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Associated Banc-Corp (NASDAQ:ASBC)

Q4 2008 Earnings Call

January 22, 2009 4:00 pm ET

Executives

Paul Beideman - Chairman and CEO

Joe Selner - CFO

Analysts

Scott Siefers - Sandler O'Neill

Terry McEvoy - Oppenheimer

Ben Crabtree - Stifel Nicolaus

Kenneth James - Robert W. Baird

Casey Ambrich - Millennium

Operator

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to Associated Banc-Corp fourth quarter 2008 earnings conference call. During the presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference is being recorded today Thursday, January 22, 2009.

I would now like to turn the conference over to Paul Beideman, Chairman and CEO of Associated Banc-Corp. Please go ahead sir.

Paul Beideman

Thank you very much and thank you all for joining our call today. Joseph Selner and Lisa Binder here with me, and you can see from our news release we earned $0.11 in the fourth quarter with really a significant number of non-recurring items that are embedded in those results. The largest of those items is the $31 other-than-temporary marks on our security. And what I would like to do is talk briefly about that specific entry and then cover the core components of our earnings which really on several funds we feel pretty good about and then as usual I'll open the call up for your questions.

In the quarter, we took a $31 million write down on a mortgage-backed security whose market value declined significantly in the quarter. Throughout 2008, even as late as the end of November, the security was trading above $0.80 on the dollar. However, in December it was downgraded and its market value declined significantly to $0.50 on the dollar. At this point we continue to receive the cash flows from the security as agreed. Losses are low, below 1% but the deterioration in the market value really drives the assumptions that caused (inaudible) mark to be set.

As you know our practice is to buy agency-insured securities, and we have on our books $3.7 billion of mortgage-related securities. $3.6 billion of that $3.7 are agency agency-secured. And of the remains $100 million, $70 million are a result of acquisitions from first federal and even as far back as first financial. So they are well-seasoned. And as a result we believe that further exposure to this type of a market is very limited.

Moving then into the core components of our earnings announcement, first with the margin again as you can see net interest income for the quarter was $192 million which is up $25 million from the third quarter and the margin was $388 as compared to $348. In terms of the balance sheet impacts on the margin, we saw really good deposit growth across the board. DDA and interest and interest interest-bearing demand deposit shows solid growth with DDA up 10% and interest bearing DDA up 7% and as we know some of this is seasonal, but we continue to see good momentum in terms of consumer household growth and growth in small business relationships and over the long run that is going to continue, we believe to drive a sustained growth in these low cost deposit categories, which are so important.

Loans were essentially flat in the quarter with some small C&I growth offset by declines in real estate construction and spreads on loans continue to improve in this environment. A significant portion of the margin expansion that we saw in the fourth quarter was a result of interest rate volatility. LIBOR dislocation which was incredible during the quarter suddenly had the aggressive declines in interest rates that we saw in the quarter. And we've talked about this really over the last several quarters and I continue to believe that in a stable environment, our core margin is in the neighborhood now of perhaps 360, in that neighborhood. And I am also convinced that over the next couple of quarters what we're not going to see is a stable environment, and that's going to continue to be volatility there.

But loan pricing and loan yields, loan spreads are continuing to improve as we build pricing disciplinary equation but we're continuing to depression on the deposit side of the equation with competitive pricing and I think that those trends are going to continue, and I think interest rate volatility will continue to have an effect on the margin. But our stable margin is in the neighborhood of around 360 at this point we believe. In terms of our execution around key variables of margin, we're going to continue to focus on executing our strategies which we've talked to you about in the past and continue to focus on, which really are around growing low cost deposits on a sustainable basis with quality, consumer and C&I loans and very importantly sustainable focus on core fee income growth. And over the intermediate term, we believe that driving those dynamics and continuing to show growth there is going to position the company well for the future and help us maintain the sustained earnings that are necessary to deal with the challenges in the credit market.

After receipt of the capital infusion from the treasury, we also purchased $1.7 billion of agency-insured mortgage-backed securities. Obviously at a macro level this purchase certainly supports the mortgage markets by freeing up capacity as volumes now, since rates have come down, as volume of mortgage originations are increasing, but it also provides associated with an additional source of earnings for accretive time that can offset a portion of the dilution that is resulting from the capital infusion. So, the purpose there is to deploy a fairly small amount of capital and against this type of security, the risk-based capital is 20 basis points. So, it is not a significant deployment of capital, but it's an opportunity to generate safe sustainable earnings with very little liquidity and interest rate risk to generate that source of earnings to overcome the dilution and work to maintain a more stable level of obtained earnings.

