Philip Flynn - President & CEO Chris Niles - CFO.

Scott Siefers - Sandler O'Neill & Partners Dave Rochester - Deutsche Bank Chris McGratty - KBW Emlen Harmon - Jefferies Jon Arfstrom - RBC Capital Markets Terry McEvoy - Stephens.

Welcome to Associated Banc-Corp's Fourth Quarter 2015 Earnings Conference Call. My name is Manny and I will be your operator today. [Operator Instructions]. Copies of the slides 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, Associated management may make statements that constitute projections, expectations, beliefs or similar forward-looking statements. Associated's actual results could differ materially from the results anticipated or projected in any such forward-looking statements.

Additional detailed information concerning the important factors that could cause Associated's actual results to differ materially from the information discussed today is readily available on the SEC website and the risk factor section of Associated's most recent Form 10-K and any subsequent SEC filings.

These factors are incorporated herein by reference. For a reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please see the press release financial tables. Following today's presentation, instructions will be given for the question and answer session.

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

Thank you and welcome to our year-end earnings call. Joining me today, as usual, are Chris Niles, our Chief Financial Officer and Scott Hickey, our Chief Credit Officer. So our 2015 highlights are outlined on slide 2. We grew our balance sheet to record levels.

We diversified our revenue stream with a successful insurance business acquisition and we kept our expenses flat. Average loans of $18.3 billion were up 8% from 2014. Commercial and business lending was up 8%, commercial real estate was up 6%, residential mortgage loans were up 14%. Average deposits of $19.9 billion were up 13% from 2014.

We've grown our deposits significantly since 2011, around the same time we began enhancing our branch footprint and investing in new mobile technology. In 2015, we saw our deposit growth accelerate. Given the persistent low rate environment during 2015, net interest income declined $5 million and net interest margin continued to compress.

We saw a larger than anticipated NIM decline, driven by increased commercial loan yield compression. But despite those trends, the margin has stabilized over the past three quarters. Non-interest income increased $38 million from 2014 due to our insurance acquisition and higher mortgage banking revenues.

The Ahmann market transaction added property and casualty scale to our legacy benefits insurance business. We delivered on our commitment to expense discipline. When you adjust for the acquisition, expenses have been essentially flat for the past four years.

We've kept expenses in check, while we significantly invested in our branches and in new technology solutions. Net income to common shareholders was $181 million or $1.19 per share, with a return on average Tier 1 common equity of 9.9%. We returned capital to our shareholders during 2015 through dividends and share repurchases.

We repurchased a total of $93 million or 5 million shares of common stock and we increased our dividend on common shares for the fourth straight year. 2015 loan details are highlighted on slide 3. Average loans grew $1.4 billion or 8% from a year ago and are up nearly $5 billion or 37% from 2011.

The commercial and business lending portfolio grew by $540 million or 8%. Over the past five years, we've rebuilt and diversified our commercial loan portfolio to include several specialized commercial lending businesses. This growth has slowed in 2015, as several of these businesses have matured.

Commercial real estate lending has been a consistent contributor to growth over the past five years and in 2015 average CRE loans grew $232 million or 6%. Residential lending has been a significant driver of our growth and average balances were up $675 million or 14% for the year.

We remain primarily an ARM lender, with ARMs accounting for approximately 70% of our residential mortgage portfolio at year end. Late last year, Associated was again recognized as the number one Wisconsin mortgage lender in 2014, marking our seventh consecutive year of being in the top spot. Our mortgage servicing portfolio is about $8 billion.

Overall commercial growth was again driven by solid performance from our specialty businesses. Particularly pleased by the early growth of our newest niche real estate investment trust lending which accounted for the majority of net growth in general commercial loans.

During 2015, our home equity and installment portfolios continue to run off, although at a much slower rate than in prior years. Overall, our loan mix has not changed from prior years. Our target is to be roughly a third consumer, commercial and commercial real estate.

And for the year, commercial accounted for about 39% of the loan book, consumer 38%, commercial real estate 23%. Loan details for the fourth quarter are on slide 4. Average loans grew $90 million in the fourth quarter to $18.5 billion and this represents growth of less than 1% quarter over quarter and 7% year over year.

