Associated Banc-Corp (ASB) Q1 2013 Earnings Report, Transcript and Summary

Good afternoon, everyone, and welcome to the Associated Banc-Corp's First Quarter 2013 Earnings Conference Call. My name is Mike, and I will be your operator today. [Operator Instructions] Copies of the slides that will be referenced during today's call are available on the company's website at investor.associatedbank.com. As a reminder, this conference call is being recorded. During the course of the discussion today, Associated management may make statements that constitute projections, expectations, beliefs or similar forward-looking statements. Associated's actual results could differ materially from the results anticipated or projected in any such forward-looking statements. Additional detailed information concerning the important factors that could cause Associated's actual results to differ materially from the information discussed today is readily available on the SEC website in the Risk Factors section of Associated's most recent Form 10-K and any subsequent SEC filings. These factors are incorporated herein by reference. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Philip Flynn, President and CEO, for opening remarks. Please go ahead, sir.

Thank you. Welcome to our first quarter earnings conference call. Joining me today are Chris Niles, our Chief Financial Officer; and Scott Hickey, our Chief Credit Officer. Highlights for our first quarter outlined on Slide 2. This quarter's solid results were highlighted by a record quarter for mortgage banking and continued focus on expense management. For the quarter, we reported net income to common shareholders of $46 million or $0.27 per share. That compares to net income of $41 million or $0.24 a share a year ago. Return on Tier 1 common equity for the quarter was 10.1%, and that was up from 9.2% a year ago. Average loan balances increased by 2% from the previous quarter, with the majority of growth coming from the commercial portfolios. Average deposits increased by 3% from the fourth quarter to $17.1 billion and have grown 14% year-over-year. Net interest income was $158 million, reflecting 2 less days in the quarter and less one-time positive items. We maintained the quarterly dividend at $0.08 per share and we repurchased another $30 million of common stock or approximately 2 million shares at an average price of $14.31. We also paid a dividend of $238 million from Associated Bank to Associated Banc-Corp, creating substantial capital flexibility at our holding company as we consider future capital and strategic options. Even after completing these capital actions, our Tier 1 common equity ratio remains very strong at 11.64%. So let me go ahead and share some details on the main performance drivers during the first quarter. Loan growth is highlighted on Slide 3. Average loan balances continued to grow from the fourth quarter, with net growth of $317 million. This represents a 2% quarter-over-quarter growth rate and an 8% increase year-over-year. Growth during the first quarter was weighted toward our commercial and commercial real estate businesses. Commercial and business lending average balances increased by $184 million during the quarter, with $125 million of that growth coming from our general commercial loan book. In our specialized lending portfolios, power and utilities grew an average of $95 million, driven by an acquisition of $115 million in loans from some European banks. Our oil & gas book was up $11 million. And in the mortgage warehouse, average loans declined $47 million, reflecting slowing refinance activity at quarter end. Average commercial real estate loans grew by $141 million during the quarter, with construction loans increasing by $62 million, mainly driven by multifamily and retail projects. Average residential mortgages grew by $137 million or 4% during the quarter. This growth was split evenly between our hybrid ARMs and 15-year fixed-rate mortgages. Currently, we're holding about $1.3 billion of 15-year fixed-rate mortgages on our balance sheet and intend to maintain that level going forward. We continue to sell 30-year production to the agencies through our mortgage banking operations. During the first quarter, we sold $680 million of loans, compared to $780 million in the prior quarter. Despite the drop in volume, we were pleased that gain on sale margin remained strong during the quarter. The retail loan portfolio, which includes mostly home equity loans, continues to experience paydowns and declined an average $145 million from the prior quarter. With continued low mortgage rates, we expect these portfolios to experience more runoff as consumers refinance into lower priced first lien mortgages. The composition of the home equity portfolio has remained fairly consistent over the last year, with about 45% in home equity first liens, 12% in junior liens and 43% in revolving lines. Turning to Slide 4. Average deposits of $17.1 billion were up 3% from the fourth quarter and have grown $2.1 billion or 14% from a year ago. Average money market, savings and interest-bearing demand deposits continued to grow during the first quarter. Non-interest-bearing demand balances increased -- experienced, I'm sorry, typical seasonal outflows. Overall, outflows were roughly consistent with prior-year seasonal flows. Total CDs continued to decline, although at a slower rate than prior quarters. Company also continued to wind down its term repo borrowings and to reduce its Federal Home Loan Bank advances. Net interest income declined by $4 million or 2% quarter-over-quarter. The fourth quarter's net interest income included $2 million of interest income related to a tax refund. The first quarter also had $2 million of less interest income due to the day count difference, compared to the fourth quarter. Further, we collected about $1 million less on interest recoveries than -- during the first quarter than we did during the fourth quarter. Net interest margin for the first quarter was 3.17%, which was somewhat less than we'd expected. Year-over-year, NIM is down a total of 14 basis points and a total of 9 basis points from the third quarter, which we believe speaks to our diligent management of the margin. While our 2012 asset yields and margins benefited from embedded floors, the renewal and refinancing trends in our commercial books are grinding away at these, and we expect to see continuing pressure on the asset side of our margins. The decline in asset yields was primarily driven by an 