Associated Banc-Corp (ASB) 2004 Q2 法說會逐字稿

Good afternoon. My name is Amanda and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Associated Banc-Corp Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remark, there will be a question-and-answer period. If you will like to ask a question during this time simply press "*" then the number "1" on your telephone keypad. If you would like to withdraw your question press "*" then the number "2" on your telephone keypad. I would now like to introduce Paul Beideman, President and CEO. Sir you may begin your conference.

Thanks Amanda and good afternoon everybody. Joseph Selner and I are here. I will just make a couple of brief comments and then we can get to your questions. As you can see from our news release, we had 58 cents per share earnings in the second quarter which is up from 51 in 2003 and 53 in the first quarter and we feel pretty good about that. Our margins through this quarter has been stable. We have seen some loan growth especially on the home equity side of things which we are happy with and we think we have made some good progress in regard to our strategic priorities. I won't go through those for you again but our asset quality continues I think to remain strong and that should continue to improve as we have taken actions to really focus on that aspect of our credit portfolio. Our expenses are well controlled and just a couple of quick comments there if I could, you recall that we acquired the Jabas organization beginning with the second quarter in 2004 and -- so those expenses are passing through the second quarter but were not there in the first quarter. As an example their staff expense is about $2 million which reflects really more than the entire increase on personnel line so they are the major contributor to -- expense increases in the second quarter and also if you look at it --in terms of the first six months of 2003 versus 2004 obviously Jabas wasn't there in 2003 and the CFG acquisition that we made, that insurance Company was only there for one of the two quarters in 2003. So, in essence -- our expense are pretty much flat -- year-over-year if you exclude the mortgage [inaudible] rate reversal. So, we think we are making good progress there and continue to focus on where we want to invest our resources for the best return we've seen good progress I think as well on fees especially in the areas of insurance and brokerage where we are seeing good progress there and some increases in the truck fees as well and in terms of First Federal we feel we have made good progress there. We really are very excited about First Federal. They have a great group of people and culturally the two organizations are getting along quite well and we are really making good progress in terms our integration team is there we think and we anticipate as we have talked earlier about a closing in the fourth quarter so with that I'll be happy to open it up for any questions that you may have

At this item I would like to again remind everyone if you would like to ask a question please press "*" then the number "1" on your telephone key pad. We will pause for just a moment to compile the Q&A:roster. Your first question comes from Barry Cronin (phonetic) with Sandler O'Neil Asset Management.

Just two quick questions if I could, number one, could you give the revenue and expense contributions from Jacob's for the second quarter and secondly, period end loans were actually lower than the average balance for the quarters, so I am just wondering if loan growth decelerated near the end of the quarter or if that's a help for sale issue or what, I am just curious, what you seeing on the commercial loan growth side. Thank you.

Sure. Well there has been a significant decline in the [inaudible] sales certainly and one of our strategic priorities also was to focus on asset quality and while we have seen some growth on the commercial side we have also been focused on improving asset quality, you can see in the numbers there and we have also as a result of that exited from credit over the first six months of this year, around $200 million of loans consciously. So from my point of view, that's getting a good foundation into place and given the relative weakness of corporate demand over the last year, this is a good time to do that and we think we are well positioned then to begin to see some increased growth in the second half of the year.

Okay.

I am sorry, the other question was [inaudible]. The total expenses are about 3.5 million and contribution and net, net they added about a million dollars to the bottom line in the quarter so about $4 million of so of this.

Okay, great. Thank you very much, nice quarter.

Thank you.

Once again please press "*", "1" if you would like to ask a question at this time.

Angelina?

Your next question comes from Ario Winlent (phonetic) of Sandler O'Neil.

Hi Ario.

Hi, guys nice quarter.

Thank you.

My question was answered by Jerry with Jerry's question but I just wanted to know if you can comment on the margin and where you think its going etc. because I notice that there was a lot of large clues in CDs, broker CDs?

