have been seeing some strong margin contribution from LIBOR dislocation and while that's been a positive over the last few quarters, it was a negative given the low level of interest rates here in the second quarter.

Lastly, we've also been experiencing over the last couple of quarters, a substantial level of deposit growth. I hope all agree that that is a good long-term component of franchise value and that it can protect the Company certainly as interest rates will increase and they ultimately will. However, it is certainly putting pressure on the margin today as those inflows of deposits are replacing much lower yielding wholesale funds.

So, really those are the primary factors that are impacting the margin and why it declined here in the second quarter. Some of these impacts are non-recurring in nature. And we believe that that factor coupled with the continued focus on managing in a disciplined way -- loan pricing where we continue to see good progress and deposit pricing as well, we believe that the margin has the capacity to recover into the mid-340s, but that the changes that we've seen in the balance sheet -- the substantive nature of the shifts in terms of the level of deposits we've generated, which we think over the intermediate run is good news and how the investment portfolio has changed, that we believe that that's going to be a better range of performance over time here until interest rates begin to move upward and then as all those pieces would change we would have to certainly reforecast that. But, we believe that given all of these factors the mid-340s is a reasonable place to consider our margin at least in the short-intermediate term.

While there are some things that we can do and will do to mitigate this decline in margin and its effect on our revenue generation around deposit pricing and focusing on increasing loan asset growth in the components of our portfolio where we are willing to market and grow those relationships, we believe that the biggest place that we can impact the effect is in expenses.

In the second quarter here, we had several factors of substance that were adversely impacting our expenses. Obviously the FDIC charge of $11.3 million was a large one-time non-recurring item. We had OREO expense of over $8 million, and while certainly that's a legitimate operating expense, given the nature of our OREO portfolio, it's not like to the occur on a regular basis at those kinds of levels. We've also had elevated HR expenses and legal expenses in the quarter.

More importantly I think we are undertaking a systemic review of our expenses really in all categories to look in a serious-minded way to find efficiencies that will impact us in the second half of 2009 and create momentum in those categories that can have a positive benefit for us in 2010. If you look at the second quarter, the total noninterest expenses were around $170 million off of a first quarter of $141 million.

We believe that through, first of all these one time items, but more importantly our sustained effort on managing the pieces of these expenses that we directly control, that we can certainly return our expenses to those levels around $140 million and maybe even do better than that. So, we believe that that's really going to be a major factor in terms of our operating leverage going forward.

Fees in the second quarter were basically flat to the first quarter and we've seen some impact certainly from market declines, but also activity fees based on consumer spending habits that are really changing patterns of usage that are affecting those activity fees there and year-over-year that's the primary reason for the decline in fees, but they were slightly up over the first quarter.

The mortgage business certainly was a significant positive for us both in terms of volume in the second quarter and in terms of the valuation of the MSR, which in this environment has been extremely volatile, a big negative in the first quarter, but a large positive in the second. And we believe that that mortgage business probably, as we go forward, in the second half of the year is going to settle back to more normal levels.

So in summary, I guess, and we can talk about this certainly more as we get into your questions, we believe that the migration of loans that have been adversely impacting provision are going to begin to moderate as we go through these next subsequent quarters here, but also while we have experienced some margin pressures and the margin is going to reset to some level slightly below what we've seen historically here, we believe that we have the ability to positively impact a series of other key variables in our operating metrics that will allow us to continue to preserve momentum in our pretax-preprovision income levels.

Hopefully that's a summary for you and Michaela would be happy to open up the phones now for questions.

Thank you, sir. (Operator Instructions). Our question come from the line of John Arfstrom from RBC Capital Markets. Please go ahead.

Thanks. Good afternoon, guys. Just trying to get clarification on a couple of your comments and some of the wording in the release. The term you use about the provisions and charge-offs remaining elevated, does elevated mean what we saw this quarter or is this more of a one-time in nature swipe at the portfolio or does elevated mean something closer to maybe what we saw in the previous quarter?

John, I hesitate to be specific around the numbers because this has been pretty volatile, but I guess what I'm saying is, and what I tried to say and I hope I said it this way is that we believe that the charge-offs are going to remain elevated. And we have seen over time here a significant difference between the absolute levels of charge-offs that we've been experiencing and the nonperforming loans, even as they have been increasing over the last few quarters. That's the one fact pattern that I can point to that mitigates I guess to some extent the concern about the level of increasing nonperformers. However, it would be, well, it's appropriate to think that with the level of, the increase of nonperformers that we've seen, that the charge-offs are certainly going to stay at these kind of levels that we've seen on average and maybe even increase a little bit.

