Associated Banc-Corp's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Apr.17.14 | About: Associated Banc-Corp (ASB)

Associated Banc-Corp (ASBC) Q1 2014 Results Earnings Conference Call April 17, 2014 5:00 PM ET

Executives

Philip Flynn - President and CEO

Chris Niles - Chief Financial Officer

Scott Hickey - Chief Credit Officer

Analysts

Chris McGratty - KBW

Ken Zerbe - Morgan Stanley

Jon Arfstrom - RBC Capital Markets

Emlen Harmon - Jefferies

Stephen Geyen - D.A. Davidson

Scott Siefers - Sandler O'Neill

Peyton Green - Sterne Agee

Operator

Good day, ladies and gentlemen. And welcome to the Associated Banc-Corp’s First Quarter 2014 Earnings Conference Call. My name is Nicole and I will be your operator today. At this time all participants are in a listen only mode. Later, we will conduct a question-and-answer session at the end of this conference. Copies of the slides that will be referenced during today’s conference are available on the company’s website at associatedbank.com/investors. As a reminder, this conference call is being recorded.

During the course of today’s discussion, Associated’s 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’s website in the Risk Factors section of Associated’s most recent Forms 10-K and 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 please see pages 2 and 3 of 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.

Philip Flynn

Thank you. Welcome to our first quarter earnings conference call. Joining me today are Chris Niles, our Chief Financial Officer and Scott Hickey, our Chief Credit Officer.

Highlights for our first quarter are outlined on slide 2. These solid results were highlighted by robust loan growth and reduced expenses. As a result, we delivered net income to common shareholders of $44 million or $0.27 per share. We had a great quarter for loan growth as average balances increased 3% from the fourth quarter to $16.2 billion. Commercial loans drove most of the overall growth with a record quarter, while mortgage loans also contributed to this increase.

Net interest income excluding interest recoveries increased $1 million from the fourth quarter. We continue to defend the net interest margin which at 312 basis points has only compressed 5 basis points from last year's first quarter.

Core fee-based revenues were essentially flat and total non-interest income of $74 million was down only $2 million from the fourth quarter due to less gain on sale of assets and loans. However, we more than made up to the lost revenues with reduced non-interest expense, which declined $12 million from the fourth quarter.

We maintained the quarterly dividend at $0.09 per share and we repurchased $39 million of common stock or approximately $2.3 million shares. And our Tier 1 common equity ratio remains very strong at 11.2%.

Now let me share some detail on the main drivers of our first quarter earnings. Loans are highlighted on slide 3. Average loans grew $416 million or 3% from the fourth quarter to $16.2 billion. Growth during the first quarter was driven by record results in our commercial businesses and commercial real estate, which were up $420 million combined. For our retail business, growth in mortgage balances were offset by continued run-off in the home equity and installment loan portfolios.

Average commercial real estate loans grew by $171 million during the quarter to $3.9 billion. Multi-family loans provided most of the growth and continue to make up the largest segment of this portfolio. In addition, we also saw an increase in retail loan activity. From a geography standpoint, most of the CRE growth was in Chicago, St. Louis and Ohio.

Commercial and business lending average portfolios grew by $249 million or 4% during the quarter. Within this group, general commercial loans grew by $157 million or 3%. Our C&I loan growth continues to be driven by lending to manufacturing companies in our upward Midwest footprint.

Oil and gas, and power and utilities averages balances both grew during the quarter by a combined $132 million. And as mortgage refinance activity continued to slow, our mortgage warehouse portfolio declined $40 million from the fourth quarter.

Average residential mortgage loans grew by 2% in the first quarter driven by increased ARM production. First quarter loan production mix was 60% variable rate, up from 45% to prior quarter. In addition, with the refinance boom ending in the middle of last year, our production mix has shifted from 70% refinance earlier in 2013 to about 40% now. However, since mortgage rates still remain relatively low, we expect consumers to continue deleveraging into lower priced first lean mortgages.

We continue to sell substantially all of our 15 and 30 year production. And during the first quarter, our mortgage banking units sold $204 million of loans to the GSEs compared to $327 million in the prior quarter. The gain on sale of these loans was 2.11% compared to 172 basis points last quarter. Home equity installment loans continued decline although at a slower pace compared to prior quarters.

