Associated Banc-Corp (ASB) 2004 Q4 法說會逐字稿

Good afternoon. My name is Deshanta and I will be your conference facilitator. At this time, I would like to welcome everyone to the Associated Banc-Corp year-ending earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. (Operator Instructions). Paul Beideman, President and CEO of Associated Banc-Corp, you may begin.

Thank you very much. Good afternoon everybody. And Joe Selner, our CFO, is here with me too. Just a couple of comments and then we will be happy to answer any questions that you may have.

I think we had a good quarter and a good year. If you compare fourth quarter to fourth quarter '03, our EPS is up 14 percent and on an annual basis, up 10 percent. And as you all know, First Federal was in our results in the fourth quarter for two of the three months and we feel really good about being able to achieve these numbers because the majority of the cost savings Associated with First Federal have not been realized yet and will be flowing through after their first quarter after our systems conversion occurs in February.

Our loan growth in the second half of the year was strong, and that really continued for us in the fourth quarter. Our commercial loans in the fourth quarter were up 11 percent, home equity loans up 22 percent for the year, but the annualized growth in the fourth quarter was 15 percent for commercial loans and 30 percent for home equity loans. So we feel that the momentum that we were able to talk to you about last quarter in that we were seeing in the first part of the second half of the year has continued through the fourth quarter.

Our asset quality was strong and continues to be -- 15 basis points of losses for the year. Our NPAs are down year-over-year from 118 basis points to 83 and our allowance at the end of the year, while the ratio is down reflecting First Federal coming in, is covering 165 percent of our nonperformers versus 146 percent last year. We think that our asset quality momentum is going to continue next year in that we will continue to see improvement in terms of our overall asset quality.

The margin for the fourth quarter was stable, down 2 basis points -- I will call that stable -- even after integrating approximately $4 billion of First Federal's assets. The flattening yield curve has had some effect on us, but we're happy that we've been able to maintain that at that 2-basis point decline.

We feel good about this year, given the level of reduction that has occurred in the mortgage business, and part of that was really reflected in the fact that nonmortgage fees were quite strong in '04 really across a variety of categories, especially in retail commissions, which reflects CFG, our insurance acquisition, being there for a full year; Jabas, which we acquired at the end of the first quarter. But more importantly on a sustained basis, I think it's a reflection of how our sales momentum has been improving in the brokerage business and in terms of other insurance products -- annuities and the like. But our deposit fees and our asset management fees were also strong, in terms of year-over-year comparisons.

I would like to note that we did take a $2.2 million onetime charge for other than temporary impairment on Freddie Mac's preferred stock security that we have. That was partially offset by a $1.5 million sale of Sallie Mae stock. That was trading in the fourth quarter at all-time highs and we felt that it was an opportunity to return some value to shareholders as a result of that trade.

We also took a $1 million charge to MSRs in the quarter, reflecting our position there. But we feel that, again, we've maintained a very conservative position, in terms of managing MSR assets. Our expenses are well controlled through the year. If you take First Federal out of the expenses in the fourth quarter, we are essentially flat. And I think that is a reflection of the discipline with which we have been managing expenses through the year.

We feel comfortable at this point with our momentum and we feel comfortable with our ability to meet or exceed the consensus estimates that are in place right now for 2005. We understand the dynamics around First Federal and really feel good about how it's going to impact our business. We have the ability to cross-sell our commercial and wealth management products more effectively as a result of the acquisition and we have enhanced our distribution system with their in-store banking system and the creation of a much denser footprint in attractive markets here between Minneapolis, Madison and down through the Fox Valley. So we feel good about the quarter and we will be happy to answer any questions that you may have.

(OPERATOR INSTRUCTIONS). Scott Siefers, Sandler O'Neill.

Good afternoon guys. I had two questions. First, (indiscernible) doing the math right, it looks like First Federal added about 18 million to cost in the fourth quarter. I was wondering if you just had similar numbers. In other words, do you know what First Federal added to net interest income and fees, specifically in the fourth quarter? And then just a separate question. In the press release, you talk about steepening of the yield curve as you look to things that should help out in '05. If the yield curve kind of continues and just sort of stays in a little but more of a flat pattern here, how do you feel about your rate sensitivity under that kind of a scenario?

