Oct 17, 2013
Executives
Philip B. Flynn - Chief Executive Officer, President, Director, Chairman of Corporate Development Committee, Chief Executive Officer of Associated Bank, President of Associated Bank and Director of Associated Bank Christopher J.
Del Moral-Niles - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Chief Financial Officer of Associated Bank and Executive Vice President of Associated Bank Scott S. Hickey - Chief Credit Officer, Executive Vice President, Chief Credit Officer of Associated Bank and Executive Vice President of Associated Bank
Analysts
David Rochester - Deutsche Bank AG, Research Division Ken A. Zerbe - Morgan Stanley, Research Division R.
Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division Matthew T. Clark - Crédit Suisse AG, Research Division Jon G.
Arfstrom - RBC Capital Markets, LLC, Research Division Terence J. McEvoy - Oppenheimer & Co.
Inc., Research Division Emlen B. Harmon - Jefferies LLC, Research Division Peyton N.
Green - Sterne Agee & Leach Inc., Research Division
Operator
Good afternoon, everyone, and welcome to Associated Banc-Corp's Third Quarter 2013 Earnings Conference Call. My name is Laura, and I will be your operator today.
[Operator Instructions] 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 call is being recorded.
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 section of Associated's most recent Form 10-K and any subsequent SEC filings. These factors are incorporated herein by reference.
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.
Philip B. Flynn
Thank you, Laura, and welcome to our Third Quarter Earnings Conference Call. Joining me today are Chris Niles, our CFO; and Scott Hickey, our Chief Credit Officer.
Highlights for the third quarter are outlined on Slide 2. As expected, we saw a significant downturn in Mortgage Banking income.
In addition, overall loan growth was flat, primarily as a result of the continued runoff in refinancing of our home equity portfolio. However, we largely made up for these shortfalls with stronger-than-expected credit outcomes and discipline around expenses.
As a result, we reported net income to common shareholders of $44 million or $0.27 per share. We continue to deliver strong EPS and note that our year-to-date EPS is tracking up 11% over last year.
Average deposits increased 3% from the second quarter to $17.6 billion adding only -- adding over $0.5 billion to our deposit base. Net interest income was up slightly from the second quarter, and net interest margin compressed 3 basis points to 313 basis points.
Gross fee income of $71 million declined 16% from the second quarter driven by the decrease in mortgage banking income, although core non-interest income was up $3 million. Notably, non-interest expense of $164 million was down $6 million from the prior quarter.
We repurchased another 1.8 million shares during the third quarter. In addition, on October 4, we executed an accelerated share repurchase of an additional 1.8 million shares.
Our Tier 1 common equity ratio remains very strong at 11.64%. Now let me share some detail on the main drivers of third quarter earnings.
Loans are highlighted on Slide 3. Despite 1% growth in Commercial Real Estate, C&I and Mortgage lending, average loan balances were flat to the second quarter.
Most of the C&I growth came in our Oil & Gas and Power & Utilities units. General Commercial Loan growth is being affected by lower demand, lower line utilization and increased competition.
The Mortgage warehouse portfolio also decreased, reflecting slower refinance activity at quarter end. Multifamily and Retail project construction loans account for most of the growth in Q3 CRE lending.
We continue to see opportunities to grow our Commercial Real Estate portfolio. Average residential mortgages grew by 1% during the quarter.
We currently hold about $1.4 billion of 15-year fixed-rate mortgages on our balance sheet, as we have for some time, and we intend to generally remain at about that level going forward, reflecting our strategy to sell substantially all 15- and 30-year production. During the third quarter, our Mortgage Banking units sold $514 million of loans compared to $782 million in the prior quarter.
Gain on sale on the loans delivered was 2.2% compared to 2.18% last quarter or about the same. Consumer refinance activity has definitely slowed with our pipelines running at less than half of Q2 levels.
However, even with the increase in mortgage rates, they remain relatively low. So we expect our home equity portfolios to experience more runoff as consumers continue to deleverage and refinance into lower priced first lien mortgages.
Average deposits of $17.6 billion were up 3% compared to the second quarter. Average money market balances increased $625 million during the quarter and were partially offset by a decline in time deposit balances of $134 million.
Checking and savings average balances were essentially flat from the second quarter. We have seasonal inflows of Commercial and trust balances in the first and third quarters related to trust and tax activity.
