Associated Banc-Corp (ASB) 2012 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to Associated Banc-Corp's first-quarter 2012 earnings conference call. My name is [Rocco], and I will be your operator today. At this time, all participants are in listen-only mode. We will be conducting a question-and-answer session at the end of this conference. Copies of the slides that will be referenced during today's call are available on the Company's website at investor.associatedbank.com. As a reminder, this conference is being recorded today.

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 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 discussed today, is readily available on the SEC website, in the Risk Factors Sections of Associated's most recent Form 10-K and any subsequent Form 10-Q. Following today's presentation, instructions will be given for the question-and-answer session. At this time, I would like to turn the conference over to Philip Flynn, President and CEO, for opening remarks. Please go ahead, sir.

Thank you, [Rocco], and welcome to our first-quarter conference call. Joining me today is Chris Niles, who recently assumed the role of Chief Financial Officer from Joe Selner after Joe's retirement announcement last month. Joe has led the Company's finance function for nearly three decades and has guided Associated through periods of tremendous growth, including several mergers and acquisitions. I feel very fortunate to have worked with Joe to restore Associated to a strong and profitable Company. Joe will continue to support the Company as a member of various operating committees until his retirement later this summer.

Joining us as well today is Scott Hickey, our Chief Credit Officer. I'll begin by reviewing our results for the quarter and provide you with an update on the key drivers of our business and, finally, share our outlook for the rest of the year. In general, this quarter's performance was in line with our expectations, and I'm pleased to reiterate our outlook for the balance of 2012. First-quarter highlights are outlined on slide 2. We reported net income available to common shareholders of $41 million or $0.24 a share. This compares to net income of $40 million or $0.23 a share for the fourth quarter and $15 million or $0.09 a share from a year ago.

This quarter's net income to common shareholders now stands at the highest level since early 2008. Also during the quarter, we increased the common dividend to $0.05 per share. Loan balances continued to grow during the quarter and increased by $223 million, or 2%, to $14.3 billion. Net interest income increased by $3 million to $155 million, while net interest margin grew from prior quarter to 331 basis points. We continue to see steady improvement in credit quality, including a 9% decline in non-performing assets this quarter. Non-performing assets of $362 million are at the lowest level in nine quarters and now represent just 165% of total assets. We recorded zero provision for loan losses this quarter.

Moving on to slide 3, you'll see our improving earnings trend. The earnings profile of Associated has shown considerable progress over the prior year with both net income and return on Tier 1 common improving significantly in each period. Return on Tier 1 common for the first quarter was 9.23% up significantly from just under 4% a year ago, as we continue to drive towards bringing long-term value to our shareholders.

On slide 4 you'll see some detail on our loan portfolio. Portfolio grew to $14.3 billion at March 31. This was up $223 million from year end and represents a 2% quarter-over-quarter and 13% year-over-year growth rate. Although loan growth this quarter was seasonally weaker than we would have liked, we remain optimistic for the balance of the year. First-quarter loan growth was driven by net growth in the retail and residential mortgage portfolio of $155 million and in commercial real estate lending of $82 million.

Residential mortgage balances increased by $178 million or 6% during the quarter. Installment loan balances continue to decline by $20 million this quarter, and home equity balances were down $3 million. Investor commercial real estate loans grew by $100 million during the quarter, while construction loan balances declined by $18 million. The commercial and business lending portfolio declined by a net $15 million during the quarter. General commercial loans, which include middle market activity, grew by a net $27 million. Oil and gas lending increased by about $5 million during the quarter. Declines in the mortgage warehouse book of $37 million and declines in the power and utilities portfolio of $12 million offset the growth in the other commercial and business lending portfolios during the quarter.

On slide 5, we have information about our deposits and cost of funding. Total deposits of $15.7 billion were up $563 million, or 4%, from the end of the fourth quarter. Net deposit growth was primarily driven by a $1 billion or 20% increase in money market deposits and was driven by our pricing strategies to ship client funds away from repo agreements and into more traditional deposit products. Demand deposits also increased during the quarter by $60 million, or 2%, and are up $704 million, or 21%, from a year ago. At the same time, we continued to allow brokered and other time deposits to decline as we maintained a disciplined deposit pricing strategy. We continue to focus on growing core customer deposits.

