Associated Banc-Corp — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited consolidated results; balance-sheet comparisons are with December 31, 2016 unless noted. Amounts below are rounded.
Financial results and key metrics
| Metric | Q2 2017 | Prior comparable period | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $183.8 million | $176.7 million | $364.1 million | $348.7 million |
| Net interest margin | 2.83% | 2.81% in Q2 2016 | 2.83% | 2.81% |
| Provision for credit losses | $12.0 million | $14.0 million | $21.0 million | $34.0 million |
| Noninterest income | $82.4 million | $82.2 million | $162.2 million | $165.4 million |
| Noninterest expense | $176.3 million | $174.4 million | $350.0 million | $348.3 million |
| Net income | $58.0 million | $49.1 million | $114.3 million | $91.6 million |
| Diluted EPS | $0.36 | $0.31 | $0.71 | $0.58 |
- Q2 pre-tax income was $77.9 million versus $70.5 million a year earlier. Q2 common net income was $55.6 million after preferred dividends.
- For the first half, the fully tax-equivalent efficiency ratio was 65.05%, compared with 67.61% in 2016; this is a non-GAAP measure. Effective tax rate was 26.44%, down from 30.45%.
- At June 30, assets were $29.77 billion, loans $20.78 billion, deposits $21.62 billion, and stockholders’ equity $3.19 billion.
- Allowance for loan losses was $281.1 million, or 1.35% of loans. Nonaccrual loans were $231.9 million, down from $275.3 million at year-end; nonperforming assets were $247.1 million, or 0.83% of assets.
- Regulatory capital ratios: common equity Tier 1 9.87%, Tier 1 10.61%, total capital 13.01%, and Tier 1 leverage 8.09%. All exceeded regulatory minimums.
- Six-month cash flows: $298.5 million provided by operations, $882.1 million used in investing, and $511.2 million provided by financing. Cash and cash equivalents declined $72.4 million to $569.8 million.
Changes, funding and liquidity
- Loans rose $728 million (4%) from year-end, led by $783 million growth in residential mortgages and $219 million growth in construction lending; total deposits declined $270 million (1%). Versus June 2016, loans increased 5% and deposits 7%.
- Total short- and long-term funding increased $811 million to $4.66 billion, including a $500 million issuance of long-term funding and higher FHLB advances. Long-term funding was $3.26 billion; short-term funding was $1.40 billion.
- Management reported compliance with internal liquidity objectives and sufficient liquidity under its stress scenario. The Bank had $2.1 billion available for future FHLB advances and $2.1 billion available for Federal Reserve discount-window borrowing. Network deposits totaled $3.22 billion, 15% of deposits.
- During the first half, approximately $1 billion of GNMA securities was transferred from available-for-sale to held-to-maturity. Management said it intended and was able to hold them to maturity. It judged portfolio unrealized losses to reflect interest rates and market conditions rather than credit impairment.
Outlook, risks and unusual items
- For the rest 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 revenue but declining mortgage banking revenue, and noninterest expense about 1% above the prior year with continued efficiency-ratio improvement. Credit provision was expected to vary with loan volume and credit quality.
- The oil-and-gas portfolio was $601 million; $114 million, or 19%, was nonaccrual. Several large oil-and-gas loans contributed to higher nonaccrual restructured loans. Management cited improvement in broader commercial and oil-and-gas problem credits; potential problem loans fell to $262.6 million from $351.1 million at year-end.
- Interest-rate simulations indicated a slightly asset-sensitive profile: a 100-basis-point rate increase was estimated to lift 12-month net interest income 2.1% under the dynamic forecast. Market value of equity was estimated to decline 3.3% under that rate shock and 7.0% under a 200-basis-point increase.
- On July 20, 2017, the company announced an all-stock merger agreement with Bank Mutual, valued at approximately $482 million at announcement. Bank Mutual shareholders would receive 0.422 Associated shares per share; closing was expected in early 2018, subject to approvals and other conditions.
- Legal matters include appeals and lawsuits related to customer or borrower matters, for which management said material loss probability or amount could not be estimated in certain cases. The filing also describes potential regulatory remediation or enforcement relating to legacy consumer products. The HUD lending-practices agreement requires community lending and outreach commitments; management did not expect a material financial impact.
- Other notable items: net securities gains were $0.36 million in the first half versus $6.21 million a year earlier; approximately $16 million of Illinois municipal securities were sold amid credit concerns. A new fair-value accounting election for residential mortgage loans held for sale took effect January 1, 2017; prior periods were not restated.
Important facts for investors to verify
- Whether loan growth, deposit pricing and funding costs sustain the projected margin improvement; interest-bearing deposit costs rose year over year.
- Whether oil-and-gas and other criticized credits continue to improve, and whether loan-loss provisions remain appropriate as the portfolio grows.
- Execution, regulatory approvals, shareholder approval, consideration and expected timing of the Bank Mutual merger.
- Liquidity and funding mix, including reliance on network deposits, wholesale funding and FHLB advances, as well as actual use of available contingent liquidity.
- Potential outcomes of pending litigation, consumer-product remediation and regulatory matters that the filing says cannot currently be quantified.