Apr 23, 2010
Executives
Philip Flynn - President, Chief Executive Officer Joseph Selner - Chief Financial Officer, Executive Scott Hickey - Chief Credit Officer
Analysts
Ken Zerbe - Morgan Stanley John Arfstrom - RBC Capital Markets Scott Siefers - Sandler O'Neill Kenneth Usdin - Bank of America/Merrill Lynch Anthony Davis - Stifel Nicolaus & Co Erika Penala - UBS Dennis Klaeser - Raymond James Terry McEvoy - Oppenheimer & Co. David Conrad - Keefe, Bruyette & Woods Sherry Lansing - Alliancebernstein
Operator
Good day, ladies and gentlemen. Thank you for standing by, and welcome to Associated Banc Corp’s first quarter 2010 results conference call.
My name is Alicia and I will be your operator today (Operator Instructions). During the course of the discussing today, Associate’s management may make statements that constitute projections, executions, beliefs or similar forward-looking statements.
Associated actually results could differ materials 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 materials from the information discussed today, is ready available on the SEC website, and the Risk Factors section of Associate’s most recent from 10-K and any subsequent from 10-Q.
(Operator Instructions) Now, I would like to turn the conference over to our hose Mr. Philip Flynn, President & CEO.
Please go ahead sir.
Philip Flynn
Thank you, and welcome to our first quarter conference call. Joining me today are Joe Selner our CFO; and Scott Hickey our Chief Credit Officer.
This afternoon I will provide you with more detail on our results for the quarter. I’ll also provide additional information about our loan portfolio, and steps we are taking to address our credit challenges.
As you saw in our release issued after the market closed today, we reported a net loss to common shareholders of $33.8 million or $0.20 per share for the first quarter ended March 31. This compares to a loss of a $180.6 million or $1.41 per share for the fourth quarter of ’09, a net income of $35.4 million or $0.28 for the same quarter a year ago.
First quarter results were impacted by our continuing efforts to address our credit challenges, particularly in the construction and commercial real-estate segments of the loan portfolio. We recorded credit related charges of $166 million, less that half of $405 million in the previous quarter.
As you know, we took a very hard look at our credit portfolio during the last quarter of ’09, and we took aggressive and appropriate actions to address our credit problems and move the company forward. On January 15 we completed a $500 million common stock offering, resulting in a net increase in the company’s equity capital or $478 million and an increase in our tangible common equity ratio by almost 2% to 7.73% at March 31.
Our tier one capital to total average assets ratio is 10.57%, and the total capital-to-rise related assets ratio is 18.15%. These ratio’s are now among the highest of any financial instruction in the company.
The successful capital raise positions our company well, and takes concerns about our capital adequacy off the table, as we continue to work thought our credit problems and focus on our strategy priorities. I would now like to talk in more detail about the credit results we reported.
The loan loss provision of $165 million exceeded net chare-offs by $2 million for the quarter. This resulted in an allowance for loan losses of $576 million, or $4.33% of total loans at March 31, compared to $4.06 at December 31, and $197 a year ago.
Net charge-offs for the first quarter of 2010 were $163 million, compared to $234 million in the fourth quarter, and $58 million in the first quarter ’09. Charge-off in the construction and commercial real estate loan categories were down significantly from the fourth quarter, but they remain at high levels.
Charge-off’s of C&I loans continue to be lumpy. For the quarter, net chare-off of C&I loans were $64 million, up $21 million from the previous quarter, primarily due to the chare-off of two financial services related credits totaling about $30 million.
Chare-off in the home equity and mortgage loan categories were down from elevated levels in the fourth quarter. This quarter we reported the lowest level of net new non-performing loans that we’ve experienced during the past five quarters.
Total non-performing loans increased to $88 million during the quarter, to $1.2 billion, but commercial, real estate and construction related non-performing loans increasing a $124 million, to $844 million form the prior quarter. Non-performing loans in the C&I segment were down $54 million, while non-performing loans in other categories remain at about the same level as reported in the fourth quarter.
Potential problem loans declined $228 million or 14% during the quarter to $1.4 billion, as the in flow of new potential problem loans slowed significantly to prior quarters. We saw a 60% decrease in new potential problem loans compared to the fourth quarter of ’09.
While a single quarter’s result don’t indicate a trend, we are encouraged by the decline in early stage delinquencies we experience. Loans, 30 to 89 days past due totaled $165 million at March 31, 31% lower than the fourth quarter and 33% lower than the first quarter of 2009.
