Associated Banc-Corp 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Associated Banc-Corp is a Wisconsin bank holding company operating primarily in Wisconsin, Illinois, and Minnesota. It reported 213 branches and $30.5 billion in year-end assets.
Financial results and condition
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net interest income | $741.2 million | $707.3 million | Up 5% |
| Net interest margin | 2.82% | 2.80% | Up 2 basis points |
| Noninterest income | $332.7 million | $352.9 million | Down 6% |
| Noninterest expense | $709.1 million | $702.6 million | Up 1% |
| Net income | $229.3 million | $200.3 million | Up 14% |
| Diluted earnings per common share | $1.42 | $1.26 | Up 13% |
| Cash dividends per common share | $0.50 | $0.45 | Up 11% |
- Revenue and margins: Net interest income grew with higher average loan balances and loan yields, partly offset by increased deposit and funding costs. Average loans rose 5% to $20.6 billion; average deposits rose 4% to $21.9 billion. The fully tax-equivalent efficiency ratio improved to 64.51% from 65.46%.
- Credit: Provision for credit losses fell to $26 million from $70 million. Net charge-offs were $39 million, or 0.19% of average loans, versus $65 million, or 0.33%. Nonaccrual loans declined to $208.5 million from $275.3 million; allowance for loan losses was $265.9 million, or 1.28% of loans.
- Balance sheet and liquidity: Year-end loans were $20.8 billion, deposits $22.8 billion, investment securities $6.3 billion, and total assets $30.5 billion. Total stockholders’ equity was $3.24 billion. Cash and cash equivalents increased $73.8 million to $716.0 million. Operating cash flow was $458.4 million; investing activities used $1.40 billion and financing activities provided $1.01 billion.
- Funding and capital: Short- and long-term funding totaled approximately $4.07 billion, up from $3.85 billion. Basel III ratios were 10.08% common equity Tier 1, 10.82% Tier 1, and 13.22% total capital; the bank subsidiary was categorized as well capitalized. The company reported $2.5 billion of network deposits, equal to 11% of deposits, and $67 million outstanding under its commercial paper program.
Material changes versus 2016
- Net interest income increased $34 million, reflecting loan growth and higher commercial loan yields; the average cost of interest-bearing liabilities also rose, to 0.69% from 0.42%.
- Noninterest income fell $20 million. Net mortgage banking income declined 49% to $19 million, primarily reflecting the strategy of retaining some longer-dated mortgage production on the balance sheet. Fee-based revenue increased 3%.
- Credit costs and problem assets improved: potential problem loans fell to $176.9 million from $351.1 million, and nonaccrual loans declined, notably following improvement in oil-and-gas credits.
- Consumer loans increased 15%, mainly because of mortgage retention, while commercial real estate lending declined 5% as the company moderated growth ahead of the Bank Mutual transaction.
Outlook, significant events, and risks
- 2018 outlook: Management expected mid-single-digit average loan growth, a loan-to-deposit ratio below 100%, and a stable to modestly improving net interest margin. It forecast noninterest income of approximately $360 million to $370 million and noninterest expense of approximately $820 million, including $40 million of Bank Mutual restructuring costs. Management also expected an improving efficiency ratio and a lower effective tax rate. Credit-loss provision was expected to respond to portfolio risk, credit quality, and loan volume.
- Bank Mutual: The acquisition closed February 1, 2018, after the reporting date. Associated expected to issue approximately 19.6 million shares, valued at about $485 million based on the January 31, 2018 share price, and planned to merge the bank subsidiaries in late June or July 2018. Management expected the deal to be accretive to EPS in 2019, but cautioned that integration, costs, and expected benefits were uncertain.
- Tax Act: Enactment in December 2017 generated $13 million of fourth-quarter tax expense, primarily from remeasuring deferred tax assets. The federal corporate rate reduction was expected to benefit future earnings, partly offset by reduced deductibility of FDIC premiums; the company projected an additional $10 million to $12 million after-tax insurance cost in 2018.
- Principal risks: Credit exposure includes commercial lending (58% of loans), commercial real estate, and oil and gas. Oil-and-gas loans outstanding were $600 million, including $77 million nonaccrual; the related allowance was $27 million. Other risks include interest-rate and funding sensitivity, mortgage-related valuation and prepayment risk, cybersecurity and third-party operational risks, regulatory and litigation exposure, and execution of the Bank Mutual integration. The filing says a 100-basis-point rate increase would raise modeled 12-month earnings-at-risk by 2.5% under the dynamic forecast but reduce market value of equity by 3.1%.
- Contingencies and unusual items: The bank remained subject to a HUD fair-housing Conciliation Agreement through May 22, 2018. The filing described pending World Marketing bankruptcy-related lawsuits for which management could not assess the likelihood or reasonably estimate potential loss. The R.J. Zayed Ponzi-scheme litigation had a settlement approved by the court in January 2018; the bank expected no material adverse impact. The company also identified CECL adoption, then expected in 2020, as potentially materially affecting credit-loss reserves; the impact was not yet estimable.
Important facts for investors to verify
- Whether loan growth, margin performance, deposit pricing, and the 2018 loan-to-deposit target developed as management forecast.
- Whether Bank Mutual integration delivered projected synergies and 2019 EPS accretion, and how actual restructuring and integration costs compared with estimates.
- Whether credit quality remained improved, particularly in oil and gas and commercial real estate, and whether the allowance remained adequate.
- How the lower tax rate, FDIC premium deductibility limits, and other Tax Act provisions affected realized earnings and capital.
- Updates on the HUD agreement, unresolved litigation, and the expected allowance and capital effects of CECL implementation.