We are pleased with the early feedback on Associated Connect, our enhanced treasury management solution for commercial clients, and we expect continued commercial deposit growth in 2012. First-quarter net interest income increased by $3 million, or 2%, from the fourth quarter, to $155 million. The net interest margin for the first quarter was 331 basis points. Yields on earning assets increased by 4 basis points, quarter over quarter, and the run-off of high-cost CDs and disciplined repricing of liabilities drove down liability costs by 8 basis points, contributing to the increase in NIM for the quarter. This disciplined-deposit pricing has allowed us to manage down the cost of money market deposits to 25 basis points, or down 32% year over year, while we've grown the portfolio over the same period by 24%.

Non-interest income on slide 6. Total non-interest income for the quarter was $82 million, up $8 million from the fourth quarter. Mortgage banking outperformed during the quarter and accounted for most of the lift. Increased trust service fees and higher retail commissions offset seasonally lower card-based fee revenues. On slide 7, total non-interest expense for the quarter was down 1%, or 2 million, reflecting net reduction in expenses. Legal and professional fees increased by $5 million from the prior quarter, primarily due to the cost of addressing BSA items. Losses other than loans were $8 million lower than the fourth quarter, which included increased litigation settlement expense in that period. Personnel expense increased by $4 million and was driven by the resetting of payroll taxes and benefit accruals.

Occupancy expenses were up $1 million while reduced business development and advertising expense, lower foreclosure and OREO expense and reduced FDIC insurance expense all helped to offset the net impact of total [non] interest expense. Late last year we announced plans to consolidate 21 retail branch offices as part of our footprint enhancement strategy. We have completed closing activities at all of the impacted locations. Early results confirm that we're seeing retention of clients and deposit balances in line with our projections.

On slide 8, we continue to see improvement in our key credit metrics. Net charge-offs were $22 million for the first quarter, down 59% from $53 million for the first quarter of 2011. Potential problem loans continued to decline to $480 million, down from $566 million from the prior quarter and down from $912 million a year ago. The level of non-accrual loans to total loans continued to improve to 2.3% from 2.5% at the end of the fourth quarter and is down over 150 basis points from a year ago. Non-accrual loans were down 8% to $327 million from $357 million last quarter and down 33% from $488 million a year ago. The allowance for loan losses now equals 2.5% of loans and covers over 100% of [period-end] non-accrual loans. And the provision for loan losses for the quarter was zero as the portfolio continues to show significant improvement.

Our capital ratios on slide 9 continue to remain very strong and remain well in excess of regulatory benchmarks and what we will be expected -- and what will be expected under Basel III. Tier 1 comment is at 12.49% and provides us with a great deal of flexibility as we think about priorities for capital deployment throughout the year. As we've said previously, foremost, we remain focussed on utilizing capital to fund organic growth in our core businesses. Second, we're committed to paying a competitive dividend to our shareholders and, as we said, have recently increased the quarterly dividend on common shares to $0.05.

Next, we'll look to deploy capital through non-organic options such as M&A; however, we continue to see limited opportunities at prices that make sense for our shareholders. If we do a transaction, we will be disciplined in pricing and structure and will likely favor in-market consolidation transactions with certainty of cost take outs. Finally, we'll look at buy-backs of our common stock and redemptions of other capital instruments as part of our overall capital plan to the extent that it makes financial sense for our shareholders.

So, on slide 10, we want to talk about our outlook for the rest of 2012 compared to 2011. We continue to expect robust loan growth and deposit growth over the year. Although the margin will continue to be pressured by the current low rate environment, we continue to believe that we'll be able to defend a relatively stable margin for full year 2012 compared to full year 2011. Modest full-year improvement in fee income will likely include reduced mortgage banking income going forward compared to the increased level from this quarter.