Residential lending was the largest growth contributor in the fourth quarter. Our mortgage business is focused in our branch footprint; Wisconsin, Illinois and Minnesota. The growth of the residential portfolio says a lot about the economy in the upper Midwest.

People are working and have the confidence and the credit strength to take out or refinance mortgages. We expected softer loan growth during second half of the year and we saw commercial and business lending activity decline in both the third and fourth quarters. Throughout the past year, we've discussed the intense competition in commercial lending.

We model the risk and return on every transaction. We're prepared to pass on opportunities that are not expected to deliver long-term double-digit risk-adjusted returns. At times, these can be tough conversations, but we're committed to delivering long-term shareholder value and believe this discipline is appropriate.

Commercial real estate was a solid contributor again this quarter. Balances were up $113 million. We recently announced new commercial real estate leadership. Breck Hanson has been promoted to Vice Chairman and will retain the title of Chicago Market President, focused on customer relationships.

We rebuilt our real estate portfolio under Breck's leadership and we're pleased he will continue as a key leader within the bank. Paul Schmidt has succeeded Breck as head of our Commercial Real Estate effort. Paul has over 30 years of banking experience, including extensive experience in commercial real estate.

I would like to spend a few minutes on our oil and gas portfolio which begins on slide 5. This business represents 4% of our total loans and is focused exclusively on the upstream sector which means that 100% of our loans are reserve secure. We're not in the service, midstream or refinery businesses. That's an intentional strategy on our part.

We lend to small and medium-sized enterprises, about 40% of which have private equity sponsorship. The book is comprised of about 50 credits and we're participant in almost all of these as shared national credits.

As you can see in the lower left of the slide, we've increased our reserves against these loans over the past year, as prices have continued on their downward trend. Addressing our loan-loss reserves for oil and gas, please turn to slide 6. As you can see, the loan outstandings have remained relatively flat.

This is a function of both the reduction in borrowing basis, as prices have declined and the fact that customers don't need to borrow in order to support expansionary drilling activity. The top table reflects risk rating migration, as the underlying commodity prices have declined.

We believe it's prudent to recognize the current market prices when we evaluate credits. The top table illustrates the increase in criticized, classified and non-accruing oil and gas credits. The middle table on the slide, provides some perspective on oil and gas, relative to the rest of the commercial loan portfolio.

As you can see, the increase of potential problem loans has been driven primarily by the oil and gas business. All other commercial potential problem loans have remained relatively stable over the past year. The bottom chart reflects the build-up of the energy reserve over the past five quarters and also calls out the related specific reserves.

We understand this is a cyclical business. We believe we're reserving appropriately. If prices remain at these levels or lower, we expect further downward risk ratings migration and additional reserves. Slide 7 shows the quarterly utilization trend of our commercial lines. Commercial and business lending utilization declined 2% from the third quarter.

The drop was due to seasonal declines in working capital and mortgage warehouse and the decrease mirrors what we've seen in prior years. Fourth quarter utilization was flat to the prior year's quarter. Commercial real estate line usage of about 55% was down 3% from the prior quarter. The decline was due to year-end construction closings and payoffs.

Average CRE construction loans declined in the fourth quarter, as projects stabilized and paid off. During the same period, we closed on a number of new construction deals which usually start with low initial fundings. We highlight our deposit growth on slide 8.

Our continued focus on the customer experience has allowed us to gain market share in a competitive and transforming industry. Per the 2015 FDIC summary of deposits report, we grew deposits in Wisconsin by over 10%, grew nearly 25% in Illinois, nearly 8% in Minnesota. In fact, we outpaced the total deposit growth across our footprint.

Average fourth quarter deposits were up $2.1 billion from the year-ago quarter. Our year-over-year growth was driven by low-cost deposits. Money market, interest-bearing demand deposits and savings products grew by $1.4 billion or 11%. These products had a weighted average cost of only 16 basis points in 2015.

Time deposits, our most expensive source of deposit funding were modestly up in 2015. In 2016, we expect to maintain a loan to deposit ratio under 100%. At the end of the fourth quarter, that ratio was just under 90%. Turning to slide 9, full-year net interest income was $676 million, down $5 million or 1% from 2014.

