Associated Banc-Corp — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. The unaudited filing covers a banking business and a wealth management segment. Dollar amounts below are in millions unless noted.
Key financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $154.1 | $159.8 | $307.8 | $329.0 |
| Provision for loan losses | $16.0 | $97.7 | $47.0 | $263.0 |
| Noninterest income | $64.8 | $80.9 | $136.9 | $178.9 |
| Noninterest expense | $158.9 | $155.0 | $323.1 | $306.9 |
| Net income (loss) | $34.4 | $(2.8) | $57.2 | $(29.2) |
| Net income (loss) available to common equity | $25.6 | $(10.2) | $41.0 | $(43.9) |
| Diluted EPS | $0.15 | $(0.06) | $0.24 | $(0.26) |
| Net interest margin | 3.29% | 3.22% | 3.30% | 3.29% |
Balance sheet, credit, and liquidity
- At June 30, assets were $22.05 billion, loans $13.09 billion, and deposits $14.07 billion. Since year-end 2010, loans rose $473 million while deposits fell $1.16 billion. Available-for-sale securities declined $359 million to $5.74 billion.
- Cash and cash equivalents ended the half at $1.09 billion, up $227 million. Six-month cash flow was $273 million from operations, $(188) million from investing, and $141 million from financing.
- Short-term funding increased to $3.26 billion from $1.75 billion at year-end; long-term funding was $1.48 billion. The company issued $300 million of 5.125% senior notes due 2016. Total stockholders’ equity was $3.00 billion, down $160 million, mainly reflecting the $262.5 million CPP preferred-stock redemption; equity/assets was 13.60%.
- Nonaccrual loans fell to $468 million (3.57% of loans) from $574 million at year-end and $976 million a year earlier. Potential problem loans declined to $699 million from $964 million at year-end. The allowance was $426 million, or 3.25% of loans, covering 91% of nonaccrual loans. Six-month net charge-offs were $98 million; annualized net charge-offs were 1.54% of average loans.
- Bank capital ratios were 10.18% Tier 1 leverage and 17.01% total capital, above the specified OCC MOU minimums of 8% and 12%. Corporation Tier 1 common equity/risk-weighted assets was 12.61%; total risk-based capital was 17.50%.
Changes versus comparable periods
- Profitability recovered to positive net income in Q2 and the first half, chiefly as credit-loss provisions fell sharply. Net interest income and noninterest income were lower year over year, while noninterest expense increased.
- Credit quality improved, with lower nonaccrual and potential problem loans and lower net charge-offs than in first-half 2010. Management cautioned that net charge-offs would remain elevated even as it expected provisions to decline in each of the next two quarters.
- Fee income was pressured: first-half core fee-based revenue fell 7.0%, primarily because deposit service charges declined 27.3%, including lower overdraft fees. Mortgage banking shifted to a $1.5 million net loss from $10.9 million income, as mortgage servicing rights expense increased and secondary-market production declined.
- Efficiency ratio worsened to 72.58% in Q2 from 64.38% a year earlier; first-half ratio was 72.62% versus 63.34%. Personnel expense rose 12.2% for the half.
Outlook, risks, contingencies, and unusual items
- Management anticipated modest net interest margin pressure for the remainder of 2011, slower loan growth of 2–3% in each remaining quarter, continued pressure on core fees, and a moderate increase in expenses. It expected the remaining $262.5 million of CPP preferred shares to be repurchased in Q3 or Q4.
- The Durbin Amendment was expected to reduce card fees by about $4 million in Q4 2011, with an annualized ongoing impact of $17–$19 million. Management also cited low interest rates, competitive pricing, economic conditions, regulatory changes, and customer behavior as factors affecting results.
- The remaining $142 million of subordinated notes was due August 15, 2011; management expected to fund repayment from parent-company cash and liquid securities. Funding, capital distributions, and certain debt actions remained subject to regulatory restrictions and approvals under the OCC and Federal Reserve memoranda.
- A putative class action alleges unfair overdraft-fee assessment and collection; class certification was pending. The company denies the allegations and intends to defend the case. The filing says certain matters are accrued but warns litigation outcomes could materially adversely affect future results.
- Other notable items include a $5.8 million first-half addition to the mortgage servicing rights valuation allowance and a $10 million write-down of installment loans transferred to held for sale. Management reported no goodwill impairment in its May 2011 annual test, while identifying allowance estimates, goodwill, mortgage servicing rights, derivatives, and taxes as judgment-sensitive areas.
Most important facts for investors to verify
- Whether lower provisions and improving credit metrics persist, and how elevated net charge-offs affect the allowance.
- Deposit trends and the increased reliance on short-term and customer-repo funding, including associated costs and liquidity implications.
- Execution and funding of the August subordinated-debt repayment and planned CPP preferred-stock redemption.
- Mortgage servicing rights valuation sensitivity, mortgage banking performance, and the expected impact of interchange-fee changes.
- Developments in the overdraft-fee litigation, regulatory memoranda, and any related capital or operating restrictions.