Associated Banc-Corp — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. Unaudited. Associated Banc-Corp is a Wisconsin-based banking company with Commercial Banking, Consumer Banking, and Risk Management and Shared Services segments. Unless noted otherwise, amounts below are in U.S. dollars; financial amounts are rounded to millions.
Financial performance and condition
| Metric | Q1 2013 / March 31, 2013 | Comparable period / prior year-end |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $239.7 million | $233.1 million in Q1 2012; up 2.8% |
| Net interest income | $157.7 million | $154.7 million in Q1 2012; up 1.9% |
| Net interest margin | 3.17% | 3.31% in Q1 2012; down 14 basis points |
| Provision for loan losses | $4 million | Zero in Q1 2012 |
| Noninterest income | $82.0 million | $78.4 million in Q1 2012; up 4.5% |
| Noninterest expense | $166.9 million | $169.8 million in Q1 2012; down 1.7% |
| Net income | $47.4 million; diluted EPS $0.27 | $42.6 million; diluted EPS $0.24 in Q1 2012 |
| Total assets | $23.28 billion | $23.49 billion at December 31, 2012 |
| Total loans / deposits | $15.55 billion / $17.42 billion | Loans up $141 million and deposits up $481 million since year-end |
| Allowance for loan losses | $286.9 million; 1.84% of loans | $297.4 million; 1.93% at year-end |
| Cash and cash equivalents | $427.4 million at quarter-end | Down $310.5 million from $737.9 million at year-end |
| Short- and long-term funding | $2.68 billion | Down $657.7 million since year-end |
| Stockholders’ equity | $2.94 billion; 12.61% of assets | $2.94 billion; 12.50% of assets at year-end |
- Cash flow: operating activities provided $133.4 million; investing activities used $219.9 million and financing activities used $223.9 million. Net cash declined primarily alongside loan and securities investment, reduced short- and long-term funding, dividends, and $33.1 million of treasury-stock purchases.
- Profitability: return on average assets was 0.83%; return on average common equity was 6.56%; and the reported efficiency ratio was 69.74% (68.52% on a fully taxable-equivalent basis).
- Capital: Tier 1 common equity to risk-weighted assets was 11.64%, versus 12.49% a year earlier; total risk-based capital was 13.45%, versus 15.78%. Management said capital ratios exceeded regulatory minimums and that the company and bank would be “well capitalized” under the proposed Basel III rules if then effective.
Changes versus prior comparable period
- Net income available to common equity increased to $46.1 million from $41.3 million. Lower funding costs and growth in earning assets supported net interest income, but margin contracted as asset yields fell faster than funding costs.
- Average earning assets rose 7% to $20.7 billion, including growth in commercial loans. Loan yields fell 38 basis points to 3.83%; the yield on earning assets fell 33 basis points to 3.52%. Management attributed pressure to adjustable-rate loan repricing, competition, and the low-rate environment.
- Credit indicators improved: nonaccrual loans fell to $225 million from $327 million a year earlier; nonperforming assets declined to $261 million from $362 million; and net charge-offs decreased to $14.5 million from $21.9 million. Potential problem loans were $344 million versus $480 million.
- Noninterest income increased in part because asset results improved from a $3.6 million loss to an $0.8 million gain. Core fee-based revenue was broadly stable; trust and card-related fees rose, while deposit service charges, brokerage and capital-market fees declined.
- Noninterest expense declined $2.8 million. Lower legal and professional fees, non-loan losses, and foreclosure/OREO expense more than offset higher personnel, data-processing, equipment, and FDIC costs. Average full-time equivalent employees declined 4% to 4,841.
Outlook, management commentary, risks, and unusual items
- Management anticipated modest net interest margin compression through the remainder of 2013, modest improvement in core fee-based revenue, lower mortgage banking revenue, and flat year-over-year noninterest expense. It expected continued credit improvement and a higher loan-loss provision in line with new loan growth.
- Management identified low interest rates, loan repricing and competitive pricing as pressure on asset yields. A 100-basis-point rate increase was modeled to raise net interest income by approximately 2.4% at March 31, 2013; the simulations were within company policy limits.
- Mortgage servicing rights were $52.1 million net, against a $7.6 billion servicing portfolio. Management estimated a 50-basis-point decrease in refinance rates would reduce the asset’s value by about $7 million; a 50-basis-point increase would raise it by about $7 million. Valuation depends on assumptions including prepayments and discount rates.
- Mortgage repurchase activity increased: the reserve for potential claims was $4.4 million, up from $3.3 million at year-end, following a $3.0 million provision in the quarter. The company reported $15.9 billion of loans sold during January 2006–March 2013, with about $6.9 billion still outstanding; make-whole requests and losses may rise.
- Legal and regulatory matters include a previously accrued $13 million overdraft-fee class-action settlement, subject to court approval, and a new lawsuit concerning an alleged Ponzi scheme. Management could not assess the likelihood or estimate potential loss in the new case. The Bank remained subject to an OCC BSA compliance Consent Order and could face civil money penalties; management believed it was complying.
- Off-balance-sheet exposure included $5.50 billion of commitments to extend credit, $131.9 million of commercial letters of credit, and $277.0 million of standby letters of credit. These contractual amounts do not necessarily represent expected cash outflows.
- The Board declared a regular $0.08 per-share common dividend for payment in June 2013. The company repurchased 2.1 million shares for $30 million during the quarter; $65 million remained authorized for repurchase at March 31.
- Management cautioned that interim results are not necessarily indicative of full-year results and that estimates—especially loan-loss reserves, mortgage servicing rights, goodwill, derivatives, and taxes—may differ from actual outcomes.
Important facts for investors to verify
- Whether margin compression, lower mortgage banking revenue, and projected flat expenses develop as management expected.
- Whether credit-quality improvement continues and whether the $286.9 million allowance remains adequate as lending grows and charge-offs evolve.
- Trends in mortgage repurchase claims, reserve adequacy, and potential exposure on sold loans and servicing rights.
- Progress and any penalties related to the OCC Consent Order, and developments in the Oxford-related lawsuit and overdraft settlement.
- Capital levels under final Basel III rules, funding and liquidity needs, and the effect of share repurchases and dividends on capital.