If I could, just shifting at their quality, you recall that, that since we're though the end of second quarter, we have been projecting that losses and provision would be in a range around those second quarter levels and the more recently, as we have seen the deterioration beginning to occur in the economy more severely; that we've been concerned that we could see additional deterioration as a result of that economic weakness and the potential for some expansion outside of losses that have really been contained to retail to residential construction and to see that begin to spill over in other sectors.

The fourth quarter results, I think too align pretty much with what we have been talking about in terms of being within a range around the second quarter levels, but we're seeing some small additional deterioration and not seeing that wave effect that we had all experienced in the first part of 2008.

Our fourth quarter total provision is about 10% higher than the second quarter levels. And we have seen some additional weakness more broadly in our portfolios. Charge-off is slightly elevated, NPAs increased by about 11% and provision continues to be in excess of charge-offs reflecting those weaker economic conditions.

Having said that, we're not experiencing a significant deterioration seen more generally in the industry and we continue to believe that those charge-offs and provision levels will remain in a range at these kinds of levels for the first half of 2009.

At some point and it's really difficult to be precise as to when this can start to occur, we believe that the level of deteriorating commercial credits is going to subside and as a results of pressure on continuing to provide provision at levels significantly higher than charge-offs is going to begin to ease. So even if charge-offs remain at those elevated levels, the level of provision will begin to subside a little bit, and then that cost leverage can start to become a positive.

And that happens as we continue to realize the reserving needs against our deteriorating credits and we get ourselves more and more focused into our core Wisconsin portfolios and in the smaller credits. If we've done a good job of recognizing where we are in our construction real estate portfolios and in the larger credits, which I believe we're really getting at, eventually we're going to see this Wisconsin base of business become a benefit towards reaching a level of stability.

Switching to fees, fees are up. Core fees are up 6% over the fourth quarter of 2007, which to me is the best comparison year-over-year. And while trust fees are down significantly for obvious reasons in terms of market conditions, service charges and car based fees and commission are really all up reflecting household growth, increased commercial banking fees which has really been a powerful contributor for us and increased car usage. And those core fees are continuing to show good growth in a challenging environment with trust pulling that number down somewhat.

Mortgage banking income was down in absolute terms in the quarter, and also in comparison to year-over-year. And this is due exclusively to $7 million valuation charge to the mortgage servicing rights. It's important to note that in December with the interest rate movements that we've seen, mortgage origination volume for us is up 200% in December over November levels and obviously quarters end at an arbitrary time so we felt the full effect of the MSR valuation charge in the fourth quarter and very, very little benefit of that increased mortgage application volume.

So, while we're seeing significant amount of increase, we believe that we're going to see that volume close certainly in the first quarter of 2009. The MSR valuation certainly is a wild card and if interest rates continue to go down or if mortgage rates are driven down and prepayments fees increase, obviously there'd be some pressure on the MSR. But we're going to have the volume levels ramped up to a level where at least the natural hedge is going to be there. And eventually that positive volume will begin to pass through in the numbers and we're hopeful about mortgage business in 2009.

Expenses are up $12 million in the fourth quarter over the third quarter. And I would say that virtually all of that is as a result of items that I would categorize as non-recurring. We have a fraud matter of some size which is quite unique for us in that quarter, a large (inaudible) write-down which again is pretty unique, a whole series of non-recurring legal expenses obviously relating to the due diligence and exercise around an agreement with the treasury regarding the tarp funds and then some other expenses there, and elevated occupancy expenses largely associated with weather.

Going forward, we expect that our expenses going in to 2009 are going to settle back into more stable levels. As with everybody who has got deposits, we're going to see a $20 million increase in costs from the FDIC associated with deposit insurance, but we're also taking a series of initiatives especially focused at non-staff expenses to bring efficiency to the table. And we believe that next year our expenses overall are going to be up maybe slightly over 1%, so virtually flat. And that's the approach that we're taking there.