We remain committed to managing full-year expense growth in the low single-digit range, including the costs of BSA compliance and realized savings from branch consolidations. This outlook continues to be guided by our focus on creating and maintaining positive operating leverage for the full year, while continuing to invest in our franchise in order to build long-term shareholder value at Associated.

So, those are my prepared remarks, and with that, we'll open up to your questions.

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

Jon Arfstrom, RBC Capital Markets.

A couple of questions for you. In terms of loan-growth category drivers for the rest of 2012, do you expect it to be residential heavy? You talked about C&I being seasonally weaker in Q1. Just curious how you see that flowing for the rest of the year.

The first quarter was seasonally weak and commercial industrial results were weaker than we had hoped. But like last year, we actually expect we'll get balanced growth amongst the three categories, C&I, commercial real estate and residential, so it won't be all residential mortgage growth by any means.

Okay. Quick question for you on M&A, just one of your later comments. Is this something that is on the wish list in terms of longer term, or is this something you're actively considering at this point in looking at potential transactions?

We get shown a lot of stuff. At this point, nothing really seems to make a lot of sense. If something did, we would consider doing it.

Okay. And how do you think about some of your expansion, like in Michigan, for example, Detroit, you obviously have some hiring there. You maybe a little bit light in Minneapolis/St. Paul, a little bit light in St. Louis or Chicago. When you say in-market, is that considered in-market, or are you thinking Wisconsin?

No, our market is the eight upper Midwestern states. But when we talk about an acquisition that is based upon surety with cost take outs, it needs to be somewhere where we have significant operations. Having an LPO in Cincinnati, St. Louis, Indianapolis and now Detroit doesn't really qualify.

Okay. Just one question is what kind of growth are you seeing out of Chicago? Just curious how that effort is going for you.

Chicago is doing well. It's -- I mean, this past quarter, it generated more than 25% of the commercial loan production, more than 40% of the commercial real estate. It's a big market. So, for this past year, year and a half, it's been a significant piece of our growth, and we expect it to continue that way.

Okay. Great. Thank you.

Scott Siefers, Sandler O'Neill.

Good afternoon, everybody. Phil, I guess I was there last year, so I've become really accustomed seeing just the really outsized loan growth number so was a little surprised to hear your comments. I guess you have spoken to it at least a little but was just hoping you could give a bit more color on where you were and weren't satisfied with how things came out in the first quarter.

The outlook sounds like it's still intact and firing on all cylinders but just would be curious to hear your outlook. And then, separately, maybe for Chris, just wondering what stage you guys are in in terms of run-off of the securities portfolio and if that's pretty much as low as we're going to go such as that earning asset base might expand a bit more rapidly as we look forward.

Sure, so on the loan side, I would take you back to slide 4, and you can see that in the first quarter of last year, we actually had less than 1% quarter-over-quarter growth. And so this first quarter, you know, we had a little less than 2%, so it was better. I, too, have gotten used to robust loan growth, so when I express a certain amount of disappointment, there is a reality that we and a lot of other banks have been reporting do show some seasonality in that first quarter.

As I said, we clearly are looking for more commercial banking growth, and we expect to get that with the pipeline that's in place right now and actually with transactions that are closed since month end and are scheduled to be closing over the next month or two.

We also knew that we would have a drag from the mortgage warehouse, that there would be some pay downs in that portfolio, and that did occur. So overall we would like to see better growth. We had extraordinary growth through the last three quarters of last year, but we do expect to be right back on track.

Okay.

And with respect to the question on securities investment portfolio positions, I would draw your attention to the first page of the consolidated balance sheet, and you will see that the net shrinkage in the securities portfolio from December 31 to March 31, was $268 million, which largely mirrored the $244 million of net balance sheet loan growth.

So, we have been pacing and managing the run-off in securities to fund the run-up in loan growth, and we'll continue to manage those in parallel, and we believe we'll have the flexibility to continue to manage that going well into the third quarter.

Okay. Perfect. Phil, just one additional follow up. You've done some of the things like LPOs in places in the Midwest that are the outside the core banking footprint. Do you see more opportunities for dynamics such as those, or are they -- I guess, what stage are you in that kind of a rollout?