I'll take that last part, and Joe's getting the precise number for you on the net interest income. There's a whole series of variables that are going to affect the margin. Loan repricing is positive, volume is positive, the flattening of the yield curve at 10 years especially is a negative. Deposit pricing, there's probably going to be some pressure there. So we see ourselves as asset-sensitive. To the extent that the yield curve is flatter, it mutes the positive effect.

Scott, let me try to get at the issues of what the fourth quarter looked like or what was First Federal's component of the fourth quarter. As you can imagine, we are already co-mingling a lot of cost (indiscernible) operations and the numbers are not perfect. But I will give you a relative indication so you can get a sense. Fee income, we think about 11 million and margin of about 21 million. And expenses, your 18 million number was pretty close.

Great, thank you very much guys.

Terry McEvoy, Oppenheimer.

I was just wondering, looking at my notes from when the deal was announced, are you still expecting cost savings of about $30 million, or 25 percent of their operating base? And do you still believe that about 60 percent of those potential cost saves will be realized in 2005?

Yes, we feel comfortable with both of those numbers. Some of it has been realized already, and so it's baked into the run rates now with executive compensation and the expenses that they had assumed in their budgets and everything have slowed as we've managed it and changed priorities and the like. The conversion occurs -- of the systems integration -- occurs in February, so the lion's share of the saving occurs after that. And we would anticipate getting ourselves to a run rate of savings by the end of '05.

And the merger expenses pretax are still expected to be about $55 million, the structuring costs?

I think if I understand where you are going, we will see some merger-related expenses in the future quarters, but they will not be significant. That 55 million, some of that was part of the contracts that got taken care of in the purchase accounting. So I don't think there is going to be -- there is some dollars we have from conversion-related costs and things, but nothing significant like the number you're thinking.

Thank you.

Kevin Reevey, Ryan Beck.

Good afternoon. My first question is related to the Fannie Mae stock. Do you still own any of it in the portfolio? And if so, how much?

Well, Kevin, first of all, we own Freddie Mac, not Fannie Mae.

I'm sorry, Freddie Mac.

Yes, we still own it. We did not sell it. We have 8.5 million of it; that's what we own at this point, and we don't intend to sell it. We think there is an aberration going on in the market. But again, when you have these situations, you have to do other then temporary impairment, so we did that. But there isn't any more, if that's your question. This write-down is against that security.

And then, related to your sales initiative programs, I know when I met with you a couple of months, you talked about e-refer program and then a couple of other initiatives. Can you give us an update on how those initiatives are coming along?

I think if you start to look at how the performance is going across the second half of the year, in terms of fees and volume, we're starting to see some payoff from those investments in our people. And to me, this is something that occurs over a period of time. It's not transformational, but it's transitional as you continue to just work hard everyday to improve your efficiency and effectiveness. And we are seeing progress now, in terms of our absolute sales and it is translating through into some of the loan volumes and the fees that we're seeing. And the cross-selling especially is affecting positively the insurance fees and wealth management fees and commissions. So we're comfortable with where we're going. We have a long way to go.

And then the loan growth that you're seeing -- is that from new business, or is that existing customers drawing down?

It's a combination. We're seeing more existing customers get back into the market, which is good and we're seeing some positive moment in our commercial businesses, in regard to the business with new customers as well. And certain markets are important to us for that. And as we clear the conversion hurdles with First Federal, we have a much enhanced branch system in a market like Madison, which gives us the potential we hope to generate many more new customer interaction opportunities.

Great, thank you.

Marsella Martino, KeyBanc Capital Markets.

Good afternoon. One question. You touched a little bit on deposit costs, and I was wondering, you seem to be pretty disciplined in raising yours as of the fourth quarter. I was wondering what you're seeing out there in your markets, as far as your competitors'. Are you seeing a pickup and the competitive nature of that?

Most of the competitors here are remaining pretty disciplined. And I think they're trying to maximize the returns from deposits. I believe and I made the assumption or the statement earlier to one of the questions that I think deposit pricing is going to put pressure on the margin. I believe that, as we go through the year, we're going to have to begin to price more aggressively to try and get that some of the growth objectives we're going to have and to defend the customer base. So I think that the pressure will build, in terms of market deposit pricing.

