Associated Banc-Corp

NYSE:ASB

Earnings Call Transcript 2018-Q4

[Operator]

Good afternoon, everyone, and welcome to the Associated Banc-Corp's Fourth Quarter and Full Year 2018 Earnings Conference Call. My name is Dana, 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.

As outlined on Slide 2, during the course of the discussion today, management may make statements that constitute projections, expectations, beliefs or similar forward-looking statements. Associated's actual results could differ materially from the results anticipated or projected in any such forward-looking 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 Factors section of Associated's most recent Form 10-K and any subsequent SEC filings. These factors are incorporated herein by reference.

For a reconciliation of non-GAAP financial measures to the GAAP financial measures mentioned in this call, please refer to the slide presentation and to Slide 10 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, President, CEO & Director]

Thanks, and welcome to our fourth quarter and full year 2018 earnings call. Joining me as usual are Chris Niles, our Chief Financial Officer; and John Hankerd, our Chief Credit Officer. On Slide 3, 2018 was a year of great progress for Associated Banc. The momentum we've built over the last several years continued and provided great bottom line results. Collectively, these improvements drove earnings per share to $1.89, which is a 33% increase from 2017 and a 50% increase from two years ago. The bottom line was driven by solid top line growth coming from higher revenue in both our loan portfolio and our fee businesses. We also grew our deposit franchise as we completed the Bank Mutual acquisition and system conversion. We finished the year with record deposit levels and believe that the recently announced Huntington branch transaction will further enhance our deposit franchise value. Our credit metrics continued to improve, and we finished the year with zero provision for credit losses. Our progress in this area reflects our commitment to disciplined underwriting standards. We maintained our strong capital position while increasing the amount of capital we return to shareholders through higher dividends and $240 million of share repurchases.

Turning to Slide 4, we summarize our 2018 results. We're pleased that our final reported results have been consistent with our 2018 guidance. Average loans were up over 10% from 2017, with growth across most of our lending classes, and our net interest margin increased 15 basis points benefiting from our inherently asset-sensitive commercial loan mix. We continue to grow our fee-based revenue year-over-year, driven by strong markets and further boosted by our acquisitions of Whitnell, Diversified Insurance and Anderson Insurance. As we projected our cost control efforts and the cost savings achieved from the Bank Mutual acquisition, there'll be greater than 200 basis point improvement in our year-over-year adjusted efficiency ratio, which excludes the acquisition-related costs. Lastly, the credit environment remain benign, contributing to the provision for credit losses of zero in 2018, allowing us to deploy capital through an increased dividend and repurchases of common stock totaling that $240 million.

Turning to Slide 5, we highlight our 2018 loan trends. The strong growth can be credited to the acquisition of Bank Mutual and the addition of numerous commercial lenders to expand our market penetration. With respect to mortgages, we remain the largest mortgage lender in Wisconsin and benefited from both good organic and acquired activity in 2018. Residential mortgages represent about 36% of our average total loan book at year-end, and we strive to keep that roughly in balance with our C&I book of business. Commercial real estate loans increased 10% year-over-year as acquisition growth was partially offset by higher-than-expected paydown activity. Our CRE portfolio makes up about 1/4 of our total loans and is well diversified by geography, property type and borrower. Our exposure to retailers continue to be modest, and our construction exposure was 6% at year-end. Our commercial and business lending book grew almost 7% in 2018, driven by solid results in our general commercial business and across most of our specialty verticals. Mortgage warehouse lending was the one outlier as rising interest rates curtailed overall mortgage activity. Commercial and business lending represented 36% of our total loan book at year-end, and our largest single industry exposure remains the manufacturing and wholesale trade sector.

Fourth quarter loan trends are highlighted on Slide 6. Our commercial and business lending book had great momentum and grew by 12% year-over-year. Q4 activity was driven primarily by fundings in our oil and gas and REIT lines. We expect commercial and business lending to account for the lion's share for our growth in 2019. As we previously communicated, our CRE book declined during Q4 due to significant payoff activity. We expect the average CRE balances to continue to decline modestly into Q1 2019. However, our project backlog and funding pipeline remain robust, and we expect commercial real estate balances to rebound in the second quarter of 2019 and grow into Q3. Our residential mortgage portfolio decreased modestly from the third quarter as elevated interest rates and seasonality tempered mortgage activity. For 2019, we expect mortgage lending to accelerate in Q2, reflecting normal purchase market activity. Overall, we're expecting full year average loan growth of 3% to 6% in 2019.

