Associated Banc-Corp's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Jan.16.14 | About: Associated Banc-Corp (ASB)

Associated Banc-Corp (ASBC) Q4 2013 Earnings Conference Call January 16, 2014 5:00 PM ET

Executives

Philip Flynn - President and CEO

Chris Niles - Chief Financial Officer

Analysts

Matthew Clark - Credit Suisse

Chris McGratty - KBW

Ken Zerbe - Morgan Stanley

Scott Siefers - Sandler O'Neill & Partners

Emlen Harmon - Jefferies

Dave Rochester - Deutsche Bank

Peyton Green - Sterne Agee

Operator

Good afternoon, everyone. And welcome to the Associated Banc-Corp’s Fourth Quarter 2013 Earnings Conference Call. My name is Kate, and I will be your operator today. At this time all participants are in a listen only mode. We’ll be conducting a question-and-answer session at the end of this conference. Copies of the slides that will be referenced during today’s call are available on the company’s website at associatedbank.com/investors. 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 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 Factors section of Associated’s most recent Form 10-K and any subsequent SEC filings. These factors are incorporated herein by reference.

Following today’s presentation, instructions will be given for the question-and-answer session. At this time, I would like to turn the conference over to Philip Flynn, President and CEO, for opening remarks. Please go ahead, sir.

Philip Flynn

Thanks. Good afternoon and welcome to our 2013 earnings conference call. Joining me today are Chris Niles, our Chief Financial Officer, and Scott Hickey, our Chief Credit Officer.

Highlights for 2013 are outlined on slide two. The year was another successful one for the bank. From a total revenue standpoint we were up approximately $20 million from last year, while holding total expenses flat. As a result, we were able to deliver net income available to common shareholders of $184 million or $1.10 per share which represents a 10% improvement in EPS over 2012.

Average loans of $15.7 billion were up 6%, commercial and residential mortgage loans both drove the growth with each category up 12%. Average deposits of $17.4 billion were up 12% from 2012 and we continue to drive strategies which will optimize our funding mix from a cost and a liquidity perspective.

Net interest margin for the year up 317 basis points compressed by 13 basis points, yet we grew net interest income $20 million or about 3%. Gross fee income of $313 million was flat compared to 2012 as declines in mortgage-banking income were offset by improving core fee based revenues and favorable results from the impairment of non-core assets.

We delivered on our commitment to keep expenses flat and we were actually down a $1 million despite significant investments in personnel, technology and facilities during 2013.

We continue to return capital to our shareholders through an increased dividend and common stock repurchases, delivering a 100% combined payout for the year. Our Tier 1 common equity ratio remains very strong at 11.46%.

So, now let me share some detail on the main drivers of our 2013 earnings. Loans are highlighted on slide three.

Average loans grew $921 million or 6% from a year ago to $15.7 billion. As we rebuilt and rebalanced our loan portfolio, we’re approaching our historical loan balance peak of $16.1 billion, reached in 2008. 2013 was another good year for residential mortgages as we grew this portfolio, $384 million or 12% to $3.7 billion. For the portfolio, we remain primarily an ARM lender with over $2 billion of 5/1 and 7/1 ARMs. We continue to be the leading mortgage originator by units in Wisconsin and sold substantially all of our 15 and 30 year production to the agencies. Our mortgage servicing portfolio has grown to over $8 billion.

Commercial real-estate grew $355 million or 11% to $3.7 billion. Most of the growth in commercial real-estate came in multifamily loans which make up the largest segment of this portfolio. Commercial and business lending average portfolios grew by $671 million or 13% from 2012. Within this group general commercial loans accounted for the largest amount, growing by $304 million or 7%. Manufacturing continues to be the largest contributor to C&I loan growth. Given a positive economic backdrop, we expect continued commercial loan growth during 2014. We note that commercial line utilization has declined to about 45% in the fourth quarter from 48% earlier in the year. We continue to diversify our commercial portfolio by building out our power and utilities and oil and gas businesses. We purchased several power and utility portfolios during 2013 and continue to see our specialty portfolios as growth opportunities.

