Associated Banc-Corp (ASB) 2013 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to the Associated Banc-Corp's first quarter 2013 earnings conference call. My name is Mike, 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. Copies of the slides that will be referenced during today's call are available on the Company's website at investor.associatedbanc.com. As a reminder, this conference is being recorded.

During the course of the discussion today, Associated management they make statements that constitute projections, expectations, 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 differ materially from the information discussed today is readily available on the SEC website in the Risk Factors section of Associated's most recent Form 10-K and any subsequent SEC filings. These factors are incorporated herein by reference.

Following today's presentation, instructions will be given for the question-and-answer session. At this time, I would like to turn the conference over to Mr. Philip Flynn, President and CEO, for opening remarks. Please go ahead, sir.

Thank you. Welcome to our first-quarter earnings conference call. Joining me today are Chris Niles, our Chief Financial Officer and Scotty Hickey, our Chief Credit Officer.

Highlights for our first-quarter outlined on slide 2, this quarter's solid results were highlighted by record quarter for mortgage banking and continued focus on expense management. For the quarter, we reported net income to common shareholders of $46 million, or $0.27 per share. That compares to net income of $41 million, or $0.24 a share a year ago. Return on tier 1 common equity for the quarter was 10.1%, and that was up from 9.2% a year ago. Average loan balances increased by 2% from the previous quarter with the majority of growth coming from the commercial portfolios. Average deposits increased by 3% from the fourth quarter to $17.1 billion and have grown 14% year-over-year. Net interest income was $158 million, reflecting two less days in the quarter and less one-time positive items.

We maintained the quarterly dividend at $0.08 per share, and we repurchased another $30 million of common stock, or approximately 2 million shares at an average price of $14.31. We also paid a dividend of $238 million from Associated Banc to Associated Banc-Corp, creating substantial capital flexibility at our holding Company as we consider future capital and strategic options. Even after completing these capital actions, our tier 1 common equity ratio remains very strong at 11.64%.

So, let me go ahead and share some details on the main performance drivers here in the first quarter. Loan growth is highlighted on slide 3. Average loan balances continued to grow from the fourth quarter with net growth of $317 million. This represents a 2% quarter over quarter growth rate and an 8% increase year over year. Growth during the first quarter was weighted toward our commercial and commercial real estate businesses. Commercial and business lending average balances increased by $184 million during the quarter, with $125 million of that growth coming from our general commercial loan book. In our specialized lending portfolios, power and utilities grew an average of $95 million, driven by an acquisition of $115 million in loans from some European banks. Our oil and gas book was up $11 million, and in the mortgage warehouse, average loans declined $47 million, reflecting slowing refinance activity at quarter end. Average commercial real estate loans drew grew by $141 million during the quarter with construction loans increasing by $62 million, mainly driven by multifamily and retail projects.

Average residential mortgages grew by $137 million, or 4% during the quarter. This growth was split evenly between our hybrid arms and 15-year fixed-rate mortgages. Currently, we are holding about $1.3 billion of 15-year fixed-rate mortgages on our balance sheet and intend to maintain that level going forward. We continue to sell 30-year production to the agencies through our mortgage banking operations. During the first quarter, we sold $680 million of loans compared to $780 million in the prior quarter. Despite the drop in volume, we were pleased that gain on sale margin remained strong during the quarter. The retail loan portfolio, which includes mostly home equity loans, continues to experience pay-down's and declined an average of $145 million from the prior quarter. With continued low mortgage rates, we expect these portfolios to experience more runoff as consumers refinance into lower-priced first lien mortgages. The composition of the home equity portfolio has remained fairly consistent over the last year with about 45% in home equity first liens, 12% in junior liens and 43% in revolving lines.

Turning to slide 4. Average deposits of $17.1 billion were up 3% from the fourth quarter and have grown $2.1 billion, or 14% from a year ago. Average money market, savings and interest-bearing demand deposits continued to grow during the first quarter. Non-interest-bearing demand balances increased -- experienced, I'm sorry, typical seasonal outflows. Overall, outflows were roughly consistent with prior year seasonal flows. Total CDs continue to decline, although at a slower rate than prior quarters. Company also continue to wind down its term repo borrowings and to reduce its federal home loan bank advances.

Net interest income declined by $4 million, or 2% quarter over quarter. The fourth-quarter's net interest income included $2 million of interest income related to a tax refund. The first quarter also had $2 million of less interest income due to the day count difference compared to the fourth quarter. Further, we collected about $1 million less on interest recoveries than -- during the first quarter than we did during the fourth quarter. Net interest margin for the first quarter was 3.17%, which was somewhat less than we had expected.

