Associated Banc-Corp (ASB) 2013 Q3 法說會逐字稿

Good afternoon, everyone, and welcome to Associated Banc-Corp's third-quarter 2013 earnings conference call. My name is Laura, and I will be your operator today

(Operator Instructions)

Copies of the slides that will be referenced during today's call are available on the Company's website at investor.associatedbank.com. As a reminder, this conference call is being recorded. During the course of the discussion today, Associated management may 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 Philip Flynn, President and CEO, for opening remarks. Please go ahead, sir.

Thank you, Laura, and welcome to our third-quarter earnings conference call. Joining me today are Chris Niles, our CFO, and Scott Hickey, our Chief Credit Officer.

Highlights for the third-quarter are outlined on slide 2. As expected, we saw a significant downturn in mortgage banking income. In addition, overall loan growth was flat, primarily as a result of the continued runoff and refinancing of our home equity portfolio. However, we largely made up for these shortfalls with stronger than expected credit outcomes, and discipline around expenses. As a result, we reported net income to common shareholders of $44 million or $0.27 per share. We continue to deliver strong EPS, and note that our year-to-date EPS is tracking up 11% over last year. Average deposits increased 3% from the second quarter to $17.6 billion, adding only -- adding over $0.5 billion to our deposit base.

Net interest income was up slightly from the second quarter, and net interest margin compressed 3 basis points to 313 basis points. Gross fee income of $71 million declined 16% from the second quarter driven by the decrease in mortgage banking income, although core non-interest income was up $3 million. Notably, non-interest expense of $164 million was down $6 million from the prior quarter. We repurchased another 1.8 million shares during the third-quarter. In addition, on October 4, we executed an accelerated share repurchase of an additional 1.8 million shares. Our Tier 1 common equity ratio remains very strong at 11.64%.

Now let me share some detail on the main drivers of third-quarter earnings. Loans are highlighted on slide 3. Despite 1% growth in commercial real estate, C&I, and mortgage lending, average loan balances were flat to the second quarter. Most of the C&I growth came in our oil and gas and power and utilities units. General commercial loan growth is being affected by lower demand, lower line utilization and increased competition. The mortgage warehouse portfolio also decreased, reflecting slower refinance activity at quarter-end. Multi-family and retail project construction loans account for most of the growth in Q3 CRE lending. We continue to see opportunities to grow our commercial real estate portfolio.

Average residential mortgages grew by 1% during the quarter. We currently hold about $1.4 billion of 15-year fixed rate mortgages on our balance sheet, as we have for some time, and we intend to generally remain at about that level going forward, reflecting our strategy to sell substantially all 15 and 30 year production. During the third-quarter, our mortgage banking units sold $514 million of loans, compared to $782 million in the prior quarter. Gain on sale on the loans delivered was 2.2% compared to 2.18% last quarter, or about the same. Consumer refinance activity has definitely slowed, with our pipelines running at less than half of Q2 levels. However, even with the increase in mortgage rates they remain relatively low, so we expect our home equity portfolios to experience more runoff, as consumers continue to deleverage and refinance into lower-priced first lien mortgages.

Average deposits of $17.6 billion were up 3%, compared to the second quarter. Average money market balances increased $625 million during the quarter, and were partially offset by a decline in time deposit balances of $134 million. Checking and savings average balances were essentially flat from the second quarter. We have seasonal inflows of commercial and trust balances in the first and third quarters related to trust and tax activities, so we expect to see only moderate deposit growth in the fourth quarter. And the increase in deposits this past quarter allowed us to repay about a $1 billion in Federal Home Loan Bank advances.

On slide 4, net interest margin. Despite soft loan growth, net interest income of $161 million increased slightly from the second quarter. As we projected, net interest margin for the third-quarter was 3.13%, down 3 basis points from the prior quarter. Loan pricing continues to be competitive, as banks in our footprint seek to gain market share. But even more than pricing, we are seeing commercial deal structures such as 10-year loans, or fixed rate financing, that we are frankly walking away from. We continue to manage down interest-bearing liability costs, which now stand at 38 basis points, down from 62 basis points in the third-quarter of 2012.

Our expectation is that earning asset yields will continue to compress a few basis points per quarter, while our ability to manage deposit and funding costs lower will become more challenging. There will be some continuing benefit from the repricing of the CD book through the rest of this year. Additionally, we have about $26 million of 9.25% sub debt outstanding that will be redeemed this month. In fact, we just redeemed it. Total non-interest income from the quarter was $71 million, down $13 million from the second quarter, and down $10 million or 12% from Q2 of 2012, driven by lower mortgage-related income, partially offset by higher core fees.

