Associated Banc-Corp (ASB) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Associated Banc-Corp's first quarter 2010 conference call. My name is Alicia, and I will be your operator today. At this time, all participants are in a listen-only mode. We will be conducting a question and answer session at the end of this conference. As a reminder this conference call is being recorded.

During the course of the discussion today Associated management may make statements that constitute projections, estimations, beliefs, or similar forward-looking statements. Associated's actual results could differ materially from the results anticipated or projected in any such forward-looking statements. Additional detailed information concerning the important factors that could cause Associated's actual results to different materially from the information discussed today is readily available on the SEC Website and the Risk Factor section of Associated's most recent Form 10-K, and any subsequent Form 10-Q.

Following today's presentation instructions will be given for the question and answer session. (Operator Instructions). As a reminder, this conference is being recorded today, Thursday, April 22, 2010. And now I would like to turn the conference over to our host, Mr. Philip Flynn, President and CEO. Please go ahead,

Thank you, and welcome to our first quarter conference call. Joining me today are Joe Selner, our CFO, and Scott Hickey, our Chief Credit Officer. This afternoon I will provide you with more detail on our results for the quarter. I will also provide additional information about our loan portfolio, and steps we are taking to address our credit challenges. As you saw in our release issued after the market closed today, we reported a net loss to common shareholders of $33.8 million, or $0.20 per share for the first quarter ended March 31. This compares to a loss of $180.6 million, or $1.41 per share for the fourth quarter of '09 and net income of $35.4 million, or $0.28 for the same quarter a year ago.

First quarter results were impacted by our continuing efforts to address our credit challenges, particularly in the construction and commercial real estate segments of the loan portfolio. We recorded credit-related charges of $166 million, less than half the $405 million in the previous quarter. As you know, we took a very hard look at our credit portfolio during the last quarter of '09, and we took aggressive and appropriate actions to address our credit problems and move the Company forward. On January 15 we completed a $500 million common stock offering, resulting in a net increase in the Company's equity capital of $478 million, and an increase in our tangible common equity ratio by almost 2% to 7.73% at March 31.

Our Tier 1 capital to total average assets ratio is 10.57%, and the total capital to risk weighted assets ratio is 18.15%. These ratios are now among the highest of any financial institution in the country. The successful capital raise positions our Company well, and takes concerns about our capital adequacy off the table, as we continue to work through our credit problems and focus on our strategic priorities. I would now like to talk in more detail about the credit results we reported.

The loan loss provision of $165 million exceeded net charge-offs by $2 million for the quarter. This resulted in an allowance for loan losses of $576 million, or 4.33% of total loans at March 31, compared to 4.06% at December 31, and 1.97% a year ago. Net charge-offs for the first quarter of 2010 were $163 million, compared to $234 million in the fourth quarter, and $58 million in the first quarter of '09. Charge-offs in the construction and commercial real estate loan categories were down significantly from the fourth quarter, but they remain at high levels. Charge-offs of C&I loans continue to be lumpy. For the quarter, net charge-offs of C&I loans were $64 million, up $21 million from the previous quarter, primarily due to the charge-off of two financial services-related credits totaling about $30 million.

Charge-offs in the home equity and mortgage loan categories were down from elevated levels in the fourth quarter. This quarter we reported the lowest level of net new nonperforming loans that we have experienced during the past five quarters. Total nonperforming loans increased $88 million during the quarter to $1.2 billion, with commercial, real estate and construction-related nonperforming loans increasing $124 million, to $844 million from the prior quarter. Nonperforming loans in the C&I segment were down $54 million, while nonperforming loans in other categories remained at about the same levels as reported in the fourth quarter.

Potential problem loans declined $228 million, or 14% during the quarter to $1.4 billion, as the inflow of new potential problem loans slowed significantly from prior quarters. We saw a 60% decrease in new potential problem loans compared to the fourth quarter of '09. While a single quarter's results don't indicate a trend, we are encouraged by the decline in early stage delinquencies we experienced. Loans 30 to 89 days past due totaled $165 million at March 31, 31% lower than the fourth quarter, and 33% lower than the first quarter of 2009. This level is the lowest the Company has seen since the end of 2007.