Year over year, NIM is down a total of 14 basis points and a total of 9 basis points from the third quarter, which we believe speaks to our diligent management of the margin. While our 2012 asset yields and margins benefited from an embedded floors, the renewal and refinancing trends in our commercial books are grinding away at these, and we expect to see continuing pressure on the asset side of our margins. The decline in asset yields was primarily driven by an 18 basis point decline in the commercial loan book. We've chosen to remain asset-sensitive in this low rate environment, and we recognize that this is weighing on the margin. Accordingly, we continue to manage down interest-bearing liability costs which now stand at 45 basis points, down from 70 basis points from the first quarter of last year.

Our expectation for the rest of 2013 is that earning asset yields will continue to compress while our ability to manage deposit costs lower will become more challenging. We do see some continuing benefit from repricing of the CD book through the rest of this year. We have about $300 million of higher rate FHLB advances maturing during the second quarter. That will provide some level of support to the margin. Additionally, we do have about $25 million of 9.25% sub debt outstanding that becomes callable in October that we would certainly expect to redeem.

Total non-interest income for the quarter was $82 million, up $4 million from the fourth quarter. Mortgage banking accounted for essentially all of the netted increased from the previous quarter. This pickup was aided by continued strong margins and reduced mortgage servicing rights expense as prepayment speeds slowed during the quarter. Our other fee revenues were up modestly from the fourth quarter with increases in insurance commissions and trust service fees, but these improvements were partially offset by decreases in card and brokerage income. Capital market fees declined by about $2 million from the fourth quarter related to lower commercial lending volumes and related lower customer demand for interest rate swaps and other hedges. Asset gains and losses were favorable to the previous quarter by $1 million.

Total non-interest expense for the quarter was down $9 million, or 5% from the fourth quarter. Personnel expense was down slightly, salary expense was lower, which reflects our lower full-time equipment counts. FTE levels are now at their lowest since mid 2010. Payroll savings were partially offset by seasonally higher payroll taxes during the first quarter. Legal and professional fees declined nearly $3 million from the previous quarter, which is largely reflective of lower BSA remediation-related professional expenses. We continue to believe the bulk of the remediation in implementation costs from our BSA enhancement initiatives are behind us and that professional fees will continue to reflect a reduced run rate in 2013. Occupancy expense declined by almost $2 million from the previous quarter, which was related to our branch consolidations where there was a charge taken in the fourth quarter. Losses other than loans also declined more than $3 million from the fourth quarter. This decline reflects a reduction in the reserve for unfunded commitments and reduced exposure in our risk-related self-insured mortgage insurance activities.

Turning to slide 5, credit quality continued to improve. Net charge offs were $14 million for the first quarter. The majority of these net charge-offs were in our home equity and residential mortgage portfolios. Similar to the fourth quarter, this quarter we completed a sale of around 100 small commercial loans with an unpaid principal balance of about $16 million that resulted in about $4 million of incremental charge-offs. We believe that note sales such as this are an efficient means to remedy small non-performing credits.

Potential problem loans declined $344 million from $361 million last quarter, and they are down 28% from a year ago. The level of non-accrual loans to total loans continued to improve to 145 basis points from 164 at the end of the fourth quarter and have improved now for the 12th consecutive quarter. Total non-accrual loans of $225 million were down from $253 million at the fourth quarter and down from $327 million a year ago. The allowance for loan losses now equals 184 basis points on loans and covers 127% of period end non-accrual loans. The provision for loan losses for the quarter was $4 million compared to $3 million in the fourth quarter, and we expect provision expense to increase as new loans are added in 2013.

Our capital ratios on slide 6 continue to remain very strong with a tier 1 common equity ratio of 11.64%. We are well-capitalized and well in excess of the proposed BASAL III expectations on the fully phased-in basis. As I mentioned during the first quarter, we dividended a total of $238 million from Associated Banc to Associated Banc-Corp. While this was purely an inter-company transaction by moving the excess capital from the bank to the holding company, we are creating further corporate financial flexibility to consider future strategic or capital deployment actions. This will also bring our bank capital ratios into alignment with our overall consolidated capital ratios. Our priority for capital deployment continues to focus on organic growth. We will evaluate our dividend payout ratio over time so that it stays in line with earnings growth. We will buy back shares when accretive, and we will be disciplined in evaluating other opportunities to optimize our capital structure over the coming year.