18-basis-point decline in the commercial loan book. We've chosen to remain asset-sensitive in this low rate environment and we recognize that this is weighing on the margin. Accordingly, we continue to manage down interest-bearing liability costs, which now stand at 45 basis points, down from 70 basis points from the first quarter of last year. Our expectation for the rest of 2013 is that earning asset yields will continue to compress, while our ability to manage deposit costs lower will become more challenging. We do see some continuing benefit from repricing of the CD book through the rest of this year and we have about $300 million of higher rate FHLB advances maturing during the second quarter. That will provide some level of support to the margin. Additionally, we do have about $25 million of 9.25% sub-debt outstanding that becomes callable on October that we would certainly expect to redeem. Total non-interest income for the quarter was $82 million, up $4 million from the fourth quarter. Mortgage banking accounted for essentially all of the netted increase from the previous quarter. This pickup was aided by continued strong margins and reduced mortgage servicing rights expenses. Prepayment speeds slowed during the quarter. Our other fee revenues were up modestly from the fourth quarter, with increases in insurance commissions and trust service fees, but these improvements were partially offset by decreases in card and brokerage income. Capital market fees declined by about $2 million from the fourth quarter related to lower commercial lending volumes and related lower customer demand for interest rate swaps and other hedges. Asset gains and losses were favorable to the previous quarter by $1 million. Total non-interest expense for the quarter was down $9 million or 5% from the fourth quarter. Personnel expense was down slightly, salary expense was lower, which reflects our lower full-time equivalent counts. FTE levels are now at their lowest since mid-2010. Payroll savings were partially offset by seasonally higher payroll taxes during the first quarter. Legal and professional fees declined nearly $3 million from the previous quarter, which is largely reflective of lower BSA remediation-related professional expenses. We continue to believe the bulk of the remediation and implementation costs from our BSA enhancement initiatives are behind us and that professional fees will continue to reflect a reduced run rate in 2013. Occupancy expense declined by almost $2 million from the previous quarter, which was related to our branch consolidations where there was a charge taken in the fourth quarter. Losses other than loans also declined more than $3 million from the fourth quarter. This decline reflects a reduction in the reserve for unfunded commitments and reduced exposure in our risk-related, some self-insured mortgage insurance activities. Turning to Slide 5. Credit quality continued to improve. Net charge-offs were $14 million for the first quarter. The majority of these net charge-offs were on our home equity and residential mortgage portfolios. Similar to the fourth quarter, this quarter we completed a sale of around 100 small commercial loans, with an unpaid principal balance of about $16 million that resulted in about $4 million of incremental charge-offs. We believe that note sales such as this are an efficient means to remedy small non-performing credits. Potential problem loans declined $344 million from $361 million last quarter and they are down 28% from a year ago. The level of non-accrual loans to total loans continued to improve to 145 basis points from 164 at the end of the fourth quarter and have improved now for the 12th consecutive quarter. Total non-accrual loans of $225 million were down from $253 million in the fourth quarter and down from $327 million a year ago. The allowance for loan losses now equals 184 basis points on loans and covers 127% of period end non-accrual loans. The provision for loan losses for the quarter was $4 million, compared to $3 million in the fourth quarter and we expect provision expense to increase as new loans are added in 2013. Our capital ratios on Slide 6 continued to remain very strong, with a Tier 1 common equity ratio of 11.64%. We are well capitalized and well in excess of the proposed Basel III expectations on a fully phased-in basis. As I mentioned during the first quarter, we dividended a total of $238 million from Associated Bank to Associated Banc-Corp. While this was purely an intercompany transaction, by moving the excess capital from the bank to the holding company, we're creating further corporate financial flexibility to consider future strategic or capital deployment actions. This will also bring our bank capital ratios into alignment with our overall consolidated capital ratios. Our priority for capital deployment continues to focus on organic growth. We'll evaluate our dividend payout ratio over time so that it stays in line with earnings growth. We'll buy back shares when accretive and we'll be disciplined in evaluating other opportunities to optimize our capital structure over the coming year. Slide 7 is a slide that we've shared in the past. We include it today to reiterate our guidance for the rest of the year. We continue to expect loan growth in 2013 in the high single-digit range. This outlook is in line with our performance during the second half of 2012. First quarter's loan growth was lower, but that's what we expected and what we mentioned in the fourth quarter earning call. We will remain focused on disciplined cost of pricing and we'll look to continue to grow core retail deposits and Commercial deposits through our enhanced Treasury Management offerings. We expect modest net interest margin compression over the course of the year, driven by continued pressure on earning asset yields. We expect to defend margin compression through liability repricing and refinancing actions to partially offset the asset yield compression. We expect total non-interest expense for 2013 to be flat on a year-over-year basis, compared to the 2012 reported level. Benefits from reduced regulatory costs are expected to be offset by continued investments in the franchise. Credit trends are expected to continue to improve, with provision expense increasing generally in line with new loan growth. Capital deployment was a priority in 2012 and it will continue to be the priority in order to drive long-term shareholder value. So thanks. And with that, we'll open it up to your questions.