The ratio of nonperforming loans to total loans increased to 9.1% at March 31, due in large part to an $830 million reduction of our loan portfolio. This compares to ratios of nonperforming loans to total loans of 7.94% at the close of '09, and 2.84% a year ago. The nonperforming loan book was marked to approximately 65% at the end of the quarter. The marks ranged from a low of about 61% for construction loans, to a high of approximately 75% for commercial real estate loans, with a mark of about 62% for C&I loans. The marks by category for new nonperforming loans in the quarter are similar to the overall portfolio. Of the new additions to nonperforming loans, approximately 60% are current. In total, about one-third of our nonperformers are current.

Our residential mortgages totaling approximately $1.9 billion continued to perform relatively well in this environment. Nonperforming loans were 5.3% of total outstanding mortgage loans at March 31. Our $2.5 billion of home equity loans also performed well, as nonperforming loans were 1.9% of outstanding loans at the end of the quarter.

We believe the performance of these more stable segments of the portfolio will continue to hold up well, as we saw a decline in short-term delinquencies and a moderation in charge-offs during the quarter. We continue to work with our customers who may be having difficulty making payments on their mortgages. We offer our customers a number of work-out programs, and have had a servicing agreement under the government's home affordable modification program, since it was introduced in 2009. Mitigation efforts during the first quarter resulted in more than $15 million in restructured mortgage loans.

During the past two quarters we have added a total of $560 million to our loan loss reserve, and experienced $397 million in charge-offs, as we continue to take actions to deal with nonperforming loans. We believe the loan loss provision will continue to moderate over the next few quarters, while charge-offs will remain elevated as we work through our remaining problem loans. In keeping with our strategy to reduce nonperforming loans over the balance of the year, we are working on the potential sale of certain nonperforming loans, and developing in-house systems and staff to handle bulk loan sales.

The Company's loan portfolio was $13.3 billion at March 31, down 5.9% from $14.1 billion at the end of '09, and down 16.5% from $15.9 billion a year ago. We experienced declines in all segments of the portfolio during the quarter, driven by paydowns and charge-offs, along with decreased line utilization, and lower borrowing levels by current commercial customers.

At quarter end the construction segment of the portfolio was $1.3 billion, representing 10% of the total. This segment continues to decline, down $900 million from $2.2 billion a year ago. The decline is primarily due to more than $200 million in charge-offs, and approximately $500 million in loans that have migrated into the commercial real estate segment of our portfolio, as construction has been completed, along with approximately $200 million of payoffs.

The commercial real estate segment at $3.7 billion represents 28% of the total at March 31. This segment increased by just $100 million from $3.6 billion a year ago, as the migration of construction loans into the commercial real estate segment of our portfolio has been largely offset by loan repayments. The total shared national credit book declined $71 million during the quarter to $917 million. The decrease was primarily due to $35 million in charge-offs and $24 million of repayments. These reductions are in line with our strategy to move away from large, widely-syndicated SNCs, to smaller club type deals, where we can provide meaningful credit and noncredit services. We are targeting about a $200 million reduction in large SNCs over the next year or so.

Generating new loan growth is a significant challenge, and likely will be for some time. We need to overcome the loss of loan outstandings driven by the reduction in problem credits, as well as lower borrowing levels by current customers, who remain cautious given the near-term outlook for the economy. In addition, the Company has become inwardly focused since 2008, as its problems mounted and its efforts to gain new borrowers slowed. During the past quarter we began the process of clearly defining the Company's acceptable risk appetite. We also made several process changes and improvements to help our bankers close deals, while maintaining strict underwriting standards and risk-appropriate spreads.

Our liquid cash and cash equivalence position increased by nearly $1.5 billion, to a very strong level of $2.3 billion at March 31. The S&P downgrade of our debt in January, resulted in a $1 billion reduction in unsecured borrowing capacity, leaving us with limited ability to access unsecured overnight funding as a source of liquidity. In order to mitigate the increased liquidity risk associated with this downgrade, we took steps to proactively increase our on-balance sheet cash during the quarter. Most notably we increased our brokered CD balances by $600 million, and increased institutional deposits by $700 million.