Slide 7 is a slide that we have shared in the past. We include it today to reiterate our guidance for the rest of the year. We continue to expect loan growth in 2013 in high single-digit range. This outlook is in line with our performance during the second half of 2012. First quarter's loan growth was lower, but that's what we expected and what we mentioned in the fourth quarter earnings call. We will remain focused on disciplined deposit pricing and will look to continue to grow core retail deposits and commercial deposits through our enhanced treasury management offerings. We expect modest net interest margin compression over the course of the year driven by continued pressure on earning asset yields.

We expect to defend margin compression through liability repricing and refinancing actions to partially offset asset yield compression. We expect total non-interest expense for 2013 to be flat on a year-over-year basis compared to the 2012 reported level, benefits from reduced regulatory costs are expected to be offset by continued investments in the franchise. Credit trends are expected to continue to improve with provision expense increasing generally in line with new loan growth. Capital deployment was a priority in 2012 and it will continue to be a priority in order to drive long-term shareholder value.

So, thanks, and with that, we'll open it up to your questions.

Thank you, sir.

(Operator Instructions)

The first question we have comes from Dave Rochester of Deutsche Bank. Please go ahead.

Hey, good afternoon, guys.

Good afternoon, Dave.

Can you talk about where your loan production yields were for the quarter, either on an all-in basis or just across the categories you break out, just to get a sense for how those compared to book yields today?

Sure. I think in general they are below the book yields today. So Dave, I think you are familiar with our press release tables. I will point to page 7 which has our margin tables and the upper part of that will show you the quarter, March 31 book yields that we are realizing in the portfolio. On our commercial book for the quarter, for the commercial business lending and commercial real estate lending combined, it was a 3.81% yield and in today's world, we are seeing lots of good deals, but they are being done at spreads a lot closer to 3%. And with LIBOR where it is, that means with every new deal we're putting on the books, it's incrementally dilutive.

And on the resi side, what are you guys booking now?

Mostly we are booking 5-1 arms, and those are coming in -- 5-1 arms in 15 years, and both of those coming in between 2.75% and 3%.

Got you. And gave you noticed any spread pressure versus last quarter, or is that pretty much where we were last quarter?

I think -- on the commercial side I would say the spread pressures are continuing, and we see them carrying through from the prior quarters, but it's not getting any easier. And in fact probably -- while I can't say it is getting less competitive, it's been very competitive and will continue to be very competitive and we move forward.

On the residential side, I would say that actually our net margins and spreads are slightly wider today than they have been despite the fact that we are putting stuff on at 2.75% and 3%. We've been putting stuff on at that levels for the better part of a quarter at center margins relative to market benchmarks, and we are pleased to be able to put that paper on still at slightly wider margins in the current environment.

Okay. And you had mentioned interest recoveries declining this quarter versus last quarter. Was just wondering if you had the dollar amounts for both quarters.

Not immediately at hand, but it was a net $1 million delta.

Got you. And you talked about the CD book repricing. You mentioned that previously. Was just wondering how much of that reprice is through the end of this year and what the rate is all-in rolling off?

Sure. The -- substantially, all the book is one year at end maturities. So, the substantial portion of the roughly $2 billion still an outstandings will turn over. Certainly, more than $1.5 billion of that will turn over in the next 12 months, and the weighted average rate we're putting new stuff on is closer to 50 basis points.

Great, and just one last one. You talked about pushing cash up to the holding Company. Was wondering how much cash is there today.

Cash is in excess of $250 million. In addition to that, we have liquidity investment portfolio positions that are another $100 million-plus --(multiple speakers). More than $400 million.

Great, all right. Thank you very much.

Thank you.

The next question we have comes from Ken Zerbe of Morgan Stanley.

Great, thanks. Was hoping to get a little more detail on the gain of sale margins. If I heard correctly, your origination volumes were down $100 million, so it would probably imply some much greater margin number, and also why? Why is it stronger than what we are seeing in the rest of the space?

Sure, so I think the important thing there is, if you will notice in our table page 4, we disclosed the mortgage loans originated for sale during the period, and that's when a standard reporting for us. And that was down, Ken, as you pointed out correctly, as we stated from $780 million to $681 million. So, the production -- new production coming through the pipeline was down $100 million. However, due to some operational bottlenecks, we closed some loans in the fourth quarter that we didn't deliver out to the agencies during the fourth quarter.

Those were on our books as closed loans, so they did not get picked up in our year-end mark to market because they're carried at lower cost to market. And when we subsequently delivered them in the first quarter, we realized a gain on roughly $90 million to $100 million that was actually produced in the fourth quarter but not delivered and recognized until the first quarter.

