Associated Banc-Corp — Q1 2019 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2019, compared primarily with Q1 2018. Associated Banc-Corp is a bank holding company. Amounts below are in U.S. dollars; financial statement figures are rounded to millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / change |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $306.7 million | Up 2% from $300.3 million in Q1 2018 |
| Net interest income | $215.5 million; net interest margin 2.90% | Up 3% from $209.9 million; margin down 2 basis points year over year and 12 basis points sequentially |
| Noninterest income | $91.2 million | Up 1% year over year |
| Noninterest expense | $191.7 million | Down 10% from $213.0 million, mainly reflecting $20.0 million lower acquisition-related costs |
| Net income / common earnings | $86.7 million / $82.9 million available to common equity | Net income up 25% from $69.5 million |
| Diluted earnings per common share | $0.50 | $0.40 in Q1 2018 |
| Total assets | $33.7 billion | Up $53 million from December 31, 2018 |
| Loans / deposits | $23.1 billion / $25.5 billion | Loans up 1% and deposits up 3% from year-end 2018 |
| Allowance for loan losses | $235.1 million; 1.02% of loans | $238.0 million and 1.04% at year-end 2018 |
| Regulatory capital | CET1 ratio 10.29%; total capital ratio 13.46% | Both above regulatory minimums, per management |
Cash flow and funding: Operating activities used $13.6 million, investing activities used $162.5 million, and financing activities used $54.2 million. Cash, cash equivalents, and restricted cash declined $230.4 million during the quarter to $646.3 million. Deposits increased $635.7 million, while FHLB advances declined $629.6 million from year-end to $2.9 billion. The company reported $3.4 billion of available FHLB advances and $2.8 billion of discount-window borrowing capacity.
Material changes versus prior periods
- Net interest income increased year over year, supported by loan growth, but higher funding costs pressured margin. The cost of interest-bearing liabilities rose to 1.51% from 0.90% in Q1 2018.
- Average loans increased 5% year over year to $23.1 billion, and average deposits increased 4% to $24.6 billion. Period-end loans were up 1% year over year; deposits were up 7%.
- Insurance commissions rose 12% year over year, reflecting the Diversified and Anderson acquisitions. Mortgage banking, net, declined 26%, and capital markets revenue declined 40%.
- Provision for credit losses was $6.0 million versus none in Q1 2018. Net charge-offs were $7.4 million, or 0.13% of average loans annualized, compared with $9.3 million, or 0.17%, a year earlier.
- Nonaccrual loans rose to $155.6 million from $127.9 million at December 31, 2018, but were below $208.6 million a year earlier. Nonperforming assets were $167.8 million, or 0.50% of assets.
- Q1 2018 expense included $20.6 million of acquisition costs, compared with $0.6 million in Q1 2019. Q1 2019 also included $1.7 million of investment securities gains.
Outlook, commentary, and risks
- Management outlook for 2019: annual average loan growth of 3%–6%, with the loan-to-deposit ratio below 100%; full-year net interest margin flat to slightly lower assuming no further federal funds rate action; noninterest income of approximately $360 million–$375 million; and noninterest expense of approximately $800 million. Management expects provision expense to vary with risk grades, other credit-quality indicators, and loan volume.
- Acquisition: Huntington’s Wisconsin branch transaction received regulatory approval in February and was expected to close in June 2019, subject to customary conditions. The company expected to acquire about $850 million of deposits, $134 million of loans, and a net 14 branches.
- Interest-rate exposure: management described the earnings-at-risk profile as slightly asset sensitive under its current rate expectations. A modeled 100-basis-point rate increase raised 12-month earnings at risk 4.8% under the dynamic forecast; modeled market value of equity declined 2.3%. These are scenario estimates, not forecasts.
- Credit and securities: management considered the allowance appropriate. Potential problem loans were $241.4 million, down 3% from year-end. Management attributed unrealized investment-security losses primarily to interest rates and market conditions rather than credit deterioration, and said it did not intend, and did not expect to be required, to sell those securities before recovery.
- Contingencies: the company reported routine pending and threatened legal matters and said it did not believe any current proceeding would materially adversely affect the company. It could not assess the probability or estimate potential losses relating to certain consumer-product regulatory scrutiny. Commitments to extend credit were $8.7 billion, excluding specified mortgage-origination commitments.
- Accounting and other items: adoption of lease accounting recognized a $49.4 million operating lease right-of-use asset and a $53.5 million liability at quarter-end. The company expected adoption of the current expected credit loss standard in Q1 2020 and anticipated an increase in the allowance, but had not quantified the impact.
- The board authorized an additional $100 million of common-stock repurchases in February; about $30 million was repurchased during Q1. A quarterly common dividend of $0.17 per share was declared on April 30, 2019.
Important facts for investors to verify
- Whether loan growth, deposit mix, and funding costs support management’s 2019 margin and loan-growth expectations.
- How the increase in nonaccrual loans—particularly commercial and industrial credits—develops, and whether reserve coverage remains adequate.
- The final timing, acquired balances, integration costs, and expected benefits of the Huntington branch acquisition.
- The eventual CECL transition impact on reserves, earnings, and capital; the filing does not provide a quantified estimate.
- Whether liquidity and capital remain adequate as funding needs, commitments, repurchases, dividends, and FHLB advance maturities evolve.