Total deposits were $17.5 billion at quarter end, up 4.6% from $16.7 billion at December 31, and up 10.2% from $15.9 billion at March 31 of '09. Although total deposits grew, we saw seasonal decreases of just over $400 million in interest-bearing and noninterest-bearing demand accounts for the quarter.

Net interest income for the first quarter was $169 million, down $9 million from $178 million in the fourth quarter of '09, and down $20 million for the same quarter a year ago. Our net interest margin was 335 basis points for the first quarter, down 24 basis points from 359 for both the previous quarter and the first quarter of '09. The net interest margin decline was largely due to two factors. First, our conscious decision to increase our liquidity position resulted in a 19 basis-point reduction. Second, increased levels of nonaccrual loans had a negative 4 basis-point impact. Net interest income declined $9 million from the prior quarter, due to lower loan balances and rates, which accounted for $7 million of the decline, higher nonaccruals, and two less days due to the shorter quarter.

Although the increase in our cash position had a significant drag on the margin, it had little effect on net interest income. We chose not to reinvest the cash in long-term securities and take on the added interest rate risk. However, we recognize that there is an opportunity cost associated with holding these balances, which we estimate at between $15 million and $20 million annualized, depending on the alternative use of these funds. Noninterest income for the first quarter was $98 million, up $13 million from $85 million for the fourth quarter, and up $9 million from $89 million for the first quarter of '09. Noninterest income for the first quarter includes a $23.6 million net gain on the sale of $538 million of investment securities.

Core fee-based revenue remained relatively strong at $62 million for the first quarter. This compares to $67 million for the fourth quarter, and $61 million for the first quarter of '09. The decline in fee-based revenue was primarily due to lower consumer fee-based deposit activity. Overdraft and debit card fees declined a total of $4 million from the previous quarter. Like the rest of the industry we saw a reduction in NSF overdraft fees of approximately 9% during the past year, which we believe was largely attributable to changes in customer behavior. We are prepared to implement changes related to the opt-in regulations that go into effect this summer.

Approximately one-third of our annual personal NSF overdraft fees are generated from debit card or ATM activity, which will be impacted by these regulatory changes. We believe we will retain about half of that impacted revenue, as we expect some of our customers will choose to opt in. A number of new initiatives will help offset lost revenue related to the reduction in NSF overdraft fees, including account inactivity fees, and a transition from free checking products to no fee accounts with appropriate balances or utilization levels.

Mortgage loans originated for sale during the first quarter totaled $455 million, compared to $671 million for the fourth quarter, and a record $1.1 billion for the first quarter of '09. Industry-wide, mortgage lending has slowed. Net mortgage banking income totaled $5 million for the quarter, down $4 million from the fourth quarter, and up $1 million from the first quarter of '09. Total noninterest expense for the quarter was $152 million, down $7 million from $159 million in the fourth quarter, and up $11 million from $141 million in the first quarter of '09. As noted in the release, the decrease from the fourth quarter was primarily due to a $400,000 increase in the reserve for unfunded commitments, compared to a $10.5 million reserve increase in the fourth quarter.

Personnel expenses were up $7 million from the prior quarter due to the resetting of payroll tax and incentive accruals, and we saw a $2 million increase in FDIC expense on higher deposit balances. These increases were offset by decreases in several other expense categories, most notably in legal and professional fees which were down $4 million, and foreclosure and OREO costs, which were down $3 million from the fourth quarter. On a year-over-year basis, the $11 million increase was primarily due to $6 million in higher FDIC expenses, and $3 million higher foreclosure and OREO costs.

That completes my prepared remarks. And now we would like to take your questions.

(Operator Instructions). And our first question is from the line of Ken Zerbe. Please go ahead.

Thanks. The first question I have is on the net interest margin. I understand the liquidity really had a negative impact there. But maybe you could just talk a little bit about your ability to reduce deposit costs, and if that is going to be able to help offset some of the compression going forward?