So we expect to see only moderate deposit growth in the fourth quarter. And the increase in deposits this past quarter allowed us to repay about $1 billion in Federal Home Loan Bank advances.
On Slide 4, net interest margin. Despite soft loan growth, net interest income of $161 million increased slightly from the second quarter.
As we projected, net interest margin for the third quarter was 3.13%, down 3 basis points from the prior quarter. Loan pricing continues to be competitive as banks in our footprint seek to gain market share.
But even more than pricing, we're seeing Commercial deal structures such as 10-year loans or fixed-rate financing that we're frankly walking away from. We continue to manage down interest-bearing liability costs, which now stand at 38 basis points, down from 62 basis points in the third quarter of 2012.
Our expectation is that earning asset yields will continue to compress a few basis points per quarter, while our ability to manage deposit and funding costs lower will become more challenging. There will be some continuing benefit from repricing of the CD book through the rest of this year.
Additionally, we have about $26 million of 9.25 sub debt outstanding that will be redeemed this month. In fact, we just redeemed it.
Total non-interest income from the quarter was $71 million, down $13 million from the second quarter and down $10 million, or 12%, from Q2 of '12, driven by lower Mortgage-related income, partially offset by higher core fees. I'm on Slide 5 now.
Core fee categories, which includes service charges on deposits, card-based income and trust service fees, were in fact up 5% in total from the second quarter. In addition, trust service fees are up 10% year-over-year as Assets Under Management have reached a record high of over $7 billion.
Mortgage Banking income, on the other hand, declined 82% from the second quarter. Now half of that drop related to the one-time $8 million pickup in MSR valuation, which we called out in the second quarter.
The other $8 million can be attributed to lower volumes and a negative mark in our pipeline at quarter end. Insurance revenue normalized this quarter.
Also we sold some of our real estate resulting in a $2 million increase in asset gains. We expect to see more real estate transactions as part of our continuing process to evaluate consolidation opportunities and rationalize our footprint.
Capital market fees decreased by about $2 million related to lower Commercial lending volumes and related lower customer demand for interest rate swaps and other hedges. Given the tough revenue environment, we took additional efforts to manage our expenses this past quarter.
Total non-interest expense declined by $6 million or 3% from the second quarter. Quarter-over-quarter personnel expense decreased $2 million, FTE levels continue to decline and are at the lowest level since mid-2010.
Legal and professional fees were down $2 million from the prior quarter related to a decline in BSA consulting fees, BSA remediation expenses are largely behind us. Losses other than loans declined $3 million from the second quarter, as we had a more favorable than expected resolution of a litigation matter.
These savings were partially offset by a net $1 million increase in business development and advertising, mainly related to production costs of our new fall campaign, which emphasizes the good fit we are for our customers and how our mobility tools and proactive solutions fit into their lives. Our efficiency ratio remains a key focus, and management is committed to working diligently toward a number that is more in line with our peers.
Turning to Slide 6. We've now improved our credit quality to a point where improvements in the future will likely be more modest.
With just 4 basis points of Commercial net charge-offs this quarter, it's hard to imagine it could get any better. Potential problem loans declined to $277 million from $310 million last quarter and are down more than 30% from $404 million a year ago.
The level of non-accrual loans to total loans continue to improve to 1.33% from 1.38% at the end of the second quarter. This metric has improved for the 14th consecutive quarter.
Total non-accrual loans of $208 million were down from $217 million at the second quarter and $278 million a year ago. Net charge-offs were $5 million for the third quarter.
This was affected favorably by an $8 million loan recovery. The allowance for loan losses now equals 1.74% of loans and covers 131% of period-end nonaccruals.
Given our flat loan volumes and the low levels of net charge-offs for the quarter, our provision for loan loss was 0. On Slide 7, our capital ratios continue to remain very strong, with a Tier 1 common equity ratio of 11.64%.
We're well capitalized and well in excess of the Basel III expectations on a fully phased-in basis. Our priority for capital deployment continues to be on organic growth.
We plan to maintain our dividend in line with earnings growth, and we'll be disciplined in evaluating other opportunities to optimize our capital structure over the coming year. There are a few items to note regarding the fourth quarter.