If you turn to slide four in addition to increased line commitments, our commercial clients also increased utilization of their lines in the first quarter. This contributed to our commercial loan growth although we note that this increase is partially seasonal. Commercial real estate line utilization of 64% has steadily increased each quarter as construction projects fund. Given current funding activity, we expect this to continue into the year.

Line utilization for our specialized lending areas also increased as our oil and gas segment booked a significant amount of fully funded deals compared to the prior quarter. This was partially offset by mortgage warehouse line utilization dropping from 29% in the fourth quarter to 24% this quarter.

Turning to deposits and funding, during last quarter’s earnings call we discussed our funding initiative to reduce collateralized municipal deposits, net work to transaction deposits, brokered CDs and institutional funds. And you’ll recall that near the end of the fourth quarter, we replaced these funding sources with lower cost longer-term financing in the form of five year putable variable rate federal home loan bank advances. As a result of that initiative, average deposit balances of $17 billion declined $891 million during the fourth quarter, although period end deposit balances of $17.5 billion actually increased $243 million from the end of the fourth quarter.

Turning to slide 5, net interest income declined $2 million from the fourth quarter. However, if you net out the interest recoveries that we had in the fourth quarter, it was up $1 million. In addition, the first quarter had $2 million less interest earned due to the day count difference that always existed in the first quarter.

Net interest margin for the first quarter was 312 basis points, down 11 basis points from the prior quarter but that was in line with what we’ve expected. Fourth quarter net interest margin of 323 basis points was inflated as you recall by approximately 8 basis points due to $4 million of interest recoveries. So year-over-year, the NIM is down only 5 basis points, which we believe speaks to our diligent management of margin.

Total asset yields declined 14 basis points from the fourth quarter and are being driven primarily by continued compression of commercial loan yields. Compression has actually slowed in our residential mortgage and investment portfolios.

Our aggressive liability management on the funding side continues to drive cost down each quarter. However with overall deposit cost of just 19 basis points and interest-bearing liability costs of 31 basis points, our ability to reduce these costs is becoming even more constraint.

Non-interest income is highlighted on slide 6. Total non-interest income for the quarter was $74 million, down $2 million from the fourth quarter and down $8 million from the first quarter of 2013. These declines are driven by lower mortgage related income as refinance activity is slowed. As expected, mortgage banking income of $6 million, decline $2 million from the fourth quarter and is down $11 million on a year-over-year basis.

Core fee based income which includes service charges on deposits, card-based income, insurance revenue, brokerage commissions and trust fees was essentially flat from the fourth quarter.

Asset gains decreased $2 million, as less net gains on real estate were realized in the first quarter. As we continue to evaluate consolidation opportunities and rationalize the footprint, we expect to see more real estate transactions flowing through this account.

Turning to slide 7, total non-interest expenses declined $12 million from the fourth quarter to $168 million. Quarter-over-quarter personnel expense decreased $4 million as our FTEs continued to decline and are now at their lowest levels since mid 2010. In addition, the fourth quarter had over $2 million in severance cost.

Business development and advertising expense declined $3 million, mainly related to less media advertising in the first quarter. Legal and professional fees were down $2 million from the prior quarter, primarily related to declining consultant costs. Losses other than loans declined $1 million as we have more favorable than expected resolutions to the few litigation matters.

Turning to slide 8, we had another quarter of improving credit quality as net charge-offs, non-accruals, past dues and potential problem loans all declined. Net charge-offs of only $5 million were inline with the prior two quarters. Potential problem loans declined 7% to $220 million this quarter and are down 36% from a year ago. The level of non-accrual loans to total loans continued to improve to 1.08% from 1.17% at the end of the fourth quarter. And total non-accrual loans of $178 million were down 4% from the fourth quarter.

Our total allowance for loan losses equal 1.63% of total loans and covers over 150% of period end non-accrual loans. For 2014, we are reporting a new roll up called provision for credit losses in our consolidated financial statement. This roll up includes provision for loan losses and unfunded commitments. The provision for credit losses was $5 million for the quarter and was primarily driven by loan growth.