What I'm trying to say is that we think that we've been pretty aggressive and at least responsive to the fact base that we've been seeing around the migration of loans that affect the provision, the $100 million over charge-offs. And we believe that that level of migration is going to moderate.

Okay.

If that helps clarify for you.

That does help. In terms of, you referred to the C&I customers providing updated financial statements and that was one of the factors in determining the reserve built for the quarter. What period of time would you typically see from those C&I clients?

Well, we get annual statements that review their financial performance, but also the, we look for projections and in this environment the projections are quite important. And we are seeing a -- I guess a less optimistic view as a general course in terms of how our C&I customers are seeing the prospects for their business in this environment. And then that causes you to then think about the prospects of that credit differently.

So, those projections would reflect recent expectations if you will.

Oh, exactly, yes. Again, let me make the point. Half the nonperformers are two credits. We can obviously understand those and those are credits we've been looking at for a long time that we have moved now into the nonperforming stage. The rest of it is granular across our regional businesses. So, I don't know that we are seeing a massive deterioration in those regional businesses. If you set aside literally half the movement in these two large credits the rest of it is pretty small.

Okay. That's helpful. Then just one separate topic. In terms of the loan growth or the loan balance outlook, how much of the recent performance is the result of your caution versus, maybe a decline in lending demand from your client?

Thanks for asking. That's a good question. I probably should have commented on that. Let me sort of cut it into a couple of different pieces and I'll try to be brief, but if you look at the consumer side of the equation what we are having is over the last couple of quarters is a white-hot mortgage refinancing environment. We did $1.3 billion of closed mortgages this quarter. So, we are seeing a decline in our mortgage and our home equity portfolios. You'll remember last year our home equity portfolios grew significantly in an environment where the mortgage environment was much different.

If that mortgage business, if rates go up a little bit and that mortgage business begins to wane, what's going to happen is we are going to trade this big slug of loans held for sale which is on an average balance right now for the last couple of quarters, over $400 million, that's going to begin to decline, but the ability to grow, to stabilize the mortgage and the home equity portfolios and then grow them will kick back in. So those things are sort of, in my mind they trade off of each other and it's logical to think that the home equity loans are going to go down a little bit when it's white-hot in terms of refinancing mortgage businesses.

On the commercial side we are seeing some run-off in the construction portfolio. We are seeing some run-off in the, I'll call it the larger commercial corporate banking book of business. And it's in categories like floor plan and other larger kinds of transactions that are somewhat transactional from our point of view.

Our regional business is only down about $100 million and I'm giving you year-to-date kind of numbers not quarter-to-date, but year-to-date kinds of numbers. S,o we feel good about the stability in our regional business and, okay, loan demand is down a little bit there and customer line utilization is down measurably. So, to answer your question, the stuff that we are seeing run off I would suggest is in categories of products that are less attractive to us right now and that we are basically not unhappy about it entirely.

Okay. Okay. Thank you.

Thank you. Our next question comes from the line of Scott Siefers with Sandler O'Neill, please go ahead.

Good afternoon, guys.

Hi.

The first question is on credit, I wonder if you could touch on the level of criticized loans now, I guess specifically as a percent of total loans, and I think if I recall correctly from the queue you guys sort of redefined the way you define criticized loans. So, if you could sort of compare the first quarter to the second quarter on an apples-to-apples basis.

We'll have to dig through a couple of numbers here so we can be --

Scott, I think, again this is from memory, Brian is checking it for me but -- in the first quarter with the redefinition if my memory is correct it was around 15% and with the increase in the potential problem loans and the nonperforming loans we think we are getting back closer to 20%. And again I need to validate that to be absolutely sure and I'll correct that before you're finished here.

Okay. I just have one question then on capital. I was curious how you're thinking about overall capital levels. I guess you guys are in a somewhat unique position and obviously, there's a lot of dislocation going on in the industry, but you guys are above 6% TCE still.

Right.

But, I guess the loss content in the portfolio is perhaps coming into a little higher than expected and then certain pieces of the preprovision earnings, specifically the margin are maybe getting reset a bit lower than we might have thought. So, you couple those with in the industry sort of moving to a higher base level of capital. How are you guys thinking about all those moving parts?

I could go on and on. The -- I believe and our intention -- our attack plan is to maintain the level of pretax, preprovision earnings by -- okay, let's say the margin is down $10 million a quarter. I'm not so sure it's going to be that much given some of the one-time factors that effected us this quarter. I believe we have the levers to pull to be able to manage at that in, first of all in some things that we can do within that interest income to grow the business and to focus on that more aggressively, but also around expense management and expense control. So, I mean that's not a giant number to overcome.