Ken, I will let Joe give you the details on the deposit costs. But we have moved those down quite significantly over the past year. And Joe, do you have any detail on that?

Well, sure. From the first quarter of last year our deposit costs were 151, and we are down to 83. And in fact, because of some of the liquidity issues we are talking about, we are reluctant to push the rates much lower because we want to maintain CD balances, we want to maintain the non-maturity deposits. So I would not suggest there is a ton of room there.

Okay. So we show NIM going forward might remain fairly flat at this level?

It probably will until we make a choice on these extraordinary liquidity actions we have taken, Ken.

Okay. And the other question I had, when you think about longer term, or sort of maybe trough balance sheet levels, obviously that has been coming down pretty rapidly, do you have a target asset size in mind?

No, we don't. I mean, the asset size of the whole company has stayed relatively stable. We have had a remixing out of loans into securities as you know over the past year or year and a half.

Maybe on the loan side specifically?

Yes. On the loan side, we have still got a significant amount of loans that need to be run off the balance sheet. So it is going to be awhile until you see us turn the corner on loan growth. There isn't much loan demand anywhere. And we have heard that repeatedly from other banks over the last few days. The same holds true in our footprint.

We have got a lot of nonaccrual loans that will be going away. And we have got other loans like the $200 million of shared national credits I mentioned, that will be ultimately leaving the balance sheet. So we are doing a lot to put strategies in place to help grow our loan balances, but I don't expect to see much fruit from that for a while yet.

Okay. So just so I make sure I have all the pieces correct, so loan balances go down, security balances go up.

Or flattish.

Relatively flat. You don't reduce deposit costs. But I assume giving up the loans with the higher yields might pressure that. Do you still think you might be able to maintain your NIM at this level?

We think it will be around here, yes.

All right. Thank you.

The next question is from the line of Jon Arfstrom from RBC Capital Markets. Please go ahead.

Thanks. Good afternoon, guys.

Hi, Jon.

Question for you on how aggressive you want to be on moving some of the nonperformers. I mean, are you talking about very large bulk sales, or is this something that you think is going to happen maybe a bit each quarter over the next several quarters?

We have been pretty public about saying that we intend on being aggressive on moving NPAs off of the balance sheet. So you should anticipate during the course of the year some significant reductions from bulk sales.

Did you have any sales this quarter?

We sold a couple of loans at about the low 60s. But we were in the process, as I talked about, of putting in place the people, and the systems, and building a virtual data room, and all of the things you need to do to get ready to do bulk sales, and we have made good progress on that.

Good progress does that mean you are ready to go? This is something that we could see in Q2?

I would be surprised if you don't see something in Q2. I am not going to promise it. But certainly within the next two quarters you will see significant bulk sales.

Okay. And you talked last quarter a bit about the valuation fund that did a lot of work leading up to the Q4 results. Any of that, any of those people still around? Or is that still lingering in the expense space at all?

No. That was a one-time project that was start to finish over the last couple weeks of December.

Okay. And then the last question, a lot of this exercise that I think we will all go through in asking you questions is trying to set a new baseline for the Company. And just curious if you were an outsider how you would read the potential problem loan trend. You talked a little bit about the loan loss provision continuing to moderate. But maybe give us your best shot on where you think NPAs would go absent any kind of sale?

I think the inflow of NPAs will likely continue to slow. We are seeing a real moderation in the flow of early delinquencies, we are seeing a moderation in the flow of new potential problems. It is one quarter's worth, so I don't want to overemphasize that. But our best estimate is that we will continue to see a slowing in the flow of these things.

Okay. Fair enough. Thank you.

The next question is from the line of Scott Siefers with Sandler O'Neill. Please go ahead.

Good afternoon guys. Thanks. I was going to ask a lot of the same NPA-type questions that Jon just asked. But I guess I am curious, following the pretty rigorous review that you did in your first several weeks there, I guess my experience has been almost no matter how diligent one tries to be in coming into a turnaround situation, there always ends up being more than you thought. So now you have had another couple months to continue to delve into the portfolio. How successful do you think that review was? Is there other stuff that has cropped up in your mind? What are your thoughts on that?