This level is the lowest the company has seen since the end of 2007. The ratio of nonperforming loans to total loans increased to 9.1% in March 31, due in large part to an $830 million reduction of our loan portfolio.
This compares to ratios of nonperforming loans to total loans of 794 at the close of ’09, and 2.84% a year ago. The nonperforming loan growth was marked to approximately 65% at the end of the quarter.
The marks range from a low of about 61% for construction loans, to a high of approximately 75% for commercial real estate loans, to the market of about 62% for C&I loans. The marks by category for new nonperforming loans in the quarter are similar to the overall portfolio.
Of these new additions to nonperforming loans, approximately 60% are current. In total about one third of our non-performer are current.
Our residential mortgages totaling approximately $1.9 billion continue to perform relatively well in this environment. Nonperforming loans were 5.3% of total outstanding mortgage loans at March 31.
Our $2.5 billion of home equity loans also performed well, as nonperforming loans were 1.9% of outstanding loans at the end of the quarter. We believe the performance of these more stable segments of the portfolio will continue to hold up well, as we saw a decline in short term delinquencies and a moderation charge off during the quarter.
We continue to work with out customers who may be having difficulty making payments on their mortgages. We offer our customers a number of workout programs, and have had a servicing agreement under the governments home affordable modification program since it was introduced in 2009.
Litigation efforts during the first quarter resulted in more than $15 million in restructured mortgage loans. During the past two quarters we’ve added a total of $560 million to our loan loss reserve, and experienced $397 million in charge offs, as we continue to take actions to deal with nonperforming loans.
We believe the lone loss provision will continue to moderate over the next few quarters, while charge-offs will remain elevated as we worked through our remaining problem loans. In keeping with our strategy to reduced nonperforming loans over the balance of the year, we are working on the potential sale of certain nonperforming loans, and developing in-house systems and staff to handle both loan sales.
The company’s loan portfolio was $13.3 billion at March 31, down 5.9% from $14.1 billion at the end of ‘09, and down 16.50% from $15.9 billion a year ago. We experienced declines in all segments of the portfolio during the quarter, driven by pay downs and charge offs along with decreased line utilization and lower borrowing levels that correct commercial customers.
At quarter end, the construction segment of the portfolio was $1.3 billion, representing 10% of the total. This segment continues to decline down $900 from $2.2 billion a year ago.
The decline is primarily due to more than $200 million in charge-offs, and approximately $500 million in loans that have migrated into the commercial real estate segment of our portfolio as construction has been completed, along with approximately $$200 million to pay-offs. Commercial real estate segment at $3.7 billion represents 28% of the total at March 31.
This segment increased by just $100 million from $3.6 billion a year ago, as the migration of construction loans into the commercial real estate segment of our portfolio has been largely offset by loan repayments. The total shared national credit book declined $71 million during the quarter, to $917 million.
The decrease was primarily due to $35 million in charge offs, and $24 million of repayments. These reductions are in-line with our strategy to move away from large widely syndicated snicks, to smaller club tied deals where we can provide meaningful credit and non-credit services.
We are targeting about a $200 million reduction in large snicks over the next year or so. Generating new loan growth is a significant challenge, and likely will be for sometime.
We need to overcome the loss of loan outstandings driven by the reduction in problem credits, as well as lower borrowing levels by current customers who remain cautious given the near term outlook for the economy. In addition, the company has become inwardly focused since 2008, as its problems mounted and its efforts to gain new burrower slowed.
During the past quarter we began the process of clearly defining the companies acceptable risk appetite. We also made several process changes and improvements to help our bankers close deals, while maintaining strict underwriting standards and risk appropriate spreads.
Our liquid cash and cash equivalents position increased by nearly $1.5 billion, to a very strong level of $2.3 billion at March 31. The S&P downgrade of our debt in January resulted in a $1 billion reduction in unsecured borrowing capacity, leaving us with limited ability access unsecured overnight funding as a source of liquidity.
In order to mitigate the increased liquidity risk associated with this downgrade, we took steps to proactively increase our on balance sheet cash during the quarter. Most notably we increased our brokerage CD balances by $600 million and increased institutional deposits by $700 million.