The credit metrics, I mean they are certainly challenging this quarter. I think time will tell as to how we feel about that, but if we are accurate around seeing the -- over time -- the factors driving at that excessive provision moderating then that would sort of ease our thinking around that. But, we continually are, I'll use the term, but we stress test our portfolios individually and seek consultancy help in doing that and so it's an (inaudible) of process with the Board that we think about all the time.

I agree with you that right now that our tangible common equity and our tier-one equity on a measure of, against the industry on a relative basis is in at least an average place if not a slightly above average place and that our pretax preprovision earnings allow us to sort of keep that consistent view that we've had and that many of you have commented on. I don't see it changing substantively, but it's something that we are looking at and reevaluating constantly.

Okay. All right. Thank you.

Hey, Scott.

Yes.

The number is 19% plus for this quarter and was 14% plus, so I was pretty close, 15% to 20%. So, it's up about 5%.

Okay. Thanks, Joe.

Thank you. Our next question comes from the line of Terry MacEvoy with Oppenheimer. Please go ahead.

Hi, good afternoon. Just listening to your comments at the beginning of this call, is it simple to say that you and your borrowers are simply just too optimistic about the economy and the collateral value of real estate heading into the second quarter and as you got through to the end of the second quarter simply some of your assumptions were wrong and that optimism just proved to be false or was there something within your credit model where there was a flaw where the Company was maybe behind the curve and have you changed that model so we don't see something like that repeat itself in the third quarter?

Yes, I would suggest it's the former. We felt that we were going to be in a better place with a group of credits that were sort of on the edge and that based on the best information we had we were making assumptions about where those outcomes were going to be and obviously we are here now several months later in a very different place.

We continue to and I think, I don't think we are alone in this, we continue to raise the bar to challenge ourselves to think about these, the credits and the metrics and the way we manage and approach it with a more critical eye all the time and we keep working at improving our metrics and our operating support systems and all of that to make the best decisions that we can. I think it's probably as much the former as anything else.

Just one other question with, that hasn't been addressed today. Did you lose a senior person on the management team in the second quarter. Could you talk about the role that that person played or who is essentially in charge of what that person was running before she left and whether you think will you actually need to go out and hire a senior person to fill that role in the future.

Okay. Well, the simple change is that the people that were reporting to Lisa are reporting directly to me. The Chief Credit Officer of the Company was reporting to me before any of this and continues to. The businesses were reporting to her, the front line, the sales force, the retail business, commercial banking businesses from a line point of view were report to go her and now they are reporting to me which is the way it was before she joined the Company. I believe that over time we will look to -- first of all, succession within an organization is an important variable to always consider too, and it's the primary job of the CEO to make sure that the organization has that capacity within it and so we will likely look over time to fill that position.

Thank you, Paul.

Thank you. Our next question comes from the line of [Anad Kreshaun] with [Fore Research and Management]. Please go ahead.

Hi, good afternoon. I wanted to understand the (inaudible) procedure (inaudible) the reserves to nonaccruals so that (inaudible) has been coming down so mostly some (inaudible) 55%. So, how to think about that, is that a function of, are you anticipating that recoveries will be better or is it a function of some of these things could be worked out and they will move from nonaccrual to performing? So, how to think about this?

It's a very specific process where once a loan moves into the nonperforming categories, it gets a specific reserve assigned to it. So, it could be in one case, where a very significant amount of reserve is required against the collateral short-falls that we may see. In another case, we may believe that we are completely adequately collateralized or have already charged the loan down to the value with a discount of that collateral. So, there could be a nonperforming loan in there that has no specific reserve against it. So, it's a function of, at that point, above a certain size, a loan-by-loan analysis to determine what the specific reserve against that loan should be. So, the percentage is an outcome. It's -- and taking the entire reserve and looking at it against the nonperformers certainly is a proxy that people can use, but each loan is individually reserved and the percentage change has declined somewhat here because obviously because of the amount of increase that occurred within the quarter of the overall level of nonperformers. Joe, do you want to say any more?

No, that's correct.

It's a very specific process to each individual loan.

Is there any, anything built into your expectation that the flow of the nonaccruals would slow down so you do not need to have as much reserves? Is that a criteria at all or not?