How much was that amount?

Gain on sale margins have been roughly 2.5% for stuff that was done in the fourth quarter and another -- so another $2.5 million.

No, I mean the total dollar amounts. I'm just trying to get a sense of what is --

I'm sorry. So, total delivered to the agencies during quarter one, actual deliveries was $770 million versus $680 million of production.

Got it, okay.

And then when you look at the prior quarter, we originated $780 million, but we actually only delivered about $680 million.

All right, perfect. That actually helps out. And then just one last question on the dividend that you pay out to the holdco, thanks for the numbers that we have. How significant is this? I am just trying to get a sense of, if you are buying back $125 million of stock every year roughly, you have $50 million of dividends. You are using up almost $200 million for a 12 month look forward. Should we be reading something a little more significant into this, or is this cash just for normal operations?

No Ken, this is Phil. You shouldn't read anything terribly significant into this. Having cash at the holding company gives us inherent flexibility. We can always put it back down into the bank if it was needed in the bank. So, it is really -- we wanted to call it out because you will see it when we file the Q, and we didn't want anyone to be surprised by that. But I would not read anything of great significance into this.

Perfect. Okay, thank you very much.

Next with Scott Siefers with Sandler O'Neill.

Good afternoon, guys.

Good afternoon.

Chris, I just wanted to ask a question on the outlook for the margin. Obviously, is under a little pressure, but I guess I was curious about order of magnitude. I guess as I think about the remainder of the year, you have some significant funding action, right -- in two of the remaining three quarters of the year, whether it is the sub debt or the FHLB advances. I guess it would stand to reason that the first quarter's compression was perhaps more significant than what we should expect for the remainder of the year. Is that a fair way to think about it, or how are you thinking about it?

Yes. I think -- this is Phil, Scott. I think the way to look at this is look at the third quarter, fourth quarter, and first quarter, and recognize that net interest margin in the fourth quarter at 3.32% had some anomalies in that gave it a boost, mostly the interest that we got paid on the tax refund as well as more interest recoveries. So, if you look at the third quarter at 3.26%, you look at this quarter at 3.17% over a six month period, I think that's a better comp than looking at the delta between the fourth and the first quarter. We do not expect that magnitude of quarter by quarter NIM compression going forward.

Okay, that's helpful. I appreciate it. And then just wanted to ask about the expense side as well. Obviously, you guys are looking for a flat number year-on-year, but that implies at least some growth off of this quarter's base on a quarterly basis throughout the year. Anything there, whether it's speaking of marketing costs or anything else that would cause it to bump up from this quarter's run rate?

It's hard, and I would encourage you not to try to look at the expense this quarter-by-quarter-by-quarter. We are committed to making sure that our expenses are flat to last year. We are off to a good start.

Okay. I guess just final question. On the end of period basis, loan growth was slower, which you guys had telegraphed and definitely make sense. On an average basis, it's still like -- I thought it looked pretty good. Just qualitatively, how are you feeling about your pace, either the pace of demand or what you guys are booking as you start the year here?

We still feel just fine with the guidance that they provided of upper single-digit loan growth. You did note that we are talking about averages, and I just want to give everybody a sense of why we are talking about averages. We have been in the habit here of talking about point to point loan growth from the end of one quarter to the end of the next quarter. And because of the way the mortgage warehouse draws happen toward the end of a quarter and tend to flow out early in the next quarter, it's created some anomalies in tracking these numbers. Of course, we make net interest income on average loans. So, going forward, we are going to talk about average loan growth, which I think is the better way for everybody to think about it.

But the demand side also continues to feel reasonable, and we feel confident with the guidance we gave you.

Okay, perfect. All right, thanks a lot for the color.

Next we have Jon Arfstrom from RBC Capital Markets. Please go ahead.

Thanks, good afternoon, guys. Just a couple more questions on pricing. Are you seeing the same type of pricing pressure in your specialty businesses or your national businesses, or do you think that your sense is that is holding up a little bit better?

I think it's generally holding up a little better. Certainly in the oil and gas book it is. The power and utilities credits that we do are very high quality credits, so they carry out lower yield than some other things that we do. On the other hand, they have much lower risk in our view. But we haven't seen the same really -- I don't want to use the word crazy, but the real serious competitive drive on any decent sized commercial loan in say Chicago or other parts of our footprint.

Okay, and I guess the other question would be on commercial real estate. Can you just talk a little bit about the competition there and how you would compare the competition in your core markets versus some of the new markets that you have entered?