While we continue to expand, we do expect the rate of growth to slow as the business matures. A large portion of our 2013 loan growth was offset by the continued runoff of our home equity and installment portfolios. Balances declined $489 million during 2013 as customers continued to deleverage and refinance in the lower priced first lien mortgages.

We expect to see continued runoff in HELOCs and student loans in 2014. 41% of our year end home equity loans are in a first lien position. In addition, we’d add that our mortgage warehouse utilization continued to decline with the slowdown in mortgage refinancing. We also increased our securities portfolio during the fourth quarter by 8% to approximately $5.3 billion.

To recap as we look forward 2014, we expect to see continued growth in commercial, commercial real-estate and specialized lending and modest net growth in overall consumer lending. So in aggregate, we expect mid-single-digit loan growth in 2014.

Average deposits of $17.4 billion were up 12% from 2012. Our low cost money market checking and savings products grew by over $2 billion or 17%. Non-interest bearing checking grew by $300 million or 8% to $4.2 billion on average.

Our interest bearing deposits including savings, money market and interest-bearing checking total $11.3 billion and had a weighted average cost of just 17 basis points in 2013. Time deposits, our most extensive source of deposit funding, continued to decline during 2013 and at period end totaled just $1.7 billion. Overall, cost of interest-bearing deposits declined by more than $10 million or 12 basis points year-over-year.

During the fourth quarter, we also took actions to reduce our collateralized municipal deposits, networked transaction deposits, brokered CDs and institutional funds. We replaced these funding sources with lower cost, longer term financing in the form of five year puttable variable rate Federal Home Loan Bank advances. The impact of these actions reduced total deposits and customer funding by over a $1 billion. We refinanced $400 million of higher cost FHLB term advances in the first half of 2013, and redeemed $26 million of 9.25 subordinated debt in October. These actions contributed to the $19 million of realized funding cost savings during the year. We've also recently called for the early redemption of $155 million of our 1.875 senior notes issued in 2012. These securities will be retired in February.

Looking to 2014, we continue to build out our commercial deposit treasury management solutions. We are introducing a new lockbox solution in the first quarter. And combined with the treasury portal we've rolled out early in 2013, we feel good about our product line-up. We expect to grow core deposits this year in the high single-digits year-over-year.

Turning to slide four, our yield on earning assets increased in the fourth quarter, although for the full year the yield on earning assets declined 20 basis points to 3.5%. While the average yield on commercial and business lending loans declined six basis points in the fourth quarter, the average yield on mortgages and retail loans continued to increase.

CRE loans posted an average yield of over 4% for the quarter, but this included over $3 million of interest recoveries. However, even after adjusting for these interest recoveries, gross interest income on loans and securities improved quarter-over-quarter and the NIM expanded.

Competition for asset generation, particularly C&I loans is high due to stronger bank balance sheets and lower economic growth due to skewing market share gains. Pricing was tighter during the year as there was a lot more bidding on term sheets and in addition loosening loan structures were more prevalent in some of the markets where we compete.

On the liability side, interest expense continued to decline, cost of interest-bearing liabilities declined 16 basis points year-over-year and 3 basis points quarter-over-quarter. These savings are being driven by disciplined deposit pricing and aggressive liability management. We continue to look at ways to further reduce our interest-bearing liability cost. However with overall deposit cost of just 22 basis points and interest-bearing liability cost of 35 basis points, our ability to manage these costs lower is becoming constrained. Nonetheless, dollar net interest income is expected to grow even as NIM continues to modestly compress in 2014.

Non-interest expense is highlighted on slide five. Total non-interest expenses declined slightly from 2012 to 681 million, FTEs declined by 7%, technology and equipment spend increased by $8 million as we continue to focus on technology solutions for labor intensive processes within the bank. As our credit metrics have improved, foreclosure and OREO expenses declined by a third from 2012 to about $10 million and a less than half of the levels a few years ago.