Turning to Slide 7, we highlight our annual deposit trends. We finished 2018 with record levels of checking deposits and total deposits. Average deposits grew 10% or $2.1 billion from a year ago, and we continue to improve the proportion of balances in our lowest cost categories to over 50% of our total deposit mix at year-end. The graphs on the right side of the slide highlight the success we've had in improving our low-cost deposit mix in a rising rate environment, both growing overall deposit balances since 2014. While we have seen some modest remixing to our time deposits in the last couple of years as customers have sought to benefit from rising interest rates, we're pleased with the results of our focus on managing our deposit categories and our success at retaining and growing these lower cost balances. We were also able to further reduce our funding from network transaction deposits in 2018. The average balances of these higher cost funds fell 33% from 2017 and represented just 9% of our total deposits at year-end, the lowest level in 6 years. We believe the investments in technology we've made, including the launch of our new online and mobile platforms in February 2018, will continue to help us win and retain customer deposits. Additionally, we've been pleased with the retention rates of Bank Mutual customers, which have been as expected, and believe we'll be able to replicate the success with the Huntington transaction.

Fourth quarter deposit details are shown on Slide 8. Reflecting our seasonality, our loan-to-deposit ratio was 92% at year-end, down from the first half and essentially unchanged from the third quarter. During the quarter, we continued to purposefully manage down our higher cost network transaction deposit balances. While we expect these balances will increase in the first quarter of 2019 as we experience seasonal outflows of municipal deposits and we fund anticipated draws on commercial loans, we nonetheless expect core deposit inflows in Q2 will help keep the overall level of noncore deposit funding in check. The Huntington transaction should add about $650 million in net deposits in the second quarter, and we expect to use those deposits to fund growth and offset higher cost funding. While our loan-to-deposit ratio will remain somewhat seasonal, we're committed to maintaining a loan-to-deposit ratio under 100% and to funding the majority of our loan growth with core deposits.

Turning to Slide 9. Full year net interest income was $880 million, up 19% or $138 million from 2017. $28 million of this increase can be attributed to Bank Mutual prepayments and accretion. The other $110 million reflects our balance sheet growth, our core asset sensitivity and our ability to successfully retain low-cost deposits while improving the funding composition. The average yield on our commercial real estate loans climbed to over 5%, up 115 basis points from the prior year, and the average yield on our commercial and business lending loans increased 85 basis points to over 4.5%. The majority of loans in these portfolios are linked to LIBOR, and the yields benefited from rate increases throughout 2018. Expansion in our residential mortgage loan yields was more modest, increasing 17 basis points to 3.4%. However, given the uncertainty and expected Fed rate action, this portfolio offers some margin protection as it is primarily constituted of ARM loans that will continue to reprice and reset higher in the intermediate term. Interest-bearing deposit costs were up 38 basis points from 2017, and we continue to see competitive pricing pressure emerging within our markets.

Looking at our overall margin performance, total loan yields increased 65 basis points, interest-bearing liability costs increased by 47 basis points, contributing to a 15 basis point expansion in net interest margin.

Fourth quarter net interest margin trends are highlighted on Slide 10. The average yields on both our commercial real estate and business lending portfolios benefited from the full effect of the September rate hike, along with higher prepayments from both legacy and Bank Mutual loans. The average yield on residential mortgage loans also increased during the quarter as our ARM loans continued to reprice higher. Our interest-bearing deposit cost was 1.14% in the quarter, up 11 basis points from Q3. This increase was less than the rise between Q2 and Q3 as we benefited from the actions we took last quarter to lock in funding on certain municipal and time deposits. Our interest-bearing deposit beta was 0.44 in the quarter, essentially in line with our cycle-to-date interest-bearing deposit beta. Given upward Fed rate action in 2019, we expect an improving loan yield trend to be somewhat offset by continued deposit pricing pressure, leading to a stable to modestly improving year-over-year net interest margin.