I think it's going to be some time until we would provide at a level that would be below charge-offs if that's your question. One other point that I would site and again I said it earlier, but it's the only fact that I can put forth where history has a reflection on this, is that our level of charge-offs have been and even in this quarter, were not increasing at the trajectory that the nonperformers did. That can be a function of several different things. It can be a function of adequately writing the credits down, of the underwriting behind the credits from the get go. The loss content just may not be there and over a backward view, that's been the case even as nonperformers have increased. So, that's the one objective fact that I can point at that to some extent mitigates that percentage that you're referring to.

And one other little question, what's the average carrying value of your nonperforming loans? Do you right them off to some extent or these are essentially carried at par?

No, they are not carried at par because obviously you have some of those loans, as Paul said, have been partially charged, some have just reserves and some have zero reserves. So, an average statement on those loans is something that we have not been focused on. We are focused on individual loans and getting the individual loans right and getting the reserve right. So, I think it's misleading to talk about averages or try to generalize like that because, again, some loan can be written off, as Paul said, 80% of the loan could be written off and other 0%. So, the average of those two loans would be 40%. I don't know how meaningful that is. I think the comfort we are trying to give you is we look at these credits individually. If there is collateral, we get appraisals, we get valuations, and get them regularly, actually, as regularly as we need to ensure we are accurate and we are trying to judge the loss content in each individual credit and giving you an average is not something we are comfortable with.

Finally a question, any indirect impact because of the CID situation where there are some common customers and (inaudible)?

No.

Okay. Thanks. Good luck.

Thank you.

Thank you. Our next question comes from the line of Ken Houston with Bank of America Securities Merrill Lynch. Please go ahead.

Hi. Thanks, good afternoon. Paul, with all these moving parts that we have talked about I was wondering if you could provide color, do you anticipate returning to profitability in the next quarter or so or do you think it's going to be a tough slug as long as provision expense remains high.

It's our intention to manage the Company so that we are going to be profitable. I mean, that's what we are shooting at. And that's our goal.

And within that, you think that by keeping the nickel dividends is reasonable given the intention to maintain profitability above that?

Well, our Board will meet next week and I should comment formally after that, I think. And that's the appropriate time for us to discuss that.

That's fair. As far as, can you walk through within the charge-offs this quarter was it, can you give us a little more color, we get the nonperformer break-down in the release, but can you give us a little more color on where the charge-offs were coming from?

Over the -- yes, we have that right here, I think, and we can talk to you about that. Interestingly, what's going on here in these commercial portfolios, I'll categorize the charge-offs as lumpy. We are not seeing, like over a period of two or three quarters, we are not seeing one segment of the portfolio just generating credible deterioration over time. For example, in the first quarter of 2009 the construction charge-offs were $3 million. In the second quarter they were $16 million. Right? Hold on a second -- numbers here -- and that's how it's been occurring, and it was $17 million in the quarter before that.

Let me see, in the real estate portfolio was $2 million then it was $8 million and in the C&I portfolio it was $15 million in the fourth quarter, $35 million in the first quarter and $19 million -- so it's sort of, it's not sustaining. It's, but if you look at the portfolio, it went from 140 basis points to 160 basis points to 180 basis points. So, it looks like it's a slow steady increase, but the components of the charge-offs seem to be concentrated in individual credits in different components if you look at it over time.

Go ahead, Paul, sorry, I didn't mean to interrupt.

That's all right.

So, if I could summarize maybe, $19 million of the charge-offs were in the C&I portfolio, $16 million were in the construction.

I was looking at it differently.

In terms of the where they are coming from? And again, let's see, I'm reading upside down here, $10 million were in home equity. I think that's, did I read that right.

Yes, you did.

That is quite a bit of the $60 million.

Okay. And then just to that point about lumpiness, so within your MPA's we know that these two credits are a good chunk of the C&I, but is it also lumpy as far as the MPA growth, meaning is it a lot of big loans, is it a small amount of big loans or is it just a mass migration across the granular portfolio?

In the construction portfolio, which is much more distressed at this point, with almost 14% of the portfolio is in nonperforming. So, I mean that's a secular trends within that portfolio. In the C&I portfolio, what we've seen is that the core regional bank, frankly what we have seen some deterioration, it's not massive in nature and there's a few credits whether they are from the regional bank or from the larger corporate bank, there's often just a couple of credits that are comprising the movement. But, in construction, I mean that's been a trend through the portfolio of significance.

I think, Ken, I would have answered the question in this fashion. There are some larger loans in every one of these categories that are affecting the gross dollars that are moving, but I wouldn't want you to think that there aren't also a lot of smaller loans that are moving. There is some migration occurring at the smaller end also.

