Associated Banc-Corp (ASB) 2011 Q1 法說會逐字稿

Good afternoon everyone and welcome to Associated Banc-Corp's first-quarter, 2011 earnings conference call. (Operator Instructions) As a reminder this conference is being recorded. Management will be referencing a slide presentation during the prepared remarks. A copy of this slide presentation as well as the earnings release and financial tables are available on the Investor Relations portion of the Company's website at www.associatedbank.com. During the course of the discussion today Associated management may make statements that constitute projections, expectations, beliefs or similar forward-looking statements. Associated's actual results could differ materially from the results anticipated or projected in such forward-looking statement. Additional detailed information concerning important factors that could cause Associated's actual results to differ materially from the information discussed today is readily available on the SEC website and the risk factors section of Associated's most recent Form 10-K and any subsequent Form 10-Q. Now, I would like to turn the call over to Philip Flynn, President and CEO of Associated Banc-Corp.

Good afternoon and thanks for joining us. With me today are Joe Selner, our CFO and Scott Hickey, our Chief Credit Officer. Results for the first-quarter continue the improving trends we've seen for the past five quarters. Credit quality continues to improve and is progressing as planned. While loan growth in a slow economy is challenging, we saw improving core lending activity and we look forward to accelerating growth in future quarters. First-quarter highlights are outlined on slide three. We are pleased to report net income of $15.4 million or $0.09 per share. Up from $6.6 million and $0.04 a share last quarter. Credit quality improved for the fifth straight quarter by every measure. In particular, as planned, we did not execute any bulk non-performing loan sales in the first-quarter. But our non-accruals continued to fall by 15% from December 31. Also as forecast, without bulk sales, both charge-offs and the provision for loan losses fell substantially this quarter, both by more than half.

Loan outstandings were again up modestly from the fourth-quarter. Our net interest margin moved up nicely by 19 basis points to 332 basis points. And capital ratios continue to be extremely robust with Tier 1 common at 12.65%. In March, we successfully issued $300 million in senior notes and a portion of the proceeds were used to repurchase $262.5 million or half, of our TARP preferred stock early in April. We agreed to sell the bulk of the installment loans in our consumer finance subsidiary, Riverside Finance, consistent with our strategy to focus on core business opportunities. These loans were marked down and moved to loans held for sale with an anticipated close during the second-quarter.

Now I'll get into more detail on our first-quarter results beginning with credit. Slide four provides details on our non-accrual loans. We ended the quarter with $488 million in non-accruals, down $86 million from year end. The inflow of new non-accruals was only $81 million, the lowest inflow for the past six quarters. And payoffs were almost equal to new problems and charge-offs were much lower than previous quarters. The results of the past five quarters, detailed on slide five, are reflective of the actions taken in the fourth-quarter of 2009. To recognize and address the problems in our loan portfolio. You can see the continued steady improvement in our credit quality metrics. Charge-offs and provisions were much lower, reflecting the end of bulk loan sales in the fourth-quarter. Our coverage of non-accrual loans is now approaching 100% and the overall level of reserves to total loans is strong at 359 basis points.

Slide six demonstrates the continued positive trend and potential problem, loans as does slide seven for past due loans. Slide eight outlines the key drivers for the loan loss provision. $53 million of net charge-offs include the impact of $12 million of recoveries. In addition, the net charge-offs include the impact of a $10 million charge against the Riverside consumer loans that were moved to held for sale in anticipation of closing later this quarter. We released a net $33 million of specific reserves on non-accrual loans again reflecting the continued overall improvement in our credit quality. We increased the troubled debt restructuring historical loss allocations and management factor by a total of $11 million and all of this resulted in the $31 million provision we booked for the quarter.

