Associated Banc-Corp — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. Associated Banc-Corp is a bank holding company with Commercial Banking, Consumer Banking, and Risk Management and Shared Services segments.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net interest income | $160.2 million | $154.3 million | $317.8 million | $308.9 million |
| Total noninterest income | $84.3 million | $76.0 million | $166.3 million | $154.4 million |
| Net income | $47.9 million | $43.3 million | $95.3 million | $86.0 million |
| Net income available to common equity | $46.6 million | $42.0 million | $92.7 million | $83.4 million |
| Diluted EPS | $0.28 | $0.24 | $0.55 | $0.48 |
| Noninterest expense | $170.0 million | $166.0 million | $336.9 million | $335.8 million |
- Q2 total revenue was $244.5 million; first-half total revenue was $484.1 million. First-half net income rose about 11% year over year, while revenue rose about 4.5%.
- Net interest margin was 3.16% in Q2 and 3.17% for the first half, down 14 basis points year over year for both comparable periods. Management attributed margin pressure to lower asset yields, partly offset by lower funding costs.
- Q2 return on average assets was 0.82%, return on average equity 6.58%, and the reported efficiency ratio 69.54% (67.73% on a fully taxable-equivalent basis).
- Mortgage banking, trust fees, and capital markets contributed to noninterest income. First-half mortgage banking income was $37.0 million, including a favorable recovery in the mortgage servicing rights valuation allowance; management expected lower mortgage banking revenue in the remainder of 2013.
Balance sheet, funding, and capital
- At June 30, 2013, total assets were $23.62 billion, loans were $15.75 billion, deposits were $17.13 billion, and stockholders’ equity was $2.88 billion. Since year-end 2012, loans rose $336 million and deposits rose $193 million.
- Commercial loans grew, while consumer loans declined, principally due to lower home equity balances. Commercial loans were 62% of total loans; consumer loans were 38%.
- Total short- and long-term funding was $3.38 billion, up $37 million from year-end. Short-term funding increased $438 million and long-term funding declined $401 million, including repayment of $400 million of long-term FHLB advances.
- Cash and cash equivalents were $555.0 million at June 30, down $182.9 million in the first half. Operating cash flow was $193.2 million, investing cash use was $513.3 million, and financing cash flow was $137.2 million.
- Total equity declined $59 million from year-end, with accumulated other comprehensive income shifting from positive $48.6 million to a loss of $25.0 million, primarily reflecting unrealized losses on available-for-sale securities as market interest rates changed. The filing reports a 12.18% equity-to-assets ratio, an 11.49% Tier 1 common equity-to-risk-weighted-assets ratio, an 11.88% Tier 1 risk-based capital ratio, and a 13.29% total risk-based capital ratio.
- Management stated the company and bank would meet Basel III capital requirements on a fully phased-in basis using June 30, 2013 figures, if those requirements were then effective. It reported compliance with internal liquidity objectives.
Credit quality, changes, and outlook
- Credit quality improved: nonaccrual loans fell to $217.5 million, or 1.38% of loans, from $317.9 million, or 2.16%, a year earlier. Potential problem loans declined to $309.9 million from $409.9 million.
- First-half net charge-offs were $28.2 million, versus $45.5 million in the first half of 2012; annualized net charge-offs were 0.36% of average loans versus 0.63%. The allowance was $277.2 million, or 1.76% of loans, compared with $332.7 million, or 2.26%, one year earlier. The company recorded an $8 million provision in the first half, versus none in the comparable 2012 period.
- Management expected continued net interest margin compression in the remainder of 2013, modest improvement in core fee-based revenues, lower mortgage banking revenues, and flat year-over-year noninterest expense, with lower regulatory costs offset by continued franchise investment. It expected modest improvement in credit trends but a higher loan-loss provision as loan growth continued.
- Q2 included a $3 million reserve for third-party insurance products sold in prior years. The first half included a $4 million mortgage repurchase provision. Mortgage servicing rights valuation recovery materially benefited mortgage banking results; the net asset value was $61.4 million, and management disclosed that a 50-basis-point decrease in refinance rates would reduce estimated value by about $7 million.
- Available-for-sale securities recorded substantial unrealized losses: first-half other comprehensive loss was $73.6 million, and Q2 comprehensive loss was $20.1 million despite positive net income. Management attributed security losses primarily to interest-rate and market movements rather than credit deterioration and reported no other-than-temporary impairment for the period.
Risks, contingencies, and subsequent developments
- The Bank remained subject to an OCC Consent Order concerning Bank Secrecy Act compliance. The OCC could impose a civil money penalty for past deficiencies; the company said it could not reasonably estimate a loss range.
- A lawsuit related to the Oxford Global Partners Ponzi scheme sought unspecified consequential and punitive damages. Management said it could not assess the likelihood or estimate a potential loss at this early stage and intended to defend the Bank.
- Mortgage representations-and-warranties activity increased. The repurchase reserve was $5.2 million at June 30, compared with $3.3 million at year-end; management said it would continue monitoring claims. The overdraft-fee class-action settlement for $13 million received final court approval on August 1, 2013; the amount had previously been accrued.
- On July 23, 2013, the board authorized an additional $120 million common-stock repurchase, on top of $35 million remaining from the previous authorization, and declared a $0.08 quarterly common dividend. It also authorized, subject to applicable approval, redemption of the 9.25% subordinated notes at the first redemption date and purchase of up to $10 million of Series B preferred stock.
- Management’s forward-looking statements are subject to risks including economic conditions, interest rates, credit quality, liquidity and funding access, regulatory requirements, and valuation estimates. The filing notes that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether margin compression and lower mortgage banking revenue materialize, and whether fee income and expense trends meet management’s expectations.
- Whether loan growth continues alongside improving credit quality, and whether the allowance remains adequate as provision expense is expected to rise.
- The sensitivity of securities values, accumulated other comprehensive income, and mortgage servicing rights to interest-rate and prepayment changes.
- Developments in OCC BSA compliance and potential penalties, the Oxford-related litigation, and mortgage repurchase claims and reserve adequacy.
- Capital and liquidity after planned buybacks, dividends, subordinated-note redemption, and preferred-stock purchases; verify regulatory approvals and execution.