Associated Banc-Corp — Q2 2015 Form 10-Q
Business context and reporting period. Associated Banc-Corp is a Wisconsin-based bank holding company. This unaudited quarterly report covers the three and six months ended June 30, 2015; balance-sheet comparisons are primarily with December 31, 2014. Unless noted otherwise, amounts below are in millions of dollars.
Financial results and key metrics
| Metric | Q2 2015 | Comparable period / change |
|---|---|---|
| Net interest income | $166.5 | $168.7 in Q2 2014; down 1% sequentially from Q1 2015 |
| Net interest margin | 2.83% | 3.08% in Q2 2014; 2.89% in Q1 2015 |
| Noninterest income | $86.5 | $72.2 in Q2 2014; up 19.8% |
| Noninterest expense | $176.8 | $167.9 in Q2 2014; up 5.3% |
| Net income | $49.4 | $46.4 in Q2 2014 |
| Net income available to common shareholders | $47.9 | $45.1 in Q2 2014 |
| Diluted EPS | $0.31 | $0.28 in Q2 2014 |
- For the first half of 2015, net income was $96.1 million versus $91.6 million a year earlier; diluted EPS was $0.61 versus $0.55. Net interest income was $334.3 million versus $333.7 million, while noninterest income rose to $166.6 million from $145.8 million.
- Q2 fee growth was led by insurance commissions and mortgage banking. Insurance commissions rose 47% year over year, primarily reflecting the Ahmann & Martin acquisition; mortgage banking income rose 85% to $9.9 million.
- Q2 personnel expense increased year over year, including $2 million of severance related to brokerage restructuring and planned branch closures. First-half noninterest expense was $351.1 million versus $335.6 million.
- At June 30, total assets were $27.2 billion, loans $18.3 billion, deposits $19.3 billion, and stockholders’ equity $2.9 billion. From year-end, assets rose 1%, loans 4%, and deposits 3%.
- First-half operating cash flow was $112.8 million; investing activities used $842.8 million and financing activities provided $214.7 million. Cash and cash equivalents decreased $515.3 million to $516.8 million.
Material changes, balance sheet, and capital
- Deposits increased $506 million from year-end. Short-term funding rose $527 million, while long-term funding declined $750 million; combined short- and long-term funding decreased about 4% to $4.78 billion. Long-term funding included $2.25 billion of FHLB advances, $680 million of senior notes, and $250 million of subordinated notes.
- The company acquired Ahmann & Martin Co. in February for approximately $48 million, with up to $8 million of contingent additional consideration. The acquisition added approximately $40 million of goodwill and $12 million of other intangible assets and contributed to higher insurance commissions.
- During Q2, the company sold more than $1 billion of FNMA/FHLMC mortgage-related securities and reinvested in GNMA securities, generating a $1.2 million net securities gain. Management said the restructuring reduced risk-weighted assets and improved portfolio liquidity.
- Common Equity Tier 1 was 9.31% of risk-weighted assets; the company reported capital above regulatory minimums and said it remained well-capitalized under the applicable rules. Total stockholders’ equity was 10.68% of assets. The company issued $63 million of Series C preferred stock in June.
- The company repurchased approximately $93 million of common stock in the first half, including $63 million in Q2. Management said it would pause further common-stock repurchases with CET1 within its target range.
Credit quality, outlook, and risks
- Nonaccrual loans were $160 million, or 0.88% of loans, down from $174 million at March 31 and $179 million a year earlier. Potential problem loans were $200 million, down from $219 million at March 31. Nonperforming assets were $174 million, or 0.64% of assets.
- First-half net charge-offs were $14.3 million versus $8.0 million a year earlier; the annualized rate was 0.16% versus 0.10%. Q2’s annualized rate was 0.19%, up from 0.13% in Q1 and 0.06% in Q2 2014. The allowance for loan losses was $261.5 million, 1.43% of loans, and covered 163% of nonaccrual loans.
- Oil-and-gas-related credits warrant attention: the allocated allowance was $26 million, or 3.43% of period-end oil and gas loans, versus $17 million and 2.26% at year-end 2014.
- Management expected high-single-digit annual average loan growth for the remainder of 2015 and a loan-to-deposit ratio below 100%. It anticipated modest further net interest margin compression, provision expense varying with loan growth and credit conditions, and seasonally lower insurance commissions. The company expected full-year noninterest expense not to exceed $700 million.
- Management described the balance sheet as slightly asset-sensitive. A modeled 100-basis-point rate increase raised 12-month earnings-at-risk 1.5% under the dynamic forecast; market value of equity declined 2.1% under the same upward shock. Results depend on assumptions about rates, deposit behavior, and balance-sheet mix.
- Liquidity management was reported within internal objectives. The company said approximately $2.9 billion of remaining investment securities could be pledged or sold to enhance liquidity; a downgrade or reduced access to wholesale funding could increase funding costs.
- Legal and regulatory matters include a Ponzi-scheme-related lawsuit remanded for further proceedings; management could not assess the likelihood or amount of a material loss. A HUD conciliation agreement requires approximately $196 million of mortgage lending and other community commitments over three years; management did not expect a material financial impact. Potential regulatory action concerning legacy debt- and identity-protection products also remains uncertain.
- Other notable planned actions include consolidation of 13 branches in the second half of 2015, with approximately $3 million of expected lease-breakage expense, and restructuring of the securities brokerage business, which management expected to modestly reduce brokerage and annuity revenue.
Most important facts for investors to verify
- Whether loan growth and deposit funding can meet management’s targets without further margin compression or a higher cost of funds.
- Whether rising net charge-offs and oil-and-gas exposure lead to higher provisions, and whether improving nonaccrual and potential-problem loan trends continue.
- Whether the $700 million full-year expense ceiling incorporates acquisition, severance, and branch-closure costs as expected.
- The effect of the securities portfolio restructuring and interest-rate movements on net interest income, liquidity, and capital.
- Developments in the remanded lawsuit, legacy-product regulatory review, mortgage repurchase exposure, and execution of the HUD commitments.