Turning to slide 9, our capital ratios continue to remain very strong with the Tier 1 common equity ratio of 11.2%. We are well capitalized and we are in excess of the Basel III expectations on a fully phased-in basis. Our priority for capital deployment continues to focus on organic growth. We’ll ensure that our dividend stays inline with earnings growth. And we’ll be disciplined in evaluating other opportunities to optimize our capital structure over the coming year.

On slide 10, we want to discuss our outlook for the remainder of 2014. We are slightly increasing our guidance on average loan growth to 6% to 8%. We expect average deposits and other funding to 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 the decline in mortgage banking income will be partially offset by other fee growth. And as we said before, non-interest expense is expected to be flat to last year. Finally our provision for credit losses will grow based on loan growth.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes from the line of Chris McGratty of KBW. Your line is now open.

Chris McGratty - KBW

Good afternoon guys.

Philip Flynn

Hey good afternoon Chris.

Chris McGratty - KBW

Chris on your margin guidance, I was wondering if you could help frame the degree of compression kind of going forward. I am interested both in kind of when you think the margin maybe [soft] in, is it around 3% kind of when and where? Any guidance would be great? Thanks.

Chris Niles

It’s hard to call the long-term. As you’re aware Chris, many loans that come on today come on at spreads that are frankly below our estimated margins today. So effectively new loans are inherently dilutive [assumingly] and LIBOR rates remain where they are in the coming year. So we’ve not put a floor out there, although I’d like to think that the very incremental dilution you’re seeing to the margin will be the case so long it stays at these levels. Those loans are growing reasonably, I don’t expect significant margin movement quarter-to-quarter, but there will be a continual slow grinding loan to stay at low rates.

Scott Hickey

And just remember if you put aside the fourth quarter where we had the interest recoveries, the third quarter net interest margin was one basis point higher than what we reported for the first quarter. And if you go all the way back to the first quarter of ‘13, it was 5 basis points higher. So, absent the noise of interest recoveries, this thing has been declining 1 or 2 basis points on average for the last year or so.

Chris McGratty - KBW

Any perspective Chris on what the new kind of blended origination yields were in the quarter versus kind of what was on the book already?

Chris Niles

LIBOR plus 250 to 300 is a reasonable range for many of the credits that we are [originating] and unfortunately those are both below our, but certainly right at or below our margin. Much of what we originate is on a one month LIBOR basis.

Chris McGratty - KBW

And how much of the growth Chris was sort of national credits in the quarter?

Chris Niles

It was a portion of the growth within the commercial, but again we have broad-based growth, we do very little mixed activity within our CRE portfolios and obviously our residential portfolio results are home grown.

Chris McGratty - KBW

Okay. Just one last housekeeping the (inaudible) income kind of ticked up in the quarter, is this the run rate that we should be using kind of going forward?

Chris Niles

No, (inaudible) is idiosyncratic based on unfortunate events. And so we don't project it perse it’s just a background number.

Chris McGratty - KBW

Okay. Thanks a lot.

Operator

Thank you. Our next question comes from Ken Zerbe of Morgan Stanley. Your line is now open.

Ken Zerbe - Morgan Stanley

Yes thanks. First question I had just in terms of capital deployment, I saw right on the press release you put in a comment that you're looking for opportunities to deploy capital. Let's assume that's probably M&A. And I would say can you just address your comments. Have you seen more activity in M&A versus where you were last quarter and was there a reason why this is now popping up in the press release? Just trying to get a sense of your views on how M&A potentially is changing over the last couple of months?

Chris Niles

Sure Ken. So a couple of things, we've said all along that our priorities for capital use to use are to fund organic growth in the company, to pay a competitive dividend, to look for other opportunities, to deploy capital through acquisitions and finally share buybacks. For this past year and a half, we have been steady buyers of our shares and we will continue being steady buyers of our shares. With the resolution of our BSA/AML matter, we are in a better position now than we were to be able to executive on a potential transaction. So that’s why we mentioned that and it’s something we have been mentioning all along.