Over the past four years, we've seen steady compression on asset yields of about 20 to 30 basis points per annum in the declining rate environment. On the liability side, we've managed funding costs generally lower. We've held interest-bearing deposits costs to about 20 basis points for the past three years, while we've been growing deposits.

Last month, we announced our plans to redeem $430 million of senior notes at the holding company during the first quarter of this year. And we remind you that we issued $500 million of senior and sub notes at the holding company in November of 2014 to pre-fund this redemption.

Turning to slide 10, net interest income was up $1 million from the third quarter. Net interest margin for the fourth quarter was 2.82% and flat to the prior quarter. The average yield on commercial loans increased 4 basis points from the third quarter to 3.28%.

This was driven by $2 million of interest recoveries and deferred fees taken in the fourth quarter. This activity added 3 basis points to the net interest margin. On the liability side, we continued to manage interest expense. In the fourth quarter, the cost of interest-bearing liabilities was up only 1 basis point.

Looking ahead to 2016, we expect the Fed fund rates to gradually increase and we expect that NIM will modestly increase as well. Annual non-interest income is highlighted on slide 11. Total non-interest income for 2015 was $328 million, up $38 million from the prior year. Core fee-based income was up $29 million in 2015.

We're pleased with the insurance business acquisition and its contribution to our 2015 results. The acquisition grew our insurance revenues from under $50 million to $75 million in 2015. We've positioned ourselves to be one of the leading benefits brokers across the Midwest and one of the top 50 overall insurance brokers in the country.

Service charges on deposit accounts were down $3 million for 2014, driven by changes in customer behavior and technology improvements which enable our customers to better manage their finances. About half of our deposit customers are active online banking users.

Mobile banking is our fastest-growing digital platform and about 20% of our depositors have signed up. Mortgage banking increased $11 million in 2015 on higher volumes and margins. Other non-interest income includes $8 million in gains for the year, related to the restructuring of our investment securities portfolio.

We've sold nearly $1.6 billion of Fannie and Freddie Mac securities and purchased a similar amount of Ginnie Mae mortgage-backed securities. These bond swaps lowered our risk-weighted assets and improved the liquidity of our investment portfolio. Turning to slide 12, fourth quarter non-interest income was up $2 million from the past quarter.

Mortgage banking income increased $2 million due to higher volumes and positive interest rate marks. Security gains were driven by the continued restructuring of the investment portfolio. Insurance commissions were flat to the third quarter.

We remind investors that the insurance business is seasonal and commissions tail out over the back-end of the year and increase during the front-end the year. Looking forward to 2016, we expect non-interest income to be flat to 2015, adjusting for the $8 million in investment securities gains. Annual non-interest expense is highlighted on slide 13.

We delivered on our commitment to keep expenses below $700 million. We finished the year at $697 million. We said the insurance business acquisition would add about $20 million in expense. Adjusting for this, expenses actually declined in 2015. We've kept expenses flat for four consecutive years, while continuing to invest in our franchise.

Personnel expense increased $14 million, almost entirely related to the insurance acquisition. Over the past five years, we've invested in talent to support our business and footprint expansion and to expand our risk compliance and technology teams. We're making very substantial investments into the Company, particularly in the technology space.

Technology and equipment expenses increased $4 million to $84 million in 2015. We don't expect this trend to reverse. We recognize we'll have to continuously invest in technology in areas that support online and mobile customer solutions, risk and compliance and cyber security to just name a few.

We've also been diligent about investing in technologies to support the efficiencies in our business. Overtime, we expect to reduce our efficiency ratio to our peer levels. Through our investments, we think we have capacity to grow the bank going forward, without adding staff.

Slide 14 shows that non-interest expenses were up $3 million from the third quarter. Business development and advertising expenses were up $2 million due to our fall advertising campaigns. FDIC expense was also up $2 million, as growth in loans outstanding contributed to higher FDIC risk premium.

Personnel expense was impacted by three significant items in the fourth quarter. First, expenses declined $3 million due to the effect the additional provision taken in the fourth quarter had on onset of compensation plans. Second, they declined due to reduced costs related to branch consolidations.

And third, these reductions were partially offset by a $3 million increase to employee health and benefit costs. The net effect was $1 million reduction in total personnel. In 2016, we expect expenses to be flat to the prior year again. The Company's 2015 tax expense decreased by $4 million.

