Good morning ladies and gentlemen and thank you for standing by. Welcome to the Associated Banc-Corp Second Quarter 2008 Earnings 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 Monday July 14, 2008. I would now like to turn the conference over to our host Paul Beidman, Chairman and CEO of Associated Banc-Corp. Please go ahead, sir.

Thank you very much and good morning everyone and thank you for joining our call today. As usual Joe and Lisa are here with us as well. We made the determination to announce our earnings today rather than wait until Thursday, due to the larger than anticipated provision that we are taking and the resulting impact on quarterly earnings in the second quarter. As you can see from the release we're reporting income of $47.5 million or $0.37 per share for the quarter and this is down from $66 million and $0.52 per share in the first quarter. And obviously the primary difference is the provision of $59 million versus $23 million in the first quarter, and of the $29 million, $37 million was charge-offs. Also, non-performing loans increased in the quarter by $81 million to $289 million. These are essentially the same credits that we've been talking about for the last several months, but primarily larger in nature construction loans that deal with housing and condo developments within our construction portfolio and C&I loans that are specifically linked to the housing industry. The increased losses in non-performers are a result of deteriorating collateral values below expected levels, and with no really clear time in terms of recovery, and we've seen that late in the quarter in terms of the appraisals that we've been receiving, and also around a series of specific projects where we've had a series of options with borrowers and investors that these options really did not come to fruition. In both NPAs and charge-offs, increases can be attributed to about a half a dozen or so credits deteriorating late in the quarter. That's why the levels are higher than our expectations. However, and it's very important that we send the message that we believe that conclusions…

Thank you, sir. (Operator Instructions) And our first question comes from Scott Siefers with Sandler O'Neill Asset Management. Go ahead please.

Good morning, guys.

Hi, Scott.

I guess Paul, maybe if you could just make some additional comments beyond what you touched on, just on credit crunch stabilizing over the second half of the year. I guess just looking at the various categories of non-performing, it looks like most of them deteriorated. So, I guess any additional color you can provide on why things should stabilize looking forward and then obviously the topic of the last few months is in capital industry wide. I guess if you could just touch on the way you are thinking about things from a capital perspective as well?

Sure, well, we've been saying for sometime over the last several months at our conferences and meetings with investors that we felt that our non-performing loans were going to certainly escalate in the first and the second quarter, but then begin to show stabilization around those levels. Now, granted the non-performing level that we saw in the second quarter here was slightly higher than we would have anticipated. But in going through the process of analyzing our portfolios, we have really locked in on a group of identifiable credits that we've been talking about that are ones where we have really seen some deterioration and they relate to specific credits within the construction portfolio that relate to land development, housing development, condominium development and a specific group of CNI credits that are also linked to the industry. So, basically within our evaluations internally we've seen those credits; they've been a fairly stable pool of credits. So, we have been working and they are the ones that have contributed to this. And you can see it in the press release; we are talking literally about a half dozen credits this quarter and I believe four credits last quarter, the total around a $130 million of the non-performers and that's been the lion share of the increase. Now, there has been a little movement in some of the other portfolios but that's really the lion share of the increase. So, we continue to believe now that we are not going to see the level of increases going forward that we have seen in the last two quarters, as we have been focusing on those specific credits. Our consumer portfolios, mortgage and home equity together, if you look at them one was up and one was down this quarter and it stays at…

Okay, perfect. I guess, just one follow-up on the credit side. As you guys looked at sort of the housing related stuff that's gone bad, as you think of that portfolio more broadly. How often are you guys doing appraisals? Is it when specific loan shows signs of weakness or have you done sort of a more blanket reevaluation of the entire portfolio? How do you think about that dynamic?

Scott, this is Joe. We don't routinely go out and get appraisals if there isn't a renewal going on or the loan showing some stress. We just don't do that. But as soon as the loan has some issues with it of course we are actually going on trying to figure out what our collateral is, but appraisals in today's world are pretty challenging. And hopefully, that's only one point of reference as we look at a loan in terms of trying to figure it out. Obviously it's in our best interest to try to keep the creditor going and the business going because we don't want the property, but it is a point of reference. But certainly at regular renewal times for the entire portfolio and if there are any performance issues that change the nature of the agreement, if you will, then certainly we get back into it and (inaudible).

