Associated Banc-Corp. (ASBC
Q3 2011 Investor Presentation Call
November 16, 2011 09:50 a.m. ET
Executives
Philip B. Flynn – President & CEO
Joseph B. Selner – CFO
Christopher Del Moral-Niles – Deputy CFO
Erika Penala – Bank of America Merrill Lynch
Erika Penala
It is my pleasure to introduce up next, Associated Banc-Corp, headquarter in Green Bay with $22 billion in asset and probably the best football team in the league. Associated continues to make steady progress to improve EPS power having recently repaid TARP without any additional dilution to shareholders and demonstrating consecutive quarters as (C&I) driven loan growth.
Today, we have President and Chief Executive Officer, Phil Flynn, also CFO, Joe Selner and Deputy CFO, Chris Niles. And with that, I will turn the mike over to the company.
Philip Flynn
Thanks, Erika. There is more to Green Bay than the Packers. There is Associated Banc, so I am here to tell you little bit about us. I know many of you know about the company, so I will just do a brief introduction and talk a little bit about where we are? Some of the progress we have made of late. I will go into little bit more detail on business lines, hit some of the numbers from the third quarter and then talk a little bit about why we think Associated is something that you all consider as you think about investing in a financial space to the extent anyone thinks to stop that any more.
So, first of all, we are a Upper Midwestern bank. We have as Erika said about $22 billion in assets, about 270 banking offices were amongst the top 50 US banks. We are the largest bank headquartered in the State of Wisconsin now after the BMO, M&I transcation closed and we have been up in Wisconsin for a very long time. We just celebrated the 150th anniversary of the company just this past month or so.
We have extremely strong capital ratios dating back to a large secondary offering that we did in January of 2010. We have done that of course at a time of great stress so that we were extremely well capitalized and able to clean up our loan book as it turned out. We really didn’t use much of that capital as we did clean up the loan book in 2010. So, we find ourselves well positioned from the capital point of view.
When I first got to the company two years ago, we spent quite a bit of time thinking about what’s the vision for Associated Banc that’s translated all the way now to thinking about what our brand image should be.
But, our goal is to be the most admired Midwestern financial services company and there is different components of this vision statement that are important for us that talks about our (inaudible), serving them properly and then ultimately giving exceptional value to our shareholders.
So, this is a synopsis of what’s gone on over this last couple of years. So, I joined the company in December 2009, in fact, almost exactly two years ago. At that time, the company was under great stress, we had amongst the very worst portfolios in the country for regional bank. And so, we aggressively moved to fix those problems. So, we raised significant amount of equity, as I said in January of ‘10. In the fourth quarter of ‘09 in the best December after I got there, we took a huge charge mark-to-book quite dramatically and then throughout the course of 2010 particularly in the first two quarters sold almost $600 million of non-performing assets.
While the company was somewhat late into recognizing problems in the cycle, we did aggressively move against our problems, we turned the company to profitability down halfway through 2010 and we’ve had growing profitability since then.
We repaid our TARP monies in two chunks in April and September of this year. We were very patient and deliberate about that given the capital ratio as we had the last thing we wanted to do was repay TARP with another common stock issuance. And so, we allowed this company’s performance to improve, we’ve had very good constructive dialogue with both the OCC and Fed along the way and we are happy to be able to ultimately repay TARP with about $430 million of senior notes, $65 million of preferred stock and the rest cash on hand.
So, we got that accomplished in September, at the same time, the OCC, MOU was terminated that had been given to the company in November of 2009, it was mostly credit related issue. So, both getting the OCC’s permission to repay TARP as well as having MOU signed from the regulators point of view, we’ve got those kinds of problems behind us.
Since that time, we’ve been executing against the plan to grow our loan book and you’ve seen us now with very healthy growth throughout the course of this year and we continue to have that growth.
The Upper Midwest believe it or not is actually a pretty decent place to be in the banking place, I moved to Los Angeles, I had absolutely no idea that Wisconsin was going to be a good economy to be a banker in, but in fact, unemployment is lower there, manufacturing activity is strong and has been strong, various indexes that you look at would support that so, our customers are doing pretty well up there and particularly with the M&I BMO transaction, we are quite well positioned to take advantage of what is a reasonably good economy.
