Associated Banc-Corp — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; filed August 3, 2012. Financial statements are unaudited. The company is a bank holding company with commercial and consumer banking operations.
Financial results and position
Amounts are in millions of dollars except per-share data, ratios, and where noted.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net interest income | $154.3 | $154.1 | $308.9 | $307.8 |
| Noninterest income | $76.0 | $61.6 | $154.4 | $132.6 |
| Net income | $43.3 | $34.4 | $86.0 | $57.2 |
| Net income available to common equity | $42.0 | $25.6 | $83.4 | $41.0 |
| Diluted EPS | $0.24 | $0.15 | $0.48 | $0.24 |
| Noninterest expense | $166.0 | $155.7 | $335.8 | $318.7 |
| Provision for loan losses | $0 | $16.0 | $0 | $47.0 |
- Q2 total revenue, defined here as net interest income plus noninterest income, was $230.2 million, up from $215.7 million. Higher mortgage banking income drove much of the increase; noninterest expense also rose 7% year over year.
- Net interest margin was 3.30% in Q2, versus 3.29% a year earlier; first-half margin was 3.31%, versus 3.30%. First-half return on average assets was 0.80%; the efficiency ratio was 72.57% (69.69% on the company’s fully taxable-equivalent basis).
- At June 30, total assets were $22.08 billion, loans $14.70 billion, deposits $15.11 billion, and stockholders’ equity $2.91 billion. Compared with year-end 2011, loans rose $668 million and deposits were broadly unchanged.
- The allowance for loan losses was $333 million, 2.26% of loans and 105% of nonaccrual loans. First-half net charge-offs were $45 million, or 0.63% annualized of average loans.
- Nonaccrual loans fell to $318 million (2.16% of loans) from $357 million at year-end and $468 million a year earlier. Potential problem loans declined to $410 million from $566 million at year-end. Nonperforming assets totaled $358 million, including $40 million of other real estate owned.
- Cash and cash equivalents were $599 million at period-end, down $18 million from year-end. First-half operating cash flow was $236 million, investing cash outflow $338 million, and financing cash flow $84 million.
- Short- and long-term funding totaled $3.80 billion, up $112 million from year-end. Capital ratios were 12.04% for Tier 1 common equity to risk-weighted assets, 13.64% for Tier 1 risk-based capital, and 15.08% for total risk-based capital. Management said the company and bank exceeded regulatory minimums and would be well-capitalized under proposed capital rules if then effective.
Material changes and management discussion
- Year-over-year Q2 earnings growth reflected a zero loan-loss provision versus $16 million in Q2 2011 and stronger noninterest income. Mortgage banking income was $16.7 million, compared with a $3.3 million loss a year earlier; second-quarter mortgage production sold to the secondary market was $738 million versus $251 million.
- First-half mortgage banking income was $34.4 million versus a $1.5 million loss. Core fee-based revenue fell 10% to $110.5 million: lower deposit service charges and card fees included effects from customer behavior, regulatory changes, and the Durbin Amendment.
- Loan growth was concentrated in commercial and commercial real estate lending. The company said it used investment-security runoff to fund loan growth; available-for-sale securities declined $416 million from year-end to $4.52 billion.
- Credit metrics improved and the company recorded no loan-loss provision in either 2012 quarter. Management nevertheless anticipated a modest provision for the rest of 2012 and noted that the allowance estimate is sensitive to economic conditions, borrower performance, collateral values, and regulatory review.
- Common dividends were $0.10 per share in the first half. In Q2 the company repurchased approximately 2.33 million shares for about $30 million. It also redeemed $25 million of junior subordinated debentures.
Outlook, risks, contingencies, and unusual items
- Management expected approximately 3% quarterly loan growth for the remainder of 2012, modest pressure on net interest margin from the low-rate environment, and continuing improvement in credit trends. It expected modest improvement in core fee-based revenue, but said first-half mortgage banking strength was likely to ease.
- Management anticipated low-single-digit quarterly noninterest-expense growth in the rest of 2012, including spending on Bank Secrecy Act (BSA) compliance enhancements and footprint upgrades. The Bank had entered an OCC Consent Order in Q1 concerning BSA compliance and was working to address the regulator’s concerns; the filing said no civil money penalty had been communicated.
- The company recorded a $12.1 million other-than-temporary impairment of mortgage servicing rights in Q1, citing uncertainty about recovery of the valuation allowance in a persistently low-rate environment. The net servicing-rights asset was $47.5 million. Management estimated that a 50-basis-point decline in refinance rates could reduce its value by about $6 million, while a 50-basis-point increase could raise it by about $8 million.
- A proposed $13 million settlement of the overdraft-fee class action received preliminary court approval on July 26, 2012; the amount had already been accrued. The Bank received a $2.5 million insurer contribution and about $1.5 million toward defense costs in Q2. The company also disclosed a $9 million estimated liability for private mortgage insurance reinsurance losses and substantial lending commitments, including $4.89 billion of commitments to extend credit.
- Visa-related litigation and indemnification obligations remained uncertain. Following Visa’s July 2012 settlement memorandum on interchange-fee litigation, the company expected its remaining Visa shares to be adequate to offset remaining indemnification obligations, while noting the outcome and timing remained uncertain.
- Goodwill was $929 million; 2012 impairment testing found no impairment. Management identified loan-loss allowance, goodwill, mortgage servicing rights, derivatives, and income taxes as critical estimates. It also noted deferred-tax-asset realization depends on forecast future taxable income.
- Proposed Basel III and other U.S. capital rules could change capital requirements and phase out trust preferred securities from Tier 1 capital beginning in 2013; final rules and their effect were uncertain. Interest-rate simulation indicated net interest income could rise 3.2% under an immediate 100-basis-point rate increase. Management reported compliance with internal liquidity objectives and effective disclosure controls.
Most important facts for investors to verify
- Whether loan growth and improving credit quality continue, and whether the reduced allowance remains adequate as commercial and commercial real estate exposures expand.
- How earnings develop as mortgage refinancing and gain-on-sale income moderate, core fees remain pressured, and expenses rise.
- The effect of low interest rates, deposit pricing, and asset repricing on net interest margin and mortgage servicing rights valuations.
- Progress and any further costs related to the OCC BSA Consent Order, the overdraft settlement, and Visa-related contingencies.
- Capital and liquidity effects of proposed regulatory rules, funding mix changes, share repurchases, and planned dividends.