Associated Banc-Corp — Q1 2017 Form 10-Q
Business context and reporting period. Associated Banc-Corp is a bank holding company with commercial, consumer, mortgage, insurance, and other financial services businesses. This unaudited report covers the three months ended March 31, 2017; income and cash-flow comparisons are with Q1 2016, while balance-sheet comparisons are principally with December 31, 2016.
Financial performance and condition
- Revenue and earnings: Net interest income was $180.3 million, up 5% from $172.0 million. Noninterest income was $79.8 million, down 4%, primarily reflecting the absence of the prior-year investment securities gains. Total revenue, calculated as net interest income plus noninterest income, was $260.1 million versus $255.2 million, up about 2%. Net income rose to $56.3 million from $42.5 million; net income available to common equity was $53.9 million versus $40.3 million. Diluted EPS was $0.35 versus $0.27.
- Margins and expenses: Net interest margin, on a fully tax-equivalent basis, was 2.84% versus 2.81%. Total noninterest expense was essentially flat at $173.7 million. The fully tax-equivalent efficiency ratio was 64.89%, compared with 67.44% in Q1 2016. The effective tax rate declined to 27.31% from 30.51%, including a tax benefit related to stock-based compensation.
- Credit and asset quality: Provision for credit losses was $9.0 million, down from $20.0 million; net charge-offs were $5.7 million, or 0.11% of average loans, versus $16.9 million, or 0.36%. Nonaccrual loans were $260.0 million, 1.29% of loans, compared with $275.3 million and 1.37% at year-end. Nonperforming assets were $274.9 million, 0.94% of assets. The $282.7 million loan-loss allowance equaled 1.40% of loans and covered 109% of nonaccrual loans.
- Loans and deposits: Period-end loans were $20.15 billion, up modestly from year-end and 5% from March 2016; consumer loans and residential mortgages grew, while commercial and business lending declined from year-end. Deposits were $21.83 billion, little changed from year-end and up 6% year over year. Average loans were $20.1 billion, up 6% year over year, and average deposits were $21.5 billion, up 4%.
- Cash flow and liquidity: Operating activities provided $169.8 million; investing activities used $40.4 million and financing activities used $82.1 million. Cash and cash equivalents increased $47.2 million to $689.5 million. Total assets were $29.11 billion. Short- and long-term funding totaled $3.84 billion. Management reported compliance with internal liquidity objectives and access to $2.9 billion of FHLB advances and $2.2 billion of Federal Reserve discount-window borrowing capacity. Network deposits were $3.4 billion, or 16% of deposits.
- Capital: The common equity Tier 1 ratio was 9.87%, the total capital ratio 13.05%, and the Tier 1 leverage ratio 8.05%. Management stated that the Corporation and its bank subsidiary exceeded regulatory minimum capital requirements.
Material changes, outlook, and risks
- Management outlook: For the remainder of 2017, management expected mid-to-high single-digit annual average loan growth, a loan-to-deposit ratio below 100%, and an improving net interest margin trend. It expected improving fee-based revenues and increased tax-credit investment activity, but declining mortgage banking revenue. Noninterest expense was expected to be about 1% higher than the prior year, with continued efficiency-ratio improvement as revenue grows. Credit-loss provisions would depend on loan volume and changes in credit quality.
- Credit concentration: Oil and gas loans totaled $625 million; $134 million, or 21%, were nonaccrual. The allowance attributed to oil and gas credits was $42 million. The filing cites lower market prices and volatility as drivers of risk migration. Q1 included approximately $55 million of troubled debt restructurings, largely several large oil and gas loans; approximately $54 million was nonaccrual.
- Interest-rate exposure: Management described the balance sheet as slightly asset-sensitive. Its dynamic model estimated 12-month net interest income increases of 1.5% and 3.0% for instantaneous rate increases of 100 and 200 basis points, respectively. Market value of equity was estimated to decline 2.9% and 6.2% under those scenarios. The Federal Reserve raised its target range in March; the timing and magnitude of future increases were uncertain.
- Accounting and portfolio changes: Beginning January 1, 2017, newly originated residential mortgage loans held for sale were measured under the fair value option; prior periods were not restated. The Corporation transferred about $300 million of GNMA commercial mortgage-related securities from available-for-sale to held-to-maturity and expected further transfers during 2017. Management reported no material impact from early adoption of the cited accounting standards.
- Legal and contingent matters: The Bank received summary judgment in the Oxford-related Zayed lawsuit, but the plaintiff appealed; management could not estimate the potential loss. Two World Marketing bankruptcy-related lawsuits also had outcomes and potential losses that management could not estimate. The filing notes ongoing customer remediation and regulatory scrutiny of certain legacy consumer products. The Bank’s HUD agreement includes multiyear lending, branch, outreach, and grant commitments; management did not expect a material financial impact.
- Subsequent events: The board declared a $0.12 quarterly common dividend on April 25, payable June 15, 2017. A favorable Minnesota tax-court ruling on April 18 concerned a tax liability for 2007–2008; about $2 million had been reserved, and some or all could be released in a later period, subject to further proceedings or settlement.
Most important facts for investors to verify
- Whether loan growth and the expected improvement in net interest margin materialize as deposit and funding costs adjust to interest rates.
- Subsequent performance, reserve adequacy, and charge-offs in oil and gas lending, including the restructured loans and nonaccrual balances.
- Whether noninterest income, especially mortgage banking and fee-based revenue, follows management’s outlook, and whether expenses remain near the stated expectation.
- Liquidity and funding mix, particularly network deposits, short-term funding, and management’s ability to maintain its loan-to-deposit objective.
- Developments in the appealed Zayed case, World Marketing litigation, consumer-product remediation, and the Minnesota tax reserve.
- The effects of continued transfers of securities to held-to-maturity and the adoption of new accounting standards, including expected-credit-loss guidance.