Associated Banc-Corp (10-K) — FY 2011
Business context and period. This is the annual report for the fiscal year ended December 31, 2011, with fourth-quarter results also disclosed. Associated Banc-Corp is a Wisconsin bank holding company operating primarily in Wisconsin, Illinois, and Minnesota. Banking generated 90% of 2011 segment revenue; Wealth Management generated 11% before intercompany eliminations.
Financial performance and condition
- Profit: Net income was $139.7 million, versus a net loss of $0.9 million in 2010. Net income available to common shareholders was $114.9 million, or $0.66 per diluted share, compared with a $30.4 million loss, or $0.18 per share.
- Revenue and margin: Net interest income was $612.8 million, down 3.3%; taxable-equivalent net interest income was $634.2 million, down 4%. Net interest margin improved to 3.26% from 3.20%. Noninterest income declined 18% to $282.5 million, including lower deposit service charges, mortgage banking income, and securities gains. Noninterest expense increased 4.7% to $659.9 million; the fully taxable-equivalent efficiency ratio rose to 71.68% from 64.32%.
- Credit costs: Provision for loan losses fell to $52 million from $390 million. Net charge-offs were $150.7 million, or 1.13% of average loans, versus $486.7 million, or 3.69%. Nonaccrual loans declined to $356.8 million (2.54% of loans) from $574.4 million; potential problem loans fell to $566.4 million from $963.7 million. The $378.2 million allowance equaled 2.70% of loans and covered 106% of nonaccrual loans, versus 3.78% and 83%, respectively, at year-end 2010.
- Balance sheet and funding: Assets were $21.9 billion; loans were $14.0 billion, up 11% year over year, while deposits were $15.1 billion, down 1%. Short- and long-term funding totaled $3.69 billion, including $2.51 billion short-term. Stockholders’ equity was $2.87 billion. Cash and cash equivalents ended at $616.6 million, down $251.6 million.
- Cash flow: Operating activities provided $309.8 million; investing activities used $472.5 million; financing activities used $88.8 million.
- Capital and liquidity: Parent-company Tier 1 and total risk-based capital ratios were 14.08% and 15.53%; its leverage ratio was 9.81%. Associated Bank was categorized as well capitalized, with ratios of 15.23%, 16.50%, and 10.56%, respectively. The company reported compliance with internal liquidity objectives.
- Fourth quarter: Net income available to common shareholders was $39.8 million, or $0.23 per diluted share, versus $6.6 million, or $0.04, in Q4 2010. The provision was $1 million; annualized net charge-offs were 0.64% of average loans.
Material changes versus 2010
- Return to profitability was driven chiefly by the sharp reduction in loan-loss provision and improved credit metrics, despite lower net interest income and fee revenue and higher operating expenses.
- Year-end loans grew $1.4 billion, particularly commercial and business lending and residential mortgages. Investment securities fell $1.2 billion as runoff helped fund loan growth.
- Funding strategy reduced network transaction and brokered deposits; total deposits declined modestly. Short-term funding rose $767 million, while long-term funding fell $237 million.
- Associated repaid the remaining $525 million of Treasury CPP preferred stock in 2011, funded in part by $430 million of 5.125% senior notes due 2016 and $65 million of 8% Series B perpetual preferred stock. Treasury warrants to purchase about 4 million common shares remained outstanding.
- The OCC terminated the Bank’s 2009 memorandum in September 2011. The Federal Reserve memorandum remained in effect at filing, although management expected termination in March 2012.
Outlook, risks, and unusual items
- Management expected 2012 loan growth of approximately 3% per quarter, potentially slower in Q1 for seasonal reasons; continued improvement in credit trends and a fairly low provision; stable but low-rate-pressured net interest margin; modest fee-income improvement; and modest expense growth.
- Key risks include commercial and real-estate credit exposure, continued weak housing and economic conditions, low-rate pressure on net interest income, liquidity and funding-market access, regulatory change, and operational, cybersecurity, litigation, and compliance risks. Commercial loans were 57% of loans.
- The Bank agreed to an OCC consent order addressing Bank Secrecy Act compliance, requiring an action plan, enhanced customer due diligence, a risk assessment, and independent testing. No civil penalty had been announced; related costs were not determined.
- A $13 million overdraft-fee class-action settlement was agreed in principle and accrued; court approval was still pending. The company reported no goodwill impairment despite a fourth-quarter impairment test; goodwill was $929 million. Deferred tax assets were approximately $70 million net of tax-effected items, and realization depended on future taxable income.
- The company disclosed proposed Basel III and Dodd-Frank capital, liquidity, and stress-testing requirements, and said it believed it would meet expected requirements if then applicable. The filing cautions that forward-looking statements are subject to risks and actual results may differ.
Most important facts for investors to verify
- Whether credit improvement continues, especially in nonaccrual, potential problem, restructured, and commercial real-estate loans, and whether the lower allowance remains adequate.
- Whether loan growth can be funded sustainably as deposits, securities, and funding mix change, including reliance on short-term repurchase funding.
- Whether net interest margin and core fee income hold up under prolonged low rates, regulatory fee limits, and mortgage servicing valuation changes.
- Completion and regulatory consequences of the BSA consent order and termination of the Federal Reserve memorandum; court approval and final cost of the overdraft settlement.
- Capital and shareholder implications of the 8% preferred stock, outstanding Treasury warrants, dividend restrictions, and anticipated regulatory rules.