The effective tax rate remained largely unchanged at about 30%. And going forward, we expect the marginal tax rate to stay in the low 30%s. On slide 15, we show our annual credit quality trends. Most recent year's increase of potential problem loans is driven by the migration in the oil and gas portfolio.

Non accruals have flattened, represent about 1% of total loans, down from 2.5% five years ago. We continue to see very low levels of net charge-offs. But at our current levels, any single meaningful credit will move that trend. Over the past five years, our allowance to total loans has slowly trended down to a normalized level.

On slide 16, we'll show our quarterly credit quality trends. Potential problem loans increased $38 million this quarter, driven by the migration within the oil and gas portfolio. We expect to see some level of continued negative migration in ratings, if the current pricing environment persists.

The level of non-accrual loans to total loans increased to 95 basis points and is down from 101 basis points a year ago. Fourth quarter non-accruals of $178 million were up $31 million, due to couple of downgrades in the general commercial book and a small oil and gas deal. Net charge-offs of $8 million were flat to the third quarter.

In general, we believe our portfolio strategy is consistent, with an overall net charge-off rate of 40 to 60 basis points through the cycle. The total allowance for loan losses equals 147 -- 1.47% of total loans and covers 154% of period end non accruals.

The provision for credit losses was $20 million in the fourth quarter, $38 million for the full year. In 2016, we expect provision to increase, along with loan growth and potential changes in credit quality. So on slide 17, we want to summarize our 2016 outlook. We expect high single-digit annual loan growth.

We expect to maintain our loan to deposit ratio under 100%. We expect NIM to modestly increase, assuming the Fed continues to move rates up over the course of the year. If the Fed doesn't raise rates, we expect our NIM to be relatively flat to 2015.

Non-interest income is expected to be flat to 2015, adjusted for the $8 million in investment security gains. However, our trust and brokerage fees may come under some pressure, given the current market volatility. Non-interest expense is expected to be flat to 2015 and we'll continue to deploy capital for our stated priorities.

Finally, loan loss provision is expected to grow, based on loan growth and changes in risk rate or other indications of credit quality. With that, we'll open it up to your questions..

[Operator Instructions]. Our first question is from Scott Siefers with Sandler O'Neill. Please go ahead..

First, just a question on the margin, maybe best for Chris. And so, Phil, you suggest that if we don't get any additional Fed increases, the margins still be flat year-over-year.

I imagine a lot of that is just the favorable benefit of the notes redemption, offset by maybe some continued, just natural compression? Maybe Chris, if you could sort of go through the ins and outs, as you see them right now?.

Sure. We would expect a favorable lift, yes, from the note redemption. But in the ordinary course and the absence of any further action, we probably wouldn't see the overall NIM expansion that we would like to see, given that we're asset sensitive. And it's possible and likely that we would see marginal compression, if there was no further Fed action..

Yes, okay.

And then on your guidance for high single-digit loan growth, just curious what would cause overall loan growth to accelerate from the recent couple quarter's trend, particularly if we don't get any easing in the energy space?.

Yes. So we certainly aren't expecting growth in the oil and gas book..

Yes..

We have attractive pipeline as we sit today in a number of our corporate banking areas, as well as our power business. The residential mortgage business, we expect it to continue to grow nicely. The smaller end of commercial banking is expected to grow as well.

So we've done quite a bit of work to get our arms around what we think is reasonable, considering that we had pretty slow results in this second half. And we feel comfortable we'll get to those numbers..

And then last question is just on those -- a couple commercial loans that were downgraded to NPAs. It sounds like those were outside of the energy portfolio.

Are you able to provide any color on what was going on with those?.

These were just one-off transactions. There was -- I think a $7 million oil and gas loan went to nonaccrual in the fourth quarter. And then, there were a couple loans that made up the bulk of the rest, give or take $30 million.

I believe it was a scrap dealer, was one of them that was impacted by metal commodity costs, but nothing systemic, just sort of one-off situations..

The next question is from Dave Rochester of Deutsche Bank. Please go ahead..

Just back on the NIM, what do you guys see as a major drivers of that NIM pressure, that's going to offset the debt roll-off benefit? Is that primarily just continued loan yield pressure?.

