Associated Banc-Corp (ASB) 2004 Q1 法說會逐字稿

My name is and I will be your conference facilitator. At this time I would like to welcome everyone to the Associated Bank Corp. first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remark, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number two, on your telephone keypad. Thank you, I would now like to turn the conference over to Paul Beideman, CEO. Please go ahead sir.

Thanks Tina and good afternoon everyone. I have Joe Selner, who is our CFO, here with me, and what I like do is just make a few comments about our quarter, and then certainly wrap the things up for question. I think we were pleased with our first quarter of $0.80 a share, and while our mortgage business certainly has flowed somewhat. Many of the initiatives that we have been talking about for some time are beginning to some positive momentum for us. And many of you will recall in our one-on-one conversation at our presentation, and we have identified seven strategic priorities that are designed to help us to diversify our revenue stream, and overcome this anticipated reduction in the contribution of the mortgage business. And just quickly, those seven points were: to retain the growth in our traditional corporate and Business Banking business is going to improve the performance of our wealth management business; to grow small business relationships; focus more on our consumer opportunities even our distribution, specifically, consumer lending and home equity business; to grow demand deposits logically as a result of the focus is on a small business and consumer; improve pricing discipline into return our asset quality to traditionally strong level. And I think the quarter really has evidenced that we are beginning to make some real progress on many of these initiatives.

Net interest income grew both compared to last year, and on a link-quarter basis and while the margin has stabilized, our loan growth, specifically our commercial loans, which are showing a growth of that 9% on annualized basis and our consumer loan, double-digit, 16% on annualized basis, are evidence of some of these things that are going to gain traction. Our credit quality has improved significantly, as we reduced our charge after that 20 basis points and also have seen a very meaningful reduction in our non-reforming loans, down to about 89 basis points, which is the lowest, since the second quarter of 2002. The function really is in fact we have been able to work through the two large foreign credits that we have identified about this time last year, and also really a systematic approach to looking our credit and I think really having some successful management in terms of working through some anther problem, credit within portfolio and in some cases exiting those credits; we also improving their structure, so that the ratings can improve as well. Our wealth management business really for the last couple of quarter has been a strong performer, if you compare to where we were 12 months ago, the trustee revenue components of the businesses are up very nicely, and our brokerage and annuity revenue streams, which we categorize in our wealth management category is really up significantly, and we're seeing good positive momentum within that business segment as well. We were very pleased with the progress that our business managers have made in terms of focusing on expenses within each of their businesses, helping us to create operating leverage there, and our expenses are down about $6m on a link quarter basis, which we think is -- certainly has been a positive contributor for us in terms of our operating leverage.

We had a small gain on security sales as you see in the report in the income statement, and that really was the sale of some stock which is some types of initiatives that we book out on an ongoing basis, this doesn't affect our run rate certainly from an earnings point of view and we felt that it is an opportunistic time to take some small gains there and we have had frankly some small expense categories, severance and the like, partially offsetting those gains as well. So, all things considered, we think we had a pretty good quarter and we're beginning to show some signs of positive influence as a result of these strategic priorities that we've been talking about over the last several months. So, that's really all I had to say, oh! one other quick comment, I'm sorry. We did acquire the Jabas Insurance Agency a few weeks ago, which coupled with our CFG Agency acquisition of about a year ago in Minneapolis, really I think is helping us flush out this insurance business. Jabas, very much like CFG, sells employee benefit programs to companies and is a very relationship oriented business, and we feel that it fits very nicely along with CFG in Minneapolis with our commercial businesses. Jabas provided many of these services to Associated over the last 20 years, and we've had a relationship with them for that length of time, and we feel very comfortable with that company and the people that are in it and look forward to being a stronger participant here with Associated as CFG has been in the last year. So, those are my comments, and we'll be very happy to open things up for questions. Katina, are you there?

Yes sir. At this time, I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Thank you.

You're welcome. Your first question comes from the line of Eric Grubelich with KBW.

Okay, thanks.