We expect loan growth to continue to be challenging in this environment and net growth to be around 1%. Also we have recognized a $6 million tax benefit earlier this month related to the settlement of a tax issue and the expiration of various statutes of limitations.
And as I've mentioned in the highlights, we executed an accelerated share repurchase on October 4, and consequently, you can expect the Q4 share count to be about $163 million. Turning to Slide 8.
Last week, we announced a couple of actions related to refining our operations that I'd like to discuss a little further. In addition to the 3 rural branches that we sold during the third quarter, we're consolidating an additional 8 branches in Wisconsin and Illinois.
We have an ongoing process where we evaluate the way we are serving our customers. Declining branch traffic and rising online and mobile banking usage dictates that our delivery model evolve.
We've made significant investments into our online mobile and ATM channels, and our customers are making more and more frequent use of these services. In addition, we're consolidating several support front functions from our La Crosse service center -- I'm sorry, our La Crosse service center, which will be closed into Green Bay and Stevens Point.
We continue to look at our back-office functions for a way to reengineer and become more efficient. And with that, we'll open it up to your questions.
Operator
[Operator Instructions] And our first question is from Dave Rochester of Deutsche Bank.
David Rochester - Deutsche Bank AG, Research Division
On expenses, you mentioned personnel expenses down and the FTE is down. I was just wondering how many positions were reduced net?
And was any of that decline related to terming in the mortgage bank?
Philip B. Flynn
Yes, so if you go back not too long ago, we had approximately 5,000 FTE in our company. We are down from that peak by, say, about 400 people.
Those are just permanent employees of Associated. In addition, particularly in our Mortgage operation, we've had a number of contract workers and temporary workers.
So we've meaningfully, over this past couple, 3 months, reduced the Mortgage operation, as well as of course other areas as well. So we continue on a path of looking to become more efficient and certainly recognized and have reacted to the decline in mortgage volumes.
David Rochester - Deutsche Bank AG, Research Division
Is it fair to say that we would see some of that -- those actions that you took spill into fourth quarter expense trends as well? [indiscernible]
Philip B. Flynn
Yes, that would be fair. Yes.
David Rochester - Deutsche Bank AG, Research Division
Okay, great. And then I was just wondering how much did the favorable resolution of litigation reduce the losses other than loans line?
I know you said that the change of the line was $3 million. Was that a total impact or was it larger than that $3 million?
Christopher J. Del Moral-Niles
No, the litigation's specific impact was $1.1 million of that change, and there were some other unfunded commitment reserves changes, et cetera. But the largest single component was $1.1 million favorable resolution on litigation.
David Rochester - Deutsche Bank AG, Research Division
Great. And you mentioned that most of the BSA costs are behind you.
Is there going to be any benefit that we'll see in 4Q from those stepping down? I was just wondering if you can kind of update us on whether you've had that final BSA exam and where you stand there?
Philip B. Flynn
Yes, the big step down in BSA costs has been seen from the second to the third quarter. So we're not going to see a lot of change now because we didn't have many expenses in the third quarter.
And I'm very reticent, in fact, I don't comment on what our regulators are doing at any point in time, but suffice it to say, we have spent significant time, energy, management attention and money to remediate and resolve our BSA/AML problems, and we believe we're in very good shape now.
David Rochester - Deutsche Bank AG, Research Division
Great. And one last one, I was just wondering if you can talk about how loan spreads are holding up, just given all your comments about the competitive landscape.
And it sounds like there's more stretching of terms out there?
Philip B. Flynn
Yes, loan yields overall declined by 5 basis points, second to third quarter. Within specific areas, there continues to be some movement.
If we do some adjusting for CRE yields, for example, they were down about 4 basis points on that portfolio quarter-over-quarter, which is a significant move. I mean individual credits now are being competed for in the market at substantially lower spreads than they were a year ago.
So CRE probably has declined 50 to 75 basis points. Commercial is probably down 25 basis points, and it wasn't all that exciting to start with.
And even in some of our specialty areas, we've seen some margin compression. But on top of that, frankly, we are seeing even smaller banks committing to fixed-rate, 10-year terms, which defy any kind of logic, frankly.
So to be perfectly honest, we run the bank with a view toward the long term. And when we extend credit, we extend credit in what we believe are prudent terms with a reasonable return.
Operator
And our next question is from Ken Zerbe of Morgan Stanley.