[Operator Instructions] The first question about comes from Dave Rochester of Deutsche Bank.

Can you talk about where your loan production yields were for the quarter, either on an all-in basis or just across the categories you breakout just to get a sense for how those compare to book yields today?

Sure. I mean, I think in general, they are below the book yield today so, Dave, I think you're familiar with our press release tables. I'll point you to Page 7, which has our net interest margin tables and the upper part of that will show you the quarter March 31 book yield that we're realizing in the portfolio. So on our commercial book for the quarter, for the commercial business lending and commercial real estate lending combined, it was a 3.81% yield. And in today's world, we're seeing lots of good deals, but they're being done at spreads a lot closer to 3%. And with LIBOR kind of where it is, that means with every new deal we open on the books, it's incrementally dilutive.

And on the resi side, what are you guys booking now?

Mostly we're booking 5/1 ARMs and those are coming in -- 5/1 ARMs and 15 years. And both of those coming in between 2.75 and 3.

Got you. And have you noticed any spread pressure versus last quarter, or is it pretty much where we were last quarter?

I think on the commercial side, I would say the spread pressures are continuing and we see them carrying through from the prior quarters, but it's not getting any easier. And in fact, probably, a lot of it, I can't say, is getting less competitive. It's been very competitive and will continue to be very competitive as we move forward. On the residential side, I would say that actually our net margin spreads are slightly wider today than they have been despite the fact they're putting stuff on at 2.75% and 3%. We've been putting stuff on at that level for the better part of a quarter at thinner margins relative to market benchmarks, and we're pleased to be able to put that paper on still at slightly wider margins in the current environment.

Okay. And you had mentioned interest recoveries declining this quarter versus last quarter. I was just wondering if you have the dollar amounts for both quarters?

Not immediately at hand, but it was a net million dollar delta.

Got you. And you talked about the CD book repricing, you had mentioned that previously. I was just wondering how much of that reprices through the end of this year and what the rate is all-in rolling off?

Sure. The -- substantially all of the book is 1 year and in maturities. So the substantial portion of the roughly $2 billion still in outstandings will turn over. Certainly more than $1.5 billion of that will turn over in the next 12 months and the weighted average rate we're putting new stuff on is closer to 50 basis points.

Great. And just one last one, you talked about pushing cash up to the holding company. I was wondering how much cash is there today?

Cash is in excess of $250 million. And in addition to that, we have a liquidity investment portfolio positions that are another $150-plus million.

A couple of hundred-plus million.

More than $400 million.

Your next question we have comes from Ken Zerbe of Morgan Stanley.

Great. I was hoping to get a little detail on the gain on sale margins. If I heard correctly, your origination volumes were down $100 million, so would probably imply some much greater margin number, and ask kind of why. Why is it stronger than kind of what we're seeing in the rest of the space?

Sure. So yes, I think the important thing there is if you'll notice in our table Page 4, we disclosed the mortgage loans originated for sale during the period and that's been a standard reporting for us and that was down, Ken, as you pointed out correctly as we stated from $780 million to $681 million. So that production -- new production coming through the pipeline was down $100 million. However, due to some operational bottlenecks, we closed some loans in the fourth quarter that we didn't deliver out to the agencies during the fourth quarter. Those were on our books as closed loans so they did not get picked up in our year end mark-to-market, sort of carried at lower cost to market. And when we subsequently delivered them in the first quarter, we realized the gain on roughly $90 million to $100 million that was actually produced in the fourth quarter, but not delivered and recognized until the first quarter.