I am on slide 5 now. Core fee categories, which include service charges on deposits, card-based income and trust service fees were in fact up 5% in total from the second quarter. In addition, trust service fees are up 10% year-over-year, as assets under management have reached a record high of over $7 billion. Mortgage banking income on the other hand, declined 82% from the second quarter. Now half of that drop related to the one-time $8 million pick up in MSR valuation, which we called out in the second quarter. The other $8 million can be attributed to lower volumes, and a negative mark on our pipeline at quarter-end. Insurance revenue normalized this quarter.

Also, we sold some of our real estate, resulting in a $2 million increase in asset gains. We expect to see more real estate transactions, as part of our continuing process to evaluate consolidation opportunities, and rationalize our footprint. Capital market fees decreased by about $2 million, related to lower commercial lending volumes, and related lower customer demand for interest rate swaps and other hedges. Given the tough revenue environment, we took additional efforts to manage our expenses this past quarter. Total non-interest expense declined by $6 million or 3% from the second quarter. Quarter-over-quarter personnel expense decreased $2 million. FTE levels continue to decline, and are at the lowest level since mid-2010. Legal and professional fees were down $2 million from the prior quarter related to a decline in BSA consulting fees. BSA remediation expenses are largely behind us.

Losses other than loans declined $3 million from the second quarter, as we had a more favorable than expected resolution of a litigation matter. These savings were partially offset by a net $1 million increase in business development and advertising, mainly related to production costs of our new fall campaign which emphasizes the good fit we are for our customers, and how our mobility tools and proactive solutions fit into their lives. Our efficiency ratio remains a key focus, and management is committed to working diligently toward a number that is more in line with our peers.

Turning to slide 6, we have now improved our credit quality to a point where improvements in the future will likely be more modest. With just 4 basis points of commercial net charge-offs this quarter, it is hard to imagine it can get any better. Potential problem loans declined to $277 million from $310 million last quarter, and are down more than 30% from $404 million a year ago. The level of non-accrual loans to total loans continue to improve to 1.33%, from 1.38% at the end of the second quarter. This metric has improved for the 14th consecutive quarter. Total non-accrual loans of $208 million were down from $217 million at the second quarter, and $278 million a year ago. Net charge-offs were $5 million for the third-quarter. This was affected favorably by an $8 million loan recovery. The allowance for loan losses now equals 1.74% of loans, and covers 131% of period end non-accruals. Given our flat loan volumes, and the low level of net charge-offs for the quarter, our provision for loan loss was zero.

On slide 7, our capital ratios 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 Basel III expectations on a fully phased-in basis. Our priority for capital deployment continues to be on organic growth. We plan to maintain our dividend in line with earnings growth, and we will be disciplined in evaluating other opportunities to optimize our capital structure over the coming year.

There are a few items to note regarding the fourth quarter. We expect loan growth to continue to be challenging in this environment, and net growth to be around 1%. Also, we have recognized a $6 million tax benefit earlier this month, related to the settlement of a tax issue and the expiration of various statutes of limitations. As I mentioned in the highlights, we executed an accelerated share repurchase on October 4. And consequently, you can expect the Q4 share count to be about 163 million.

Turning to slide 8, last week we announced a couple of actions related to refining our operations that I would like to discuss a little further. In addition to the three rural branches that we sold during the third-quarter, we are consolidating an additional eight branches in Wisconsin and Illinois. We have an ongoing process where we evaluate the way we are serving our customers. Declining branch traffic, and rising online and mobile banking usage dictates that our delivery model evolve. We have made significant investments into our online, mobile and ATM channels, and our customers are making more and more frequent use of these services. In addition, we are consolidating several support functions from our Lacrosse service center -- I'm sorry, our Lacrosse service center which will be closed into Green Bay and Stevens Point. We continue to look at our back office functions for a way to re-engineer, and to become more efficient.

And with that, we will open it up to your questions.

(Operator Instructions)

And our first question is from Dave Rochester of Deutsche Bank.

Hi, good afternoon.

Good afternoon.

On expenses, you mentioned the personnel expenses down, and the FTE is down. I was wondering how many positions were reduced net? And was any of that decline related to terming of the mortgage bank?

