Associated Banc-Corp — 2011 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited consolidated results; balance-sheet comparisons are to December 31, 2010 unless noted. The company’s primary business is banking, with a smaller wealth-management segment.
Financial results and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net interest income | $153.2 million | $153.9 million | $461.0 million | $482.9 million |
| Noninterest income | $71.7 million | $81.9 million | $208.6 million | $260.8 million |
| Net income (loss) | $41.3 million | $14.3 million | $98.6 million | $(14.9) million |
| Net income (loss) available to common equity | $34.0 million | $6.9 million | $75.0 million | $(37.0) million |
| Diluted EPS | $0.20 | $0.04 | $0.43 | $(0.22) |
- Margin and operating performance: Net interest margin was 3.23% in Q3, up 15 basis points year over year but down 6 basis points sequentially. Nine-month margin was 3.28% versus 3.22%. The Q3 efficiency ratio was 71.89%, compared with 67.36% a year earlier.
- Credit costs: Provision for loan losses was $4 million in Q3 and $51 million year to date, versus $64 million and $327 million, respectively, in 2010. Nine-month net charge-offs were $128 million, or 1.32% of average loans annualized, versus $379 million and 3.78% in 2010.
- Balance sheet: Assets were $21.9 billion; loans were $13.5 billion, up $887 million since year-end; and available-for-sale securities were $5.5 billion, down $648 million. Deposits were $14.8 billion, down $443 million. Short- and long-term funding totaled about $4.0 billion, up approximately $848 million.
- Capital and debt: Stockholders’ equity was $2.85 billion, down $308 million, primarily reflecting redemption of Treasury CPP preferred stock. The corporation’s Tier 1 risk-based and total risk-based capital ratios were 14.35% and 15.81%, respectively; management said capital ratios exceeded regulatory minimums. Long-term funding was $1.48 billion; total short- and long-term funding was $4.01 billion.
- Cash flow: For the first nine months, operating activities provided $242.7 million, investing activities used $368.7 million, and financing activities used $76.7 million. Cash and cash equivalents declined $202.7 million to $665.5 million.
Changes and management commentary
- Profitability improved substantially year over year, largely alongside sharply lower loan-loss provisions and improved credit indicators. Net interest income and noninterest income both declined for the first nine months; aggregate net interest income plus noninterest income was $669.6 million, down from $743.7 million.
- Noninterest income fell 20% year to date. Deposit-account service charges declined $18.2 million, and net mortgage-banking income declined $16.9 million. The prior-year period included $26.8 million of net investment-securities gains; 2011 recorded a net loss of $0.8 million.
- Noninterest expense increased 4.7% year to date to $485.2 million, mainly due to a 12.2% rise in personnel expense. Management expected moderate expense increases for the remainder of 2011 as it invested in personnel, systems, and its branch network.
- Credit quality improved: nonaccrual loans were $403 million, or 2.99% of loans, versus $574 million at year-end 2010 and $728 million a year earlier. Potential problem loans fell to $660 million from $964 million at year-end. Accruing restructured loans rose to $113 million from $80 million at year-end; nonaccrual restructured loans were $80 million.
- Management expected a moderate 2–3% pace of loan growth in Q4 2011, lower provision expense, and net charge-offs to remain flat. It anticipated modest margin pressure from the low-rate environment, modest loan growth, and funding the CPP preferred-stock redemption. It also expected continued pressure on core fee income.
Outlook, risks, and unusual items
- The Durbin Amendment was expected to reduce card-based fees by approximately $4 million in Q4 2011 and $17–$19 million on an annualized basis thereafter.
- The Bank’s 2009 OCC Memorandum of Understanding was terminated in Q3 2011. A separate 2010 Federal Reserve Bank of Chicago memorandum remained in effect and required prior approval for specified capital, debt, dividend, and share-repurchase actions.
- The company redeemed all $525 million of Treasury CPP preferred stock during 2011, funded by issuing $430 million of senior notes and $65 million of 8% perpetual preferred depositary shares. The senior notes carry a 5.125% coupon and mature in 2016. CPP warrants remained outstanding.
- Management reported that the annual May 2011 goodwill test found reporting-unit fair values above carrying values; no impairment was recorded. Mortgage-servicing rights, loan-loss reserves, derivatives, and deferred tax assets depend on estimates and assumptions. A 25% increase in estimated prepayment speeds would have reduced the estimated MSR value by about $7.6 million, according to the filing.
- A putative class action alleges unfair overdraft-fee practices. Management considered a loss probable and recorded an accrual it described as immaterial; the potential claim amount had not been determined. Other disclosed exposures include mortgage repurchase representations and warranties, PMI reinsurance, and off-balance-sheet lending commitments.
- Management stated the company was in compliance with internal liquidity objectives. It disclosed $4.18 billion of commitments to extend credit, $47.7 million of commercial letters of credit, and $330.2 million of standby letters of credit. A $0.01-per-share dividend declared after quarter-end was payable November 16, 2011.
Important facts for investors to verify
- Whether improving nonaccrual, potential-problem-loan, and charge-off trends continue, and whether the allowance remains adequate as it declines.
- How much earnings are affected by ongoing low interest rates, margin pressure, deposit and funding mix, and the cost of the new senior notes and preferred shares.
- Whether fee-income declines—including the anticipated Durbin Amendment impact—and higher personnel and strategic investment costs affect future profitability.
- The ongoing status and potential financial consequences of the Federal Reserve memorandum, overdraft litigation, mortgage-related recourse and reinsurance exposures, and unfunded commitments.
- The sustainability of reported earnings, which benefited from lower provisions, and the extent to which cash, liquidity, and capital ratios withstand further credit or funding stress.