Associated Banc-Corp (ASB) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Associated Bank's fourth-quarter earnings release analyst call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions on how to participate will be given at that time. (Operator Instructions) And as a reminder, today's conference call is being recorded.

Now I would like to turn the conference over to Tim Sedabres for some forward-looking language.

Good afternoon, everyone, and welcome to Associated's fourth quarter 2011 conference call. My name is Tim Sedabres, Vice President of Finance for Investor Relations with Associated. Copies of the slides that will be referenced in today's call are available on our website at investor.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 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 and the Risk Factors section 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'd like to turn the conference over to Phil Flynn, President and CEO for Associated, for opening remarks.

Thanks, Tim. And thank you, everybody, and welcome to our fourth quarter conference call. Joining me today are Joe Selner, our CFO; Chris Niles our Deputy CFO; and Scott Hickey, our Chief Credit Officer. Today I'll begin by reviewing our results for the quarter and full year. Then provide you with an update on the key drivers of our business. And finally, share our outlook for 2012.

Fourth-quarter highlights are outlined on slide 2. We reported net income available to common shareholders of $40 million or $0.23 per share. This compares to net income of $34 million or $0.20 per share for the third quarter, a 17% increase. We delivered another quarter of consistent loan growth, with our loan portfolio growing 4% to $14 billion during the quarter. We continue to see solid growth from each of our major portfolios which include commercial, commercial real estate, and residential mortgage. Net interest income from loans grew quarter over quarter, while securities income continued to contract as we continued to fund loan growth through the runoff of the securities portfolio.

Net interest margin for the quarter was 321 basis points, down just 2 basis points from the last quarter as compressing asset yields were largely mitigated by aggressive liability repricing. We see continuing improvement in our credit metrics, including a 12% decline in nonaccrual loans this quarter. Nonaccrual loans of $357 million are at the lowest level in two years and now represent 2.5% of loans, down from 3% last quarter. We recorded a provision for loan losses of just $1 million. And despite this reduced provision, our overall allowance for loan losses now covers more than 100% of our period-end nonaccrual loans. And, of course, our capital ratios remain very strong, with a Tier 1 common ratio of 12.24%, and a total capital ratio of 15.53% at year end.

If you go to slide 3 you'll see highlights from 2011. 2011, as we've said, was a year of transition for Associated as we continued to execute on our strategic plan to position the Company for the future. We accomplished many key milestones during the year. In September, for example, we were pleased to have our MOU with the OCC terminated. And fully repaid TARP without raising additional common equity. We consistently grew our loan book throughout the year with total loans growing 11% year-over-year. And commercial and business loans growing 17% year-over-year. In spite of the low interest rate environment, we increased the margin year-over-year. Credit quality improved considerably, with nonaccruals down 38%. And net chargeoffs down 69% from a year ago. Finally, we were pleased to deliver full-year net earnings to our common shareholders of $115 million.

Turning to slide 4, you can see that over the past year we've made considerable progress in increasing net income to shareholders on a quarterly basis. With improvements of over $5 million per quarter in each period as we continue to remix our balance sheet and invest in our franchise.

On slides 5 and 6, you'll see detail on our loan portfolio. The portfolio grew to $14 billion at December 31. This was up $528 million from September 30, representing a 4% quarter-over-quarter growth rate. And an 11% year-over-year growth rate. Fourth-quarter loan growth was driven by net growth in commercial and business lending of $386 million, net growth in commercial real estate lending of $112 million. The retail and residential mortgage portfolios grew by a net $29 million during the quarter.

Now, a little more detail on the loans. Our commercial and business lending portfolio benefited from growth in all categories. Including C&I lending, owner-occupied commercial real estate lending, and lease financing. General commercial loans, which include middle-market activity, grew by a net $127 million, and represented about 24% of the total loan growth. Power and utilities lending increased by about $90 million during the quarter. While oil and gas lending increased by about $70 million. These two portfolios showed strong growth but are coming off of a small base.