Turning to Slide 11, we highlight annual noninterest income. Total noninterest income for the year was $356 million, up $23 million from '17. Excluding Bank Mutual related write-downs and investment sales, the run rate was $360 million. Fee-based revenue growth was driven by higher brokerage and advisory fees, reflecting the strength of the underlying equity markets through September and the full year contribution of our Whitnell wealth management acquisition, which we closed in late 2017. Additionally, insurance revenue increased $8 million in 2018, driven in part by the acquisitions we made earlier in the year. For 2019, we expect increasing year-over-year fee-based revenues and for total noninterest income to be between $360 million and $375 million.

Noninterest expense trends are highlighted on Slide 12. Annual noninterest expense was $822 million, in line with our guidance of $820 million to $825 million. I'd like to highlight that as expected, we were able to drive our adjusted efficiency ratio 200 basis points lower from 2017 to 2018, excluding acquisition-related costs. This marks the seventh consecutive year that we've improved our operational efficiency and demonstrates both our commitment to controlling costs and our acquisition discipline. Our fourth quarter noninterest expense was $193 million, reflecting the successful operational integration of Bank Mutual and our achievement of the targeted cost savings. The increase in Q4 '18 versus the year-ago quarter is due mostly to the permanent personnel, facilities and customer costs brought on from Bank Mutual as well as the smaller acquisitions. In 2019, we will continue to invest in technology that will further improve operational efficiency and build out our digital presence and capabilities. We anticipate 2019 noninterest expense will be approximately $800 million, including the impact of the Huntington branch acquisition. We expect to further reduce our 2019 adjusted efficiency ratio by 100 basis points.

On Slide 13, we summarize the annual credit quality trends of our loan book. During 2018, the credit environment remained benign and we saw our credit metrics improve. Nonperforming assets decreased $89 million from 2017, and nonaccrual loans decreased $81 million from 2017. In total, nonaccrual loans represent just 56 basis points of total loans at year-end. Total net charge-offs for the year were $30 million, down $9 million from 2017. Full year net charge-offs to average loans decreased to 13 basis points from 19 basis points in 2017. Our provision for credit loss was zero, down from $26 million in 2017.

I'd like to briefly comment on our potential problem loans metric found on Page 6 of our financial tables. While fourth quarter 2018 potential problem loans may appear to be elevated when compared to results from fourth quarter of 2017, this is only because Q4 '17 potential problem loans were unusually low due to payoffs and downgrades of several large loans in late 2017. I want to emphasize that we've seen no deterioration in our credit environment and that our Q4 2018 potential problem loan levels are in line with the previous 3 quarters of 2018. Our credit quality outlook remains very positive.

On Slide 14, we highlight our strong capital position. We've established our capital position by maintaining a disciplined approach to capital deployment. We adhere to our stated priorities and manage capital to support our organic growth, pay a competitive dividend, pursue in-market cost takeout acquisitions and share repurchases. Over the last several years, this approach has enabled us to maintain steady levels of economic capital while improving our common equity Tier 1 ratio. We've driven this improvement in part by reducing the risk in our loan portfolio through disciplined underwriting and through purposeful portfolio growth choices. We've also reduced the risk in our securities portfolio by increasing our investments in zero risk-weighted government-guaranteed securities. In 2018, we continued our disciplined use of capital. We increased our dividend 24% and deployed capital through the acquisitions of Bank Mutual, Diversified Insurance and Anderson Insurance. We also returned $240 million to shareholders through stock repurchases.

Turning to Slide 15, I'd like to discuss the Huntington transaction. As we announced on December 11, we've entered into an agreement to purchase all 32 Wisconsin branches from Huntington Bank. We expect to receive approximately $850 million of deposits and $134 million of consumer, small business and commercial loans in the transaction. The acquisition will further enhance our Wisconsin deposit franchise as we expand into 13 new communities. We expect to add over 60,000 deposit accounts and 33,000 households, and our Wisconsin base deposits are anticipated to grow by 5%. The customer deposit and revenue mix is comparable to our current book. From a financial perspective, the acquisition is expected to be accretive to our adjusted efficiency metrics and EPS outlook. We expect to achieve 45% cost savings, similar to what we realized with Bank Mutual, and we expect to use the deposits, which we anticipate will have a cost of funds less than 1% to replace higher cost network deposits. Given conversion costs expected to be incurred this year, we anticipate the transaction to be neutral to 2019 EPS but expect that it will be 2% accretive to our 2020 earnings. With just 1.5% tangible book value dilution expected at closing, we believe this transaction is an effective deployment of bank capital and is consistent with our previously stated strategy of pursuing transactions in our existing markets where there's a meaningful opportunity to increase efficiency. We've already filed our application with the OCC and we anticipate receiving approval in the first quarter. We expect the transition - the transaction, excuse me, to close in the second quarter of 2019, with conversion occurring simultaneously with closing.