Well we've been stable now for the last couple of quarters right around the 380-381 mark and we think that stability is going to continue. We command all balance for assets growth and fighting discipline at the same time and are going to try and you know manage both of those variables. [inaudible] you know we believe we are asset sensitive and depending upon the trajectory of those increases and at what level they occur we would hope that the margin could be able to expand and [inaudible] I mean we are fighting hard to maintain stability there and I have done so for the last couple of quarters.

[Ario], brokers are simply another funding vehicle for us and we utilized those depending on the prices. So they go up and down depending on what our choices are and where the pricing is in the market.

Okay, thank you. Good job

Thanks.

Your next question comes from Benjamin Crabtree with Piper Jaffray.

Yeah, hi, I -- question about the I want to get the right word here the right word is retail permissions with a pretty involved number quality products first what is that and you know, what drives the volatility and what's your outlook?

Okay, there is several different things in there, the insurance revenue was in there as well as annuity sales and in terms of fixed and [inaudible] annuities and brokerage so part of the growth that you are seeing there is the addition of Jabas in the quarter part of it if you look at it back over a year is the increased sales that we are seeing on fixed annuities and brokerage which have increase significantly. Revenue in the brokerage business for example has increased 60% from this year versus last so we have invested a lot of time and effort in getting the sales forces aligned and we started to see some real benefit from the sale of the [C base] products and [inaudible]. Then I am not sure what you mean by volatility because I look at the trend its actually been steadily growing for each quarter for the last 4-5 quarter, I am not sure why you thought it was volatile other than growing.

Yeah, I guess, you know, just I guess I hadn't mentally corrected to the Jabas acquisition and with the expenses I guess when I look at the net with the expenses of Jabas show up in kind of spread through out every thing with that being the other operating expense category.

Right they spread throughout given the category, you know, the lion's share of it is on the staff line may be two thirds on the staff line and the rest is spread throughout all the lines. And I guess the -- may be follow-on question relative to kind of what you are already talking about in terms of commercial real estate picture. Obviously, on a period end-to-period end basis the C&A number looks pretty good. I guess I will be more interested in kind of color on that in terms of growth and line utilization and how you are feeling about momentum going into the second half in terms of commercial loan growth?

While I have been sort of -- my view has been somewhat conservative on that for sometime and frankly it continues to be. We are beginning to see some the increased line usage from our existing customer base and our pipe lines are getting stronger, but I continue to believe and you know I've given probably the same answer for the last year.

Okay.

Is that it's going to be slower then any of it -- we would like it could be and you know that’s okay because I think there are signs of life like we are going to see some improved growth in the second half of the year but it's not going to be boomtown.

And may be a one final question. In terms of -- kind of your building up our retail banking capability through your existing branch network. Where would you say you are in terms of how much through that process are you on a period end basis, it doesn’t reflect you are getting much loan growth in that sector yet?

We are in the third innings.

Okay.

We are through -- in terms of John, getting the sales training process completed in that sort of thing. We've realigned incentive programs and gotten goal setting into place, the sales management, sales process training programs we literally ending in June. You know we run several thousands people through this and focus on the management processes that they want to put into place and we are seeing some descent home equity growth. The mortgage portfolios are --

Sure.

That have been -- have been seeing some payoff in that sort of thing as that volume did indeed pick up for a time there in the second quarter so that -- that's in there to do John.

Okay, thank you

Well, I mean I am pretty happy with where we are going in the retail side The -- insurance fixed annuities, variable annuities in brokerage is largely driven by the capacity of the retail, of license associates in the retail system and the referrals that they can make to dedicated brokers and -- you know I am seeing good momentum and I think it will continue to build on in terms more of home equity.

Great, thanks.

Sure.

Your next question comes from Eric Grubelich with KBW.

Hi good afternoon.

Hi.