And then, in looking at your nonaccrual loans on a linked-quarter quarter basis, I'm wondering if there's anything of size in that increase, or if it's just widespread?

Well, the lion's share of the increase, in terms of nonperforming you're talking about?

Yes.

Is the integration of First Federal into our balance sheet. And there's some -- it's about $16 million of it was First Federal and the remainder was Associated. We have been going down, down, down in nonperformers and we had a little blip on the Associated side. I think we're going to begin to see the trend again start to go downward as we go through at least the early stages of '05. We can always be surprised, but I think the trend is going to be to show continued improvement there.

Okay. And nothing of size in the Associated inflows?

Now.

Thank you.

Eric Grubelich, KBW.

Hi, good afternoon. Paul could you clarify something for me? Earlier on in your discussion, you mentioned growth in commercial and home equity loans. And I think you may have been referring to some year-over-year trends. Last quarter, you had tremendous growth in the commercial side of the business on a linked-quarter basis, June through September. And of course with First Federal capital in the numbers, you could sort of disaggregate it I guess a little bit with the last page of your analyst disclosure that you sent out. But maybe if you can just save me a little bit of grief and try to be a little bit more precise. If you looked at your core Associated business on the E&I and on the consumer side, what did those numbers look like for the quarter from your own organic business, the growth?

I will let Joe get some precise numbers together. What is going on since owning First Federal in November, and this is the one quarter I guess where it's going to be most confusing going forward now that we sort of have a baseline in place. But we have not actually seen some reduction in commercial balances that we brought in, which were not large to begin with, from First Federal. And frankly, we were not entirely unhappy to see that. So if we had 11 percent growth in our commercial business, it would imply that Associated side was growing at a rate that was some level higher than that, because First Federal's absolute commercial balances declined.

So that 11 percent was on a linked-quarter basis, then?

Yes, and the 15 was -- I'm sorry -- the 11 was the full year, the 15 is the fourth quarter annualized. I did not give you a linked-quarter number.

That's what I was referring to. The (MULTIPLE SPEAKERS) 15 percent in commercial, and then the home equity was 13 percent?

30.

Eric, let me give you the real numbers, then you can annualize it. 3.6 percent for commercial and 7.8 percent for home equity.

Was your own core --?

Well, let me say this. I answered your commercial question. On the consumer side, First Federal was a contributor to that. But the numbers I gave him, Paul, are ex-First Federal.

So it's 3.6 percent on the commercial --?

And then you annualize that, of course. That's the nominal growth rate.

So again, to your point, you had some good commercial growth and some good, very strong annualized growth in the home equity business based on your platform?

Right, and that has been a strategic priority of ours to try and change the trajectory, especially in this home equity category.

Okay, that is good. And one less question on the margin. So your expectation going into next year, assuming there's a few more Fed rate hikes here, the curve sort of stays where it is. Is the margin neutral, up or down a little bit? What's your best guess?

I am betting it is neutral.

Okay, fair enough.

With a half-dozen ifs, of course. But I would suggest that your question was -- if the yield curve stays where it is.

Yes -- it has certainly flattened in the last couple of months (MULTIPLE SPEAKERS) change. Do you think neutral is a reasonable place to be?

Yes. That would lead me more towards neutral. If the yield curve were to normalize, then I would say positive.

Okay. On that subject, you did talk about that a few minutes ago. When you look at your business, where do you think the most relevant points of the curve are for us to look at? Is it like a 2-5 year spread? Is it (indiscernible)? It sounds like most of your assets as you've mentioned are reasonably well adjusted or short. Do you sort of look at it that way, or am I being too specific?

We don't really look at it that way. We try and look at and dissect the business variables. So the momentum around loan repricing forces you to look in one area. How you want to price for deposits forces you to look at another area, the investment portfolio forces you to look at another area, short-term borrowings at another, and you sort of have to dissect each one of those things and then put it altogether to really strike an educated view. And we could talk about that for a long time.

I understand. One more question, and I'm done. On the deposit side, similar to what I had asked on the loans, if you strip out First Federal, how do the core deposits look, compared brokered and timed?

Linked-quarter?

Linked-quarter, Joe.

Stripping out -- you're saying you are stripping out CDs?

Yes. Just concentrating on the core accounts and the CDs separately, but taking out First Federal on both.

