Associated Banc-Corp (ASB) 2016 Q4 法說會逐字稿

Good afternoon everyone, and welcome to Associated Banc-Corp's fourth quarter and full year 2016 earnings conference call. My name is Daren, and I will be your operator today.

(Operator Instructions)

The slide presentation and accompanying press release financial tables 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 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 statement.

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 factor section of Associated's most recent form 10-K and any subsequent SEC filing. 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 refer to the slide presentation and to page 10 of the press release financial tables.

(Operator Instructions)

At this time I would like to turn the conference over to Philip Flynn, President and CEO, for opening remarks. Please go ahead, sir.

Thanks and welcome to our fourth quarter and full-year 2016 earnings call. Joining me today are Chris Niles, our Chief Financial Officer; Scott Hickey, our Chief Credit Officer; and James Simons, our Deputy Chief Credit Officer.

For the quarter we reported $0.34 per common share, our highest quarterly earnings of the year. The fourth quarter benefited from stabilizing margins, higher net interest income, and lower provisions. For the year we reported $1.26 per common share.

We delivered positive operating leverage on higher net interest income and fee revenues combined with slightly higher expenses. Our progress against our 2016 priorities is summarized on slide 2. Average loans were up 8% from 2015 with growth driven by commercial real estate and residential lending.

We will touch more on loans on the next slide. Deposit growth was quite good year-over-year. Average deposits were up 6% from 2015. We focused our efforts are growing organic long term deposits. Our affinity programs and evolving mobile technology have proven to be effective in capturing low cost deposit balances.

Noninterest income increased $24 million from 2015 driven by significant growth in capital markets and insurance commissions, businesses where we have made great strides in deepening our client relationships. Expenses increased 1% from the prior-year and included $5 million of severance.

We improved efficiency over 200 basis points year over year, and we've now lowered our efficiency recently ratio for five consecutive years. We posted near double-digit returns on capital and returned 35% of the year's net income to shareholders through dividends, reflecting our disciplined approach to capital management.

2016 loan details are highlighted on slide 3. Average loans grew $1.4 billion or 8% from a year ago and were up nearly $5 billion or 33% from 2012. Highlighted in green, residential lending was the primary driver of our growth. Average balances were up $618 million, or 11% for the year.

We remain the largest mortgage lender in Wisconsin, and have significant market share in Illinois and Minnesota as well. Residential mortgages continued to represent approximately 31% of our average total loan book.

In orange, commercial real estate lending has been a steady contributor to our growth over the past five years, and was up 12% this past year. During 2016 we added over $0.5 billion of CRE outstandings principally across our eight-state footprint. Now at $4.7 billion, CRE accounts for 24% of our average total loans and is well diversified.

Multifamily, retail and office projects each comprised between 20% and 30% of our commercial real estate outstandings at year end. Presented in blue, the commercial and business lending portfolio grew by $360 million or 5% from 2015. Overall, commercial growth was driven by solid performances from our power and utilities, and REITs businesses.

Our goal for our specialized verticals is to act as agent, underwriter, and syndicator. We've made good progress on this front in 2016. Our commercial and business lending portfolio accounts for 38% of average total loans, manufacturing continues to be our largest industry exposure at year end.

And during 2016 we continued to see run off in our home equity and solvent portfolios. Loan details for the fourth quarter are highlighted on slide 4. We closed the quarter with $20 billion in loans, a new high-water mark. Average loans decreased $76 million, down less than 1% quarter over quarter.

Remind you that we settled over $200 million of loan sales late in Q3, which contributed to the downtick in average loans in Q4. Historically we've enjoyed stronger loan growth during the first half of the year and softer growth over the back half. This pattern repeated itself once again.

Seasonality in commercial line utilization is a contributor to this pattern while the power and utilities and REITs areas saw continued growth, our mortgage warehouse and general commercial outstandings declined. Overall commercial line utilization decreased from 54% in Q2 to 52% in Q3 and was down to 50% in Q4.

Shifting to residential mortgages, average balances increased by $63 million during the quarter. We remain primarily an RM lender for our portfolio with RMs accounting for approximately 75% of our residential mortgage portfolio at year-end, up from 70% last year.

I would like to highlight the recent shift in our residential mortgage strategy. Historically we've sold the majority of our long dated loans to the agencies. Beginning in the fourth quarter, we began to hold some of our 30-year mortgage production, and we intend to retain more over the next several quarters.