As far as activity we are both actively out talking to potential banks and other institutions as well as getting more inbound calls. I think it’s not a secret that we have capital to deploy and that again with the resolution of the regulatory matter, we’re in a position to execute.

Ken Zerbe - Morgan Stanley

Got it, okay. Next question I had just in terms of the loan growth guidance, it seems that the guidance was going up a little bit more than sort of what this quarter alone would suggest. Has the outlook materially changed? I mean obviously as far as the line utilization rates picking up a little bit, is there something meaningfully different in the environment or you kind of going just the activity that we have seen this quarter and extrapolating that going forward?

Philip Flynn

Well you might want to look at -- we report our loan growth on averages which we think is the best to do it but you might want to look at the point to point growth. So we had point to point growth of $545 million which frankly is more than what we had expected three months ago. So, if you look at that where we ended the first quarter versus where we started, we had very robust loan growth in this first quarter, I mean on an annualized basis certainly very robust. We don’t expect to continue at that cliff but this was a much stronger first quarter than what we’d originally thought and that certainly affects our outlook for what the average loan growth for the whole year will be.

Ken Zerbe - Morgan Stanley

Got it. Meaning the second, third and fourth quarters might actually be consistent with what you thought before. Okay that really makes sense.

Philip Flynn

Yes.

Ken Zerbe - Morgan Stanley

Okay. And then just a final question, advertising down this quarter, do you actually not the first bank to have lower advertising? Can you just remind us, is there something unusual about fourth quarter where banks generally advertise a lot more and less in first quarter, I was just curious about the seasonality there?

Philip Flynn

Well, I don’t know about other banks but for us, we initiated a significant launch of our brand campaign during the fourth quarter, so we spent more money on that. And our pattern has been and will be that we generally do spring and fall pushes on advertising, on brand advertising. So those would be the seasonal effect that you’d see it associated.

Ken Zerbe - Morgan Stanley

Got it. Okay, perfect. Thank you.

Operator

Thank you. Our next question comes from the line of Jon Arfstrom of RBC Capital Markets. Your line is now open.

Jon Arfstrom - RBC Capital Markets

Thanks. Good afternoon guys.

Philip Flynn

Good afternoon John.

Chris Niles

Good afternoon John.

Jon Arfstrom - RBC Capital Markets

Just following up on Jim’s question on C&I growth, I mean it does seem like something has changed when you look at the last couple of quarters. And I know a lot of your book is upper mid-western type credits, so anything specific in the C&I growth or is this just broad based?

Philip Flynn

The growth that we had this quarter and in the fourth quarter was broad-based. I mean we’re quite pleased to see it across all of our business lines. So our general commercial lending has been strong, commercial real estate was strong and has been strong for a while, our specialized units had very strong growth, particularly this past quarter. And the mortgage business were just being or for originating just right mortgages that we can put in our balance sheet has also been good. So, it’s been a very good six months for loan growth.

Jon Arfstrom - RBC Capital Markets

Okay. On your 2014…

Philip Flynn

We have seen purchases in there, there was nothing unusual, this was organic growth that we generated.

Jon Arfstrom - RBC Capital Markets

Okay. And I guess the other thing you mentioned fewer loan payoffs during…

Philip Flynn

Yes, there was less loan payoffs here and there. And line utilization as you saw in the chart is picking up. It looks like there is some seasonality particularly in the general commercial space for the first quarter. So, we’ll see how that plays out. But we don’t expect that to materially impact us.

Jon Arfstrom - RBC Capital Markets

Okay. On the 2014 outlook slide, you gave us, we could probably solve for this, but you gave us the loan growth number and the continued NIM compression. Is it safe to assume that you were assuming modestly higher net-interest income that would track with loan growth?

Philip Flynn

We’re assuming growing dollar NII over the course of the year.

Jon Arfstrom - RBC Capital Markets

Okay, good. That helps.

Philip Flynn

So, you want it definitely as you look at our first quarter compared to the fourth, back out $4 million of net -- of interest recoveries that artificially popped up NII in the fourth quarter, we had a much lower amount in the first. And there is a day count adjustment of a couple of million as well.

So, NII actually taking up the anomalies of the fourth quarter has got a nice trend.