Slide nine demonstrates our very strong capital ratios at March 31. Tier 1 common as I said is 12.65% and the total capital ratio was 19.56%. Slide 10 provides the recap of the actions we took to repay half of our TARP preferred shares on April 6. Given our consistently and rapidly improving credit trends, improving profitability and strong capital position, we were pleased that we were not required to raise any incremental new capital to affect this first repayment. We want to highlight two impacts that will come from this action. First, we will book an approximate $5 million charge in the second-quarter from the redemption. Second, with the issuance of additional debt at the holding Company, and the consequent occurrence of additional interest expense, we expect a decrease in our net interest margin by up to 10 basis points, during the second-quarter. Note however, that the after-tax cost of the new debt will be more than offset by dividend savings from the redeemed TARP preferred and thus the transaction will be accretive to EPS.

Let me move to select balance sheet and income statement items. On slide 11 total loans were $12.7 billion at March 31, up 1% from $12.6 billion at December 31. And average loans grew at a rate of just under 3% annualized. For the first-quarter, the residential mortgage segment of the portfolio grew 8% to $2.5 billion and the home-equity segment of the portfolio was up 2% to $2.6 billion. Notably almost all of our net home-equity growth came in the form of first lien equity loans. First lien equity loans now account for over $1 billion of our total home-equity loan book. The increases in the residential mortgage and home equity segment of the portfolio for the quarter were offset by declines in most other loan categories, as we continued to rebalance our risk appetite. Our commercial mortgage and construction portfolios totaled $3.9 billion at the end of the quarter down 4% on an annualized basis from the prior quarter as we continue to pare our exposures. On average, our CNI loan balances were about flat to Q4.

On slide 12, total deposits were $14 billion at March 31, down from $15.2 billion at year-end. We've continued to aggressively manage our funding costs with the mix of lower cost deposits up, as a percentage of the total deposit base from a year ago. The reduction in demand deposits from the past quarter reflects an anomaly that occurred at year-end to remixing the deposit base as customers migrated from tag ensured deposits to other fully insured and collateralized deposits including repurchase accounts. The longer-term trend of demand deposits excluding the fourth-quarter, is encouraging. During the quarter, we also continued to optimize our funding. Managing net worth and brokered deposits down, while customer savings, sweep and repurchase account balances continued to grow. At March 31, all of the Company's repo liabilities totaling $1.9 billion were with customers. The $348 million reduction in liabilities was matched with net reductions in securities holdings, cash, and loans held for sale positions on the asset side.

Turning to slide 13, as you will recall, late in 2010 we began two programs to improve our margins and net interest income. On the asset side, we began to reduce the excess liquidity we'd built last year and to redeploy that liquidity towards retained mortgage assets in investments. These efforts bore fruit in the first-quarter, as interest income from these categories grew over $2 million. However, these gains were offset by the effects of the continued runoff and sales in our commercial mortgage and construction loan books, which while reducing risk in the loan portfolio, also reduced net interest income by nearly $5 million. On the liability side, we took a disciplined approach to managing down our highest cost liabilities and to reposition some of our customers from traditional deposit relationships, to sweep programs and repurchase programs at much lower costs. Collectively, the liability management efforts reduced our interest expense by over $5 million on a sequential quarter basis. Taken together, all of these efforts drove a net interest income margins expansion of 19 basis points for the quarter. While we expect our core banking book margin to grow, as we bring on new loans and deposits later in the year, as we have previously noted, our TARP financing will pressure our run rate margins by 8 to 10 basis points going forward.

Non-interest income of $72 million was down $13 million from the fourth-quarter. Attributable to the weaker mortgage banking fees. We originated for sale $290 million in first mortgages compared to $630 million last quarter. As a higher interest rate environment began to dry up refinancing activity. Net mortgage banking income for the quarter was $2 million versus $13 million last quarter. Core fee-based revenue was $61 million slightly more than the fourth-quarter as increases in retail commissions and trust fees offset about $1 million decline in deposit related fees. Total non-interest expense for the quarter was $164 million down $3 million from the fourth-quarter. Personnel expenses as usual were up in the first-quarter, primarily due to the resetting of payroll taxes and incentive accruals. Occupancy expenses were up mostly due to increases in snow plowing costs. And I can tell you that I've never said that on an earnings call when I worked in California. These increases were offset by reductions in foreclosure and OREO expenses as well as lower FDIC assessments.