So those are my comments across the variables of our earnings and we'll be happy to answer any questions that you may have.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions). And our first question comes from Scott Siefers, Sandler O'Neill. Go ahead please.

Scott Siefers - Sandler O'Neill

Good afternoon guys.

Paul Beideman

Hi Scott.

Scott Siefers - Sandler O'Neill

I just had a few questions, might jump around a bit, probably you addressed the margin and kind of the volatility that was created by interest rate movements. I wonder if you guys would be comfortable giving the margin maybe by month given that's where sort of where it settled out towards the ends of the quarter?

Paul Beideman

I can tell you that it was a little lower in December than it was in November and if you think about it one month LIBOR in October was 4% and in December it was four tenths of 1%. So, that type of volatility drives it, but it was high really through all three months and it's still a challenge to predict how it's going to play out with this kind of volatility. But it was slightly higher in October than it was in December.

Scott Siefers - Sandler O'Neill

Okay. And then if I can jump over to credit for a second. I guess I would just like to get a little bit more of a sense for sort of the mix of any deterioration you've seen…

Paul Beideman

Sure.

Scott Siefers - Sandler O'Neill

Kind of construction versus other. Might you be able to sort of say how much in the fourth quarter of your charge-offs was construction related versus other.

Paul Beideman

Yes.

Scott Siefers - Sandler O'Neill

And how would that compare to maybe, say the third quarter?

Paul Beideman

Sure. I'll be happy to do that. The lion's share of the increasing non-performance loans and in the charge-offs both were in C&I and in fact $22 million of the $30 million of non-performers were one large C&I loan. Construction and I'm not going to call this a trend, but you've got to have one quarter before you can have a trend; constructions were down almost 10% and construction charge-offs were down as well.

So, I categorize our C&I losses as choppy. And its going to be very credit-by-credit related. In one quarter well, they'll be elevated in the next quarter it'll be lower. And we don't see like a sustained mass of deterioration there. So this quarter we had one large credit with a $5 million charge-off and a $20 million remaining component to non-performing. And that's been a major driver of the metrics. Our CRE portfolio, the non-construction CRE portfolio had a tick-up in non-performers but the charge-offs were down slightly. Mortgage charge-offs flat as a pan cake from equity charge-offs of a small amount. So really the delta is this one large C&I credit. C&I charge-offs in the third quarter were $8 million and the fourth quarter were $15.

Scott Siefers - Sandler O'Neill

Okay.

Paul Beideman

So that's more than all the difference. Construction was down, CRE was stable. We get asked a ton of questions, and legitimately so, about our consumer books, home equity and residential mortgages. And I continue to harp on the fact that these things are relatively well behaved because of the nature of the underwriting associated, when the mortgage charge-offs are flat to the third quarter and equity up slightly.

Scott Siefers - Sandler O'Neill

Okay, and then I guess the final question; I just wanted to make sure, I heard you clearly on the expense outlook. You talked about 2009 expenses up less than 1% versus 2008. Was that just the non staff? Did I hear you correctly?

Paul Beideman

What I tried to say, maybe I went too fast. But I'm going to say our expenses are going to be up 1 to1 and a half percent, total expenses that's about it, even with the $20 million of FDIC insurances. So we're taking initiatives to really control other aspects of it and not let that $20 million of FDIC expense come through.

Scott Siefers - Sandler O'Neill

Okay, great, thank you very much.

Paul Beideman

Sure.

Operator

Okay, thank you. And our next question comes from Terry McEvoy with Oppenheimer. Go ahead please.

Terry McEvoy - Oppenheimer

Thanks. Good afternoon.

Paul Beideman

Okay.

Terry McEvoy - Oppenheimer

I won't ask a tough question because it sounded like you dropped a baseball bat in the middle of your prepared remarks.

Paul Beideman

That happens occasionally.

Terry McEvoy - Oppenheimer

I'll keep it simple. You've had really good growth over the year in the home equity category. But there was an uptick in the charge-offs and home equity. Is any of that, some of the newer loans that have been put on the books over the past year or has it continued to be kind of legacy Twin Cities home equity that came from an acquisition?

Paul Beideman

None, none associated with the new stuff. Of all the credit metrics, if we break our home equity portfolio into timing of its origination and the characteristics of it, the cleanest, best stuff we have got is the new stuff. And it continues to be deterioration that we have seen from the same sources that we've seen throughout the year.

