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Associated Banc-Corp (ASBC)

Q4 2008 Earnings Call

January 22, 2009 4:00 pm ET


Paul Beideman - Chairman and CEO

Joe Selner - CFO


Scott Siefers - Sandler O'Neill

Terry McEvoy - Oppenheimer

Ben Crabtree - Stifel Nicolaus

Kenneth James - Robert W. Baird

Casey Ambrich - Millennium



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.

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