We have matched this activity with reduced mortgage-backed securities purchases. In a rising rate environment, we believe this strategy will result in higher revenue, as increased net interest income will largely offset reduced mortgage banking revenue realized during 2017.

Heading into 2017, we are well positioned to capture market share and new customers in all the markets we operate in, and we anticipate high -- I'm sorry, we anticipate mid- to high single digit annual average loan growth. We highlight our annual deposit growth on slide five. Average deposits grew $1.1 billion or 6% from a year ago and have grown 35% from 2012.

In 2016 nearly all of our growth came through our demand account relationships. In particular, 2016 was a great year for our noninterest-bearing demand products. Average noninterest-bearing balances toped $5 billion and were up more than 10% from the prior year.

On the right side of the page the chart illustrates the cumulative growth of our three largest deposit categories from 2012. We're particularly pleased to deliver this growth in an environment where we've been consolidating branches, streamlining deposit account offerings, and adapting to evolving customer preferences.

Money market and time deposits, our most expensive deposit categories, decreased modestly in 2016. We managed these deposit categories down and focused on growing lower cost balances. We are committed to building a simpler way for depositors to bank with us. Our results are encouraging.

On average over 55% of our deposit and withdrawal activity now occurs outside of our branches. Over 30% of our retail depositors have signed up for mobile banking app, compared to about 25% a year ago. Additionally, we saw more active online banking users year over year.

While we have good trends, there's still room to improve our customer awareness and adoption. We expect to rollout a new mobile app in 2017. In general, we're pleased to see continued and steady deposit growth in an industry that is rapidly changing.

Deposit details for the fourth quarter are highlighted on slide 6. Average deposits were $21.7 billion, up 2% from the third quarter. Despite the December fed rate increase we continued to see very little deposit pricing action from the larger institutions in our markets.

The cost of interest-bearing deposits remained relatively stable at 33 basis points compared to 32 in the prior quarter. We continued to grow our noninterest-bearing deposits. Balance were up about $130 million or 3% through the quarter. This category represented nearly a quarter of our average total deposit balances in the fourth quarter.

Money market deposits were up about $200 million or 2%, and our cost of money market deposits was 31 basis points, up one from the prior quarter. All of the deposit categories were relatively flat from the third quarter. For 2017 we expect to maintain a loan deposit ratio under 100%. We remain committed to funding the majority of our loan growth with core deposits.

On slide 7 we summarize the annual credit quality trends of our loan book. Our oil and gas loans are highlighted in light gray. In 2016 almost all of our nonaccrual and net charge up activity was driven by the oil and gas portfolio. Looking back over the entirety of 2016, while potential problem loans increased moderately, other credit trends outside of oil and gas broadly improved.

Nonaccrual loans increased by $97 million, primarily due to downgrades in oil and gas book. These were partially offset by a net decrease in other nonaccrual categories. At year-end all oil and gas nonaccrual loans were current on their contractual interest payments. Total net charge-offs for the year were $65 million, $59 million of which were oil and gas loans.

In 2016 we took losses on three sizable oil and gas credits which had some common characteristics. We're comfortable that we don't have similar loss content in the remaining book. Nonetheless, given volatility in the oil and gas marketplace, we're retaining an allowance of 5.7% against our oil and gas loans. Over the past five years our overall allowance level has trended down, reflecting the broadly improve credit environment.

Slide 8 we detail our quarterly credit quality trends. For the quarter, we saw declining levels of potential problem loans, nonaccrual loans and net charge offs. On a linked-quarter basis we saw improvement in the oil and gas book.

Potential problem loans decreased $90 million from the prior quarter. Nonaccrual loans moved in the right direction, down $15 million. Our overall level of nonaccrual loans declined to 1.37% of total loans from 1.46% last year -- last quarter.

Total net charge-offs were $9 million for the quarter and were 18 basis points of average loans. Outside of energy, we continue to see remarkably low levels of charge-offs. We ended the year with an allowance for loan losses covering 101% of our nonaccrual loans and representing 1.4% of total loans. Both of these ratios were slightly higher than the prior quarter. In 2017 we expect provisioning to adjust with changes in risk rate, other indications of credit quality, and loan volume.

On slide 9 we provide a little more detail on the energy book which now accounts for about 3% of our total loans. Period-end oil and gas loans were $668 million, down $28 million from the prior quarter and down $84 million from the prior year-end.

In 2016 we funded 14 new credits, with $310 million of commitments and about $190 million of outstandings. Nearly 30% of the book's year-end outstandings were originated in 2016. We remain committed to this business, and we recently closed first agented transaction.

