Associated Banc-Corp (ASB) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Associated Bank Corporation fourth-quarter 2009 earnings conference call.

During today's presentation, all parties will be in listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, April 16, 2009.

During the course of our discussion today, we may make statements that constitute projections, expectations, beliefs, or similar forward-looking statements. We would like to caution you that Associated's actual results could differ materially from the results anticipated or projected in any such forward-looking statements. Additional detailed information concerning the important factors that could cause Associated's actual results to differ materially from the information we will discuss today is readily available on the SEC Web site and the Risk Factors sections of our most recent Form 10-K and any subsequent Form 10-Q.

I would now like to turn the conference over to your host, Mr. Paul Beideman, Chairman and CEO. Please go ahead, sir.

Okay, thank you very much, and thank you all for joining our call today. Good afternoon.

I will make a few comments about our performance in the quarter and especially about the dividend action that our Board approved today, and then we will open up the lines, as is typical, for questions.

As you can see from the release, earnings in the quarter were $0.28 per share, which is up from the $0.11 in the fourth quarter. I'd like to just, if I could, highlight a couple of key points within the business.

First of all, net interest income was virtually flat to the first quarter of last year at $189.3 million, and the margin, as we have been discussing for some time, was right around 3.59%. That's flat virtually to the first quarter of last year, and really we feel pretty good about that.

There are some dynamics that we've talked about, but some things are really taking shape here. And if generating earnings for the Company on a sustained basis, managing credit and preserving capital are like the three core things we need to be focusing on right now around the earnings creation and the investment and the implementation of our strategy, I think we are really making some very good progress.

Our total core deposits are up about $350 million from last year and $270 million from the fourth quarter. Normally, you will recall from these discussions over the years that we see a significant seasonal decline in deposits in the first quarter, and we are really seeing the opposite of that this quarter. Our checking deposits are flat from the fourth quarter, and usually they are down about 15%. Now, some of that is environmental, but some of it is also a result of some really positive execution around our strategies.

In the first quarter, we've grown over 10,000 new core consumer households, and that trend is off of positive momentum from last year. Our core checking balances are up from a year ago over 6%, and I think a lot of that momentum is passing through both our consumer businesses and our commercial businesses as well. Across other categories of money markets and even CDs, we are seeing some decent, sustainable deposit growth there.

Our core checking production, the sale of checking accounts, is also up quite nicely over a year ago, and these are things that we think are sustainable. Treasury management fees associated with that process and exercise continue to be quite strong as well.

So we feel pretty good about our business, our core business metrics, in terms of being able to generate pretax, pre-provision income and strengthen our core revenue businesses. I just wanted to make sure we highlighted some of that and didn't lose it in some of the other comments.

Core fees were essentially flat to a year ago with asset management showing some weakness, but core banking fees and these treasury management fees and cash management fees that I talked about earlier are really generating some good growth for us.

Expenses were down from the fourth quarter, which we feel good about, and were basically flat to the first quarter if you exclude the FDIC premium of about $5 million. So, we believe we've got -- continue to focus on the core components of expense control, which I think are a core strength for the Company and continue to be.

Mortgage banking really was exceptionally strong for us in the quarter, and the loans that we originated for sale were in excess of $1 billion as compared to about $0.25 billion in the fourth quarter. Much of that revenue unfortunately in this quarter was offset by a very large MSR valuation of $12 million, but in spite of that record level really of MSR charge, we still made money on the mortgage business in the quarter. That is attributable to the revenue strength.

We believe that loan volume is going to continue and probably even be slightly higher in the second quarter and probably should continue even through the third order based upon the demand we are seeing. And that we believe if that MSR valuation stabilizes -- which, by definition, at some point it needs to or will -- that we are going to see some very positive revenue momentum out of that mortgage business.

Importantly, we experienced a significant one-time tax benefit in the quarter; that is a direct result of a recently passed Wisconsin tax law that is related to combined reporting, which basically is attempting to pull revenue that is not earned in Wisconsin to be taxable in Wisconsin for all types of businesses based in Wisconsin. I won't go through the great details of all of this, but the passing of that law allowed us to take into income in this quarter some reserves that were created against NOLs.