Total deposits were $17.5 billion at quarter end, up 4.6% from $16.7 billion at December 31, and up 10.2% from $15.9 billion at March 31 of ’09. Although total deposits grew, we saw a seasonal decrease as of just over $400 million in interest bearing and non-interest bearing demand accounts for the quarter.
Net interest income for the first quarter was $169 million, down $9 million from a $178 million in the quarter of ’09, and down $20 million for the same quarter a year ago. Our net interest margin was 335 basis points for the first quarter, down 24 basis points from 359, for both the previous quarter and the first quarter of ’09.
Net interest margin decline was largely due to two factors; first, our conscious decision to increase our liquidity position, resulting in a 90 basis point reduction; second, increased levels of non-accrual loans had a negative four basis point impact. Net interest income declined $9 million from the prior quarter, due to lower loan balances and rates, which accounted for $7 million of decline, higher non-accruals and tow less days due to the shorter quarter.
Although the increase in our cash position had a significant drag on the margin, it had little effect on net interest income. We chose not to reinvest the cash in long-term securities and take on the added interest rate risk.
However, we recognized that there is an opportunity cost associated holding these balances, which we estimated between $15 million and $20 million annualized, depending on the alternative use of these funds. Non-interest income for the first quarter was $98 million, up $13 million from $85 million for the quarter, and up $9 million from $89 million for the first quarter of ’09.
Non-interest income for the first quarter includes a $23.6 million net gain on the sale of $538 million in investment securities. Core fee-based revenue remained relatively strong at $62 million for the first quarter.
This compares to $67 million for the fourth quarter and $61 million for the first quarter of ’09. The decline in fee-based revenue was primarily due to lower consumer fee-based deposit activity.
Overdraft and debit card fees declined a total of $4 million from the previous quarter. Like the rest of the industry, we saw reduction in NSF overdraft fees of approximately 9% during the past year, which we believe was largely attributable to changes in customer behavior.
We are prepared to implement changes related to the opted in regulations that go into affect this summer. Approximately one third of our annual, personal NSF overdraft fees are generated from debit card or ATM activity, which will be impacted by these regulatory changes.
We believe we will retain about half that impact of revenue as we expect some of our customers who chose to opt in. A number of new initiatives will help offset lost revenue related to reduction in NSF, overdraft fess including account inactivity fees, and a transition from free checking products to no fee accounts with appropriate balances or utilization levels.
Mortgage loans originated for sale during the first quarter totaled $455 million, compared to $671 million for the fourth quarter, and a record $1.1 billion for the first quarter of ’09. Industry wide mortgage lending is slow.
Net mortgage banking income totaled $5 million for the quarter, down $4 million from the fourth quarter and up $1 million from the first quarter of ’09. Total non-interest expense for the quarter was $152 million, down $7 million from $159 million in the fourth quarter, and up $11 million from a $141 million in the first quarter of ’09.
As noted in the release, the decrease from the fourth quarter was primarily due to a $400,000 increase in the reserve from unfunded commitments, compared to a $10.5 million reserve increase in the fourth quarter. Personnel expenses were up $7 million from the prior quarter due to the restarting of payroll tax and incentive accruals, and we saw $2 million increase in FDIC expense on higher deposit balances.
These increases were offset by decreases in several other expense categories, most notably is legal and professional fees which were down $4 million and foreclosure and OREO costs, which were down $3 million from the fourth quarter. On a year-over-year basis the $11 million increase was primarily due to $6 million in higher FDIC expenses, and $3 million higher foreclosure and OREO costs.
That completes my prepared remarks, and now we’d like to take your questions.
Operator
(Operator Instructions) Your first question is from the line of Ken Zerbe; please go ahead.
Ken Zerbe - Morgan Stanley
First question I have is on the net interest margin. I understand that the liquidity had a negative impact there, but can you just talk a little bit about your ability to reduce deposit costs, and if that is going to be able to help offset some of the compression going forward.
Philip Flynn
Ken, I’ll let Jo give you the details on the deposit costs, but we have moved those down quiet significantly over the past year; and Jo do you have any detail on that.
Joseph Selner
Sure. From the first quarter of last year our deposit cost was 151 and we were down to 83, and in fact because of some of the liquidity issues we are talking about, we are reluctant to push the fees rates much lower, because we want to maintain CD balances, we want to maintain non material deposits.
So I would not suggest this.
Ken Zerbe - Morgan Stanley
Okay, so NIM [ph] going forwards might remain fairly flat at this level.