Turning to slide 10, full year net interest income was $707 million, up $31 million or 5% from 2015. Margin was down four basis points from 2015, reflecting modest levels of compression through the first three quarters of the year.

Relative to prior years, margin is generally stabilized and was in line with our expectations as fed rates were largely unchanged during the year. The average yield on total loans was 3.38%, down two basis points from the prior year. Interest-bearing deposit costs were up 10 basis points from 2015, reflecting the deposit data of 0.4% which is slightly better than our modeled expectation of 0.5%.

Looking forward, we expect deposit repricing to remain disciplined in our core Wisconsin and Minnesota markets. Our other funding costs declined as we redeemed $430 million of senior notes in early 2016 and benefited from growing core deposits throughout the year.

Turning to slide 11, net interest income was up $1.5 million or 1% from the third quarter. Net interest margin for the fourth quarter was 2.8%, up three basis points from Q3. The average yield on total loans increased to 3.4% for the quarter; however, this was primarily driven by $2 million of interest recoveries which added three basis points to the quarter's NIM.

Yields on investment securities continued to trend down and ended the year at 2.25%. At these yields and in this rate environment we're reluctant to grow the portfolio. In the fourth quarter the cost of interest-bearing liabilities increased just one basis point from the prior year-ago quarters.

The December 2016 interest rate increase had no real impact to our fourth-quarter's results, but is expected to add to this year's bottom line. Looking ahead we expect to see a stable to improving NIM trend assuming additional Fed action to raise rates.

Annual non-interest income is highlighted on slide 12. In 2016 total noninterest income was $353 million, up $24 million from the prior year. Fee-based revenue grew by $8 million from the prior year and comprise nearly 75% of this year's total noninterest income. Growth was largely driven by higher insurance commissions.

Our insurance business acquisition in 2015 helped grow our insurance revenues from under $50 million to over $80 million in 2016. Last year we rebranded our insurance business under a new name, Associated Benefits and Risk Consulting, which is more reflective of the comprehensive services we offer. We also enjoyed strong growth in mortgage banking and capital markets activity this year.

Capital markets fees increased significantly to $22 million and were the largest contributor to this year's growth. We benefited from higher loan syndication activity and increased customer hedging transactions.

Of note, for real estate transactions of $100 million or less, Associated ranked as the number one book runner, with 43 syndicated transactions. We were number two in 2015. Mortgage banking income increased $6 million from the prior year, driven by portfolio sales generating $9 million of gross gains in the third quarter and higher overall gains on sales throughout the year.

Turning to slide 13, noninterest income was down $3 million in the fourth quarter. Capital markets activity was quite strong again in the fourth quarter and we're pleased by the momentum we are building in this line of business.

Mortgage banking was $12 million in the fourth quarter, down from an elevated third quarter but up nicely from the prior periods. Our insurance commissions were slightly lower in the fourth quarter and were down from the first half of the year as usual, due to seasonal factors. Securities gains of $3 million in the fourth quarter were driven by reduced investment positions. All other fee categories were up collectively about $1 million in the quarter.

Looking ahead into 2017, we expect reported non-interest income to decline by approximately $20 million year-over-year. The drivers of the expected decline are lower mortgage banking income and increased tax credit investment activity. However, this decline is expected to be largely offset in other reported income statement line items.

Reported mortgage banking income will be impacted by the retention of loans which will contribute to lower net gains for 2017. Also, $9 million of the past year's mortgage gains were generated from portfolio sales, which we don't plan to repeat this year.

Over the last several years we've expanded our tax credit investment activity. While to date this activity has not been particularly material, we expect it to become more meaningful starting this year. In general, we expect higher tax credit write offs to occur in concert with lower reported tax expense.

Annual non-interest expense is highlighted on slide 14. Positive operating leverage remains a top priority of ours and we're pleased with our consistent and steady progress. In 2016 revenues were up 5%, while expenses grew by less than 1%. Our efficiency ratio was lower in 2016, and is now improved by nearly 600 basis points from 2012.

Enhanced automation, operational efficiencies, and branch consolidations have all been part of the equation. We believe that our strategy of focusing on long term reengineering is the right approach and will continue to drive improvement over time.

Total expenses for the year came in at $703 million. Personnel expense increased $10 million from the prior year, driven by $5 million of severance incurred in 2016. Excluding this charge, we held the expense line to under $700 million.

Overall nonpersonnel expense was down year over year as savings in occupancy, technology, and other areas offset increases in FDIC expense and legal and professional fees. Slide 15 shows that noninterest expense was up $4 million from the third quarter driven by $3 million of severance reported in personnel expense.