4 percent.

4 percent? That's on the core?

Yes.

On annualized?

No, on annualized, for the quarter.

Oh, wow. And how about on the timed deposits? Is there much change there?

Let me see if I can -- excluding broker?

Yes.

2.5.

Now there's a 4 is good. There's a seasonality with this stuff, and in the fourth quarter, you see an artificial lift and in the first quarter, you see an artificial decline usually. And then over time, it normalizes out. But the fourth quarter is where you would see naturally the most aggressive lift due to seasonality, especially in commercial.

Okay. But again, 4 percent unannualized for core, and about 2.5 percent ex-brokered (ph) on the timed accounts?

Eric, I want to restate Paul's view that, when we look at it on an annual basis, fourth quarter to fourth quarter, it is about 4 percent also. So when you say it is 4 percent for the quarter, it is reflecting some of this natural lift we get in December.

Thanks.

And we have been pricing our deposits to a question that was discussed earlier to be very aggressive to manage the cost Associated with them right now.

Perfect, thank you.

Ben Crabtree, Piper Jaffray.

I guess several small questions related to the integration of First Federal. I'm just wondering if you have yet gotten to the point of doing any branch closings or anything like that? Be interested in whether or not you have done anything to try to utilize what they know about the grocery strategy, and if you had done anything with that? A couple of other questions kind of related to them would be -- how much of the servicing portfolio came with them, and is it similar in characteristics to yours? And then the final one would be, the home -- I'm sorry -- the home equity loan, did they contribute much to that? And if not, would they be an opportunity to re-expand this further?

No branch closings have been undertaken to date. After the systems consolidation occurs, then when everybody is working on one platform, then we will start to look at those things. And if you will remember, this is not a big branch consolidation play for us. Our systems overlap, but really, they're more complementary than overlapping or redundant. And we're going to close 10 branches, let's say, but not until after the systems get consolidated.

In terms of the grocery store system, we've gotten a good understanding now of how that works for them, and in fact, we have put one of their people in charge of managing that aspect of the business reporting to Terry Rosengarden (ph), who's our head of retail bank, so that we can build a strategy for it. And we have reached the conclusion that they manage the system well and have good working relationships with the in-store providers and we want to take advantage of that.

In terms of home equity loans, they were a contributor and really did a pretty good job through the year, I would say, in terms of their home equity lending growth. And we think that's something that's actually going to help us going forward to get at getting our fair share of that business. And to utilize our -- we have enhanced product capability. The in-store system is an access point for consumer lending, as well as an enhanced distribution system with their branches now and they're very comfortable in that consumer around selling those products.

Real numbers, in terms of home equity, they brought over 475 million of home equity and we had about 1.4 billion. So relatively compared to their size, they had a little more than we did. In the servicing loans they brought over were 13.9 billion.

And would be the kind of same sort of loans and same values?

And I guess one last question kind of over this whole area. I know Paul, you had made the point that when you looked at them coming on board, their deposit base looked a lot more like yours than a normal thrift's would. I guess just the question -- is there a lot that needs to be done, in terms of product mapping? And are you kind of into that or through it, or I suppose does that wit until after you integrate the systems?

Well, we are through all of the design issues now. In fact, we have communicated with their customer base. One of the things that really forced, if you will, their deposits to look like ours is that for a long time now, the Fed fund's rate has been 1. So almost by definition, it cannot be that much different. But there is not sticker shock from their customers' perspective, in terms of deposits. They had a few areas where they had done some premium pricing and we fully expected a portion of that money to run off, and that's fine. If it's that price sensitive over the long run, that is not a bad thing. But we believe, after we get through the systems conversion, we will probably see some small decline in deposits in the first quarter as a result of some of that hot money. But then after that, we think we're going to be well positioned with their distribution system to grow with an integrated product line. And the changes that customers will see really are minimal. On the commercial side, our products really provide a significant enhancement to alternatives that their customers would have had.

And if I could not hog the time here, but was there a significant difference anywhere across your geography, in terms of the loan growth, or was it fairly even throughout footprint?