We reported an $8 million income tax expense this quarter versus an $8 million tax credit in the fourth-quarter which included a $5 million benefit from the resolution of certain tax matters. Just a few other additional updates on our business, after months of planning, we are starting on our four year initiative to upgrade the condition of many of our traditional and in-store branches and ATMs. As well as optimize the location of our distribution network in relation to consumer and business opportunities. We intend on updating all of our signage this here, starting in our Southern Illinois branches and will also begin the branch remodeling effort starting in Milwaukee.

We had our strongest seasonally adjusted consumer quarter for new checking accounts since the elimination of free checking in the second-quarter of last year. Some of the drivers of the success includes our affiliation with the Green Bay Packers where in some weeks around the Super Bowl we had 20% boost in new sales. And from direct marketing. Also consistent with the rest of the industry, we are expecting ongoing softness in service charges on deposit accounts. Predominately driven by customer behavior changes in NSF and OD fees. People are just not incurring as many.

We continue to execute our strategic initiatives in commercial, commercial real estate and wealth management. And in particular this includes the hiring of seasoned relationship managers in the Chicago, St. Louis, Minneapolis, Milwaukee, and Madison markets to round out our expertise across the footprint. We further strengthened our Board of Directors with the February appointment of Robert Jeffe, his extensive experience in the capital markets will be invaluable in the successful execution of Associated's growth strategy in particular as we consider the potential of future merger and acquisition opportunities.

We have also made some changes internally to further align Associated's risk, compliance and audit functions with the hiring of Art Heise, to the newly established role of Chief Risk Officer and we also welcome Patrick Derpinghaus as our new General Auditor. Patrick is succeeding Art Olsen who previously announced his plans for retirement. In summary, we are pleased with the progress we continue to make, our credit quality continued its rapid improvement, profitability is increasing and our capital ratios remained extraordinarily strong. During the balance of the year we expect to see increasing loan demand. This will lead to higher net interest income and coupled with moderating loan loss provisions, increasing earnings per share. As we get further into the year, we remain committed to repaying the balance of our TARP outstanding in the most shareholder friendly manner possible. And with that, we would be very pleased to answer any questions you have.

Thank you. (Operator Instructions) Our first question comes from Jon Arfstrom with RBC Capital Markets.

Question for you on expenses, in your positioning for 2011, you talk a little bit about additional talent and also you, in your prepared comments talked about the branch upgrades. Could you help us size the increase in expenses and timing and just generally what's on the horizon in terms of the expense base?

Sure. Last quarter we had provided some insight into that. And we had said that we expected mid-single digit increases in non-interest expenses over the course of the year. And that's what we still expect, despite the fact that expenses were down a little bit this quarter. Some of that was timing. Foreclosure expense was down OREO expense was down. We had the normal seasonal increase in resetting FDIC and other incentive accruals. Although we were adding a lot of new talented colleagues, our head count is not growing at the same pace, because to some extent, people are leaving and we are replacing them. So we still think that mid-single digits is about right.

Okay, good. That's helpful. And then a question for you in terms of the loan mix. A little surprised to see the home-equity growth, but I understand the first lien aspect of it. But, curious if you're going to plan on placing any limits in terms of how large the [revi] in home-equity portfolios might become just because of some of the growth we are seeing?

Sure. Our intent and I think we've talked about this before, is to have a balanced portfolio of consumer assets being residential mortgage and home-equity loans, substantially. C&I loans and commercial real estate loans, including construction. We want the portfolio to be in rough thirds although somewhat more weighted on the consumer side and somewhat under-weighted on the commercial real estate side. As we sit today, we are pressing up, you know, against maybe 40% or so, maybe even a little bit more on the consumer side. But we do expect significant C&I growth in particular as we go through the year and some CRE growth. So, I think we are going to generally achieve the balance that we are looking for as the year goes on.