Okay. Thank you.

Sure.

Thank you. And our next question comes from Terry McEvoy with Oppenheimer. Go ahead please.

Good morning.

Hi, Terry.

Could you talk about the reserve build of call $22 million was that a function of non-performing assets going up in Q2. What I'm getting at is trying to come up with a best guess for provision levels for the third and the fourth quarter given your guidance for charge-offs as well as NPAs?

Right and certainly provision is somewhat of a wild card in this environment and is very difficult to try and predict. But, yes in the second quarter the provision above charge-offs is a reflection primarily of the deterioration of some of those credits into the non-performing status. And if non-performers do begin to stabilize that certainly then reduces one of the pressure points on provision. But in this environment it's difficult to try to be precise about how the length, the duration, the depth around and then in different segments of the portfolio; how that can ultimately play out around the provision numbers. But in the second quarter it's primarily driven by the deterioration of those credits into the non-performing status.

Okay. And then away from credit, some very good growth in service charges and fees both sequentially and year-over-year. Can you comment on that?

Yeah. This is something that we have been focusing on for quiet sometime as you know. The wealth management business at this point does feel some pressure, as the market declines and the like, but we've been seeing within our commercial businesses, we've invested in people, systems, products around expanding our fee based components of our relationship management with middle-market and larger companies. And that's an area where we've seen really great progress. And in consumer banking, we've done a whole series of things to continue the momentum around the creation of these regarding debit cards and basically all aspects. So, I think the other real positive thing here is that we are seeing significant improvement in the net numbers of checking accounts and that's a function of many of the things that Lisa and her team have been doing to position from a marketing, from a selling, from closing the backdoor as well as selling more in terms of improving service levels in our branches. And that's starting to play out in our net consumer checking numbers at really quite measurable levels. And that in addition to driving high value demand deposit growth is also a contributor to fee growth from those consumer businesses. Also, the home equity growth that we are generating, which is largely first lien positions that's a new household acquisition tool for us as well, which is also contributing positively to those demand deposit flows.

Okay. And then one last question, I was under the impression up until the first quarter that a lot of the increase in residential construction NPAs was connected to the State Financial acquisition or franchise. Was that the case in Q2? Are you starting to see some deterioration in some of your call it legacy-associated markets?

We've seen some deterioration, certainly in virtually any aspect of our business that has touched, that touches construction on the residential side. And yes, that’s certainly, as much within the core Associated portfolios as the acquired portfolio. On the home equity side of things, much of the deterioration that we had seen there relates to the First Federal acquisition that we did back in 2004 in the Minneapolis market. And that's very attributable to that transaction and we shut off those programs that were driving it in '05 but we are still working through those vintages. On the construction side, if it's residential in nature and if it’s condominium in nature, it's got risk associated with it. And as you know, and if you go back to our presentations, you can see on those charts in terms of the geography, while working with customers that are based within our footprint, we have a small amount of loans that are out of market and the bad news is that those are under stress, but the good news is that it’s not of an incredibly large number of loans as well. But that’s some of these credits that we are talking about here.

Terry, I would suggest to you that maybe your perception was inaccurate on State Financial because the area that we've been seeing the pressure the last couple of quarters has been in our large corporate book. And that’s all Associated. So that’s where we are seeing the erosion.

Okay, thank you.

Thank you, sir. And our next question comes from James Ellman with Seacliff. Go ahead, please.

I was hoping you could give us a little more detail on some of your thoughts regarding your comments in PSO will hopefully stabilize here. And just from speaking with some people who also look at the company and looking at the movement on the stock today, could comment on why you think NPAs will not go up as energy prices being higher close through your commercial portfolio. And also if we think about that in your mortgage portfolio both on equity and first in the primary as we move towards the winter heating season particularly as it seems to market movement on Fannie and Freddie is saying that loss rates even on prime loans may be a bit higher than expected?