Mortgage warehouse financing added approximately $95 million of net growth in outstandings. Our commercial real estate lending portfolio grew by $112 million to $3.1 billion. We continue to see opportunities for growth and expansion in CRE lending because of the retrenchment of other competitors and other sources of capital. Our residential mortgage portfolio continued to show strong momentum, growing by a net $111 million during the quarter despite the sale of $94 million of previously portfolio'd assets. This growth was partially offset by runoff in the home equity book of about $67 million as consumers continued to favor first lien residential mortgages as they pay down and de-lever in this period of low rates. Mortgage loans originated for sale during the quarter were $844 million, up 79% from the third quarter. We are pleased with our lending activity throughout 2011. And expect continued loan growth of approximately 3% quarterly for the coming year, although the first quarter may be a little less due to seasonal factors.

Moving to deposits on slide 7. Total deposits of $15.1 billion were up 2% from the end of the third quarter. Net deposit growth was primarily driven by a $217 million or 6% increase in demand deposits. And a $226 million or 11% increase in interest-bearing demand deposits. Quarter-over-quarter, we saw continued growth in average NOW accounts and money market balances that were partially offset by declines in average brokered CD balances. Our focus continues to be on growing core customer deposits.

On slide 8 we highlight the impact of the remixing of our balance sheet during the quarter. As projected, we've continued to fund our loan growth largely with runoff from the securities book. We expect this to continue over the first half of 2012. Using securities run-off to fund loan growth should help us to defend the net interest margin in early 2012. Core deposit growth during the quarter also largely allowed for the reduction of short- and long-term funding balances as we work to reduce our average cost of liabilities. We expect to see further runoff of high-cost and brokered CDs during the first half of 2012, which we expect to replace with lower cost customer funding.

Fourth-quarter net interest income was $152 million. Fourth-quarter net interest margin was 321 basis points, down 2 basis points from the prior period. While yields on earning assets compressed by 7 basis points quarter-over-quarter, cost of interest-bearing liabilities was managed down by 5. From the year-ago quarter, we'd note that both NII and NIM improved as growth in interest income on loans and reduced deposit costs more than offset the impact of reduced securities income. While we believe the margin will continue to be pressured by the current low rate environment, we remain optimistic that we will be able to report a relatively stable margin throughout 2012.

Non-interest income for the quarter was $74 million, up $2 million from the third quarter. Card-based and other non-deposit revenues declined by $4 million from the prior quarter, primarily due to the expected impact of the Durbin Amendment. Mortgage banking income increased by $5 million from the third quarter, driven by increased mortgage production, lower valuation expense on mortgage servicing rights, and a $3 million gain on the sale of $94 million of portfolio mortgages previously mentioned.

Personnel and occupancy expenses remained relatively flat from the prior quarter. However, total non-interest expense for the quarter was $175 million, up $13 million from the third quarter. Primarily due to a $10 million change in losses other than loans. The largest contributor to this category of losses other than loans related to the additional litigation reserves we established for the Harris matter. Other drivers of the increase in non-interest expense include increased data processing expenses and increased business development and advertising expenses. However, we note that the bottom-line impact of the losses other than loans was offset by a reversal of certain prior years tax reserves due to the expiration of statute of limitations.

In December, we announced plans to consolidate 21 retail branches during the first and second quarters of 2012 as part of our footprint enhancement strategy. All of the impacted branches are within close proximity to other Associated locations. In most cases, within 2 miles. And we remain committed to continue to invest in the retail footprint. We expect the consolidations will increase deposits per branch at the remaining locations, and allow us to service the impacted markets more efficiently. Over the course of 2012 we expect non-interest expenses to grow in the low single digits on a year-over-year basis as we continue to invest in the Company for the long-term.

Moving on to slide 9, we continued to see improvement in our key credit metrics. Potential problem loans continued to decline to $566 million, down from $660 million at the third quarter, and down from $964 million a year ago. The level of nonaccrual loans to total loans continued to improve to 2.5% from 3% at the end of the third quarter. Nonaccrual loans were down 12% to $357 million from $404 million last quarter. And down 38% from $574 million a year ago. Our overall allowance for loan losses now covers over 105% of our period end nonaccruals. The provision for loan losses for the quarter was $1 million. Net charge-offs of $23 million were down 25% from $30 million in the third quarter. We expect continuing improvement in credit trends throughout 2012, with a very modest outlook for provision expense.

Our capital ratios are on slide 10 and continue to remain very strong. And remain well in excess of regulatory benchmarks and what will be expected under Basel III.

