Associated Banc-Corp — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This annual filing reports full-year results, not a standalone fourth-quarter summary. Associated Banc-Corp is a Wisconsin bank holding company operating primarily in Wisconsin, Illinois, and Minnesota through Associated Bank and related businesses.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Net interest income | $835.7 million | $879.6 million |
| Net interest margin | 2.86% | 2.97% |
| Provision for credit losses | $16.0 million | $0 |
| Noninterest income | $380.8 million | $355.6 million |
| Noninterest expense | $794.0 million | $821.8 million |
| Net income | $326.8 million | $333.6 million |
| Net income available to common equity | $311.6 million | $322.8 million |
| Diluted earnings per common share | $1.91 | $1.89 |
| Year-end total assets | $32.4 billion | $33.6 billion |
| Year-end loans | $22.8 billion | $22.9 billion |
| Year-end deposits | $23.8 billion | $24.9 billion |
- Cash flow: Operating activities provided $574 million and investing activities provided $1.6 billion; financing activities used $2.5 billion. Cash, cash equivalents, and restricted cash declined $288 million to $589 million.
- Funding and debt: Year-end FHLB advances were $3.2 billion; short- and long-term funding excluding FHLB advances totaled $1.0 billion. The company redeemed $250 million of senior notes in October 2019. Total short- and long-term funding, including FHLB advances, was $4.2 billion.
- Liquidity: Management said the company met internal liquidity objectives and had sufficient asset-based liquidity under stressed scenarios. The Bank had $4.3 billion available for future FHLB advances and $1.2 billion available for Federal Reserve discount-window borrowing.
- Capital: Year-end CET1, Tier 1, total risk-based capital, and leverage ratios were 10.21%, 11.26%, 13.21%, and 8.83%, respectively. The Bank was classified as well-capitalized.
- Asset quality: Net charge-offs rose to $55 million, or 0.24% of average loans, from $30 million, or 0.13%, in 2018. The allowance for loan losses declined to $201 million, or 0.88% of loans, from $238 million, or 1.04%. Nonaccrual loans were $118 million versus $128 million.
Material changes versus 2018
- Net interest income fell 5% and margin declined 11 basis points. Management attributed the decrease chiefly to lower Bank Mutual acquisition-related prepayments and accretion, and LIBOR-rate compression outpacing funding-cost reductions.
- Net income declined about 2%, while diluted EPS increased to $1.91 from $1.89, supported in part by a lower weighted-average share count.
- Noninterest income rose 7%, led by a 60% increase in net mortgage banking income to $32 million and higher investment securities gains.
- Noninterest expense decreased 3%, mainly because acquisition costs fell $22 million and FDIC assessments fell $14 million; technology expense increased $10 million.
- Average loans increased 2% and average deposits increased 3%, but year-end balances fell 1% and 4%, respectively. The company completed its Huntington Wisconsin branch acquisition in June, assuming $725 million in deposits and adding $116 million in loans. It also sold about $240 million of portfolio mortgages as part of a deleveraging strategy.
- Commercial and industrial charge-offs included $44 million net charge-offs from oil and gas lending. Year-end oil and gas loans were $484 million, approximately 2% of total loans.
Outlook, risks, and unusual items
- 2020 outlook: Management expected average loan growth of 2%–4%, net interest margin of 2.80%–2.85% assuming stable interest rates, noninterest income of $375–$385 million, and noninterest expense of $790–$795 million. Provision expense was expected to vary with credit grades, credit quality indicators, and loan volume.
- CECL: The company adopted the expected-credit-loss standard on January 1, 2020. It estimated a $70–$80 million after-tax reduction to opening stockholders’ equity and a 21–24 basis-point reduction in tangible common equity ratio.
- Key risks: Exposure includes commercial and commercial real estate credit risk, oil and gas lending, interest-rate and liquidity sensitivity, deposit outflows, cybersecurity and third-party systems, regulatory and consumer-compliance requirements, and mortgage-servicing and loan-repurchase obligations. Management described the interest-rate profile as slightly asset-sensitive; a lower or inverted yield curve can pressure earnings.
- Contingencies: The company reported ordinary-course litigation and said it did not believe any current proceeding would have a material adverse effect. Potential regulatory remediation relating to consumer products and fees could not be assessed or reasonably estimated. The mortgage repurchase reserve was approximately $0.8 million.
- Unusual items and accounting: The company sold and repositioned securities, recognized a $13.4 million upward value adjustment on remaining Visa Class B shares, and transferred $692 million of municipal securities from held-to-maturity to available-for-sale classification. A retrospective derivative-netting accounting policy change affected balance-sheet presentation but not earnings or equity. First Staunton, an approximately $76 million cash acquisition, was pending and expected to close in February 2020.
- Shareholder distributions: Common dividends were $0.69 per share for 2019. The company repurchased 8.2 million shares for $177 million during the year; the Board declared a $0.18-per-share quarterly dividend in February 2020.
Important facts for investors to verify
- Whether net interest margin and funding costs track the 2020 outlook, particularly if rates or the yield curve change.
- Whether higher charge-offs, especially in oil and gas, require additional provisions or a higher allowance under CECL.
- The final CECL adoption adjustment and its effect on tangible common equity and regulatory capital.
- Deposit trends, wholesale funding reliance, and liquidity after the year-end balance-sheet reduction.
- Integration and realized benefits of Huntington, and completion and purchase accounting for First Staunton.
- Any material developments in consumer-product regulatory matters, litigation, or mortgage repurchase claims.