Associated Banc-Corp — 2018 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018; the filing provides annual and quarterly data, not a standalone “2018 Q4” earnings report. Associated Banc-Corp is a Wisconsin bank holding company operating primarily in Wisconsin, Illinois and Minnesota through Associated Bank and related businesses. Its principal revenue sources are net interest income and customer fees.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Net interest income | $879.6 million | $741.2 million |
| Net interest margin, fully tax-equivalent | 2.97% | 2.82% |
| Noninterest income | $355.6 million | $332.7 million |
| Noninterest expense | $821.8 million | $709.1 million |
| Income before taxes | $413.3 million | $338.8 million |
| Net income | $333.6 million | $229.3 million |
| Net income available to common equity | $322.8 million | $219.9 million |
| Diluted earnings per common share | $1.89 | $1.42 |
| Effective income tax rate | 19.3% | 32.3% |
- Profitability and margins: Diluted EPS rose 33%. Return on average assets was 1.01% (0.78% in 2017); return on average equity was 9.03% (7.23%). The fully tax-equivalent efficiency ratio was 64.87%, compared with 64.51%.
- Credit costs: The income statement reports no net provision for credit losses in 2018, versus $26 million in 2017. The allowance rollforward separately shows a $2.5 million loan-loss provision offset by a $2.5 million release for unfunded commitments. Net charge-offs declined to $30.4 million, or 0.13% of average loans, from $39.5 million, or 0.19%. The loan-loss allowance was $238.0 million, equal to 1.04% of loans and 186% of nonaccrual loans.
- Cash flow: Operating activities provided $496.6 million; investing activities used $380.9 million; financing activities provided $45.0 million. Cash, cash equivalents and restricted cash increased $160.7 million to $876.7 million.
- Balance sheet and funding: Total assets were $33.65 billion, loans $22.94 billion and deposits $24.90 billion. Short- and long-term funding, including FHLB advances, totaled $4.53 billion. Stockholders’ equity was $3.78 billion. The common equity Tier 1 ratio was 10.26%, total capital ratio 13.47%, and Tier 1 leverage ratio 8.48%; the Bank was categorized as well capitalized.
Material changes versus 2017
- Assets increased 10%, loans 10% and deposits 9%, substantially reflecting the February 1, 2018 acquisition of Bank Mutual, which added approximately $2.8 billion in assets, $1.9 billion in loans and $1.8 billion in deposits.
- Net interest income rose 19%, supported by balance growth, higher loan yields and the Bank Mutual acquisition. Interest expense increased to $274.6 million from $145.4 million as deposit and funding costs rose.
- Noninterest income increased 7%; fee-based revenue rose 10%, helped by acquisitions including Diversified and Anderson. Noninterest expense increased 16%, including $29.0 million in acquisition-related costs and higher personnel and technology costs.
- Credit quality improved on several measures: nonaccrual loans fell to $127.9 million from $208.5 million; nonperforming assets declined to $139.9 million from $228.6 million. Potential problem loans, however, increased to $249.9 million from $176.9 million.
- The lower federal corporate tax rate contributed to the decline in the effective tax rate. The 2018 tax expense also included a $9 million charge related to a Minnesota court case and state tax examinations; management reported a $15 million benefit from tax-planning strategies.
Outlook, commentary and risks
- 2019 outlook: Management expected average loan growth of 3%–6%, a loan-to-deposit ratio below 100%, stable-to-improving net interest margin, noninterest income of approximately $360–$375 million and noninterest expense of approximately $800 million. Credit provision was expected to vary with loan volume and credit quality.
- Planned acquisition: Associated agreed to acquire Huntington’s Wisconsin branch operations, including approximately $850 million in deposits, $134 million in loans and 32 locations, for a net premium of about $34 million. The transaction was expected to close in June 2019; regulatory approval was reported in February 2019. Management expected a net addition of 14 branches.
- Interest-rate exposure: Management described the balance sheet as slightly asset-sensitive under its year-end assumptions. A modeled 100-basis-point rate increase raised 12-month earnings-at-risk by 5.0% under the dynamic forecast, while market value of equity declined 2.0%. These are model estimates and depend on assumptions about deposit behavior, prepayments and rates.
- Key risks: Commercial lending represented 58% of loans; commercial real estate and construction loans totaled $6.0 billion, or 26% of loans. Oil-and-gas loans outstanding were $747 million, approximately 3% of loans, across 52 credits. The filing also highlights regional economic and real-estate conditions, funding and interest-rate sensitivity, cybersecurity and third-party service providers, regulatory and consumer-compliance costs, litigation, acquisition integration, and changes in financial technology and competition.
- Unusual items and contingencies: The Bank Mutual integration was completed in June 2018 and included acquisition costs and branch consolidation expenses. The company reported no material cybersecurity incidents discovered during 2018 and no goodwill impairment. A Minnesota Ponzi-scheme-related lawsuit was affirmed resolved by the appeals court in January 2019 without material impact. Other claims and consumer regulatory matters remain subject to uncertainty; management said a material loss could not be assessed or estimated for certain regulatory matters.
- Accounting and capital: CECL was expected to take effect for the company in 2020. Management anticipated a one-time allowance adjustment and transition and ongoing implementation costs, but stated that the magnitude of the impact was not yet determinable.
Important facts for investors to verify
- How much of 2018 earnings growth reflects sustainable operating performance versus Bank Mutual acquisition effects, purchase-accounting accretion and the lower tax rate.
- Whether loan growth, deposit funding and margin trends meet management’s 2019 outlook as funding costs rise.
- Credit performance behind the lower nonaccrual balance, including the increase in potential problem loans and exposures to commercial real estate and oil and gas.
- The eventual CECL allowance and capital impact, which management had not quantified, and the adequacy of reserves as the loan portfolio grows.
- Huntington branch transaction completion, integration costs, deposit retention and realization of expected benefits.
- Capital and shareholder-return implications of 2018 repurchases, preferred-stock issuance and declared dividends; common-stock repurchases and dividends remain subject to board discretion and regulatory constraints.