When you roll back the clock to us reinvigorating and restarting our commercial real estate business, I think we got an earlier jump than some of our Midwestern competition because we cleaned up our real estate book very quickly and then hired Breck Hanson, who obviously is very well known in commercial real estate circles in the upper Midwest. So, we got a good jump on being back in the market, picking up market share, hiring very experienced commercial real estate lenders in all of our real estate offices, including the new LPOs, and we are getting the benefit of having very qualified long tenured people in these markets.

I'd say per the first half of that three years that we have been doing this -- or say two years, competition was a little bit on the sidelines, but that has come back over this past 6, 9, 12 months across the whole footprint. And so it is more competitive, but I will put our commercial real estate -- the quality of our commercial real estate lenders up against anybody's. It's a relationship driven business.

Are you seeing anything out of Ohio, Indiana, Michigan yet?

Yes, we've had nice growth in those markets.

All right. Thank you.

And next with Erika Penala of Bank of America Merrill Lynch.

Yes, good afternoon. Thanks for taking my questions. My first as a follow-up on the margin. I realize -- thank you for all the color that you gave in terms of how to look at it going forward. Given what you mentioned about the yields that protect -- the floors that protected your yields last year going away this year, should we expect your core loan yield compression in 2013 to be greater than 2012?

So, Erica, if you are looking at quarter-over-quarter -- I will direct you again to page 7. The total compression year-over-year from the first quarter of '13 to the first quarter of '12 was 38 basis points in the commercial loan book. And I certainly would not expect it to be more than that. The total compression for the entire earning asset side was 3 basis points, and again, I wouldn't expect it to be that order of magnitude total-wise, in part because we have lost those floors already and things have reset and repriced to new levels. So, unless there is another leg down further, which we don't really expect given where rates are right now, we are hitting bottom as we moved through into 2013.

Got it. That's helpful. In terms of the FHLB advances in the sub debt that is rolling this year, do you plan to replace them with wholesale or with just deposits?

Either -- we will replace them with the cheapest thing we can replace them with. We have had good deposit growth, and that's always the best funding source. To the extent we need to fill a bucket with something else, we will probably go to short-term FHLB advances, which are extremely cheap.

Okay, and just a follow-up to Ken's question on the mortgage. Did I hear you right, Chris, that it's about $2.5 million enhancement to the mortgage banking number this quarter that was related to the late delivery of some mortgages, so our starting point for the year should be about $15.3 million?

Yes, $2 million to $2.5 million

Okay. Thank you.

Next we have Emlen Harmon of Jefferies.

Hey, good evening. Just looking at the mortgage banking -- getting back to that, and the gain on sale. Obviously, you had a little bit of a helper this quarter. If we back that out, could you give us a sense of just where the gain on sale in your portfolio is today and where you think a normalized level for that would be, just giving your business mix?

Sure. Obviously, we benefited from very wide margins during much of the later half of 2012, and we projected and expected and conveyed our expectation that we would see meaningful margin compression over the course of 2013. What we would say is margin compression was not as severe as we expected during Q1, and we continue to have consistent margins in excess of 200 basis points on production that we contracted for sale. So, between 200 and 250 basis points depending upon the date it was sold.

Beyond that, volumes are still holding up better than we expected, so we've got better volumes than we thought. Better gain sale margins than we expected, and attribute that to getting to be more dominant position here in the state of Wisconsin. Some of our competitors have left for the largest mortgage lender in the state by dollars and units. So, we are getting some benefit from that. But it has -- it was a much better quarter than we had guided or expected.

Got you. Thanks, and then one small one. Again, on the mortgage side of things. Last quarter, you guys put up a provision for repurchases in the mortgage book. I didn't notice anything in the commentary about that going away. Are you still building a reserve there? And could you just give us maybe a little bit of a color about any particular portfolios you are worried about? Put backs in?

It's not material. Our total reserve we have at -- we'll close the quarter at $4.4 million, which would be roughly 5.8 basis points on the service book, which we think is very much in line with a better quality and better performing peers. The trends are not changing much, so we continue to build that reserve a little bit, but we don't expect it to move materially from where we have it and would expect it to perhaps moderate, hopefully, as we move through the course of 2013.

And we built the reserve up by about $1 million.

Got it. Thanks. Appreciate the answers there.

The next question we have comes from Chris McGratty of KBW. Please go ahead.

Hey, guys. Good afternoon.

Good afternoon, Chris.