During the fourth quarter, we structured our commercial and business lending areas to improve profitability and ensure that these operations were positioned for efficient growth. Occupancy was down about $2 million from the prior quarter, driven by a lease termination charge which was incurred in the third quarter. Business development and advertising expense was up $1 million from the prior quarter, reflecting an increased focus on our marketing activities related to mortgage and lending businesses. Outside of these larger movements, all other expense categories were steady quarter over quarter.

For 2017 we expect total noninterest expense to increase by approximately 1%. The Company's 2016 tax expense increased by $6 million, and the effective tax rate was largely unchanged at about 30%. For 2017, given our increased tax credit activity, we expect an annual average effective tax rate between 28% and 30%.

So on slide 16 we would like to summarize our 2017 outlook. We expect mid- to high single-digit annual average loan growth, and we expect to maintain our loan to deposit ratio under 100%. We expect a stable to improving NIM trend assuming additional Federal Reserve action to raise rates.

Noninterest income is expected to decline by approximately $20 million from 2016, as lower mortgage banking revenue and tax credit write-offs are expected to be partially offset by continued growth in fee based and capital markets revenues. We expect lower reported non-interest income to be largely offset by improvements in other income statement line items.

Non-interest expense is expected to be up about 1%; we expect continued improvement in our efficiency ratio. We expect to continue to deploy capital through our stated priorities. We will continue to target a common equity Tier 1 ratio within a range of 8% to 9.5%. And finally, our loan loss provision is expected to adjust with changes in risk rate, other indications of credit quality and loan volume.

This outlook reflects a similar economy to what we experienced in 2016 and includes our expectation of two interest rate increases in 2017. The guidance does not reflect any changes to the regulatory environment or to corporate tax rates.

We may adjust our outlook if and when we have more clarity on any of these factors. And with that, we will open it up to your questions.

(Operator Instructions)

Dave Rochester, Deutsche Bank.

Good afternoon, guys.

Good afternoon, Dave.

On your slower loan growth guide for 2017, can you just provide some color on what you think will grow more slowly next year? I know energy was still considered -- continued to be a drag, but any other areas that stand out?

No, we're expecting mid-to-high single digit growth. This year we had 8%. The mortgage business is most likely to slow even though we're going to retain some mortgages as rates go up. Things will slow there.

The backlog is already slower this past quarter than it was in previous quarters. Certainly, the oil and gas business although we are active, as some of the other loans are worked out and refinanced there's not going to be much upward pressure there. In general, we're not really forecasting any really big change there.

Okay. And then, on your NIM guide, I know you said it included two rate hike. How would that look without the rate hikes but with the curve as it is today? Would you expect stable NIM? Would you still expect some pressure? Just any thoughts there would be great.

I think keep in mind -- and I think we break that out in charts -- we have had interest recoveries along the way. So our realized effective NIM is slightly less than the $280 million, net of the interest recoveries. And so, in a flat rate environment, we tend to compete away a lot of the spread when you look them up. You've see that in our first and second quarters.

We the banking industry.

We the banking industry. And so, in the absence of further actions, it is not clear how quickly our margins would grow. On the other hand, in spite of -- in light of expected actions, we expect our margins to generally expand.

Got you. Okay. And then, just drilling into yields that are coming on today. Where are securities reinvestment rates generally these days given the steeper curve?

So generally I'd say our current investment portfolio, 2.25%-ish or lower is given the stuff that we are buying. And that's part of the reason why we have not purchased securities to the same degree in Q4. And we're shifting the strategy because new mortgage loans yield higher levels, and seemed to make more sense.

And then, where are spreads on C&I and CRE? Have those changed at all post rate hike and can you remind us what those are today?

They haven't really changed much. You've got the current numbers there, right?

So the overall spread on our commercial book was $330 million for the fourth quarter. And $345 million for the CRE book for $336 million total.

And so post rate hike, where would you be bringing in C&I and CRE at this point? To spread [lives] versus LIBOR?

Again, we haven't seen any commercial actions to tell us to spread their [wibey] yet.

Okay. And just one last one on credit, you mentioned the energy reserve ratio was up, you've got that in the slide here, but problem loans we're down decently, so I was just curious what do you need to see to actually reduce that reserve ratio on that specific segment?

Well, it's highly likely that the worst is behind us. Obviously on our oil and gas portfolio. That said, a significant move on price accrued would potentially impact some of the loans that are still in a workout phase. So we're being conservative. But it's likely that our oil and gas book will improve throughout the year.