On slide 11 we highlight some of our expectations going into 2012. Again, we expect continued loan and deposit growth, a relatively stable margin, a modest improvement in fee income, and further improvement in credit trends. This positive revenue outlook will require modest expense growth as we continue to invest in the franchise. As we've said publicly, we are reviewing our dividend policy and have submitted a capital plan to the Fed that includes increased dividends in 2012.

So, thank you. And with that, we'd be happy to take your questions.

(Operator instructions). Tony Davis of Stifel Nicolaus.

Good quarter. Just a follow up here on the credit dynamics. You say very modest. Given the dramatic improvement in early-stage indicators, I just wonder how you're thinking about the reserves, as a percent of [criticized credits] or reserve adequacy. Given the dynamic way at which you're growing loans, how should we think about the way you are thinking of reserves?

Tony, thank you. We believe that, as you point out, we are getting good loan growth, which of course is requiring a certain level of reserves to be held against the new loans. Although they don't take up a lot of reserves since these are high-quality loans we're putting on. On the other hand, the portfolio is improving, as you point out, quite rapidly, both in the potential problem area as well as nonaccruals. So that's providing an offset to the need for additional reserves for growth. So our outlook right now is that our loan loss provisioning will be very close to zero, frankly, for the year. It could go negative early, and could go modestly positive later in the year. But, as you know, it depends on how things turn out from quarter to quarter. We are still carrying a fairly robust level of overall loan loss reserves of 270 basis points. So the pressure is probably more on the downside of reserves than what we might have to provide in provisions. I think you've heard us say before we're not huge fans of doing negative provisioning, but accounting rules may drive us to that.

Got you. Joe, one for you. I just wondered if you could update us on the funding repositioning opportunities. Last I recall you had about $2.5 billion of CDs. I think the embedded was a 1.5% rate. And something like $5 billion in money market. Can you just walk through that?

I will let Chris do that. He's closer to it.

I think if we look at the last page of the press release tables, you'll find a breakdown of all the different categories of both current funding as well as a period end composition of funding. I would highlight for you top of the last page, time deposits of $2.5 billion on average for the quarter. At a weighted average rate of 1.44%. And you'll see there, again, money market deposits of a little over $5.3 billion on average at a weighted average rate of 27 basis points. Total deposit levels had an average cost of 51 basis points for the period which we think compares relatively favorably with peers and others.

Finally, for you all, one question on the branch consolidation. In this rate environment we are in, the post-Durbin, I wonder if you could just comment on the percentage of the 270 branches or so that you have right now that are profitable on a fully loaded basis? This 21 branch consolidation you've announced, is that about it? Or do you see more consolidation and efficiency opportunities out there?

For the foreseeable future that's it. I would remind everybody that over this last several years we've closed, on average, about 10 branches a year. We took a hard look at our expense run rates, as you would expect in this environment, at the end of last year. And took the opportunity to consolidate these 21 branches into locations that are within, on average, two miles. I think the furthest one is only 3.5. We assume that we'll hang onto approximately 90% or more of the customers based upon our past history when we've done this. And we will save somewhere in the neighborhood of, give or take, $300,000 per average branch. This was a move to become more efficient, continue to serve our customers in a convenient manner, but recognizing the realities that we have to take a hard look at our delivery channels in this low-rate environment.

Okay. Thank you. Thank you very much.

Jon Arfstrom of RBC Capital Markets.

A question, just to follow-up on Tony's first question. I know this is a volatile category. But the 30 to 89 days past due number just really dropped materially. Is there any story there?

Yes, this is Scott, Jon. We talked about it at the last meeting we got together. We had a handful of large credits that were in various stages of renegotiation or documentation. That subsequently all got cleared up this quarter. I think the numbers you are seeing there today are probably closer to what we'd be expecting going forward. But none of those went into nonperforming status at the end from last quarter.

That's a great trend. A couple of questions on the guidance. Phil, on the expenses, the low single-digit year-over-year growth, where do you plan to spend the money? Is it hiring? Is it incentives? Is it occupancy? Give us an idea of your plans.

That's three of them.

Can you weight them for me?