We have added a lot of bankers over this last couple of years both in Chicago and Milwaukee and elsewhere and we’re getting nice productivity in this now from the people that we have hired. I’ll talk a little bit more about each of the business lines, but we are working on our footprint in the retail bank and also on differentiating the features in the retail business.
We talked about the M&I disruption. Credit quality continues to improve, non-performing assets now are lower than any time since 2008, our loan loss reserve now covers now of course, a 100% and we continue now to have improving credit leverage. We are still sitting with the 3% loan loss reserve. So, we have been releasing that reserve and in fact as we’ve said before it’s not unlikely that we will go negative on footage and incur shortly.
We have lost our investment grade ratings along the way those came back to assist past year and again our capital ratios are well in excess of any measures including Basel III as well as liquidity.
I talked a little bit about the markets we are in, here is just a snapshot Wisconsin and Minnesota together population wise, gross state product wise are about the size of Illinois. Fortunately, those two states were the most active, are giving so much better than Illinois, but even Illinois continues to show some improvement.
So, as I said not a bad place to do business, we’ve had continued job growth in much of our footprint, you can see the 67 of the 72 counties in Wisconsin continue to show improvement in unemployment levels. The economy is driven by manufacturing, agriculture, the auto business; all these businesses are doing pretty well right now.
So, let’s talk a little bit about the specific business line. So, our commercial and business lending area, we’ve put a tremendous amount of effort into hiring new people, reorganizing those businesses and we are now reaping the benefits of that.
So, both our commercial real estate and commercial banking has their down in Chicago, which is the largest market we participated in. Chicago continues to be extraordinarily competitive, but it also continues to be extraordinarily fragmented. So, there is opportunity for us to continue to grow the C&I booking in Chicago and we are getting good success there.
Commercial banking business is all about consistent calling, consistent treatment of customers and having good people out in the market and we have all of those things going for us to the commercial banking business.
We grew commercial loans about $200 million net in the third quarter and we did it in the ways that we want to. So, is well diversified across the footprint, is well diversified across the different types of borrowers. We are growing a specialty finance unit, my personal background as the banker was in specialty finance at Union Bank, I rendered synergy business for many years before I did other things with Union Bank. I brought a few people with me from that bank and we have a small team of people for example in Houston doing research in crude oil and gas lending, and we have a small team of people doing tyre and utilities lending businesses that I am personally familiar with and that the guy who works for me at overseas came with me from the other bank I am familiar with.
This is a diversification play for us, Associated got into a lot of trouble during real estate lending all over the country, you are not just really know it going out and buying, participation in loan throughout the country. But, we are focused on certain niche businesses that we will grow in a deliberate manner in order to get more access to assets as well as diversification out of the Upper Midwest. So, I’m very comfortable with that, that whole strategy.
In the commercial real estate space, we are fortunate to be able to bring again Breck Hanson out of retirement. He had run the sales of commercial real estate business before the (BFA) purchased those sales. He has put together a very strong team to commercial real estate space, and again, this is a great time for us to be an active commercial real estate lender in the Upper Midwest, a lot of banks have run away from that business, it’s again a relationship driven business, valuations are down and the developers that are still standing have been through the fire and self selective themselves.
So, we are very comfortable with our activity in the commercial real estate space, this is an example. M&I was a huge player in the multi-family lending space, which is traditionally the least volatile commercial real estate class. The Canadians don’t really like that business, so they have run away from that so we are picking up some nice business now in the private lending area.
We have expanded geographically to Indianapolis and Cincinnati with loan production offices starting with commercial real estate teams that were hired, people that have worked in the past with Breck, we have added commercial bankers there as well. So, we are expanding in the seven States in the Upper Midwest, don’t expect us to do any retail transaction in those places in the foreseeable future and continue to grow the commercial businesses.
On the wealth side, Associated has a nice wealth business, I came to learn after I got there, but it was very Green Bay centric. So, we do an awful lot of asset management around Green Bay, we do good job in private banking around Green Bay, but we haven’t really taken those capabilities along with our trust capabilities on the road if you will. So, we’ve hired folks in Milwaukee, again got some people from M&I that we have hired in the wealth space.