Terry McEvoy - Oppenheimer

Great. And you continued to have really good deposit growth in the fourth quarter. Without naming names, is it coming from the real small banks? The big banks? Is there a sense at all where those customers are coming from?

Paul Beideman

To tell you the truth, sitting here at this time in January I don't have information that would give me that. I have anecdotal information, but I believe it is the activities of our people, of our colleagues in the branches and commercial banking that are out there with a renewed focus and better product arsenal to work with and that's where the fee increases on the commercial side are coming from as well. So I think it is sustained. And it is taking business from others. But it's hard for me I can't sit here with precision and tell you from who.

Terry McEvoy - Oppenheimer

Okay. And then just one last question, could you update us on the board's thinking with regards to the dividend policy going forward?

Paul Beideman

Sure, well, the board will meet next week. But if you look at our retained earnings on a core basis, I would be very reluctant to recommend that we think about changing the dividend. And our plans for next year and our approach is to and you know if you look at the core of this thing from my perspective, it is earning $0.30 as a share area. And that covers the dividend. And that's our intention next year to cover it and to earn above it. And our plans are being laid out and our focus on execution is designed to approach it that way. So I feel you know pretty good about at this point recommending that there are really no changes that we're anticipating, at least here in the short run.

Terry McEvoy - Oppenheimer

Thank you.

Paul Beideman

We think about it each quarter and are very, very in a focused way. And you know if dynamics were to change, then that is different. But like I said, our goals and objectives for next year are to earn in those levels that exceed the dividend. And our objective is to keep it in place to fight to do that.

Terry McEvoy - Oppenheimer

Okay. Thank you.

Operator

And our next question comes from Ben Crabtree with Stifel Nicolaus. Go ahead please.

Ben Crabtree - Stifel Nicolaus

Thank you, good afternoon. Couple of questions, looking below the reported numbers in amount it goes to 90 days. Any comment on the shorter, the 30-89 days delinquencies and kind of ratings migration now so that you've shown some pretty nice trends in the early stage delinquencies in the last few quarters and kind of wondering what's going on there.

Paul Beideman

Well, I can tell you this that we're continuing to reserve above charge-offs, and that is a reflection of recognizing I think some deterioration in the core commercial credits. And seeing some migration there, basically the core driver of that provisioning above charge-offs. And that was to the comment that I was making earlier. Sooner or later we're going to catch up to that. And the banks have begun to start to get that provision number come in and align itself towards, getting the provision back towards the charge-off number is where some of your operating leverage is going to be created. 30-89 day delinquency between the third quarter and the fourth quarter is flat.

Ben Crabtree - Stifel Nicolaus

Okay.

Paul Beideman

Down the (inaudible) but I'll call it flat.

Ben Crabtree - Stifel Nicolaus

In relatively good performance? Then the issue I guess I have been waiting for, deposit competition to get rational for an awful lot of quarters here. It would seem like we'd be in the kind of an environment where people your competitors would be concerned about margins, or things like that. So I'm going to scratch my head. And you're not the first one I have heard it from. The question is where is the greatest pressure coming from on the deposit side? And are there any signs, say so far this year that it might be getting a little less irrational?

Paul Beideman

Yes, I think that rates are beginning to start to come down. And perhaps earnings pressures are going to get to more rational behavior around those sorts of things. But you're not going to get deposit prices down to where they rationally ought to be as compared to the fed funds. And the temptation is gee, if I go to fed funds (inaudible) gee I'll make some money here in the short run. You just can't do that. You can't do it. You have to focus on a sustainable basis growing core deposits, especially the low cost ones. And to not get sucked into this gee, I can turn it off and on like a switch. You've got to position the business to be sustainable going forward over an intermediate term as you start to think about how you're going to come out of this, and you can't compromise your strategy. Now you want to get the price down to the lowest level humanly possible you can. But you have got to grow. That then shifts the question to how are you going to manage risk on the loan side and on the asset sides of the equation, and how are you going to price extremely rigorously there with the discipline that allows you to get the right return.

Ben Crabtree - Stifel Nicolaus

And the market can hold on, go ahead.