Ken A. Zerbe - Morgan Stanley, Research Division
What gives you the confidence that loan growth could actually be up 1% next quarter? Because it sounds like everything that we're talking about with home equity portfolios running off, walking away from CRE, it just doesn't sound like a great environment right now.
Philip B. Flynn
Yes, I don't want to give the impression we're walking away from CRE. In fact our pipeline for Commercial Real Estate has been building over this past 3 months or so.
So the visibility that we have into loan growth gives us some reasonable comfort that we'll have 1% growth, and it wasn't too long ago that we had much more substantial growth than that. So I don't think it's a big stretch to think that we'll get some growth.
Ken A. Zerbe - Morgan Stanley, Research Division
Okay. And then I just -- quick on the provision expense, it looks -- I presume that the 0 provision relates to the $8 million recovery that you had.
So going forward, is it fair to assume that your expectation is for something a little more higher than 0 in terms of the provision line?
Philip B. Flynn
The provision has been very low all year. Even with 1% loan growth, that's not going to attract a lot of reserves.
We continue to have some recoveries in the offing, so we expect to have low loan loss provision again, certainly for this quarter. And when we get into January, we'll provide our thoughts on what next year looks like.
Ken A. Zerbe - Morgan Stanley, Research Division
Okay, and then just one last question. In terms of Mortgage Banking, I think you mentioned that you had a negative mark in the portfolio.
How much was that? And if we do back that out, is that new core number, is that a kind of sustainable number given the origination volumes that you're seeing right now?
Christopher J. Del Moral-Niles
I think the amount of the mark net including MSR, FAS 133 and low comp adjustments was several million dollars, to the tune of $4 million, $5 million and on a net basis. And yes, I would believe that's more consistent with what we expect to be the run rate going forward, which would be a mid-single-digit number.
Operator
And the next question will come from Scott Siefers of Sandler O'Neill.
R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division
I guess so maybe just given what's going on in the revenue side, could you talk a little bit about what additional opportunities you would have to take out some cost in addition to the stuff you articulated? In other words, if the revenue environment stays as challenging as it is, would you guys be open to doing something even more substantial?
Philip B. Flynn
Of course. I mean, I think I said awhile ago that I'm not a big believer in grandly named expense initiatives and announcing big bangs.
We've been working hard all year to manage our expenses. We said that we would keep our expenses flat compared to last year; we've done that and a little more so far.
And that's in the teeth of a company that's required significant investment into basic infrastructure of systems, physical facilities, et cetera. So we are constantly working in a number of areas to find efficiencies.
A lot of our efforts are now turning to our back shops. So you've seen the action that we just took in La Crosse.
And we continue to look for opportunities to get more efficient. The company is not efficient.
The company underinvested in its past in technology solutions. And so we've been making a number of investments often using technology in order to become more efficient.
And as time goes on, the benefits of those will become more apparent. So expense management in this environment is a very, very high priority for us.
So yes, you can expect us to continue to work hard and see some results on the expense side.
R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division
Okay. And then separately, I think I know the answer to this based on what you said about the fourth quarter share count.
But the accelerated program you did earlier this month, is that basically in lieu of what you would have done normally throughout the fourth quarter? I think you had been targeting kind of 100% total earnings payout this year, so is that still what you're thinking, or is there a chance you would go kind of meaningfully over that?
Philip B. Flynn
For now, as we said, we have pulled forward what we have "normally done" to earlier in this quarter. And as the quarter goes on, we'll evaluate our options, but I wouldn't assume that we're doing anything else right now.
R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division
Okay, and then finally, maybe, Chris, this is best for you, but you guys still have a lot of capital and I think some excess liquidity as well, would you -- given the trends -- the kind of slowing trends on the loan side, would you do anything in terms of maybe looking at beefing up the securities portfolio to just generate some additional NII? Is any stuff like that on the table?
Christopher J. Del Moral-Niles
Clearly we're always looking at strategies to enhance the bottom line and add more value to shareholders. And yes, we are having an active dialogue as a management team and with our board on strategies to better leverage our capital or more efficiently deploy it and maybe both.
Operator
And the next question is from Chris McGratty of KBW.
Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division
So on the loan growth commentary, does your decision to do smaller deals -- could you maybe revisit that and maybe look to do more larger deals or be more aggressive with the smaller deals since the organic growth is stalling a bit?