So, we are growing nicely in the wealth business, but granted this offer to small base. So, as time goes on, we expect to continue to do a nice job in growing our fees, our loans and our deposit from the private banking customers. But, it will take a while for that to become more meaningful for us.
On the retail side, we have the largest retail network in Wisconsin, we have about 25 branches up in the twin cities and we have about 50 branches in Chicago and south of there. But most of the concentration of retail branches is in the State of Wisconsin. Prior to be M&I Harris merger, we had the largest group of branches now they have it, but I think they’ll be doing some consolidation.
We announced about a year ago, a significant investment into the footprint in our retail business. So, lot of our branches overtime has been under invested in and really we’re looking pretty sorry from a volunteer point of view. So, we’ve done quite a bit of remodeling over this past season, coming from LA, I didn’t know there were such things of season for this, but there is. So, the season is just about done for doing work on branches in Wisconsin. But, we’ve done about a year’s worth of work, we’ve refined almost all of the branches, we actually had two different logos out there, so we’ve got consistent signage at this point across the branch footprint.
But, one think you ought to know is that in this new environment that we ran now extended low interest rates, we have taken a real hard look again that we’re making investment in the branches. So, this will not be in across the board, investment in the branch space, we can’t do that with an extended outlook for a low interest rate. Obviously branches are not as valuable at this moment as they were a year ago.
So, the trick for us right now is, how much do we invest, what’s our near term and our longer outlook for investing in that retail space. I still think there’s a lot of value of course in having a core retail driven deposit franchise, but we’ve got to be very deliberate about how we’re investing and how we’re spending money in that. So, we’re doing that work as we speak.
We spent a lot of time growing and expanding and modernizing our mortgage business, we’re the largest mortgage originator in Wisconsin, which has been a really good place to originate mortgages, now involves the market.
Again, the bank I came from had a very unusual mortgage business and that is originated only just by jumble mortgages instead of Californian portfolio and all of them and they’ve of course done extraordinarily well throughout the cycle.
We brought the guy who built that business, who retired, has a consultant and we have opened up some new channels for Associated where instead of simply originating conforming mortgages and selling them on.
We are now portfolio in just over eight mortgages. So that business is growing nicely even as they enter into more affluent customers around places like Minneapolis, Chicago, Madison, Milwaukee and so we are growing our portfolio to mortgage business. We are also doing things in the back shop to consolidate operations. So, we consolidated all of our processing in the South Milwaukee and we are looking to doing that up in the North as well right now.
What is differentiating ourselves in the retail banking business, clearly there is an awful lot of pressure on fees with Durbin, with the regi changes that are already baked in. For us, we have been very deliberately trying to add higher value retail customers at the expense of lower value retail customers leaving and we’ve seen a lot of remixing there going on.
We built a new channel called Premiere Banking between our private banking offering and our mass consumers offering that’s very attractive. We hired Aaron Rogers as our spokesperson about eight months ago that’s obviously going rather well given the way he is planning.
So, we are getting a lot of lift from Aaron Rogers, Packer checking as the big deal, Wisconsin to imagine. So, we are pretty happy with differentiating efforts that we are making in our retail space.
So, let me turn to some of the numbers that we have just put up in the third quarter. You can see that we’re getting nice loan growth of about $400 million net growth in third quarter after about the same in the second quarter, so we are ticking along at almost the double digit loan growth.
In the fourth quarter that was nicely spread between couple hundred of commercial, a hundred of commercial real estate to hundred of consumer and we expect that growth playing to continue. Any more rapid growth than that would probably be somewhat concerned, but we think that in our footprint in the economies we’re operating in, this is a pretty sustainable rate of growth for us. So, we are very comfortable that we should be able to continue this.
Our goal as we think about our portfolio is to mix it into roughly a third, we don’t get overly concentrated in any particular asset class. So, ultimately we expect our C&I book to be about a third, our commercial real estate book to be about a third and our consumer asset book which is really residential mortgages and mostly firstly in home equity loans to be about a third. And, if you look at the mix at the end of the third quarter, we’re in the about the right space on the C&I side and we are underweighted in commercial real estate which is surprise after what we have been through and somewhat over-weighted on the consumer side.