Philip Flynn
It probably will until we make a choice on the this extraordinary liquidity actions we take in account.
Ken Zerbe - Morgan Stanley
And then the other question I had just, when you think about longer term or some maybe tough balance sheet levels. Obviously that has been coming down pretty rapidly get the target assets size remind.
Philip Flynn
No, we don’t. I mean the asset size of the whole company has stayed relatively stable.
We’ve had a remixing out of loans and the security over the past year now.
Ken Zerbe - Morgan Stanley
Maybe on the loan side specifically.
Philip Flynn
Yes, on the loan side we’ve still got a significant amount of loans that need to be run off the balance sheet. So it’s going to be a while until you see us turn the corner on loan growth.
There isn’t much loan demand anywhere, and we’ve heard that repeatedly from other banks for the last few days. The same holds true in our footprint.
We got a lot of non-accrual loans that will be going away, and we’ve got other loans like the $200 million of shared national credits I mentioned that will be ultimately leaving the balance sheet. So we are doing a lot to put strategies in place and help grow our loan balances, but I don’t expect to see much fruit from that for a while yet.
Ken Zerbe - Morgan Stanley
Okay, so I’m just trying to make sure I have all the pieces correct. So loan balances go down, security balances go up and again are relatively flat.
You don’t reduce deposit costs, but I have assume giving up the lower ends with higher yields might pressure that. Do you still think you might be able to maintain your NIM at this level?
Philip Flynn
We think it will be a round there, yes.
Ken Zerbe - Morgan Stanley
Okay, alright thank you.
Operator
The next question is from the line of John Arfstrom from RBC Capital markets. Please go ahead.
John Arfstrom - RBC Capital Markets
Thanks, good afternoon.
Philip Flynn
Hi John.
John Arfstrom - RBC Capital Markets
A question for you on how aggressive you want to be on moving some of the nonperformers. Are you talking about very large bulk sales or is it something that you think it’s going to happen in each quarter over the next several quarters?
Philip Flynn
We have been pretty public about saying that we intend on being aggressive on moving NPAs off the balance sheet. So you should anticipate during the course of the year some significant reductions from bulk sales.
John Arfstrom - RBC Capital Markets
Did you have any sales this quarter?
Philip Flynn
We sold a couple of loans at about the low 60s, but we were in the processes I talked about putting in place the people and the systems and building a virtual data around all the things you need to do, to get ready to do bulk sales and we make some progress on that.
John Arfstrom - RBC Capital Markets
Do you feel that good progress; does that mean that you’re about to see something that we could see in Q2.
Philip Flynn
I would be surprised if you don’t see something in Q2. I am not going to promise it, but certainly within the next two quarters you will see significant bulk sales.
John Arfstrom - RBC Capital Markets
And you talked last quarter a bit about the evaluation fund that did a lot work leading up to the Q4 results. Any of that peoples still around, who are still lingering in the expense space at all?
Philip Flynn
No that was a one-time project that was started to finish over the last couple of weeks at December.
John Arfstrom - RBC Capital Markets
Okay and then the last question; a lot of this excess will all go through and ask any questions that transferred a new base line for the company. I’m just curious if you want to outset it, how you would lead the potential problems loans.
You talked a little bit about mass provision continuing to moderate that maybe. Give us your best shot on where you think NPAs will go after in any kind of sales.
Philip Flynn
I think the inflow of NPAs will likely continue to slow. We are seeing a real moderation in the flow of early delinquencies, we are seeing a moderation in the flow of new potential problems.
Its one quarters work, so I don’t want to over emphasize that, but our best estimate is that we will continue to see a slowing in the flow of these things.
John Arfstrom - RBC Capital Markets
Okay, fare enough. Thank you.
Operator
Your next question is from the line of Scott Siefers with Sandler O'Neill. Please go ahead.
Scott Siefers - Sandler O'Neill
Good afternoon guys. Actually, I think I was going to ask a lot of the same questions that John just asked, but I guess I’m curious following the pretty rigorous review that you did in your first several weeks there.
My experience has been almost no matter how diligent one tries to be coming in to a turnaround situation, it always ends up being more than you thought, so now you have another couple of months to continue to delve into the portfolio. How successful do you think that review was as there are other stuff that’s cropped up in your mind.
what are your thoughts on that?