It's the reinvestment effect on the portfolio, as well as the -- I think as you mentioned last year, in the first and second quarter, we saw sort of new and renewed effect that was slightly competitive. And in the absence of any Fed action, we're not sure how much pressure we'll feel this time, but that will be a source of pressure..

And we're not expecting the significant compression. So if the Fed were just to stay here, it's going to look pretty flattish overall..

Okay.

So maybe you get a little bit of a bump early on in the year and then you see pressure after that?.

And then maybe it will--.

And we'll have a decent -- what's that?.

And then, maybe it dwindles a little bit from there. But it should be fairly close, if the Fed doesn't do anything.

Got you.

Where are you guys pricing new commercial and CRE loans today post the hike?.

Well, the spread on top of the index hasn't particularly changed. So certainly, you're picking up the little pop you that got off of LIBOR, but the competitive pressures are still there..

Okay. But the spreads have remained fairly consistent for you, versus opposed--.

They have not widened--.

Well, look, there's a reason, as I was saying that we had paydowns in the general corporate environment, because we're just not willing to put on loans that we're not getting paid for..

In terms of the energy book -- sorry if I missed this, but what oil price assumptions are you assuming in your reserve calculation for the quarter? It sounds like you're assuming some kind of an upward slope there.

I was just wondering what that looked like?.

Well, remember that this -- all of this is done as of snapshot of 12/31, right? So since then obviously, we've had further price declines. So really the next round of information will be the spring redeterminations, with new price decks that will be attached to those and that work is yet to be done.

So at $27 or $30 WTI, I guess, it popped up a little bit today, there will be further downward migration, if we don't get any kind of price recovery. That's just reality. That said, I have looked at what all the other banks who have energy books have detailed out.

And we're sitting today as far as I know, with the highest level of reserves, against a reserve secured portfolio of anyone that I've seen..

And I guess, is there anyway or maybe you've done the analysis and you haven't talked about yet, but was just trying to frame what that differential could be if we do see oil prices stabilize in that $30 level through the end of this year?.

Yes, I'm not going to hazard a guess right now, because the danger of trying to generalize across 50 loans is pretty big. Every one of them has its own specific circumstances.

Again, what I am telling you is, I believe that throughout this past four or five quarters, this bank has been in front as best we possibly can, given the accounting rules of making sure we're reserving appropriately along the way..

And then just one last one on expenses.

I take it the guide is off of reported expenses for 2015, so not backing out any branch consolidation charges or anything like that?.

No. So the guidance is flat to this year, of $697 million..

And then just one last one, where do you see opportunities to cut back, as you continue to invest in the business?.

Sorry, you tailed off at the end there?.

What's that? I'm sorry?.

I couldn't hear the end of your question, Dave, sorry..

Sure.

I was just wondering where you see the opportunities to cut back on expenses as you continue to invest?.

We have consolidated a lot of branches. There's always going to be work done to make sure that we have the optimal branch network, but there isn't a whole lot more to do there. We've closed 100 branches in eight years. So there isn't a lot more there. We continue to work on be more efficient in our back shops.

We continue to roll out new technology and more straight through processing. There's certainly more opportunity in the back shops. But as we've said, over these last three years, we spend technology dollars in order to drive those type of efficiencies over the longer haul. So we'll get more there, as time goes on.

And we continue to evaluate how we run our business and try to be as lean as we possibly can. We do strongly believe that we have the opportunity to increase the balance sheet loan book of this Company, without having to add people and a lot of that is because of the investments we've made.

So we think we can get more effective savings through positive operating leverage, as time goes on..

The next question is from Chris McGratty of KBW. Please go ahead..

Chris, maybe a question for you. Any change in depositor or deposit rates in your markets? Are you seeing any kind of pressure from the first 0.25%? Any color you could give there, would be great.

Yes. There been no material change in any of our deposit rates for any of our customer types or classes. We have, at the margins seen some of the larger more wholesale type customers ask, if we would raise rates. We've generally declined and said, no. And we didn't see any action during December, in fact, we saw inflows, as is typical in December.

We've seen a little bit of outflows in January, but we're not taking any action on rates..