So, likely to see a shift in the mix of where the growth is coming from is what you're saying?

Yes, but we think the C&I growth will outpace some of the other components. And also note that we had decided to keep $1 billion of residential mortgages on the balance sheet. We've completed that program now. So that -- residential mortgages that we originate now will generally be sold on into the market.

Alright thanks for the help.

Our next question comes from the line of Scott Siefers with Sandler O'Neil.

I guess first on the TARP repayment. So, obviously, glad to see that first half with no capital raised, so I guess I just wonder how you are weighing things, you know, one, sound like you definitely wan to get rid of the second half in, sometime during the remainder of this year. But, I guess conversely, you know what is the tolerance to add new additional capital if that's what the regulators would require? You guys have such strong capital levels now, and we did see a benefit to waiting from some of the last [S-cap] guys who paid. Would you be willing to put it off after this year if you thought that would lessen the odds of a capital raise? How are you thinking about that?

You know we thought-- the stance that we have taken is that we are prepared to be very patient about repaying TARP in order to get it done with the least amount of new dilutive equity conceivable. So, we do believe that we will be able to achieve that and get TARP repaid this year.

Okay.

But you know, there is more than one party in the stair.

I'm afraid I've learned that painfully over the last couple of years. Let's see, the other question I just wanted to ask on the mortgage line, I mean, I guess we knew it would be down, I was caught a little bit off guard by the magnitude. So, if maybe you or Joe could speak to the magnitude of the decline. I mean obviously the refi environment just kind of dried up. But whether it was going to gain on sale margins et cetera. Anything that drove just the magnitude?

Joe can give you a little bit more detail, but a couple things to remember, first we were diverting mortgages that in the past we would have been selling into the market and generating fees against to our portfolio. So, we are to a certain extent not getting the immediate income benefit that we would have seen in past years. Although we will benefit over the longer run by having good yielding assets on the books. So, that's one. Two, of course, with the spike up in rates, the refi market really slowed very dramatically. As far as the individual components, do you want to comment on any of those?

Sure. There's a variety of things that occur when you are thinking about that you are marking your commitments, and so you're marking your commitments you're marking your warehouse and both of those have declined substantially. So in a sense you -- last quarter we were ready, recognizing income for things we are delivering this quarter. So that is part of it. We also had valuation reversal last quarter in the MSR and we didn't have that this quarter. So, there's a variety of pieces that move around. And obviously we hope it's a little higher than $2 million a quarter but that's the way the math worked this time.

Okay and I guess the last question unless I'm mistaken, I think you guys still have the regulatory agreement? I guess it's been a while now and I think for sometime you guys, I would imagine, are pretty much satisfied? Everything that you could hope. Do you guys have any additional insight that you can offer as to when or what it might take to get that lifted?

Well, we got the MOU from the OCC, which is I think what you are referring to, November of '09. So, it's been not quite a year and a half. Our expectation all along was that we would do everything we could possibly do to satisfy the various components of that MOU. Which, if you read some of our filings including the 10-K that we filed, you will see that we've asserted that we believe we have largely satisfied everything. And we are in that mode now where the regulators are ensuring that the changes we've made are lasting and sustainable. So we are in that mode today and we are very hopeful and in fact expect that we would see the MOU be lifted sometime later this year. The lifespan of these things, in my experience, is somewhere out there from where we are today. These normally last a good 18 months or so.

Yes. Okay. Sounds good. Thank you very much.

Our next question comes from Tony Davis with Stifel Nicolaus.

Good afternoon, gentlemen. Did see a decline here, Phil you talked about it that you feel good about the prospects for lending, but you're seeing our portfolio was down for the first time in three quarters. I'm just wondering if you maybe you had some paydowns or was that related to the mortgage warehouse? And maybe any color you can give us on utilization rates and things like that?