Paul Beideman

And it is an upside down place from four or five years ago, two or three years ago, when credit is too available and too cheap and life is good. You’ve got to think about it the exact upside down way. If we’re going to risk the banks capital, you’re better to get paid for it and you better get off these and you better get the deposits or else we're not going to do it. And there is just no room for movement on any of that stuff. That is why I have a strategy to take away your focus on how to do it and spend all your time.

Ben Crabtree - Stifel Nicolaus

But if I could go back to what you were saying 18 months ago, you were on the credit spread side of it. You are now planning to getting paid for the credit risk?

Paul Beideman

I agree that is one factor in the market that has indeed changed. Now, I was on the phone with Senator Cole's office from Wisconsin a few weeks ago asking what are we doing with the tarp money and how are you deploying it? We talked about the $1.7 billion of mortgages. We also pointed out that from the middle of November to the middle of January; we’ve either originated or renewed $1.8 billion of loans. So we’re doing loan lending, we’re lending money, we’re working with our customers. It also gets in, you can see how much churn that is going on in the world if you’re doing $1.8 billion of loans and the volume is relatively flat. But that’s still lending money and as that stuff turns and as you get that churn and you’re focused with discipline, you have an opportunity on that side of the equation to allow yourself to grow deposits relationship comfortably even in this sort of exaggerated environment.

Ben Crabtree - Stifel Nicolaus

And then one last question, would you all comment on what kind of spread you get on your leveraging yield, you’re very quick leveraging up of the tarp money?

Paul Beideman

Joe you want to…

Joe Selner

I don't know that I can give you an exact number, Ben, but we were fortunate that we entered the mortgage-backed market when the rates were pretty nice. And we were able to fund it when the funding curve was going the other way, match funded. So we’ve actually got a nice spread. I don't remember the exact numbers and so I'm reluctant to say them. But to say that it was a timing issue and it worked out real well, then it is better than it, we have ever get an investments is accurate. But I don't know the exact number. I know I have it in my desk somewhere, but I don’t have it here but we got a nice spread.

Ben Crabtree - Stifel Nicolaus

And was that put on? I mean I'm trying to relate the timing of that to the fact it had to accrue the preferred dividend I guess for half the quarter. Were the assets on the books pretty much contemporaneously?

Paul Beideman

Yes.

Joe Selner

Yes.

Ben Crabtree - Stifel Nicolaus

Okay. All right. Great, thank you.

Operator

Okay, thank you. And our next question comes from Jeff [Honer] with Kirkland Analysis. Go ahead please.

Unidentified Analyst

Yes, thanks for holding the call. It is a pretty interesting discussion. I have a question about the senior preferred stock investment by the government. I was wondering, it is more philosophical at this point, the government seems to be using their investment in Citibank to force them to make some decisions that they probably wouldn't have made before. What is the ability to disclose that investment if you chose to do so?

Paul Beideman

The rules under the investment today are within the first three years; if you want to replace the capital you have to raise like capital, basically tier one capital. After three years you can pay it back. So, the government put in a structure that said if you do it before the end of 2009, you can also eliminate 50% of the warrants. So there are some opportunities to do it depending on what the markets give us and we obviously will pay attention to all of that.

Unidentified Analyst

All right, thanks.

Operator

Thank you. (Operator Instructions) Kenneth James with Robert W. Baird. Go ahead please.

Kenneth James - Robert W. Baird

Hi, good afternoon.

Paul Beideman

Hi Kenneth.

Kenneth James - Robert W. Baird

Had a question about your mortgage-backed security, was that like a private label product or that is not some kind of structured credit product, is it?

Paul Beideman

It is a private label.

Kenneth James - Robert W. Baird

And then on the credit trends, the last couple of quarters the consumer stuff has held in well, this quarter you are at destruction charge off like you mentioned they are down, but the charge does keep going up to the commercial, can you kind of give me some more color on why you're comfortable and don't think that is maybe the front edge of a, when I almost called it a wave but deterioration in the asset class?

Paul Beideman

Based on our analysis of the portfolios and what we're seeing and the fact that it was one loan. There could always be one loan the next quarter and one loan the next quarter or there could be two or three. But look there is going to be deterioration. I am not going to sit here and say that the economic conditions aren’t weakening. But when we sit and look at it, Kenneth, I guess that is why I'm saying we're going to be in this range that we are right now. That we're not certainly going to see things subside over the next quarter or two.