Legal and professional fees which includes consulting and our BSA/AML remediation related expenses have declined by about a third or $11 million from 2012. Occupancy expenses decreased more than $1 million from 2012 and we believe we can lower this expense further with some of the real estate initiatives implemented during the past year.

For the fourth quarter, total non-interest expense of $179 million was up $15 million from the third quarter. Personnel expenses increased $3 million, although those included $2 million of severance cost related to ongoing efficiency initiatives.

Business development and advertising expense increased $2 million quarter-over-quarter as we ramped up advertising related to our brand campaign. The $2 million increase in legal and professional fees from Q3 was almost entirely made up of what we expect will be one-time consulted expenses related to (inaudible) and compliance enhancements.

Other expenses were up $3 million from the prior quarter and included $1 million increase in charitable contributions. Overall, we remain focused on efficiently managing our personnel costs, continuing our technology investments and reducing other costs across the organization. And we expect flat expenses again this year as we had last year and the year before.

Non-interest income of $313 million was flat compared to 2012. Our core fee categories increased $4 million or 2%, led by strong trust fee growth of 12%. Trust assets under management of $7.4 billion grew 15% from last year and are at an all time high.

Mortgage-banking income of $49 million in 2013 declined from record levels in 2012 as the refinance boom ended last spring. While the first two quarters of 2013 continued to benefit from strong mortgage banking results, the second half run rate is likely more typical of what we would expect in 2014. With this in mind, total non-interest income is expected to decline slightly in 2014.

The company's 2013 tax expense increased by $4 million as income grew and the effective tax rate remained largely unchanged at about 30%. While the companies enjoyed annual tax rates of just under 30% over the last couple of years, going forward, we expect marginal tax rates decline into the low 30s as earnings continue to improve.

Turning to slide six, credit quality continued to improve in the fourth quarter as net charge-offs, non-accrual, past dues and potential problem loans all declined. Net charge-offs of only $5 million were flat compared to last quarter as we continued to experience higher recoveries. For our consumer book, charge-offs have fallen to 19 basis points compared to 93 basis points a year ago.

Potential problem loans declined 15% to $235 million this quarter and are down 35% from a year ago. The level of non-accrual loans, the total loans is now improved for 15 consecutive quarters and is at a 117 basis points down from 1.33%. Total non-accrual loans of $185 million are down 11% from the third quarter. The total allowance for loan losses equals 1.69% of total loans and covers a 145% of period end non-accruals. The provision for loan losses was $2 million in the fourth quarter and $10 million for the full year.

On slide seven, our capital ratios continue to remain very strong for the Tier 1 common equity ratio of 11.46%. We are well capitalized and are excess with the Basel III expectations on a fully phased-in basis. Our net income available to common shareholders was $184 million. Our return on Tier 1 common was 9.8% for the year. Our stated capital deployment priorities placed an emphasis on organic growth and paying a competitive dividend and total dividends per common share of $0.33 increased 43% from 2012. Other capital uses would include non-organic opportunities and share buybacks and we repurchased about 7.7 million shares of common during 2013.

On slide eight, we’d like to recap our outlook for 2014. We are expecting mid single-digit average loans growth similar to 2013. Average deposit and other funding should grow in the high-single digits. Net interest margin will compress modestly throughout the year. We expect non-interest income to be down slightly as core fee growth will be offset by decline in mortgage banking income. Non-interest expense is expected to be flat. And finally, our loan loss provision will grow based on loan growth.

And with that, we’ll open it up to your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Matthew Clark with Credit Suisse. Your line is open.

Matthew Clark - Credit Suisse

Hey, good evening, guys.

Philip Flynn

Good evening.

Matthew Clark - Credit Suisse

Maybe just first on the mini deposits that you guys reduced in the billion dollars, just curious what those cost on average and the cost of what you replaced them with on the FHLB side?

Philip Flynn

The average cost of deposits we replaced was right around 20 basis points. And the weighted average cost of what we replaced them with the Federal Home Loan Bank advances was just out some 10 basis points.