On Slide 16, we want to summarize the results of the Bank Mutual acquisition and lay out its similarity to Huntington transaction. Bank Mutual strengthened our position in our core markets and increased the value of our deposit franchise. We're pleased to report that we achieved the financial targets that we set out for ourselves. We had targeted a 200 basis point improvement in our 2018 adjusted efficiency ratio. We came in slightly better than that with 206 basis points of improvement.

Our acquisition-related costs were $9 million less than our initial estimate of $40 million. Finally, our tangible book value per share is higher today than it was before the acquisition, and we expect the crossover will likely be achieved in 2020. We learned much from our efforts to integrate Bank Mutual, and we'll approach the Huntington transaction as an opportunity to both replay and capitalize on our learnings. Our confidence around the merits of Huntington deal is rooted in the success we achieved in the Bank Mutual transaction. We see this as a very similar although smaller transaction, and we're excited about the opportunity to create more value for our customers and shareholders with another successful integration.

Finally, on Slide 17, we'll summarize our 2019 outlook, which reflects a stable to improving economy and assumes the closure of the Huntington transaction in the second quarter. We expect 3% to 6% annual average loan growth and to maintain our loan-to-deposit ratio under 100%. We anticipate a stable to improving year-over-year NIM trend, assuming some additional Federal Reserve action to raise rates by midyear. Noninterest income is expected to be between $360 million and $375 million, with improving year-over-year fee-based revenue. Noninterest expense is anticipated to be approximately $800 million, including the acquisition-related costs in connection with the Huntington transaction. We expect our adjusted efficiency ratio to further improve by 100 basis points. We expect the 2019 effective tax rate of between 21% and 23%. Our loan loss provision is anticipated to adjust with changes in risk grade, other indications of credit quality, and loan volume. And finally, we expect to continue to deploy capital through our stated priorities. We will continue to operate with at least a 7% tangible common equity levels and a near-term 9.5%, 10% CET1 ratio target.

So with that, we'll open it up to your questions.

[Operator]

[Operator Instructions]. Our first question comes from the line of Jon Arfstrom from RBC Capital Markets.

[Jon Arfstrom, RBC Capital Markets]

A question for you guys on loan growth. The loan growth guidance is 3% to 6%. So I think I didn't catch all of it, but you talked about maybe, I think, commercial and general business as the key drivers. Give us an idea of what gives you confidence there and kind of an idea of where and what you think will pull through.

[Philip Flynn, President, CEO & Director]

Sure. So our confidence in our loan outlook is really based upon the activities that we've seen over this last quarter or so. We have a lot of momentum building up in our general commercial lending business as well as the specialty verticals. The pipeline is strong. We had a number of commitments closed during the quarter, which will begin to fund up. And in addition, while we still think that we're going to see some paydowns through this first quarter in commercial real estate, the pipeline and the closings and the fundings that will come from those closings of the commitments in commercial real estate are going to start to kick in and generate positive growth in that loan segment as well. Last year, the commercial real estate folks, for example, closed $2 billion of commitments approximately, and a lot of that hasn't funded yet. So the combination of continued strong growth in the general commercial area, specialty verticals as well as, as we get a little further into the end of Q1 and into Q2, we'll start to see net growth in commercial real estate again. That gives us confidence that we should get to that 3% to 6% range.

[Jon Arfstrom, RBC Capital Markets]

Okay, good. That's helpful. And then the margin guidance - but you have the phrase in there, "based on continued upward Fed rate action." Can you help us understand what that means and what that might mean if that continued upward Fed rate action does not happen?

[Christopher Del Moral-Niles, EVP & CFO]

Sure. So we're calling for stable to improving NIM to expand as Fed continues to guide higher rate, continue to set higher and the curve continue to steepen out, we'll have positive margin momentum. To the extent the Fed stops cold or pauses and that momentum gets lost, we'll take actions to defend the margin, we'll be more likely to be stable.

[Jon Arfstrom, RBC Capital Markets]

Yes. I was just going to ask that. What type of actions? Give us an example of what that might be, Chris.