It's important to note -- and I want to make this point -- that we believe there is virtually no impact to our earnings going forward over the foreseeable future from this change.

All right, moving to provision if I can, you can see that provision in the quarter was significantly more than charge-offs at $105 million. Charge-offs were at $57 million, up about $12 million from the fourth quarter.

The level of provision that we saw here in the quarter is really the result of a few key factors. One, nonperforming loans did increase substantively. That is a result of continued deterioration in our commercial real estate portfolios, most notably from condo and residential real estate. That increase is slightly higher than we thought it would be, but that is one key factor around the provisioning.

The second factor is appraised values on commercial properties continue to decline. At the end of the year, it's a time where we get a large number of these appraisals in and we're then reflecting those values and changes against those reserve levels in provision.

Thirdly, we are seeing a migration within our C&I portfolio, but still primarily related to C&I credits that are related to housing as again we are getting a large number of those annual statements in here at the end of the year and analyzing those businesses.

So those are really the three factors that impacted provision here in the quarter. The provision is obviously a reflection of our analysis of the value of those collateral pieces and the loss potential in those nonperforming credits.

As a result, we believe that we've accurately got that reflected, and we believe that, as a result, provision going forward is going to come in lower than the level here that we've experienced in the first quarter and is going to return to levels that are really only going to be slightly higher than those that we experienced in the fourth quarter of 2008.

I'd like to think that, over the last several quarters, we have been pretty accurate at being able to predict a range around charge-offs and provision. If we felt that $105 million was the run rate, we would clearly say so. I guess what I am suggesting is that we believe, based upon what we see and what we know, is that run rate is going to be closer to a range slightly higher than in 2008, more toward the $70 million to $80 million type of a range over the next couple of quarters.

Now, obviously there could be always some surprises and things, but that's our best estimate and guess of what we are seeing today based upon what we know.

Charge-offs in the quarter were up about $12 million from last quarter. These really are the direct result of two rather unique situations within our C&I portfolio, one fairly large loan that is largely an enterprise-value type of a loan, which is quite unique for this. We rarely do that type of lending. We've had a customer for about, well, in excess of ten years who has grown with the Company, who experienced significant difficulty.

The second piece of that was a large truck dealership that wouldn't be surprising that is having some problems. But if you exclude those two credits, it would be a $15 million or so swing within those charge-off numbers. Again, we think that settling back to -- well, exclusive of these somewhat unique credits will be another positive factor towards the overall provision going forward.

To change focus here a minute and talk about the dividend, effective today, the Board did approve reducing our dividend from $0.32 to $0.05 per share, freeing up an additional $34 million of capital each quarter. This is a very difficult decision for us to make, and we understand how this will affect our shareholders, and we are very sensitive to that.

But while it is a difficult decision, we believe that preserving capital and enhancing capital in this environment really is a prudent action to take. It also allows us to support the important initiatives here for the Company to grow and to take advantage perhaps of some opportunities to enhance shareholder value that may evolve as a result of this environment.

We believe that, as I said before, there's three core focuses here. One is generate retained earnings; second, manage assets quality aggressively; and third, retain capital. We believe that we are taking this action from a position of strength. It is a tough decision but around retaining capital it is an important one for these times.

We are going to work very hard to remain profitable. We believe that our pretax, pre-provision earnings are going to be stronger in 2009. We see in excess of $500 million versus the levels that we saw in 2008.

Our tangible ratio here at the end of the quarter was 6.10%. As a result of this action, we have an opportunity to increase the value of tangible common equity, which really is the primary focus here. We look forward to, as a management team and as a Board -- and we are committed to increasing this dividend back towards more normal levels as soon as we possibly can do so.

So, that's the end of my comments. We will be happy to open things up for questions.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). Jon Arfstrom, RBC Capital Markets.

A couple questions for you. Paul, you talked about the savings and money market and checking account growth, anything you can attribute that to? Was it environmental in your region? Is it an emphasis that you have or is it something else that is driving that?

I think it is largely coming into place the stuff that we've been talking about for the last few years, and that Lisa and our heads of Retail Banking and Commercial Banking have really gotten strong momentum in each of those businesses around the things that you need to do to market more effectively, to sell to your existing customers.