Philip B. Flynn
I'm sorry. Help me with what you mean by smaller deals or larger deals.
Are you talking about...
Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division
Well, like in the past you said you're looking at acquisitions, couple of billion in assets, nothing transformational necessarily, in-market cost takeout plays. Does that strategy need to change at all if the organic slows?
Philip B. Flynn
Well, we haven't executed on any part of that strategy yet. Give us a chance and we'll get into next year and we'll see what we look at.
Christopher McGratty - Keefe, Bruyette, & Woods, Inc., Research Division
Okay. And on the guidance, you gave some verbal comments about the fourth quarter, should we expect, once you do your budget, that we'll get the more detailed financial guidance in the slide deck like you've presented in the past?
Philip B. Flynn
Sure, yes. In the January call, we will provide an outlook of our drivers for what we think will happen in '14.
That's our normal pattern.
Operator
And our next question is from Matthew Clark of Credit Suisse.
Matthew T. Clark - Crédit Suisse AG, Research Division
On the Mortgage front, can you just give us a sense for the magnitude of expenses in terms of dollars that you pulled out of this quarter? And I guess what's left to do given, again, how much smaller that revenue contribution is?
Philip B. Flynn
Yes, so let me give you a little bit of information on the pipeline first of all. So I don't want anyone to have the impression that the mortgage business has come to a complete standstill.
It certainly hasn't. As of mid-month, we have a pipeline of almost $700 million in process.
Now that's down in about 4 months by about half. We've reduced, as I said, expenses already, and we're looking at other things we can do.
Now there's a certain amount of fixed cost in a mortgage operation and there's quite a bit of variable cost. So our Mortgage brokers, the originators, largely work on commission.
So that's a self-adjusting expense, if you will. If there's lower volume and lower closings, then there's lower commission paid.
Certainly, in the areas of underwriting and processing, we've reduced costs and we'll continue to look to do that to match it up to where the volumes are. But as you get into servicing and default services, there isn't a lot of cost takeout there because the volumes in that part of the shop don't really change.
So as far as absolute dollars, I don't have that handy in front of me, but we've certainly seen a noticeable drop, which will continue and probably grow as we get into this quarter and next year. And at this point, we've -- I'm trying to recall, we've probably reduced personnel expense by more than 20% on a going forward run rate as I recall.
Christopher J. Del Moral-Niles
In that group.
Philip B. Flynn
In that group, yes.
Matthew T. Clark - Crédit Suisse AG, Research Division
Okay. Is it fair to assume that, that run rate, I guess, on an overall basis, after you adjust for the legal -- favorable legal settlement?
I mean is it fair to assume that, that run rate can remain fairly steady if not begin to decline again before you remain in this tepid growth environment?
Philip B. Flynn
You're talking about the run rate of non-...
Matthew T. Clark - Crédit Suisse AG, Research Division
Just the overall -- non-interest expense run rate, yes.
Philip B. Flynn
Yes, I mean there's always a lot of ins and outs in there, so we do have -- we've had, in this past quarter and we will have this quarter, some elevated marketing costs as we roll out our branding campaign, but that will be offset by other stuff. So I don't know that this quarter multiplied by 4 is necessarily the run rate you want to assume going forward.
We can give you more guidance on what we think next year, but certainly expenses are in downward trend overall and will continue that way.
Matthew T. Clark - Crédit Suisse AG, Research Division
All right. And on the loan front, you guys trimmed your guidance intra-quarter, but things obviously changed since then.
I guess when you talk to weaker demand and utilization being down and increased competition, can you give us a sense for the order of magnitude or the relative contribution of each of those things happening that transpired?
Philip B. Flynn
Well, I mean, for example, overall line usage at the end of the second quarter for Commercial, for example, was about 48%, and that dropped by a full percentage point. Our specialized group went from about 56% utilization to about 52%.
So utilization came down pretty much across the board, and we are passing, as I've indicated, on more Commercial and more Commercial Real Estate transactions that just don't seem to make sense to us. And of course, Mortgage volumes are somewhat down.
So it's a mixture of utilization and competition. And frankly, I think some of the effects of all the uncertainty in the economy between the Affordable Care Act, government shutdown, fear about hitting the debt ceiling, none of this stuff helps businesses be confident and want to make investments.