[Christopher Del Moral-Niles, EVP & CFO]

Sure. Clearly, if the Fed pauses, one of the reactions will be - well, if we're going to think about our investment portfolio options and we think about our deposit pricing strategies. So on the world of continuously rising rates, we're taking actions on deposit side to price ourselves in anticipation of a couple more rate hikes. If that's not the case in the marketplace, then clearly, we assume that competitive pressure will diminish and we'll be able to manage our funding and liability costs more optimally.

[Operator]

Our next question comes from the line of Scott Siefers from Sandler O'Neill.

[Robert Siefers, Sandler O'Neill + Partners]

I guess first thing I wanted to ask is just to go back to that loan growth guidance. So do you think that the first quarter will be loans actually increasing? Especially, we've had a couple of quarters of flat or down loan. And I guess just the way things sort of entered to project with you guys and based on what you're saying, it really only leaves a couple of quarters of what would have to be really strong growth to get to even though the lower end of the range. So I guess, we've got the CRE headwind in the first quarter, then you guys typically have down loans in the fourth quarter. So it kind of feels like it only leaves the middle part of the year. I'm just trying to - sort of similar to the last question, can we establish confidence as to - with respect to how we get there?

[Philip Flynn, President, CEO & Director]

Yes. So we expect net growth in the first quarter and then we expect it to accelerate as the CRE net growth starts to kick in more forcefully.

[Robert Siefers, Sandler O'Neill + Partners]

Okay, all right. So a kind of acceleration basically through the next three quarters of the year, I guess, is what does it, right?

[Philip Flynn, President, CEO & Director]

I think that's right.

[Robert Siefers, Sandler O'Neill + Partners]

Yes, okay. And then I know you said on the expense guide for the year, that includes the impact of the Huntington branches. Is the same true of the fee guide as well? And is there anything meaningful that you would expect from those branches within your total guide there?

[Philip Flynn, President, CEO & Director]

Yes. So right, the expenses include our anticipated costs for completing the transaction. The fees that are being picked up are not terribly meaningful, but it does include those.

[Robert Siefers, Sandler O'Neill + Partners]

Okay. I appreciate that. And just on that expense fee specifically, I might have missed the one you originally disclosed or announced the transaction, but cost that we would, like from the outside, consider sort of one-time, given amount that would be included in that number from the Huntington transaction.

[Philip Flynn, President, CEO & Director]

Yes. We're anticipating, give or take, $7 million.

[Operator]

Our next question comes from the line of Jared Shaw from Wells Fargo.

[Jared Shaw, Wells Fargo Securities]

I guess, just sticking to the loan side for a minute here. If we look at the CRE paydown activity that you're anticipating for first quarter, do you think that the benefit to prepayment penalties will be similar in magnitude as we saw in fourth quarter?

[Philip Flynn, President, CEO & Director]

We do not. We think a lot of the prepayment accretion that came out of Bank Mutual has mostly played itself out.

[Jared Shaw, Wells Fargo Securities]

Okay. So even though we may see the impact in the CRE balance headwinds, we won't necessarily get that same - that benefit on the prepayment side?

[Philip Flynn, President, CEO & Director]

We think the pace of paydowns is slowing and we think the pace of new fundings will be consistently growing, and we expect those lines to cross sometime later in this quarter and then accelerate into the rest of the year.

[Jared Shaw, Wells Fargo Securities]

Got it, okay. And then on the specialty lines, do you anticipate bringing on new teams or hiring there to help keep the pace of growth consistent, especially with the bigger balance sheet? Or do you think that the change you have in place are sufficient to keep that growth going?

[Philip Flynn, President, CEO & Director]

In the specialty verticals, we're very well-staffed with very high-caliber bankers. Most of the additional staffing we've done in the commercial space has been in the various regional offices focused on general, corporate and commercial lending. So a lot of those folks came on this past year. We've seen results from that, but we actually anticipate improving results as this year goes on as these folks get up to speed.

[Jared Shaw, Wells Fargo Securities]

So we could see those specialty lines maybe a bigger percentage of C&I as we go through the year?

[Philip Flynn, President, CEO & Director]

No, no. Maybe you misunderstood. So the specialty lines are fully staffed and have been for a while with the same folks. They'll continue the strong performance they've had. We anticipate that our general commercial area, where we have added staff, will actually probably do more proportionally than what we've seen over the last couple of years.