Sure. That is very perceptive. We have a mortgage warehousing business and in fact, outstandings sell quite a bit there. We didn't lose any customers, just with the slowdown in the mortgage market, outstandings dried up on those lines of credit. So, that had some of the impact. We had the other normal paydowns. There's no denying, and I certainly wouldn't deny, that we are somewhat disappointed with the C&I results for the quarter. We expected more growth than this, but in all of our discussions with our various business unit leaders, the pipeline is strong. So far it's very early, we are getting good results early in the second-quarter, and seeing growth. We had indicated we thought we would get mid-single digit loan growth year-over-year, and we are still going to see that type of loan growth we believe. So we do see some acceleration coming. But we were a bit disappointed no doubt.

Okay. I wonder, as the Bank of Montreal and Marshall Illsley merger approaches here, can you give us any color about discussions or opportunities you are seeing for new relationships?

Sure. We are experiencing a couple of impacts there. We are speaking to, and in fact have hired, more than a few bankers with you know good seasoned experiences in various markets. So, that is one thing. And secondly, we are getting an opportunity to talk to some of their customers that we weren't really getting an opportunity to do before. So, all of that will take a little bit of time, but we do see this as a significant opportunity for us.

Finally Joe, just wondering if $500 million is about the right level in terms of short-term liquidity, even if you get your investment grade rating back?

We continue to think about that Tony. And if we get our investment rating back, we are thinking we could be lower. We monitor our cash flows pretty closely and we're just not having a lot of need for overnight liquidity. So, $500 million is what we have been targeting but it's likely to migrate down. It's never going to go to $0 of course. But, it could come down a little bit from this level.

Thanks for the color.

Our next question comes from Ken Zerbe with Morgan Stanley.

Okay thanks. I guess the first question just in terms of capital and then let's look out a few years here and make the assumption that you can repay TARP, you don't have to raise more, your capital position is still very strong you know at an all-in basis. How does the capital get deployed? And maybe this is a question on your capital priorities. Obviously, I would imagine you want to do loan growth, but is there enough growth in your market to really materially bring down your capital ratios? You know, how aggressive do you think you might be with buybacks or dividends, longer-term of course, and how much does acquisitions come into the mix? Thanks.

Okay, well you've just listed out the uses of capital.

Probably in the right order to.

Probably. In fact that was the order I would've suggested. So -- .

I guess the bigger question though is how much can you grow loans? Versus -- ? Thanks.

Right. We have expectations of growing loans point-to-point fairly significantly this year and if in future years. Time will tell if we'll be successful on that of course. So that's our first priority for using capital is to grow the business organically. Certainly once TARP is repaid and we have re-established consistent and growing profitability, we are going to need to take a look at our dividend policy. We certainly are going to think about growing non-organically. And share buybacks some point in the future are something that might be on the table. The regulators have on awful lot to say about all of these things, in our new banking world, not just for us but for all banks. So, time will tell on all of this. Clearly we have a lot of capital and even post-TARP, we have a lot of capital to grow into and utilize and get a reasonable return on.

And in terms of the non-organic growth that you mentioned, how far afield would you consider in terms of expanding?

Well, let's see, after the 10 inches of snow we got up here on Tuesday, I was thinking maybe Florida would be good.

Or California perhaps.

California. No, seriously, anything that we do is going to be in the upper midwest. That is our stated area that this bank will operate in. And certainly we will be very focused and disciplined about sticking to the roots of the Company which are in the upper midwest.

Okay great thank you.

Our next question comes from Terry McEvoy with Oppenheimer Funds.

Good afternoon. Phil, I was wondering if you could just provide an update on the initiative in Chicago. Where you stand, was there any growth in the first-quarter? And whether you're still committed to that market?