We don't have any plans to open any other LPOs right now. The three that we opened in Cincinnati and Indianapolis and Detroit we planned a short while ago. The small operation that we have in Houston for the only gas business is been up and going for awhile. So, we are not planning anything else.

What you will see us doing is adding additional product lines to some of these operations. Cincinnati, Indianapolis started as commercial real estate. We've added commercial banking capabilities. Over time, the commercial real estate LPO in Detroit will likely expand with some commercial banking operations, as well. But, we don't have any new geographies on our mind at the moment.

Okay. That sounds good, thanks for all of the color.

Dave Rochester, Deutsche Bank.

Hi guys, thanks for taking my questions. On the margin, it generally looked like the loan yield pressure wasn't too bad given some of the competitive pressures you talked about, especially on the C&I side. Can you just talk about where those spreads are today? And if you could also touch on CRE spreads, sounds like it may be a little less competitive on that side.

Commercial real estate continues to be pretty good, and when you think about the mix of loans that came on, quite a bit of residential, quite a bit of commercial real estate, we're getting pretty good yields in both of those lines at the moment. Where there's pressure is on commercial banking middle market loans, and whether it's Chicago, Wisconsin, Minneapolis, banks are fiercely competing for available commercial banking transactions, and spreads are reflective of that.

Have you seen those spreads come in at all last quarter to this quarter?

You know, anecdotally, maybe, but it has been competitive now for a good six, nine months.

Alright, great. On the funding cost side, it seems like you still have some more room to go on the CDs. Can you just talk briefly about what's repricing over the next couple of quarters maybe, and the rate on that?

I'll let Chris do that. Chris?

You can see from the table on page 7 of the press release, the weighted average yield for the quarter on the $2.3 billion of CDs was around 119 basis points. We previously noted 80% of our CD book was going to mature during 2012. We're on track for that. There is no new information there. Continue to see continual repricing throughout the year. We did have a solid lift in the first quarter. We will continue to see repricing from that book, which has been north of 1% into something in the 50-basis-point range as we continue to move through the year.

The majority of what is repricing and rolling over is rolling into maturities of less than 13 months, and when they're not rolling into CDs, we're very comforted to see that we're capturing a fair amount of that in money market and savings products, which are actually repricing into lower rates. So, we have been very pleased of the migration of high-cost CD book into other core deposit categories, and we see that continuing.

Great, thanks for that color. Just one quick one on expenses. Should we expect to see the bulk of that $5 million increase in the legal and professional line from BSA to go away next quarter?

No, we're going to have some elevated costs for BSA compliance through the course of the year. It is not going to stay at that run rate for the entire year, but we're working fast and furious right now with a lot of consultant help, lot of systems work we're doing, and so it will be elevated in the early part of the year and probably moderate as we get later into the year.

Okay. Great. Thanks, guys.

Chris McGratty, KBW.

Good afternoon, guys. Just a question on the mortgage banking business. Was there a write-up or a write-down of MSR this quarter?

There was a write-up and there was less expense incurred than in the prior period, so collectively, lower net MSR expense of $3 million.

Okay. And then on the capital levels, Phil, maybe you could just talk to us and remind us of where you're longer term thinking about where the bank needs to be?

Well, we're going to remain very well capitalized. We're going to be Basel III compliant, but we have a lot of room between there and where we are today, clearly. As time goes on, we need to deploy the capital or return the capital.

Okay. And just lastly, what is the tax rate we should be using (inaudible)?

I think the current period tax rate is reflective of full-year expectation, so that wouldn't be a bad starting point.

Okay. Thank you.

Emlen Harmon, Jeffries.

Good evening. Could we start -- actually go back to the liability profile, and you guys showed, what I would call extraordinary growth in money market deposits over the quarter. Was there anything unique going on there to try to drive that, and would you expect growth there to continue going forward? Pulling that into the big picture, how are you thinking about the liability profile longer term, and would you expect any other significant shifts?