Not to belabor the MSR issue in the mortgage banking, but Chris, aside from the one-time, the $2 million, $2.5 million benefit this quarter, was there a write up in the MSR? And I guess, what was the amount that benefited earnings net of hedging?

Sure. If you look at the bottom of page 4, we disclose our servicing rights, the servicing portfolio, and you'll see that we marked it up during the period from 62 basis points to 69. We believe both numbers are fairly conservative. We note that the 69 is the same level we carried it at a year ago, and that accounted for about $4 million of the total quarter.

So, earnings were, I guess, elevated by $4 million, just on the write up. Okay. In terms of the commentary on growth and margin, can you maybe wrap it all together in terms of the outlook for NII? Can we grow in this landscape NII for the balance of the year?

Sure. So, I think when they got $1 NII, I would take the $162 million that we posted last quarter, take off $2 million for the day count, take off $2 million for the tax refund, take off a little bit for interest recoveries, and you'd be down to $158 million as a starting point. So effectively, we hit the starting point that you would expect on a core run rate basis, and we believe that we'll continue to grow loans and therefore earning assets over the course of the year that will be additive to the bottom line and to NII.

Okay, great. Last one, the reserve. Obviously, the credit numbers look good. Can you help us where you think the reserve might eventually floor?

Yes, we -- Chris, we get asked that question all the time. We don't get to pick a floor, as we know. The provision has been trending downwards as the loan book grows. We have started to positively provide, obviously, over this last couple of quarters. Charge-offs are starting to get pretty small. Most of our charge-offs now are retail oriented. We don't have much flowing through on commercial.

Recognize that you can always get a bump on any particular credit that might come along and surprise us for some reason or another. And we actually -- the charge-offs were actually a little bit elevated because we chose to disposable bunch of small notes. So we, I'm sure you figured out by now, are very conservative as we think about running this bank and making sure that we have robust but justifiable loan-loss reserve. Where it finally settles out is hard to say. The benefit of an improving troubled loan book is basically behind us, and it should be tracking now with loan growth as we go forward.

Great. Thank you.

The next question we have comes from Terry McEvoy with Oppenheimer.

Hello, good afternoon.

Good afternoon, Terry.

Thanks for all the color on what you are doing to defend NII. I'm just wondering, within the fee income businesses excluding mortgage, you talk about modest improvement there. Could you be more specific? Trust, card, insurance brokerage? What do you feel optimistic about in 2013?

Sure. So, I think our trust, private banking, asset management related businesses are doing well, as we've talked about a lot. We have hired a lot of good people in those businesses, and we are getting nice, steady growth, and we expect that to continue. Our insurance brokerage business, AFG, is a very strong insurance brokerage, relatively large. We are actually one of the -- it's one of the larger bank-owned insurance brokerages out there.

It's a slow growth business, but it continues to grow. We are actively adding brokers to that business, so we expect growth there. We think deposit-related fees have generally bottomed as we grow the business, they'll tend to trend upwards. And card stuff is still steady and will probably grow some.

The -- our Associated investment services business, our brokerage is relatively small. We have new leadership there. We expect to get better results as we go on, but it hasn't been contributing a lot of late. We expect to get some growth there. Anyone of these businesses is relatively small in the overall scheme of things, but in aggregate we expect to get good, steady non interest fee growth out of those businesses over time.

And Terry, I would note just as additionally, in the insurance commissions, there is the seasonality to that business, and the second quarter is our stronger quarter for that business.

And then just -- looking at the positive trends and flows. It doesn't look like the branch consolidation you did really had an impact at all. Does that make it easier going forward to maybe rethink that strategy in terms of shutting additional branches? And then, could you just remind me -- I know the consolidation in Green Bay you've talked about. What's -- could you remind me what's going on in downtown Chicago?

Sure. So, two questions there. On branch consolidation, we consolidated 21 branches a year ago and another 12 this past quarter, give or take 10% of our branch network. Time needs to pass before we see the impact of the 12 that we just consolidated. But looking back now over the course of more than a year, we got very strong results, but it's a -- there isn't a lot of low hanging fruit there, if you will. We have consolidated branches that were quite close to other branches. There isn't as much obvious consolidation left for us to do without really digging into the network.

That said, as we have talked about, we have made, and continue to make, significant investment into alternative channels for our -- particularly, our consumers to who they're banking with. We have a major upgrade of our mobile platform coming later this quarter. We have put image enabled ATMs across the footprint in the metropolitan areas. All of that, as time goes on, will continue this industry-wide trend of less and less foot traffic in branches, and we'll be very cognizant of that as we think about how many branches we operate.