I am really pleased by this household growth number because that shows that we are attracting -- that our magnets are getting stronger and we are attracting business to the Company, and that's what you build on the over time. So I believe the lion's share of what's happening here is execution.

Another core variable to the margin I had mentioned is loan pricing discipline. We are making very good progress to our curve, to our pricing, our risk-based model for pricing around just generating sustained spreads.

Loan volume you can see is weak on a relative basis, on a historical basis, and those commercial balances have fallen a little bit. But capturing that spread income with much greater discipline is really a very positive offset for that going forward.

So I think, around both, around pricing and around the execution of the checking growth and the deposit growth, it is improved execution. When you get that mindset and when you get the execution going, you can generate that level.

Okay, good. And then a follow-up on a comment you just made in terms of your loan growth appetite or the growth for the quarter -- is that decline in demand or is it caution on your part that is driving that?

It is really decline in demand. Last year, we generated some very good C&I growth and generated some really phenomenal core home equity growth. By the way, the performance of that stuff has just been great and the credit quality in it has been quite solid. If we could continue to do that, we're going to. We have our standards and we apply those standards to the growth metrics, but really demand right now is pretty weak.

Okay. Then just last question -- any change of heart on TARP capital? There are a lot of bankers that are talking about giving it back. I'm just curious if you could give us your updated thoughts.

Well, we are just going to continue to evaluate our options and look at where we are in terms of our place in time and just think about it. I think we are going to be circumspect about it for a while. It is a cheap source of capital. It is a challenging time. Over time, we will look at it and when we feel action is appropriate, we will take it.

Okay, thank you.

Terry McEvoy, Oppenheimer.

Could you just talk about the inflow of construction nonperforming loans -- it was up $62 million -- and maybe break it out between residential versus commercial? I think early on you highlighted condos, but just a little bit more detail there, please.

I've got a list here. Let's see. I would have to sit here and do some adding, and we can get that to you with some greater precision. But I'm going to suggest that it is pretty much down the middle between the two categories.

Then if you look at the $38 million of commercial real estate NPLs, was there a theme at all or was it really based on your comments about appraisals coming in and it really was represented across the portfolio?

It's really -- well, it's a large group of small credits in the CRE portfolio. It really is, more than anything else, appraisal driven.

I will comment that across all of these loans, there's only one loan that would be categorized as out-of-market.

Then that $5 million FDIC expense, is that a good run rate to use going forward? Then how are you going to accrue for the third-quarter special emergency fee in Q2? Do you know the dollar amount?

Well, the $5 million is a good run rate going forward. We will accrue, I imagine, as everyone else will, in the second quarter once the absolute amount is clearly defined. I assume that's going to occur in the second quarter. So again, that would be an industrywide kind of a thing.

The amount keeps coming down, it seems, which is a good thing but it hasn't been, from my view, yet landed on. So we are going to wait to see where the final outcome is and I hope it continues to come down further. I mean, it started out to be as high as $30 million as I recall, and right now, we could be under $10 million. So it is moving in the right direction.

Okay. Thanks, Paul.

Scott Siefers, Sandler O'Neill.

Good afternoon. Let's see. Paul, I guess I was -- most of my credit questions have been answered, but just looking or switching gears into some of the fee line items, I guess service charges on deposits in particular, the seasonal drop. A little more than it has been in prior years -- I wonder if you could just touch on some of the dynamics that you are seeing there?

Yes, we saw that, too, and in that category, it came in a little lower or more of a seasonal drop, if you will, than we would have seen in the past. I think that's across a couple of categories. I would suggest that it is as much activity-based as anything else. I think there is less utilization of -- less purchasing power, less utilization of debit cards, and so lower fees there. Maybe that drives lower NSF fees and that sort of thing.

But it's a little weaker than we thought it was going to be, but not significantly so. There is a seasonal drop here in the first quarter, and we expect that it's going to come back. Maybe it's going to be a little bit weaker than in prior years because of these activity kinds of things and less utilization.

