Associated Banc-Corp (ASB) 2015 Q1 法說會逐字稿

Good afternoon, everyone and welcome to Associated Banc-Corp's first-quarter 2015 earnings conference call.

(Operator Instructions).

Copies of the slides that will be referenced during today's call are available on the Company's website at associatedbank.com/investor. 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. For a reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please see the press release financial tables.

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. Welcome to our first-quarter earnings call. Joining me today as usual are Chris Niles, our Chief Financial Officer and Scott Hickey, our Chief Credit Officer.

Our first-quarter highlights are outlined on slide 2. Our results reflect continued loan growth, higher insurance commissions and benign credit trends. Average loans of $17.8 billion grew $428 million from the fourth quarter. Commercial loans accounted for most of the overall growth. Average deposits of $19.1 billion were up $523 million from the fourth quarter with money market accounts contributing to most of the increase.

Net interest income of $168 million was up from last year, but down from the fourth quarter. Net interest margin compressed more than expected as we saw added growth and higher quality, but lower yielding commercial loans along with greater than expected levels of mortgage prepayments. Our margin pressures were offset by a strong quarter for insurance commissions and mortgage banking income, which drove non-interest fees up $10 million from the fourth quarter.

Our expenses were in line and only increased $2 million from the fourth quarter, largely due to the Ahmann & Martin acquisition. Overall, we delivered net income to common shareholders of $45 million or $0.30 per share, an 11% year-over-year increase. We also delivered a double-digit return on tier one common equity for the third consecutive quarter.

Loan details for the first quarter are highlighted on slide 3. As I said, average loans grew $428 million from the fourth quarter to $17.8 billion. This represents growth of 2% quarter over quarter and 10% year over year. Growth during the quarter was driven by our commercial and commercial real estate businesses, which were up over $300 million combined.

Our retail loans grew over $100 million as growth in mortgage balances were partially offset by continued run-off in our home equity and installment loan portfolios. Average commercial and business lending portfolios grew $272 million or 4% during the quarter. Within this group, general commercial loans grew $168 million or 3%. Over half of this growth came from our REIT and healthcare segments. These credits typically have higher credit quality and lower yields more in line with investment-grade credits.

Oil and gas average balances grew $92 million during the quarter, with most of the growth driven by higher fundings in the fourth quarter. End of period balances grew only $26 million or 3% from last quarter. Power and utilities average balances were down slightly in the first quarter, as there were a few substantial payoffs at the end of last year.

As mortgage refinance activity picked up during the quarter, our mortgage warehouse portfolio grew 5% and was up about $200 million compared to last year. Average residential mortgage loans grew $174 million or 4% in the first quarter driven by continued strong ARM production. During the first quarter, total mortgage production of $780 million was up 4% from the prior quarter.

Slide 4 reflects the trends we've seen on our commercial line utilization. Commercial and business lending utilization increased 200 basis points from the fourth quarter. First quarter utilization is up 6% compared to a year ago. Mortgage refinance activity in the first quarter drove our mortgage warehouse utilization rate up to 55% compared to 24% a year ago.

Commercial real estate line usage has moderated as this portfolio has matured and stabilized after several years of growth. The higher utilization rates in 2013 reflected a ramp-up in construction financing as a result of improved market conditions. In 2014, utilization rates began to decline, reflecting payoffs of these short term deals driven by permanent refinancing and property sales. We expect commercial real estate utilization rates to expand as we approach the summer.

Moving to deposits and funding, average deposits of $19.1 billion increased over $500 million from the fourth quarter. Average money market balances grew by over $400 million or 5% from the previous quarter and accounted for the majority of the growth. Notably, average time deposits grew $45 million during the first quarter as our special rates on longer-term CDs attracted more customer traffic. That's the first growth we've seen in CDs in years. This growth in total deposits combined with proceeds from our debt offering in the fourth quarter allowed us to pay down $1 billion of our FHLB advances in the first quarter.