Jon Arfstrom - RBC Capital Markets

Okay. And then just one for Scott, if I can.

Philip Flynn

Scott, didn’t think he was going to have to say anything today.

Jon Arfstrom - RBC Capital Markets

Alright. Yes, the credit guys are not center stage any longer. But Scott anything you are seeing from a credit point of view out there that concerns you things that you are maybe steering the bank away from?

Scott Hickey

Yes sure. The leverage market’s been rather frowsy at the higher multiple levels and we have stayed away from those high five, six multiple type deals. So we have definitely been out of that market. I think in the real estate side you would read a lot about multifamily, particularly on the construction side, we monitor that very closely as well. So those would be the two areas that I think there is a fair amount of activity where we have close monitoring within the company as to how we are going to play in those markets.

Jon Arfstrom - RBC Capital Markets

Okay. Alright, thanks for the help guys.

Philip Flynn

Sure.

Operator

Thank you. Our next question comes from line of Emlen Harmon of Jefferies. Your line is now open.

Emlen Harmon - Jefferies

Hey, good evening guys.

Chris Niles

Hey, good evening.

Emlen Harmon - Jefferies

Continue on the commercial growth theme I mean any, we did see the utilization rate balanced this quarter, anything you are seeing that would indicate that there is kind of a C change in use of utilizations and maybe we start to see that heading the other way for a while?

Philip Flynn

Well that would be nice I think it’s a little early to call that. Certainly if you look at slide four commercial real estate will continue to decline because we have something in the neighborhood of $0.5 billion of unfunded construction commitments which we will be funding up. At some point that will start to top because you’ll start to get churn in the portfolio as construction loans mature and most likely get taken into its permanent loan markets. On the specialized side, the oil and gas loans really vary, sometimes when they come on, they fund very quickly, other times they fund more slowly depends on drilling activities. So it’s hard to predict.

Commercial is kind of a wildcard. So we’ve been hanging around in the mid 40s. We’ve picked up here by a couple of percent in the first quarter. It’s very hard to predict whether that will continue. But overall with what’s going on with CRE the overall utilization rate probably has a bias towards going up at this point.

Emlen Harmon - Jefferies

Got it. Okay thanks. And then just one kind of quick housekeeping item Chris, have you guys said what the effect of payroll taxes was just on the personnel line this quarter?

Chris Niles

It is a couple million bucks.

Emlen Harmon - Jefferies

Okay. Perfect, thanks guys. Appreciate it.

Operator

Thank you. Our next question comes from line of Erika [Naharnia] of Merrill Lynch. Your line is now open.

Unidentified Analyst

Hey guys this is Ibrahim. Just a quick question on your expense sort of guidance for being flat compared to 2013. When we look at the 1Q run rate which as you have pointed out included some seasonal payroll impact, maybe weaker marketing spend. We are already at level which is below 2013, is the expectation expenses that that line is going to bounce around or should we see expenses relative to the 1Q run rate trend lower from hear?

Chris Niles

Yes, we’re not changing our guidance which would be basically about $681 million actually to be exact, which was what we had last year. And expect that this year. So, yes we’re running at slightly below that pace if you were to annualize the first quarter. But I mean I would remind you that it’s a fair side company, expenses can move around from quarter to quarter. So that's why we tend to give guidance on an annual basis.

Philip Flynn

We will have a marketing campaign that will hit second quarter numbers. We will have a follow up marketing plan to hit later numbers et cetera.

Unidentified Analyst

Got it. And I guess what I was trying to get to is are we getting to a point where sort of the investments we have been making and you point this out on slide 7 on the technology spend et cetera. Are we getting to a point where that’s sort of falling off and we actually start seeing expenses falling to the bottom line.

Chris Niles

I think looking at slide 7, you'll see the headcount continues to come down as we've implemented these efficiency initiatives. And we would expect that to start running through the numbers overtime as the investment start to fall off. But we continue to make investments and we are continuing to buy and build new technology solutions.

So, we're not speaking quite yet as per the timing, but the trends continue and they are moving in the right direction.

Unidentified Analyst

Alright. Thank you very much.

Operator

Thank you. (Operator Instructions). Our next question comes from Stephen Geyen of D.A. Davidson. Your line is now open.