I think it was very successful. I mean, when you consider everything that was done in the course of no more than a month, we did a very good job of getting our arms around the portfolio. And we don't have a lot of surprises that we are seeing. Now that said, as you well know, you don't get to just charge-off or put on nonaccrual things just because you want to. You operate within a very specific box defined by accounting rules and such. And that is what we operated in within the fourth quarter.

There continues to be new problems that creep in because of valuation issues. And we saw some of those. But we had the lowest formation of net new NPAs that we have had in five quarters. And I don't see anything in the portfolio, and Scott is sitting here, I don't think he does either, that would indicate to us that there are significant pieces of this portfolio that we haven't looked at pretty hard, and that we don't have a good handle on.

Okay. And then separately to get back to the issue of potential bulk sales of problem loans, I know you are still kind of in the ramp-up process on the infrastructure side of it. But you provided a lot of good color on where your NPAs are marked. I am curious just having sort of started the process of looking at bulk sales, how you think pricing looks relative to where you have things marked if you are satisfied that, one, your marks have been aggressive enough, and two, that the interest from potential buyers is at such a place that it is worthwhile to go through with sales?

Well, let me put it, it is definitely worthwhile. Our overarching goal is to reduce our NPAs. We need to do that. What we have said publicly about this is that we believe that we can sell a significant amount of NPAs, and do that within the context of our core earnings for this year, covering the provision necessary to get that done, so that we end up at roughly breakeven at the end of the year.

And we have said that we thought we would lose money over the course of the first half of the year, and that is what has happened. We have lost a moderate amount of money for the first quarter. And there is nothing out there right now that gives us a feeling that what we have thought would happen going back to January isn't going to play out. I don't want to say a whole lot about individual marks and stuff, because I am actually trying to sell these loans at the best price I can get, and I don't know who is listening.

Understood. Okay. Thank you very much.

The next question is from the line of Ken Usdin with Bank of America Merrill Lynch. Please go ahead.

Hi. Good afternoon. I was wondering if you'd talk about, you mentioned you would expect that charge-offs are going to remain high and the provision starts to come down, so are we at the point already where you are anticipating starting to release reserves? And I guess the biggest thing is what would be, obviously with some of the problem loans coming down can you also give us an update on criticized classified, and how that is trending as well?

Yes. Well, we gave you the information that our potential problem loans, which we defined as substandard and still accruing loans, came down by a couple hundred million dollars. And the early delinquencies have also come down, both fairly significantly compared to past quarters. So that is good news. What was the first part of your question again?

So are we at the point where you are actually going to start releasing reserves in order to kind of, on your way forward? Is it enough that you have seen already?

Yes. You saw what we did this quarter. We did not release reserves. We essentially covered the charge-offs.

Yes.

If we were to significantly reduce the NPA book, then you might see us release reserves. But until we can get the NPA book going the other direction, which I think has to come essentially from bulk sales you probably shouldn't expect that.

Yes. Okay. And my second question is related to longer-term positioning for rising interest rates. So there are a lot of moving parts obviously with the excess liquidity and then the loan balances running down. But can you talk to us about how the Company is positioned for rising rates, and will you be a net beneficiary, or is there going to be a drag on that point about keeping the deposit costs pretty tight?

I am going to let Joe answer this technically. But let me just give you a little color on the security sale we did, because it plays into your question. As we mentioned we sold more than $500 million of securities in the first quarter, and we booked a significant gain. We did that because those securities had a relatively short duration. They were 9 to 12-month duration securities. So that the earnings from those would have largely been taken over the rest of this year.

So we effectively pulled those earnings forward and took the risk of us not seeing those earnings if rates were to rise, not that I would necessarily expect them to rise, but we took that risk off the table by going ahead and selling them and taking the gain now. So that is one way we are thinking about doing things. And then of course we haven't reinvested those proceeds long. We have added to the short position that we have. Albeit at a significant opportunity costs that we are bearing right now.

But we are taking actions to make sure that we don't get hurt, and may even benefit as the year goes on and rates go up. Joe, do you want to add any more to that?

