Business context and reporting period
Associated Banc-Corp’s unaudited Form 10-Q covers the three months ended March 31, 2011. The company primarily operates a banking business, with a smaller wealth management segment. Amounts below are in U.S. dollars.
Financial performance and condition
- Earnings: Net income was $22.9 million, versus a $26.4 million net loss in Q1 2010. Net income available to common shareholders was $15.4 million, or $0.09 per diluted share, compared with a $33.8 million loss, or $0.20 per share.
- Revenue and margin: Net interest income was $153.7 million, down from $169.2 million; net interest margin was 3.32%, versus 3.35%. Noninterest income declined 26.4% to $72.2 million. Total interest income was $186.6 million; the filing does not provide a single consolidated revenue measure under the same presentation as these income-statement lines.
- Credit costs: Provision for loan losses was $31.0 million, compared with $165.3 million. Net charge-offs were $53.4 million, or 1.71% of average loans on an annualized basis, versus $163.3 million and 4.76%. Nonaccrual loans declined to $488.3 million from $1.18 billion a year earlier; the allowance was $454.5 million, 3.59% of loans and 93% of nonaccrual loans.
- Expenses: Noninterest expense rose 8.1% to $164.2 million, including personnel expense of $88.9 million, up 12.1%. The efficiency ratio was 72.67%, compared with 62.32% a year earlier.
- Balance sheet and liquidity: Total assets were $21.47 billion at quarter-end, down from $21.79 billion at December 31, 2010. Loans were $12.66 billion; deposits were $14.02 billion, down $1.20 billion since year-end. Cash and cash equivalents ended at $799.1 million. Q1 operating cash flow was $197.3 million, investing cash flow $73.8 million, and financing cash flow a use of $340.1 million.
- Funding and capital: Short-term borrowings were $2.55 billion and long-term funding $1.48 billion. Stockholders’ equity was $3.19 billion. The company reported a 14.88% equity-to-assets ratio, 12.65% Tier 1 common equity to risk-weighted assets, 18.08% Tier 1 risk-based capital, and 19.56% total risk-based capital. The bank reported a 10.05% leverage ratio and 16.99% total risk-based capital ratio.
Material changes versus comparable periods
- Return to profitability chiefly coincided with a substantially lower loan-loss provision than in Q1 2010; Q1 2010 also included $23.6 million of investment securities gains, versus a small net loss in Q1 2011.
- Net interest income fell as average earning assets and loan balances contracted. Lower funding costs partly offset reduced asset yields; the margin edged down year over year.
- Credit measures improved: nonaccrual and potential problem loans declined from year-end, and past-due loans were lower year over year. The company cautioned that credit estimates remain subject to judgment and economic conditions.
- Deposits declined as the company reduced network transaction and brokered deposits, while wholesale funding increased. Investment securities available for sale fell to $5.88 billion from $6.10 billion at year-end.
Outlook, risks, contingencies, and unusual items
- Management expected modest core banking margin expansion if rates remained stable and loan and deposit growth strengthened, but said the new senior notes would reduce the margin run rate by 8–10 basis points. It anticipated loan growth momentum building during 2011, modest growth in deposits and customer funding, and continued reductions in network and brokered deposits.
- Management expected net charge-offs and loan-loss provision to trend lower for the remainder of 2011, and moderate expense increases from investments in personnel, systems, and infrastructure. Core fee revenues were expected to face pressure from consumer behavior and regulatory changes.
- On March 31, the company agreed to sell most installment loans in its consumer finance subsidiary. It marked $61 million of loans to the transaction price, recording a $10 million write-down through the allowance; closing was expected in Q2 2011.
- After quarter-end, on April 6, the company repurchased half of its $525 million Treasury preferred investment for $262.5 million plus accrued dividends. It said the redemption would cause a one-time, noncash reduction in Q2 income available to common equity from accelerated discount accretion. It also issued $300 million of 5.125% senior notes due 2016.
- On May 5, S&P upgraded the company’s long-term counterparty rating to BBB- and the bank’s to BBB, both with stable outlooks. The bank remained subject to an OCC memorandum requiring specified capital levels and other actions; the holding company remained subject to a Federal Reserve memorandum that requires prior approval for certain dividends, debt actions, and share repurchases.
- Risks include uncertain loan-loss estimates, commercial real estate and other credit deterioration, interest-rate and mortgage-servicing-rights valuation changes, funding access and cost, and potential tax-asset realization issues. An overdraft-fee class-action lawsuit was pending; the company denied the allegations and stated that litigation outcomes could adversely affect future results.
Important facts for investors to verify
- Whether improving nonaccrual loans and charge-offs persist, and whether the $454.5 million allowance remains adequate as credit conditions evolve.
- How deposit outflows, increased wholesale funding, and the senior-note issuance affect liquidity, funding costs, and net interest margin.
- Completion and financial effects of the installment-loan sale, including the final treatment of the $10 million write-down.
- Effects of the partial Treasury preferred-stock redemption on Q2 common earnings, capital, and remaining preferred dividends.
- Developments in the regulatory memoranda, overdraft litigation, and other contingencies.