Associated Banc-Corp — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited consolidated results; balance-sheet comparisons are to December 31, 2016. Dollar amounts below are in U.S. dollars.
Business context and financial performance
Associated Banc-Corp is a regional financial services company. Its reportable segments are Corporate and Commercial Specialty; Community, Consumer, and Business; and Risk Management and Shared Services.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $190.1 million | $178.5 million | $554.2 million | $527.2 million |
| Net income | $65.0 million | $53.8 million | $179.3 million | $145.4 million |
| Net income available to common equity | $62.7 million | $51.6 million | $172.2 million | $138.9 million |
| Diluted earnings per common share | $0.41 | $0.34 | $1.11 | $0.92 |
| Provision for credit losses | $5.0 million | $21.0 million | $26.0 million | $55.0 million |
| Noninterest income | $85.9 million | $95.2 million | $248.1 million | $260.6 million |
| Noninterest expense | $177.4 million | $175.3 million | $527.4 million | $523.6 million |
Net interest margin was 2.84% in Q3 and 2.83% for the first nine months, versus 2.77% and 2.80%, respectively, in the comparable 2016 periods. The nine-month fully tax-equivalent efficiency ratio was 64.19%, compared with 65.99% a year earlier. The nine-month effective tax rate was 27.99%, versus 30.47%.
Financial position, cash flow, and liquidity
- At September 30, 2017, total assets were $30.1 billion, loans were $20.9 billion, and deposits were $22.3 billion. Since year-end 2016, assets rose 3%, loans 4%, and deposits 2%.
- Total stockholders’ equity was $3.20 billion. Regulatory capital ratios included common equity Tier 1 of 9.90%, Tier 1 capital of 10.64%, total capital of 13.04%, and Tier 1 leverage of 7.93%.
- Short- and long-term funding totaled $4.21 billion, up from $3.85 billion at year-end 2016. Long-term funding was $3.15 billion, including $2.65 billion in FHLB advances, $250 million senior notes, and $250 million subordinated notes.
- For the first nine months, operating activities provided $316 million and financing activities provided $717 million; investing activities used $1.18 billion. Cash and cash equivalents declined $151 million to $492 million from year-end 2016.
- Management reported compliance with internal liquidity objectives and sufficient asset-based liquidity under a stressed scenario. Available borrowing capacity included $2.6 billion from the FHLB and $2.2 billion at the Federal Reserve discount window; $68 million was outstanding under the parent’s $200 million commercial paper program.
Material changes and credit quality
- Nine-month average loans increased 5% year over year, with residential mortgage lending accounting for 89% of average loan growth. Residential mortgage loans were $7.4 billion at quarter-end, up from $6.3 billion at year-end 2016.
- Noninterest income fell 5% year over year for the first nine months, primarily because mortgage banking income was lower after portfolio loan sales in 2016. Q3 noninterest income was down 10% year over year for the same main reason.
- Net charge-offs were $28.8 million, or 0.19% of average loans, for the first nine months, compared with $55.7 million, or 0.38%, in 2016. The allowance for loan losses was $276.6 million, 1.32% of total loans, and covered 131% of nonaccrual loans.
- Nonaccrual loans were $210.5 million, or 1.01% of loans, versus $275.3 million and 1.37% at year-end 2016. Total nonperforming assets were $226.4 million, or 0.75% of assets. Potential problem loans were $258.9 million, down from $351.1 million at year-end.
- The oil and gas portfolio totaled $577 million across 56 credits; $92 million was nonaccrual and the related allowance was $30 million, or 5.2% of portfolio balances. Management described oil and gas as a higher-risk lending segment, while noting nonaccrual balances had declined from year-end.
Outlook, significant items, and risks
- No specific earnings or financial forecast for the remainder of 2017 is provided. Management cited expected gradual Federal Reserve rate increases but said their timing and magnitude were uncertain. The company was slightly asset-sensitive; modeled 12-month net interest income increased 2.3% to 2.4% under an instantaneous 100-basis-point rate rise, while market value of equity declined 2.9%.
- Associated agreed to acquire Bank Mutual in a stock transaction, with Bank Mutual shareholders to receive 0.422 Associated shares per share. Closing was expected in Q1 2018, subject to regulatory and shareholder approvals. Merger-related shareholder lawsuits were settled through additional disclosures; plaintiffs agreed to dismiss their actions on stated terms.
- Whitnell & Co. was acquired on October 2, 2017. It had approximately $1.0 billion of assets under management; management expected more than 10% growth in Associated’s assets under management and related run-rate revenue, no material 2017 earnings impact, and accretion in 2018.
- During the first nine months, approximately $1.0 billion of GNMA securities were reclassified from available-for-sale to held-to-maturity. The company also bought approximately $109 million of government-guaranteed student-loan asset-backed securities. It sold about $16 million of held-to-maturity municipal securities amid credit concerns, primarily related to Illinois budget pressures, recording a net gain of approximately $359,000.
- Effective January 1, 2017, newly originated residential mortgage loans held for sale were accounted for under the fair value option; prior periods were not restated. The filing says the election was intended to reduce accounting mismatches with related derivatives.
- Material risk disclosures include oil and gas borrower credit risk, interest-rate and market risk, deposit and wholesale funding conditions, loan-loss estimate uncertainty, mortgage servicing rights valuation, litigation, and potential regulatory remediation or enforcement regarding certain consumer products. The company stated it could not assess or estimate potential losses for certain pending cases and regulatory matters.
- The bank’s HUD agreement includes community lending and other commitments; management did not expect a material financial impact. In March 2017, the bank received a “Satisfactory” CRA rating, removing restrictions associated with its prior rating.
- The board declared a post-quarter common dividend of $0.14 per share, up $0.02 from the prior quarterly rate. The company repurchased approximately $37 million, or 1.57 million shares, in Q3.
Most important facts for investors to verify
- Whether loan growth—particularly residential mortgages—and net interest margin can be sustained as deposit and funding costs rise.
- Further trends in nonaccrual, potential problem, and oil and gas loans, and whether lower credit provisions and charge-offs persist.
- Progress, approvals, integration costs, and expected benefits of the Bank Mutual merger and Whitnell acquisition.
- Liquidity and capital capacity after loan growth, share repurchases, dividends, and increased funding needs.
- Updates on consumer-product regulatory matters, legal proceedings, securities portfolio values, and key estimates such as the allowance for loan losses and mortgage servicing rights.