Hi, good afternoon gentlemen. Nice, very nice quarter.

Thank you.

Yes. I -- compared to most things I follow, it was a tremendous quarter, last couple days. Couple of things for you. One, could you provide a little bit of color on the retail commissions which would include your insurance, that had some nice volume increase this quarter. Are you getting that business or do you expect to get that business going forward more from miming existing customers of the bank or these folks, which would include the Jabas Group, are they going after other people that are not part of the bank?

It's a combination of both. Both CFG and Jabas have strong books of business themselves and continue to create opportunities there and we're seeing success up in Minneapolis where we've had CFG now for a full year in terms of creating opportunities off of our business there. Also, I should point out to you in that commissions category is also our fixed and variable annuity and core brokerage business too, and we are seeing really very strong growth there as we had integrated our brokers more into our regions so that they are feeding off the opportunities that the sales process in our branches can create, and those numbers are up significantly from a year ago and we're seeing good momentum there both from our license associates in our offices and from our dedicated program.

Okay, that's good to know. I have a question for Joe -- some Joe Selner is there right. Couple of questions for you Joe. One, could you comment a little bit on what you're doing to improve deposit growth at the bank? And then the second question is could you give me an indication if you looked at your entire loan portfolio, how much of the portfolio in approximate percentages would be in fine base loans, loans that will immediately adjust or adjust within 30 days, whatever, when rates do go up?

Let me answer the last question first because -- and I'll let Paul talk about the deposit side.

Sure.

When we look at our interest rate risk profile, we look at how much of our loan portfolio will be available to reprice, and that's -- and we, as I think I've talked before, we have a relatively short balance sheet and almost over 70% of our loans were re-priced within one year. So, we are, as I said, relatively short - the explicit answer to your question is how many are adjustable, it's some where in the 60%.

It's that a high. Okay.

Yes. So, again, I am answering the question two ways.

Okay. Now, that's great. Thanks.

And Paul will talk about the deposit and insurance.

Thank you.

And then we'll -- probably if you want to another one, Eric?

No. I am done, I am done.

On the deposit side, we are focusing on, first of all, we are investing a lot in sales management and in the commercial businesses and both management and consumer, and we are focusing very aggressively on demand deposits. And then, seasonally in the first quarter they're down on a linked-quarter basis, but they are up year over year and it's an area that we are going to continue to focus on to take advantage of the large number of consumers that we have, but also as we grow in the small business and commercial area to capture a greater portion of the demand deposits that associated with those new relationships. So, we think that's going to create growth opportunities for us.

Your next question comes from the line of Terry Mcevoy with Oppenheimer & Co.

Hi good afternoon. First of, thank you very much for holding the conference call. My question is, it has been a little over six years since the acquisition of First Financial Corp Bank, how do you yourself - or do you yourself participate in the continued consolidation in the banking sector going forward or you're going to focus on some of the fee-generating areas in terms of doing the ?

I think we are going to continue to look at both, and the Jabas acquisition is reflective of our, trying to strengthen the insurance segment of our business. We've really gained confidence nonetheless in that couple of years. We are going to continue to look for acquisition opportunities, either in footprint or in adjacent markets. Now, we are also going to be somewhat selective in that process and I want our acquisitions to be strategic in nature, so that -- you know, we are focusing on everyday on core revenue growth and the diversification of our revenue stream and looking at acquisition opportunities as they come along to enhance our distribution within footprints or to expand it into attractive MSAs in adjacent markets.

Thank you Paul.

Your next question comes from the line of Ben Crabtree with Piper Jaffray.

Hi Ben.

Three kind of loosely associated questions. On the loan side, I guess, maybe I might be wrong in this, but I would have thought that seasonally this wouldn't be a particularly strong quarter, so, when I see the kind of sequential growth I am wondering if this is indicative of kind of a building momentum on the C& I side, I'd be interested in what you have to say on that in terms of line utilization and kind of momentum that might be building? Secondly, you, Paul, mentioned exiting credits. I am wondering if there were some significant ones, where that happened, and if that -- you know, if we're talking about enough dollars that might actually color the period and loan numbers at all? And then, the third one is really just credit quality, obviously wonderful credit and I know you said that 20 basis points was a reasonable possibility, I guess, I didn't expect you to get there that fast, but I am wondering if you think that 20 to 25 basis points is in fact a sustainable charge-off ratio going forward for the next few quarters?