Matthew Clark - Credit Suisse

Okay. And then in terms of the -- your expense guidance looks encouraging relative to the run rate this quarter, it sounds like you had a couple of million in severance and uptick in charitable contribution. Could you just give us -- other than I think occupancy, can you give us a sense for what else is going to keep you flat for the year?

Philip Flynn

Well, again we had a substantial run up in advertising along with our fourth quarter brand push and we won’t be repeating that throughout the year. We also had a run up in legal and professional and consulting costs to make sure we are on top of all the things that are changing as we move forward in the regulatory environment. And we’d like to think that those costs are largely behind us and those will moderate the expense trends going into 2014.

Matthew Clark - Credit Suisse

Okay. And then on the -- was there an MSR rate this quarter or not, just curious?

Philip Flynn

It was nothing material.

Matthew Clark - Credit Suisse

Okay. I’ll step back. Thanks.

Operator

Our next question comes from the line of Chris McGratty with KBW. Your line is open.

Chris McGratty - KBW

Good afternoon, guys.

Philip Flynn

Hey good afternoon, Chris.

Chris McGratty - KBW

Phil, you guys paid out roughly 100% total payout in ‘14, given your outlook for growth and your strong capital position, is that kind of a fair assumption again, is there any restrictions that you guys kind of doing up to combine 100% again?

Philip Flynn

No, there is no particular restriction. If we were to do the same amount of share buybacks this year as we did last year, we would need to renew our board authorization, but we still have plenty of room in front us to get through most of this year.

Chris McGratty - KBW

And what, can you remind us what’s left?

Philip Flynn

90ish.

Chris McGratty - KBW

$90 million, okay.

Philip Flynn

We intend to renew it....

Chris Niles

Somewhere around that.

Philip Flynn

We would intent to renew it and we have no reason to believe there will be any limitation on our ability to continue at the current pace.

Chris McGratty - KBW

Okay. And on M&A Phil, can you update on what you might be seeing on the Midwest today, there has been a couple of transactions, not necessarily in your Wisconsin market but maybe what you are seeing in terms of opportunities?

Philip Flynn

Well, as we talked about many times, I do believe that the industry is right for a consolidation. It hasn’t happened to any great degree. That doesn’t mean I don’t think it’s going to. I think as time goes on, particularly smaller banks will continue to struggle with this economic interest rate environment, regulatory environment et cetera. And just anecdotally there has been a noticeable pick up of interest of people giving us a call and I wouldn’t be surprised to see more activity this year.

Chris McGratty - KBW

Great. And then Chris can you help us on the size of securities book going forward?

Chris Niles

Sure. I think we have been trying to sort of keep the securities book inline with the overall growth. We took a look at where we were balance wise in the fourth quarter inside the pre-investment balances here at the end of the year. You will recall we did something very similar at the end of last year. We sort of think of that as pre-investment for expected cash flows in anticipation of the fact that often times our first quarter loan growth is a little softer than other periods during the year.

Chris McGratty - KBW

Great, thanks.

Operator

Our next question comes from the line of Ken Zerbe with Morgan Stanley. Your line is open.

Ken Zerbe - Morgan Stanley

Thanks. Probably have some more questions on the same topics that we have been talking about. Just if I look at I guess this page one the first exhibit page that you guys have, your long-term funding went up by $2.5 billion which is huge. I mean I get that you are replacing the collateralize munis and that’s great, but the other $1.5 billion, I mean are you using long-term funding to probably increase your securities portfolio I am just trying to like match up all the numbers there?

Philip Flynn

Let me be clear, we took advantage of what we saw the very attractive program offered by the Federal Home Loan Bank of Chicago called the Reduced Capitalization Advance Program RCAP, which provided for us to take long-term puttable advances. So they are liquidity and cash to us for five years that we can repay without penalty any point six months or later. And these are variable rate advances. So we have short-term effective funding available to us, but five year guaranteed liquidity, which from an LCR perspective and from a liquidity management perspective is a great outcome, because we will effectively convert what we previously had was collateralized municipal deposits that were tying up our most liquid assets and replaced it with essentially funding from the Federal Home Loan Bank on a five year committed basis that is being played with whole loans that were fit in our balance-sheet otherwise not being used and creating great liquidity out of our investment portfolio. And to top it off, we did it for 10 basis points lower cost than what we had been funding previously.