No. That is actually correct. By getting in the capital, which is basically free funds, by getting in the overnight position on Fed funds has made us asset-sensitive, more asset-sensitive than we have been for several years. So again, we are getting ourselves asset sensitive, but again we don't take bets. We are all still around neutral and now we are --

Biased toward asset sensitivity.

Yes. So again, the technically correct answer is we are about a 1.5% asset-sensitive at this point.

Okay. And as the loan book shrinks, is the loan book becoming more or less variable rate?

I don't see a material change in the mix of that.

Okay. Thanks, everyone.

The next question is from the line of Tony Davis with Stifel Nicolaus. Please go ahead.

Yes. I wondered if you could talk about the rewrite of the credit policies? You mentioned the risk appetite has been defined. Has the Board approved that? And where are you I guess, in getting that word out to your loan people, in the sense of when it might be a reasonable time period to suspect, or expect some resumption of core organic growth?

It is a great question. And I want to be clear. In my remarks I said that we were in the process of formally defining or redefining the Company's risk appetite. So that is not done yet. We haven't established that risk appetite, and we have not gotten Board approval for it. We will do that over the course of this quarter.

In addition to that work, that's at the very top of the house, we are doing a lot of things right now, Scott and the credit folks, and the line people, are all meeting very frequently to make sure that everybody is on the same page, as to what types of transactions our bankers will know they can deliver. So we are doing a lot of work that way. But we still have a lot of work to do. One example of something that we have already done is a reorganization internally, where we took the underwriting staff, all of those people who actually work with the relationship managers in the field, and have reorganized them. They used to be part of our credit administration structure.

We have moved those 90 or 100 people out to the line units, so that the relationship managers have people who are very familiar with policy and procedure and underwriting criteria right there, to get things written up properly with the appropriate standards and get them ready for approval by credit. So it is those types of actions that we are taking now. So we are doing things at the bottom of the house, and we are doing things at the top of the house. And we expect to have that work completed this quarter. As I said earlier, though, I don't think you can expect to see a lot of net loan growth, given the runoff that has to occur for some time yet, Tony.

As a followup, I just wondered what you have got Oliver working on from a strategic standpoint? Obviously you have got your hands full dealing with credit issues right now. But where are you in thinking about the Company in that regard, and what projects is he working on that we may ought to know about?

Sure. So Tony's referring to Oliver Buechse, who joined us six weeks, two months ago, as our Chief Strategy Officer. And he worked with me at my previous company. Oliver has got a lot of things going on.

But what we chose to do rather than a top of the house strategic plan, we are working on specific projects for the first half of this year, and then we will turn our attention to a broader strategic planning exercise during the second half of the year. Specific projects that are going on are defining our risk appetite, as I mentioned, and we have some outside help overseen by a group of people here including Oliver. We have got work on better communications between line and credit going on.

We are working on enhancing our penetration of our footprint, particularly in the outer areas of the footprint and in particular in the bigger cities, like Chicago, Minneapolis, et cetera. And you have heard me talk about wanting to hire more people in those cities. And in fact we have had some success doing that, and we expect to have some significant success here in the next few weeks. We actually have some other projects that don't relate to growth.

We are working on an enterprise risk management project. We are also working on looking at our mortgage product to see if we can create some mortgage product that is more attractive to our wealthier clients that we can keep on balance sheet. And there are several other projects like that going on. So relatively specific rifle shot projects, that we need to get done, in order to get ourselves ready for an economic recovery, and be positioned to take advantage of that.

Thanks, Phil. That is good color.

The next question is from the line of Erika Penala with UBS. Please go ahead.

Good afternoon. My first question is a follow-up to Ken's question. Joe, when you noted that your model suggested that you are asset-sensitive, what assumptions did you make in terms of deposit volume behavior, and also potential pass-through when rates rise?

Again the way we model it is we do not change the balance sheet volume, we just make assumptions about rate changes, and we make assumptions about what we are going to do on the deposit side, what we are going to do on the loan side, based on historical behavior. So it is simply an instantaneous shock of 100 basis points or 200 basis points. That is how we do it. So we did not, there is not a volume change here.