We would highlight that we had last year chosen to migrate our customers into short-term repo-based and repo-sleep arrangements. As we have gone through the course of the year, and as securities book has paid down and the amount of excess collateral available there has moderated, we have, through pricing and given the lower rate environment, have been able to profitably and appropriately migrate customers away from repos and back to core customer deposits.

So you'll notice the offset there was the reduction of customer repo term and repo sweep as well as reduction in overall CD balances where we have seen a fair amount of recapture of CD maturities into our money market products. There was also a component of that which is related to network deposits, which was a small uptick of about $300 million in the totality; however, that really offset reduced federal home loan bank borrowings.

Got you. And then just one other quick follow up on expenses, and just the increase in the personnel expense. Can you help us understand what portion of that is due to seasonal affects versus other factors that may be in there?

I missed the last part of that. Due to what factor, I'm sorry?

Seasonal expense like FICA expense. Typically, we see some seasonal pick up in the personnel line because of payroll taxes in the first quarter. So, I am assuming that's part of the increase but was just curious what other affects were in there.

More than three-quarters of it is FICA related, and the balance would be accruals for full-year bonuses on the assumption that things are going to be better this year than they were last year, as well as the resetting of merit increases, which we typically do during the period during the first quarter.

All right. Got you. Thanks for taking the questions.

(Operator Instructions)

Terry McEvoy, Oppenheimer.

Hi, thanks. Just a question on the branch closures. Can you talk about customer attrition? Was it in line with expectations? Some of the newer branches that you built or refreshed, so to speak, any increased traction because of just being more appealing? Anything there would be helpful.

And I got another question. If I remember, when you bought First Federal under '04-'05, they had a fair amount of supermarket branches. How does this supermarket branch model appeal to you today, in light of the regulatory changes putting some of the pressure on consumer banking.

Three pieces to that, Terry. On the branch consolidations, we have now completed those, so it is very early days, but as we sit today we have actually -- if you take the consolidated branch into the branch that was consolidated into actually deposits are up. We haven't had any customer attrition. So we had modeled high 90% retention rates, and we're actually doing better than that. But it's still early days.

Some of these branches have only been closed a matter of a couple of weeks. On the remodels and refreshing of the branch network, it's also early. One piece of information I could share that we've tracked from last year was a pick up in transaction volume and new accountings in the branches as they got new signage up. A lot of our signage was very dated, and we now have made our branches much more visible through signage. We have seen some pickup on that.

As far as the branches that we've done significant remodels on, it's just really too early, but we'll be tracking that as the quarters go by, and we'll let you know. And then, finally, we do operate a significant amount of in-store branches, and that model seems to work very well for us. Actually, it works better than what I was used to at the bank I used to be at in California. So, we continue to be quite comfortable with the in-store model. We actually opened, I think, three in-stores over the past nine months or so, and we'll continue to look for those opportunities.

Great, and just one last question. Retail commissions, every quarter I just plug in $15 million or $16 million, and it's been that way for quite some time. What goes into that, and what can drive that higher to get it out of that range that it's been in for quite some time?

You've asked a very detailed question that I don't have a quick answer to. A lot goes into it, and it is a lot of different aspects of different things that are within these sales. But, it is a combination of the insurance sales, the retail brokerage channel, retail foreign exchange, to the extent there is a component there, and other related ancillary services.

And, it has been a fairly steady number, which I think reflects the steady core customer base that we've had, and I think it will be customer-activity driven to the extent it moves and household-attraction and retention driven to driving that number meaningful higher, as we're currently not aggressively introducing new products or adding new ancillary services in the current regulatory environment.

Appreciate that. Thank you.

Mac Hodgson, SunTrust Robinson Humphrey.

Great, thanks. I thought the net interest margin was great this quarter. It improved more than I expected. I was a little surprised that you didn't raise your expectations there. Is it more being conservative given that it is just the first quarter, or are there other expected movements as the year progresses that might put some pressure on the NIM from here?

It is the first quarter.