Turning to slide 5, on a year-over-year basis, first-quarter net interest income was up $3 million. However, compared to the fourth quarter, net interest income was down $7 million and that was due to three primary factors. First, $2 million was related to the day count difference between the quarters. Second, our cost of interest-bearing liabilities increased $2 million related to the full-quarter impact of the $500 million debt issuance in November of 2014. The remaining $3 million was attributable to overall loan yield compression along with lower interest recoveries and prepayment fees. Net interest margin for the first quarter was 2.89%, down 15 basis points from the fourth quarter.

The average yield on total loans declined 14 basis points. The largest portion of this decline was attributable to loan yield compression resulting from adding incremental higher-quality commercial loans at lower yields than our existing portfolio. Three basis points of decline was attributed to less interest recoveries and prepayments compared to quarter 4. Finally, higher mortgage prepayments resulting from refi activity accelerated our write-down of mortgage origination costs and reducing them by one basis point.

On the liability side, our total cost of interest-bearing liabilities increased four basis points from the prior quarter. This increase was predominantly driven from the full quarter effect of the November 14 debt issuance. Looking forward, we remain asset sensitive to short rates, particularly LIBOR. We expect fewer interest recoveries and modest ongoing compression related to new volumes as we continue to focus on new high-quality commercial loans with yields well below our existing book. Absent any Fed action, we'd expect 2 to 4 basis points of continued quarterly compression through this year.

Non-interest income is highlighted on slide 6. Total non-interest income for the quarter was $80 million, up $10 million from the fourth quarter and up $7 million from a year ago. Insurance commissions of $20 million were up $9 million from the fourth quarter and up $7 million from a year ago. This increase was primarily related to our acquisition of Ahmann & Martin.

Mortgage banking income of $7 million was up $4 million from the fourth quarter and was up $1 million on a year-over-year basis. The increase from the fourth quarter was largely attributed to a more favorable mark to market on our pipeline and the release of repurchase reserves on previously sold loans to the GSCs.

Turning to slide 7, total non-interest expenses of $174 million were up $2 million from the fourth quarter. Without the Ahmann & Martin expense impact of nearly $4 million, expenses for the quarter would have been down. Personnel expense of $100 million in the first quarter was up $3 million from the prior quarter. Occupancy expense increased $3 million from the fourth quarter, but that was related to a non-recurring one-time lease breakage expense linked to office consolidation in Chicago. Advertising expense declined $3 million from the prior quarter. Our advertising expenses are seasonal and we typically have higher expenses in the spring and fall. Our first quarter effective income tax rate of 32% was up modestly from last year's blended rate of 31%.

Turning to page 8, we'd like to give you an update on our oil and gas portfolio. Last quarter we disclosed the specifics of the January stress test that we performed. As a reminder, we stressed at $50 per barrel for the next five years and $55 per barrel thereafter without changing any other volume or costs. Given this price outlook, the qualitative and quantitative loan loss reserves for potential losses was $17 million at year-end 2014.

At the end of the first quarter, the NYMEX price strip was similar to our last stress test, so we determined that another test wasn't necessary. However, as a result of downward migration within the portfolio, we've increased our reserve to $27 million. We continue to monitor this portfolio closely and we'll new engineering reports during the second quarter to be used in borrowing base redeterminations.

Turning to page 9, potential problem loans increased $28 million this quarter, related to the downgrade of a few of our oil and gas credits. At $219 million, the balance is essentially flat from a year ago. Net charge-offs were only $6 million for the quarter, up slightly from the fourth quarter. The level of non-accrual loans to total loans in the first quarter improved to 97 basis points, down from 101 basis points. First quarter non-accrual loans of $174 million are down slightly from both the prior quarter and last year. Total allowance for loan losses equals 1.48% of total loans and covers 152% of period-end non-accruals. The provision for credit losses was $4.5 million in the first quarter compared to $5 million last quarter.