What was the, on the deposit rate side? What was the rate pass-through assumption?

Oh, boy. I can't tell you that off the top of my head. I would have to go back and ask my guys. Because I think it is different by product. I know historically, and again I am sure it has changed, but historically it has been approximately a third of the movement of the Fed funds. But I will have to get you a better answer, Erika. I don't have that here.

And I think during the prepared remarks it was mentioned that about 60% of the CRE NPLs are current. If that is the case, have you been migrating these loans if the values are upended, or is it that the debt service on the project you are funding is underwater, but the borrower is funding it from cash flow from other projects?

Yes. Let me be clear. What I said was that about 60% of the new nonperforming loans were actually current as we moved them to nonaccrual. And basically I think you are correct. The reason why that happens generally speaking is a valuation-driven issue.

So in other words, the developers are still paying current, whether it is from an income-producing property that we might be financing, or from other cash flow they have, or other resources. But because the valuations have gone down, we have gone ahead and moved things to nonaccrual. And overall when you look at the entire $1.2 billion of nonaccrual loans, roughly about a third of those are still paying current.

And I just wanted to make sure that the mark that you had mentioned, again during the prepared remarks, is 60% for, 61% for construction and 75% for CRE. Those are the marks on the new NPL, new NPL inflows?

No. That is the mark on all of the nonaccruals in those segments.

Why is CRE much higher than construction? Were these --

Because construction loans are inherently riskier and less valuable than completed leased commercial properties.

Sorry. I had that opposite, then. It is 75% for construction and 60% for term?

No. You had it right. But what we are saying is that we are carrying, when you look at the charge-offs plus the specific reserves, we have marked the construction loans down to 61%. When you do the same thing on the commercial real estate, nonconstruction commercial real estate, it is about 75%. And then if you look at the rest of the C&I book that is in the nonaccrual bucket, it is about 62% between the charge-offs and the reserves.

Okay.

Okay?

All right. Thank you.

The next question is from the line of Dennis Klaeser with Raymond James. Please go ahead.

Yes. Good afternoon. Could you comment more on your liquidity strategy, and your need for liquidity at this point? Your overall cash balance is about $2.3 billion, are three to five times higher than they were in prior periods. What drives the need for that high level of liquidity at this point?

I think it is fair to say that we are taking, and I would acknowledge a very conservative posture on liquidity, Once the bank lost its investment-grade rating, which S&P downgraded the day that we raised $500 million of capital, we became concerned, because basically our unsecured overnight funding capacity dried up. We made a decision to go ahead and build up very significant cash equivalent overnight funds to absolutely ensure liquidity. We recognize it is expensive. But we think that is the prudent thing to do until we work through our problem loans, and hopefully in the coming quarters re-establish our investment-grade rating.

Recognize that the other three rating agencies have us at an investment-grade rating. In fact Moody's for example is significantly rated higher than S&P but it doesn't matter. The fact of the matter is we have a non-investment grade rating from S&P, and that has impacted our short-term liquidity, our access to short-term liquidity.

Do you have additional borrowings that are rolling over in the short-term?

Additional borrowings? We don't have much in the way of longer term debt. We have a $200 million subdebt issue due in August of '11. Otherwise we have sort of the routine, relatively short funding that rolls.

Okay. Thank you.

The next question is from the line of Terry McEvoy with Oppenheimer and Company, please go ahead.

Thanks, good afternoon. Given the extensive review in Q4 of the loan portfolio, particularly in the construction and CRE area, should we be surprised with the increase in nonperforming loans and CRE up $50 million, construction up $74 million? Were those loans maybe smaller in size that did not go through that review process, or did they simply show deterioration in the first quarter, and that was reflected in the numbers?

Terry, I am not really surprised. As I tried to describe before, you go through these things, you review them, operating within the box that you can operate in from an accounting point of view. You do everything you can in the fourth quarter. We are not going to, there was no scenario where we would capture every potential nonaccrual in the fourth quarter, and then see them essentially dry up over the course of the year. What we expect is a decreasing velocity of new non-accruals and new problems. And that played out in the first quarter.