And how much was that amount?

Well, gain on sale margins had been roughly 2.5% for stuff that was done in the fourth quarter, and so another $2.5 million.

No, I mean like the total dollar amounts. I'm just trying to get a sense of like what was -- what is sort of the core, this quarter.

I'm sorry. So total delivered to the agencies during quarter 1, actual deliveries, was $770 million versus $680 million of production. And if you look at the prior quarter, we originated $780 million, but we actually only delivered about $680 million.

All right. Perfect. That actually helps out. And then just one last question on the dividend that you paid out to the hold co. Thanks for the numbers that we have. How significant is this? I'm just trying to get a sense of if you're buying back $125 million of stock every year roughly, you have $50 million of dividend, you're kind of using up almost $200 million just for a 12-month look-forward, should we be reading something a little more significant into this or is this cash just for normal operations?

No, Ken, this is Phil. You shouldn't read anything terribly significant into this. Having cash at the holding company gives us inherent flexibility. We can always put it back down into the bank if it was needed in the bank. So it's really, we wanted to call it out because you'll see it in -- when we file the Q and we didn't want anyone to be surprised by that, but I would not read anything of great significance into this.

Next we have Scott Siefers of Sandler O'Neill. R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division: Chris, I just wanted to ask a question on the outlook for the margin. I mean, obviously, it's under a little pressure, but I guess I was curious about sort of the order of magnitude. Now I guess as a think about the remainder of the year, you have some sort of significant funding action, right, in 2 of the remaining 3 quarters of the year whether it's the sub-debt or the FHLB advances. I guess it would stand to reason that this -- the first quarter's compression was perhaps more significant than what we should expect for the remainder of the year. Is that a fair way to think about it? Or how are you thinking about it?

Yes, I think -- this is Phil, Scott. I think the way to look at this is look at the third quarter, fourth quarter and first quarter and recognize that net interest margin in the fourth quarter at 3.32% had some anomalies in it that gave it a boost. Mostly the interest that we got paid on the tax refund as well as more interest recoveries. So if you look at the third quarter, at 3.26%, you look at this quarter at 3.17% over a 6-month period, I think that's a better comp than looking at the delta between the fourth quarter and the first quarter. We do not expect that magnitude of quarter-by-quarter NIM compression going forward. R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division: Okay, that's helpful. I appreciate it. And then I just wanted to ask about the expense side as well. I mean obviously, you guys are looking for a flat number year-on-year, but I guess that implies some growth off of this quarter's base, on a quarterly basis throughout the year. Anything there whether it's seeing kind of marketing cost or anything else that would cause it to bump up from this quarter's run rate?

It's hard, and I would encourage you not to try to look at the expenses quarter by quarter by quarter. We're committed to making sure that our expenses are flat to last year. We're off to a good start. R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division: Okay. All right. Great. And I guess just the final question. On an end-of-period basis, loan growth was slower, which you guys had telegraphed and definitely makes sense. So I guess on an average basis, it still looked -- I thought looked pretty good. Just kind of qualitatively, how are you feeling about sort of your pace of -- either the pace of demand or kind of what you guys are booking as you start the year here?

We still feel just fine with the guidance that we provided of upper single-digit loan growth. You did note that we're talking about averages. And I just want to give everybody a sense of why we're talking about averages. We've been in the habit here of talking about point-to-point loan growth from the end of one quarter to the end of the next quarter. And because of the way the mortgage warehouse draws happened toward the end of the quarter and tend to flow out early in the next quarter, it's created some anomalies in tracking these numbers. Of course, we make net interest income on average loans. So going forward, we're going to talk about average loan growth. Which I think it's a better way for everybody to think about.

The demand side also feels reasonable and we feel confident with the guidance we gave you.

Yes.

Next we have Jon Arfstrom of RBC Capital Markets.

Just a couple of more questions on pricing, are you seeing the same type of pricing pressure in your specialty businesses or your national businesses, or do you think that's -- your sense is that's holding up a little bit better?

I think it's generally holding up a little better. Certainly in the oil & gas book it is. The power and utilities credits that we do are very high-quality credits so they carry a lower yield than some other things that we do. On the other hand, they have much lower risk in our view, but we haven't seen the same really -- I don't want to use the word crazy, but the real serious competitive drive on any decent-sized commercial loan in say Chicago or other parts of our footprint.

