ASSOCIATED BANC-CORP quarterly report, Q1 FY2014

Full document

Associated Banc-Corp — Q1 2014 Form 10-Q

Business context and reporting period

Unaudited consolidated results for the three months ended March 31, 2014; balance-sheet comparisons are primarily to December 31, 2013. Associated Banc-Corp is a bank holding company with Commercial Banking, Consumer Banking, and Risk Management and Shared Services segments. Management cautions that interim results are not necessarily indicative of full-year performance.

Financial performance and position

  • Earnings and revenue: Net income was $45.2 million, down 4.6% from $47.4 million a year earlier. Net income available to common equity was $44.0 million versus $46.1 million; diluted EPS was $0.27 in both periods. Total revenue (net interest income plus noninterest income) was $238.5 million, down 0.5%.
  • Interest income and margins: Net interest income increased 4.6% to $165.0 million; taxable-equivalent net interest income was $169.6 million. Net interest margin declined to 3.12% from 3.17%. The effective tax rate was 31.35%, compared with 31.06%.
  • Fees and expenses: Noninterest income fell 10.3% to $73.5 million, mainly as net mortgage banking income declined 64.2% to $6.4 million. Noninterest expense was essentially flat at $167.7 million. The reported efficiency ratio was 70.41%, versus 70.03%.
  • Credit costs and quality: Provision for credit losses was $5.0 million, up from $3.3 million. Net charge-offs were $5.4 million, or 0.14% of average loans annualized, versus $14.5 million and 0.38%. Nonaccrual loans were $178.0 million (1.08% of loans), down from $225.4 million (1.45%) a year earlier. The allowance for loan losses was $267.9 million, 1.63% of loans, and covered 151% of nonaccrual loans.
  • Balance sheet and liquidity: Assets were $24.81 billion, up 2% from year-end; loans were $16.44 billion, up 3%, and deposits were $17.51 billion, up 1%. Cash and cash equivalents ended at $623.4 million. Operating cash flow was $73.7 million; investing used $588.3 million, principally reflecting loan growth, while financing provided $535.8 million. Management reported compliance with internal liquidity objectives.
  • Funding and capital: Short- and long-term funding totaled $4.18 billion, up $351.8 million from year-end; long-term funding fell $155.2 million after redemption of $155 million in senior notes in February. Stockholders’ equity was $2.90 billion. The consolidated Tier 1 common equity-to-risk-weighted-assets ratio was 11.20%, and the total risk-based capital ratio was 12.81%; management said capital exceeded regulatory minimums.

Material changes versus comparable periods

  • Higher average earning assets and lower funding costs supported net interest income, but margin narrowed as asset yields fell faster than liability costs improved.
  • Mortgage banking was the main earnings headwind: mortgage production sold was $204 million, down from $681 million, amid sharply slower refinancing activity. Core fee-based revenue grew 3.6%.
  • Commercial loans drove balance-sheet growth. At quarter-end, total loans were up $890 million year over year; commercial loans rose $806 million and residential mortgages rose $475 million, while home equity and installment loans declined $391 million.
  • Credit indicators improved year over year: nonperforming assets declined to $197.2 million from $260.6 million, and potential problem loans to $219.7 million from $343.8 million. The allowance-to-loans ratio also decreased from 1.84% to 1.63%.
  • Commercial Banking net income fell to $24.4 million from $27.0 million, and Consumer Banking net income fell to $7.2 million from $17.2 million. Risk Management and Shared Services net income rose to $13.7 million from $3.3 million, largely reflecting funds-transfer-pricing allocation changes.

Outlook, management commentary, risks and unusual items

  • Management anticipated continued modest net interest margin compression in 2014, noninterest income down slightly as mortgage banking declines are partly offset by other fee growth, flat year-over-year noninterest expense, and higher credit-loss provision as loans grow. No EPS or full-year earnings guidance is provided in the supplied filing text.
  • Mortgage servicing rights are sensitive to rates and prepayments. Management estimated a 50-basis-point decline in refinance rates could reduce their value by about $11 million (15%); a 50-basis-point increase could raise it by about $5 million (8%), subject to a $1 million valuation-reserve limit on recoveries.
  • Investment securities had $87.3 million of gross unrealized losses at quarter-end. Management attributed losses primarily to rates and market conditions rather than credit deterioration, and said it did not intend, nor expect to be required, to sell before recovery.
  • Off-balance-sheet exposures included $6.24 billion of commitments to extend credit, $132.6 million of commercial letters of credit, and $258.9 million of standby letters of credit. Commitments are not necessarily expected cash outflows.
  • Contingencies include an appeal in the Oxford Global Partners Ponzi-scheme litigation, possible OCC and FinCEN civil penalties relating to past Bank Secrecy Act deficiencies, and an employment class action filed April 10, 2014. Management could not estimate potential losses for these matters. The BSA Consent Order was terminated in March 2014.
  • Mortgage repurchase reserve was $4.8 million, down from $5.7 million at year-end. The quarter also included $39 million of common-stock repurchases and a new $120 million repurchase authorization; the common dividend was $0.09 per share. A quarterly dividend of $0.09 was declared in April for payment in June.
  • Management identified allowance for credit losses, goodwill impairment, mortgage servicing rights valuation, and income taxes as estimates involving significant judgment. Disclosure controls were concluded effective as of March 31, 2014.

Important facts for investors to verify

  • Whether mortgage origination, refinancing activity, and mortgage banking income stabilize, and how servicing-rights valuations respond to rates and prepayments.
  • Whether loan growth sustains net interest income despite the stated margin-compression outlook and competitive pricing pressure.
  • Credit trends in commercial and construction lending, home equity, nonaccrual restructured loans, and the allowance as loan growth continues.
  • Liquidity and funding developments, including increased short-term funding and the repricing and put features of FHLB advances.
  • Outcomes and potential financial impact of the BSA-related penalties, Oxford litigation appeal, and Boone employment lawsuit, none of which had a reasonably estimable exposure in the filing.
  • Capital levels and the effects of further share repurchases and dividends; distinguish reported regulatory capital measures from non-GAAP tangible-capital metrics.