Philip Flynn
I think it was very successful. I mean when you consider everything that was done in the course of no more than a month, we did a very good job of getting our arms around the portfolio, and we don’t have a lot of surprises that we are seeing.
Now that said, as you all know, you don’t get to just charge off or put on non-accrual things just because you want to. You operate within a very specific box defined by accounting rules and such, and that’s what we operated in within the fourth quarter.
There continues to be new problems that creep in because of evaluation issues and we saw some of those, but we had the lowest formation of net new NPAs that we’ve had in five quarters, and I don’t see anything in the portfolio and Scott’s sitting here, and I don’t think he does either, that would indicate to us that there is significant pieces of this portfolio that we haven’t looked at pretty hard and that we don’t have a good handle on.
Scott Siefers - Sandler O'Neill
Okay and then separately to get back to the issue of potential bulk sales problems, you are still kind of in a ramp up parts of some of the infrastructure side of it, but you provide a lot of good color on where your NPAs are marked. I’m curious just having sort of started the process of looking at bulk sale, how you think pricing looks, relative to where you have things marked.
You’re satisfied that (1) your marks have been aggressive enough; and (2) that the interest from the potential buyers is at such a place that it is worthwhile to go through the sale.
Philip Flynn
Let me put it, its definitely worthwhile. Our overarching goal is to reduce our NPAs, and we need to do that.
What we said publicly about this is that we believe that we can sell a significant amount of NPAs, and do that within the context of our core earnings for this year, covering the provision necessary to get that done, so that we end up at roughly breakeven at the end of the year. We have said that we thought we would lose money over the course of the first half of the year and that’s what’s happened, we lost a moderate amount of money for the first quarter, and there is nothing out there right now that gives us a feeling that what we thought would happen going back to January isn’t going to play out.
I don’t want to say a whole lot about individual marks and stuff, because I’m actually trying to sell these loans at the best price I can get and I don’t know who is listening.
Scott Siefers - Sandler O'Neill
Understood. Okay, thank you very much.
Operator
The next question is from the line of Kenneth Usdin with Bank of America/Merrill Lynch. Please go ahead.
Kenneth Usdin - Bank of America/Merrill Lynch
Hi, good afternoon. Phill I was wondering if you could talk about, you mentioned that you would expect that charge-offs are going to remain high and the provision starts to come down, so are we at the point already where you are anticipating starting to release reserves, and I guess the biggest thing is obviously with some of the problem loans coming down, can you also give us an update on criticized, classified and how that’s trending as well?
Philip Flynn
Yes, we gave you the information that there are potential problem loans, which we defined as substandard and still accruing loans came down by a couple of $100 million and the early delinquencies have also come down, both fairly significantly compared to past quarters, so that’s good news. What was your first part of your question again?
Kenneth Usdin - Bank of America/Merrill Lynch
So, are we at the point where you are actually going to start releasing reserves on your way forward? Is it enough that you have seen already?
Philip Flynn
Yes, you saw what we did this quarter. We did not release reserves.
We essentially covered the charge-offs. If we were to significantly reduce the NPA book, then you might see us release reserves, but until we can get the NPA book going the other direction, which I think has to come essentially from bulk sales, you probably shouldn’t expect that.
Kenneth Usdin - Bank of America/Merrill Lynch
Yes okay. My second question is related to longer term positioning for rise in interest rates, so there is a lot of moving parts obviously with the excess liquidity and then the loan balance is running down, but can you talk to us about how the company is positioned for rising rates, and will you be a net beneficiary or is there going to be a drag on that point about keeping the deposit cost pretty tight.
Philip Flynn
I’m going to let Joe answer this technically, but let me just give you a little color on the security sale we did, because it plays in your question. As we mentioned, we sold more than $500 million of securities in the first quarter, and we booked a significant gain.
We did that because those securities had a relatively short duration. They were nine to 12 month duration securities, so that the earnings from those would have largely been taken over the rest of this year.
So we affectively pulled those earnings forward and took the risk of us not seeing those earnings if the rates were to rise, not that I expect them to rise, but we took that risk off the table, by going ahead and selling them and taking the gain now. So that’s one way we are thinking about doing things.
Then of course we haven’t reinvested those proceeds on, they have added to the short position that we had, albeit significant opportunity costs that we are bearing right now, but we are taking actions to make sure that we don’t get hurt and may even benefit as the year goes on and rates go up. Joe you want to add anything more to that?