Great. All right, guys. Thank you very much.

Thank you.

Jared Shaw, Wells Fargo Securities.

Hi, good afternoon, this is actually Timor Braziller filling in for Jared. I guess my first question is on commercial utilization rates.

You guys had mentioned that for a few quarters now those had been trending lower. Can you just give us a little bit of color what's going on in that book and what your expectations are for utilization rates as we head into 2017?

I can't answer the question. I don't really know. It's a fairly large book, and there is no one issue that drives utilization across a pretty big book of loans.

So we have had some seasonality that we have noticed between first half and second half on loans. So we will see what happens as we get into this new year. Much depends upon whether the optimism that's building in the economy actually is realized in actual economic activity.

Okay. Thank you.

And then just switching gears to the mortgage banking business, excluding the $9 million gain last quarter, again a pretty strong quarter, especially with the fact that you are not portfolioing more than 30-year product. What was the dynamic that still drove that strong result, and I guess with that shift in strategy, can you maybe help frame what that line item should look like in future quarters?

Keep in mind we began to shift the strategy midway to late into the fourth quarter, so essentially it had no impact on settlements. So if you look at page 4 of the press release table, you will see that settlements were actually up essentially year-over-year and were still strong in the fourth quarter. We added settlements that stay there for you to see that.

So you will see the shift in banking income really start in 2017 as product that we originated or locked in November starts to close into the first quarter. So that's part of it. And then secondly, we will continue to keep a portion of -- not all of -- our 30-year production. And again, we haven't quantified that number but that's in -- baked into our overall loan growth guidance.

There's also a phenomenon that we have seen over many cycles of when folks think that rates are about to move there's a little bit of a rush to refi. So for example in the third quarter, about 40% give or take of our production was refi activity. It bumped up to more than 50% in the fourth quarter. So there's probably a little bit of rush for people trying to get their refi done.

Okay, that's helpful color. And then one more if I could, just following up on Dave's question on the energy reserves. Given the perceived increased optimism with energy prices where they are, could we see some of that reserve shift into new production in 2017? Or is that still likely too early of a time frame?

New Oil and gas production?

No. So the reserve that's going to be established for the oil and gas book shift over to production on other lending categories for reserves.

Well, it doesn't exactly work that way. As the oil and gas book improves, which we think will likely, that level of reserves will come down, and then we will be adding reserves for new loan volume. But those new loans will be coming on at much different risk rates and take up a lot less potential reserve than the oil and gas loans we are carrying around today. So it's likely there is a net benefit there assuming the oil and gas book improves like we think it will.

Okay, thank you.

Ebrahim Poonawala, Bank of America Merrill Lynch.

Good afternoon, guys. Just first question following up on the margin.

I'm trying to understand the near term looking into Q1, we saw C&I yields move up nicely in the fourth quarter. I'm assuming picking up some of the move in the LIBOR. Should we expect any pressure on the margin for Q1 as the money market deposits sort of reprice slightly higher and the data flows through, or am I missing something?

I think, Ebrehim, there really wasn't much pickup in the margin in the fourth quarter related to the December Fed hike. Keep in mind the Fed hike happened after most loans are reset at the end of the month, and so essentially we won't really see the uptick from C&I loans until January.

We do see some of the mark-to-market in the money markets in the current month the FED hike happened, because they're priced daily indexes. But you're right, we will still see more probably bleed into January. So I would say what you saw in the fourth quarter was a combination of recoveries and the mix of the book essentially helping boost the dollar numbers from the third quarter to the fourth quarter on a small percentage basis.

In absolute dollar terms, you will note it wasn't particularly a significant move. And so -- on the C&I and I book in particular. So I think you'll see more of that pump come up in the first quarter, but again there will be some offset in the money markets. They'll still bleed over into the first quarter, as well.

But if you assume we have no interest recoveries and we often have interest recoveries, they are hard to predict, but it's more normal than abnormal. If you adjusted for that, there isn't any particular reason why there will be downward pressure on the NIM post the rate hike. It should be a little bit of upward pressure with a beta of 0.4%.

Understood, that's clear. And what's the timing of the rate hikes you assume in your forecast?

We haven't specified.

Got it. And just quickly moving on to expenses, the 1% year-over-year growth guidance, that's based on the reported $703 million number I assume?

Yes. It's not adjusted, it's on that.