Okay. And I guess the other question would be on commercial real estate. Can you just talk a little bit about the competition there and how you would compare the competition in your core markets versus some of the new markets that you've entered?

When you roll back the clock to us reinvigorating and restarting our commercial rate -- real estate business, I think we got an earlier jump than some of our Midwestern competition because we cleaned up our real estate book very quickly. And then hired Breck Hanson, who obviously is very well known in commercial real estate circles in the upper Midwest. So we got a good jump on being back in the market, picking up market share, hiring very experienced commercial real estate lenders in all of our real estate offices, including the new LPOs. And we're getting the benefit of having very qualified, long tenured people in these markets. I'd say for the first half of that 3 years that we've been doing this or say 2 years, competition was a little bit on the sidelines. But that's come back over this past 6, 9, 12 months across the whole footprint and so it is more competitive, but I'll put our commercial real estate, the quality of our real estate lenders up against anybody's and it's a relationship-driven business.

And are you seeing anything out of Ohio, Indiana, Michigan yet?

Yes, we have nice growth in those markets.

Next we have with Erika Penala of Bank of America Merrill Lynch.

My first is a follow up on the margin, I realize, thank you for all the color that you gave in terms of how to look at it going forward, given what you mentioned about the yields that protect -- the floors that protected your yields last year going away this year, should we expect your core loan yield compression in 2013 to be greater than 2012?

So Erika, if you're looking at quarter-over-quarter and I'll direct you again to Page 7, the total compression year-over-year from the first quarter of '13 to the first quarter of '12 was 38 basis points in the commercial loan book. And I certainly would not expect it to be more than that. And the total compression for the entire earning asset side was 3 basis points. And again, I wouldn't expect it to be in that order of magnitude, total-wise. In part because we've lost those floors already and things have reset and repriced to sort of new levels. So unless there's another leg down further, which we don't expect given where rates are right now, we're kind of hitting bottom as we moved through into 2013.

Got it. That's helpful. And in terms of the FHLB advances and the sub-debt that's rolling this year, do you plan to replace them with wholesale or with just deposits?

Either. We'll replace them with the cheapest thing we can replace them with. So we've had good deposit growth and that's always the best funding source. And to the extent we need to fill a bucket with something else, we would probably go to short-term FHLB advances, which are extremely cheap.

Okay. And just a follow-up to Ken's question on the mortgage, did I hear you right, Chris, that it's about $2.5 million enhancement to the mortgage banking number this quarter that was related to the late delivery of some mortgages. So our starting point for the rest of the year should be about $15.3 million on a quarterly end basis?

Yes, $2 million to $2.5 million.

Next we have Emlen Harmon of Jefferies. Emlen B. Harmon - Jefferies & Company, Inc., Research Division: Just looking at the mortgage banking again back then, I guess, and the gain on sale, obviously it had a little bit of a helper this quarter. If we back that out, could you give us a sense, or just kind of where the gain on sale in your portfolio today and where you think kind of a normalized level for that will be just kind of given your business mix?

Sure. So I think we -- obviously, we benefited from very wide margins during much of later half of 2012 and we projected and expected and conveyed our expectation that we would see meaningful margin compression over the course of 2013. What we would say is margin compression was not as severe as we expected during Q1 and we continued to have consistent margins in excess of 200 basis points on production that we contracted for sale and so it would swing between 200 to 250 basis points dependent upon the day it was sold. Beyond that, volumes are still holding up better than we expected. So we've got better volumes than we thought, better gain on sale margins than we expected. And attribute that to getting to be more dominant position here in the state of Wisconsin. Some of our competitors have left for the largest mortgage lender in the state by dollars and units. So we're getting some benefit from that. But it has -- it was a much better quarter than we had guided or expected. Emlen B. Harmon - Jefferies & Company, Inc., Research Division: Got you. Okay. And then one, I guess, kind of small one again on the mortgage side of things. I think last quarter you guys put up a provision for repurchases in the mortgage book. I didn't notice anything in the commentary about that going away. Are you still building your reserve there? And could you just give us maybe a little bit of a color about kind of any particular portfolios you're worried about, put-backs in?

Yes, it's not material. Our total reserve, we have -- we'll close the quarter at $4.4 million, which will be roughly 5.8 basis points on the service book, which we think it's very much in line with the better quality and better performing peers. The trends are not changing much. So we continue to build that reserve a little bit, but we don't expect it to move materially from where we have it and we would expect it to perhaps moderate, hopefully, as we move through the course of 2013.

And we built the reserve up by about $1 million.

Yes.