Joe Selner
No that’s actually correct. By getting in the capital, which is basically free funds, by getting in the overnight position on fed funds, it’s made us more asset sensitive than we’ve been for several years.
So again, we are getting ourselves asset sensitive, but again we don’t take bets; we are all still around neutral ends. So, again the technically correct answer is we’re about 1.5% asset sensitive at this point.
Kenneth Usdin - Bank of America/Merrill Lynch
Okay, as the loan book shrinks, is the loan book becoming more or less variable?
Joe Selner
I don’t see a material change in the mix of that.
Kenneth Usdin - Bank of America/Merrill Lynch
Okay, thanks everyone.
Operator
The next question is from the line of Anthony Davis of Stifel Nicolaus & Co; please go ahead.
Anthony Davis - Stifel Nicolaus & Co
Phill and Joe, I wonder if you could talk about the relight of the credit policies. You mentioned that the risk appetite has been defined.
Has the board approved that, and where are you I guess in getting that word out to your own people in the sense of when it might be a reasonable time period to suspect or expect some resumption of core organic growth?
Philip Flynn
It’s a great question, and I want to be clear. In my remarks, I said that we were in the process of formally defining or redefining the company’s risk appetite, so that is not done yet.
We haven’t established that risk appetite and we have not got the board approval for it, we will do that over the course of this quarter. In addition to that work, that’s at the very top of the house, we are doing a lot of things right now.
Scott and the credit folks and the line people are all meeting very frequently to make sure that everybody is on the same page as to what types of transactions our bankers will know they can deliver. So, we are doing a lot of work that way, but we still have a lot of work to do.
One example of something that we have already done is reorganization internally where we took the underwriting staff, all those people who actually work with the relationship managers in the field and have reorganized them. They used to be part of our credit administration structure.
We moved those 90 or 100 people out to the line units, so that the relationship managers have people who are very familiar with policy and procedure and underwriting criteria, right there to get things written up properly with the appropriate standards and get them ready for approval by credit. So it’s those type of actions that we are taking now.
So we are doing things at the bottom of the house and we are doing things at the top of the house and we expect to have that work complete at this quarter. As I said earlier though, I don’t think you can expect to see a lot of net loan growth, given the run-off it has to occur.
Anthony Davis - Stifel Nicolaus & Co
As a follow-up, I just wondered what you have got Oliver working on from a strategic standpoint. Obviously you got your hands full dealing with credit issues right now, but where are you in thinking about the company, in that regard, and what projects are you working on that we may all know about?
Philip Flynn
Sure, so Tony is referring to Oliver who joined us six weeks or two months ago as our Chief Strategy Officer, and he worked with me at my previous company. Oliver has got lots of things going on, but what we chose to do rather than a top of the house strategic plan, working on specific projects for the first half this year, and then we will turn our attention to a wider strategic planning exercise during the second half of the year.
Specific projects that are going on are defined in our risk appetite as I mentioned and we have some outside help overseen by a group of people here including Oliver. We have got work on better communications between line and credit going on.
We are working on enhancing our penetration of our footprint, particularly in the outer areas of the footprint, and then particular in the bigger cities like Chicago, Minneapolis, etc., and you heard me talk about wanting to hire more people in those cities and in fact we have had some success doing that, and we expect to have some significant success here in the next few weeks. We actually have some other projects that don’t relate to growth.
We are working on an enterprise risk management project. We are also working on looking at our mortgage products, to see if we can create some mortgage products that is more attracted to our wealthier clients, that we can keep on balance sheet, and there are several other projects like that going on.
So relatively, specific rifle shot projects that we need to get done in order to get ourselves ready for an economic recovery and be positioned to take advantage of that.
Anthony Davis - Stifel Nicolaus & Co
Thanks.
Operator
The next question is from the line of Erika Penala with UBS, please go ahead.
Erika Penala - UBS
Good afternoon. My first question is a follow-up to Tom’s question.
Joe when you knew that your model suggests that you are asset sensitive, what assumptions did you make in terms of deposit volume behavior, and also potential pass-through when applied.
Philip Flynn
The way we model it is we do not change the balance sheet volume. We just make assumptions about rate changes and we make assumptions about what we are going to on the deposit side, what we are going to do on the loan side based on the historical behavior.
So it’s simply an instantaneous shock of a 100 basis points or 200 basis points, that’s how we do it. There is not a volume change here.