It's on there, and then can we just talk a little bit in terms of areas where you are investing be on the front line on the insurance side versus additional opportunities to restructure and is there anything left on the branch distribution side that you are doing which might show up as we move into 2017?

Well, we held our expenses essentially flat for about five years now, so we expect to basically continue that. 1% or less increases, I don't know if that's industry-leading over this period of time, but it's pretty good. So we don't have a lot of branches to consolidate at this point.

We didn't really do much about this past year. So there aren't any big branch consolidation plans. I think we have a footprint that's appropriately sized at this point. That said, as consumer preferences continue to change and as mobile and online offerings become even more sophisticated, we are very cognizant of that.

I think we have been extremely diligent and if anything ahead of most banks on recognizing that we've got to change the distribution mix. Although I don't see any of that coming up, we are very aware that as people just aren't going into branches like they used to, we will adjust accordingly over time.

But the less than 1% continues to assume very significant technology investments of high teens to $20 million a quarter that we've been running for a while. We continue to work hard on all kinds of back-shop initiatives to continue to get more efficiency and that continues.

We're just not a believer in announcing big programs to cut expenses. I think you've seen us manage our expenses very well for these last five years, quietly letting the numbers speak for themselves making the processes more efficient and then seeing the benefits flow through.

That's fair, and if I can just think one last one in, you talked about picking up a little bit in terms of the tax credit investments. How does any potential tax reform impact your decision around doing more or less of that, or is indifferent to what happens with the tax reform in Congress at some point this year?

Well the assumption would certainly be that if corporate taxation changes, then the economics of your investments into a tax credit field change as well. So we would assume that there would be adjustments in that business.

Got it. Thanks for taking my questions.

Chris McGratty, KBW.

Good afternoon, thanks for taking the question. Chris maybe just can you just close the amount of premium amortization that ran through this quarter and maybe what it was last quarter?

Sure. The change was a little less $1 million. And we typically don't give the actual number, but the change was less than $1 million.

Okay. And another housekeeping, was there any adjustment to the MSR in the quarter that may have ran through the mortgage end?

There was not a material number there.

Okay. And then last if I could, the just want to make sure I got the balance sheet guide appropriate. Securities, the portfolio that you guys are talking about, not that optimistic about where rates are and portfolioing, putting bonds on the balance sheet. Is there any way to think about the $6 million to $6.4 million, $6.5 million of investments kind of holding steady here and declining maybe as a percentage of assets, or does the dollar amount of securities shrink over 2017?

I think over the first half of the year it's more of a steady while we grow the rest of the balance sheet. And then we will look to see what type of investment profile we have over the balance of the year based on how much we retain and what the interest rate environment looks like that we move to the middle of the year.

Okay great, helpful. And maybe on M&A or potential you could capital outside of the dividend, could you just remind us, you give a target on your CET1, maybe what you're seeing post election are there more potential parties willing to talk or is that still not a strategy that you see a lot of value in? Thanks.

There has been continued chatter for -- it certainly picked up some last year and I think it generally continues. We have been talking to folks, so -- whether it has anything to do with election or not I am not sure. But there is opportunities if we choose to pursue them.

Great, thank you very much.

Jon Arfstrom, RBC Capital Markets.

Thanks, good afternoon.

Good afternoon, Jon.

Phil, good luck to the hometown team on Sunday.

Thank you.

Had to get that out of the way. I won't ask you questions about the game plan. We will just to banking at this point.

Keep the ball in Roger's hands and we will be good.

All right. Couple of follow-ups here. The energy business, you talked about starting to grow that business again. What's the competition like? Do you have banks that are permanently gone from the business and you are seeing wider spreads?

Absolutely.

Okay.

This is the time when you're in a business like this that's cyclical, this is the time to be in the business. So we never shut our window. And you can see that we were active throughout the year.

We are gaining opportunities now to step up into lead positions. There are banks that have shut their doors and gone away. And there are other banks who are there but are not entertaining new opportunities. So deals are better, there is more equity, there's less leverage, pricing is better. It is clearly the right time to be in that business.

Basically the same type of business you have been doing all along.

Yes. Reserves, secured loan and gas money. We're not doing anything other than that.

Okay. Chris, I don't know if you'll bite on this, but I will ask it anyway. How significant should we expect the growth to be in the single-family portfolio? In the coming year? I know it is a bit of a shift in strategy and you've laid out the revenue puts and takes, but what should we expect there?

Again, we've given mid to high single digit total average loan growth. Do the math on that, and mortgage growth has been a meaningful part of that. And we are just making sure that it is embedded in that. You recognize mortgages could be as much if not more than they were this year because of the shift in strategy, even though market volumes may be down.