The second question of consolidation in Chicago, we have about four different spots where people work in the greater Chicago area and consolidating all those folks into a building near the loop downtown where we have leased a couple of floors. So, we're going to get efficiency and, over time, some cost savings there.

All right. Thank you, guys.

Sure.

Next we have Mac Hodgson of SunTrust.

Just a couple quick minor questions. One, what was the dollar amount of the seasonally higher personnel costs, 1Q?

It's really the taxes. It's like -- (multiple speakers) about $3 million, $4 million -- $3 million.

I could probably get a more accurate number, but it's probably something in that ballpark.

Bryan McKeag, our Controller, is here in the room. He's going to look that up for you. It's give or take $3 million, but we will get the number here in a second.

Okay, perfect.

But that's always a first quarter event.

Got you, exactly. You may have given this, but what was the -- what's the rate on the FHLB that's maturing? The $300 million?

Roughly 1.75% on the three tranches that are left. 1.75%.

Got you. And then the $238 million dividend, was it that specific to hit a certain ratio at the bank level?

I think if you look back at our 10-K, you will notice that we had undividended bank to bank holding company dividend capacity in excess of $232 million. So, we figured out where we were when we did the dividend, then we topped it up and took the excess capacity out of the bank. So, that's what was the driver.

Okay, perfect.

I actually -- Bryan's looking around, so I'm going to embarrass our controller, because I have the numbers here. Unemployment tax was up 1.8%, Social Security taxes 1.1%, which is typical of the beginning of the year, so it's 2.9%. Call it 3%. (laughter)

Perfect, I appreciate it

The next question we have comes from Matthew Keating of Barclays. Please go ahead.

Thank you. Chris, I think you mentioned at a recent industry conference that the plan was to return 100% of net income this year. I'm just wondering, with the dividends from the bank Associated, whether or not those plans have changed at all. Thanks.

I think we continue to be on the path to have a steady dividend consistent with earnings and will continue to look to repurchase shares when appropriate. We think we have flexibility at the 100% payout level, and we will continue to evaluate that as the year progresses.

Again, I would caution, don't read too much into the fact that we move some money up to the holding company.

Okay. That's fair. And then secondly, I appreciate the color on the drop in the mortgage warehouse loans by $47 million linked quarter on an average basis. Could you just remind us the size of that portfolio? At the moment, approximately?

Well, it's -- (laughter) that's one of the reasons we give an average, because it tends to pop up and be meaningful at the end of quarters and then quickly wind itself down. Scott Hickey is looking to see if he is any more current numbers.

I don't. But it bounces between [$200,000 and $400,000].

And just on that business, I guess there's been some concern in the industry that risk weightings are going up potentially for those assets.

Not for us, because they are commercial loans here.

And we've always risk weighted them at 100%

There are apparently some other financial institutions that don't risk weight them that way.

But we have always risk weighted them as commercial loans at 100%.

And my final question would just be, your footprint might be a little unusual, I guess in terms of the spring selling season and higher purchase mortgage applications. Do you see that there, or is that more of a third quarter event, just given that the weather in the footprint?

Actually, it's not spring here. It's going to snow here tomorrow. (laughter) I'm sorry. So, what was the --

We would say that it appears to us that refinances are about 80% of production and purchase activity might be closer to 20%, which, based on some anecdotal readings of other peers, volumes would suggest that we've had a little higher purchase activity than others. But we are not sure what exactly to attribute that to, other than it certainly appears that the housing market here has continued to strengthen over the last year or so.

But not to the magnitude of other places just because it never fell as far either.

Got you. Thanks for the color.

Sure.

(Operator Instructions)

The next question may have comes from Peyton Green of Sterne, Agee.

Yes, I just want to make sure I heard that correct. 80% of your volume was refi versus 20% purchase?

Correct.

Okay. And then I may be thinking about the year in terms of what you need to fix. The last two or three years have been busy in terms of repositioning and getting things cleaned up, but what do you feel is the low hanging fruit that could help results going forward, Phil?

Peyton, it's a great question. It's one we talk about a lot, and I know we've talked about with many of the analysts on the call. We have a lot of process reengineering to do it the bank, which gives us a lot of opportunity to make this place better. Now, it requires investment, and so we are investing, for example, right now into a major project to modernize our commercial loan fulfillment system, the back end of making commercial loans from underwriting through booking. We have a very manual process today.