Turning to slide 10, we've included our 2015 full-year outlook. Our only change from last quarter is that we've updated our margin outlook. Assuming no Fed actions on rates, our outlook is for modest compression; two to four basis points from the first quarter throughout the year as loans continue to reprice lower. And with that, thank you. We'll open it up to your questions.

Thank you, sir.

(Operator Instructions)

Jon Arfstrom, RBC Capital.

Quick question for you on the higher-quality credits that you talked about driving some of the margin compression. Can you talk a little bit about the decision, and the profile of the credits? I think you touched on it briefly, but maybe give us a little more detail as to what they are.

Sure, Jon. Going back, I think we've been very clear that, despite the very low-interest and long low-interest environment we've been in, that the Company has not been willing to stretch into higher-yielding but riskier asset classes, nor have we been willing to extend the duration on the loan book or the securities book. So, we've been really very much sticking to what we think are sound asset classes and careful interest-rate management.

This particular quarter, we put on a reasonably significant amount of REIT and healthcare credits, which are almost all investment-grade quality. They necessarily carry lower yields. We are doing this business, of course, to cross-sell other things.

A lot of banks have commented over the last couple days about net-interest-margin compression and the outlook for the year, and we are very much in the same boat. It's very late in the game to try to change our strategy, and take more risk in assets or on interest-rate risks, and we're not going to do that. So, we will continue to move forward on the strategy that we have, and really won't see any relief on NIM, of course, unless the Fed moves sometime this year.

Okay. Is the net of the equation, net interest income growth for the year?

We believe we should be able to get net interest income growth, just like we did last year. We grew NII last year, despite the fact that the NIM compressed. We had very comfortable loan growth, as we expected; and we're certainly on target for the high single-digit average loan growth that we expected this year. We are continuing to run the bank for dollars of income, and that's what we're focused on.

Okay. Good.

Then, go over the comment again on the energy loan growth. I think what you said is -- just over go over it again -- the averages versus the period.

Yes, if you look at point to point at where we ended December 31, and where we ended March 31, the total oil and gas reserves accrued loans were up $26 million. The average was much higher than that because we had significant fundings at the end of the fourth quarter. We actually expect, as we go into the second quarter, to probably see some decline in overall outstandings, as redeterminations start to trigger some paydowns.

Okay. All right. Good.

And then, a separate question on credit: It looks better overall, but it looks like C&I non-performers are up a bit, and CRE non-performers are down. Can you maybe give us a little more detail on those changes?

Scott, do you have that detail?

If you look at the non-accruals, commercial was basically flat quarter to quarter. We were basically down $3 million. So, really, non-accruals were, I would say, flat.

Just as a reminder, we're talking about such low numbers now, that even a very small credit moving around moves the numbers.

Okay. I'll look at my numbers and hop back in the queue. Thanks.

That's fine. Our outlook for credit continues to be very benign, with the exception of -- as we go through the borrowing base redeterminations on oil and gas, we'll probably see some noise there, as we talked about a couple quarters ago. But we have no indication that credit has turned, if you will.

Okay. And then, the jump in the potential problem loans -- is that substantially all of it, is energy?

Those were downgrades to oil and gas reserves -- reserve secured loans, yes.

All right. Thank you.

Dave Rochester, Deutsche Bank.

On the guidance for non-interest income growth, you're using that [290] for that base level for the guidance for 2014, right? I just wanted to make sure I'm using the right thing, because if I annualize the first-quarter fee income, it seems like that would give me stronger growth in the mid- to upper-single digits for 2015. I realize that insurance line is seasonal, but you only have a partial-quarter impact from the deal in that right now in the 1Q numbers, right? So, you're expecting a little bit more of an uptick in 2Q there?

I would note, just as a side note, our insurance business is particularly strong in the second quarter because of the benefits cycle. It tends to trail off as you go back and [see it was the] seasonality in the second quarter. The [P&C] business has a little bit of seasonality in the first quarter.