Okay. And I don't know if you touched on this last quarter or not, I might've missed it, but the restructuring in the commercial and business banking, can you just give us an idea of what you are doing there?

Sure. Yes, well we did that this quarter. We haven't talked about it before. But yes, we took a look at the smaller end of our commercial lending activities and business banking which is smaller than that.

We had a separate organization that was focused on that business, separate and apart from our corporate bank. And we have taken that organization, broken it up regionally and attached it under the leadership of John Utes to the corporate bank so that for example, in the Green Bay market here we used to have two market leaders, one at the upper end, one of the lower end.

Now the person who is now we have one person running the entire market up above the small business lending and that is true now throughout the footprint. So we reduced some of our administrative overhead expense, and made the business more attached locally and run as a centralized business.

Okay. And the costs are largely done?

Yes. The $3 million of severance expense that we took in the fourth quarter was largely that restructuring.

Okay.

Of course the gained benefit going forward from that as far as expenses.

Okay. Good. Thanks for the help.

Hopefully new business.

Okay. Thank you.

Michael Young, SunTrust Robinson Humphrey.

Good afternoon.

Good afternoon, Michael.

A lot of my questions have been asked, but just wanted to maybe ask a big picture question on just the hiring outlook for next year. As we kind of move into hiring season here in the first quarter. You did the restructuring, so you might have a little more capacity to add producers. Any specific areas that you are targeting currently?

We view the bank is being fully staffed today. That said, we're always looking for the opportunity to hire someone who can bring in customers and new revenue. And those occasions occur all the time.

But generally speaking if you look at the FTE count at the bank it's been down to steady. So we're not looking to ramp up additional folks inside the Company right now.

Okay no mix shift towards certain business lines from one to another?

No. I think we're in good shape in all our business lines.

Okay.

Absent us doing an acquisition of some sort of course.

Sure. And this one may be a little more ticky-tack, but just on the fee outlook of down $20 million. Can you help me parse out maybe how much of that is mortgage versus how much of that is going to tax credit right offs. I don't know if you have an idea of the nominal amount of tax rate investment you're going to make or anything to that effect.

We wanted to make sure we highlighted the 20 because our retention strategy in mortgage is embedded in the loan volume we've given you. And the benefits of our tax credits is embedded in the tax expense rate we've given you. So wanted to make sure you didn't double count anything.

Clearly our fee-based revenues have some positives to them. The downtick will come from mortgage banking and essentially our net gains and losses. And that's why want to call out the $20 million. As you are aware, we publicly disclosed the $9 million of gains on sale which we're not planning to repeat so that's an easy one to call out.

And separately the other net gains and losses will be offset to a large extent by our tax credit activities largely. But that will show up down below the line. So we want to be sure he understood the geography. That line will go down by, call it $20 million.

You will see some uptick in net interest income from the mortgages, you'll see some benefits in the tax line below, but the geography will be down $20 million in the middle of the income statement.

But it will largely offset so it's a shift in geography. On the income statement.

Sure. I guess I was just trying to think between mortgage versus the tax credit amortization how much is coming from which line.

Certainly at least the $9 million that we don't plan to review in the sales, and the balance will be a mix of gain on sales changes over the course of the year and reduced gains on other assets, which will be eaten up by essentially tax credit write offs. Which will hit above the pre-tax line to be offset below in the tax expense line.

Okay. Got it.

Kevin Reevey, D.A. Davidson.

Hi guys, it's Kevin Reevey here. How are you?

Good afternoon.

I guess first, Chris, could you give us an idea how we should think about the net charge off ratio going into 2017?

This is Phil, if you look at the experience we've just add, we had, give or take, $65 million of charge offs, $59 million of which were oil and gas loans in the entire year of 2016. So we essentially had no charge offs outside of oil and gas.

We don't see any stress building in the rest of our portfolio today. And we think that while there might be some odd finance charge offs left in oil and gas, there probably isn't a whole lot assuming a stable price environment.

Okay.

You can probably conclude that are charge offs are going to be lower absent some other business tipping over this year.

Okay.

Charge-off ratio is going to be likely with all the caveats I just gave you, lower.

Okay. And then, you have a pretty sizable share of manufacturing-type clients in your commercial business. How are they feeling about 2017? Any sense there. Are they excited about the new year and what's in store and how does that translate into business prospects for you guys?