But, as we sit right now, we will be growing and we just saw more growth in the C&I side in the third quarter and we should probably expect that kind of a past for a while as we get this thing into the balance that we want.
On the funding side, we’ve been very diligent and very disciplined about lowering our cost of funds and you can see the path that we’ve been on over the last several quarters. Our cost of interest bearing liabilities has come down. Our cost in the markets have come down and we are getting good growth on the customer deposit funding side.
So, we have a good solid funding base at Associated. The issue of course that we are struggling with and as everybody is, I can ask Joe or Chris to fund us out in the wholesale markets as next thing nothing today versus what we are doing out in the retail side.
So, we got to balance that. Short-term how much does it cost to fund a bank? Long-term where is the franchise value in the bank? And that’s what we are working on right now, but I can assure you that is that personally I think there is a lot of value in having core funded bank and we will continue to have that.
Credit qualities we’ve talked about just continues to improve. If we roll this back, the provision for loan losses in the fourth quarter of 2009 was about $400 million. So, we’ve marched this down pretty consistently ever since then.
In the credit world, it’s all about recognized your issues to take the pain. So that’s what happened in December 2009 and since then it’s been improving. I’m very comfortable that Associated Banc is very well positioned as a defensive stock today no matter what happens. We have 3% loan loss reserve. We have an enormous amount of capital, whatever happens Associated Banc can get through whatever is in front of it today.
These are our capital ratios, even post TARP, even post TARP without a common rate you can see we have tremendous amount of capital. The issue of course is how we are going to get a reasonable return on that capital.
Again, in this low interest rate environment we and others are struggling with that question. What I can assure you is we won’t be taking that capital and blowing it on something stupid. That’s not what we are going to do. It’s not burning a hole in our pocket. It’s not a bad thing to be well capitalized in these volatile uncertain times, but we are very cognizant of the fact that we got to earn a return on this equity it’s not something that we can do in the short run and you won’t expect this to be paying to much for an acquisition just because we have a lot of capital.
This is our profitability chart. You can see that starting in the third quarter we turned profitable and we are on a rising plains this point. We are quite comfortable that trend will continue as well. There is a lot of leverage taken here and we can all talk about the quality of earnings from a the point of view or reserve the leases but the fact is that we will help the bottom line as we go through the fourth quarter and on into next year.
This is just a slide on where we stand on TARP and regulatory matters as I mentioned. We are able to repay TARP with $495 million of capital markets activity, none of which was common stock related plus some cash on hand and we did get the MOU lifted at the same time.
Associated Banc had as I said allowed this retail branches to deteriorate. This is a picture what the branches will look like in the future. Again, we’re going to be very deliberate about how much money we spend on the branches and how many of these we actually do in this rate environment. But over time that’s what you can expect some of our branches to look like.
So, when you think about the outlook for the company, you should expect to see continued improvement in credit metrics. We’ve made great progress there, but we are still not as good as our peers. We are coming from 9% level as non-performing loans not too long ago. So we’ve been marching that down nicely, but we’re still somewhat elevated, but we are on a path to see continued improvement there.
We haven’t sold any or discussed loans now for quite a long time we don’t plan to, there are no reason for us to do that. So we are working through the book now in a very deliberate manner.
Loan trends as I said should continue to be positive. We like the economy we are in, we like the people that we have doing our loans. It’s competitive, but we’re still able to maintain discipline in our underwriting and get the loan growth we want. So, I’m pretty comfortable with the path we are on the loan side.
We continued to chip away at our cost of funds, but there is not a lot of leverage there and press anymore. We’ve driven down those costs to be far. Obviously, there is an awful lot of headwinds on the fee side. We went through this very bizarre set of circumstances over Interchange these over this past month where we like many banks were thinking about charging for in some away for debit card usage then the whole thing with BFA blew up. So, we thought, well, may be we’ll differentiate ourselves and not charging this to market in around that trade out there and Rogers say we’re not going to charge for debit card to get lift.