One other question, and I don't mean to be critical, but I remember the call three months ago, one of your themes was improving just reserves relative to nonperforming assets, that ratio you felt was too low. And the fourth quarter I believe was 48. And I believe that number has kind of dropped down to 45 if I am doing the numbers correctly?

I think it was 51 and it has gone to 48.

Okay. But directionally it has gone down. Could you just talk about since you mentioned it three months ago, is that still something you are focused on and where you would like that to head?

Yes. I would have liked it to have gone the other way for sure. But the nonaccruals did creep up a bit. And we continued to aggressively take charges. So, yes, we want it to move the other way. I think the best way to get it to move the other way is to make some significant impact on selling NPAs.

Okay. That's it. Thank you.

Thanks.

The next question is from the line of David Konrad with Keefe, Bruyette and Woods. Please go ahead.

Hi, good afternoon. Just a follow-up question switching gears a little bit back to the Reg. E, in terms of NSF fees, what is the percentage of NSF fees that we can think about, relative to your service charges that you report?

Relative to service charges. I don't know if I can get at your answer that way. People are flipping pages.

I am trying to figure out the impact that you outlined?

Yes. We booked about last year $80 million to $85 million of -- $80 million of NSF OD fees. And about a third of that is ATM and debit card-related, okay? And so that is the piece of that revenue stream that is going to be mostly impacted by the opt-in provisions halfway through this year.

We think that a significant number of people who have generated those fees are going to want to opt-in. But there will be a significant number that aren't. And that is the piece of the revenue stream that is at risk. And we are doing other things in the retail bank to sort of backfill that revenue stream, with inactivity fees, and some other fees that we haven't been charging that other competitors do. And a move toward providing people free checking accounts, but holding them more closely to balance minimums, activity minimums, and things like that.

And just to be clear, the service charge income last year was $117 million. So $79 million of that was related to NSF and overdraft. That was the specific question.

Yes, okay. Great. Thank you.

(Operator Instructions). The next question is from the line of Peyton Green with Sterne Agee. Please go ahead.

Actually I am clear. Thank you.

Okay.

The next question is from the line of [Sherry Singapy] with AllianceBernstein. Please go ahead.

Guys, just a quick question on, what is the impact of NPAs on your NIM? Because you have a pretty sizeable nonperforming loan bucket. As you sell them that should help the NIM, right?

It is about four basis points was the impact, right? No?

Let me answer the question a couple of ways. The four basis points is the impact for the quarter. But if you would take $1 billion worth of loans, and say you were earning 4% on those loans, it is in the low 20s in basis points. So you could take about $40 million to $45 million times our $20 billion earning assets.

So let me ask it differently. If you had a bulk loan sale of your entire nonperforming loan bucket tomorrow, how would that impact your NIM?

It probably wouldn't do very much because it is not, there is no income being recognized on those loans today. The extent, the only way to help us, is we might earn Fed funds rates of 25 basis points on the cash we got.

Well, the question then goes to what is your alternative use of the cash that you get in from selling the NPAs? So if we were to invest in those longer, for example, we have a lot of liquidity. We don't have to have an unlimited amount of short-term liquidity. So if we reinvested longer, or we got loan growth, it could have a meaningful impact on our net worth.

Okay. Thank you.

(Operator Instructions). One moment. And I am showing that there are no further questions.

Okay. Thank you, Alicia. And thanks everybody for joining the call today. In closing I want you all to know that we are going to remain very focused on reducing our NPAs, and we are going to continue to put in place the various strategies we discussed to generate growth in coming quarters, although I think it is going to take some time. We believe these actions will serve us well, and get us ready for recovery in the economy.

We look forward to updating you next quarter. And if you have any questions in the meantime, as always give us a call. And thanks again for your interest in Associated Banc. Have a good evening.

Ladies and gentlemen, this concludes the Associated Banc-Corp first quarter 2010 earnings conference call. If you would like to listen to a replay of today's conference dial 1-800-406-7325, or 1-303-590-3030, and entering in the access code of 4377482. ACT would like to thank you for your participation. You may now disconnect.