And just a follow-up on the margin. I believe that the debt, the $430 million comes due -- correct me if I'm wrong, the end of March.

Is the assumption, just liquidity, cash on hand, kind of reduce that? And can you help us with the size of the investment portfolio, given your growth expectations?.

Sure. So yes, the assumption is -- not having cash on hand, because there's not an extra $430 million cash, but we'll probably do a very modest amount of incremental liquidity borrowings at the margin for the immediate funding but again, we expect deposit growth throughout the year.

So we assume that, in the general course, assuming there is deposit growth, it will be basically core deposit funded over time. With regard to the second part of your question, the investment portfolio. We're not projecting a material change. It's certainly not going to shrink, but it's not going to grow a lot..

The next question is from Emlen Harmon of Jefferies. Please go ahead..

So it's been a couple quarters now, where you've mentioned unattractive risk-adjusted concerns from a commercial lending perspective.

How much of that is related to rates, versus some of the back-end costs there, speaking of credit specifically? And just are there any particulars, areas of concern you have from an asset quality perspective?.

No, I mean, from an asset quality perspective, we're just not seeing any meaningful downward migration in any part of the portfolio, except for the oil and gas book. I mean, if you looked at that slide, where you saw the potential problem loans, if you backed oil and gas out, it's been pretty stable, give or take now for a while.

So we're not seeing any evidence of credit deterioration. When I talk about things that aren't attractive from a risk-adjusted return, it's just the spreads that we're getting, assuming normal type of losses over a longer credit cycle just don't seem valuable to us.

And I recognize that there are other banks in the Midwest that are growing more rapidly than me and I congratulate them..

And maybe to ask the question, from a different angle, are there asset classes where you've seen underwriting that would give you pause for concern? Not necessarily internally, but from what you're seeing from competitors?.

Not really. There hasn't been dramatic deterioration in terms and conditions that we see. There's always some deals that don't seem to make sense. I mean, we've really pulled out of -- not that we were very active to start with -- out of the levered deal-driven corporate business quite a while ago.

So one could argue that some of that has been a bit frothy over the last year or more. But generally speaking, the issues really are more about really fierce price competition, versus overly aggressive structures. At least that's our anecdotal view..

And then, just a quick one. The healthcare related items this quarter, I think it was about $3 million.

Would you anticipate most of that comes out in the first quarter of next year?.

Well, I mean, we're self-insured obviously..

Yes..

With a stop loss. We have a trust mechanism, where we estimate costs and we put money away. So there's an accrual that goes on which we're constantly looking at, looking at our experience and trying to make sure that we're always covered if you will. So that -- the accrual we put into our -- what we call our BBO [ph] was not particularly unusual.

It's experience-driven and it's forecasted and projected for a year. But your actual experience varies throughout the year and you have to true it up, as time goes on, right? And there's oftentimes noise in those type of lines at the end of the year.

People have run through their deductibles and they do elective things, since they're going to get reimbursed, that kind of stuff I wouldn't read a whole lot into that..

[Operator Instructions]. The next question is from Jon Arfstrom with RBC Capital Markets. Please go ahead..

A few questions here, just can you give us your view of the health of manufacturing in the Midwest? We just hear a lot of different things and I'm curious if you have an assessment on that?.

Yes. You look at the manufacturing index which has now been down-ish for like six months. I mean, I do think that's a reflection of what's going on globally. There's a lot of export that gets driven out of here. So I think that's real.

And from customers that we see and talk to, there's a decent amount of complaining that orders are not where they were or where they think they are. So that's definitely a potential soft spot.

Okay..

Now flip side of that, is auto has been going well and a lot of this goes to auto. So it depends on what you are making..

Yes, okay. Oil and gas question. I guess, slide 5, you have the 40% of exposure is private equity sponsored.

What are you trying to say with that comment, if anything?.

Let's not say much. A couple of people had asked us that question. A lot of smaller and midsize oil and gas companies are stood up by private equity firms that specialize in backing management teams. So that's all. It was just to answer a question that a couple of people had asked over time.

Okay..

That doesn't mean that I expect those guys to get their checkbooks out. It would be nice, but I don't necessarily expect that.