So as we gave our guidance, if you think about what people feel about the economy, there is a certain sense of optimism out there. It's going to vary from company to company to company. If the dollar remains really strong, it makes an impact on exporters of which we have some here.

But I would say in general, there is a renewed sense of optimism that there will be some regulatory relief for re-manufacturers, that the economy will pick up and it will have higher growth. So I would say in general there's an optimistic sense. None of that has manifested itself as we sit here today. But there's a certain amount of optimism that it will.

Okay great thank you.

Nathan Race, Piper Jaffray.

Good evening. A lot of my questions have been asked and answered, but just a question on the commercial real estate growth. Particularly in construction.

Just wondering if you guys could provide any additional color in terms of geography and property type you are seeing greatest opportunities in that asset class, and are you expecting any firmer pricing as well given some re-trenchment from some other things that may be pumping up on concentration levels.

Sure. I think in fact we are particularly well positioned because we have substantial world underneath the OCC guidance were other banks are bumping up against their various limits. We are -- we have been very disciplined about making sure that we have diversity amongst the product types.

So for example, our real estate guys have been managing their multifamily exposure underneath our own internal caps. So they have been holding dry powder for our best customers and passing on any number of transactions for the last several years that they could of been doing because we're not going to overbuild the concentration in that type.

So most of the activity in 2016 was in multifamily retail projects, industrial. But just to give you a sense of it, we did putting the REIT business aside about $2.2 billion in new commitments. And a little under $600 million was multifamily, a little over $500 million was retail, a little under $400 million was industrial, a little under $300 million was office.

There was actually a little under $200 million of new single-family and condo when there was very, very little in previous years. So we run a very diverse book. In general as we've talked about in a few other calls, because there is a scarcity value building amongst banks that have room to do this business, terms and pricing have been generally improving in commercial real estate.

So we are well positioned, but with the caveat that this is a bank that will maintain quite a bit of discipline around how much exposure we have by geography and by product type. And won't get overexposed in either of those in any particular market.

Understood. And then, in terms of geography, are you seeing any particular pockets of strength and conversely are you kind of pulling back in some markets that maybe a little overheated in some areas?

We have CRE offices in eight states and our activity was pretty well diversified amongst those areas. In any particular market, you might be concerned about too much multifamily in one city or another and we are very cognizant of that, but there's nothing out there that would indicate any high degree of concern at this bank about exposures in any product type our market.

I appreciate taking the questions.

Scott Siefers, Sandler O'Neill.

Good afternoon, guys. Thanks for taking my questions. I think most of my questions have been answered. Just curious if you could talk a little bit about the non-energy reserve. Just curious why you guys have felt compelled to build up the reserve the last couple of quarters.

I guess as I look at things just been extraordinarily low outside of energy, all the leading indicators seem to be improving if anything, and then based on what you said, it sounds like the risk grade on stuff is coming on is also very low. Just curious about the choice to be building up the non-energy reserve the last couple of quarters.

I think it really comes down to, we've been reserving somewhat proportionally to the charge-offs we've been taking in oil and gas. So you are right, there isn't a lot of concerning activity outside of oil and gas over this past year. And reserves have only really built based on volume growth. Which we have pretty the same volume growth outside energy during the course of the year.

Okay. And then, Chris, just sorry to harp on this key thing, but as you look at the changing geography in 2017 versus 2016, so I get that mortgage will come down considerably. I imagine is just a natural step up in the changes the way you are conducting the business, as well. But what's the other line item that ends up getting dinged by the increased tax credit investment activity?

We haven't previously broken out. It is on the other gains and losses. The net asset gains and losses, so essentially if you look at the combination of investment gains and losses and other gains and losses, that will be negatively impacted by the write off of the tax credits, and that together with the mortgage banking those two items will drop total down by about 20%.

Okay. All right, thanks. That makes a little more sense. I appreciate it. Thank you.

There are no further questions at this time. I would like to turn the call back over to Mr. Philip Flynn for closing remarks.

Thanks. So thank you everyone for joining us today.

2016 saw continued improvement in almost all areas. Loans, deposits, noninterest income increased, the NIM was generally stable. Expenses were up only slightly and earnings increased every quarter.

Absent oil and gas, loan quality was very strong, and we look forward to a continuation of these trends in 2017. We are in uncertain times, and if economic growth does indeed accelerate, interest rates rise more rapidly and we get a change in the regulatory environment, and corporate taxation, our results may well exceed our current outlook.

So we look forward to talking to you again in April. If you have any questions in the meantime, please give us a call. Thanks for your interest in Associated, and go Pack.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.