So, we've picked up the seasonal components, and what we'll see going forward are more of the normalized components. So, I wouldn't necessarily full up annualize everything. And keep in mind, the mortgage banking business is not a business you want to necessarily annualize.

Understood. Got it.

But we enjoyed seeing the $80 million, no doubt.

Understood. And on the expense guidance, I was wondering if you're still thinking expenses will come in below that $700-million mark for the year, like what you were talking about last quarter.

Absolutely expect to come in at $700 million or lower. It's one of the numbers we get to control.

Got it. And the occupancy expense -- you said there was a one-time item in there for the lease break. How much was that?

We said $3 million.

$3 million. Sorry, I missed that.

On the energy reserve -- appreciated the color there. So, that reserve was up $10 million this quarter. I was just wondering how much more of the portfolio you would say you're waiting to hear back from a redetermination perspective? Have you gotten reports on maybe half of these credits at this point?

We essentially don't have any reports yet on it. We're being proactive.

Okay. Got you.

And then just one last one on capital: I know you guys have talked about your Basel III, tier 1 common ratio range in that 8% to 9.5%. We're at the upper end of that range right now, and I was wondering if you have any similar ranges or implied similar buffers for the tier 1 capital ratio or the tier 1 leverage ratio -- trying to figure out repurchase activity going forward.

We'll continue to be very opportunistic on repurchases. Obviously, we've been fairly consistent about some normal patterns, and you can see that we've driven the numbers into the ranges that we laid out for you, at [9.39%]. I think we're very comfortable with that number, and we probably still have some capital flexibility relative to the [public] range we've talked about. Our priorities remain the same, though: grow the Bank, grow our organic assets, pay a reasonable dividend, look for M&A where it's adding value, and if not, we'll probably continue to buy back stock.

Got you. Great. All right. Thanks, guys.

Emlen Harmon, Jefferies.

Could we hop back to the Ahmann revenues quickly? You guys, I think, last quarter talked about them adding, call it, $25 million in fee income this year. So, with already $9 million with half a quarter under your belt -- was that estimate conservative or should we expect meaningful seasonal normalization through the rest of the year?

The portion attributable to Ahmann & Martin is closer to $6-million-and-change. Other factors contributed to strong first-quarter numbers as well. Our organic business had a good quarter.

And we expected cross-sell implications. I can't tell you that that's related to that yet, but it wasn't important.

Got it. Okay.

And then, I did notice the end-of-period shares appear to be up. That's more than I would expect from the Ahmann deal alone. Is there another effect in there that we should be considering, and how should we be thinking about the share count going forward?

Sure. In the ordinary course, the Company has incentive plans, which typically have shares issued and vesting. And we've issued some more shares to a number of layers of the employee base, and shares that were previously under performance plan have also vested, and that all happens in the first quarter. So, you won't see much noise in the second, third or fourth quarter related to that activity, but there is sometimes noise in the first quarter.

Got it. Okay. Thank you.

Ebrahim Poonawala, Bank of America.

Just a quick question on the deposit side -- if you can talk a little bit in terms of what drove -- and I'm sorry if I missed it, if you mentioned this earlier -- in terms of what drove the growth in the money market deposit this quarter. And is there a targeted strategy with some promotions to maintain that loan to deposit where it is today and grow deposits? I'm wondering if we should see that funding cost, as far as deposits are concerned, edge higher through the year?

In the absence of any Fed action, I think what we can count on is we're going to continue to look for a funding strategy that positions us well and to remain asset-sensitive. What we've been doing in the last couple of quarters is having a CD special. And where you see the rates have gone up the most, is if you look at our page 6 and our analysis, it's our time deposit cost of funding that's been drifting higher as we have been offering special four-year and five-year CDs.

We continue to think we're pricing those reasonably in the marketplace, competitively with US Bank and Fifth Third and others that are also offering similar CD specials. But that is causing that component of cost to drift a little higher.