Yes, I mean all those economic factors are out there and they are real and we are, I believe we are being as objective as we can be about that analysis. And I do believe it will be that NPAs will start to be more within a range around what we are seeing now. I mean could they be up a little bit, yes, they are going to up away. We've seen them over the last couple of quarters, we just don’t see it. The factors that you talking about especially as they relate to the commercial business are out there and they've been out there for sometime. But I think we along with others are seeing relative stability even in spite of those factors in our commercial, in our core end market commercial CNI books of business. So, the facts say that those portfolios are hanging in there nicely, that they are performing at levels that are stable. I mean we are just not seeing the deterioration passing through those credits. Could something of substance change in the future that could change the dynamics, of course it could. It’s difficult to predict how those things are going to go. But I mean when we are looking at the facts, and we evaluate them today, that’s what we see. We also see it in that permanent funding commercial real estate portfolio. Whether it's the non-performing levels or the loss levels, they are really not showing significant increases. The consumer portfolios, there are some dynamics if we look there. Certainly there can be some additional loans that are going to, that could go non-performing in those portfolios if economic conditions continue to deteriorate. But we're also working through this specific sector of the business that's very Minnesota focused on this acquisition…

Alright, very good. Thanks a lot for the [quarter].

Thank you. And our next question comes from Heather Wolf, with Merrill Lynch, go ahead please.

Hello, okay first of all on the construction loans, the six construction loans that you were talking about, can you talk about which of those are land versus vertical construction, and also the percent severity that you've taken on, lost severity that you've taken on them already?

I can't answer that question in either sense, so I am going to have to, I know the names but I don't know how much is vertical and how is land. My guess is most of it is vertical in the condo or housing. But I will have to get back to you. I just don't have those numbers here.

Okay and then would you guys be willing to tell us now what your tier 1 ratio is, I didn't see it in the press release?

Yeah, that's because we don't have it calculated but we think it’s going to be relatively flattish to the last quarter. It’s another week or two before we are done with all the pieces.

Okay and then the increase in your other real estate owned this quarter, is that coming more from the consumer side or Resi construction?

No, actually there was one large construction loan that we transferred to OREO for $50 million but its one of these problem loans we have that got moved. We took possession. So that's the big increase.

Okay, alright good thanks very much Joe. I will follow-up with you off-line on this construction items.

I will get that from Gordy and have it.

Okay. Thanks so much.

Thank you. Our next question comes from Andrew Marquardt with Fox-Pitt Kelton. Go ahead please.

Hi, guys.

Hi, Andrew.

I'm just going back to Terry's question on the reserve build, I just wasn't, maybe I missed it. Can you just clarify if one should expect additional reserve build going forward or not?

Well, Andrew I guess, I think about it in terms of the process we follow and all the moving parts. And clearly, some of that's hard to predict, but it would seem logical to think that reserves would exceed charge-offs as we go forward, because I don't see the migration of credits decreasing, and so as those credits move along the [credit size] classifications they require more reserves. So I see it as higher in charge-offs. Hopefully we don't see it as high as much older charge-offs it was this quarter. But at this point, it's just difficult to know all of the moving parts and how it's going to land at the end of the quarter.

Okay. Thank you. And my second question was on the margin, net interest margin. Can you talk about if there was anything unusual in the 365 this quarter and how we should think about the margin outlook?

Sure. The answer is there's really very little in there that I would call one-time. There are always little things that affect it on the loan side of the equation, but there really was nothing that was outside that would have a substantial impact. Basically, it is the loan yields that are hanging in there and cost of funds have come down, so, the spreads have been improving and its been improving over the last couple of quarters and we've seen that dynamic begin to play out. Also, EDA growth, which is in about the 5% range, based on the dynamics that I was referring to earlier is really just a major contributor. And if we can sustain that kind of effort, it will continue to have a positive effect. I don't know, I've been saying that I think the margins are going to stay relatively stable and trade within a range. It has improved over the last couple of quarters very nicely and that's been a pleasant surprise for us too. It's a little higher than I would have anticipated it being, but that's around the execution on these variables that we've been talking about. So, I'm going to say they are still going to stay relatively stable, maybe not 365 range, but certainly, I don't see it falling significantly. So more of [reasonably] 360, high 350s, low 360s I think is where it's going to be.

