Good afternoon, everyone, and welcome to Associated Banc-Corp's Fourth Quarter and Full Year 2019 Earnings Conference Call. My name is Hector, 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 in the Risk Factors section of Associated's most recent Form 10-K and any subsequent SEC filings. These factors are incorporated herein by reference. For a reconciliation of the non-GAAP financial measures to the GAAP financial measures mentioned in this conference call, please refer to the slide presentation and to Page 10 of the press release financial tables. 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.

Thank you, Hector, and welcome to our fourth quarter and full year 2019 earnings call. Joining me today are Chris Niles, our CFO; and Pat Ahern, our Deputy Chief Credit Officer. Pat is succeeding the current Chief Credit Officer, John Hankerd. I'd like to begin by extending our gratitude to John for his 15 years of service at Associated and wish him a well-earned retirement after almost 40 years in banking. We welcome Pat to his new responsibilities and know that his 30 years of banking experience including 9 at Associated will serve the bank well. Turning to Slide 3. In 2019, we faced an interest rate dynamic that was significantly different than the environment for which we had positioned the bank at the end of 2018. Going into the year, our expectation was for 2 rate increases. However, as we all know, the Fed cut rates 3 times, and we spent much of the year repositioning the balance sheet for a lower rate environment. We reduced our higher cost network transaction deposits from $2.3 billion at the end of 2018 to $1.3 billion at the end of '19, and we sold $1 billion of lower yield investment securities. Aided by the Huntington branch transaction, we increased our low-cost deposit mix from 51% to 56% at the end of the year. Since we couldn't control market interest rates, we focused on controlling our costs. We reduced our absolute noninterest expense by $28 million year-over-year even while we added 14 net branches from Huntington in June. We continued to benefit from positive credit trends, and our overall credit metrics have remained stable as we further derisked our oil and gas portfolio. We remain committed to disciplined underwriting standards. We built capital ahead of the CECL implementation that occurred on the first…

[Operator Instructions]. Your first question comes from the line of Scott Siefers with Piper Sandler.

A couple quick ones for you. Just in terms of the guidance, I know it's pretty small in the grand scheme of things. But does the guidance outside of expenses include or exclude First Staunton? And I guess, specifically, where I'd be most curious is in the margin guidance, is there any additional purchase accounting adjustments baked into there? Or is that kind of a clean margin guide 2.80% to 2.85%?

Yes. Clean guide and all the First Staunton stuff is included in all the guidance we gave you.

Okay. Perfect. And then are you able to say what -- in the press release, you noted some credit valuation adjustments in the fourth quarter. Are you guys able to detail the size of those?

It's a relatively small number. It's on our customer derivatives and it's just changing the rates, and it was $1 million.

Okay. So nothing too significant. All right. And then final question, just I think you also put in the release, there was an 18% sequential increase in potential problem loans. Anything in particular there? Or is that just kind of normal ebbs and flows?

No. We're dealing with such absolute low levels of potential problem loans, that -- year-over-year, they're down, they were up a little bit in the back half of the year, but it doesn't seem systemic, and we're not concerned about it.

Your next question comes from the line of Terry McEvoy with Stephens.

I was hoping you could discuss maybe your thoughts on insurance and mortgage banking in 2020. It looks like the insurance dipped a little bit in the fourth quarter. So within the context of that $375 million to $385 million, could you just provide some commentary there, please?

Yes. The insurance business is inherently a slow-growing business. We did a number of acquisitions. We didn't do any this past year. We'll see what happens in the coming year. But the $375 million to $385 million assumes a steady state for the insurance biz, and it assumes a lower run rate of mortgage banking income than what we enjoyed in the back half of the year given rate stabilization.

And then looking at your noninterest expenses, I see the $1.3 million acquisition-related cost. Did I miss some severance expenses as well in the fourth quarter? Is that in the $203.6 million number?