I have a couple of questions for you. Maybe a little bit more on nuts and bolts for Joe, but -- on your mortgage servicing expense -- you made it pretty clear in the release as to the recovery on the impairment reserve. I just wanted to know what you have left in that reserve and should we see something somewhere next quarter, on that line that’s the first question. I will stop there.

The valuation reserve at the end of this quarter was $13 million remaining The question about whether we will see more reversal valuation in the future is really dependent on repayments speed and where they are going to be and what the value of MSRs are -- are going to be in the future and we just don’t have any way to know it this point. We are not planning for it when happens, well it will happen

Okay that’s fine

Eric I would like to make a comment on that too. The wise way to look at it is that in the first quarter it was a fairly significant expense and in the second quarter it was, you know, a positive effect but it is about -- if you put it together over the last three quarters or so, it is about where we would expect it to be on average. There is the volatility sort of passed through -- with different effects in the first quarter versus the second when we average it out is you know -- it's impact over the last several quarters as that businesses stabilizes if that's where it's going to be.

Yeah, you also seem to have the conservatively valued reserve like it was about 80 basis points.

Yeah, 81, I think and I would categorize that as the conservative.

Yes. The other question that I had a couple were just answered but anything on the -- where am I -- oh, here I am, sorry, -- on the deposit services charge line that was up pretty nicely linked quarter, anything unique there in terms of new pricing or better collection maybe?

We focused on both things and we've been improved collection there by, you know, just the management practices in the retail system and we put a couple of additional charges into place, that are driving that number a little bit.

I think it's a little bit seasonal too.

Yeah there is more, ATM users and that sort of thing in the that --

It was real soft in the third -- fourth and first quarter. So we were expecting it would come up a little bit.

Okay, great. That's what I needed to know. Thanks very much.

Thanks Eric.

The next question comes from Terry Mcevoy from Oppenheimer.

My questions have asked and answered. Thank you.

Okay, good. Thanks, Terry.

Your next question comes from David Raff (phonetic) with Robert W Baird.

Good afternoon guys.

Hi Dave.

Hi.

Just a quick question regarding first the Fed ruling looking at their releases might their margin was down about 20 basis points and I guess my question is in regard to the impact that the combined first federal and associated on balance sheet what have in your asset sensitivity once the deal is completed ?

We don't think it's going to be material to what we are telling. We don't have it all put together and obviously things have been flown another quarter, but we don't think it's going to be material difference.

Okay thanks.

Your next question comes from Barry Cronin (phonetic) with Sandler O'Neill Asset.

Just two quick question again, Joe could you comment on the reserve level it’s a 169-170 basis points you've had non performance coming down, now for about four straight quarters and you have charged offs of, you know, basically 20 basis points. So I am just curious what are your thoughts are there in terms the reserve level and secondly I am just curious with respect to [FTFC], I know they have a lot of their branches in store and I am wondering if their sale triggers any type of -- I don’t know what the right term is, but if there would be any issue with them possibly having to..

The openers for the landlord?

Exactly thank you.

Let me talk about the loan loss reserve as I think everyone is aware the process in all of our institution has become much more structured, much more driven by process and in my opinion little less judgment. So we go through a very, very extensive analysis of the adequacy of our loan loss reserve every quarter and -- it's almost a unique exercise each quarter because you have to look at where your loans are, what the quality is, what's the trends and then we sit down and talk with our accountants and talk with our rest of the managers and we determine whether the adequacy is appropriate or not. And we, obviously, because we published these numbers we believe that this is the appropriate number to look for but the trend has being very positive as you have been observed and that worked well I think for us in the future and to the extend I can’t give you a number at this point because that would be quarter-by-quarter exercise. But I think it's likely to be positive as we go forward, but we are likely to be positive than negative, I guess this is the way I would say. And to your second question regarding to a schedule I don’t know of any openers, I am not saying there aren’t any because I don’t know of every contract, but there isn’t something that’s come to my level that would say we got big issue.

Okay. Great Thanks again guys.

Your question comes from Richard Well (phonetic) who is a private investor.