Stephen Geyen - D.A. Davidson

Hey, good afternoon.

Philip Flynn

Good afternoon.

Stephen Geyen - D.A. Davidson

Just looking at the balance sheet, just curious what the consider kind of an optimal balance sheet as looking at some of the liquidity ratios. What are you focused on?

Philip Flynn

Sure. So, I think we feel very comfortable that we have an LCR compliant profile today. And we have securities position that arguably has us well situated to address certainly our needs. But also potentially to the question earlier to absorb other that might not have liquidity profile they need or the liquidity profile suggestions of the large institutions. But I think we have potentially some excess liquidity that we would like to be deployed as we grow our balance sheet going forward.

From a peer capital perspective, I think we say again that we feel we are very, very well capitalized. And so there is room for that to move down again through acquisition or other action overtime.

Stephen Geyen - D.A. Davidson

Okay. And maybe a follow up question on the loan yields, just curious with the renewal rates on card loans, are you getting the same or better pricing on the loans?

Philip Flynn

We have a nice dynamic in our renewal book of business which tends to be smaller size and concentrated in our regional and to some extend more rural markets in Wisconsin that has a slightly higher average yield and those are still renewing at a reasonable rate and we are pleased by that and that helps sustain the margin. Clearly our new origination is that the margin and again I mentioned earlier a lot of that comes in larger dollar size and that’s into often that to become 2.5 complete under over LIBOR.

Stephen Geyen - D.A. Davidson

Sure. Okay and I guess last question. Given the competitive pricing on loans, have you adjusted how you look at the risk adjusted return on capital as far as credit and maybe their contribution from fee income, now that you have made some improvements to the corporate services, I guess over last couple of years?

Philip Flynn

We have been running the (inaudible) model here for the last two years and we continue to find that model over time, but I think its healthiness move the business in the right direction and clearly our bankers are taking that into consideration as we are pricing new loans. Bankers here from the top of the house all the way through the relationship managers are paid [such line of] metrics of earnings and returns and that their relationship manager level it’s net income and risk adjusted return on capital.

So they are highly incented, if they are going to do a lower priced higher quality transaction to make sure that they sell other services in order to get a decent return.

Stephen Geyen - D.A. Davidson

Okay. Thank you.

Operator

Thank you. (Operator Instructions). Our next question comes from line of Scott Siefers of Sandler O'Neill. Your line is now open.

Scott Siefers - Sandler O'Neill

Good afternoon guys.

Chris Niles

Good afternoon Scott.

Scott Siefers - Sandler O'Neill

I guess Chris, probably best for you. Could you talk a little bit or a discussion in a little more detail that deposit strategy that you guys had talked about last quarter and then that Philip you alluded to early on in the call, you guys have moved the loan-to-deposit ratio pretty quickly. I know there is the end of period dynamic with deposits I mean come up whereas averages were down. So, I guess I’m just curious so where are you in that strategy, how much of the quarter-to-quarter change in deposits was seasonality and where do we go from here on that factor?

Chris Niles

Well, there is a typical seasonal outflow January, February and there is rather first quarter on core DBA from businesses, we saw that. But in addition to that I think as we mentioned at the end of December of last year, we put on the federal home loan bank advances and re-pricing particularly institutional and large dollar size [network] deposits in a way that we thought would intense some of them to finding other home and that happened over the course of the quarter.

A little bit to our surprise some of it came back at the end of the first quarter. And again, there is a little bit of uptick at the end of quarters typically. But we were surprised that despite our efforts to re-price and displace and replace funding, balances came back at the end of the quarter to essentially where they had ended the last quarter.

So frankly we thought we would have more of an impact on our absolute balances and we did. The averages were consistent with our expectation; the pop back after the end of the quarter was I guess the [welcome surprise].

Scott Siefers - Sandler O'Neill

Yes. Okay good, that’s helpful. I guess it’s yes, good problem to have, if nothing else.

