Associated Banc-Corp — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014 unless otherwise noted. Associated Banc-Corp is a bank holding company. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2015 | Comparable period / change |
|---|---|---|
| Net interest income | $167.8 | $165.0 in Q1 2014; up 2% |
| Net interest margin | 2.89% | 3.12% in Q1 2014; down 23 basis points |
| Noninterest income | $80.1 | $73.5 in Q1 2014; up 9% |
| Noninterest expense | $174.3 | $167.7 in Q1 2014; up 4% |
| Net income | $46.7 | $45.2 in Q1 2014 |
| Net income available to common equity; diluted EPS | $45.4; $0.30 | $44.0; $0.27 in Q1 2014 |
| Operating cash flow | $17.5 | $73.7 in Q1 2014 |
| Cash and cash equivalents | $847.3 at quarter-end | Down $184.7 from year-end 2014 |
- Average loans increased 10% year over year to $17.8 billion; average deposits increased 12% to $19.1 billion. Period-end loans were $18.0 billion, up 2% from year-end, and deposits were $19.9 billion, up 6%.
- Total assets were $27.1 billion and stockholders’ equity was $2.9 billion at March 31. Equity-to-assets was 10.65%. Basel III Common Equity Tier 1 was 9.39%; the Corporation reported capital above regulatory minimums and said it remained “well-capitalized.”
- Total deposits were $19.9 billion. Short- and long-term funding totaled $4.1 billion, down $906 million from year-end following repayment/early redemption of $500 million in FHLB advances and a decline in short-term funding. Long-term funding was $3.43 billion; short-term funding was $662.5 million.
- Net cash used in investing activities was $334.0 million and net cash provided by financing activities was $131.7 million. Deposit growth funded loan growth while the company reduced borrowings.
- Credit provision was $4.5 million; net charge-offs were $5.5 million, or 0.13% annualized of average loans. The allowance for loan losses was $265.3 million (1.48% of loans); allowance for total credit losses, including unfunded commitments, was $290.2 million.
- Nonaccrual loans were $174.3 million (0.97% of loans), down from $177.4 million at year-end. Potential problem loans increased to $218.6 million from $190.4 million; nonperforming assets were $189.3 million.
Material changes and unusual items
- Q1 revenue (net interest income plus noninterest income) was $247.9 million, versus $238.5 million a year earlier. Higher loan and deposit volumes supported net interest income, but lower asset yields and higher funding costs compressed margin.
- Insurance commissions rose 60% year over year, primarily reflecting the February acquisition of Ahmann & Martin Co., an insurance and employee-benefits consulting firm. The transaction was valued at approximately $48 million, with up to $8 million of contingent additional consideration; it added about $40 million of goodwill and $12 million of other intangible assets.
- Expense growth included higher technology, occupancy and FDIC costs. Occupancy included a lease-termination charge related to Chicago office consolidation. The acquisition added approximately 120 employees.
- Available-for-sale securities generated $29.3 million of after-tax other comprehensive income, contributing to the increase in accumulated other comprehensive income to $24.8 million from a $4.9 million loss at year-end.
- The company repurchased approximately 1.74 million common shares for $30 million during the quarter and paid a $0.10 per-share common dividend.
Outlook, risks and contingencies
- Management expected high-single-digit annual average loan growth for the remainder of 2015 and planned to keep the loan-to-deposit ratio below 100%. It anticipated provision expense to grow with loan growth and changes in credit indicators.
- Management expected modest net interest margin compression through the rest of 2015, mid- to upper-single-digit noninterest income growth versus 2014, and low-single-digit noninterest expense growth, with continued efficiency initiatives.
- Interest-rate simulations showed the balance sheet was slightly asset-sensitive: a 100-basis-point increase was estimated to raise 12-month net interest income 2.1% under the dynamic forecast. A 100-basis-point increase was estimated to reduce market value of equity 1.0%. These are model estimates dependent on assumptions.
- Credit risks include increased allowance allocation to oil-and-gas-related credits: $27 million at quarter-end versus $17 million at year-end. Management also highlighted uncertainty in loan-loss estimates and the sensitivity of mortgage-servicing-rights valuations to interest rates and prepayments.
- Legal and regulatory contingencies include the remanded Oxford Global Ponzi-scheme lawsuit, a HUD fair-housing investigation, and possible regulatory action concerning legacy debt- and identity-protection products. Management could not assess the probability or estimate potential losses for these matters; customer remediation payments had been made and reserved, but the reserve amount was not stated here.
- Mortgage-loan sale representations and warranties create potential repurchase or reimbursement exposure; the mortgage repurchase reserve was $2.5 million. The filing also discloses substantial lending commitments and standby letters of credit, which may not all be drawn.
- On April 21, 2015, the board declared a $0.10 common dividend and authorized an additional $125 million common-stock repurchase program, bringing disclosed remaining authorization to approximately $171 million. These actions occurred after quarter-end.
Important facts for investors to verify
- Whether loan and deposit growth can continue without further net-interest-margin compression, and whether the loan-to-deposit target is maintained.
- Whether potential problem loans, oil-and-gas exposures, nonaccruals and charge-offs change materially, and whether the allowance remains adequate.
- How much Ahmann & Martin contributes to recurring insurance revenue and expenses, and whether contingent consideration becomes payable.
- Developments and possible financial effects of the Oxford lawsuit, HUD investigation and legacy-product remediation or enforcement matters.
- Liquidity and funding trends after the decline in cash and repayment of FHLB advances, including the company’s ability to meet commitments under stressed conditions.