Okay. Thank you. Our next question comes from Michael Cohen with SuNOVA Capital. Go ahead please.

Hi, thanks for taking my question. Can you talk about size of the mark that you've taken relative to individual credits, or maybe sort of on average, in other words, what are you expecting in terms of loss severity for some of your construction credits?

Michael, that's a question Heather had and I don't have that information at this point. Each one is very different, there is some little, some 10%, 15% I have to get that number. I just don't have it.

Okay.

And it is, Michael it is very, very different credit-to-credit, location-to-location.

Okay. Thank you, I'll follow-up.

Okay.

Thank you. And our next question comes from Peyton Green with FTN Midwest Securities. Go ahead please.

Hi, Peyton.

Good morning. A couple of questions. One, to what degree are you all in control of the work-out process or are you riding behind someone else that's a charge-off?

In a couple of cases, there's participation, if that's what you are referring to.

Yeah.

In the majority of cases, we control the work-out process and we are, even if there are multiple banks involved in a transaction, we are certainly involved in those discussions, in those negotiations and the banks work as a team.

Okay. And then, how long, I mean with the latest batch that have moved in, I guess over the first half of this year. Are any of them fairly quick or some of them dependent on you completing construction? Where are they in the process or…?

Well, again, each one is different. Certainly.

Okay.

And there is a chunk that are C&I, which have a different dynamic, but..

Peyton, I guess, I would answer it. Unless we want to do bottom fishing kinds of disposals, it's probably longer rather than shorter, right.

Okay.

I should rather walk away through this thing because you can get rid of them. But the haircuts you are going take are, the economics of those don't make sense to me.

Okay.

I think we are going to just kind of try to work through it, and it can take time.

Okay. So it's fair to say that you will be methodical in getting out of them.

Yes.

Okay. And then, on the deposit side, you saw fairly a decent drop and I guess your low-cost interest-bearing demand and also money market balances. I was just wondering, over what time period are you willing to fund the balance sheet growth with short-term and when might you consider lengthening out the term of your borrowings, I guess?

Well, let me answer the last question.

Sure.

Obviously, we do have a significant piece of short term borrowings at this point. And that obviously is something we continue to evaluate and think about given where we are in the interest rate cycle and so we are thinking about that and we are thinking about when and how we should extend. So, we are working through that piece of it and we can extend in a variety of ways. We can extend through a swap. We can extend to go get some longer-term funding. There is a variety of things we are looking at. But we haven't pulled the trigger yet at this point.

If I could Peyton, I thought I heard you say that you thought the demand deposits were down, but they are up.

No, the interest-bearing demand against the low cost?

Okay. All right the interest-bearing demand. I'm sorry. Now, we believe that rates are much closer to the bottom now than if anything we believe rates are going to probably start to go up over the next time here. So, we're going to also, now we believe is the time to be a little more aggressive in terms of pricing out the curve a little bit. And that growing deposit on a core basis of the curve is also a prudent use of that margin momentum I guess. And so, we are exploring those options as well.

Okay. And I guess, I mean, was there any consistency among the accounts that you lost. I mean was it more single used customers that it kind of ran away once you lowered pricing or was there any particular trend that you could elaborate on?

My reaction would be, we didn't lose accounts we lost balances.

Okay.

My reaction is that customers use their funds, as they need them and obviously that has bearing particularly interest-bearing deposits, which has some municipal [post] money in it. So all of that matters.

And as rates get more attractive, there is some internal migration too between those deposits and the money market buckets, which have grown several hundred million dollars over the last year.

Okay, great. Thank you very much.

Thank you. And our next question comes from Andrea Jao with Lehman Brothers go ahead please.

Good morning, everyone.

Good morning.

Couple of quick questions. How much were the interest reversals on non-performers in a margin?