That is what I figured. Just one more. Would you mind giving some color on the types of investor commercial real estate projects you're funding?

Sure, it's a variety of different product types. This past quarter, there was a significant amount of multi-family and a decent amount of office. Across the footprint, a lot of activity in Milwaukee, lot of activity around Chicago. Multi-family has been clearly the hottest area of commercial real estate development of late.

Okay. Great. I appreciate it. Thank you.

Stephen Geyen, Stifel Nicolaus.

Good afternoon. Just a couple of questions, I guess. You know looking at the mortgage banking line, was there any impact from HARP II, or do you expect any impact from HARP II?

I think our existing portfolio base is perhaps not as HARP II-sensitive as others. I think there is some positives to that from a credit perspective, and there is some negatives to that from an opportunity perspective. That having been said, as a leading originator within, certainly, the Wisconsin footprint and there being other institutions who have significantly different credit profiles, we see lots of upside and opportunity for us to grow the portfolio as a result of that. From others' portfolio, not solely from our own.

Phil, you mentioned acquisitions, just curious if there is any opportunity to grow the niche businesses that you have through M&A?

To the place where we can grow some of the niche businesses, for example, oil and gas or power and utilities, is through portfolio purchases. In fact, we're just in the process of closing a small bundle of loans that we're buying from a European entity that's exiting that business. So it's not going to be buying a business, if you will, but it is probably more along the lines of buying some loan portfolios.

Okay. And last question, just wondering if there were any changes in line utilization by geography. I guess, specifically looking at maybe Chicago, Minneapolis and then the--

I think it's all stuck around the high 40%s right now and hasn't been really moving much. I think the last number I saw was 48% line utilization.

Got it. Okay, thank you.

Tom Alonso, Macquarie.

Good evening, guys, just real quick on the move from rebuild to money market, is there additional opportunity to move more of that? And when you move that, what's the differential in terms of -- how much do you pick up in terms of cost savings, if anything?

I think we have repriced the product so that it's considerably -- our customers earn considerably less in a repo than in a money market, so actually the shift is costing us incrementally, but it is also freeing up the collateral allowing us to allow the securities portfolio to continue to run down, allowing us to fund continual loan growth.

So if the margin, the earning asset pick up, is on the order of 100 basis points, although the actual net interest expense is going up when we move the customer from repo to money market. But we free up an investment in security, which we then can re-loan out at loan rate and pick up the spread there.

Okay, fair enough. Thank you, guys.

(Operator Instructions)

Erika Penala, Bank of America Merrill Lynch.

Good evening, guys, this is Russell Gunther on for Erika. I just had a quick question on the securities yields up 26 basis points quarter on quarter on lower balances. Could you give us a sense for what drove that?

Sure, it was largely premium amortization and slowdown.

Okay. Do you have what that was on dollar basis this quarter versus last? What the contribution was?

No, but we can look at -- see if we can provide that number in a separate discussion.

Okay. That was it for me.

It is largely premium amortization.

Okay. Thanks, guys, thanks for the color.

Chris McGratty, KBW.

Sorry about the follow-up. Chris, can you walk through the mortgage banking number again, the MSR, what is the dollar amount of the write-up or write-down, and is there an offset, likewise, in the expenses?

Well I think -- we had increased gain on sale. That was the largest contributor, looking back to page 6. We had net lower MSR expense of $3 million. There was a valuation component to that, which was on the order of $2.4 million.

So $2.4 million MSR write-up?

Correct.

Thank you.

I'm showing no further questions at this time, so we will conclude our question-and-answer session. I would like to turn the conference back over to management for any final remarks they may have.

Thanks for joining the call today, we were pleased with this quarter's performance. It was marked by higher loan balances, higher margin, higher core fees, stable core expenses and continued improvement in credit. We remain optimistic and committed to building shareholder value through our long-term strategy for growth here at Associated. We'll look forward to talking with you again next quarter, and if you have any questions in the meantime, you know where to find us. Thanks a lot.

The conference is now concluded, and we thank you for attending today's presentation. You may now disconnect your lines.