But we don't see it expanding past what we're seeing now. So that net-net, as we go to each quarter, the deteriorating loans are going to -- we're projecting, as I stay at a pace similar to what we've been seeing and not be another wave effect. And that’s based on our best estimate of how we're analyzing these loans and looking at them in really great detail all the time. We are also going to be governed by the economy and the economies in the markets in which we service or serve and so on a relative basis, we're in areas where maybe they are a little more stable than many other parts of the country. But if we see extended deeper recessionary kinds of factors, then those numbers would reflect that weakness.

Kenneth James - Robert W. Baird

Okay. And just maybe another question on that, if I'm looking at the fourth quarter and I see construction charge-off being down in the fourth quarter, my first assumption would be that that’s going to be an anomaly. Would you agree or disagree with that?

Paul Beideman

I basically believe that we saw an incredible ramp-off in residential construction, nonperforming loans and charge-offs here in 2008. And much of that was from a small segment of our portfolio that had a little bit that was out of market and had some characteristics that drove it as real estate started to weaken early. We're through a lot of that, and I think we're going to continue to experience weakness in that sector. But I don't think we're going to see the sustained levels of deterioration that we saw earlier because much of that deterioration was unique to the rest of the portfolio.

And we're coming more and more back to smaller, Wisconsin, Illinois, Minnesota-based customer relationships. And I think it's going to be more diverse, smaller credits and less, raw exposure to the weakness because of the nature of those companies and those businesses and where they are in our underwriting. And the deterioration of the collateral itself is very different than what we saw from those early on experiences. So we're going to continue to see weakness and we're going to have deterioration for sure. But we're not going to see it at the sustained significant levels that we saw six months ago.

Kenneth James - Robert W. Baird

Okay, fair enough. And on the tax rate I think high 20s, is what you guys have talked about before. Is that a safe assumption for next year’s effective tax rate?

Paul Beideman

Low 30s, high…

Kenneth James - Robert W. Baird

Okay.

Paul Beideman

And again Ken the issue around the tax rate is obviously at the margin; its 35% for federal and 7% for state. So, if we start getting ramping earnings up, it moves that number pretty high. But I think if you were in the 30 range for next year that would be a fair thing to think about.

Kenneth James - Robert W. Baird

Okay. Thank you.

Operator

Okay. Thank you. And our next question comes from Casey Ambrich with Millennium. Go ahead please.

Casey Ambrich - Millennium

Hi. Thanks very much for taking the questions, appreciate it. Could you guys say what your problem loans are? You guys always do the good job of disclosing that.

Paul Beideman

Say with…

Casey Ambrich - Millennium

With last quarter I think you had problem loans of around $700 million.

Paul Beideman

The potential problems loans?

Casey Ambrich - Millennium

Yeah. Potential problem.

Paul Beideman

Yeah. We don't have that number gathered at this point. We'll get it as we get into the queue.

Casey Ambrich - Millennium

Okay. So you put that in the queue?

Paul Beideman

Yes. Well, we don’t get it at this point.

Casey Ambrich - Millennium

Okay. And then the MPA, do you think it's up? Its probably up right?

Paul Beideman

Yes.

Casey Ambrich - Millennium

Okay. And then the MPAs look like they're going to be $390 million up from $350. I'm just looking at the spread sheet from the press release. I have a bad printout, so I'm just trying to double check the numbers while I have you guys on the call.

Paul Beideman

Yes. Let me just validate that.

Casey Ambrich - Millennium

389 versus 351 last quarter.

Paul Beideman

Yes you're correct, that includes other real estate.

Casey Ambrich - Millennium

Okay. And then the past dues right now, what are they?

Paul Beideman

Well, 90 days or more past due are on that sheet. And the net 30 to 90 day past due number is flat to last quarter, which I think, if I remember correctly, it’s around $190 million.

Casey Ambrich - Millennium

Okay. So last quarter you guys, have you added up your prime loans, your NPAs and your past dues as around 1.2 billion or 7% of your loans. And -- so should we go to like 9% or 10%? Or are you just don't have it yet.

Paul Beideman

I would be speculating. We just don't have it.

Casey Ambrich - Millennium

Okay.

Paul Beideman

So it will be available --

Casey Ambrich - Millennium

Okay. And then you mentioned this one credit that you hooked, C&I. Was this 20% of your C&I book, is that a footprint right?