Yes, there's an awful lot of moving pieces. As you know, we've been making substantial investments in this franchise, and those continue. So the cost of branch renovations and relocations and remodels that we've been doing is now slowly becoming embedded in our run rates. We've done a lot of hiring over this last, call it, 18 months. A lot of that is done. We don't really expect a lot of growth in our headcount. We expect that as our performance continues to improve, our incentives will rise. Although they will be proportionate to the revenue and profitability that we are generating. We are expecting to see positive operating leverage this year. Which we haven't had for quite a while. So we continue to make the investments that we have to make in the franchise. We will continue to pay for the investments that we've already made. But a lot of rehiring and such that we've done over the last 18 months is slowing quite dramatically now.

Then just one quick question, if I may, on fee income. You're signaling modest improvement. And I think we all understand the headwinds. But what are you thinking on the drivers of that improvement?

The drivers are varied. We expect the mortgage business to continue to be successful. We are growing our wealth management business and getting good results there. Frankly, we're coming off such a low point now on deposit-related fees that they are likely to slowly start to increase now from the very bottom, based upon growth in our customer base. Taking the opportunity as we see it to make sure we are getting paid fairly for the services we provide. There's a number of areas. We've also made, as you know, significant investments in our treasury management offerings, both product offerings and the online system. That all is coming live in February so we expect to get lift from that, as well.

All right, thank you and congratulations on a good year.

Dave Rochester of Deutsche Bank.

Nice quarter. It seemed like the loan growth was a bit stronger than you expected last quarter. Was there any change at all in the competitive landscape? I know you've been benefiting from the retrenchment of some competitors. And I was just wondering if that's actually improved at all over the last quarter, or if this is a function of the platform build out over the last 18 months that you mentioned?

I would attribute it to the latter. We've done a lot of building out of our commercial bank, our commercial real estate area. We've got the new specialty groups that are up and going. And the mortgage business has been very strong. So I think that all the work we've done is starting to click. The economy certainly isn't robust. It is not terrible in the upper Midwest. It continues to swing up. But I think generally what you are seeing is the effect of all the work that we've done over the last 18 months or so to get this place going again.

Got it, thanks. And on capital, you talked about dividends going higher. And publicly you've also talked about your thoughts on share repurchases. I was just wondering if you had changed that at all in the last few months? And a related topic on capital deployment would be M&A. If you've changed your thoughts there?

Yes. We have, as many banks have done, submitted capital plans to the Fed and are in discussions about our plans for the coming year. So you'll need to stay tuned on that. Share buybacks, you've heard me say in the past that they were my least favorite use of capital. On the other hand, when you're trading at such absolute low values, although we've picked up 11% year-to-date, you do have to take a look at that, at least in some modest way. So we are reviewing all of our capital planning right now. Discussing all that with the regulators. And are very cognizant that investors want to see capital returned. And we are working on that.

Okay, great. Thanks again, great quarter.

Ken Zerbe with Morgan Stanley.

Just had a comment on your NIM guidance for NIM being relatively stable in 2012. I think the common view among most mid cap banks is that you're going to have NIM compression. But it seems that the reason for that is because the industry would have strong deposit inflows, goes into securities. And irrespective of any impact on NII. I'm wondering if you have loan growth of 3%, you have stable NIM, how is it that you're able to keep NIM stable? Because my initial impression is that that would imply actually weaker deposit inflows on a net basis. And hence, you'd have continued runoff in the securities portfolio. Am I thinking about that in the right way?

I think the way we would think about it -- and this is Chris Niles -- is the current excess liquidity afforded to us by the investment portfolio will allow us to reposition those cash flows into loans. That will result in a pick up from the change in mix. However, new loans in today's competitive low rate environment are not yielding a lot more than our securities were when we bought them a year ago. And so the NII pickup is essentially close to a flat trade. When we initiated the strategy a little over a year ago, our hope had been that rates would stay elevated and we would trade from securities into loans and actually expand margin as we reinflated the loan book. Given the overall low rate environment, we've not been able to expand the margin the way we had hoped. But we are able to defend the margin very adequately as securities continue to run off and we are able to roll them.

Yes. So if you'll recall that slide that I referred to earlier, where you saw that we basically funded our loans with securities runoff this past quarter, that dynamic will continue. Additional deposits that we're growing, we have an opportunity, and we'll still have an opportunity for some period of time, to pay off other liabilities that carry a higher rate. And so maybe that's the piece that you are looking for. We do have the opportunity to continue to see higher-cost brokered CDs and such rolling off, replaced with much lower cost core deposits.