There is other things like that in addition to the investment that we are making in making the branches meet our brand standards all of which, as time go on, are going to make us more efficient, improve the efficiency ratio, which is not what it should be, and give us upside. Sometimes we look around our Company and we feel like -- gee, we have so much work to do to make this place more efficient. But when you flip that over, the fact is it gives us upside potential to become much more efficient. It's a lot of work but we are taking the highest value projects one at a time and making things better. We've already, as you said, done a lot of that, but we have a lot more we can do. A lot of it in the back shop of how we do things here.

Would you characterize this as spending $1 and getting a $1.50 return, or is it $2 return for every $1 spent? How are you thinking about it from an income statement perspective?

Depends on the project, but we are looking for positive accretive to shareholder investments.

Okay. Is there -- do you feel like M&A is needed to accomplish some of that, or is this really -- you can do it internally and manage the capital through the buyback and come up with a good answer?

With the dividend that we are paying and with the buybacks that we have done and that we will likely continue to do, as Chris was talking about earlier, we will probably return, give or take, 100% of our earnings this year through buybacks and dividend. But absent really significant long growth, we are still going to end up at the end of the year with a lot of capital.

Yes, we need to figure out an appropriate way to deploy that capital. We are getting good organic growth. We've got good organic growth here for the last couple years. Earnings are improving, and the projects that we'll do will make our bank more efficient. But over the long haul, it's highly likely that we will need to look for accretive acquisition opportunities, as we've talked many times, in order to fully deploy that capital and get an appropriate return on it.

Okay, great. Thank you very much.

It looks like we have a question from Tom Alonso from Macquarie.

Just want to make sure I heard a number correctly. Earlier when you are talking about the 15-year fixed, 5-1 hybrid ARM split, did you say that you guys were full-up on the 15-year fixed and that you weren't going to be adding any more of that to the book?

That's -- yes, we are at $1.3 billion, and that's where we intend on staying.

Okay. And so that stuff, if you do get somebody who comes in, that goes to -- that gets sold or you try to -- how does that work? You push them into a 30-year and then sell it?

We sell it onto the agencies -- (multiple speakers). So last year, one could argue that we sold less than our total production because we retained some to fill up our own pipelines --

As well as the year before that.

And as you go forward, there will be more likely sales rather than retention.

We have been generally sitting on somewhere between $1 billion, $1.3 billion of 15-year mortgages now for the better part of two years. But we're not willing really to go beyond that unless the balance sheet grows significantly because of the embedded interest rate risk that's there.

Okay. So then the corollary to that is that there's -- maybe there's a little bit more room on the gain on sale in the mortgage banking side since some of that production now goes that way.

Yes. And then of course, we will continue to take the five-year hybrid ARMs as they get generated.

Okay, that's fair enough. And then just following up on Peyton's question on M&A and your prior comments on, there's a lot of process reengineering. Did you feel that you need to, for lack of a better term, get your house in order before you are ready to do something on the M&A side? Or is that something that you think you'd be able to do in conjunction?

We could do it in conjunction.

Okay. Fair enough. Thanks for the answers, guys.

Thank you.

It appears that we have no further questions at this time. We will go ahead and concludes today's question and answer session. At this time, I'd like to hand the conference back over to Mr. Phil Flynn. Sir?

Thanks, everybody, for the great questions and for joining us. I want to just close by pointing out a couple of recent accomplishments that we are proud of. First of all, some of you may have noticed this, we were one of only five servicers in the country recognized by Fannie Mae with a four-star rating in their 2012 Servicer Total Achievement rewards rankings. No servicer, to our knowledge, has ever received a five. This program measures servicers relative to their peers across key operational and performance areas and recognizes high achievement.

The second thing that recently happened, and it was a little bit of a surprise to us, is we were named to Forbes Magazine's 2013 list of America's 100 Most Trustworthy Companies. And that designation came as a result of our accounting transparency, quality governance, and the open and honest way that we manage our operations. We were the largest bank to appear on that list. So, it's always nice to be recognized in positive ways such as this.

So, just to wrap up, this quarter's strong performance was highlighted by the mortgage banking results that we've talked about and lower expenses. We are committed to our long-term strategies, which are based on building deeper relationships with our consumer and business customers through sound value-added solutions. We look forward to talking with you again next quarter. If you have any questions in the meantime, give us a call. Thanks again for your interest in Associated.

And we thank you, sir, and to the rest of Management, for your time. Ladies and gentlemen, this concludes the Associated Banc-Corp's first quarter 2013 conference call. At this time, you may disconnect your lines. Thank you, and take care, everyone.