It is, Terry. And if you look at Page 10 of our press release tables, we break out the severance specifically. It rounds to $4 million for the quarter, it's $3 million and change, it rounds up to $4 million. It was $5 million for the year and $4 million for the fourth quarter, rounded.

Your next question comes from the line of Jon Arfstrom with RBC.

Phil or Chris, on Slide 5, that decline in general commercial, you may have touched on it a little bit, but can you go into detail a little bit more on that? What really drove that?

It was kind of across the board. I think we feel it's pretty anomalous. We're not really terribly concerned. We anticipate pretty robust loan growth this coming year. We expect the general commercial lines to grow. We certainly expect commercial real estate to grow. Commercial real estate is sitting on $2 billion of unfunded commitments. They had their best year for new production ever in 2019, more than $2.8 billion of new transactions. So that $2 billion, a significant amount of that will fund up in addition to the new work they're doing now. So the combination of reasonable expectations in commercial banking, strong expectations in commercial real estate, steady growth in resi mortgage makes us feel pretty confident that we're going to hit that 2% to 4%.

Okay. Good. That helps. And then the comment you made on the securities portfolio. I just did a simple math, and I think it suggests maybe it bottoms at around $5.5 billion in Q1. Is that the right way to think about it?

Yes. It's definitely going to bottom out at roughly 17% of assets during Q1, and we're basically bouncing around the bottom now, and it will -- it won't grow other than in proportion to our balance sheet as we move through 2020.

Okay. You guys almost filled out my earnings model, but I was just trying to get to an earning asset number.

$2 million is snow plow expense. And it's snowing outside right now.

It's been great this winter. Last one, Chris. I know you've done a lot of thinking about CECL. How should we think about the provision for 2020, maybe a little bit of an increase in the state of reserves, but how do you want us to think about your provision?

Yes. So in general, we think our provision should have less volatility under CECL, so it should essentially track growth in the portfolio would be our baseline. And we would anticipate -- again, we've got some nice growth anticipations, but -- and the overall nature of the portfolio environment. And we've been on a positive or benign credit environment, and there's no reason to believe that's going to stop here at December 31. So there's some positive general portfolio trends, which will be partially offset by the growth trend we see going forward, but generally less volatile provisioning going forward.

And it feels like most of your cleanup in energy is done as well.

Yes. We feel -- we've reduced that portfolio substantially, another $100 million in the fourth quarter. We don't see a whole lot of charge-offs left and for stuff that we're worried on about beyond that. The contribution we're making to CECL here in this quarter should cover our worries. So I feel pretty good about where we are on that.

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

So in terms of capital, you talked about a 7% floor on the tangible ratio. Can you speak to inorganic growth opportunities? I think in the past, you said 1 to 2 small deals a year would be possible. And I think recently, you talked a little bit more openly about the potential merits of an MOE. Maybe some updated thoughts here?

Yes. So our stated goal is to continue to look for efficiency driven in footprint, relatively modest acquisitions, and we have discussions going on. What I've said about the possibility of MOE is there's a limited number of options, and we're always open to talking to anyone about what makes sense for our shareholders as well as potentially someone else's. So we're open to those discussions.

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

Chris, actually hit one of my questions. But any thoughts on acquiring business lines or portfolios apart from your comments on potential whole bank deals?

Sure. You saw us do the Huntington branch transaction, which at the end of the day was almost all deposits and buy any portion of what Huntington has buying out there Wisconsin stuff. So we're always open to looking at nonwhole bank deals. We're particularly interested in looking at opportunities like we had with Huntington, where we can continue to grow low-cost core deposits. Those kind of opportunities are few and far between, of course. But to the extent something came up, we would certainly be interested in that. As far as looking at loan books and portfolios, we're open to that, but it's not as high a priority is continuing to build out the deposit base.

And of course, we continue to be interested in asset management-related opportunities should they present themselves and...

And insurance transactions as well, yes.