Erika Penala - UBS
What was on the deposit rate side, what was the rate pass through assumption.
Philip Flynn
I can’t tell you that off the top of my head. I have to go back and ask my guys, because I think it’s a different by product.
I know historically and again I am sure it’s changed, but historically it’s been approximately a third of the movement of the fed funds. But I’ll have to get you a better answer, I don’t have that here.
Erika Penala - UBS
And I think during the prepared remarks it was mentioned then about 60% of the CRE NPAs are current. If not the case, have you been mind reading these loans, if the values are up ended or is it that the debt service on the project you are funding is under water, but the borrower is funding it from cash flow from other projects.
Philip Flynn
Yes, let me be clear. What I said was that about 60% of the new nonperforming loans were actually current as we move down to nonaccrual, and basically I think you are correct.
The reason why that happens, generally speaking is evaluation driven issue. So in other words the developers are still in current, whether it’s from an income producing property that we might be financing or from other cash flow they have their other resources, but because of the valuations have gone down.
We have gone ahead and moved things to non-accrual. Overall when you look at the entire $1.2 billion at non-approval loans, roughly about a third of those are still paying current.
Erika Penala - UBS
I just wanted to make sure, the mark that you had mentioned again during the prepared remarks is 61% for construction and 75% for CRE. This was the mark on the new NPA.
Philip Flynn
No, that’s the mark on all of the nonaccruals in those segments.
Erika Penala - UBS
Why is CRE much higher than construction?
Philip Flynn
Because constructions loans are inherently riskier and less valuable than completed least commercial properties.
Erika Penala - UBS
Sorry, I had that opposite then, its 75% for construction and 61% for term.
Philip Flynn
No you had it right, but what we are saying is that we are carrying when you look at the charge offs, plus the specific reserves, it marked the construction loans down to 61%. When you do the same thing on commercial real estate non-construction real estate, it’s about 75%, and then if you look at the rest of the C&I bought that’s in the non-accrual bucket, its about 63% between the chare-off and the reserves.
Erika Penala - UBS
All right, thank you.
Operator
The next question is from the line of Dennis Klaeser with Raymond James. Please go-ahead
Dennis Klaeser - Raymond James
Good afternoon. Could you comment more on your liquidity strategy and you need for liquidity at this point?
Your overall cash balance is about $2.3 billon; three to five times higher that they were in prior periods. What drives the need for that high level of liquidity at this point?
Philip Flynn
I think its fair to say that we are taking, and I would acknowledge a very conservative pasture on liquidity. Once the bank lost its investment grade rating, which S&P downgraded the day that we raised $500 million in capital, we because concern because basically our unsecured over night finding capacity dried up.
We made a decision to go ahead and build up a very significant cash equivalent over night funds to absolutely insure liquidity. We recognize that it is expensive, but we think that’s the prudent thing to do until we work to problem loans, and hopefully in the coming quarters reestablish our investment grade rating.
Recognize that the other three rating agencies added an investment grade rating and in fact for example significant higher rated the S&P but it doesn’t matter. The fact the matter is we have a non-investment credit rating from S&P, and that’s impacted our access to the short-term liquidity.
Dennis Klaeser - Raymond James
Do you have additional borrowing that are rolling over in the short term.
Philip Flynn
Additional borrowings, we don’t have much in the way of longer-term debt. We have a $299 million sub debt issue due in August 11, other wise we have sort of the routine relatively short funding.
Dennis Klaeser - Raymond James
Thank you.
Operator
The next question is from the line of Terry McEvoy with Oppenheimer & Co.
Terry McEvoy – Oppenheimer & Co.
Given these expenses review in Q4 in the loan portfolio, particularly in the construction and in, should we be surprised with the increase in non-performing, and CRE are $50 million, construction up $74 million. Were those loans may be smaller in size, but did not go thought that review process, or did they simply show deterioration in the first quarter and that was reflected in the numbers.
Philip Flynn
Terry, I’m not really surprised. I mean, as I tried to describe before, you go through these things to review them operating within the box that you can operate in from an accounting point of view.
You do everything you can for the quarter. There was no scenario where we would capture every potential non-accrual in the fourth quarter and then see them essentially dry up over the course of the year.
What we expect is a decreasing velocity of new non-accruals and new problems, and that played out in the first quarter.
Terry McEvoy – Oppenheimer & Co.