Okay. Our lenders now are starting to talk about growth opportunities that they are seeing in the marketplace that they weren't really as little as three or four months ago seeing. So, I am hopeful that that's an indication of some sustained -- of a slight shift in what's going on in the market. I wouldn't call it a sea change at this point, but we are seeing momentum from existing customers and opportunities from new customers that we weren't seeing several months ago. On the consumer side, it's really a matter of the efforts that we have been sustaining in our brand system in terms of our marketing and our sales process that I think are really going to be able to continue to show some new growth trajectory there. In terms of exiting credits, this isn't something that we've been working through for the last couple of quarters and it was a focus that we set out on ourselves as a strategic priority last year and I think it just has -- it's going to bode well for our performance, I think, in terms of relative asset quality going forward because of the reversal we brought to the analysis just a couple of quarters ago. We can always get surprised and, you know, that's just a major banking. But I'd like to think that our asset quality and our performance going forward can be in a range -- I mean, I can't say it's going to be 20 basis points every quarter because that's pretty good, but its got to be in a range that that's going to be where strategically we want to take it. Again, you can always get surprised, but that's how we see it. From a reserving point of view, we are still just a low south, I guess of a 170 basis points, and that will change hopefully as we continue to grow. But again, we think we're certainly adequately if not conservatively reserved.

This is Joe. Let me also make a comment on the existing credits. We showed a very large decline in non-performing. We got paid money on two of the credits we are talking about last year. So, you know, you got rid of some problems, and that could be seen to be an exit though we got paid, but half the reduction were in this credit, but it's still the things are in line, in right, four portfolios as well as the other hand.

My sense is that those might have rectified themselves a little quicker than you had indicated before.

I think some folks did a very good job of working with the customers do that to get it where it is.

Okay great, thanks.

Your next question comes from the line of Jerry with Sandler O'Neill Asset Management.

Good afternoon.

Hi Jerry.

Just a couple of questions. One is, just a housekeeping item on the mortgage banking revenue side. Joe, could you provide just how much of that revenue this quarter was from loan sale gains, how much was from servicing? And then secondly, just curious with respect to the bond portfolio, what you guys are thinking going forward, obviously, the yield curve is extremely steep, and rates have moved up. I know you guys really haven't added much in terms of leverage to the balance sheet. What you are thinking there, what your buying duration, and just with the recent spike in the rates, what that's done to the market value of your portfolio? Thank you.

Jerry, let me answer the question. Of the $9m, $3.8m of it was servicing, the rest was gain on sales and fees from originations.

Great, thank you.

You want me to talk about the bond portfolio?

Why not?

Obviously, the interest rate environment has been relatively volatile, and when you have, in a portfolio like ours, the market value of that portfolio goes up and done with those rate environments. So, you price on that, at a point in time and you can have some volatility. We have consciously over the last three years I guess, two and a half years, been trying to keep our portfolio very short because we realize that the low rate environment, we realize that at some point the rates would have to go up. And our duration has been in all of this time between two and two to three quarters, and it's little over two and a half right now. So, we've been relatively short. We did make a conscious decision late last year to take advantage of this steepness of the curve, and put on a little bit of volume in this area. And again, very short duration, but again, we did take advantage of it, and we continue to look at ways to continue our net interest income expectations.

Thank you, your next question comes from the line of Peyton Green with SBN Midwest Research.

Good afternoon. Joe, a question on -- the growth of the other earning assets and also the growth in the wholesale, what kind of strategies are you using in terms of funding the additional securities budget? You are going short, when are you going to go longer, how did you all do that in the quarter?

