Associated Banc-Corp — Q1 2016 Form 10-Q
Business context and reporting period: Regional financial-services holding company reporting unaudited results for the three months ended March 31, 2016, compared with Q1 2015 unless otherwise noted. Balance-sheet comparisons are primarily against December 31, 2015. Amounts below are in U.S. dollars; financial figures are rounded to millions.
Key financial results
| Metric | Q1 2016 | Comparable / change |
|---|---|---|
| Net interest income | $172 million | Up 2% year over year |
| Net interest margin | 2.81% | 2.89% in Q1 2015; 2.82% in Q4 2015 |
| Noninterest income | $83 million | Up 4% year over year; includes $3 million net securities gains |
| Noninterest expense | $174 million | Essentially unchanged year over year |
| Provision for credit losses | $20 million | $5 million in Q1 2015 |
| Net income | $43 million | $47 million in Q1 2015 |
| Net income available to common equity / diluted EPS | $40 million / $0.27 | $45 million / $0.30 in Q1 2015 |
| Operating cash flow | $22 million provided | $11 million provided in Q1 2015 |
Balance sheet and liquidity: Total assets were $28.2 billion, up 2% from year-end. Loans were $19.2 billion, up 3%; deposits were $20.7 billion, down 2%. Cash and cash equivalents ended the quarter at $375 million, down $98 million during the quarter. Short- and long-term funding totaled $4.3 billion, up $768 million from year-end, including increased FHLB advances; the company also redeemed $430 million of senior notes. Management reported compliance with internal liquidity objectives and $2.1 billion available for future FHLB advances and $1.7 billion available for Federal Reserve discount-window borrowing.
Capital: Common equity Tier 1 ratio was 9.30%, Tier 1 capital ratio 9.88%, total capital ratio 12.35%, and Tier 1 leverage ratio 7.55%. Management stated regulatory capital ratios exceeded minimum requirements. The company repurchased about $20 million of common stock in the quarter.
Material changes and credit quality
- Loan growth was broad-based; average loans rose $380 million sequentially, with commercial lending accounting for 85% of the increase. Total loans were up 7% year over year.
- Credit costs and problem assets increased materially. Net charge-offs were $17 million, or 0.36% of average loans, versus $6 million, or 0.13%, a year earlier. Nonaccrual loans rose to $286 million from $178 million at year-end; nonperforming assets reached $302 million from $193 million. Allowance coverage of nonaccrual loans declined to 97% from 154%.
- Oil-and-gas-related loans totaled $756 million. Nonaccrual balances rose to $129 million from $20 million at year-end, and potential problem balances increased to $150 million from $124 million. The related allowance increased to $49 million, or 6.5% of that portfolio. Management cited weaker prices, regulatory guidance, and limited near-term price-recovery prospects.
- Net interest margin declined year over year as loan yields fell and funding costs rose. Deposit interest expense increased, while loan growth supported higher net interest income.
- Available-for-sale securities were $4.9 billion; the company sold about $119 million of agency mortgage securities and reinvested in GNMA securities, recording a $3 million net gain and citing lower risk-weighted assets and capital requirements.
Outlook, commentary, and risks
- For the remainder of 2016, management expected high-single-digit annual average loan growth and a loan-to-deposit ratio below 100%.
- Absent Federal Reserve rate increases, management expected net interest margin to dip to 2.75%–2.80%. The provision for loan losses was expected to vary with loan growth and changes in risk grades or other credit indicators.
- Management expected noninterest income, excluding net investment securities gains, and noninterest expense to be approximately flat with the prior year.
- Interest-rate sensitivity analysis showed a slightly asset-sensitive profile for earnings: a 100-basis-point increase was estimated to raise 12-month net interest income 0.6%–0.7%; a 200-basis-point increase, 1.3%–1.4%. The estimated market value of equity declined 2.6% and 5.7%, respectively, under those shocks.
- Material contingencies include the Oxford Global Ponzi-scheme litigation, two World Marketing bankruptcy-related complaints, and potential regulatory or customer-remediation matters involving consumer products. Management could not estimate the likelihood or amount of potential losses for these matters. The HUD conciliation agreement requires community lending and related commitments over several years; the company did not expect a material financial impact.
- Other notable items: mortgage servicing rights were $59 million, with management noting that a 50-basis-point decline in refinance rates could reduce estimated value by about $11 million; the recognized valuation reserve was about $2 million. Moody’s outlook for the Corporation was negative, while S&P’s was stable.
- The board declared a $0.11 per-share common dividend after quarter-end, payable June 15, 2016; it was not reflected in the quarter-end statements. The filing also notes interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether oil-and-gas and broader commercial credit deterioration continues, and how it affects charge-offs, nonaccruals, and reserve needs.
- Whether loan growth can be sustained while deposits declined sequentially and wholesale funding increased.
- Whether net interest margin tracks management’s 2.75%–2.80% expectation and how rate changes affect earnings and economic value.
- Potential mortgage-servicing-rights valuation changes and the sensitivity of the related asset to refinancing and prepayment assumptions.
- Developments and potential financial exposure from the identified lawsuits, consumer-product remediation, and regulatory matters.