Associated Banc-Corp — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; unaudited. Comparisons are with Q1 2011 unless otherwise noted. Associated Banc-Corp is a bank holding company with Commercial Banking, Consumer Banking, and Risk Management and Shared Services segments.
Financial performance and position
| Metric | Q1 2012 / March 31, 2012 | Comparable period / prior year-end |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $236.2 million | $225.9 million in Q1 2011 |
| Net interest income | $154.7 million; net interest margin 3.31% | $153.7 million; margin 3.32% in Q1 2011 |
| Noninterest income | $81.6 million | $72.2 million in Q1 2011 |
| Noninterest expense | $172.9 million | $164.2 million in Q1 2011 |
| Net income | $42.6 million; $41.3 million available to common; diluted EPS $0.24 | $22.9 million; $15.4 million available to common; diluted EPS $0.09 |
| Cash flows | Operating $111.8 million; investing $10.4 million; financing use $26.8 million; cash and equivalents ended at $712.0 million | Cash and equivalents ended at $799.1 million in Q1 2011 |
| Total assets / stockholders’ equity | $21.9 billion / $2.90 billion | $21.9 billion / $2.87 billion at December 31, 2011 |
| Loans / deposits | $14.25 billion / $15.65 billion | Loans $14.03 billion / deposits $15.09 billion at December 31, 2011 |
| Funding | Short-term $1.94 billion; long-term $1.18 billion | Short-term $2.51 billion; long-term $1.18 billion at December 31, 2011 |
| Capital | Tier 1 common risk-based ratio 12.49%; total risk-based capital ratio 15.78%; equity-to-assets 13.24% | 12.24%, 15.53%, and 13.07%, respectively, at December 31, 2011 |
Q1 2012 efficiency ratio was 73.19% (71.44% on a fully taxable-equivalent basis). The filing reports both as non-GAAP-related measures and provides a reconciliation.
Material changes and credit quality
- Net income rose to $42.6 million from $22.9 million. A key driver was the absence of a loan-loss provision in Q1 2012 versus $31 million in Q1 2011; mortgage banking income also improved substantially.
- Net interest income was nearly flat year over year and margin eased one basis point. Lower deposit costs helped offset lower asset yields.
- Noninterest income increased 13%, chiefly as net mortgage banking income rose to $17.7 million from $1.8 million. Core fee-based revenue declined 10.6%, including lower card and deposit fees; the Durbin Amendment reduced interchange fees by about $3 million.
- Noninterest expense increased 5.3%, with personnel and legal/professional costs higher; FDIC expense declined.
- Loans increased $223 million and deposits increased $563 million from year-end; securities available for sale declined $268 million as portfolio runoff helped fund loan growth. Short-term funding fell $578 million.
- Credit measures improved: net charge-offs were $21.9 million (0.61% annualized of average loans), versus $53.4 million (1.71%) in Q1 2011. Nonaccrual loans fell to $327 million from $488 million a year earlier and $357 million at year-end. Potential problem loans declined to $480 million from $912 million a year earlier.
- The allowance for loan losses was $356 million, 2.50% of loans and 109% of nonaccrual loans, versus 3.59% and 93%, respectively, at March 31, 2011. Management attributed the lower allowance in part to improving credit metrics; it identified residential mortgage portfolio growth and slightly weaker credit quality as reasons for a higher allocation to that segment.
Outlook, risks, and unusual items
- Management expected approximately 3% quarterly loan growth for the remainder of 2012, a modest loan-loss provision, and modest pressure on net interest margin in the continuing low-rate environment.
- Management expected modest year-over-year improvement in fee income, partly offset by lower mortgage banking income, and low-single-digit noninterest expense growth, including BSA compliance costs and savings from branch consolidations.
- The Bank entered an OCC Consent Order concerning Bank Secrecy Act compliance. Required actions include a BSA-focused plan, enhanced customer due diligence, risk assessment, and independent testing. The Bank had not been informed of a civil money penalty.
- An agreement in principle provides for a $13 million settlement of the overdraft-fee class action, accrued in the financial statements; court approval remained pending. The company denies admitting liability.
- The company recorded a $12.1 million other-than-temporary impairment related to mortgage servicing rights (MSR), reducing both the asset and its valuation allowance. Management noted MSR values are sensitive to rates and prepayments; a 50-basis-point decrease in refinance rates was estimated to lower MSR value by about $7 million.
- Other exposures include mortgage representations-and-warranties/recourse obligations, with $431 million of legacy loans carrying credit-risk recourse to the FHLB and a potential $19 million PMI reinsurance exposure; the estimated reinsurance liability was $9 million. Management reported historically negligible losses or repurchases on the cited loan exposures.
- Management reported compliance with internal liquidity objectives and regulatory capital minimums. A 100-basis-point rate increase was modeled to raise next-12-month net interest income by about 3.0%; results were within policy limits. Risks include credit, liquidity and interest rates, operations, competition, regulation, litigation, and reliance on estimates for loan reserves, goodwill, MSR, derivatives, and taxes.
- Goodwill impairment tests through March 31, 2012 resulted in no charge. The Federal Reserve Bank of Chicago advised that the company had fully complied with its 2010 Memorandum of Understanding; it was terminated in March 2012.
- After quarter-end, the board approved up to $30 million of common-stock repurchases. On May 7, the company gave notice to call $25 million par value of 7.625% trust preferred securities, effective June 15, 2012.
Most important facts for investors to verify
- Whether lower credit costs and declining nonaccrual/problem loans persist, and whether the allowance remains adequate as loan balances grow.
- Whether core fee income can recover as mortgage banking revenue moderates and regulatory interchange limits continue to affect fees.
- How low interest rates, deposit pricing, loan yields, and refinancing/prepayment activity affect net interest margin and MSR valuations.
- The final court-approved terms and timing of the $13 million overdraft settlement, and the cost and progress of OCC-required BSA remediation.
- That reported capital and liquidity measures remain robust after planned repurchases, the trust preferred call, and any further funding or credit-quality changes.