Well, it's a simple question with a hard answer. What we are trying to do is continue to keep our interest rate sensitivity position as being asset-sensitive. And there is a lot of dynamics going on. As deposits grow which they have, that has helped our interest rate risk profile. And so as we look at these matched funding concepts, we tend to try to be match funded. We intend not to take a lot of interest rate risks, obviously, there are a lot of things that come in and out and I would not seek you to say that we have match-funded everyone of those investments. But again, the duration of the investments we put on are relatively short, being less than two years. So, we have funding, we've got two year funding we put on, because we ladder out as a normal proposition of it, and so, its again -- we are trying to manage the overall risks position, and we are trying not to take interest rate percentage.

Okay. And then on the expense side, just thinking about the expenses, well it be the year-over-year or like-quarter, I mean with the on-going sales training initiatives, also I guess it will be two line items they kind of look noticeably lower, but but then also business development and advertising. Should we expect those to pickup going forward, or where would the sales training expenses that you moved into earlier run through?

I will let Joe answer the precise, the answers to where they run through. In terms of how you see the trajectory going forward. I'm not -- I don't think we are going to see another quarter where they are reduced in absolute terms by the same rate from the fourth quarter, but I think we are going to see them stay down and again with some ranges; there might be some increases here and there that maybe in business development. But, I mean these are substructural changes that we are making to certain components of our business that are designed to create some operating leverage where we can and we have that opportunity. And we are going to continue to focus on being as efficient as we possibly can be as well going forward. The specific question, the expense went to other and it's obviously a more-than-a-one quarter initiative; it's over, all of this year, part of next year, part of last year's fourth quarters or third and you probably won't see a big shift because we are not expending millions and millions of dollars. So, when it's quite over that period of time, it's not a real big number to jump out.

Okay, and then just talking about the personal loan, I guess it was up about 4% year over year. But it was down significantly link-quarter. Was there anything that was recognized in the fourth quarter that I am forgetting about that caused that number to be a little higher or should we think about it going up in future quarters?

The comparison to a year-ago, the big increase there, and in fact if you look at the second quarter, you can see it normalized out as the CFG came on the first week in April, basically last year. So, CFG, which is a noticeable expense and revenue contributor, without of that first quarter completely, and I was in on the second quarter on. So that's one major piece of it. And there were a couple of one-time issues in the fourth quarter.

As we look at the fourth quarter again, there was some severance in the fourth quarter. We always look at the fourth quarter as a true-up of our approvals and so there were some incentive approvals and profit-sharing bonuses those kind of things that we had to true-up in the fourth quarter, which obviously were inflated that number a little bit, and as Paul has indicated, we had some severance because again you can see some aggressive management of the FTEs and part of that was as we are positioning some of our businesses and their severance cost related to that and there were some of that in the fourth quarter also.

Okay.

But they now also make sure that everyone realizes that what we are talking about is run rate from this business, when we put Jabas into the mix next quarter, the line items on both sides are going to move a little bit; so we'll just have to figure out what all that means for the next quarter.

Okay, fair enough. And then on the last question, I have on the retail commission side, was there any contingent premiums recognized in this quarter that wouldn't have been there because of CFG not paying in fall of last year, first quarter?

Yes.

Okay.

And again the contingent income from all of our insurance business comes in over the first half of the year, and there again our -- when we look at it, we look at it all of our insurance revenue and some of it comes to us, you know, month-by-month commissions and some comes as a contingent. So, yes, there is something there, but I think it is easier to look at the total because it's all the business we're selling.

Okay. While I am thinking about the expense growth in '04 its kind of a whole year versus '03. What would a fair range do you think?

I don't know that I can answer that question. I think there are so many variables; obviously we have to manage our expenses relative to the revenue and we are attempting to do that. But ex-Jabas, you know Jabas will come in next quarter and that will be a fun. For example, in excess what we've done in this first quarter in terms of management, the run rate has covered all of the salary increases and those types of things that would have occurred. So, it's a 2% or 3% reduction with the head count and reduction of about a 100.