We have markets where we really want to focus, and that is where we invest and it's where 80 percent of our customers are and that is where we see the growth. And it's Minneapolis, Milwaukee, through the Fox Valley, around Chicago, and now much more so than before, the Madison area. Markets like Green Bay and Lacrosse are steady, firm, strong kinds of markets with average growth potential, the markets that I cited earlier are the ones with really stronger growth potential.

Thank you.

Peyton Green, FTN Midwest.

Good afternoon. A couple questions. Just taking a little bit longer-term approach over the next two or three years, Paul, what do you really feel like you've gotten off the plate, in terms of issues that you need to address with the operational workings of Associated? And what do you feel like moves more to the forefront, in terms of working through things? And then secondarily, how do you see your appetite for additional acquisitions now that you are kind of through the -- not entirely through, but you can see the light at the end of the tunnel on the First Federal?

I think the big issue two years ago for Associated was what are you going to do when the mortgage business lands. Because at the margin, we were very dependent on the revenue creation that was coming from the mortgage business. And the strategies that we've laid out to diversify our revenue streams are really the answer to that question. And I believe that we really saw the run-off in the mortgage business this year and survived it quite nicely because we've been able to make some progress across a whole series of issues reflected in the strategic priorities that we talk about all the time to build momentum.

So in fact going forward, the mortgage business, because of the integration of First Federal's dedicated mortgage origination model, I think actually in any interest rate environment, gives us, again, after we get everything integrated, upside potential, in terms of what that business can do. And I think that the run-off, the decline in that business we saw this year takes us to about bottom. So in terms of what we have gotten behind us, I think significantly, we've been able to survive through that quite nicely.

Going forward, it's a successful integration here with First Federal, and that gives us the opportunity to build momentum into a couple of these important strategic priorities that focus really on the consumer side of the business. But through our achieving excellence initiatives and through what we're doing on the commercial side, we're seeing good momentum there. And that becomes really sustained, positive momentum across the consumer wealth and commercial businesses. And then the idea is over the intermediate run that we're positioned to deal with, because of that diversity, different economic and interest rates environments, because those things can balance themselves out.

Lastly, we are ready to look for additional acquisition opportunities right now if they are strategically important, if they give us the ability to enhance our growth proposition going forward. So if we're selling strength organically, that's great and we want to make sure that we're generating the lion's share of our growth from those organic sources. We would look for acquisitions right now that would be strategically important to better position the franchise.

Okay, good enough. And I guess one follow-up. Joe, can you comment on the breakout, in terms of the origination volume between (your) legacy mortgage franchise, and also First Federal's? Thanks.

I'm going to the check these. I don't have those numbers right at the tip of my fingers here. Met me look once.

I remember, since we have only owned them for two months, most of the applications haven't booked yet.

We did 430 million about, and it's about one-third of them and two-thirds us for the quarter, but they were only there for two months.

Great, thank you very much.

If I could, I will make this point around that. If you were to go back and look at it over the last six months, First Federal would have been generating -- given their size versus our size, if you will, a disproportionate percentage of the aggregated volume between the two. That is what bodes well from my point of view, in terms of the model going forward. As a $3.5 billion, $4 billion thing, they were generating 60-plus percent of the loan volume we were generating as a $15 million thing, because that model is more rational over the long run to compete with.

Gerry Cronin, Sandler O'Neill.

Good afternoon. Joe, I was just wondering within the $6 million mortgage number, I think you disclosed earlier that you had a $1 million impairment charge. Could you tell me what the MSR amortization was for the quarter, and also, what the gain on sale of loans revenue was for the quarter?

The regular amortization is 5.4 million, and the valuation was 1 million. (indiscernible) sale number, I'm going to have to dig and see here (inaudible). About 6 million gain on sale.

6 million?

Yes.

Gerry Cronin And the rest would be just servicing fees?

Primarily.

The net of all that?

Primarily servicing fees and some smaller line items, like origination fees and things.

Okay, great, thank you.

(Operator Instructions). Phil Kane (ph), (indiscernible) Investments.

Good afternoon. Quick question about the Wisconsin economy, if you guys could comment. The FDIC in its recent report indicated some real strength there. Do you guys also see that? And then, I have one quick follow-up question.

