Associated Banc-Corp — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results are consolidated; comparisons below are with the prior-year comparable period unless noted. The bank acquired Huntington branches in Wisconsin on June 14, adding a net 14 branch locations through the acquisition and other consolidations.
Financial performance and condition
| Metric | Q2 2019 | Six months 2019 |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $309.5 million, down 3% | $616.2 million, down 1% |
| Net interest income | $213.6 million, down 6% | $429.2 million, down 2% |
| Net interest margin | 2.87%, down 15 basis points | 2.89%, down 8 basis points |
| Noninterest income | $95.8 million, up 3% | $187.0 million, up 2% |
| Noninterest expense | $197.8 million, down 6% | $389.5 million, down 8% |
| Provision for credit losses | $8.0 million, versus $4.0 million | $14.0 million, versus $4.0 million |
| Net income | $84.7 million, versus $89.2 million | $171.3 million, versus $158.6 million |
| Diluted EPS | $0.49, versus $0.50 | $0.99, versus $0.90 |
At June 30, total assets were $33.3 billion, loans $23.25 billion, deposits $25.27 billion, and stockholders’ equity $3.90 billion. Loans rose $310 million and deposits $377 million from year-end 2018; the Huntington transaction added $116 million of loans and $725 million of deposits. Total FHLB advances were $2.74 billion, down $831 million from year-end. The allowance for loan losses was $233.7 million, or 1.00% of loans. CET1 capital ratio was 10.13%; total capital ratio was 13.24%.
For the six months, operating activities provided $70 million of cash and investing activities provided $968 million, including $551 million net cash received in acquisitions. Financing activities used $1.36 billion, and cash, cash equivalents, and restricted cash declined $320 million to $557 million. Management reported compliance with internal liquidity objectives and $4.6 billion available for future FHLB advances and $1.5 billion available through the Federal Reserve discount window.
Changes versus prior periods
- Q2 net income available to common shareholders was $80.9 million, versus $86.9 million a year earlier; diluted EPS was $0.49 versus $0.50. Six-month earnings available to common shareholders increased to $163.7 million from $154.0 million.
- Margin pressure reflected reduced acquired-loan prepayments and accretion, partly offset by loan growth. Acquired Bank Mutual and Huntington loan accretion contributed $4 million to six-month net interest income, versus $15 million of Bank Mutual accretion in the first half of 2018.
- Six-month expenses fell $34.8 million, mainly because acquisition-related costs declined $23.3 million and FDIC assessments declined $8.3 million. Credit provision rose $10 million year over year.
- Nonaccrual loans increased to $166.7 million from $127.9 million at year-end 2018; nonperforming assets rose to $185.1 million from $139.9 million. Potential problem loans declined to $165.8 million from $249.9 million. Management attributed the increase in nonaccrual loans primarily to oil-and-gas credit migration.
Outlook, risks and unusual items
- Management expected 2019 average loan growth of 3%–6%, a loan-to-deposit ratio below 100%, full-year NIM of approximately 2.90%, noninterest income of $360–$375 million, and noninterest expense of $790–$795 million. The NIM outlook assumed two 25-basis-point Federal funds rate cuts in the remainder of 2019. Credit provision was expected to vary with risk grades, credit quality indicators and loan volume.
- The oil-and-gas portfolio totaled $657 million across 48 credits, under 3% of loans. Its allowance rose to $25 million, or 3.8% of that portfolio, from $12 million at year-end. Management planned further exposure reductions during the remainder of 2019.
- The company sold $934 million of securities in the first half, recording an $11 million loss on sales, and used proceeds to reduce borrowings and reposition into higher-yielding, somewhat longer-duration agency mortgage securities. A separate $13.4 million Visa Class B share write-up, following an observable market transaction, contributed to investment securities gains.
- Management stated that unrealized securities losses were primarily interest-rate and market-related, not credit deterioration, and that it did not expect to sell the affected securities before recovery. Interest-rate sensitivity showed estimated 12-month earnings-at-risk increases of 3.0% and 6.0% for gradual 100- and 200-basis-point rate increases, respectively; the filing also notes lower or inverted rates generally pressure earnings.
- The company disclosed pending and threatened legal claims and possible regulatory scrutiny of consumer products and fees. It said it did not believe any currently outstanding legal proceeding would materially adversely affect the company; potential regulatory outcomes could not be reliably estimated. Mortgage repurchase reserve was $0.7 million.
- Expected-credit-loss accounting (CECL) was scheduled for adoption in Q1 2020. The filing said the financial impact was not quantified but an overall allowance increase was anticipated. Subsequent to quarter-end, the board declared regular dividends and approved redemption of $250 million of 2.75% senior notes, anticipated for October 15, 2019. A July 25 merger agreement to acquire First Staunton Bancshares was valued at approximately $76.3 million in cash.
Important facts for investors to verify
- Whether margin and funding costs meet management’s outlook, particularly under the assumed rate cuts and changing deposit mix.
- Trends in oil-and-gas credits, nonaccrual loans, charge-offs, and the adequacy of the allowance as CECL approaches.
- Execution and integration effects of the Huntington branch acquisition, including deposit retention, expenses, and expected benefits.
- Liquidity and capital after the planned senior-note redemption, share repurchases, dividends, and proposed First Staunton acquisition.
- Potential effects of regulatory matters, litigation, mortgage repurchase exposure, and investment portfolio repositioning.