Okay. And then on your -- on the CRE portfolio, can you comment on what you're seeing in terms of payoff, pay down trends? And what your expectations are around that as you look going into 2020? Do you expect that to stay stable or potentially increase or decrease?

Yes. So we had a real rush of payoffs back end of 2018, leaking into 2019. That has abated somewhat, and we don't expect any elevated payoff activity. So the funding up of a couple billion dollars of commitments there on our books, coupled with new production minus reasonable level of payoffs, and there's always plenty of payoffs. I mean it's the nature of the commercial real estate business that it's somewhat of a hamster wheel of making new loans, having loans payoff. That's how it's supposed to work for banks. But we're going to be net ahead and should be healthily net ahead this year.

[Operator Instructions]. Your next question comes from the line of Michael Young with SunTrust Robinson Humphrey.

Just wanted to ask about the appetite for residential mortgage on balance sheet production in 2020. Is that impacted by CECL? And do you view that at all as an alternative to securities book growth? Just kind of get your high-level thoughts there.

Sure. So the securities book is going to remain at a lower level than we've historically held, as Chris said, around that 17% range. So to the extent the balance sheet expands with loans, that will creep up a bit. The residential mortgage stuff, it's a good point. Clearly, CECL causes more credit to be attracted to those loans. So we're going to be very deliberate about what goes on the balance sheet. We have a very active origination sale, retain service model here, and we'll continue to look at continuing that model. But I think it's fair to say that we have some reticence to put lower yielding residential mortgages that attract significantly more capital because of the accounting rules than they used to on the balance sheet.

Okay. And just a follow-up on the technology and equipment expense. Can you talk about where kind of new dollars are being put to work? Maybe how much of that is kind of customer experience driven versus efficiency efforts, et cetera?

Sure. It turns out that usually improving the digital customer experience also leads to more efficiency. So we're now up to about 80% of our mortgage applications are rolling through our Blend application that we rolled out earlier this year. That causes significant efficiency with the digitization of that application from the moment that someone starts typing on their computer or their phone or their tablet. Most of our efforts are customer-facing, so that we remain relevant and more than competitive with many of our competitors in our footprint, and that will continue. But we also have other significant technology projects that we completed. We recently completed a complete revamping of our campaign -- marketing campaign management system, which automates a lot of our ability to digitally connect with customers and send out hundreds and thousands and millions of e-mails in an efficient manner. So that's both a customer-facing technology, but clearly drives efficiency and accuracy in the back shop. So I'd say it's both, but it's more heavily weighted toward the customer experience.

Your next question is a follow-up from Scott Siefers with Piper Sandler.

I was just curious on the overall credit portfolio. I guess if there -- if we're sort of nearing the end of energy-related charge-offs as you finished derisking that portfolio, where are your nonenergy charge-offs running these days, maybe in terms of basis points would be great? I know they're very small, but I'm just trying to get a sense for what the expectation for total charge-offs would be if we're kind of sunsetting on the issues in the energy portfolio?

Yes. I mean that's always hard to prognosticate because any one charge-off can drive that. In this past quarter, we had $14 million of net charge-offs, a little less than $10 million were oil and gas-related, most of the rest of it was some mortgage and other consumer assets. So the vast bulk of our charge-offs this past year were oil and gas, and the remainder was next to nothing. I don't have the basis points in front of me, but it's probably a single digit.

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

Well, thanks, everybody, for joining us today. We feel well positioned going into 2020. The efforts we made to reposition our balance sheet for the rate environment we're in, we believe, will pay dividends. We should have a stable net interest margin potentially rising a little bit. You saw the results in the fourth quarter of our NIM actually going up 2 basis points. We feel good about our loan growth. We will manage expenses as we always do, and we believe we're in a benign credit environment. So I think we're well positioned to perform well in 2020. We look forward to welcoming our First Staunton customers and colleagues in February, and we look forward to talking to all of you in April. And as always, if you have any questions, give us a call, and thanks again for your interest in Associated.

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