We don't know Andrea. I don't know that number.

Okay.

I'll have to go and get it. It's close to our normal system.

Okay. We can follow-up…

(inaudible).

The service charges in deposits are very strong, which is a very nice thing. What was the driver and how much is that sustainable in coming quarters?

We believe -- and I've talked about this for the last couple of years. We continue to be pleasantly surprised by our ability to maintain momentum in that category. Part of it is growth and net households and net checking accounts. Part of it is some pricing changes that we have made and methodologies around capturing the foregone, if you will or the revenue at risk the discretionary revenue in this category. So, I would suggest it's a combination of some policy changes, better management of the whole process and some growth. So, I continue to and I've said this all along, I don't believe we can continue to grow that category of fees at double digits or 8% to 10% a year because it's a very matured segment of the business. But we continue to grow it at the lower end of that range and generate momentum in that category. Yeah, at some level it's sustainable. At this level, I would say probably not but still in terms of some level of single-digit growth, yes. So, I think that it is sustainable.

Okay, great. Now other expenses last quarter included $2 million that went into the provision, the reserve for unfunded commitments?

Correct.

Yes

How much was there this quarter?

Zero.

Okay. Then my last question would be in terms of looking at your $2.4 billion real estate construction portfolio, your $3.6 billion commercial real estate portfolio and then also your home equity portfolio, could you remind us what LTVs were? And on the commercial side, if you could give us an indication on average what deterioration was in terms of collateral values?

We can tell you what our underwriting standards are and how we underwrite. We do not have current LTVs for the entire portfolio. We just don't gather that information. But clearly we are in all of our commercial real estate books, raw land is at 65% maximum in any commercial real estate is 80% of cost maximum. In the home equity book, which we do capture the LTVs are on average in the 70s. There were obviously tranches of that and the mortgage book is the same thing. So again, they are well less than 100% in all those categories. And I would point out that growth that we are seeing in the home equity portfolio now in excess of 75% of that growth is first lien.

Okay. But the entire portfolio how much is that is first lien?

Its obviously the percentage is improving. It was my number is yearend number, we haven't calculated it for the end of the quarter but it was around 35% historically. But the growth is more in the 75% range today and obviously that's going to move this number.

Okay. And I apologize, just one more question.

Go ahead.

The OCI account is very volatile. Its negative 2 in the fourth quarter, positive 20 in the first, negative 20 I believe in the second?

Yes.

Could you talk about that and the underlying securities that are driving that?

The investment portfolio and its all determinant on the rate environment that the pricing service that we use prices the portfolio, and so it really depends on where the yield curve is and where our securities are on the yield curve. As a general statement, we are relatively close to par value, as you can see on both sides, but it moves around depending on the day and the week and what yield curves. So it's really the investment portfolio. This quarter, we had more erosion in the mortgage-backed portfolio primarily because it extended. Prepayment speeds slowed and the portfolio extended, so there was a little more negative mark on those portfolios, but if again, relatively nominal given the size of the book.

Is there anything, the investment portfolio that has an outside contribution to the volatility of the OCI?

No.

I think the MBS and CMO are moving about the same percentage. And it’s not much. And again, when we priced it and then the curve moved a week later, you could have gotten a different price. So it's just that it moves around a little bit. It's a $3.5 billion oil revolving it doesn't take much to move it $10, $15 million.

Thank you so much.

Thank you. (Operator Instructions) And our next question comes from Tom Doney with Decade Capital. Go ahead please.

Hi, thanks for taking the question. I think you touched on this a little bit in terms of and maybe you mentioned out of footprint loans, but maybe if you can touch on the geographic mix of the six credits that had led the increase in charge-offs in the five credits, the five construction credits you mentioned on the MCL outside. Maybe just by state or just give us a general sense of where this is within or without the footprint?

Well, I can't say that precisely by state and give it to you all, but in terms of the non-performers it's about 50-50.

In terms of?

In market versus out.

Okay.

And we want to be sure you understand that all our customers are in market, just the project.

Right, our project itself would be out, so again.