You did see a bit of an uptick, 1 basis point, in the money market deposits. Really, that was because we were able to find some alternative larger-dollar relationships that we could use to take out some of the federal home loan bank activity. In the grand scheme of things, we prefer working with customers, to dealing with the federal home loan banks.

Understood.

In terms of the home equity portfolio, when does it stop? Is there a point or is there a lot more run-off to go before it stabilizes at some point?

Well, Ebrahim, if you go back a few years, it's been slowing, and we're getting close, probably, to an inflection point. We've got that number lumped in with the student loans that run off, so it's a lot less run-off than we were seeing, say, a year ago.

When we file the call report, you'll see there's only $250 million of those that are really truly first-lien home equity positions. That's the most sensitive, and that number was well over $700 million, $800 million. That's the piece that's been burning down as people have refi'd out of their first-lien home equity's into new actual first mortgages. That's got a limited room, but it could be a while, for the course of the year.

The [pace] will continue to slow. We'll get to a turn, maybe sometime this year.

Understood.

If I can sneak in one last question, in terms of a follow-up on your oil and gas disclosure? It seems like you moved some unallocated reserves towards making a specific reserve against that portfolio. Am I thinking about that correctly -- the [$17 million to $27 million]?

This is Scott. Although we do have some qualitative reserves, the majority of the increase came through our quantitative. As the credits migrated into lower grades, they attract more reserves. So, it's more along the lines of risk ratings than a qualitative piece.

Understood.

We're all trying to figure out how this plays out -- how do we think about, in terms of the work you've already done, and the regrading that you've done on that portfolio so far? And what should we expect as you go through that spring cycle? Do you think that there would be a lot more supply that could actually sort of have a P&L impact as you provide for these, or no?

Ebrahim, what we had said, I think, two quarters ago, when we started these disclosures was -- expect noise around provisioning, but we don't think we have a lot of loss content in our reserve secured portfolio. And we're still there. We don't have the new engineering yet. That will be coming in over the next two months, as with the entire industry. And that will give us a lot more insight into volumes, and we'll be able to derive some cost analysis from that, too. So, it's really too early to tell, but we are still very comfortable that we don't have a lot of loss content in this book.

Got it. Thank you for taking my questions.

Ken Zerbe, Morgan Stanley.

Going back to the Ahmann & Martin acquisition -- I want to make sure I got my numbers right. So, the $6 million is the incremental revenue; $4 million is the incremental expense. So, if you think about a $2-million pre-tax earnings contribution -- if we look out over the next few quarters or years, is that the right number to think about, or is there still something else that could drive or change profitability?

I think, Ken, keep in mind we only really had two months of activity. And because of the nature and the way that carry overrides and end-of-year calculations are done for insurance companies, we probably picked up some benefit in the first quarter that's partially attributable to activity that carried over from last year. And that activity won't be recurring in the second, third and fourth quarter on the P&C businesses.

Just like in the benefit side of the Business, we'll pick up benefit in the second quarter that won't be recurring in the third and fourth. So, I would caution you not to annualize, but, yes, it's been a -- we believe, a successfully closed acquisition, and an acquisition that's off to a good start, and one that we feel really good about, and we appreciate the hard efforts of the many team members that have been involved in bringing it together, and we're on a good path.

To push a little harder on this -- again, I don't mean to put words in your mouth, but if the revenues are unsustainably high -- because you said you picked up some benefit from last year. So, those come down a little bit, so your pre-tax of $2 million, and now something smaller than that, and I think I remember, correct me if I'm wrong, that this wasn't supposed to be accretive until say 2017 I think. Is the benefit of doing this acquisition more related to cross-sell and other things that are not actually directly tied to the insurance commission?

We believe it will be a profitable acquisition. The company was profitable on its own. It will continue to be profitable on its own. Together, we think we'll be more profitable.