I think the deposit mix is probably what I was looking for. That helps. And then in terms of the capital plans that you said you submitted with the Fed, obviously your assets are a little less than $50 billion. So when we think about the capital plan that you guys have to submit versus some of the larger banks, is it the same level of rigor, the same amount of stress they put in a portfolio? Or is there something you guys either do more or less of, versus what the larger banks may do?

This is Chris Niles. There are multiple stress test scenarios that we provide as part of our capital planning. And we provide them as well as a range of scenarios for our expected base case budgets and outlooks. Consistent with our growth and expectations in the overall business environment. Very similar to the high-level C Corp plans, although probably a little less total detail, given the size of the institution.

Okay, great, thank you.

Scott Siefers from Sandler O'Neill.

I was hoping first you could talk a little, Phil, about just pricing on overall commercial loans. Chris alluded to it earlier a second ago. But then also if you could just chat about what you are seeing on overall line utilization rates. Most of your growth has come from, I think, a combination of market share and some of the new teams you've hired. But if you could touch on maybe both of those aspects please.

Sure. First of all, utilization rates, I've got it. The total utilization is hanging around in the high 40%s. 48%. Across the whole place. And that hasn't really changed much from last quarter. It came up some as we trended through last year, but we are still at pretty low utilization rates. As far as the competitive dynamics that are going on out there, it depends on the product type we are getting. What we feel is very fair and good pricing in the commercial real estate business. The capital markets aren't there like they used to be for refi in commercial real estate. And a lot of our competitors have exited that space.

In some of our specialty groups, we are getting what we think is pretty good pricing. Commercial area, depending on where you're at, say if you're down in Chicago, it is quite competitive. To the point where if you are not doing a good job of cross-selling other products and services, which we are doing a better job at, but not yet to the level that we need to get to, these loans are awfully competitively priced. But our belief is that as we continue to roll out our new commercial deposit and treasury management products, we will do a better and better job of capturing more and more of the share of wallet from these customers. And it will make up for the competitive nature of how we are pricing things.

Okay. That's helpful. Thanks. And then just wanted to ask a separate question just on capital management. So the OCC MOU was terminated last year. But unless I'm mistaken, I think the one with the Fed is still around. It would obviously be difficult to argue that you guys do not have adequate capital and risk at this point. But is there any update on that? And does that have any significant bearing on what your capital management activities could be at this point?

Sure. The Fed MOU is still outstanding and it absolutely has a lot to do with what we can do. Recognizing that in this world, whether you have an MOU or not, the regulators, and in particular the Fed, have an awful lot to say what big banks do and banks our size do, as far as dividends and share buybacks. So it is a new world. But in our particular circumstance, we still have the Fed MOU, we still have to work with them on our capital planning, and we are right in the midst of doing that.

Okay. Perfect, thank you very much.

Chris McGratty with KBW.

Just a question, more of a technical question, on the one-time items it seems like that ran through the expense line. What was the dollar amount of the litigation charge in the tax reversal? I know you said they largely offset them but what were those dollars?

The litigation reserve was about $8 million in the quarter. And the tax reserve release was about $6 million.

Okay. And was there an MSR write-down in the quarter, as well?

No, there was actually recovery of $1.5 million.

Okay. And then just on the expense guidance going forward, maybe you could just give me a little bit of clarification. What's the starting point of expenses? Is it this quarter's $175 million, is low single-digit growth off of this? Or is it full year?

The way I would encourage you to think about expenses is we've given you some guidance for the year. Expenses tend to be lower in the first half of the year and ramp up in the second half, or start to ramp up in the second half. I think you should think about it, on average, lower in the first half, higher in the second half. Because there will be expenses that grow with the size of the institution, grow with the profitability of the institution. All of that will be relevant as we think about it. So I think you should just try to think about it in the overall annual look.

$175 million would be too high of a starting point. Substantially too high.

Any guidance you can lead me to in terms of what's a better starting point?

It was $162 million in the third quarter and $175 million. So it was probably growing from $162 million into the fourth quarter. So, again, I don't think we want to give you an exact number, but you can probably get there.

I can figure it out. Thanks a lot. And then the tax rate, what's the rate we should be using for '12?

Again, we think as we get more earnings we're going to put more taxes on at the marginal rate. We've been saying it is in the low 30%s and I think that's a fair way for you to think about it.

Okay. Thank you.