[Operator]

Our next question comes from the line of Terry McEvoy from Stephens.

[Terence McEvoy, Stephens Inc.]

Just first question, starting on the outlook slide where you talked about the margins stable to possibly higher. Are you using the, I'll call it, core margin, excluding some of the accretion in interest recoveries as the basis behind that statement? Or are you looking at the GAAP margin throughout the last four quarters?

[Christopher Del Moral-Niles, EVP & CFO]

We're looking at the 2.97% full year 2018 GAAP margin, so stable improvement from that level.

[Terence McEvoy, Stephens Inc.]

Okay. And then let me just ask you, the digital channel, you've made a fair amount of investments. Can you just talk about the traction with the Bank Mutual customer and then how your digital offerings and platform compare to the Huntington customers that are about to come over, whether it's comparable at all?

[Philip Flynn, President, CEO & Director]

Great question. So when I first had the opportunity to talk to the CEO of Huntington about this, one of the first things we went and looked at was how does our online and mobile offering compare because we were concerned about potentially moving customers from a larger bank to a smaller bank and making sure that we didn't have an inferior product. And it turns out that we believe our offerings in the online and mobile space are quite comparable to what those customers are used to. So that was actually one of the first items of diligence that we took a look at before we moved much further. Our uptake in particularly the mobile arena continues to grow steadily. If you go to the App Store and looked at the ratings of our mobile offering, it's approximately 4.5 stars, which is a pretty big improvement from the previous app that we offered. So we're quite happy with the trend that were on there. We'll be rolling out Zelle here very shortly this quarter, and the app allows us to routinely and conveniently provide upgrades to our customers. So we feel very good about where our offering is today.

[Operator]

Our next question comes from the line of Nathan Race with Piper Jaffray.

[Nathan Race, Piper Jaffray Companies]

Just going back to the discussion around loan growth and commercial hires. There's obviously been a lot of M&A in some of your footprint, particularly within the Twin Cities and Chicago. So just curious what the opportunities look like to continue to add commercial lenders in those markets to kind of solidify or take market share in the wake of some of those transactions?

[Philip Flynn, President, CEO & Director]

Yes. In fact, we've been hiring in both of those regions as well as around Wisconsin. And there is a certain amount of disruption. Recognize, of course, that those are both fairly large markets with some fairly large players. So yes, there is some disruption, but you have to put it in the context of a place the size of Chicago.

[Nathan Race, Piper Jaffray Companies]

Got it. And changing gears, thinking about the deployment of the Huntington liquidity. Chris, any thoughts on just how we can expect that deployed into the securities out of the gate and obviously over time, you won't redeploy then to loans but just kind of any help in terms of the kind of yield that you expect to get on those deposits out of the gate?

[Christopher Del Moral-Niles, EVP & CFO]

Yes. So our initial thoughts as we laid out is the uses of funding to offset other higher cost funding and anticipation that there's additional reaction or rate continue to move higher. We can tell that will be an effective redeployment of those funds to offset whether it's network deposits or federal home loan bank advances or other marginal funding sources mid-year.

[Philip Flynn, President, CEO & Director]

As you could see from some of the charts, we've been diligently moving down our percentage of higher costs, high beta network deposits. We've moved down a lot in a fairly short order. We intend on using this deposit at least out of the gate for that same purpose. So we won't be levering up against those deposits.

[Operator]

Our next question comes from the line of Chris McGratty from KBW.

[Christopher McGratty, KBW]

Chris, your comment on capital, 9.5%, 10% on CET1 and a 7% floor on tangible, you guys obviously have been very active at the buyback. Can you remind us what, if anything, is left? And it would seem - and correct me if I'm wrong, given that the deal closing will be a little bit of pressure. we should probably not be assuming near-term buybacks?

[Philip Flynn, President, CEO & Director]

The deal was really small.

[Christopher Del Moral-Niles, EVP & CFO]

Yes, so two things. One, there's $111 million left on the current board authorization as of year-end, and the deal will only use about $34 million of net premium and there'll be some one-time costs. Like roll that all together, you're in the $40 million zip code. So it's not a big deployment of capital per se and it provides a lot of liquidity. So it's a very effective and efficient use of capital. And it's only coming with $100 million of risk-weighted assets or so. So it will be not a big driver to the risk weight.