Keep in mind that part of the cost of the acquisition also is amortizing the implied premium that we paid. And there is some of that cost as well, which I don't think you factored into your analysis, in your back of the envelope there, which is part of the reason why it won't be as accretive as you articulated on an annualized or quarterized multiple basis.

So, yes, it will be good. Yes, it's going well. Yes, we're very pleased. No, I wouldn't annualize out the first quarter.

Understood. That helps a lot. I appreciate it. Thank you.

Stephen Geyen, D.A. Davidson.

A question for Phil: Certainly you've talked about the entire commercial relationship being a factor in how you structure deals and (inaudible) fee income and interest income. Looking at the fee income lines, there hasn't been a lot of growth year over year for the last couple of years. And certainly there's been some changes in the retail customer and various transactions, and due to regulatory issues and changes that have occurred in banking as far as the drop-off in revenue. Can you point to us where you've had successes, and where you see the opportunities going forward?

Sure. Yes. You're absolutely right. Reg E and Durbin took a gigantic chunk out of the entire industry's fee income. So, the entire industry is working back from a new baseline. Our various fee-generating businesses, whether it's the insurance stuff we just talked about, or some of the capital markets activities we have, deposit fees are down a little this quarter just because of the day count. Our trust fees, our asset management fees -- almost all of our fee lines have been growing at modest clips from the bottom.

So, the strategy, whether it's a private banking customer or a commercial customer, is to cross-sell as best we can, and generate additional income. If we were to stop making loans to commercial borrowers these days, we'd probably stop, because the fact is you can't get a reasonable return in this rate environment if you're not doing other things. So, the Company is very focused on cross-selling. But in general, our various fee components are performing well.

Do you think you're getting -- well, capital markets is probably impacted because of the rate environment -- but do you think you're getting your fair share of treasury management part of the relationship and other fee-based businesses from the commercial customer? Are you at where you want to be?

I'd say we have a ton of work to do there, and that work's been going on now for years. We still are relatively, in my view, under-indexed in collecting our share of the commercial deposit and treasury management business from our commercial borrowers. But there's a lot of effort -- a lot of investment has been made there, and we're making progress, but we have a lot of upside there to go.

Got it, okay. Thank you.

Scott Siefers, Sandler O'Neill and Partners.

Just wanted to ask a quick question on loan growth: Obviously you've benefited quite a bit from energy. As a contributor to your total loan growth, sounds like it's understandably going to be down going forward. But in the aggregate, is what we saw in the first quarter -- is that a high water mark for growth in your guys' opinion? Or is there enough other core growth that you can still absorb a more material slowdown in the oil and gas portfolio, and still generate?

The reason I ask is because I think you could basically flatline the average first-quarter number through the remainder of the year, and still have pretty good year-over-year growth. So, just curious how you're thinking about the dynamic through the rest of the year.

Sure. When we provided guidance, as far as loan growth this year, in January, we certainly assumed that we wouldn't enjoy the same growth that we'd had for the last couple of years in the oil and gas business. And we feel like we have enough other businesses that are well positioned that we will achieve the high single-digit growth that we forecast for you. So, we did take that into account.

Okay. All right.

You'll continue to see aggregate total loan growth period to period to period.

I get that. I was just wondering about --

The only thing I would temper is the competition -- and we've talked about this quarter after quarter after quarter -- the competition for quality commercial banking assets continues to ramp up. Almost everybody is feeling a lot of NIM pressure, and the reaction of many is to make it up in volume. So, yields are going down. And we are turning down, more and more frequently, opportunities to do credits when we just don't think there's going to be a reasonable chance that we're going to cross-sell other products and services. And just putting on a loan that day -- yield at less than 2% -- doesn't make any sense.

So, there's probably, as we sit here three months after giving guidance, a little more pressure on our outlook on loan growth. We still think we will get to the guidance we provided, or we would have changed it for you. But there'll be more pressure just because we are not going to just lay out loans if we don't think we can get a reasonable return on capital from them.