And the next question we have comes from Chris McGratty of KBW. Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division: Not to belabor the MSR issue in the mortgage banking, but, Chris, aside from the one-time, the $2 million, $2.5 million benefit this quarter, was there a writeup in the MSR?

Yes. Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division: And I guess what was the amount that benefited, I guess, earnings than of hedging?

Sure. So if you look at the bottom of Page 4, we disclosed our mortgage servicing right to servicing portfolio and you'll see that we marked it up during the period from 62 basis points to 69. We both -- we believe both numbers are fairly conservative. We note that the 69 is the same level we carried at a year ago and that accounted for about $4 million of the total quarter. Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division: So earnings were, I guess, elevated by $4 million just from the writeup? Okay. in terms of the commentary on growth and margin, can you maybe wrap it all together in terms of the outlook for NII? I guess can we grow in this landscape, NII, for the balance of the year?

Sure. So I think when you got dollar NII, I would take the $162 million that we posted last quarter. Take off $2 million for the day count, take off $2 million for the tax refund, take off a little bit for instant recoveries and you'd be down to $158 million as a starting point. So effectively, we kind of hit the starting point that you would expect on a core run rate basis, and we believe that will continue to grow loans and therefore, earning assets over the course of the year that will be additive to the bottom line and to NII. Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division: Okay, great. And last one, the reserve -- obviously, the credit numbers look good, can you help us where you think the reserve might eventually, I guess, floor?

Yes, we -- Chris, we get asked that question all the time. We don't get to pick a floor, as we know. That the mark -- the provision has been trending downwards as the loan book grows. We've started to positively provide obviously over this last couple of quarters. Charge-offs are starting to get pretty small. Most of our charge-offs now are retail-oriented. We don't have much flowing through on commercial. Recognize that you can always get a bump on any particular credit that might come along and surprise us for some reason or another. And we actually -- the charge-offs were actually a little bit elevated because we chose to disclose a bunch of small notes. So we, I'm sure you figured out by now, are very conservative as we think about running this bank and making sure that we have robust, but justifiable loan loss reserve. So where it finally settles out is hard to say. The benefit of an improving troubled loan book is basically behind us and it should be tracking now with loan growth as we go forward.

The next question we have comes from Terry McEvoy with Oppenheimer. Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division: Thanks for all the color on what you're doing to defend NII. I was just wondering within the fee income business as excluding mortgage, you talk about modest improvement there. Could you be more specific trust, card, insurance brokerage, what do you feel optimistic about in 2013?

Sure. So I think our trust Private Banking asset management-related businesses are doing well as we've talked about a lot. We've hired a lot of good people in those businesses and we're getting nice steady growth and we expect that to continue. Our insurance brokerage business, AFG, is a very strong insurance brokerage, relatively large. We're actually one of the larger bank-owned insurance brokerages out there. It's a slow-growth business but it continues to grow. And we are actively adding brokers to that business, so we expect growth there. We think deposit-related fees have generally bottomed as we grow the business. They'll tend to trend upwards. And card stuff is still steady and will probably grow some. The -- our associated investment services business, our brokerage, is relatively small. We have new leadership there. We expect to get better results as we go on, but it hasn't been contributing a lot of late. We expect to get some growth there. Any one of these businesses is relatively small in the overall scheme of things. But in aggregate, we expect to get good, steady, non-interest fee growth out of those businesses over time.

And, Terry, I would note just as additionally, in the insurance commissions, there is a seasonality to that business and the second quarter is our stronger quarter for that business. Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division: And then just looking at the positive trends and flows, it doesn't look like the branch consolidation you did really had an impact at all. Does that make it easier going forward, to maybe rethink that strategy in terms of shutting additional branches? And then could you just remind me -- I know the consolidation in Green Bay you've talked about, what's -- could you remind me what's going on in downtown Chicago?

Sure. So 2 questions there. On branch consolidation, we consolidated 21 branches a year ago and another 12 this past quarter, give or take 10% of our branch network. Time needs to pass before we see the impact of the 12 that we just consolidated. But looking back now over the course of more than a year, we got very strong results. But it's -- there isn't a lot of low hanging fruit there, if you will. We've consolidated branches that were quite close to other branches. So there isn't as much obvious consolidation left for us to do without really digging into the network. That said, as we've talked about, we've made -- we continue to make significant investment into alternative channels for our, particularly our consumers, to do their banking with. We have a major upgrade of our mobile platform coming later this quarter. We've put image-enabled ATMs across the footprint in the metropolitan areas. All of that, as time goes on, will continue. This industry-wide trend of less and less foot traffic in branches. And we'll be very cognizant of that as we think about how many branches we operate. The second question, consolidation in Chicago, we have about 4 different spots where people work in the greater Chicago area and consolidating all those folks into a building near the Loop downtown, where we've leased a couple of floors. So we're going to get efficiency and over time, some cost savings there.