And the last question and I will let others get on is that, is that the same with regards to how you think the provision has been building up? Meaning, have you been providing proportionally for the large loans versus small loans? I guess what I am asking is where do you believe the greater embedded loss content is, is it in those bigger loans or is there any difference between the lumpy side being bigger loss content or the smaller side being bigger loss content?

What we have seen in 2008 much of the loss content was in a group of loans that we had done that had some loss content characteristics driven by what I would call unique factors. They might have been customers that we had been banking that were in our footprint, but that had expanded with some construction projects out-of-market. And we had some presence with some loans in Florida. We are largely through all that stuff, but the loss content in those loans was much higher than what we would expect the loss content of a customer in Wisconsin or Minnesota to be. So, I think it's going to change as we work through it as well.

But, I think, Ken, from your perspective the challenge I think is that -- if I think about a $25 million loan that's got a 10% loss content you have a $2.5 million charge-off. If you have a $500,000 loan that has a 10% loss content, you got $50,000. So, when you see the numbers coming through the big ones are going to have more of an impact. I don't know if that's necessarily meaning that they have more loss content. But, they sure as heck are going to have a bigger impact. I don't have any data in front of me or that I can recall that would tell you that the loss content is worse or better in size. I just don't have that about the I can tell you the dollar difference of course is huge.

Undoubtably and that's why, undoubtably and that's why I wonder the severity if it's a bigger proportion of a bigger loan dollar as opposed to the same but thank you for that. That's good clarity. Thank you.

Thank you. We have a question from the line of Casey Ambresh with Millennium Partners. Please go ahead.

Hi. Thanks very much for taking the question. Just a follow up on a credit, so if you guys kind of went back to your historical way of looking at problem assets and you were to include your watchlist loans, what would the percent be?

We'd have to go and calculate it Casey. I don't have that at this point. We changed our definition because we don't think that's the appropriate way to report it, so we changed it to the criticized level which includes management intention and worse. So,I don't have that number here. I would have to go back and calculate it.

It does not include watchlist, right?

That is correct.

That's correct.

Do you have an idea how big the watchlist is?

No, I don't. I just don't have it here in front of me and I would have to go dig it out. Since we are not reporting it that way now I would just as soon not go dig it out for you.

Okay, I guess people care, though, just because it's clearly going the wrong way. Right now if you guys just look at your criticized loans how you look at those, problem loans incurred and current NPLs, it's about -- the dollar amount is about $3 billion on $15 billion of loans, because you said around 20%?

I think that's right.

And you have a $400 million reserve?

That's correct.

Wow. Okay. Thank you.

Thank you. Our next question comes from the line of [Andrew Marquidard] with [Fox-Pitt, Kelton]. Please go ahead.

Sticking with credit, can you talk about how much the syndicated credit exam impacted this quarter's results and how much the (inaudible) book is for you guys?

We don't disclose the level of the [snick] book Andrew and we are still getting, frankly we are still getting the results of the --

The formal results come out in the the third quarter, we think, anything we are hearing is individually anecdotal.

I will say this. We've gotten some information about it, but it's not certainly in written form or in comprehensive form, but the level of impact on our ratings, if you will, was quite small.

So, there was some impact in the second quarter and there may be more in the third quarter or how should we think about it?

Negligible impact.

Well, based upon the information we have seen thus far the impact is negligible.

Andrew, I would say the sure national credit portfolio of the way we've done it, we don't think that it's fair to compare that to having a higher risk characteristic than our directly originated loans because they are all written the same. The only impact it has is because they are bigger and was I said earlier the bigger ones have bigger impact on the results, but I don't think in terms of risk profile we should say it's something much different than we would have done directly.

Okay. Just on the commentary about elevated costs, credit costs remaining, but at a slower pace is that just to kind of simplify that you expect net charge-offs to continue to increase and reserve build to continue to increase, but at a slower pace than in the second quarter? And it may or may not kind of aggregate up to the $155 million that was this quarter in terms of total provision costs?

I think that's a fair way to look at it.

Okay. And then just lastly, you had made a comment about expenses in the second quarter being somewhat abnormally high and potentially coming back down to the $140 million range. Are you talking about potentially coming do you understand that quickly in the third quarter and fourth quarter or is that a longer term?

Well, you can't change things on a dime, but it's our intention to attack it pretty aggressively and to manage the variables that we control. Now, we also want to keep business momentum going too. And we want to balance all those variables, but we believe that we can impact it over the short term by a whole series of measures that we can control.