Okay. All right. Thanks.

And along the lines of pricing, if you net all the moving parts of the benefits last quarter to the margin from the interest recoveries, and then the full-quarter impact of the sub debt -- the margin came in about 5 basis points or so worse than you anticipated. What would cause the amount of compression to slow? It sounds like there's going to be even less interest recoveries going forward -- that competitive dynamic still continues. So, why wouldn't something in the mid-single digits continue until the Fed does something?

Forecasting NIM is a -- I refer to it, as some of our folks -- to some of our folks as sort of a fool's errand, because there's so many moving pieces. Our best estimate, and we did a bunch of work on this, this past week, is we think about [2%] to [4%] per quarter is about what we'll see, taking into account everything that you just ran through and other things as well. What would make that better -- if you have a hotline to the Fed, please use it.

(laughter) I'm not sure how much I can do, but I'll do what I can.

Just to add one point: Keep in mind, that Phil articulated in his comments, at least 1 basis point of the NIM was lost due to the -- I'll call it the February refi boom that we saw in the mortgages. So, if there's not another downward boom -- refi event -- it should stabilize at something less than the [5%].

And further, we saw a very competitive market. I think we are all reacting to new Basel III; we are all reacting to capital considerations. People are looking at these things. And I would suspect that we are going to be very thoughtful about our pricing as we move forward, not only us but everyone else in the marketplace. So, I'm thinking there is going to be stability.

You're ascribing an awful lot of price discipline to the banking industry.

I am.

I hope you're right. We'll hope for the best.

If I can sneak in a couple ticky-tack questions? The energy downgrades -- were those choices that you guys made, or were those driven by the leads? And regardless of who made the decision, are you guys noticing any more regulatory pressure to be ultraconservative, given the environment? How is that all working out?

Sure. This is Scott. No, all these downgrades were internally driven as we reviewed the portfolio. Now, that being said, as you know, the shared national credit exam will be taking place. So, sometime in the second or third quarter we will have feedback from the regulators on those large credits. But for now, all this is done by internal risk rating reviews.

Okay. Great. Thank you.

And then Chris, just a final one -- I think I might have missed some of your color on mortgage banking. Out of the $7.4 million, what's a core number in there, once you net out any write-ups, repurchases [or other leases], et cetera?

With or without another refi boom? Yes. (laughter) It's an interesting core number. Keep in mind, we've reported quarters here where that number was $19 million, and we recorded quarters where that number was $3 million. So, between $3 million and $19 million seems pretty core.

All right.

(laughter) It's very difficult, as you know. So much of it depends upon what happens to rates, literally on a day. So, it's hard to ascribe core to that number.

The mark to market on the pipeline at the end of the number could be several million dollars. And that's a function of where the rates are on that day, and what loans are in the pipeline over the preceding 30 to 60 days, depending upon our turn times.

So, it's somewhat difficult to say what's the true core. But we've seen good spreads, good gain on sale, good volume, and the team's been doing a herculean job at getting product for our customers done in the marketplace. And we continue to have a very strong and leading market share here in our core markets, and to do a lot of very good business in the surrounding space.

Yes. Okay. That sounds good. I appreciate the time.

Tom Alonso, Macquarie.

Most of my questions have actually been answered. Could you tell us what the reserve release in the mortgage banking line was?

$1 million.

Okay. So, not a tremendous impact there. Okay, great.

On the energy stuff, your comfort in terms of not a lot of loss content -- is that just the idea that if guys do find themselves in trouble, there's probably, A, more collateral they can bring to the table because they've continued to drill over the past year? And/or, B, is there a way that they can start to pay down a little bit faster -- maybe the exploration side of the E&P equation goes away, and that cash flow starts to come to you guys? Is that the way we should think about it?

There's a lot of factors that go in there. The first factor is the underwriting standards that we and most banks follow here provide a lot of cushion, one.

