Associated Banc-Corp (ASB) 2004 Q3 法說會逐字稿

Good afternoon. My name is Tamara and I will be your conference facilitator. At this time, I'd like to welcome everyone to the Associated Banc-Corp Third Quarter Earnings Conference Call.

(OPERATOR INSTRUCTIONS)

Thank you, Mr. Beideman, President and CEO, you may begin your conference.

Thank you, Tamara. Good afternoon everybody.

First of all, before I begin I want to remind everyone that we are rapidly approaching tomorrow's shareholder meeting at First Federal. And as a result, we remain in the blackout period around First Federal. So, as I said, we have our shareholder meeting scheduled for tomorrow and we anticipate closing the transaction at month end. And at this point, that's really the extent of our comments in relation to First Federal. And we'll be happy to talk to you about that, I guess technically, three days after the shareholder meeting tomorrow, which would technically end the blackout period.

So, as it relates to Associated, we think we've had a good quarter. A year or so ago, we articulated to you and to the market our strategy and our approach to diversify revenue, to overcome the interest rate environment and the deterioration in the mortgage business. And we laid out several strategic priorities, which focus on growing our commercial loans at traditional levels, which has been a strength of the company for a long time; significantly improving our wealth management performance; growing and investing in our capability to serve small business relationships; growing our consumer businesses so that we're getting our share within the markets, if you will; improving our pricing discipline and broadening cross-sell to our commercial relationships; getting our asset quality back to historically strong levels; and implementing our Achieving Excellence sales management program. We think that we've, over the last year, made some real progress on many of these priorities and that that progress is reflected in our third quarter results.

Our commercial loans are growing. And in the third quarter, on an annualized basis, we'd be over 12 percent. And we are beginning to see some new momentum from our customers, but we're especially heartened by the recent adds of new relationships to the Company.

Our Wealth Management, Brokerage, Insurance and Annuity businesses are performing at significantly higher levels than they were last year. And if you extract the mortgage fee income from our fee income categories and compare the third quarter last year to the third quarter this year, on a base of 40 million last year, we're just about at 47 million this year. And that's coming from -- largely from these fee-based businesses.

Our consumer loan performance is up double-digits, and especially the home equity fixed lending part of that business, which is where we really had the opportunity to grow. Based on a historical performance, is generating some strong growth for us. And our home equity categories in aggregate are growing at about 14 percent on an annualized basis, which we're happy with.

Our asset quality continues to strengthen and is very strong. If you look at non-performing loans last year versus this year, we're down about 27 percent. Charge-offs are down over 40 percent, while we've maintained a reasonably conservative allowance to loan losses.

So, you put all this together and we think we're making good progress in terms of the revenue components of our strategic priorities.

We're also working very hard to maximize efficiency. And I -- our expense comparisons year-over-year, and even through the last couple of quarters, I think, reflect that. And again, if you extract the MSR from the expenses, last year our core expenses were in excess of $91 million. In the third quarter, they were 89. And that reflects the focus, I think, on the efficiency components of our strategy. And they're showing a reduction, even after the acquisition of the Jabas Agency, which is passing through those numbers.

So, I think it's a real tribute to the management team here in terms of how both front office and back office have been focused on sustaining effort at controlling our operating expenses and creating, as a result, some positive operating leverage for us.

So, those are my comments, briefly. And Joe Selner is here with me and we'll be happy to open the floor up for any questions that you may have.

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Ben Crabtree, Piper Jaffray.

Yes, good afternoon. Could you -- I kind of went back real quickly and I'm not sure I caught it. Did you say basically that C&I loan growth was running at about a 12 percent pace? And then would you perhaps talk a little bit if there's much of a difference in terms of geography as to where that's showing up?

Yes, we saw some positive momentum, both from existing customers and in the market generally in terms of our ability to attract new customers. And it's in -- it's in Associated's traditional sweet spot, in terms of middle market lending, basically. And we're starting to see some positive momentum in Minneapolis and in Milwaukee as well. And Chicago has really pretty -- has been consistently strong for us. So in the -- you know, in the urban environments in and around those areas.

And is -- would it be -- am I putting words in your mouth to say that the backlog might be building faster than the absolutes in the quarter?

We feel better about it now than we did 3 to 6 months ago, because we're seeing our existing customers -- again, the larger components of the customer base begin to sort of get back into the game a little bit. So, I would say that we feel better about it than we did before. And as you know, I've been a pessimist for the last year.