Chris Niles

And we can put this back six months out from when we borrow it. So, we can keep it for five, we can get rid of it after six months.

Ken Zerbe - Morgan Stanley

Got it. Okay. No that helps, a great explanation. In terms just to be super clear in terms of the expense guidance of flat, is there any items in 2013 that you're adjusting for or is it I think I have 681 in my model. But is that a number that you're talking about?

Chris Niles

We're committed to 681 or less.

Ken Zerbe - Morgan Stanley

Got it. Perfect. Okay. And then just last question on loan growth, I know your guidance was sort of the mid single-digit growth and a little bit weaker last several quarters than that, I think close to zero. Like what gives you the confidence again? And maybe you addressed this, but what gives you the confidence that we're going to see the pick up in loan growth, whereas we have not seen that in last few quarters.

Philip Flynn

Sure. If you look into the fourth quarter, first of all, we went to a basis of reporting our loan outstandings on an average quarter basis as opposed to point-to-point growth. But if you look at what actually happened in the fourth quarter, we had point-to-point $300 million of loan growth in the fourth quarter. So what that means is as we come into the first quarter of this year, we are very well poised from an average to an average point of view of having probably 1.5% to 2% loan growth in the first quarter average over average. So when we talk about getting for the year to mid single-digits, we feel like we’re in a very good position to have a good start on that.

Ken Zerbe - Morgan Stanley

Got it. Perfect. Thank you.

Operator

Our next question comes from the line of Scott Siefers with Sandler O'Neill & Partners. Your line is open.

Scott Siefers - Sandler O'Neill & Partners

Good afternoon guys. Actually I think most of mine have been answered. I guess just one clarification question. So, you’ve got that total of it looks like $5 million or so of one-time cost in the expense lines from the $2 million severance and then the others $3 million with aggregate. The $3 million, did that include the charitable contribution or was that just the [defies] and compliance as well.

Philip Flynn

Yeah. So I’d say the severance again was 2.5ish. We would note that advertising expenses were considerably higher and they won’t be necessarily recurring at that pace. Legal and professional fees were considerably higher it won’t be recurring at that pace. And that the other expenses, which include the charitable contribution down on the other category, but also we had write-up costs under the sub-debt, we had some expanded travel and training expenses at the end of the year all of that, we don’t think will necessarily repeat quite the same way as we move into 2014.

Scott Siefers - Sandler O'Neill & Partners

Okay, alright. So probably sounds like even more than the $5 million that gets called out in release and then I guess the bottom-line now is flat for 2014?

Philip Flynn

We’re very committed to the absolute flat on dollar terms.

Scott Siefers - Sandler O'Neill & Partners

Yeah, okay. Alright I think that does it so I appreciate it.

Operator

Our next question comes from line of Emlen Harmon with Jefferies. Your line is open.

Emlen Harmon - Jefferies

Hey, good evening, guys.

Philip Flynn

Good evening.

Emlen Harmon - Jefferies

Within your guidance, you call for the provision to be contingent on loan growth. So I understand there could be some provision put up for that, but also I mean, you guys had a fair amount of recoveries this year, you are also releasing some reserves. Can you help me understand how that provision that you use for loan growth interplays with what’s actually kind of happening underneath from a credit perspective?

Philip Flynn

Sure. So recall that for now basically 3.5 plus years. We had an improving credit quality. So we’ve been getting the benefit for some period of time, reserve releases driven by improving credit metrics that were more than enough to offset the need to provide for loan growth. That dynamic pretty much went away call it six months ago or so, a couple of quarters ago.