And then within your footprint there are specific geographies where these credits are popping up as well?

The Minneapolis market of all of our input print markets, I would categorize as the least stable. I mean it's not that it doesn't have the characteristics of Miami or Phoenix or anything like that, but just then more of a deterioration if you will in those markets because they were built more aggressively. So within that pocket, we've seen it on a consumer side relating to the home equity, I have talked about before they had come largely from First Federal, who had the bigger position there. And we've seen in couple of commercial real state construction projects in Minneapolis has shown some deterioration. We really on a relative basis then across the rest of our footprint, we feel that we've seen relative stability, in certainly the Wisconsin market.

So then in terms of the NPL’s that are in the 50% that are out of footprints that primarily Florida?

Yeah, primarily it's a couple of these larger loans where we have a relationship with a customer in our footprint that has gone to that market to do a project. And we have one in Arizona also.

Okay, one.

One, yeah.

Okay, final question, maybe on the dividend, just kind of how you're thinking about this, given kind of the updated guidance on charge-offs and maybe what the payout ratio might look like, just kind to follow on your comments on capital earlier.

Well, we feel good about the dividend. The Board consciously, with this announcement, confirmed the dividend for the quarter and it’s our intention to maintain it at these levels.

Okay, thanks a lot.

Okay. Thank you. And our next question comes from Ben Crabtree with Stifel Nicolaus. Go ahead, please.

Yeah. Good morning.

Hi, Ben.

I've actually got mostly just follow-on questions. In the investment portfolio, do you have any agency-preferred, Fannie and Freddie?

Yes.

That's right. You obviously took out other-than-temporary hit on that. Can you let us know what the amount of that is?

Yeah. It’s valued at about $11 million right now.

Okay

The total.

Okay, fair value.

So that’s the range.

Great. Tax-rate.

Ben, be careful. I heard you use the word, fair value. That was the book value at end of the quarter.

Oh, book value, okay. Thank you.

Since they moved Ben, if you wanted to go fair value, you would have to price it today and I don’t have that number.

Okay, great. That’s fine. The tax-rate in the quarter was lower than I expected. Obviously, there were lots of moving parts there. I'm looking for some kind of a guess as to what number we might use going forward.

That, in the tax-rate, its interesting, Ben, as you look at the tax-rate, what happens in this environment, if you make less money, all the money that you make over the permanent items and primarily the municipal stuff, which are coming in at 40% marginal rates. So, when you break less, it pushes the permanent items to stay the same size or pushes the rate down. Again, we were telling you between 32 and 33, given the level of earnings that we're anticipating, I think you can take that down a little bit.

Okay.

Maybe 1% would be an appropriate range.

Okay.

Again, I am trying to do the same estimate myself. I have to tell you its a little challenging, it really depends on how much earnings we will get from the 40% bracket.

Sure, great. Have you had your regulatory exams?

Yes.

Okay.

We are examining all the time, what do you…

You are having somebody there permanently almost.

Yes, we do a company our size, we have for almost two years.

Okay. And then just to, maybe Paul, you might want to make sure that I understood exactly what you were saying as essentially what you had said was, I agree. That the charge-off, the jump in the charge-offs was really not because you got a whole bunch of new bad loans in but because the charge-off severity was worse because it effected collateral value and deteriorated more than expected.

Yes, that’s correct. It’s a universe of credits that we've been looking at and tracking. And the ultimate, the strength of the position the investor and the borrower find themselves in for the reality of this situation coupled with the deterioration in collateral value.

Ben, I want to be careful that we maybe describe for you a little bit about process, when do you actually take a charge off versus when do you just provide for it in the reserve and the charge-off is when you think that the collateral is the only source of getting cash when you are actually in sort of a liquidation mindset, because as I work with mind set, because if you are working with a customer and you think the customers can work their way through, you can reserve for it, but you don't necessarily charge it. So, again as you look at each of these credits, there a series of discussions and circumstances that leads you to a charge-off point versus just a reserve point. So again, each situation is different, you have to work through but these credits have gotten to that point where we think charge-off is the right answer.