[Christopher McGratty, KBW]

Okay. So maybe I was a little bit wrong. You can still plan buying the stock given these levels and given the market weakness?

[Christopher Del Moral-Niles, EVP & CFO]

Correct.

[Christopher McGratty, KBW]

Okay. Maybe one other question on deposit pricing. We learned from some of your Chicago peers this quarter, Midwest peers, some level of moderation in kind of the competitive environment. I'm wondering if you share that as well given what's happening and kind of rate expectations kind of going on with the market.

[Philip Flynn, President, CEO & Director]

You saw our commercial yields have continued to move up. I don't have any anecdotes for you whether things are really moderating. We haven't noticed a big change particularly. For a decent-sized commercial loan opportunity in Chicago that's in the market, there's more than enough competitors chasing it around as usual. So I don't think there's been any tremendous moderation, but perhaps some of the folks who are solely in Chicago have a better feel for that than me.

[Christopher Del Moral-Niles, EVP & CFO]

And on the deposit side, the other part of the question, I think we took some action to be a little more ahead of the curve in Q3, and we've been able to be disciplined here in Q4. And we're hopeful we can maintain a good, disciplined outlook on our deposit pricing strategies as we move to the current year.

[Operator]

Our next question comes from the line of Michael Young with SunTrust.

[Michael Young, SunTrust Robinson Humphrey]

I wanted to follow up on the network transaction deposits commentary. I know in the past, you - there was some hesitancy around taking those levels down to low or maybe a minimum threshold but you just kind of had to remain that to keep the customers, et cetera. Is there any threshold or anything that it wouldn't go below at this point?

[Christopher Del Moral-Niles, EVP & CFO]

No. I think we're thinking about optimizing the total funding stack. And clearly, we're working with some well-established and long-term relationships. But that's still a $2 billion plus number and it doesn't have to be to maintain those relationships, and we can certainly manage that in the spirit of the funding seasonality that we have. Keep in mind, we do have some seasonality in the first half. We tend to fund up a little bit, and then we tend to bring that down in the second half. And this year, given that we expect net funding to come to us from the Huntington settlement, it will be probably not as much seasonality as it. But that underlying pattern is there for our core municipal and corporate customers.

[Michael Young, SunTrust Robinson Humphrey]

Okay, but is there a minimum level? I mean, does it go below $500 million, for instance? Or is there some level that it's got stay above just to maintain those relationships?

[Christopher Del Moral-Niles, EVP & CFO]

No. There's certainly commercial relationships and they're long term but they're transactional, underlying nature. And so yes, we can manage that to optimize ultimately our funding cost. And so no, there's no minimum. We could theoretically go to zero. Given our seasonality, that probably wouldn't be the answer for us but...

[Philip Flynn, President, CEO & Director]

And it's probably not likely anyway.

[Christopher Del Moral-Niles, EVP & CFO]

Yes.

[Michael Young, SunTrust Robinson Humphrey]

Right, okay. And then one quick follow up. Just Phil, you were pretty positive and optimistic, I think, on asset quality. Obviously, problem loans are at very low levels. But could you give any more color behind that? I think a lot of management teams have been hedging a little bit and providing kind of higher provision guidance, but you seem pretty confident there. So just curious for color.

[Philip Flynn, President, CEO & Director]

I can't speak about everybody else, but we're not hedging. We had $200,000 of net charge-offs in the fourth quarter. Our criticized assets are the lowest they've been in 10 years, and we just quit looking after 10 years. So I can't tell you what everybody else is seeing, but we're seeing very, very solid credit quality.

[Operator]

[Operator Instructions]. Our next question comes from the line of Scott Siefers from Sandler O'Neill.

[Robert Siefers, Sandler O'Neill + Partners]

Just one really quick one. Phil, you mentioned the $7 million in kind of onetime cost related to the Huntington transaction. So just so I'm crystal clear, those are included in the $800 million expense guidance, right? So in effect, we'd be looking at like $793 million of core expenses for the year?

[Philip Flynn, President, CEO & Director]

That's correct. And then obviously, also included in the $800 million will be the additional expenses of the permanent facilities, permanent staff, et cetera, post-closing.

[Operator]

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Flynn for closing remarks.

[Philip Flynn, President, CEO & Director]

Well, thanks for joining us today. As always, we appreciate your interest in Associated, and we look forward to talking to you in April. And if you have any questions, please give us a call. Thank you.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.