So over this last couple of quarters, we’ve continued to have very significant unusual recoveries. We don’t plan for that in the future. So apples-to-apples taking out to recoveries and also with charge offs particularly in the retail area moderating, we think that for what provisions at least for the coming year are very much going to be tied to what happens with loans.

So we expect pretty modest provisioning during the course of the year, particularly if we have mid-single digit loan growth. So we are still not anywhere near getting to a ‘normal part of the cycle.’ Loan provisions will grow for us and I believe for most banks over the coming years as we laid back into whenever the next cycle starts.

Emlen Harmon - Jefferies

Got you. Okay. Thank you. That's helpful. So I guess maybe think about kind of a fair way to think about will be to think about 2013 in total had $10 million in charge-offs, have you got a good loan growth may be you would trickle up a little bit from that, does that sound fair?

Philip Flynn

Well, a $10 million in provisions for the year.

Emlen Harmon - Jefferies

I am sorry. Yeah.

Philip Flynn

Yeah.

Emlen Harmon - Jefferies

Okay. And then how should we be thinking about the starting point for the NIM next quarter? I guess ex the interest recoveries seems like you guys were up 4 or so basis points on the quarter, just kind of want to understand how we get to your guidance for the year kind of as we progress through the year?

Philip Flynn

Sure. So part of that in the pick-up, there is a little bit of premium amortization that helped us well. But we would expect nonetheless rate to move up a little on long end, we've might seen more of that lift. What we have seen is continued competitive environment on lending. And so while we are putting on mortgages now at an even a better rate as things roll-off and we replace them, much of the commercial activity is still very competitive and that we expect to see modest erosion to the effective commercial yield over the balance of the year, but it should be relatively modest.

Emlen Harmon - Jefferies

Right.

Philip Flynn

So it would be fair to say we were pleased to see what happened in fourth quarter with the NIM, even backing out the interest recoveries. I mean it’s entirely possible that we might be seeing some stabilization. But it’s really too early to call that yet. So we think it’s prudent to think that we will have continued very slow erosion in the NIM in the coming quarters. So that could change.

Emlen Harmon - Jefferies

Got you. So when we think about your guidance that's more referring to what happens on a quarterly basis as opposed to what’s happening on an annual basis?

Philip Flynn

Right. I mean the NIM can move around as we all know quarter-to-quarter based upon other factors, particularly interest recoveries. But over the course of the year, we would expect some modest compression in the NIM. And the one thing we know is it won’t be smooth.

Emlen Harmon - Jefferies

Got it. Okay. Thanks a lot guys.

Operator

Our next question comes from the line of Dave Rochester with Deutsche Bank. Your line is open.

Dave Rochester - Deutsche Bank

Hey, good evening, guys. You mentioned you’re getting more inbounds on the M&A front and expecting more activity in general in the market. In terms of your ability to do deals this year; have you formally gotten out from under the constraints that you may have had under the BSA issues?

Philip Flynn

If we were formally out of those constraints, you would absolutely know it. So, the answer is no not quite yet.

Dave Rochester - Deutsche Bank

Okay.

Philip Flynn

We completed all the work as we’ve said, quite a while ago. And we feel like we are in a good place and we are awaiting regulatory confirmation.

Dave Rochester - Deutsche Bank

Got it. And does your expense guidance assume that you are going to complete the branch refurbish program in 2014 still or you kind of extending that a little bit into 2015?

Philip Flynn

We’ve actually -- that [Basel] program has evolved over this last three years. So, we expect that we will continue that program into ‘15 before it’s complete, but recall we’ve actually consolidated a number of branches. So overall the program has gotten a little bit smaller and we’ve gotten a lot better as time has gone on about being cost efficient. So, the bulk of it, at least 80% will be done by the end of this year and there will be some remaining next year.

Dave Rochester - Deutsche Bank

Got it. And just switching to the margin, I noticed the securities yield was up a little bit this quarter; you had mentioned securities premium earlier, I was just wondering what the dollar amount of that was this quarter and how much it may have supported the margin?

Chris Niles

It was about $2 million.