We're locked into a market share game right now where the economy isn't feeding any opportunities for us or anybody else. So it's all a matter of taking business from somebody else today.
And if people are willing to do that on what I view as overly aggressive terms where you're not getting paid for it, that doesn't make a lot of sense when you're running a bank over the long haul, not for the short run.
Matthew T. Clark - Crédit Suisse AG, Research Division
Okay. And then just maybe on the M&A front.
You guys mentioned here again, looking at opportunities to deploy capital. Can you just give us a sense for any change in activity in terms of pitch books that you might be seeing or just any increased chatter or anything that you might be seeing?
Philip B. Flynn
Well, there is -- I mean there's clearly, over this past 6 months, there's been a pickup in activity and talk. You've seen a couple of transactions happen in the last couple of quarters, particularly at the very small end, but in even the medium size and a couple of transactions in the Midwest.
So there is more activity. There's more stuff that we're seeing.
And if something makes sense for us as we move forward over the next few quarters, you can certainly expect us to be active. We're certainly well positioned to do that.
The bank is in very strong shape from a balance sheet point of view. We have a lot of capital.
And we have a management team that's fully capable of managing a larger operation. So if something makes sense to us, we're well positioned to take advantage of it.
Operator
And the next question comes from Jon Arfstrom of RBC Capital Markets.
Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division
Jon Arfstrom. Just not to slice and dice lending even more so, but just the national business cautiousness, obviously, not immune, but is there anything specific there or does it really just go to your general comments?
Philip B. Flynn
When you say the national business, you mean like Oil & Gas and Power & Utilities?
Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division
Yes.
Philip B. Flynn
Yes. They actually -- you saw that they had growth in the third quarter.
We certainly expect those businesses to continue to grow. We are passing on a few more transactions than we probably would have 6 months ago.
But we expect Commercial Real Estate, Oil & Gas, Power & Utilities, our major specialty units, to continue to grow as they have been. General Commercial lending is slowing.
There's a lot of competition there and not a lot of organic activity, if you will.
Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division
Would you characterize it as newer competition?
Philip B. Flynn
I don't -- it all becomes very anecdotal. I don't know if it's newer competition.
I think more and more banks have put whatever problems they had behind them, and there's a fierce battle out there for market share and loan outstandings.
Jon G. Arfstrom - RBC Capital Markets, LLC, Research Division
Okay. And then maybe a question for you or Chris, just -- and I'm not quite sure how to ask it, but when you go to these efficiency initiatives in a revenue environment like this, how do you draw the line or how do you determine what makes sense and what doesn't make sense, when we maybe have temporary pressures versus more a long-term view?
Philip B. Flynn
Well, that's the great question, and that's why we all get paid, to make difficult decisions. So the -- what we have to work very hard at is to figure out how to become more efficient, how to do more with less, how to make intelligent investments, particularly in the technology or facilities that will pay off in the long run for us without cutting into our ability to be successful in the long run.
So I don't want to keep repeating it, and I'm sure you're tired of hearing it on the phone right now, everybody, but we think about this company in a long-term view. So for example, we are rolling out brand advertising this quarter and next -- this past quarter and this quarter.
That's an expensive endeavor, but it's important for us for the long haul to do that. Likewise we continue on a very selective basis and in an increasingly efficient basis to upgrade our branches.
We also continue to make investments in technology. So it's a difficult process to make sure that we are doing hard things like choosing to close an entire service center in La Crosse and be sure that the impact of that is being covered elsewhere and that we don't diminish customer service or our ability to get back to people on a timely basis.
And all of that is being done with a long-term view of the company in mind.
Operator
And our next question is from Terry McEvoy of Oppenheimer.
Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division
With 1% loan growth and additional pressure on asset yields, do you think you can grow net interest income again quarter-over-quarter in the fourth quarter?
Philip B. Flynn
Yes.
Terence J. McEvoy - Oppenheimer & Co. Inc., Research Division
Okay. And, Phil, you and your team work really hard strengthening the balance sheet.
Now you're rightsizing the branch network, restructured the loan portfolio. You've been growing the portfolio up until recently.
But my question is what's next in terms of strategy and finding growth opportunities? Is there a new area of lending that you have experience that you'd like to get into, or are you just happy with the current platform and really being patient in waiting for this macro environment to turn in your favor?