Chris Niles

Yes. And I think the FHLB borrowing program just as a reminder has an all in average cost today of less than 10 basis points and so it would help quite nicely from overall liability cost. And we also took out our senior notes that we had during the quarter. So the combination of reduced borrowing cost essentially the federal home loan bank was all refinanced and re-priced from what we had last year into the first quarter. We took out the debt and we lowered deposit cost all contributed to obviously helping us defend the margin.

Scott Siefers - Sandler O'Neill

Yes. Okay perfect. And then if I could jump a little bit back to the line utilization rates, obviously as we’ve discussed pretty big jump across basically every category. I’m just curious what you guys consider sort of typical line utilization rate, I’m concerned mostly with the commercial side, but going to the other portfolios as well that’d be helpful too?

Philip Flynn

All right. I think it wasn’t that long ago and I have been a banker for a long time that you would have been looking at low 50s, right? 55, 53; in this economy that we did it now for a while, everybody’s utilization rates have ticked down meaningfully below 50%. I would think in a more normal environment, you would be north of 50 on the commercial side, and we’ve still got our ways to go even with the pickup that we have.

So particularly for bank like us, I mean we are not a big player in unfunded large corporate deals, that’s not really what we do. So there is still a [resistance] on the part of many businesses to make significant investments. You have also got the dynamic, which has been talked about many times of lots of cash on corporate and middle market balance sheets to be deployed before borrowings pickup. And we still haven’t seen much of that yet either.

Scott Siefers - Sandler O'Neill

Yes. Okay that’s perfect. I appreciate it.

Operator

Thank you. And our next question comes from the line of Peyton Green from Sterne Agee. Your line is now open.

Peyton Green - Sterne Agee

Yes, good afternoon. Phil, I was wondering maybe if you could add just a little color on the commercial loan growth and I apologize if I missed this. But would you attribute and certainly the line utilization information is very helpful. But would you attribute the success, the calling effort really getting more traction or and broadening out of customers or were you getting more business from existing customers?

Philip Flynn

I think it’s a combination of many things, Peyton. I think we had -- we have a calling officer base that is well established here now. We haven’t been doing a lot of hiring, so it’s not like we have bunch of new people, so people are well established in their calling routines. I think that’s paying off. We’ve had very good results in our specialized businesses, commercial real estate has been doing very well now for a long time. And as those construction loans ramp up, we obviously get outstandings from those. So, it is quite broad-based. What it really isn’t is, the economy generating a whole lot of loan activity for us or anybody. This is generally taking share from someone else.

And we’ve had for example, very good results in commercial banking up in the Twin Cities. We hired some very good people up there over the last couple of years and they’ve been doing a very good job of taking some sizable accounts from some of our competitors out there. That’s the anecdote.

Peyton Green - Stern Agee

Okay. And so really no change in your ability to grab business from others, I mean you still see pretty good opportunity there, is that fair?

Philip Flynn

We do, although as Scott was saying earlier, we are very disciplined about what we are building here as far as the loan portfolio. So, we are seeing a way from quite a bit of the frontier, private equity driven, higher leverage deals that’s not where we’re playing to any great extent today. So we are leaving some potential loan business on the table that perhaps others are picking up.

Peyton Green - Sterne Agee

Okay. And then maybe in your calling efforts, I mean do you get any sense that this will be a better capital spend year by commercial customers or do you still feel like they are someone under the desk and not really coming out?

Philip Flynn

Well, if we see utilization continue into the second quarter and pass then, then perhaps we can start to say companies are getting a little more aggressive on capital spending. I still think it’s a little early to declare victory on that.

Peyton Green - Sterne Agee

Okay, great. Thank you for taking my questions.

Philip Flynn

Of course.

Operator

Thank you. I’m showing no further questions at this time. I would like to hand the call back over to Mr. Phil Flynn for any closing remarks.

Philip Flynn

Okay. Well thank you for call and thanks everybody for joining us today. Just to close, we’re really happy with the first quarter results. And we’re quite optimistic about the rest of the year, we’re off to a very good start. So we’ll look forward to talking to you next quarter. And as always, if you have any questions in the meantime, give us a call. And thanks again for your interest in Associated.

Operator

Ladies and gentlemen, this concludes the Associated Banc-Corp first quarter 2014 conference call. You may all now disconnect. Have a great day everyone.

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