Associated Banc-Corp — Q3 2015 Form 10-Q
Business context and reporting period. Associated Banc-Corp is a Wisconsin-based banking and financial services company. This unaudited filing covers the quarter and nine months ended September 30, 2015; balance-sheet comparisons are primarily with December 31, 2014. Amounts below are in U.S. dollars, rounded to millions unless stated otherwise.
Key financial metrics
| Metric | Q3 2015 | Comparison |
|---|---|---|
| Net interest income | $170.5 million | Down 1.2% from Q3 2014; net interest margin was 2.82%, versus 3.06% |
| Noninterest income | $79.9 million | Up 6.7% year over year |
| Noninterest expense | $171.4 million | Nearly unchanged year over year |
| Net income | $49.4 million | Compared with $50.2 million |
| Net income available to common shareholders; diluted EPS | $47.3 million; $0.31 | Compared with $49.0 million; $0.31 |
- Nine-month results: net interest income was $504.8 million, noninterest income $246.5 million, noninterest expense $522.5 million, and net income $145.5 million. Diluted EPS was $0.92, versus $0.85 in the first nine months of 2014. Net income available to common shareholders was $140.6 million, versus $138.0 million.
- Margins and efficiency: nine-month net interest margin was 2.84%, down from 3.09% a year earlier. The fully tax-equivalent efficiency ratio was 67.09% for Q3 and 68.07% year to date.
- Balance sheet at September 30: total assets were $27.5 billion; loans $18.5 billion, up 5% from year-end; deposits $20.6 billion, up 10%; and stockholders’ equity $3.0 billion. Total short- and long-term funding was $3.7 billion, down 26% from year-end, mainly reflecting lower long-term FHLB advances.
- Cash flow, first nine months: operating activities provided $239 million, investing activities used $1.27 billion, and financing activities provided $412 million. Cash and cash equivalents ended at $410 million, down $622 million from year-end.
- Credit and capital: the allowance for loan losses was $262.5 million, or 1.42% of loans. Nonaccrual loans were $147 million (0.80% of loans), and nonperforming assets were $161 million. Common equity Tier 1 was 9.39%, the Tier 1 leverage ratio 7.53%, and total risk-based capital 12.49%; the company reported capital above regulatory minimums and “well-capitalized” status.
Material changes versus comparable periods
- Q3 net income declined modestly year over year despite higher fee income: stronger insurance commissions, principally from the Ahmann & Martin acquisition, and investment-securities gains offset lower net interest income and the prior-year benefit from asset gains.
- For the first nine months, noninterest income rose 11.7%, including a 69.6% rise in insurance commissions; noninterest expense rose 3.0%, partly due to acquisition-related personnel costs and technology investment. Net interest margin contracted as asset yields fell and funding costs increased.
- Credit indicators were mixed: nonaccrual loans declined year over year, but nine-month net charge-offs rose to $22 million from $11 million and potential problem loans increased to $264 million from $190 million at year-end 2014. Management attributed the latest quarterly increase in potential problem loans to migration of a small number of commercial credits.
- In February 2015, the company acquired insurance and employee-benefits firm Ahmann & Martin for approximately $48 million, with up to $8 million of additional contingent consideration. It recorded approximately $40 million of goodwill and $12 million of other intangible assets.
- The company reclassified approximately $500 million of closed-end first-lien home-equity loans as residential mortgages during Q3; prior periods were restated. This was a presentation change, not a change in total loans.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance was provided. Management noted continued uncertainty about the timing of interest-rate changes. The company was slightly asset-sensitive in its interest-rate profile; modeled 12-month earnings at risk rose 1.2% under an immediate 100-basis-point rate increase, while market value of equity sensitivity was negative 2.0% under that scenario.
- Management said Q3 average loans grew 1% sequentially and average deposits reached a record $20.3 billion. Sequentially, net interest margin edged down one basis point; fee income fell 8%, principally due to seasonally lower insurance activity and reduced mortgage banking income.
- The company sold more than $1 billion of FNMA/FHLMC mortgage-related securities and reinvested in GNMA securities during Q2 and Q3, generating a $4 million net gain. Management said the restructuring lowered risk-weighted assets and improved investment-portfolio liquidity. It did not consider unrealized securities losses to be other-than-temporary impairment.
- Key risks include low-rate and competitive pricing pressure on loan yields, higher funding costs, borrower credit deterioration (including commercial and oil-and-gas exposures), and valuation sensitivity of mortgage servicing rights. The filing estimates a 50-basis-point decline in refinance rates would reduce MSR value by about $10 million, holding other factors constant.
- Contingencies include an Oxford Global Partners Ponzi-scheme lawsuit remanded for further proceedings; management could not estimate the probability or amount of a potential loss. The Bank’s HUD conciliation agreement includes approximately $196 million in mortgage-lending commitments and other community commitments over multiple years; management did not expect a material effect on financial condition or results. The company also disclosed customer remediation for legacy products and possible further regulatory action, with potential losses not reasonably estimable.
- After quarter-end, the board declared a $0.11 per-share common dividend and quarterly preferred dividends, payable in December 2015. These were not reflected in the quarter-end statements.
Important facts for investors to verify
- Whether the increase in potential problem commercial loans, particularly oil-and-gas-related exposure, leads to higher provisions or charge-offs.
- Whether loan growth, deposit mix and funding costs stabilize net interest margin, and how actual results compare with the filing’s rate-sensitivity scenarios.
- How much acquisition-related insurance revenue and expense persists, and whether the Ahmann & Martin contingent consideration is triggered.
- Developments in the Ponzi-scheme litigation, customer-remediation matters and regulatory scrutiny, for which the filing provides no clear estimate of potential losses.
- Whether liquidity and capital remain adequate after dividends, share repurchases, contractual commitments and changes in wholesale funding.