Yes. So if you go back not too long ago, we had approximately 5,000 FTE in our Company. We are down from that peak by, say, about 400 people. Those are just permanent employees of Associated. In addition, particularly in our mortgage operation, we have had a number of contract workers and temporary workers. So, we have meaningfully, over this past couple, three months reduced the mortgage operation, as well as of course, other areas, as well. So, we continue on a path of looking to become more efficient, and certainly recognize and have reacted to the decline in mortgage volumes.

Is it fair to say that we would see some of that -- those actions that you took, spill into fourth quarter expense trends as well?

Yes.

Great. I was just wondering how much did the favorable resolution of the litigation reduce the losses other than loans lines? I know you said that the change in the line was $3 million. But was that the total impact or was it larger than that $3 million?

The litigation's significant impact was $1.1 million of that change, and there was some other unfunded commitment reserve changes, et cetera. But the largest single component was $1.1 million favorable resolution on litigation.

Great. Thanks. And you mentioned that most of the BSA costs are behind you. Is there going to be any benefit that we will see in 4Q, from those stepping down? And was just wondering if you can update us on whether you had that final BSA exam, and where you stand there?

Yes, the big step down in BSA costs has been seen from the second to the third-quarter. So we are not going to see a lot of change now, because we didn't have a lot of expenses in the third-quarter. And I am very reticent, in fact, I don't comment on what our regulators are doing at any point in time. But suffice it to say that we have spent significant time, energy, management attention and money to remediate and resolve our BSA ML problems, and we are -- we believe we are in very good shape now.

Great. Thanks. And one last one. I was just wondering if you could talk about how loan spreads are holding up, just given all your comments about a competitive landscape? It sounds like there is more stretching of terms out there.

Yes, loan yields overall declined by 5 basis points, second to third-quarter. Within specific areas, there continues to be some movement. If we do some adjusting for CRE yields, example, they were down about 4 basis points on that portfolio quarter-over-quarter, which is a significant move.

I mean, individual credits now are being competed for on the market at substantially lower spreads than they were a year ago. So CRE probably has declined 50 to 75 basis points. Commercial is probably down 25 basis points, and it wasn't all that exciting to start with. And even in some of our speciality areas, we are seeing some margin compression. But on top of that, frankly, we are seeing -- even smaller banks committing to fixed-rate10-year terms, which defy any kind of logic, frankly. So to be perfectly honest, we run the bank with a view towards the long-term. And when we extend credit, we extend credit in what we believe are prudent terms with a reasonable return.

All right. Great. Thanks for the color.

And our next question is from Ken Zerbe of Morgan Stanley.

Great. Hi, guys. What gives you the confidence that loan growth could actually be up 1 percent next quarter? Because it sounds like that everything we are talking about, with home equity portfolios running off, and walking away from CRE, it just doesn't sound like a great environment right now.

I don't want to give you the impression that we are walking away from CRE. In fact, our pipeline for commercial real estate has been building over this past three months or so. So the visibility we have into loan growth gives us reasonable comfort that we will have1% growth. And it wasn't too long along that we had much more substantial growth than that. I don't think it is a big stretch to think that we will get some growth.

Okay. And then I just, quick on the provision expense, it looks -- I presume that the zero provision relates to the $8 million recovery that you had? So going forward is it fair to assume that your expectation is somewhere something a little more higher than zero in terms of the provision line?

The provision has been very low all year. Even with 1% loan growth that is not going to attract a lot of reserves. We continue to have some recoveries in the offing, so we expect to have low loan loss provision again, certainly for this quarter. And when we get into January, we will provide our thoughts on what next year looks like.

Okay. And then just one last question. On terms of mortgage banking, I think you mentioned that you had a negative mark in the portfolio. How much was that? And if we do back that out, is the -- is that new core number, is that a sustainable number given the origination volume that you are seeing right now?

I think the amount of the mark net including MSR, FAS 133, and low common adjustments was several million dollars, to the tune of $4 million or $5 million. And on a net basis, and, yes, I would believe that is more consistent with what we expect to be the run rate going forward, which would be a mid-single-digit number.

Perfect. Thank you.

And the next question will come from Scott Siefers of Sandler O'Neill.

Good afternoon. So Phil, maybe just given what is going on in the revenue side, can you talk little bit about what additional opportunities you would have to take out some costs, in addition to the stuff that you articulated? In other words, if the revenue environment stays as challenging as it is, would you be open to doing something even more substantial?