Okay. And then, I guess, bigger picture and I hope you take this question the right way and not the wrong way here. But just there's a lot of very negative commentary that comes out, that may not be entirely fact-checked, in terms of how bad it could get in energy.

And I guess, my question for you is, when you did your assessment at year-end and you took the reserve to 5.6%, does that mean you expect losses to start to show up in the next couple of quarters? Or is that just the loan migration -- said another way, how do we know that 5.6% is enough?.

Right. So I can't tell you as we sit here today, in an environment where oil prices have been literally collapsing for a while, but particularly since the start of the year, that that's enough. I just don't know. What we can do is, in real-time, with real information, estimate potential losses that are sitting in the book and then reserve accordingly.

Yes, I mean, there's plenty of negative information out there and a lot of it's warranted. At $27 WTI, if it were to stay there, there's a lot of pain to come out of the oil patch. I mean, there's just no way around that.

Now for us, again the good news -- to the extent there is good news -- is everything is collateralized, so we don't have any service company loans.

The problem with the service companies as you well know is, once activity dries up and it's largely dried up -- those companies, there's no cash flow, right? And their collateral is equipment that is sitting on the sidelines. So that's not good. So we're not involved in any of that.

Everything that we have is still cash flow and the incremental cost of continuing to produce is pretty low. So there is cash flow coming. But I'm not going to sugarcoat it. I mean, I think it's a tough environment. The other real big benefit that we have is, we don't live in the oil patch.

So all of the knock-on effects that are coming from this, of people being out of work, et cetera, we're not going to experience that, because we're not down there..

Yes, that makes sense.

And I guess, what should we expect broadly, from the spring redeterminations? Is it just smaller lines? I guess, loan-to-values increase and we get some more negative migration, is that the way we should think about it?.

Yes, I mean you're going to -- borrowing bases are going to be under pressure from new prices being applied. So a lot of folks are going to be over-advanced against their borrowing bases. So that there's going to be an effort to restructure. No one really wants to own this stuff. So you're going to work with the companies as best you can.

And we're in the business of supporting our customers, so we're going to do everything we can to support our customers through this downturn. But yes, you will expect to see a lot of defaults start to pop up, as people fall out of conformance with their borrowing bases.

And then, you'll start to see some bankruptcies and you'll start to see losses starting to be taken. So I don't know when the losses start, but I would certainly expect you'll start to see reserves here for losses in the first half of the year.

Our next question is from Terry McEvoy of Stephens. Please go ahead..

The capital is at the upper end of the range. You've talked about kind of that 8% to 9.5%. You're sitting there right at 9%, The stock is down, like everyone else.

Could you just update with your thoughts on the buyback and what's currently approved?.

Sure. We have plenty of room to buyback shares from our Board approval.

I think we have in the neighborhood of $100 million or something, right Chris?.

Correct..

So yes, I mean we've got that capacity. As we project out, our loans -- if we get the loan growth that we're projecting, then I wouldn't necessarily urge you to expect a lot of buybacks. But if loan growth turns soft, we'll have the capacity to put some capital in that direction, if we so choose..

Okay. And then, just as a follow-up, I used to have a little pie chart with your CRE breakdown.

Do you have any CRE exposure in markets like Houston or Texas, where that could be impacted by what's going on in oil?.

No. I mean, I wouldn't say it's impossible that we don't have some building down there that we financed for a Chicago developer. But if it is, it's like -- it's probably zero, but I hesitate to say anything zero..

Thank you. We have no further questions at this time. I would like to turn the conference back over to management for any additional comments..

All right. Well, thank you, everyone. We appreciate you joining us today. Just to wrap up, we thought that last year was highlighted by solid balance sheet growth, growing noninterest income. The acquisition of Ahmann Martin was very successful and it's been integrated very well.

And we kept our expenses flat for four years in a row which at the same time that we're investing in the Company is not all that easy. So I think we're poised in 2016 to deliver positive operating leverage. We expect to grow the loan book.

We'll have stable costs and we're really focused on continuing to enhance our customer solutions which we think is driving a lot of our particular deposit growth and all that will generate shareholder value. So thanks, we'll look forward to talking to you next quarter and if you have any questions, give us a call.

Thanks for your interest in Associated..

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time and thank you for participation..