Paul Beideman

No, I don't think that is right.

Casey Ambrich - Millennium

How much of your loan book is that a footprint?

Paul Beideman

Total loan look is at 2 or 3%.

Casey Ambrich - Millennium

Yeah.

Paul Beideman

The total loan book.

Casey Ambrich - Millennium

But we don't have any portfolios that would approach any numbers near that. I would have to go back and check that, case. But it is not that high.

Paul Beideman

I’ll tell you what, why don’t you give us a call, we can sit and look at the last analyst day and we can walk you through that. In some of the businesses you'll see some loans that are at a foot print. But they're for example if we're working with a drug store chain that is based in Minneapolis that has stores in 30 states -- drug store chain, a drug store in you know pick-a-state.

Casey Ambrich - Millennium

Okay, I got you….

Paul Beideman

And the customer is here and it is just a physical presence in another location. That is very different than saying gee you got out of market exposure to just the other thing.

Casey Ambrich - Millennium

Okay. And then just one last question on the capital, a lot of people have asked you about that. So right now you're paying out I think $0.32. And I guess, can you just kind of go through that again, how you think about it? Because from our seat right now, it looks like your (condo) common equity went down to around 580, its down about 10% link quarter to 5.86%.

Paul Beideman

No, it is at 6.05.

Casey Ambrich - Millennium

6.05 that went down from 650 right..

Paul Beideman

Starts with a six.

Casey Ambrich - Millennium

Okay it was from 650 down to 6 because I'm calculating a fair difference. So it went from...

Paul Beideman

It went down entirely because of the $1.7 billion. So the divisor changed that’s the only reason. We contributed basically to tangible common equity through the market valuations of our securities and our investments in average are above water and have actually increased in value. And to a couple of other areas, we got 1.9 billion of tangible common equity when we started the quarter; we got 1.9 billion of tangible common equity when we ended the quarter; it’s just that it is a bigger company.

Casey Ambrich - Millennium

Okay. I guess this is my question and I'll leave it at that; it just looks like your tangible equity regards to how you calculated; it’s definitely moving down. And at that...

Paul Beideman

A bigger company.

Casey Ambrich - Millennium

I know I guess my question is this.

Paul Beideman

I know it’s exactly the same; the dollar amount of tangible common equity is the same number from the end of the last quarter to the end of this quarter.

Casey Ambrich - Millennium

Okay. This is my question; I guess at best it looks like you guys can earn around $0.30. So at best you're earning 100% of payout ratio and it could be higher if you hook anymore credits. So you guys still comfortable with paying out that type of dividend?

Paul Beideman

Yes, if you look at our retained earnings, I mean everybody calculates core differently. But if I look at my retained earnings this quarter, it is above $0.30. You take out all the stuff that we’re talking about here that I know isn’t going to recur. Now it can always be a one-time thing. Next quarter it is a different one-time thing. But we're planning on earning in the -- you know in the 30.its not 30. And our retained earnings, our core earnings when you look at it reflect that.

Casey Ambrich - Millennium

Okay.

Paul Beideman

So that is how I'm looking at it. I can add it up for you, and everybody can disagree on what they think is core and what isn’t, but you know the mortgage business is $5 or $6 million, $7 million off its run rate. The mortgage applications the way they are.

Casey Ambrich - Millennium

Can we say that part back?

Paul Beideman

I look at the margin even down at a significantly lower percentage and it is going to be contributing at a greater dollar amount than it was last year. So I see retained and expenses relatively flat. If credit can be in the ranges that I'm talking about our retained earnings are going to be just fine.

Casey Ambrich - Millennium

Okay, and just let us know if you want to send Brett Favre back to Wisconsin.

Paul Beideman

You can keep him.

Casey Ambrich - Millennium

Okay bye.

Operator

Thank you. And ladies and gentlemen that does conclude our question and answer session for this conference. I would now like to turn the conference over the Paul Beideman.

Paul Beideman

No closing statements. Thank you all for your participation. I appreciate it.

Operator

And ladies and gentlemen this does conclude our Associated Banc-Corp fourth quarter 2008 earnings conference call. If you would like to listen to a replay of today’s conference please dial 800-406-7325 or 303-590-3030 with the passcode 3960724. Thank you for your participation. You may now disconnect.

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