Oh, of course. I mean, I think I have said a while ago that I am not a big believer in grandly named expense initiatives and announcing big bangs. We have been working hard all year to manage our expenses. We said that we would keep our expenses flat compared to last year. We have done that and a little more, so far. And that is in the teeth of a Company that has required significant investment into basic infrastructure of systems, physical facilities, et cetera. So we are constantly working in a number of areas to find efficiencies.

A lot of our efforts are now turning to our back shops. So you have seen the action that we just took in Lacrosse, and we continue to look for opportunities to get more efficient. The Company is not efficient. The Company underinvested in its past in technology solutions. And so we have been making a number of investments, often using technology in order to become more efficient. And as time goes on, the benefits of those will become more apparent. So expense management in this environment is a very, very high priority for us. So, yes, you can expect us to continue to work hard, and see some results on the expense side.

Okay. And then separately, I think I know the answer to this based upon what you said on the fourth quarter share count. But the accelerated program you did earlier this month, is that basically in lieu of what you would have done normally in the fourth quarter? And I think you had been targeting kind of 100% total earnings payout this year. So is that still what you are thinking, or is there a chance that you would go meaningfully over that 82.

For now as we said, we have pulled forward what we have, quote, normally done, to earlier in this quarter. And as the quarter goes on, we will evaluate our options, but I wouldn't assume that we're doing anything else right now.

Okay. And then finally, maybe Chris this is best for you, but you still have a lot of capital and things and excess liquidity as well. Would you, given the trends, the kind of slowing trends on the loan side, would you do anything in terms of maybe looking at beefing up the securities portfolio to just generate some additional NII? Is any stuff like that on the table?

Clearly, we are always looking at strategies to enhance the bottom line and add more value to shareholders. And, yes, we are having an active dialog as a management team, and with our Board on strategies to better leverage our capital or more efficiently deploy it, and maybe both.

Okay. All right, I think that is all I have. So thank you.

Sure.

The next question is from Chris McGratty of KBW.

Hi, good morning -- or good afternoon. So on the loan growth commentary, does your decision to do smaller deals, could you revisit that and maybe look to do more larger deals, or be more aggressive with the smaller deals since the organic growth is stalling a bit?

I'm sorry. Help me with what you mean by smaller deals or larger deals? You talked about --

Well, I think in the past you said you were looking at acquisitions, a $2 billion in assets, nothing transformational necessarily, in-market cost take-out plays. Does that strategy need to change at all if your organic slows?

Well, we haven't executed on any part of that strategy, yet. So give us a chance, and we will get into next year, and we will see what we look at.

Okay. And on the guidance, you gave some verbal comments about the fourth quarter. Should we expect once you do your budget that we will get the more detailed financial guidance in the slide deck, like you have presented in the past?

Oh, sure. Yes, in the January call we will provide an outlook of our drivers for what we think will happen in '14. That is our normal pattern.

All right. Thanks.

And our next question is from Matthew Clark of Credit Suisse.

Hi. On the mortgage front, can you just give us a sense for the magnitude of expenses, in terms of dollars that you pulled out of this quarter? And I guess, what is left to do, given again how much smaller that revenue contribution is?

Yes, so let me give you a little bit of information on the pipeline, first of all. So I don't want anyone to have the impression that the mortgage business has come to a complete standstill. It certainly hasn't. As of mid-month, we have a pipeline of almost $700 million in process. Now that is down in about four months by about half.

We have reduced as I said, expenses already, and we are looking at other things we can do. There is a certain amount of fixed cost in a mortgage operation, and there is quite a bit of variable costs. So our mortgage brokers, the originators, largely work on commissions. So that is a self-adjusting expense, if you will. If there is lower volume and lower closings, then there is lower commissions paid.

Certainly in the areas of underwriting and processing, we have reduced costs, and we will continue to look to do that to match it up to -- to where the volumes are. But as you get into servicing and default services, there isn't a lot of cost takeout there, because the volumes in that part of the shop don't really change.

So as far as absolute dollars, I don't have that handy in front of me, but we have certainly seen a noticeable drop, which will continue and probably grow, as we get into this quarter and next year. And at this point we have -- I am trying to recall. We have probably reduced personnel expense by more than 20% on a going-forward run rate, as I recall.

In that group.

Yes, in that group, yes.