And maybe one follow-on question, and that relates to the pricing competition for those customers. I guess we're hearing smatterings of bank managements complaining about that, and particularly in the upper Midwest. And I know bankers always complain about that, but it's gotten particularly intense recently. I'm wondering if you've ran into that.

I think it has gotten very intense. It's --in an already intense environment. And I think it's an issue that's always there. So, our strategic priority around pricing discipline is to build into the capabilities of our relationship managers, the concept of selling value to the customer so that it's not all just a price-based decision. And that, you know, it's a hard fight and -- but yes, we're certainly seeing price pressure.

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Jerry Kronan (ph) with Sandler O'Neill Asset Management.

Joe, just a quick question. The tax rate has ticked up over the last four quarters, maybe from 32 percent to what looks like 35 percent. That's on an FTE basis. What is causing that and is the 35 percent this quarter a good run rate to use going forward? Thank you.

Jerry, first of all, I have a hard time relating to the tax rate on an FTE basis, but--.

Fully taxable equivalent, that's what I mean by that.

Yes, I know. So I relate to it, and I think I've told you and I've told others that I think our normal run rate for taxes is somewhere approaching 31 percent, and this quarter was 30.6 So, I think this is normal. The prior -- prior quarters this year we've had some capital loss carry forwards that we were able to utilize to have the rate be a little lower than the 31 percent. So, I -- again, I think that it's just the dynamics of where the earnings are coming from and whether we had any capital gains to offset some of those capital losses in the prior quarters. It's really nothing real magic.

Peyton Green with FTN Midwest Research.

I was wondering if you all could comment a little bit. The buy-back program was -- has been fairly, I guess, low active for the first half of the year and was inactive in the third quarter. Is that related to the First Federal deal, or is there another reason for not buying back the stock with the capital that you're generating?

No, it's related directly to First Federal. We're blacked out basically for the last several months until -- until we get the thing closed.

Okay. Good enough. Thank you.

Eric Grublige (ph), KBW.

Hey, Joe, not that I was terribly surprised that you didn't have a loan loss provision this quarter, but can you give us a little bit of guidance going forward on that? Are you getting any pressure from, you know, accountants because your reserve is so strong?

How about if I take that one, Eric?

Okay, go ahead. Either one.

No, we're not getting any pressure. But, it -- and it is hard to make a commitment on something like that because you don't know what's around the corner. But, our asset quality has been improving at a sustained rate, and our ratio of reserves has been not declining at that same rate. And on a relative basis, if you compare us to the top 50 banks as a peer group, we would be above the mean. So, I mean, there's the opportunity there, but I'm still not going to make a commitment that we're going to free up reserves. We also do have this acquisition coming on we hope in the next few weeks and that will change it as well.

Okay. Fair answer. Thanks.

But -- but, you know, we feel very good about our asset quality and we think at -- on a relative basis at some level it's, you know, you can always be surprised. But, we think on a sustained basis, over the long run, it's going to be a positive contributor to our performance because we think it (indiscernible) performance and we feel good about it going forward.

You have a follow-up question from Ben Crabtree with Piper Jaffray.

Right. Just one more little question on the -- on the loan portfolio. I wonder if you would talk a bit about, on the commercial side, as to a breakdown between commercial real estate and regular C&I kind of industrial loan demand in your markets.

Yes. One of the things that we're feeling good about, frankly, is that the lion's share of our growth is C&I. And we're still doing a lot of business on the commercial real estate side, but we're also experiencing a lot of pay-downs and a lot of projects coming to fruition that we put on the books over the last couple of year. So, you know, we think that the growth rates, at least in the short run here, are going to be more reflective on the C&I line than in the commercial real estate line, just as, you know, those dynamics play through.

You have a follow-up question from Peyton Green with FTN Midwest Research.

Just getting back to the credit question. I guess on a link quarter basis, the NPAs plus (90s) is ticked up a little bit. Is -- I mean, should we take as I guess an indication that the watch list improved on a link quarter basis versus the NPAs? Do you have any color on how to watch those books?

Yeah, we've seen some improvement in a variety of categories. If you look at -- if you break down non-performance a little bit, the non-accrual loans didn't tick up. They were flat. The loans past 90 days that were still accruing did tick up a little bit. I can tell you that those have all virtually been dealt with. So, the tick up was in the, you know, still accruing loans.

So, I mean, the doubling of the 90 day past dues was something that was just a timing related issue and they've been cleaned out since that?

A sizeable portion of it, yes.

Okay. Good enough. Thank you.

At this time, there are no further questions. Mr. Beideman, are there any closing remarks?

No. Thank you all for participating.

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