Could I infer from that that the number of watchlist credits is not expanding a lot?

I don't know that I can answer that question, I don't know that's a conclusion you should jump to from that statement. I mean, obviously we've been talking about exiting credits; we've been talking about trying to make sure we stop the flow in and so that is what we are working on, but at this point I'm trying to think through whether those watchlist credits are going up or not this last quarter and I can't remember. If you think that's important I'll have to get back to you.

Okay, yeah. I appreciate it. I've got a couple of these other lingering questions I'd be interested in what the input is to, so other than that, that takes care of me, thanks.

Thank you. (Operator Instructions) And we and have a follow-up question from Andrea Joa, go ahead please.

Hello?

Ms. Jao if you have your mute button off?

Oh, sorry about that. Regarding the other operating income line item which is up 1.3 million linked quarter. What is in there and should just go back down in succeeding quarters? Then why are you looking if you can ask …

No, I know what it is, I know the answer, the other category has our all of our income related to our commercial banking, fee initiative and that has been growing nicely and I expect that that will continue to grow.

Okay, so that will not pullback next quarter, so that was a nice…

We would, that's a big piece of it, so no I wouldn't, I would think it would stay nice and steady.

Okay that's very nice. Then regarding deposit pricing that you used this quarter, could you talk about that? I'm just trying to understand the decrease in customer time deposits as well as money market deposits. Then if you could also talk about the significant decrease in broker deposits and your use of wholesale funding, because I think wholesale funding is based on your second quarter average balance sheet is still slightly more expensive than the brokered stuff?

Yes, again, our decisions on all of these wholesale funding sources, whether it's brokered deposits, whether it's the special money market accounts we get from the institutional marketplace, or whether it's wholesale funding, it's all availability price, stability kinds of decisions that our treasury guys go through everyday and they are trying to make sure they are using all sources. They are trying to make sure they are keeping the liquidity piece of our balance sheet strong, and then they are looking at prices. So there is really not a pattern that I can tell you we follow, we just try to look at all those things on a day-to-day basis and try to figure that out. Obviously, in terms of would you prefer deposits? Of course and the wholesale funding is a residual; it funds whatever our balance sheet is that isn't funded by deposit and we are trying and we have been working on growing deposits and Paul alluded to those things earlier. We are getting more households. We are trying to build prices in maybe to get some people out of the curve. We are doing everything we can to grow deposits because obviously that has the sustainability that we want.

And Andrea as I said before we believe that now is the time to get a little more aggressive on the pricing side of things to start to grow deposits at what we proceed to be the bottom basically in terms of our interest rates are going to be.

Okay. How do you think of loan deposits, the deposit ratio will progress over the next few quarters? How quickly do you think that may come down?

As soon as I say, I think it’s going to go one direction, it’s going to go the other direction, because it really depends on what happens in any given month. Obviously, it's our intent to improve it. But I could have said that last quarter and it didn't improve. So, I'm really reluctant to predict.

Okay.

I think it's fair to say that it's our intention to improve it.

Okay.

And I really think it’s all about making sure we are getting the right pricing on our assets, if we're not growing the deposits. I think that's where we have got to spend our time.

Okay. Thank you so much.

Thank you. And our next question comes from Kenneth James with Robert W. Baird. Go ahead please.

Hi, good morning.

Good morning.

I wonder if I could just dial back into the residential construction issue here, and can you just maybe give me a little color details or anecdotal on why that rest of the residential construction portfolio or how it’s different, why you feel better about it than the handful of credits you been zeroed in on here as you have been mentioning the past few months, and what differentiates what's left, versus what's gone bad? And then, on the second part of that question, is in your non-performing kind of outlook, how much of that is dependent upon that you've been able to get successful workouts on some of your larger residential credits that have run into problems?