Okay. The last question I had was on mortgage banking. You had made a comment on mortgage results likely to come down and go back to normalized levels. What is does that mean in terms of, I mean there's obviously each quarter a couple of moving parts kind of, if you go back a couple of quarters, I mean the mortgage results were in kind of the single-digit range?

I guess the production levels a year ago were $400 million, (inaudible) fourth quarter was $200 million and now we've been $1 billion, $1.3 billion. Again, I think that's we are talking about normal levels in that $300 million to $400 million range.

I guess maybe without saying it, I'm suggesting that I think interest rates that are going to drive the mortgage rate decisions are going to at least stabilize if not maybe tick up a little bit. Of course if it goes the other way we will do another $1.3 billion. We have the capacity to do it and we can generate it, but I guess our forecast, our thoughts about all this is that it's going to begin to moderate. Maybe it's not going to go all the way back to $200 million or $400 million, but it's not going to stay at $1.3 billion on a sustained basis.

Thank you.

Thank you, our next question comes from the line of [Maklovia Pena] with Morningstar Equity Research. Please go ahead.

Thank you, good afternoon. I'm curious about your TARP repayment plans. Do you have any -- have you thought about that at all?

We think about it and talk about it with the Board on a regular basis, but I've taken the position and I think it's appropriate really not to discuss plans publicly around any of this until we have a firm decision in place and have spoken to the regulators first.

Okay. Thank you. And your C&I portfolio decline of 6%, I was just curious if that was more or less evenly spread throughout the quarter or was it most until a particular month?

Oh, gee. It would be hard for me to gauge. I'm sure we know the numbers. Somebody does here. I just don't know. It's more important for me to look at it in terms what have categories are declining and how we feel about that and what response we want to have to it. And obviously, we don't want to see any decline in our regional C&I book frankly, but we want to make sure we are doing the business that replaces any weakness that we are seeing in the right business segment. So, from our point of view it's focusing on what the quality of the business is that's leaving and the nature of it to determine how we feel about it or how aggressively we want to try to keep it and then it's responding to in an aggressive way. We want to be in the market. We want to keep doing business, but we want to do it in the much tighter constraints that we've placed on ourselves in terms of how we want to generate that business and that makes it tough in this kind of an environment. If line utilizations are down across the board all of these things going to put pressure on your core assets.

And my reaction again and I don't have the numbers in front of me, but my reaction is it's going to, there's not a dramatic shift if I remember the numbers that it's just been a relative, I mean there's nothing that says, oh my gosh, where did these loans go? There's are things that are happening on a week-by-week, day-by-day basis. So, I think it's just fairly even.

Okay. That answers that. Thank you.

Thank you. Our next question comes from the line of Jeffrey Talbert with Wesley Capital. Please go ahead.

Good afternoon, I have a question, please, with respect to the real estate construction portfolio and the CRE portfolio and how much of the construction portfolio between linked quarter has migrated to becoming a mini firm within the CRE portfolio? I'm trying to get a sense within CRE how many of those loans are stabilized properties and how many of those might yet be unstabilized with respect to occupancy and still working off an interest reserve? It look like construction dropped, but CRE went up.

Yes, it did go up slightly and I'm sure there's somewhat of a trade there. I'll tell you what, instead of us being imprecise why don't Joe or Brian can get that number and give it to you specifically. I don't have it sitting in front of me.

Okay, I was trying to get a rough sense within CRE, even a ballpark, since how many of those might be something other than stabilized properties.

Not very many. Not very many. There's going to be a limited number that went from construction to permanent lending. We just didn't, I just don't remember us talking about very many, so it may be one or two deals. We'll have to ask but, no, I don't think you should make that assumption. Okay. Thank you very much.

Thank you. Our next question comes from the line of Gary Cooper with Auster Weiss Capital. Please go ahead.

Thanks, guys. So, the C&I, the two loans, can you tell us what business those companies are in if you won't tell us that, just tell us the broad industry?

One is in the financial industry and the other one is in the manufacturing industry.

Okay. And they are within your Wisconsin footprint?

Correct.

Yes.

Okay. The definition change of the criticized loans, what was the definition change?

Last quarter we changed, we used to include (inaudible) assets we used to include the watch loans in our criticized loans and we realized that --

That was not the norm.

To be consistent with what everyone else was doing that that was inappropriate, so we took the watch loans outreason just recording special mention and worse. So, that's the simply all we are doing.

Okay. And then so can you just kind of educate me on, over history what your recoverability has been on your C&I loans that have gone bad, just trying to think about how you're referring are reserved here?

