Associated Banc-Corp — 2012 Form 10-K
Business context and reporting period. Associated Banc-Corp is a Wisconsin bank holding company serving Wisconsin, Illinois and Minnesota through Associated Bank and related subsidiaries. Its businesses are Commercial Banking, Consumer Banking, and Risk Management and Shared Services. This filing reports the fiscal year ended December 31, 2012; fourth-quarter results are also summarized below. Amounts are in U.S. dollars.
Financial performance and condition
- Earnings: Net income was $179 million, versus $140 million in 2011. Net income available to common equity rose 51% to $174 million, or $1.00 per diluted share, from $115 million, or $0.66. Fourth-quarter common income was $45 million, or $0.26 per diluted share, versus $40 million, or $0.23.
- Revenue and margin: Net interest income was $626 million, up 2% from $613 million; taxable-equivalent net interest income was $647 million. Net interest margin improved to 3.30% from 3.26%. Noninterest income rose 15% to $313 million, led by net mortgage banking income of $64 million, up from $13 million. Core fee-based revenue declined 7% to $220 million. Noninterest expense increased 5% to $682 million; the efficiency ratio improved slightly to 70.42% from 70.66%.
- Credit quality: Provision for loan losses fell to $3 million from $52 million. Net charge-offs declined 44% to $84 million, or 0.57% of average loans. Nonaccrual loans decreased 29% to $253 million; potential problem loans fell 36% to $361 million. The allowance was $297 million, 1.93% of loans and 118% of nonaccrual loans, compared with 2.70% and 106%, respectively, in 2011.
- Balance sheet and funding: Total assets were $23.5 billion, up 7%. Loans increased 10% to $15.4 billion, with commercial loans representing 61% of the portfolio; retail loans declined 12%. Deposits rose 12% to $16.9 billion. Short- and long-term funding totaled $3.34 billion, down from $3.69 billion. Total stockholders’ equity was $2.94 billion.
- Cash flow and liquidity: Operating cash flow was $350 million; investing activities used $1.63 billion and financing activities provided $1.40 billion. Cash and cash equivalents increased $121 million to $738 million. Management reported compliance with internal liquidity objectives and access to deposits, securities, FHLB advances and other funding sources.
- Capital and shareholder returns: The Bank was categorized as well capitalized. At year-end, the Bank’s Tier 1 risk-based, total risk-based and leverage ratios were 14.08%, 15.34% and 10.53%; the holding company’s corresponding ratios were 12.01%, 13.42% and 8.98%. Common dividends paid totaled $0.23 per share for 2012 versus $0.04 in 2011. The company repurchased approximately 4.7 million shares for $60 million during 2012.
Material changes versus 2011
- Common earnings increased substantially, reflecting a much lower loan-loss provision, higher net interest income and stronger mortgage banking income.
- Loan and deposit growth accelerated, while investment securities balances and short- and long-term funding declined. Lower funding costs helped offset continued declines in earning-asset yields.
- Credit indicators improved, including lower nonaccrual loans, potential problem loans and net charge-offs. However, loans past due 30–89 days increased 46% to $64 million.
- Core fee income weakened, notably deposit service charges and card-based fees; management cited customer behavior and regulatory changes, including interchange fee limits.
- Noninterest expense increased, particularly personnel, data processing, occupancy, and legal and professional fees. The latter included costs related to BSA compliance work.
Outlook, risks and unusual items
- 2013 outlook: Management expected high-single-digit full-year loan growth, continued focus on core customer and commercial deposits, modest net interest margin compression, modest improvement in core fee-based revenue, lower mortgage banking revenue, and flat noninterest expense. It expected credit trends to continue improving, with provision expense increasing in line with loan growth.
- Regulatory matters: In February 2012, the Bank entered into an OCC Consent Order concerning Bank Secrecy Act compliance. Management stated it was cooperating and believed it was complying. The Dodd-Frank and proposed Basel III requirements could increase compliance, capital or liquidity costs; the ultimate effects were uncertain. The prior Federal Reserve Memorandum of Understanding was terminated in March 2012.
- Legal and contingent exposures: A $13 million overdraft-fee settlement had preliminary court approval and was accrued; final approval was scheduled for March 2013. A January 2013 lawsuit related to an alleged Ponzi scheme sought unspecified damages; management said it could not yet assess the likelihood or estimate a potential loss. Mortgage repurchase claims increased, prompting a $3 million reserve in late 2012. The company also disclosed $5.9 billion of credit commitments and a $22 million reserve for unfunded commitments.
- Unusual items and estimates: The company recorded an approximately $14.6 million other-than-temporary impairment of mortgage servicing rights in 2012, associated with the sustained low-rate environment. Mortgage servicing rights valuation, the allowance for loan losses, goodwill and deferred tax assets rely on significant estimates. Goodwill was $929 million; no goodwill impairment was recorded in 2012.
- Market and operating risks: Management highlighted low interest rates and margin pressure, credit and real-estate exposure, deposit or wholesale-funding stress, regulatory and litigation risks, operational and cybersecurity risks, and potential mortgage servicing and repurchase losses.
Important facts for investors to verify
- Whether loan growth and credit quality remained consistent with management’s 2013 expectations, especially given the commercial-heavy loan mix and higher short-term delinquencies.
- Whether the $297 million allowance remained adequate as the loan portfolio expanded and provision expense normalized from its unusually low 2012 level.
- How net interest margin, core fee revenue and mortgage banking income performed under continued low rates and changing refinancing volumes.
- The status and costs of the OCC BSA Consent Order, the overdraft settlement approval, and the Ponzi-scheme litigation.
- Whether mortgage repurchase claims and losses exceeded the $3 million reserve, and whether contingent credit commitments or liquidity needs changed materially.
- The final U.S. Basel III capital and liquidity rules and their effect on capital ratios, dividends and repurchases.