Next we have Mac Hodgson of SunTrust.

Just a couple of quick of minor questions. One, what was the dollar amount of the seasonally higher personnel cost in 1Q?

It's really the taxes. It's like...

It's like end of...

So it's about $3 million, $4 million, $3 million.

I could probably get a more accurate number, but it's probably something in that ball park.

Bryan McKeag, our Controller, is here in the room. He is going to look that up for you. It's give or take $3 million, but we'll get the number here in a second, but that's always a first quarter event.

Got you. Exactly. And then you may have given this, but what was the -- what's the rate on the FHLB that's maturing, the $300 million?

Roughly 1.75% on the 3 tranches that are left. 1.75%.

Okay. And then the $238 million dividend, was it that specific to hit a certain ratio at the bank level?

I think if you look back at our 10-K, you'll notice that we had undividended bank to bank holding company dividend capacity in excess of $232 million. So we figured out where we were when we did the dividend and we topped it up and took the excess capacity out of the bank. So that was the driver.

Yes, I actually -- Bryan is looking around so I'm going to embarrass our Controller because I have the number here. Unemployment tax was up $1.8 million, Social Security tax is $1.1 million, which is typical at the beginning of the year. So it's $2.9 million, call it $3 million.

And the next question we have comes from Matthew Keating of Barclays.

Chris, I think you mentioned at a recent industry conference, the plan was to return 100% of net income this year. I'm just wondering, with the dividend from the bank associated whether or not those plans have changed at all?

I think we continue to be on the path to have a steady dividend consistent with the earnings and we will continue to look to repurchase shares when appropriate. We think we have flexibility at 100% payout level and we'll continue to evaluate that as the year progresses.

Again I would caution don't read too much into the fact that we moved some money up to the holding company.

Okay, that's fair. And then secondly, I appreciate the color on the drop in mortgage warehouse loans by $47 million linked quarter on an average basis, can you just remind us the size of that portfolio at the moment approximately?

Well, it's -- I think that's one of the reasons it's on average because it tends to pop up and be meaningful at the end of quarters and then quickly wind itself down. Scott Hickey is looking to see if he has any more current numbers but...

But the balance is between $200 million and $400 million.

Yes.

Yes.

And just on that business, I guess, there's been some concern in the industry that risk weightings are going up potentially for those assets...

Not for us because their commercial loans here.

And we've always [Audio Gap]

Chris meant 100%. There are apparently some other financial institutions that don't risk weight them that way.

But we have always risk weighted them as commercial loans at 100%.

Okay. And my final question would just be your footprint might be a little unusual, I guess, in terms of the spring selling season and higher sort of purchase mortgage applications. Do you guys see that there? Is that more of a third quarter event just given that the weather in the footprint?

Well, actually it's not spring here. It's going to snow here tomorrow. I'm sorry, so what was the...

I think we would say that -- it appears to us that refinances are about 80% of production and purchase activity might be closer to 20%, which based on some anecdotal readings of other peers, volumes would suggest that we've had a little higher purchase activity than others, but we're not sure whether we can actually attribute that to other than it certainly appears that the housing market here has continued to strengthen over the last year or so.

But not to the magnitude of other places just because it never fell as far either.

[Operator Instructions] The next question we have comes from Peyton Green of Sterne Agee.

Yes, I just want to make sure I heard that correct. 80% of your volume was refi versus 20% purchase?

Correct. Peyton N. Green - Sterne Agee & Leach Inc., Research Division: Okay. And then maybe thinking about the year in terms of what you need to fix. I mean, the last 2 or 3 years have been busy in terms of repositioning and getting things cleaned up, but what do you feel like is the low hanging fruit that can help results going forward, Phil?

Peyton, it's a great question. It's one we talk about a lot and I know we've talked about with many of the analysts on the call. We have a lot of process reengineering to do at the bank, which gives us a lot of opportunity to make this place better. Now it requires investment and so we're investing, for example, right now into a major project to modernize our commercial loan fulfillment system, the back end of making Commercial loans from underwriting through booking. We have a very manual process today. There's other things like that in addition to the investment that we're making in making the branches, meet our brand standards, all of which as time go on are going to make us more efficient, improve that efficiency ratio, which is not what it should be and give us upside. So sometimes, we look around our company and we feel like, gee, we have so much work to do to make this place more efficient. But when you flip that over, fact is, it gives us upside potential to become much more efficient. So it's a lot of work, but we're taking the highest value projects one at a time and making things better. We've already, as you said, done a lot of that but we have lot more we can do. A lot of it in the back-shop of how we do things here. Peyton N. Green - Sterne Agee & Leach Inc., Research Division: So I mean, would you characterize this as spending $1 and getting $1.5 return, or is it $2 return for every $1 spent? I mean, how are you thinking about it from, I guess, maybe an income statement perspective?