Actually that's an interesting question because we were having an internal conversation about that today and what are the likelihood of recoveries on the charge-offs we are taking now because, again, if you go back in history and I've been here a long time, because we are collateral lenders and because we work loans through we had a long history of very low net charge-offs because we had decent recoveries. We are, in this environment I just don't know how to judge that. You'd like to think we are going to chase the loans to the ground, but if there's nothing to get what are you going to do? I just couldn't give you a guidance on that and we were having that same conversation internally.

Okay. Then finally, can you remind us sort of what percentage of your loan book is land and say land and condos, maybe separate those two out and kind of tell us where those are marked on average?

We had an investor deck that talked about how much of our construction book was in land and we'll update it again, last quarter, so I don't think that's materially changed. Let me see if I can find that. We had 49% was in those two categories, 20% of it was in lands and 29% of it was in single-family condos. So, we had about $1.1 billion. The majority was in footprint and that's on the investor deck we have on our website. Again, in terms of marks, I can't give you that answer, I just don't know. Because again everyone, if it's a performing loan it's a general FAS five reserve and if it's a nonperforming loan it's a specific reserve as I said earlier. I don't have an answer for you.

You don't have the marks, that's fine. Can you tell us, I mean, are those projects, are they appraised twice a year, once a quarter, what's kind of the time line on that?

Well, it depends on the circumstances. Obviously, any time an event occurs we get into an appraisal. So, if there's a renewal you get a new appraisal. If the customers is having some trouble you get a new appraisal. If the loan is performing and everything is good you might get an appraisal every couple of years. So, it really is again loan dependent and obviously we understand that the market value of these properties are eroding and as we start to get nervous we will go get an appraisal. We've been getting an awful lot of them, of course.

Thank you, guys.

Thank you. Our next question comes from the line of Tony Davis from Stifel Nicolaus. Please go ahead.

Good afternoon, Paul. I wondered if you could just indulge us a bit more on geography? Any color on the weakness you are seeing in Minnesota versus Illinois versus Wisconsin of note?

I can give you, well, the vast majority of the trouble credits in CRE are in Wisconsin and Illinois and Minnesota. It's virtually all in-market. And that's the case now pretty much across the board. We are seeing very little exposure in these out-of-market conditions where a year and a half ago, although the percentages still were relatively small, much of the distress that we were seeing was out-of-market.

And, again, I think as we look at these marketplaces, for example in Wisconsin the unemployment rate has been historically below national averages and now it's picking up. So, you say, well we have some challenges here in unemployment in Wisconsin, you look in Illinois, you take a look at the Chicago market, you can see you are having some problems with the condos. You look at Minnesota, they have some housing industry. So, I don't know that I would say one market is worse than the other. I think they are all feeling stress from the environment we are in. And I don't think we can say one is worse than the other. It really depends on the specific segment of the economy.

We are Wisconsin Centric Bank, so the lions share, 40% to 60% in each category is going to be in Wisconsin, but then when you think about other issues around loss content and that sort of thing because of the economic conditions that may be different in market A or market B. I know that you and I talked about this briefly that Minnesota can have some characteristics that cause the value to be under some distress because, I mean it's not Phoenix or anything like that, but there were some characteristics of over building that carried a little bit of over valuation and there and it's a little difference in that sense, but the absolute levels are much lower.

One more nit pick here, you mentioned 8 basis points, I think it was, in margin drag because of securities book. I wondered if you could isolate what the other components of that would have been, maybe the nonaccrual drag or --?

Okay. I will be within a basis point or so, but the deposits interestingly, are only about 2 or 3 basis points because, I mean, you are comparing it to 25 basis point Fed funds, but our total deposit costs are like 130.

Right.

And most of the stuff that is coming in right now. We've been aggressive at pricing down but it's still coming in, but it's below 1%. The nonaccruals probably were about 3 or 4 basis points in the quarter.

Okay.

They were. I will say 4 basis points in the quarter.

Okay. Thank you very much.

Sure.

Thank you. Our last question comes from the line of Peyton Green with Sterne Agee. Please go ahead.

Good afternoon. I was wondering if you all could comment a little bit on kind of your expectations for loan growth? I think there was a noticeable drop between the end of period balance of about $15.3 billion -- I guess it's down over $1 billion over the last couple of quarters and I was just wondering what your outlook was for pay-offs versus new originations?