And just one another question, and I don’t mean to be critical, but I remember the call three months ago, one of your teams was improving just reserves relative to non-performing assets. That ratio you felt was too low.
The fourth quarter I believe it was 48 and I believe that number has dropped down to 45 if I’m doing the numbers.
Philip Flynn
I think it was 51 and it’s gone to 48.
Terry McEvoy – Oppenheimer & Co.
Okay, okay, but directionally its gone down and could you just talk about it. Since you mentioned it three months ago, is that still something you are focused on and where you like that to head?
Philip Flynn
I would have liked it to have gone the other way for sure, but the non-accruals did creep up a bit, and we continue to aggressively take charges. So yes, we wanted to move the other way.
I think the best way to get it to move the other way is to make some significant impact on selling NPAs.
Terry McEvoy – Oppenheimer & Co.
Okay that’s it, thank you.
Philip Flynn
Thanks.
Operator
The next question is from the line of David Conrad with Keefe, Bruyette & Woods. Please go ahead.
David Conrad - Keefe, Bruyette & Woods
Hi, good afternoon. Just a follow-up question switching gears moving back to the Reg E in terms of NSF.
What is the percentage of NSF used, that we can think about relative to your service charges that you report?
Philip Flynn
I’ll take the service charges. I don’t know if I can get to our answer that way, people are flipping pages, but
David Conrad - Keefe, Bruyette & Woods
Not trying to turn out the impact that you outlined.
Philip Flynn
Yes, we booked about last year $80 million NSF OD fees, and about a third of that is ATM and debit card related. So that’s the piece of that revenue stream that’s going to be mostly impacted by the opt in provisions happily through this year.
We think that a significant number of people who have generated those fees are going to want to opt in, but there will be a significant number that aren’t, and that’s the piece of the revenue stream that’s at risk, and we are doing other things in the retail bank to sort of backfill that revenue stream with an inactivity fees and some other fees that we haven’t been charging, that other competitors do. And a move toward providing people free checking accounts, but holding them more closely to balance minimums, activity minimums and things like that.
Joe Selner
Just to be clear, service charge income last year was $117 million; $79 million of that was driven into NSF and overdrafts. That was a specific question.
David Conrad - Keefe, Bruyette & Woods
Yes, okay great thank you.
Operator
The next question is from the line of Sherry Lansing with Alliancebernstein. Please go ahead.
Sherry Lansing - Alliancebernstein
Hi guys just a quick question on what is the impact of NENs on your name because you have a pretty solid growth nonperforming loan bucket, and as you sell that in, that should help you right.
Philip Flynn
Its about four basis points was the impact right.
Joe Selner
Let me answer to question; the four basis points of the impact for the quarter but if you would take a $1 billion worth of loans and say you are earning 4% on those loans, its in the low 20s in basis points. You can take about $40 million, $45 million or $20 billion are in the assets.
David Conrad - Keefe, Bruyette & Woods
So let me ask it differently. If you had a bulk loan sale of you entire nonperforming back tomorrow.
I mean how will that impact you in the end?
Joe Selner
It probably wouldn’t do very much there is no income being recognized on those loans today. The extent the only way to help us is we might earn set point rates of 25 basis points on the cash we got.
Philip Flynn
While on the other, the question then goes to what’s you alternative use of the cash that you get in from the selling. So if we are to invest those longer for example, we have a lot of liquidity, we don’t have an unlimited amount of short-term liquidity, so if we reinvested longer or we got loan growth, we could have a meaningful impact.
David Conrad - Keefe, Bruyette & Woods
Okay thank you.
Operator
(Operator Instructions) And I am showing that there are no further questions.
Philip Flynn
Okay thank you Lisa, and thanks for everybody for joining the call today. In closing I want you all to know that we are going to remain very focused on reducing our NPAs and we are going to continue to put in place the various strategies we discussed to generated growth in coming quarters, although I think its going to take some time.
We believe these actions are serviced level and get us ready for recovery in the economy. We look forward to updating the next quarter and if you have any questions in the mean time, as always give us a call and thanks again for your interest in Associated Bank.
Have a good evening.
Operator
Ladies and gentleman, this is the Associated Banc-Corp first quarter 2010 earnings conference call. If you like to listen to a replay of today’s conference, please dial 1800-406-7325 or 1303-590-3030 and entering an access code of 4377482.
We would like to thank you for your participation. You may now disconnect.