Dave Rochester - Deutsche Bank

$2 million in terms of decline this quarter?

Chris Niles

$2 million less premium amortization.

Dave Rochester - Deutsche Bank

Got you. Okay, great. And in terms of the expense for the quarter?

Chris Niles

Correct. The premium amortization expense declined by $2 million. So it helps.

Dave Rochester - Deutsche Bank

Perfect. And on mortgage banking, I know you mentioned that should decline next year or this year. What's a more normalized level of income from that business do you think? How much of the decline…

Chris Niles

Our estimate is if you look at the third and fourth quarter of 2013 that combined run rate is probably a reasonable forecast. It’s subject to a lot of market forces obviously but that's what we're assuming.

Dave Rochester - Deutsche Bank

Alright, thanks guys. I appreciate it.

Operator

(Operator Instructions). Our next question comes from the line of Peyton Green with Sterne Agee. Your line is open.

Peyton Green - Sterne Agee

Yes. Good afternoon. Thank you for taking my question. I was wondering Phil, last year sequentially the loan growth was much stronger than the first half of the year and it was harder to combine the second half. Would you think it'd be a little bit different coming in the ‘14, maybe flipped or what’s your guidance? I know historically in the first quarter, it's been a tough quarter historically for Associated to book much loan growth.

Philip Flynn

Given the shape of what happened in the fourth quarter, we're going to have good average loan growth in the first quarter. One of the other things that happened is as the mortgage refi boom come to an end, we tended to have these spikes in usage by our mortgage warehouse borrowers. That's significantly abated. So, I wouldn’t call it noise, but some of the noise of relatively large outstandings for short period as time is kind of out of the picture now. So there is a little less volatility month-to-month, quarter-to-quarter than what we were experiencing in the past.

As far as whether -- how we’re going to get this single-digit average loan growth, I would hate to try to prognosticate whether it’s first half or second half. This first quarter, like I said, looks pretty promising, but as opposed to a year ago, it’s significantly more competitive in the various geographies and asset classes that we deal in and not just from a pricing point of view, but also from a structure point of view which precludes us from wanting to participate in some of that. We’re continuing to run to the shaking up our portfolio with an eye toward the next credit cycle.

Peyton Green - Sterne Agee

Okay. And then maybe if you could put it, the outlook in the context of what the pipeline looks like, maybe compared to what it looked like six months ago?

Philip Flynn

Pipeline is in pretty good shape. Commercial real estate looks very promising. Our specialty businesses continue to do quite well. Commercial continues to have a very competitive environment particularly in the Chicago area. Our pipeline for the mortgage business is running in the $500 million to $600 million range, which is half or less from what it used to be. But overall, it’s in decent shape.

Peyton Green - Sterne Agee

Okay. All right, great. And then if you look at your guidance, I mean with the bigger risk being on the loan guidance and maybe the expenses coming better than you think in terms of flat, maybe they are down 1% or 2% or…?

Philip Flynn

I think the guidance that we have offered is we stand behind all of it. We think we will achieve what we have said. I wouldn’t wait one more than the other. I did say that we were happy with what happened with the net interest margin. Maybe it turns out a little better, we’ll just have to see as we like to say one quarter trend does not make.

Peyton Green - Sterne Agee

Sure. Okay, great. Thank you very much for taking the questions.

Operator

I’m not showing any further questions at this time. I’d like to turn the call back over to Phil Flynn for closing remarks.

Philip Flynn

Okay, thanks. Thanks for joining us today everybody. This past year’s strong performance was highlighted by balance sheet growth, as well as higher net interest income. We were able to modestly reduce our expenses and grow the bottom-line and we remain focused on deploying capital to build shareholder value. And we’re optimistic in our ability to continue to grow the franchise in 2014. So we’ll look forward to talking with you again next quarter. If you have any questions in the meantime, as always, give us a call. And thanks for your interest in Associated.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Everyone have a good day.

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Associated Banc-Corp (ASBC): Q4 EPS of $0.28 beats by $0.01.