Yes, to be fair a little bit here around some of these, the issues around credit, we may have -- we've been somewhat internally focused and I think that's legitimate given the nature of the beast and the environment that we are all working in. So, I mean I don't know that we are alone in that. But, we don't want to make the mistake of being so internally focused around managing the risks around credit and trying to exit trouble credits that we are not out there doing business that we want to and need to do and we are going to revitalize our efforts around those targeted commercial segments that we view as attractive and I believe there will be opportunity on the consumer side coming up if rates do stabilize and even begin to move up a bit, that's going to show the same kind of potential that we've seen in the past. We've proven that we can go out and generate good solid quarter consumer business.

Now, demand will determine at what level we can be successful, but I'm very confident that we know what we are doing there and how to do it and when the environment is right we will and it's beginning to get close to that right now that we will be able to start to take advantage of that.

And I guess, that's more my question, are customers simply not want to go borrow and so for those that generate cash, they are amortizing their loans or paying them off at more of a bulk basis or what kind of a change in customer behavior have you seen?

Line utilization is down in the high single digits. So, the commercial customer and one of the reasons we are seeing such aggressive PDA growth is that the commercial customer is hoarding cash. They are not, they are trying to basically, borrowing is one of the last alternatives because of their experience and what's happening to the weakness of their customers willingness to purchase and build inventory. So, that's an issue right now for us. I think that's going to begin to change a little bit here.

We have the opportunity to focus our intention on some other specific financial institutions and we are doing that and we are doing it aggressively. To get the business that is available in the marketplace. And, if we keep our calling efforts at aggressive focused levels there is some business still to be done and new customers that you can bring to the organization. So, but we are not going to see a lot of growth from our existing customers as a general rule in this environment. They are paring back to preserve the value of their individual franchises.

Okay. And then in terms of the investment portfolio, the yield dropped about 60 basis points link, quarter. What is different in it today than how you managed it, maybe a couple of quarters ago? I know you grew it a little bit to offset the effect of the TARP [inaudible], but maybe if you can give us some color?

Sure, Peyton. Really it's, all mortgage products are being bought at a premium and that premium is being amortized over the assumed life. When the prepayment fees accelerated at the end of last quarter in March, it caused, it causes the amortization of that premium to change pretty dramatically and it did. And as we got to the end of this quarter it's gone back. So, the volatility in the earnings is driven a lot by that premium amortization. Not in terms of the nature of the investments. I will say this though that the investments we put on in November had a five handle on them and today they have a three handle on them. So, the actual marketplace rates you can get for mortgage-backed securities on the short ends have dropped also. So, of course if you get something with a five handle coming off and you are putting it on at three, that's going to have an impact. So there's a variety of things. There's another subtlety here. We recognized some gains in the first quarter because we thought the prepayment speeds were going to get worse on certain securities.

They did.

They did and the gains came out of the run rate so that has a bearing on it. So, there's a lot of dynamic in the investment portfolio, but it hasn't changed because we changed our philosophy about investing or extending or whatever. It's really, we are doing the same thing, it's just the dynamics of the rate environment doing it, doing to the portfolio what you've seen in the margin.

Now, you can argue that if rates do begin to move up those metrics all begin to shift the other way.

Okay. Sure.

Rates fell like a stone at the end of the first quarter and that generated a lot of this effect.

Okay. In terms of the amount of unamortized premium that you have versus the securities portfolio --

I don't know. I have to go ask. I don't know. I used to know, but I don't know now because we leveraged up in November. I just don't have that number. I'm looking at the yield. I'm not looking at the components.

Sure. And then in terms of the loan yield, it was down about 15 basis points linked quarter. And I was just wondering when you think you will see that floor out and start to rise.

Well, again, the linked quarter has a couple thing going on in the loan yield. One is the nonaccruals are affecting it. Two, the decline in one-month LIBOR, three-month LIBOR is affecting it. So, those are drags, clearly we are trying very diligently to get a higher, a higher overall yield on our new production above the portfolio yields.

And renewing.

And renewing production. So, we are working hard at it, but in this quarter there were some things that went against us. You would like to think that that stuff all stabilizes and it starts to turn around, but who knows. I wouldn't have told thank you one-month LIBOR was going to have a three on it either, so.

Then, I guess if you think about the renewing loan portfolio. Is there any particular lumpiness throughout the year or is it pretty consistent?

It's pretty evenly spread month-to-month.

Okay. All right. Good enough. Thank you.

Thank you and at this time I would now like to turn the conference back over to Mr. Beideman. Please continue.

Thank you. We really have no additional comments to make. We want to thank you all for your attention and for your questions and obviously if you have any other additional questions don't hesitate to call Joe or I.

Ladies and gentlemen, that does conclude the Associated Banc-Corp second quarter 2009 earnings conference call. You may now disconnect.