Associated Banc-Corp — FY2013 Form 10-K
Reporting period: Year ended December 31, 2013. The filing also reports fourth-quarter results. Associated Banc-Corp is a Wisconsin bank holding company operating primarily in Wisconsin, Illinois, and Minnesota through Associated Bank and related businesses. Its reportable segments are Commercial Banking, Consumer Banking, and Risk Management and Shared Services.
Financial performance and position
| Metric | 2013 | 2012 / change |
|---|---|---|
| Net income available to common equity | $183.5 million | $173.8 million |
| Diluted EPS | $1.10 | $1.00 |
| Net interest income (GAAP) | $645.5 million | $626.0 million |
| Net interest margin | 3.17% | 3.30% |
| Noninterest income | $313.1 million | $313.3 million |
| Noninterest expense | $680.7 million | $681.8 million |
| Provision for loan losses | $10.0 million | $3.0 million |
| Total assets at year-end | $24.23 billion | $23.49 billion |
| Loans at year-end | $15.90 billion | $15.41 billion |
| Deposits at year-end | $17.27 billion | $16.94 billion |
| Stockholders’ equity at year-end | $2.89 billion | $2.94 billion |
- Management reported total revenue of approximately $959 million, up 2%. On a taxable-equivalent basis, net interest income was $665.6 million, up 3%; balance-sheet volume and mix added $52.9 million, partly offset by $34.3 million of unfavorable rate effects.
- Net income was $188.7 million, compared with $179.0 million. Return on average assets was 0.81% in both years; return on average tangible common equity rose to 9.73% from 8.96%. The efficiency ratio improved to 69.57% from 69.99%.
- Average loans grew 6% to $15.66 billion and average deposits grew 12% to $17.44 billion. Year-end loans rose 3%; commercial real estate construction loans increased 37% year over year, while home-equity balances declined 18%.
- Credit indicators improved: net charge-offs were $39.1 million, or 0.25% of average loans, versus $83.7 million, or 0.57%. Nonaccrual loans fell to $185.4 million (1.17% of loans) from $252.9 million (1.64%); potential problem loans decreased to $235.4 million from $361.0 million. The allowance was $268.3 million, 1.69% of loans, versus $297.4 million, 1.93%.
- Cash flow from operations was $487.3 million; investing activities used $1.25 billion and financing activities provided $630.3 million. Cash and cash equivalents decreased $135.6 million to $602.2 million.
- Year-end short- and long-term funding totaled $3.83 billion, versus $3.34 billion. Long-term funding rose to $3.09 billion, principally after $2.5 billion of five-year variable-rate FHLB advances; short-term funding declined to $740.9 million from $2.33 billion. Stockholders’ equity/assets was 11.93%, down from 12.50%.
- Regulatory capital remained above minimums. The Bank’s total risk-based capital ratio was 14.70%, Tier 1 risk-based ratio 13.44%, and leverage ratio 9.90%; the Bank was categorized as well capitalized. The Corporation reported Tier 1 common equity/risk-weighted assets of 11.46%.
Material changes and fourth-quarter results
- Compared with 2012, annual common earnings and EPS increased, supported by loan and deposit growth and lower funding costs. The lower net interest margin reflected falling asset yields; management attributed the higher net interest income to volume growth.
- Net mortgage banking income declined 23% to $48.8 million as mortgage production and gains on loan sales weakened; a substantial reduction in mortgage servicing rights expense partly offset the decline. Core fee-based revenue rose 2% to $224.5 million.
- Fourth-quarter net income available to common equity was $46.5 million, or $0.28 per diluted share, compared with $45.3 million, or $0.26, in the prior-year quarter. Fourth-quarter net interest margin was 3.23%, down 9 basis points year over year.
- Common dividends totaled $0.33 per share in 2013 versus $0.23 in 2012. The Corporation repurchased $120 million of common stock during 2013. Stockholders’ equity declined $45 million, with accumulated other comprehensive income moving from $48.6 million to a loss of $24.2 million, largely reflecting securities valuation changes.
Outlook, risks, and contingencies
- For 2014, management expected mid-single-digit average loan growth, high-single-digit average deposit and other funding growth, modest further net interest margin compression, and slightly lower noninterest income, including weaker mortgage banking. It expected flat noninterest expense and a higher loan-loss provision as lending grew.
- Management said its year-end interest-rate simulations estimated net interest income would rise 0.4% under an immediate 100-basis-point rate increase and 0.9% under a 200-basis-point increase. It also disclosed that a 1-percentage-point market-rate change could move the securities portfolio’s value by approximately $213 million, based on portfolio duration.
- The Bank remained subject to an OCC consent order concerning Bank Secrecy Act compliance. Management said it believed the Bank was complying, but the OCC could impose a civil money penalty for past deficiencies; the company could not reasonably estimate a loss range.
- A receiver’s lawsuit alleging the Bank failed to uncover an Oxford Global Partners Ponzi scheme had been dismissed, but the plaintiff appealed. Management could not assess the likelihood or estimate potential loss at the filing date.
- Mortgage-loan representation-and-warranty exposure remained: the repurchase reserve was $5.7 million at year-end, and approximately $7.5 billion of loans sold during 2006–2013 remained outstanding. The filing cautions that future claims and losses depend on borrower performance and other uncertain factors.
- Key broader risks include commercial and real-estate credit concentrations, low-rate pressure on margins, deposit and wholesale-funding access, securities valuation changes, operational and cyber risks, litigation and regulatory costs, and implementation of Basel III and consumer-protection rules. Management reported no goodwill impairment in 2013; goodwill was $929 million.
- The Board declared a $0.09-per-share quarterly common dividend in January 2014 and approved early redemption at par of $155 million of senior notes due March 2014. These were subsequent events, not reflected in the 2013 statements.
Important facts for investors to verify
- Whether the OCC consent order is resolved and whether any civil penalty or further remediation costs arise.
- Whether improving credit trends continue as commercial and construction lending grow, and whether the lower allowance remains adequate.
- Actual 2014 loan and deposit growth, margin performance, mortgage banking income, and provision expense versus management’s outlook.
- Deposit stability and the cost, repricing terms, and liquidity implications of the $2.5 billion variable-rate FHLB advances.
- Developments in the Oxford-related appeal and mortgage repurchase claims, including adequacy of the related reserves.
- Capital and shareholder returns after repurchases and dividends, and sensitivity of securities values and earnings to interest-rate changes.