But working the other side of that is, if we continue to keep growing more checking accounts, that's going to be a sustainable positive for us. If we can keep building the commercial banking fees, ex-loan fees, the treasury managed fees, cash management fees, swap fees and all those kinds of things, that is going to continue to be a positive lift for us as well.

Okay.

Scott, the other point I want to make in this quarter is, if you're comparing it to the fourth quarter, there's two less processing days this quarter, so that had a bearing on it also.

If you look at -- from my point of view, especially in the first quarter, you've got to look at fees year-over-year. The one bright spot is that the deposit fees are up. I'm looking at the table. It was about $4 million year-over-year, which is maybe part of that stuff we're talking about there that's sustainable, the income coming from having more accounts to work with.

But the other category, commissions and that sort of thing, is down some because of these activity-based kinds of fees.

Okay, thank you.

That's right. There was a one-time Visa thing last year, too. You've got to -- there are so many one-time adjustments that can occur to all of these things, but it still is a weaker number, to your point.

David George, Robert W. Baird.

Good afternoon. A couple questions with respect to credit. The first, in going back to your 10-K from last month, it indicates that approximately 20% of your loan book is criticized, so I wanted to get a sense as to what -- if there was a delta from Q4 to Q1 and where criticizeds and classifieds stand today. Then I've got one follow-up.

Total classified credits are up from right about 20% of the portfolio to about 21.75% of the portfolio in total. That's from December. From a year ago, the number would be larger than that obviously.

Okay, and then one quick follow-up. Can you share with us your exposure to Shared National Credits, please?

We don't, as most companies do, disclose the specifics around that. I mean, we have some but it's not a specific that we disclose.

Okay, thanks.

Ben Crabtree, Stifel Nicolaus.

I'm going to jump around a few questions. Just to make sure that I understood the response to one of Terry's questions, I am trying to get a little behind the jump in commercial real estate loans. How much of that, off the top of your head, might have been in retail strip mall kind of stuff related?

In the CRE portfolio, really pretty small.

Okay. The big charge, the MSR charge -- could you supply a breakdown between how much of that might've been a reserve, impairment reserve versus an actual write-down?

Ben, again, we are not impairing anything this quarter. This is really a valuation.

So it is a valuation reserve?

Correct. It is purely a result of prepayment speeds and then the other factors that affect it. But it is largely driven by prepayment speeds, which just went through the roof.

So in other words, it could be reversed?

Absolutely.

And flow back into earnings?

Yes and (multiple speakers).

It's not a permanent write-down? Right.

That's right, and at least in my mind stabilize because of the level of prepayment speeds that the assumptions drove.

Ben, the other perspective I have on that question is that the MSR is valued at 60 basis points, which to me is a --

Great, thank you.

-- a relatively conservative number.

Yes, yes.

Extremely.

Yes, that's helpful, thanks. Could you flesh out a little bit that kind of large securities gains? What was in that, what drove that?

Sure. Ben, as you know, we, back last November, bought a large number of securities in anticipation of getting the CPP money. We bought some of those securities with high underlying coupon mortgages. Also, they were fairly high rate.

What's happening to the prepayment speeds on those investments, they are coming in a lot quicker. So, we didn't want to continue to take the chance that they might even come in faster, so we've realized the gains now because it was going to come in pretty quick. So it really was a play on prepayment speeds.

Which might --

We made a decision to try to accelerate that gain.

So that might suggest that the investment yield could be measurably lower in the second quarter?

Well, again, we didn't take -- it wasn't a lot of money, and again, the investment portfolio still has about $97 million or close to $100 million of appreciation in it at this point, so there's still quite a bit of positive in it. But yes, for the piece that we sold, obviously the reinvestment yields will be lower of course.

Those securities would have prepaid at a pretty aggressive clip, so whether it happened all in this one quarter or over just a few, we thought it was opportunistic to capture some value from it.

As long as we are talking about earning assets and things like that, I guess I am surprised at the extent to which your loan yield dropped in the quarter. I mean, I guess I am used to missing my margin forecast but it was way off on this one. Just if I look at the components of it, it seems like there's mostly a loan yield and earning asset yield. I just wonder if you could talk about that a little bit.