That’s gone now because everybody chewing the towel. So, we like everybody are seeing here with, in our case about the $4 million a quarter hole in our fees that we used to get from Interchange and trying to think about how to claw some of that back and the only way to do that is looking at other types of fees. So, what we charging for checking account every month, what are ways that people can opt out of that and all the other little fees that we might be able to think about getting a little more pricing on but there is an awful lot of headwinds there.
We are growing other fee businesses; the wealth business continues to grow, if it is not it’s going to sell these kind of whole set that we and everybody else is testing. And then, we would announce an awful lot plans and needed investment in our company and we continue to do that. So, we’ve hired the people that we need to hire that’s pretty much done. We have invested a significant amount of money and we’re building our treasury management capability so we can do a better job with our commercial depositors, that’s mostly done.
We are investing in some of our internal systems to be able to get proper capital allocation, proper profitability measurement throughout the place that’s underway, some of the other things that are on our list of things that we need to invest in. We are taking a hard look at whether or not this is the right time to make those investments. And, you can expect that and we probably not going to be able to do all the things that we’ve planned on doing, maybe a year ago, it’s the way it is in this environment.
So, when you think about Associated Banc, why this is something you ought to think about? Where interactive markets believe or not Upper Midwest is really a good place to be in the banking business, employment trends are good there and the industries that were heavy are doing well. We are getting organic growth you’ve seen that, we are getting benefits from the competitive disruption in the marketplace. M&I has still not been rebranded, that will get rebranded sometime next year. That will provide lift to us and as things inevitably change with the new ownership there, there is going to be some benefit from that, there is going to be fall out in their customer base and we should be the natural beneficiary of that.
We continue to rundown our securities book, which had grown very large during the crisis to fund our loan growth. So, you should expect to see a continued remixing of our balance sheet without a lot of balance sheet growth as we roll out of securities and roll in the loans, obviously that’s the good thing because we have customers there and we are able to cross sell to them. And again, the core funding base continues to improve in this environment.
We have a lot of capital, we have a lot of flexibility, we meet all the standards that the regulators want today. I don’t see a lot of opportunity in the near term or in type of M&A activity, the valuation perception between buyers and sellers is very great today. So, don’t expect, I think to see much of that will be very focused on our organic issues. We will be taking a look at our dividend policies very shortly, you’ve heard me say before that I am not a fan of share buybacks but a tangible book value is something you got to be thinking about so, we’re thinking about that as well.
And, importantly I am very proud to say that everything we said we would do two years ago, we’ve done. So, hopefully we have built a certain amount of credibility with our investor base and we try to be open, no nonsense. We’re not trying to be overly optimistic nor overly pessimistic; we’re just trying to be realistic about the outlook for us in the industry. So, and I hope we have certain value of credibility there.
And finally, we think we have very valuable franchise and we continue to invest in it. So, when I say that we’re taking a hard look at where we’re investing our money, we are taking a hard look at it. That doesn’t mean that we’re not investing in the company and we don’t think we have a great franchise that we can improve upon.
So with that, I know Erika has about a thousand questions and so do you. So we’d be happy to answer to those.
Question-and-Answer Session
Erika Penala – Bank of America Merrill Lynch
So, allow me to kick off with one of my – the first of my thousands.
Philip Flynn
Okay.
Erika Penala – Bank of America Merrill Lynch
As clearly you addressed with the excess capital doesn’t burn a hole in your pocket and you just mentioned that you don’t think there’s a lot of M&A opportunities near term.
Philip Flynn
Right?
Erika Penala – Bank of America Merrill Lynch
You have the luxury of not being part of the SECAR process. So, do you believe a bank outside of the SECAR process with your capital ratios will be able to, if you so chose outrun or outperform whatever cap for distribution will be placed for those banks, is the 50% to 60% and – but you have more capital even after you grow your balance sheet. Could you pay out more than 50% to 60% if that was a priority for you?
Philip Flynn
Yeah, I haven’t asked the regulators and they haven’t told me, but to be perfectly honest, no, I don’t think a bank our size is going to have a particular advantage that way. I mean, we’re regulated by the SEC, we are a national bank. We are part of the Chicago Fed process. I don’t think they’re going to allow us to buyback or dividend a lot of more than a $50 billion or $60 billion bank I really don’t.