Okay. Is it fair to assume that that run rate -- I guess on overall basis after you adjust for the legal -- a favorable legal settlement, I mean is it fair to assume that that run rate can remain fairly steady, if not begin to decline again before you remain in this -- in a tepid growth environment?

You talking about the run rate of -- ?

Just the overall non-interest expense run rate, yes.

Yes, I mean, there is always a lot of ins and outs in there. So we do have -- we have had in this past quarter and we will have this quarter, some elevated marketing costs as we roll out our branding campaign. But that will be offset by other stuff. So I don't know that this quarter multiplied by 4, is necessarily the run rate you want to assume going forward. We can give you more guidance on what we think next year. But certainly expenses are on a downward trend overall, and will continue that way.

All right. And on the loan front, you trimmed your guidance in your quarter, but things obviously changed since then. I guess, when you talk to weaker demand and utilization being down and increased competition, can you give us a sense for the order of magnitude, or the relative contribution of each of those things happening, that transpired?

Well, I mean, for example, overall line usage at the end of the second quarter, where commercial, for example, was about 48%. And that dropped by a full percentage point. Our specialized group went from about 56% utilization to about 52%. So utilization came down pretty much across the board. And we are passing, as I indicated, on more commercial and more commercial real estate transactions that just don't seem to make sense to us.

And, of course, mortgage volumes are some what down. So it is a mixture of utilization, competition. And, frankly, I think some of the effects of all of the uncertainty in the economy between the Affordable Care Act, government shutdown, fear about hitting the debt ceiling -- none of this stuff helps businesses be confident and want to make investments. (Multiple Speakers).

All right.

But we are locked into a market share game right now, where the economy isn't feeding any opportunities for us or anybody else. So, it is all a matter of taking business from somebody else today. And if people are willing to do that, on what I view as overly aggressive terms, where you are not getting paid for it, that doesn't make a lot of sense when you're running a bank over the long haul, and not for the short run.

Okay. And then just maybe on the M&A front, you mentioned here again, looking at opportunities to deploy capital. Can you just give us a sense for any -- any change in activity in terms of pitch books that you might be seeing, or any increased chatter or anything that you might be seeing?

Well, there is, I mean, clearly over this past six months there has been a pickup in activity and talk. You have seen a couple of transactions happen in the last couple of quarters, particularly at the very small end. But in even the medium size and a couple of transactions in the Midwest, so there is more activity. There is more stuff that we are seeing.

And if something makes sense for us as we move forward over the next few quarters, you can certainly expect us to be active. We are certainly well positioned to do that. The bank is in very strong shape from a balance sheet point of view. We have a lot of capital, and we have a management team that is fully capable of managing a larger operation. So if something makes sense to us, we are well-positioned to take advantage of it.

Okay. That is it for me. Thank you.

And our next question comes from Jon Arfstrom from RBC Capital Markets.

Jon Arfstrom. Thanks.

We knew who it was.

Yes, I figured you did. Just not to slice and dice one even more so, but the national business cautiousness, obviously not immune. But is there anything specific there, or does it really just go to your general comments.

When you say national business, you mean like oil and gas, and car and utilities?

Yes.

Yes, they actually -- you saw they had growth in the third-quarter. We certainly expect to see those businesses continue to grow. We are passing on a few more transactions than we probably would have six months ago. But we expect commercial real estate, oil and gas, power and utilities, our major specialty units to continue to grow as they have been. General commercial lending is -- is slowing. There is a lot of competition there, and not a lot of organic activity, if you will.

Would you characterize it as newer competition?

I don't -- it all becomes very anecdotal. I don't know if it is newer competition. I think more and more banks have put whatever problems they had behind them, and there is a fierce battle out there for market share and loan outstandings.

Okay. And then maybe a question for you or Chris just -- and I am not quite sure how to ask it. But when you go to these efficiency initiatives in a revenue environment like this, how do you draw the line, or how do you determine what makes sense, and what doesn't make sense when we maybe have temporary pressures versus more of a long-term view?

Well, that is the great question. And that is why we all get paid to make difficult decisions. So the -- what we have to work very hard at is to figure at how to become more efficient on how to do more with less. How to make intelligent investments, particularly into technology or facilities that will pay off in the long run for us, without cutting into our ability to be successful in the long run. So I don't want to keep repeating it. And I'm sure you are tired of hearing it on the phone right now everybody, but we think about this company in a long-term view.