Yes, sure. The fourth quarter was -- well, I will say this. For the first time in three or four quarters, we actually were pretty close to our forecast of what we thought the margin was going to be.

But seriously, it is a function of really the aggressive LIBOR dislocation that we saw in the fourth quarter that really pushed the margin incredibly high and some of those loan yields. We actually had, for the first time in quite some time, we had stability in the first quarter around those LIBOR rates and the yields, the portfolio yields and the impacts of that. So there weren't big swings in home equity or in veritable-rate commercial lending that would exaggerate it one way or the other.

So this would look kind of like a normalized rate, then -- margin?

Yes. To the extent that deposit costs might put pressure on one side and loan pricing discipline provides momentum on the other side, you have those kinds of variables to work with. That could generate some small amount of additional pressure, we think, on the margin, but this is a reasonable rate, I think, at least over the short/intermediate term.

Ben, I want to make sure that I also say to you that the floating-rate nature of our commercial loan book works against us in this environment. Of course, we have floors in there, but we also have loans that are tied to LIBOR, so that works against you. So again, that was being masked by the LIBOR dislocation in the fourth quarter. Now you're seeing it.

Okay. Then the last question would be I mean you provided some detail in terms of the tax rate, what it would have been on things like that. Paul, you indicated that -- no lasting impact from the legislation. Are we headed back to something in the mid to maybe even high 20s% as a tax rate going forward?

Ben, again the tax rate is -- it has a lot of moving parts but, as earnings come down, the permanent items -- i.e., the tax-exempt income -- becomes more dominant. So I would suggest to you that we are looking at for the rest of the year, a rate somewhere between 20% and 25%.

Okay, great.

That's where we think it's going to be this year.

Okay, terrific. Thanks.

(Operator Instructions). Peyton Green, Sterne Agee.

Yes, I was wondering if you could comment on the level of potential problem loans and if you've seen any change in trend there.

Payton, I don't have that number in front of me. Obviously, with nonperforming loans going up and substandard still seeing some migration, I don't see that number coming off. But I don't have a number in front of me that tells me how much they went up from year-end. I just don't know. I can get back to you if you need me to. I just don't happen to have it.

Okay. Then in terms of the deposit fees going forward, I mean do you think there has been a meaningful change in consumer behavior that has moderated the fee levels? I guess do you feel like this is the normal first-quarter sluggishness that normally occurs and are you more optimistic about it growing just because of the strong household growth you've had?

Yes, we would like to think, on those activity fees, that we are going to continue to see some net growth there because of the volume that we are generating. It will be clearer to us probably after we get through the spring and in the second quarter as to what the impact of the customer effect would be.

Okay. Then on the bond gains that you -- or I assume that they are bond gains --

Right.

What types of securities did you sell, and then what kind of change in yield will you have going forward from that?

Again, they were MBS securities. They were mortgage-backed Fannie and Freddie guaranteed. That's what we did. We were, as I said, we had a yield of in the 5%s, and we're probably going to be reinvesting closer to the 4%s.

Okay, so we should factor it. Now, would that have affected the margin in the first quarter, or is that really a 2Q event?

It would be little effect, little effect this quarter; it would be next quarter. But again, it wasn't that many securities. Remember, we've got a $5 billion book, and if we sold a couple hundred million of securities, it's not going to change that number materially.

On the fee question, just to be a little more specific, we are assuming that the first quarter -- and that has been the case historically -- is the low point, and that it is going to grow. I guess the question to your point is that -- might that growth be a little more muted than we've seen because of behavior changes? That's possible, but then the growth in accounts is going to help, we hope, to offset that.

Okay, great. Thank you.

Thank you. I'm showing no further questions in the queue. I will turn it back to Mr. Beideman for any closing remarks.

No closing comments. Thank you very much for participating. If there are any other questions, please feel free to give Joe or Lisa or myself a call.

Ladies and gentlemen, this concludes the Associated Bank Corporation fourth-quarter 2009 earnings conference call. You may access the replay system at any time by dialing 303-590-3030 or 1-800-406-7325 and entering the access code of 4048464.

Thank you for your participation. You may now disconnect.