Two, there's a lot of different ways that oil and gas companies can typically pay down their debt. Whether it's, as you said, bringing more collateral to the party -- they can improve their cash flow by reducing expenses, and we're seeing that happen very rapidly. You actually saw production start to decline in the Bakken, which has been fueling some of this rally we've seen the last couple days.

There's also a lot of private equity money on the sidelines looking for opportunities to be deployed at a lower cost basis, as far as acquisition costs, than what was out there a year ago. And you've got strategic players who will undoubtedly be active, as perhaps some of the larger independents or independents feel some pressure. So, besides the very conservative underwriting that goes in at the start, there's a lot of other ways for people to either reduce their borrowings, add more collateral or improve their cash flows or find buyers, if necessary, for properties or themselves.

Great. That's super helpful. Thanks.

Thank you.

(Operator Instructions)

Chris McGratty, KBW.

Chris, on your margin outlook, assuming the Fed -- we get a rate hike in the back half of the year, meaning late in the year, can you talk about the lag effect of stabilization? Is that the time when the [margin compression] immediately stops, or can you answer the question in terms of the amount -- minus the amount of floors and the timing that you might think before you get to go the other way and kind of benefit from what you described as an asset-sensitive balance sheet?

Sure. On the asset side, I remind you that, well over 85% of our loans reprice or reset in a very short period of time. And the bulk of our loans, well over half, reset actually to LIBOR, on essentially a 30- to 90-day roll basis. So, we would expect that the asset side of our balance sheet would reprice a very significant portion within the first quarter. And at this point in time, really, there are no meaningful floors that would constrain the upside.

I would also, however, highlight that, alongside the significant LIBOR loan book that we have, we have a fairly significant money market deposit. So, the real question will be as to what extent will we be able to lag the money market deposit repricing to benefit from that uptick? At this point in time, we continue to believe that much of our money market book is very [core]. We'll have a repricing lag opportunity, as set on administered rates, not necessarily index rates, and will provide us a very substantial opportunity to benefit from that lag.

Phil and I have done this before -- a different place, a different time. Every time is different. I don't know that we'll see the same sort of rapid uptick that we saw in 2004, 2005, 2006, but it's good to be a competitor in a market that's got some rational, big players. And I have no reason to believe that the other big deposit-taking institutions here in Wisconsin and Minneapolis won't be very rational.

Okay. Helpful. Thank you.

Phil, on capital deployment, there hasn't been any real talk about bank M&A. I know you haven't done anything yet, but has there been any change in appetite for bank deals, or is it going to be continued buybacks over the course of the year?

We continue to be in dialogue with potential partners; that hasn't changed. Our priority is still to find something that makes sense for us -- that fits our risk profile versus doing buybacks.

Can you remind us the size of -- at this point, given you haven't done a deal -- are we still focusing on smaller institutions or are there opportunities to do multi-billion-dollar deals?

There's opportunities to do almost any size deal, to tell you the truth, but you've been around us long enough to know that we are risk-averse bankers. So, the larger the transaction, the more risk there would be. Considering this institution hasn't bought another depository since 2007, my bias is to do something smaller at the start.

Okay. Thank you.

Thank you. We have no further questions in queue at this time. I would like to return the floor back over to Mr. Flynn for closing remarks.

Well, thanks. And thanks, everybody, for joining us today.

In closing, we are pleased with this quarter's performance. We had strong loan growth, higher fees, stable core expenses, and we continued to return capital to our shareholders. In this low-rate environment, we'll continue to control expenses, grow our loans and fees, and do our best to defend our net interest margin without taking undue duration or credit risk in search of yield.

Look forward to talking with you again next quarter. If you have any questions in the meantime, as always, please give us a call, and thank you for your interest in Associated.

Ladies and gentlemen, this concludes the Associated Banc-Corp's first-quarter 2015 conference call. You may disconnect your lines at this time, and thank you for your participation.