Philip B. Flynn
Yes, we're not seriously looking at any meaningful new lending endeavor. I think we have a solid portfolio of businesses that we understand that we can continue to invest in and grow.
This is the first quarter that we've had flat loan growth in a very long time. So I'm not inclined to dramatically shift what we do on the lending front.
We do need to grow the company organically, but we also need to look for some opportunities to do other transactions. And I think, as I've said, that those will become apparent as time goes on.
The macro environment is such that I believe there are going to be a lot of banks that are going to be looking to sell themselves in the future. It's a difficult environment.
I find it difficult. I got to believe people who don't have the balance sheet we do find it even more difficult.
In the meantime, we continue to manage capital very prudently, and we have effectively returned 100% of our earnings to our shareholders so far this year.
Operator
And the next question is from Len Harmon of Jefferies.
Emlen B. Harmon - Jefferies LLC, Research Division
It's Emlen. Just going back to loan growth next year, I know we're going to get your explicit expectations next quarter.
But I mean is there anything that would lead you to believe that loan growth was meaningfully different from kind of what you expect to see in the fourth quarter in terms of a run rate?
Philip B. Flynn
I think it's a little early to say yet. I don't really want to try to provide guidance for next year's loan growth right now until we have a little more visibility as we finish all of our budgeting, which we're still in the midst of.
So in the past, we've had double-digit loan growth in '11 and '12. We're going to have mid-ish loan growth this year, mid-single-digit loan growth this year.
We'll certainly be able to do that next year, but I can fine-tune that for you when we get to January.
Emlen B. Harmon - Jefferies LLC, Research Division
Okay, fair enough. And then the one spec thin area that you don't break out for us in the deck is just health care lending.
I was hoping you could give us an update on just kind of what the progress of that business has been?
Philip B. Flynn
Sure. Scott Hickey is here and he's got a...
Scott S. Hickey
Yes, the health care book hasn't grown dramatically year-over-year. It's up roughly 10%, 12%.
So it's not been a meaningful growth over the last year.
Philip B. Flynn
As compared to some of our other higher-growing specialties.
Scott S. Hickey
Correct.
Philip B. Flynn
Yes. But it's also the newest, too.
Scott S. Hickey
Correct.
Emlen B. Harmon - Jefferies LLC, Research Division
And I guess -- so I mean any -- when you think about the opportunities there, I mean, is that a book where you haven't necessarily ramped up fully on personnel or there are other just kind of opportunities in terms of properties you'd be looking at? I guess how should we think about opportunities in that business given that it is one of the smaller divisions there still?
Scott S. Hickey
Yes, this is Scott. We have got the personnel in place.
We've moved a lot of our health care that was in the company to them. Now they're kind of in the position where they're beginning to go out and be more aggressive from a marketing perspective.
So yes, we would expect more growth from that group prospectively.
Emlen B. Harmon - Jefferies LLC, Research Division
Got you. Okay.
One quick last one. I guess maybe this would be for Chris.
Could you just quantify how much of the comp decline quarter-over-quarter came from Mortgage? I know we talked about a number of the components between kind of commissions and paring back on some of the temporary staff, but I would just be interested to know how much of that decline was specifically related to Mortgage.
Christopher J. Del Moral-Niles
Yes, I don't have that number specifically for you in detail, but I think it's important, as was commented on earlier, that some of those costs -- declining costs also come in the form of contractors, and they're not necessarily only therefore in the comp line. So I think there's some costs sprinkled about.
So I think you're going to see overall cost decline, I think, as Phil mentioned, between commissions, reductions, operational shifts. I think we've said publicly we expect at least a 30% decline plus in dollars of revenue, at least 30% variable with each dollar of revenue decline, although there's no offset directly for valuation marks.
So both the MSR writeups didn't have an offset and FAS 133 adjustments don't have offsets. But on a pure business side it's, call it, 70% fixed, 30% variable until we restructure or rescale.
Operator
And the next question is from Peyton Green of Sterne Agee.
Peyton N. Green - Sterne Agee & Leach Inc., Research Division
I was just -- most of my questions have been asked and answered, but I was just wondering maybe, Phil, if you could talk a little bit about what is acceptable from a valuation perspective in terms of what you might incur from a tangible book value dilution in an M&A transaction.
Philip B. Flynn
Go ahead, Chris.