Oh, yes, we are very committed to the market. Mark Sander who runs Commercial Banking and Breck Hanson who runs Commercial Real Estate live in that market. We have hired, as you know, a lot of people, particularly in commercial, but also in commercial real estate now. We have really very attractive pipelines that are growing. We had a tremendous gathering of very influential and active and successful real estate investors last week for dinner down there. We think there's a lot of opportunity in the commercial middle market lending space in both commercial banking and real estate for us in Chicago. So, we are highly committed to the market.

And just a question on the restructured loans, just walk me through the decision to move forward with the restructured loan and the CRE restructured loans more than doubled in the first-quarter versus maybe taking more aggressive actions? And then kind of surprised to see the construction restructured loans dropped so quickly given the increase in the fourth-quarter. Just some color there would be helpful.

Yes, Scott can give you a little color. But remember that a construction loan that finishes construction gets restructured is going to move out of construction category into commercial real estate. So, you really ought to look at those together. And if you do that, the increase was about $10 million.

Yes this is Scott. If you look at the restructured loans, primarily in commercial real estate, we had one fairly large loan that we did an AB note restructure. We took a small charge off on and the remainder will ultimately be put back on accrual. So, that's the majority of the commercial real estate, was really one transaction.

Understood, thank you.

Our next question comes from the line of Emlen Harmon from Jefferies.

Maybe kicking it off, could you give me a little bit of color just on your outlook for the charge-off and provision level going forward? And just how we should be thinking kind of about the core charge-off for the quarter given that there was a $10 million due to the asset sale in there?

Yes, we have not provided and we are not particularly comfortable providing really specific guidance. What I can tell you is, certainly that $10 million is not a core run rate charge-off. We expect that our charge-offs and provisions will continue to trend lower as we go through the year. As you know, a lot of the charge-offs and provisioning during the last three quarters of last year were driven by bulk note sales. Since we are done with that and since we are getting really, really good results from watching the portfolio get better, we are not going to need to do any sales. One thing to remember is, as we get to a relatively absolute small numbers, you can get a little bumpiness on the way. But we think the trend is continuing to be down from here on charge-offs and provisioning.

Okay got you thanks. And then, you gave some good color just on what you are seeing in C&I a couple minutes go. Could you talk a little bit about what you saw in terms of demand over the course of the quarter? And whether things got better or worse as the quarter wore on?

Things were improving into -- through the end of the quarter. So, kind of slow early and increasing balances as we went through March and that's continued into April.

Okay thanks that was helpful. I appreciate it.

Our next question comes from Peyton Green with Sterne Agee.

Hi, good afternoon and another follow-up on the C&I piece. You have more optimism about it than most. Which probably you are hopeful rather than as optimistic and as firm about the growth in C&I. Are you seeing anything from customers about increasing their lines? Or is this customer growth separate from that?

Most of this is taking customers away from other institutions, to tell you the truth. We did have some pickup in overall utilization, a few points as we got into the latter part of the quarter. But right now in a slow economy, this is sort of a zero sum gain.

Okay and how big was the mortgage warehouse?

We had balances run down in our mortgage customers by --

Almost 50% -- 60%.

How much dollar wise do think Scott?

Probably came down from $160 million to $80 million at one point.

So we probably had close to $100 million run down there.

Okay. Alright, and then in terms of the branch repositioning, is there any opportunity for consolidation, or is this more repositioning?

It's everything. So, we are looking at minor and major remodels of existing branches. We are looking at consolidation of branches. We're looking at the [novos]. We're looking at [re-novos] if you will, moving a branch to a better location. So, we've got a broad project underway to basically improve everything about our physical footprint.

Okay great. Thank you very much.

(Operator Instructions) At this time I'm showing no further questions in the queue.

Okay. Well, thank you very much for your interest in the Company. As always give us a call if there's questions that you think of tomorrow. And we appreciate your interest in the Company and we look forward to improving results as we move through the year. And we will talk to you in three months. Thanks.

Ladies and gentlemen thank you for your participation in today's conference. This concludes the program you may now disconnect. Everyone have a great day.