Yeah. To answer your last question, certainly there is dependency there. And again, it's how you are evaluating the fact pattern that you are seeing, in the time that you are evaluating it. But if you look at our construction portfolio, it's slightly over $2 billion, and half of it, roughly, is in land and single-family condos or so. Half of it is in the residential area, and a relatively small portion of that is out-of-market. The out-of-market pieces are stressed. There is no doubt about that. There is a small percentage of it in Florida, and as Joe said, literally just one loan and that's in Arizona, but it's one troubled loan. We are seeing very little deterioration in the non-residential components in retail, industrial, offices multifamily I mean its quiet strong. Rental properties are vibrant today. So, I mean we are seeing in that half the portfolio, we are seeing very little deterioration and these larger trends, these larger loans are more concentrated in the housing and condominium sector. So, we've been able, we think, to identify them and look at them and manage through them or reach the conclusions that we have at this point in time, in terms of their disposition. And I think, Kenneth, the other thing that we want to make sure you understand is that, obviously, we are as worried as you are by your question about what might be coming on credits that we haven't identified or haven't experienced problems at this point, and we are dedicating resources to make sure we are staying on top of those credits, and we are making sure that we get ahead of any red flags, and so we try to stop the flow into the nonperforming category. So, we are redeploying resources, and we're spending a lot of time on those things. Again, Paul talked to the weekly meetings. We've done a lot of things. But, can we say out of that $1 billion that Paul just referred to that we've seen everything and know everything? We look at it hard and we think we know where they are today, but I don't think anybody can say that we know for sure that we are not going to, potentially, have a problem with the credit somewhere in there.

Okay. And you have also referenced some workout options that didn't come to fruition this quarter, is that strictly or predominantly a price issue on your side? Just not wanting to take the price that was offered? I mean, if it comes down to it, are there buyers for this stuff out there is, basically, what I'm asking, or have you seen absence of buyers?

I think Paul's reference was more along the lines that we had arrangements with the borrower that either the borrower is going to get additional equity, or the borrowers will find a buyer, or the borrower is going to enter into this agreement, and those are the things that didn't happen. Not that we try to sell the credits and didn't like the price. We just have the pricing that, the few times we have gone out, has been pretty negative. So, we really don't actively look at selling the credit. It's a matter of working with the borrower and finding an alternative to get for us to get paid.

Okay. And just quickly back to the deposit service charges. Did I hear you in the last question that you had nice growth in the commercial banking fee income initiative? Was that in the deposit service charge line? Or did I hear that incorrectly?

No. We invest resources in the international banking, swaps, letters of credit, all those kinds of areas that are very natural to our business. And we, as I think you've noted, we hired some folks to help us with that, and that initiative has been very good for us. And that was in the other income line. That's where it is today. It's down in other income and it's very nice. And again, Andrea’s questions, she didn’t, she said we're up we also had the Visa gain last quarter which wasn’t there this quarter. So, actually we are up a

It's actually more up than it looks like.

Right. So, it was nice and strong and we think that will continue.

Okay. On the deposit one, then, how much of that would you attribute to in NFS fees or something that could be considered to be a negative from stress kind of local consumers?

Lion’s share.

Okay.

Ken, but also, and growth is the major piece of it, too, or an important piece of it. So, you are right, the NSF fees, I keep saying but I don’t think the levels of growth are sustainable, but they continue to be sustained. But that’s the piece that is hard to grow, upper single digits or doubled digits certainly, but the growth piece is, how you want to contribute all the aspects of your business, that’s the constructive side of the thing.

Okay. Thank you very much.

Well, thanks.

Ken! Before, we pick another call, I want to respond to Ben Crabtree's call about the watch-less loan. Watch-less last quarter, this quarter has been relative flat. So, we’re not seeing a rapid increase, I was able to pull that number.

Yes, sir. And so, we have no further questions at this time. So, I would like to turn it back over to management for any closing statements.

No, thank you all for your participation and for your good question. And if you need more information or like to talk any more about, Joe and I are available. Thank you.

Ladies and gentlemen, this concludes the Associated Banc-Corp second quarter 2008 earnings conference call. You may access the replay system at anytime by dialing 800-406-7325 or 303-590-3030 and entering the access code of 3901460. Thank you for your participation and you may now disconnect.