Erika Penala – Bank of America Merrill Lynch
Questions from the audience?
Unidentified Analyst
Taking into account of the headwinds that you have been laying out on the revenue side a lot of on the fees, taking into account on of the headwinds on the revenue line, do you have any specific plan on the non-interest expense side? And in that sense, even if you have a plan, how do you see your normalized cost to income ratio to be in the next year?
Philip Flynn
Okay. So, if I got the question, since we have the headwinds on the revenue side particularly around the fees, what kind of opportunities there are on the expense side and I think where do we think the efficiency ratio would be? So, yeah. We have the headwinds on the fees clearly. And we expect through some of our other business lines, you know, better penetration of our commercial depositors on treasury management fees, our growing wealth business to get our fee lines at least back up to – close to where they were before the interchange fee changes, so there is some opportunities on the revenue side. On the expense side, when I got here two years ago, I quickly realized that the company had performed very well in the past on an efficiency basis, frankly because it is under-invested in the franchisee so we had branches going apart and to credit system etc. So we’ve needed and we’ll continue to be in the need to make some investment in the expense side. So we don’t have a lot of opportunity to slash the expenses, what we have an opportunity to do is not have expenses necessarily rise as quickly as we thought.
Our efficiency ratio is terrible. That’s 70%. A lot of that is more of a revenue issue than an expense issue, but we will have to be disciplined on the expense side and ultimately grow the revenues. The conundrum there is on the revenue side in this low rate environment we like everybody under lot of pressure, and in particular for Associated Banc this mean mix into the balance sheet that I talked added securities into loans. It is going just as we planned.
Our securities book has maturities every month that are about equal to where the loans are going at. The problem is we’re just trading yields there and we didn’t anticipate we will be trading 3% securities or LIBOR plus loans that are about 3%. So we are not getting any pick up there in this rate environment. So I don’t have a – I can do this, this and this and make it all better that’s just not reality right now.
Unidentified Analyst
Two follow ups to that question. You mentioned that there is going to be – bonds will continue doing investment in the brand, but if we take into account some savings, perhaps on the OREO side in 2012, could you keep expense growth under 5% or in the single-digit range for 2012?
Philip Flynn
Absolutely in this single-digit range. Hopefully, at those other levels, but we will give a lot more detail on that in January because will have some of the drivers about how we think the probable play out when we do the earnings call in January.
Unidentified Analyst
And you also mentioned pricing and you mentioned that you had hired the old head of the commercial real estate interest. Could you give us a sense of how – we all know about D&I pricing, if you could give us an update on how those spreads are looking versus what you look there for the last quarter and also the commercial real estate pricing dynamics in Chicago as you mentioned it’s still quite fragmented.
Philip Flynn
Yes, so on the C&I side, I mean I’m sure you’ve all heard that every bank in the world is chasing every decent commercial loan possibility like craziness driving down prices, there is some truth to that. So, in a place like Chicago pricing is extremely competitive and we are purposely walking away from situations. We had a situation just the other day before Chris and I got on the plane were a very well known, large company, private investor in Chicago, we had an opportunity to join their bank relationships. These are people that some of our bankers and bank in their previous lives that were thought to be away or whoever.
But LIBOR plus 65 with no risk, all collateralized with the promise of may be future business, no that doesn’t make sense. We can’t do that. So, we are walking away from some opportunities in places like Chicago. However in Wisconsin, some of the smaller places we do business price is still quite reasonable and we can still in fact get the floors on some smaller commercial loans. So, it’s mix continues, depending on which geography we’re talking about.
On the commercial real estate side, pricing is pretty attractive. On the capital markets they are not there like they used to be in the commercial real estate space, a lot of banks are not in the commercial real estate lending business anymore. Real estate tends to be a very relationship driven business. The fact that we have guys like Breck and some of the people he’s brought who have deep relationships is very important. So, we are pretty happy with the commercial real estate space we are getting.
Erika Penala – Bank of America Merrill Lynch
Question from the audience?