We're seeing improvement, without a doubt. And I think the Wisconsin economy needs to be divided into a couple of pieces. And there is rural Wisconsin, there's some markets you could categorize as average intermediate kind of growth markets, and then there's very attractive, high-affluence, high-growth markets. We are fortunate to have the lion's share of our distribution in that last category, and First Federal in markets like Madison and through the Fox Valley, between Green Bay and Appleton and Milwaukee, strengthens the distribution in those attractive areas.

And to define past Wisconsin a little bit, around Chicago up to Milwaukee, the Minneapolis market is certainly a very attractive and vibrant market. Madison and Milwaukee are places where we have a strong position and a large portion of our presence. A market like Green Bay and Lacrosse I would put in that intermediate category where there's strong, dependable, not boom-bust kinds of markets, and then there's rural Wisconsin. We have some presence in those markets, but frankly, very little. And we focus our investment attention on those higher-growth, higher-affluent areas.

Okay. Following up, outside of Wisconsin and Chicago, that's probably your biggest market, how do you feel with competition? What do you see in Chicago right now?

We are a private bank in Chicago. We have a few locations there, we focus on middle-market commercial lending and services to the affluent and we generate good, solid growth in that market. We have the people that can service that type of business very, very well and it would not be our intention to try to become a retail player with the heft required to compete with the activities that are currently going on in the Chicago market with the significant investments being made by these large national retail players. So we're very comfortable being a private bank, if you will, in Chicago, and we generate very nice growth there. And obviously, that market has the ability to support that for us. So our investments in Chicago over the near-term future would be to continue to enhance those private banking and middle-market lending capabilities.

Okay. Thanks, my other questions have been answered.

Terry McEvoy, Oppenheimer.

Just two quick questions. Because First Federal was only in the numbers for two months, could you tell me the period end earning assets, and also, the fully diluted share count we should be using for Q1?

Tough question, Terry. Fully-diluted share count -- my guess would be around 132 million -- 131, 6 or 7, really depends a little bit on stock price. Earning assets -- well, I gave you loans. I don't know if I can give you earning assets. I think the investments were --.

You can, it might take you a second (multiple speakers).

I'm thinking about what that investment number was. Why don't I call you?

Okay, it's just important for the model. Thanks.

Scott Chapman (ph), (indiscernible) Management.

This is Underhill (ph) with Scott. The question on provision for loan losses -- is that a mixture of the parent and the First Federal?

Yes.

Can you break that down?

In terms of the losses?

No, the provision.

Oh, the provision. It was substantially Associated. Very little at First Federal. They have a very low reserve and a low provision. And that is reflective of their portfolio being largely consumer in its nature.

I think their provision was a couple of hundred to 300,000. I don't have that number right in front of me.

So that proportion should hold going forward?

Again, I would suggest that going forward, we're going to look at it at a consolidated world, and in February, they're going to be integrated into our branches and so there will be no distinction. They will just be into our (indiscernible) adequacy analysis.

We were very comfortable with their reserving methodology and the level of reserves that they created, and this is a function of the two.

Mostly mortgage products, so the reserves are lower in those types of assets.

Thank you, gentleman.

Peyton Green.

Hi. I was just wondering if you could comment, if you keep a disciplined approach on the deposit side, how much cash flow do you have coming from the securities portfolio which you expect in '05 that could be used too find loans, versus having to go out and raise deposits?

The duration of the investment portfolio is two years. So if you -- and that takes into consideration both principal and interest cash flow. But that does not mean that I would tell you that it's 2 billion, but it is over $1 billion. It's probably $1.5 billion, $1.6 billion, I would think. I'd have to check that to be sure. But again, it's a substantial dollar amount of cash flow if we need it.

And then the extension risk ended up 200 or 300 environment -- do you know off the top of your head?

No, but it's not significant. We have been managing very, very carefully the extension risk. It is not very significant, if we go out with those kind of rates. But we will get some extension because we have a fair amount of mortgage product, but it's not about the bank kind of a process.

I don't of you can comment to what extent the purchase accounting adjustments were positive in the fourth quarter, related to the First Federal?

I cannot tell you to what extent. The marks were a net positive, though. But I cannot -- I don't have the numbers here on every line item, but they were a net positive.

Do you have any idea on a general basis what the number added to?

No, I do not.

Thank you.

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

No. Thank you all for participating. We appreciate it.

This concludes today's Associated Banc-Corp year-ending conference call. You may now disconnect.