It depends on the project, but we are looking for positive accretive-to-shareholder investments. Peyton N. Green - Sterne Agee & Leach Inc., Research Division: Okay. Is there -- I mean, do you feel like M&A is needed to accomplish some of that or is this really -- you can do it internally and manage the capital through the buyback and come up with a good answer?

With the dividend that we're paying and with the buybacks that we've done and that we'll likely continue to do, as Chris was talking about earlier, we'll probably return give or take 100% of earnings this year through buybacks and dividend. But absent really significant loan growth, we're still going to end up at the end of the year with a lot of capital. So yes, we need to figure out an appropriate way to deploy that capital. We are getting good organic growth. We've got good organic growth here for the last couple of years. Earnings are improving and the projects that we'll do will make our bank more efficient. But over the long haul, it's highly likely that we will need to look for accretive acquisition opportunities as we talked many times in order to fully deploy that capital and get an appropriate return on it.

Looks like we have a question from Tom Alonso of Macquarie.

Just want to make sure I heard a number correctly. Earlier when you were talking about the 15-year fixed, 5/1 hybrid ARM split, did you say that you guys were kind of full up on the 15-year fixed and that you weren't going to be adding any more of that to the book?

On that, yes. We're at $1.3 billion and that's where we intend on staying.

Okay. And so then that stuff, if you do get somebody who comes in that goes to -- that gets sold or you try to -- how does that sort of work? You push them into a 30 year and then sell it?

We sell it on to the agencies. You can sell a senior paper.

So last year, one could argue that we sold less than our total production because we retained some to fill up our own pipelines.

As well as the year before that.

And as you'll go forward though, they'll be more likely sales rather than retention.

We've been generally sitting on somewhere between $1 billion and $1.3 billion of 15-year mortgages now for the better part of 2 years, but we're not willing really to go beyond that unless the balance sheet grows significantly because of the embedded interest rate risk that's there.

Okay. So then the correlate of that is that maybe there's a little bit more room on the gain on sale in the mortgage banking side since some of that production now goes that way?

Yes, sure. And then, of course, we'll continue to take the 5-year hybrid ARMs as they get generated.

Okay, That's fair enough. And then just kind of following up on Peyton's question on M&A and kind of your prior comments on sort of there's a lot of process reengineering, did you feel that you need to sort of, for lack of a better term, get your house in order before you're ready to do something on the M&A side or is that something that you think you'd be sort of able to do in conjunction?

We could do it in conjunction.

Well, it appears that we have no further questions at this time. We will go ahead and conclude today's question-and-answer session. At this time, I'd like to hand the conference back over to Mr. Phil Flynn. Sir?

Thanks. Thanks, everybody, for the great questions and for joining us. I wanted to just close by pointing out a couple of recent accomplishments that we're proud of. First of all, some of you may have noticed this, we are one of only 5 servicers in the country recognized by Fannie Mae with a 4-star rating in their 2012 Servicer Total Achievement and Rewards rankings. No servicer, to our knowledge, has ever received a 5. And this program measures servicers that have elected to their peers across key operational and performance areas and recognizes high achievement. And the second thing that recently happened and it was a little bit of a surprise to us, we were named to Forbes Magazine's 2013 list of America's 100 Most Trustworthy Companies. And that designation came as a result of our accounting transparency, quality governance and the open and honest way that we manage our operations. We were the largest bank to appear on that list. So it's always nice to be recognized in a positive way such as this. So just to wrap up, this quarter's strong performance was highlighted by the mortgage banking result that we've talked about and lower expenses. We're committed to our long-term strategies, which are based on building deeper relationships with our consumer and business customers through sound value-added solutions. So we look forward to talking with you again next quarter. If you have any questions in the meantime, give us a call. Thanks again for your interest in Associated.

And we thank you, sir, and to the rest of management for your time. Ladies and gentlemen, this concludes the Associated Banc-Corp's First Quarter 2013 Conference Call. At this time, you may disconnect your lines. Thank you, and take care everyone.