So, for example, we are rolling out brand advertising this quarter and next, and this past quarter and this quarter. That is an expensive endeavor, but it is important for us for the long haul to do that. Likewise, we continue on a very selective basis, and in an increasingly efficient basis to upgrade our branches. We also continue to make investments in technology.

So it's a -- it is a difficult process to make sure that we are doing hard things, like choosing to close an entire service center in Lacrosse, and to be sure that the impact of that is being covered elsewhere, and that we don't diminish customer service or our ability to get back to people on a timely basis. And all of that is being done with a long-term view of the Company in mind.

All right. Thank you very much.

And our next question is from Terry McEvoy of Oppenheimer.

Hi, good afternoon.

Hi, Terry.

With 1% loan growth and additional pressure on asset yields, do you think you can grow net interest income again quarter-over-quarter in the fourth quarter?

Yes.

Okay. And Phil, you and your team, you worked really hard to strengthen the balance sheet. Now you are right-sizing the branch network, restructured the loan portfolio, you have been growing portfolio until recently. My question is, what is next in terms of strategy and finding growth opportunities? Is there a new area of lending that you have experience, that you would like to get into? Or are you just happy with the current platform and really being patient and waiting for this macro environment to turn in your favor?

We are not seriously looking at any meaningful new lending endeavor. I think we have a solid portfolio of businesses that we understand, that we can continue to invest in and grow. This is the first quarter that we have had flat loan growth in a very long time. So I am not inclined to dramatically shift what we do on the lending front.

We do need to grow the Company organically, but we also need to look for some opportunities to do other transactions. And I think as I have said, that those will become apparent as time goes on. The macro environment is such that, I believe there are going to be a lot of banks that are going to be looking to sell themselves in the future. It is a difficult environment. I find it difficult. I got to believe that people who don't have the balance sheet we do, find it even more difficult.

Right. And in the meantime--

In the meantime, we continue to manage capital very prudently. And we have effectively returned 100% of our earnings to our shareholders so far this year.

Thanks.

Yes.

And the next question is from [Lynn Herman] of Jefferies.

Hi, good evening, gentlemen. Just going back to loan growth next year. I know we are going to get your explicit expectations next quarter, but is there anything that would lead you to believe that loan growth was meaningfully different from what you expect to see from the fourth quarter in terms of a run rate?

I think it's a little early to say yet. I don't really want to try to provide guidance for next year's loan growth right now, until we have a little more visibility as we finish all of our budgeting, which we are still in the midst of. So, in the past we have had double-digit loan growth in '11 and '12. We are going to have mid-ish loan growth this year, mid single-digit loan growth this year. We will certainly be able to do that next year, but I can fine-tune that for you when we get to January.

Okay. Fair enough. Thanks for that. And then the one spec thin area that you don't break out for us in the deck is just healthcare lending. I was hoping you could give us an update on the progress of just kind of what that business has been?

Sure. Scott Hickey is here, and he's got a --

Yes, the healthcare book hasn't grown dramatically year-over-year. It is up roughly10%, 12%. So it has not been a meaningful growth over the last year.

As compared to some of our other higher growing specialities.

Correct.

Yes.

But it is also the newest too.

Correct.

And I guess, so I mean, when you think about the opportunities there, I mean, is that -- is that a book where you haven't necessarily ramped up fully on personnel? Or there are other just kind of opportunities in terms of properties you would be looking at? I guess, how should we think about opportunities in that business, given it is one of the smaller divisions there still?

Yes, this is Scott. So, we have got the personnel in place. We have moved a lot of our healthcare that was in the Company, to them. Now they are kind of in the position where they're beginning to go back and be aggressive from a marketing perspective. So, yes, we would expect more growth from that group prospectively.

Got you. Okay, thanks. And one quick last one, I guess this would be for Chris. Could you just quantify how much of the comp decline quarter over quarter, came from mortgage? I know we talked about a number of the components, between kind of commissions and paring back on some of the temporary staff. But I would be interested to know how much was specifically related to mortgage?

Yes, I don't have that specifically for you in detail. But I think it is important, as I commented on earlier, that some of those costs, and some of those declining costs also come in the form of contractors. And they are not necessarily only, therefore, in the comp line. So, I think there is some costs (inaudible) about. So, I think you are going to see overall cost decline, as Phil mentioned, between commissions, reductions, operational shifts.