Terry McEvoy with Oppenheimer.

Phil, since you have a history in some of these specialized businesses -- power, oil, gas, et cetera -- though it's relatively new for Associated, can you just talk about maybe the credit performance through the cycle in the specialty businesses? And compare that to, just call it the legacy Associated C&I portfolio. And what you see any differences between the two.

Yes, I see some differences. The power and utilities, generally speaking, are high quality credits. Oftentimes investment grade or near investment grade credit. So as compared to a general basket of middle-market loans or commercial real estate loans, through the cycle they will have much lower loss rates.

Likewise, in the oil and gas business, as long as you stick to conforming reserve secured loans, which is what we are doing, through the cycles of prices -- and we are announcing natural gas prices decline -- through those cycles, if you are prudent with the way you forecast future cash flows and build cushions in, losses on reserve secured loans are extremely low. And I've lived through many cycles in that business. So one of the reasons why we've chosen these two businesses, as well as a few other specialty businesses, is that, in our view, through the cycles they will have significantly lower losses than your typical middle-market commercial or middle-market commercial real estate loan. But as you rightly point out, these are new businesses for Associated Bank.

Great. And then just the commercial real estate growth in the fourth quarter, was that end market upper Midwest credits?

It was almost all in the upper Midwest. If there was anything outside of the upper Midwest it was with an upper Midwest-based developer or customer who might have a particular product specialty in some other place. But what we are doing is footprint, or the rare occasion outside the footprint with a developer who's a customer in the footprint.

Understood. Thanks, Phil.

Erika Penala with Bank of America Merrill Lynch.

My first question is a follow-up on Scott's question with regards to commercial loan yield competition. I noticed that the average rate on C&I came down just 5 basis points quarter-over-quarter. Given the color that you provided, do you think this pressure widens in 2012? Or could you keep it in this range?

I think there will be slow downward pressure throughout the course of the year. But remember that you have a fair-sized portfolio that's being added to on the margin. So even with a lot of competitive pricing, it's not going to move the needle on the whole portfolio very dramatically.

Got it. And again, I just wanted to make sure I understood what Chris was saying in response to Ken's question, in that you're really looking at 2012 in terms of a flat balance sheet growth. And remixing your liabilities and your assets will give you margin support. But in terms of how that translates to NII, that would be a flattish NII for 2012?

No. We will continue to grow NII as loan interest income continues to come onto the balance sheet, and lower-yielding securities continue to run off. But the loans that will be coming on at the margin are going to come on at tighter and tighter spreads, we anticipate, given the continuing low rate environment. So there will be a modest growth in NII as the balance sheet continues to expand and grow. As earning assets, in total, mix towards loans, you'll have expanding NII.

Got it, okay. And just my last follow-up question. You mentioned that the loss content in specialized lending has typically been fairly low. Is the implication here that as you add these new specialties for Associated that the inherent loss content of this portfolio in a more, quote-unquote, normal cycle is lower than it was when you compare it to the legacy loss content?

Absolutely. And it is not just because of the specialty mix in. It is because we are building the portfolio, in all honestly, in a much more disciplined way than we did in the past. As we've talked about before, at one time this bank allowed real estate construction loans to grow to 11% of the total loan portfolio. You will not ever see that again here at Associated Bank, at least not while Scott or I are here.

Got it. Okay, thank you.

Emlen Harmon, Jefferies.

Another follow-up on loan growth and specialty lending. When you guys had initially started that business you talked about that being maybe a $500 million to $600 million portfolio over time. Could you give us a sense of just where that stands today and how you think that could grow as the balance sheet grows over time?

Sure. So as of the end of December, I think the segments that you are probably interested in. Oil and gas we had approximately $170 million of outstanding loans. And power and utilities we had about $130 million. And then we have other much smaller specialty, some of which are legacies of Associated Bank -- insurance and public funds and a little bit of financial institutions. The biggest piece of the specialized industry book at the end of the year was the mortgage warehouse at $340 million. But as we've talked about in the past, that's a fairly volatile loan class. It moves up and down pretty rapidly in response to what's going on in mortgage refinancing.

So we are growing this book. It still remains a pretty modest piece of the business. But we are quite comfortable continuing the growth path that we've been on for this past year. But we're also very mindful of making sure that it is proportionate to the other things that we do. And we will continue to report on this as the quarters go by.

