Associated Banc-Corp — 2015 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2015. Associated Banc-Corp is a Wisconsin bank holding company serving customers mainly in Wisconsin, Illinois, and Minnesota through Associated Bank and related businesses. Its principal activities are commercial and consumer banking, wealth management, insurance, and related financial services. Unless noted, amounts below are in U.S. dollars.
Financial and operating performance
| Metric | 2015 | 2014 | Change / context |
|---|---|---|---|
| Net interest income | $676 million | $681 million | Down 1% |
| Net interest margin | 2.84% | 3.08% | Down 24 basis points |
| Noninterest income | $328 million | $290 million | Up 13% |
| Noninterest expense | $697 million | $679 million | Up 3% |
| Provision for credit losses | $37.5 million | $16.0 million | More than doubled |
| Net income | $188 million | $191 million | Down 1% |
| Net income available to common equity | $181 million | $186 million | Down 2%; diluted EPS was $1.19 versus $1.16 |
| Total assets at year-end | $27.7 billion | $26.8 billion | Up 3% |
| Loans at year-end | $18.7 billion | $17.6 billion | Up 6%; average loans rose 8% |
| Deposits at year-end | $21.0 billion | $18.8 billion | Up 12%; loan-to-deposit ratio was 89% |
| Short- and long-term funding at year-end | $3.5 billion | $5.0 billion | Down $1.5 billion, principally from early repayment of FHLB advances |
| Net charge-offs | $30 million; 0.16% of average loans | $15 million; 0.09% | Credit costs increased |
| Operating / investing / financing cash flow | $302 million / $(1.5) billion / $674 million | $200 million / $(2.1) billion / $2.3 billion | Cash and cash equivalents declined $558 million to $474 million |
Year-end allowance for loan losses was $274 million, or 1.47% of loans, compared with $266 million, or 1.51%, in 2014. Nonaccrual loans were $178 million (0.95% of loans), roughly flat in dollars and lower as a share of loans. Potential problem loans increased to $302 million from $190 million.
Capital remained above regulatory minimums: the Corporation reported a 9.52% Common Equity Tier 1 ratio and a 12.62% total risk-based capital ratio. Associated Bank was categorized as well capitalized. Return on average assets was 0.70%, versus 0.76% in 2014. Common dividends were $0.41 per share for 2015, up from $0.37.
Material changes versus the prior period
- Loan growth was broad-based, including 14% growth in residential mortgages; deposits rose faster than loans, primarily through noninterest-bearing demand and money market accounts.
- Net interest margin contracted amid lower loan and securities yields and higher funding costs. Long-term funding costs rose in part because of notes issued in late 2014.
- Noninterest income benefited from higher insurance commissions following the Ahmann & Martin Co. acquisition and higher mortgage banking income. The acquisition added approximately $40 million of goodwill and $12 million of other intangibles.
- 2015 noninterest income also included $8 million of net investment securities gains from a portfolio restructuring. The company sold approximately $1.6 billion of agency mortgage securities and reinvested in GNMA securities, citing improved liquidity and lower risk-weighted assets.
- Credit costs rose, with the increase in potential problem loans driven primarily by migration in the oil and gas portfolio. Oil and gas commitments were approximately $1.0 billion, including $752 million outstanding at year-end.
- The company reclassified closed-end first-lien home equity loans as residential mortgages and restated prior-period loan-category amounts; this was a presentation change, not reported loan growth.
Outlook, risks, contingencies, and unusual items
Management outlook for 2016: high-single-digit average loan growth; a loan-to-deposit ratio below 100%; provision expense expected to increase with loan growth and credit-quality changes; a modestly improving net interest margin assuming further Federal Reserve rate increases; noninterest income expected to be flat excluding net securities gains; and noninterest expense expected to be approximately flat. These are forward-looking expectations, not guarantees.
- Credit and sector exposure: Commercial loans were 61% of the portfolio. The oil and gas portfolio had $752 million outstanding; its allocated allowance was approximately $42 million, or 5.58% of year-end oil and gas loans, versus 2.26% a year earlier. Continued low energy prices could increase problem loans, provisions, and charge-offs.
- Interest-rate and market risk: Management identified low rates and margin compression as risks. Modeling estimated that an instantaneous 100-basis-point increase would raise 12-month net interest income by 1.6% under the dynamic forecast, while market value of equity would fall 1.7%; model assumptions and actual outcomes may differ.
- Liquidity and funding: Management reported compliance with internal liquidity objectives and access to deposits, FHLB borrowing, securities, and other funding. Network transaction deposits were $3.2 billion, about 15% of deposits. A downgrade, deposit outflows, or impaired market access could raise funding costs or constrain liquidity.
- Legal and regulatory matters: The Zayed case concerning an alleged Ponzi scheme was remanded for further proceedings after an appellate reversal; management could not estimate the probability or amount of loss. Two World Marketing bankruptcy-related complaints filed in January 2016 also had no estimable outcome. The company had reserved for customer remediation involving legacy third-party products, while potential additional regulatory actions or refunds could not be estimated.
- HUD agreement: A 2015 conciliation agreement included commitments over three years in minority communities, including approximately $196 million in mortgage lending, new offices, special financing, grants, and outreach. The company said related costs over four calendar years were not expected to materially affect results.
- Other items: Goodwill was $969 million; the 2015 impairment assessment found no impairment. A 50-basis-point decrease in mortgage refinance rates was estimated to reduce mortgage servicing rights value by about $9 million. The company called $430 million of senior notes for redemption in February 2016, prefunded by its prior note issuance.
Most important facts for investors to verify
- Whether oil and gas credit deterioration, the rise in potential problem loans, and higher 2015 charge-offs lead to further increases in provisions or nonaccrual loans.
- Whether loan growth and deposit mix support management’s margin and funding outlook, particularly if rate increases are delayed or deposit costs rise.
- How much of 2015 fee growth reflects the insurance acquisition and securities gains, and whether underlying fee revenue can meet the 2016 outlook.
- Developments in the Zayed and World Marketing litigation, consumer-product remediation, and any related regulatory actions or losses.
- Capital and liquidity after share repurchases, the 2016 note redemption, and the phased introduction of the Basel III capital conservation buffer.
- The impact of the HUD commitments, acquisition integration, and mortgage servicing rights assumptions on future costs and earnings.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2015.