I think we have said publicly, we expect at least a 30% decline plus in dollars of revenue, at least 30% variable, with each dollar of revenue decline. Although there is no offset directly for valuation marks. So, both the MSR write-up didn't have an offset and FAS 133 adjustments don't have offsets. So, on the pure business side, it is call it 70% fixed, 30% variable until we structure or rescale.

Got it. Perfect. Thanks for taking the questions.

And the next question is from Peyton Green of Sterne Agee.

Yes. I was just -- most of my questions have been asked and answered. But I was just wondering maybe, Phil, if you could talk a little bit about what is acceptable from a valuation perspective, in terms of what you might incur from a tangible book value dilution in M&A transactions?

Go ahead, Chris.

Yes, this is Chris. What we said publicly is we are focused on transactions where we are confident through cost takeouts, we can take -- we can see tangible value earned back within five years. It is probably not likely that there will be too many solid franchises that we will get, where we will see tangible value less than three years. But we are sort of focused on things where we think we can see value in less than five.

Okay. So then --

Obviously, being accretive as well.

And then maybe, Phil, I guess just this would be probably more anecdotal than anything else. In your dialog with customers, I mean, did you get any sense that their behavior has changed any in the last 30 days, since all I guess the headlines stuff out of Washington occurred? I guess it has been pushed 90 days forward. I mean, what is your sense of the degree of change? Is it slight? Is it something that is measurable, or still hard to tell?

Well, people weren't thrilled about the environment six months ago, coming up to all of this government by crisis. And I think the general sentiment of folks that I talked to, is just complete -- people are just incredulous about what they have just witnessed. And all we have done now is kick the can down the road, and appointed another group which we have had in the past, which wasn't any more successful than what we have just seen. So, I just don't think that business owners are getting much positive out of all of that stuff that is going on in DC. And it is not helping the economy, and it is not helping people to want to make investments.

Okay. I mean, I guess, is it more of a break, or is it more of just an impediment from keeping people to really do things that they would have done otherwise?

Like you said, it is all anecdotal, and now I'm just talking. But people need confidence in order to make business investments, and this environment is not one that breeds confidence. At least, that is what people tell me, and it is hard to argue with that.

Okay. And if that weren't there, I mean, generally, though, I mean, if you look from a credit perspective, the underlying credit line trends would suggest your customers are still in better shape. Is that still true?

Absolutely, yes. Corporate balance sheets are corporate, and middle market and small businesses, even, are much improved than where they were. Absolutely. There is a lot of liquidity out there.

Okay. Good enough. Thank you.

Sure.

Next we have a follow-up question from Scott Siefers from Sandler O'Neill.

Hi. I just wanted to go back to this notion of distribution optimization. And just given some of the things that you are looking at like strategic Fed return on capital. I wonder about some of these markets that you have. In other words, would you look at potentially getting out of some places where you are, like places like Central Illinois and St. Louis, which I imagine are profitable, but may not have the same bang for the buck like with marketing and stuff like that? Would you look at doing more, larger distribution refinements, in other words, getting out of markets versus sort of the individual branch things that you have done so far?

Yes, that's not really something that we are looking at. You know, we continue mostly to fine-tune the branch network, to make sure that we have opportunities in close by branches. Or in fact, in this last round there are some very small communities that we are consolidating branches out of.

But as far as entire geographies, no, we are not looking at that right now. We are constantly evaluating the return that we get from all of our businesses, including the various geographies we operate in. If something at some point didn't make sense to us, we wouldn't hesitate to take action.

Okay. All right. I appreciate the color.

Okay.

This concludes our question and answer session. I would like to turn the conference back over to Phil Flynn for any closing remarks.

Thanks, Laura, and thank everybody for joining us today. In closing I would like to let everyone know of an important promotion that we made during the third-quarter. As you may have noted, our controller, Brian McCabe resigned to become the CFO at a smaller midwestern bank. So Tammy Stadler has been appointed our new controller. Tammy has been with Associated since1996, when she joined us as our corporate tax director.

In conclusion, this quarter's performance was solid, despite the headwinds of large mortgage banking income declines and flat loan growth. We grew net interest income. We grew core fees and showed expense discipline. Even though the dynamics of the current banking environment are challenging, 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.

So we look forward to talking with you again next quarter. And if you have any questions in the meantime, please give us a call. Thanks again, for your interest in Associated.

Ladies and gentlemen, this concludes the Associated Banc-Corp third-quarter 2013 conference call. You may now disconnect your lines.