Gentlemen?

Yes

Hello and congratulations on an outstanding quarter.

Thank you

My only question is being [transferred] mid-western to down here in Florida there is a bank in every corner. How are we are going to equip ourselves to fight the battle of use and remaining independent in the years to come. Do we have enough capital to do so?

Well, we fight that battle every day and I think -- if your question is specifically focused on our capital ratios, I think we are very strong in capitalized -- even after the first struggle transaction with only 10% cash we've really not exceeded our capital at all and we believe that we are in the right to be independent by executing our strategy and that our strategy is focused on creating value for shareholders and if we succeed that goes well for the future.

Thank you.

Thanks.

Good luck to you.

Thank you.

Your next question comes from John Steven (phonetic) of [inaudible]

Hi, guys good quarter.

Thanks [John].

My first two questions one on loan loss reserves starting to look high was already answered in the evaluation of [inaudible] was answered but talk about the M&A environment. You know, lot of small and mid-size companies are seeing huge pinch in margins and you are seeing things sort of come your way as far as potential opportunities for you guys out there or is it still just competitive effect? Thanks guys

Probably both. I would suggest that in the environment that we are in right now you have seen a lot of M&A activity and I would think that we are going to continue to see more and you feel good about for several transaction because we have been able to preserve our capital and if we were to see or find a good opportunity we would consider. If it was strategically important to us, and I think its fair to say that there we get to look at opportunities on a regular basis on a variety of fronts but, you know, you have to be selective and this has got to strategically important to the organization. At the end of the day, we can be confident. We are going to be better off in terms of our earnings trajectories in performance having done the transaction.

Okay. Thank you.

Sure.

Once again I would like to remind everyone if you would like to ask a question please press "*" then the number "1" on your telephone keypad. You have a follow up question from Eric Grubelich of KBW

Hi, one more thing on the expense side -- the premises line was a little low is that more of an ongoing run rate -- or is there something in the quarter that [inaudible] turn down?

Are you talking about the occupancy?

No I combined the premises and equipment, yes occupancy

All right no removal. The first quarter is usually higher than the second and third if the weather isn't co operating --

You are dead serious no removal

Yes

Okay

Yeah, its several hundred thousand dollars left.

Yeah, I should of figured that was Wisconsin -- sorry.

But if you look at it year-over-year they are flat pretty much and so that’s -- I think that’s indicative of how we are trying to manage it.

Okay, thanks a lot.

And natural gas ---

Yeah, that’s true that the prices are up for that, that's a good point. Thanks.

Sure

We have a follow up question from Benjamin Crabtree from Piper Jaffray.

Just -- maybe little bit of discussion on the tax rate, Wisconsin banks are occasionally in the head lines. I don’t think there has been any development there but it does sound like -- some of the banks are moving towards settlements, I am wondering what the outlook if you would be willing to be comment on it what the outlook might be for your tax rate going forward?

Well there's lots of variables that impact the tax rate, the specific question regarding the issue in Wisconsin -- simply put I believe that our exposure is zero -- and at the end of the day that's where it will play out. The executive branch of Government in Wisconsin is attempting to interpret the legislation through their actions in terms of interpreting what the law is today and it's the exact same laws that has been in place for the last 10 years and I think that at the end of the day our exposure is zero because we have been rigorous in terms of following the letter of the law and intent of the law and we have had really no discussions with the department of revenue in the last several months.

Then to talk specifically what you should expect for the tax rate?

I think it's reasonable to expect it to increase because one of the reasons it is more is because they are excited about municipal portfolio, tax exempt, and as the investment portfolio continues to become a smaller part of our earning asset mix the rate will gradually pull up to you. That's the marginal rate of 40% between State and [inaudible], so again, I would think it is reasonable to think that it would continue to rise overtime and I am not saying over the next quarter but overtime.

Okay, thank you.

There are no further questions.

Thank you all. We will talk again soon.

This concludes today's conference call. You may now disconnect.