I have been very impressed by the expense management I just wonder to put it's started officially a little lower in the first quarter and it's seem to happen that way over the last year. I just didn't know--

Yes, it's probably a little in terms of the comparison of the fourth quarter; it's probably a little low that's because of the couple of one-time severance things that happened to be in the fourth quarter.

Okay, great thank you very much.

At this time, I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. Your next question comes from the line of Ario with Sandler O'Niell.

Hi guys, great quarter really on all levels.

Thank you very much.

Many of my questions have been answered a lot of it has to do with what Jerry was talking about with respect to the mortgage portfolio, but one idea maybe is maybe you can tell me a reason why not, why don't you give the mortgage breakdown detail and the fees etcetera?

Well, this discussion in queue, but we've got so many numbers already in our press release. We are trying to cover it all. I guess if it's something that's really important, we can try to fit it in here, because we disclosed it. It's not a --

No, I know you've disclosed, I was just saying in terms of backing into really what happened since it's such a large fluctuation or has been such a large fluctuation.

Well, we'll take your advice and take a look at it for next quarter.

Right. And also we do appreciate you hosting the conference call, it's very appreciable.

Okay. Well, we'll have it next quarter.

Okay. Thanks guys.

We have a follow up question from the line of Ben Crabtree with Piper Jaffray.

Hi. Just a little follow-on on the expense line, not so much the dollars, but the trend in FTE is clearly been moving lower. I just wonder if there is more to go here or if you kind of accomplished most of what you have been trying to -- again forgetting about the pending acquisition, but the kind of core operation, is there is more to go in terms of FTEs?

That's a good question. I would suggest that there is probably slightly more to go. Like I said, this is something that we are going to do on an on-going basis and hopefully not create an environment where we have big sways in there, you know, going down to 3%, 5% layoff or that kind of thing. We are trying to manage it prudently and sensitively as well. But there are opportunities, certain of our businesses, the back office areas that created this opportunity and as a priority I want managers to be thinking about all the time. So, I would suggest that, I mean in some cases there will be some investments that occur too.

Sure.

We see opportunities, but we are going to -- something we are going to manage vigorously as an on-going part of manager's responsibility here associated. Then I think, you also -- we also have some fluctuation in this, just simply by turnover and open decisions and that will move the number a little bit also. So, it is real hard to say exactly what it can do quarter by quarter. But still , those points we will try to do. It's not going to another 100 next quarter.

Well, it's a kind of follow on to that. obviously you've seen a pretty nice over the last few quarters, a drop in the efficiency ratio and I should know the answer of this, but I don't know if that's a metric that you managed to -- but if you do what of kind of a target would you have in terms of the efficiency ratio, let's say, over three or four quarters?

I view it as an outcome.

Right.

I'm less concerned about what it is. If I could make significantly more money and help the efficiency ratio go to 60, I'll do it.

Okay.

But it's an outcome of our action. It's an end result, not a target that we should look for.

Okay. Thanks.

We have another follow up question from the line of Jerry Crowing with Sandler O'Neill.

Thank you. Paul I'm actually just curious about, if you compare maybe today versus the end of the fourth quarter, how you feel in terms of one, the business environment and two, the economic environment, what are you folks . Thanks.

I think we are starting to see some positive momentum within our commercial customer base, and hopeful that's what we are seeing. It's starting to have -- I hope it's starting to have an effect on our volumes and our assets in the first quarter as much as we did last year. And I think that's a positive sign on the consumer and the commercial side. I think there is still opportunity with customers and with interest rates where they are. I think if interest rates do go up aggressively over a fairly short period of time, that could by the time reflect on consumer lending activities. But we are beginning to see commercial customers begin to step out and commit to making some investments, which is I think is good news.

Great. Thank you very much.

At this time, there are no further questions. Will there be any closing remarks?

No. Thank you. I thank everyone who participated and appreciate the questions.

Thank you. This now concludes today's Associated Banc-Corp first quarter earnings conference call. You may now disconnect.