Associated Banc-Corp — Q3 2016 Form 10-Q
Business context and reporting period. Associated Banc-Corp is a Wisconsin-based bank holding company. This unaudited quarterly report covers the three and nine months ended September 30, 2016; balance-sheet comparisons are primarily with December 31, 2015. Its reportable segments are Corporate and Commercial Specialty; Community, Consumer, and Business; and Risk Management and Shared Services.
Key financial results
| Metric | Q3 2016 | Comparable period / change |
|---|---|---|
| Net interest income | $178.5 million | Up 5% year over year; up 1% from Q2 2016 |
| Net interest margin | 2.77% | Down 5 basis points year over year and 4 basis points sequentially |
| Noninterest income | $95.2 million | Up 19% year over year; up 16% sequentially |
| Noninterest expense | $175.3 million | Up 2% year over year; up 1% sequentially |
| Provision for credit losses | $21.0 million | Up $13 million year over year and $7 million sequentially |
| Net income | $53.8 million | Up from $49.4 million in Q3 2015 |
| Net income available to common equity; diluted EPS | $51.6 million; $0.34 | Up from $47.3 million; $0.31 in Q3 2015 |
For the first nine months of 2016, net income was $145.4 million, essentially unchanged from $145.5 million in 2015; diluted EPS was $0.92 versus $0.92. Net interest income rose to $527.2 million from $504.8 million, while noninterest income increased 6% to $260.6 million. The provision for credit losses increased to $55.0 million from $17.5 million, contributing to net income available to common equity declining to $138.9 million from $140.6 million. The nine-month effective tax rate was 30.47%.
Financial position, funding and capital
- Total assets were $29.2 billion at September 30, up 5% from year-end 2015. Loans were $19.8 billion, up 6%; deposits were $21.7 billion, up 4%.
- Stockholders’ equity was $3.10 billion. Regulatory ratios included a 9.33% common equity Tier 1 ratio, 10.08% Tier 1 capital ratio, 12.49% total capital ratio and 7.64% Tier 1 leverage ratio.
- Short- and long-term funding totaled $4.00 billion, up 14% from year-end. Long-term funding was $2.76 billion. The company redeemed $430 million of senior notes in February and increased FHLB advances.
- Cash and cash equivalents were $610 million at period-end, up $137 million from year-end. Nine-month operating cash flow was $408 million; investing activities used $1.47 billion and financing activities provided $1.19 billion.
- Management reported compliance with internal liquidity objectives and sufficient asset-based liquidity under a stressed scenario. Available borrowing capacity included $2.8 billion from the FHLB and $1.7 billion at the Federal Reserve discount window.
- During the nine months, the company issued $97 million of Series D preferred stock and redeemed $58 million of Series B preferred stock. It repurchased $20 million of common stock and paid $56 million in common and preferred dividends.
Material changes and management commentary
- Credit quality weakened, particularly in oil and gas. Nine-month net charge-offs were $55.7 million, versus $22.3 million a year earlier; management attributed much of the increase to three large oil and gas credits. Nonaccrual loans rose to $289.9 million from $178.3 million at year-end, and potential problem loans rose to $440.7 million from $301.7 million.
- Oil and gas loans totaled $696 million, with $127 million on nonaccrual and $171 million classified as potential problem. Nonaccrual oil and gas loans increased by $107 million from year-end. The related allowance was $38 million, or 5.5% of that portfolio.
- The allowance for loan losses was $269.5 million, equal to 1.36% of loans and 93% of nonaccrual loans, compared with 1.47% and 154% at year-end. The allowance for unfunded commitments increased to $28.4 million.
- Loan growth was broad-based: commercial and business lending increased 7% and commercial real estate lending 10% from year-end. Commercial loans were 63% of total loans.
- Q3 noninterest income benefited from $9 million of gross gains on portfolio mortgage-loan sales and higher capital-markets activity. Nine-month capital-markets fees increased 96% year over year. FDIC expense rose 38% for the nine-month period, which management linked to growth in criticized and risk-weighted assets.
- Net interest margin faced pressure from competitive loan pricing and the low-rate environment. Management described the interest-rate risk position as slightly asset-sensitive; modeled NII increased 1.9% under an instantaneous 100-basis-point rate increase in the dynamic forecast. The modeled market value of equity declined 1.9% under that scenario.
Outlook, risks and contingencies
The filing provides no specific earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year results and that forward-looking statements are subject to risks and uncertainties. Key exposures include credit deterioration—especially oil and gas and other criticized commercial credits—interest-rate and mortgage-prepayment changes, and valuation judgments for the loan-loss allowance and mortgage servicing rights. A 50-basis-point decrease in refinance rates was estimated to reduce mortgage servicing rights value by about $11 million; any recovery recognition was limited by a $3 million valuation reserve.
The company disclosed pending litigation, including the Oxford Global Partners Ponzi-scheme-related case and two World Marketing bankruptcy-related complaints. Management said it could not assess the probability of a material adverse outcome or reasonably estimate potential losses for these matters. It also noted possible regulatory action or customer remediation relating to certain consumer products; the potential loss was not estimable. HUD commitments relating to historical lending practices were expected not to materially affect financial condition or results. The company reported no material control changes and concluded disclosure controls were effective at September 30, 2016.
After quarter-end, the board declared a $0.12-per-share common dividend and regular Series C and Series D preferred dividends, payable December 15, 2016.
Most important facts for investors to verify
- Whether oil-and-gas and broader commercial credit deterioration continues, and how charge-offs, nonaccruals, potential problem loans and reserve coverage evolve.
- Whether loan and deposit growth can sustain net interest income as margin pressure and funding costs change.
- How much Q3 earnings depended on portfolio mortgage-loan sale gains and whether mortgage banking income is repeatable.
- Capital and liquidity trends, including the effects of funding mix, preferred dividends, common dividends and any further repurchases.
- Developments in the disclosed legal and regulatory matters, for which potential losses were not clearly quantifiable in the filing.