Unidentified Analyst
Sorry if this was mentioned earlier, but did you give any or do have any NIM guidance for your outlook on NIM up or down?
Philip Flynn
Yeah, last call we had that question and what we said, you know, we think, we can just spend our net interest margin about where it is, a lot of that’s because of the dynamics that are associated with. In fact that we have the securities books that remixing down been replaced by loan. I mean the other way to cynically look at is our NIM is so slow that it’s already been beaten down. So, I think it’s – I think, we are about where we are going to be on the net interest margin.
Erika Penala – Bank of America Merrill Lynch
Absolutely, pick up in rates obviously.
Philip Flynn
Yeah, I mean our assumption, our working assumption is that rates aren’t going anywhere through at least mid-13, because then pull this up, right. Obviously, given the remixing that we have into a lot of variable rate loans, if we did get some sort of – for whatever reason a spike in rates that will be a good thing, we will like that.
Erika Penala – Bank of America Merrill Lynch
Have you thought about the duration or the stickiness that some of the excess liquidity that you’ve gotten on the deposit side and how you are thinking about, you know, what core when looking out in your AMM process?
Philip Flynn
Sure. Why don’t we let Chris answer that one?
Christopher Del Moral-Niles
Sure.
Erika Penala – Bank of America Merrill Lynch
Okay.
Christopher Del Moral-Niles
So, we had the benefit of having simply a period of distress to back upon and notice that our core customers who did their core retail deposits and small business customer deposits over and are incredibly sticky. So despite the fact that have some challenges, we have some downgrades. That customer base stuck to us for the entire cycle and continue to be there. As you’ve come back on the backside and we’ve looked to optimize or funding over the last year, we moved some of what we thought would be the more volatile balance. Actually out of deposits that’s we saw in the fourth quarter of 2010 and into essentially some repo and some other dynamics, all customer-driven, none of it was Wall Street and we’ve evaluated that pool of more suspect of volatile funding slightly differently. So, what we found actually over the course of last year is that that core customer base really likes Associated. It’s very comfortable Associated and when a process starts migrating them into other deposit type categories. And so, we’ve actually found a very strong core franchise in our deposit and funding gathering abilities and it’s something we can continue to capitalize on it as we go forward.
We do see it as a sticky core base with opportunities for incremental growth which will obviously be impacted when the economy does come forward, but we think it will be longer live than average and we are very comfortable. Certainly what’s currently on the books of deposits and with a lot of work in customer rebound money. That’s all sure in short-term though and when we model it for allowing purposes, we modeled all the short terms and we are still very comfortable with overall position.
Erika Penala – Bank of America Merrill Lynch
Just to follow up Chris, there is clearly a lot of potential pressures down the asset side, could you remind us between now and let’s say year-end 2012. What potential liabilities savings you could extract in the right hand side of the ledger?
Christopher Del Moral-Niles
Sure. We have looked to manage the cost of overall deposit going downwards. We have a little over $5 billion at money market funding at roughly 30 basis points. There is a little bit of room in that portfolio in addition to room in our CD book. We would know we have a little over 2.5 billion CDs at a weighted average cost of that could be 1.5%. And, when we see that reprising generally, we are migrating those customers into considerately shorter lived and/or money market type products that are all typically below 1% in all-in cost. And so, in effect we’re seeing for those customers that they in 50 basis point more pickup as the fund in liability because they are simply not choosing to look at a five plus year CD as the real reinvestment rate.
So, on a CD side, we’ll continue to see some runoff for off anything you see remixing into a lower funding. There is a pickup there. We do have roughly $200 million of callable just for securities and it’s part of our overall capital planning, capital thinking there may be the opportunity to reduce some of that as we look into 2012 and that obviously would be an opportunity for considerable pickup.
Erika Penala – Bank of America Merrill Lynch
And what’s the effect of the net $200 million.
Philip Flynn
175, but that’s (7 and 58) and the other $30 odd million at roughly LIBOR plus 300.
Erika Penala – Bank of America Merrill Lynch
Any other questions in the room? Thank you so much better time today.
Philip Flynn
Thanks Erika, thanks everybody.
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