Okay, got you, thanks. And then one -- it's a little bit ticky-tacky, so I apologize. But I saw the service charges line go down $2 million in the quarter. Anything underlying that?

We've noticed that, but we can't give you a good explanation. We just think it is customers having more money and not over-drawing their accounts. We just can't come up with a real good explanation.

Got you. And just as far as overdraft -- and this is, again, related to that line -- as far as overdraft fees are concerned, are you guys high to low sale, or have you gone to low to high? And is there potential hit from re-ordering on that over time?

No, that's old news. And that was the heart of the Harris legal matter that so many banks are wrapped up in. We've now gone to time of presentment quite a while ago.

Okay, great. Thanks for taking my questions.

Maclovio Pina, Morningstar Equity.

Just one very quick question on loan growth. It is a very sturdy clip that you're projecting there. And I'm just wondering if there's any particular market where you expect to see the strongest growth. And also, if you can give any details on sectors, if we are talking about C&I loans?

If you take a look at the slide presentation on the page where we've got some detail on loans, we've had balanced loan growth for most of this year. And certainly in the fourth quarter, between commercial and all the various segments of commercial, which we detailed out on that slide. Commercial real estate grew at a little more than $100 million this quarter across a number of different product types and across geographies in our footprint. And our residential mortgage book of mortgages that we retain for our own balance sheet continues to grow. That's being offset by continued softness in the home equity portfolio, where people are paying off their home equity loans and refi-ing into firsts. The outlook is for continued balanced growth. And I said roughly that 3% per quarter, maybe a little bit of softness in the first quarter just because of seasonal factors. Across all three of the major components of the portfolio. And well diversified, both geographically and by product type within the commercial sector and the commercial real estate sector.

Okay. Excellent. Thank you.

(Operator instructions) Tom Alonso with Macquarie.

Most of my questions have been answered. Just real quick, on the expense guidance, should we just think about -- I'm trying to wrap my head around the branch consolidations and give or take $6 million of savings. Should I just think of that as basically money that's been freed up to invest elsewhere?

I think that's fair. We have quite a bit of investment we are doing in the branch system. So by becoming more efficient this way, it allows us to improve the overall delivery.

Okay. And then just on the growth in the mortgage warehouse, that $95 million increase, is that basically just driven by the market? Or is that you guys expanding that line?

We've done both. We've expanded our customer base nicely over the course of this year. Our guys have done a very good job there. And of course, with the mortgage refi boom that's gone on across the country, those customers are more active and therefore borrowing in our warehouse facilities.

Okay. And then just one last one on the balance sheet. Your guidance for funding loan growth through the first half of the year with securities runoffs. So we should look for the balance sheet to remain relatively flat and then it should start to grow in the second half of the year? Is that fair?

Correct. And growth in the second half of the year will be funded with deposits which should allow for expanding NII going into the back half of the year.

Okay. But securities balances are likely to remain flattish in the back half, but you'll have loan growth?

Correct.

Okay, perfect, thank you so much.

Mac Hodgson of SunTrust Robinson.

Most of my questions have been answered. Just one to clarify, to be sure I understand. The only non-core item in expenses this quarter was the additional $8 million of litigation reserve, is that right?

I think in any quarter there's things that you could identify as being unique. But I think in terms of thinking about the quarter, that $10 million increase in losses other than loans is probably the thing that would be a relatively good way to think about it. For example, one of the things we could point out is non-cores. We got part of the Visa escrow decision that was made by Visa and we had to book $700,000 of expense. But we booked $700,000 in revenue. That doesn't occur every quarter but we have those things every quarter. So I think you're thinking about it as the way we've expressed it is probably fair.

Okay, great. So about $10 million. Okay, that's hopeful. Thank you.

Thank you. And at this point I would like to turn the program over to Phil Flynn for any closing comments.

All right. Thanks, Matt, and thanks everybody for joining us on the call today. We're happy with the results of this quarter and our progress that we made throughout 2011. And we really do remain optimistic and are committed to building shareholder value through our long-term strategy for growth here at Associated. We look forward to talking to you again next quarter. If you have any questions in the meantime just give us a call. Thanks again for your interest in Associated Bank.

Ladies and gentlemen, thank you for joining today's conference. This does conclude the program and you may now disconnect.