Christopher J. Del Moral-Niles
Yes, this is Chris. What we've said publicly is we are focused on transactions where we're confident that through cost takeouts we can see tangible value earn-back within 5 years.
Probably not likely there'll be too many solid franchises that will get -- we'll see tangible value in less than 3 years, but we're sort of focused on things where we think we can see that value in less than 5. Obviously, we'd need it accretive as well.
Peyton N. Green - Sterne Agee & Leach Inc., Research Division
Okay, and then maybe, Phil, I guess just -- this would probably be more anecdotal than anything else, but I mean in your dialogue with the customers, did you get any sense that their behavior has changed any in the last 30 days as all the, I guess, headline stuff out of Washington occurred? Or I guess it's been pushed 90 days forward, I mean what's your sense of the degree of change?
Is it slight? Is it something that's measurable or still hard to tell?
Philip B. Flynn
Well, people weren't thrilled about the environment 6 months ago coming up to all of this government by crisis. And I think the general sentiment of folks that I've talked to is just complete -- I mean, people are just incredulous about what they've just witnessed.
And all we've done now is kick the can down the road and appointed another group which we've had in the past, which wasn't any more successful than what we've just seen. So I just don't think that business owners are getting much positive out of all the stuff that's going on in D.C.
and it's not helping the economy and it's not helping people want to make investments.
Peyton N. Green - Sterne Agee & Leach Inc., Research Division
Okay. I mean I guess is it more of a break or is it more of just an impediment from keeping people to really do things that they would have done otherwise?
Philip B. Flynn
Like you said, this is all anecdotal, and now I'm just talking. But people need confidence in order to make business investments, and this environment is not one that breeds confidence.
At least that's what people tell me, and it's hard to argue with that.
Peyton N. Green - Sterne Agee & Leach Inc., Research Division
Okay. And if that weren't there, I mean generally though, I mean if you look from a credit perspective, I mean the underlying credit trends would suggest your customers are in better shape.
Is that still true?
Philip B. Flynn
Absolutely, yes. I mean corporate balance sheets are -- corporate and middle market and small businesses even are much improved than where they were, absolutely.
There's a lot of liquidity out there.
Operator
Next, we have a follow-up question from Scott Siefers of Sandler O'Neill.
R. Scott Siefers - Sandler O'Neill + Partners, L.P., Research Division
I just wanted to go back to this notion of kind of distribution optimization. And just given some of the things that you're looking at, like strategic fit, return on capital, et cetera, I wonder about some of these markets that you have.
In other words, would you look at potentially getting out of some places where you are, like -- places like Central Illinois and St. Louis, which I imagine are profitable, but you may not have the same bang for the buck with -- like marketing, stuff like that.
Would you look at doing kind of more, larger distribution refinements, in other words, getting out of markets versus sort of the individual branch things that you've done so far?
Philip B. Flynn
Yes, that's not really something we're looking at. We continue mostly to fine-tune the branch network to make sure that when we have opportunities for close-by branches.
Or in fact in this last round, there are some very small communities that we were consolidating branches out of. But as far as entire geographies, no, we're not looking at that right now.
We're constantly evaluating the return that we get from all of our businesses, including the various geographies we operate in. If something at some point didn't make sense to us, we wouldn't hesitate to take action.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Phil Flynn for any closing remarks.
Philip B. Flynn
Thanks, Laura, and thanks, everybody, for joining us today. In closing, I'd like to let everyone know of an important promotion that we made during the third quarter.
As you may have noted, our Controller, Bryan McKeag, resigned to become the CFO at a smaller Midwestern bank. So Tammy Stadler has been appointed our new Controller.
Tammy has been with Associated since 1996, when she joined us as our Corporate Tax Director. In conclusion, this quarter's performance was solid despite the headwinds of large Mortgage Banking, income declines and flat loan growth.
We grew net interest income, we grew core fees, and we showed expense discipline. Even though the dynamics of the current banking environment are challenging, we're committed to our long-term strategies, which are based on building deeper relationships with our consumer and business customers through sound value-added solutions.
So we look forward to talking with you again next quarter. And if you have any question in the meantime, please give us a call.
Thanks again for your interest in Associated.
Operator
Ladies and gentlemen, this concludes the Associated Banc-Corp third quarter 2013 conference call. You may now disconnect your lines.