ASSOCIATED BANC-CORP quarterly report, Q3 FY2014

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Associated Banc-Corp — 2014 Third-Quarter Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2014. Amounts below are approximate USD millions unless otherwise noted. Associated Banc-Corp is a bank holding company providing commercial, consumer, mortgage, deposit, wealth-management, and related financial services.

Financial performance

  • Third quarter: Net interest income was $172.6 million, up 7.6% from $160.5 million a year earlier. Total noninterest income was $74.9 million, up 5.6%; total revenue (net interest income plus noninterest income) was $247.5 million, up 7.0%. Net income increased to $50.2 million from $45.7 million, and diluted EPS rose to $0.31 from $0.27.
  • First nine months: Net interest income was $506.3 million versus $478.3 million; total noninterest income was $220.7 million versus $237.2 million; and total revenue was $727.0 million versus $715.6 million. Net income was $141.8 million versus $140.9 million. Net income available to common shareholders was $138.0 million, with diluted EPS of $0.85 versus $0.82.
  • Margins and expenses: Net interest margin was 3.06% in Q3, down 7 basis points year over year; nine-month margin was 3.09%, down 6 basis points. Nine-month noninterest expense increased 1.2% to $507.4 million. The reported efficiency ratio was 69.44% for Q3 and 69.85% year to date.
  • Cash flow: For the nine months, operating activities provided $130.7 million, investing activities used $1.516 billion, and financing activities provided $1.258 billion. Cash and cash equivalents declined $127.7 million to $474.6 million.

Balance sheet, funding, and capital

  • Total assets were $25.65 billion at September 30, up 5.9% from year-end 2013. Loans were $17.16 billion, up 7.9%; commercial loans grew $868 million and consumer loans $395 million.
  • Deposits totaled $18.20 billion, up $934 million from year-end. Short- and long-term funding totaled $4.36 billion, up $534 million; short-term funding rose $689 million while long-term funding fell $156 million, including repayment of $155 million in senior notes.
  • Stockholders’ equity was $2.87 billion, down $22 million from year-end. Total equity to assets was 11.19%, versus 11.93% at year-end; Tier 1 common equity to risk-weighted assets was 10.39%, versus 11.46%. Management stated regulatory capital ratios exceeded minimum requirements.
  • The company repurchased approximately 9.0 million shares for $159 million during the first nine months. The quarterly common dividend was $0.09 per share during the period.

Changes and credit quality

  • Lower mortgage refinancing activity substantially reduced nine-month net mortgage banking income, to $18.4 million from $40.6 million. Secondary mortgage production was $778 million versus $2.0 billion.
  • Credit indicators improved year over year: nonaccrual loans were $184 million, or 1.07% of loans, versus $208 million and 1.33%; potential problem loans were $220 million versus $277 million; and annualized nine-month net charge-offs were 0.08% versus 0.29%.
  • The allowance for loan losses was $266.3 million, equal to 1.55% of loans and 145% of nonaccrual loans. The total allowance for credit losses, including unfunded commitments, was $290.7 million. Nine-month provision for credit losses was $11.0 million versus $7.8 million.
  • Management attributed higher net interest income mainly to growth in loans and securities and lower funding costs, while noting continuing asset-yield pressure from low rates and competitive loan pricing. Core fee income increased modestly, but did not offset weaker mortgage banking income over the nine-month period.

Outlook, risks, and unusual items

  • The filing provides no specific earnings or revenue guidance. Management noted the Federal Reserve had left rates unchanged and, at the time, had indicated short-term rate increases were unlikely until 2015. Its rate simulations estimated net interest income would increase 0.9% under an immediate 100-basis-point rise and 2.1% under a 200-basis-point rise; these are model estimates, not guidance.
  • Key risks include interest-rate and margin changes, loan losses, commercial real estate and consumer credit exposure, and judgment-sensitive estimates for credit allowances, mortgage servicing rights, goodwill, and taxes. Management reported no goodwill impairment through September 30. A 50-basis-point decline in refinance rates was estimated to reduce mortgage servicing rights value by about $10 million; a 50-basis-point increase was estimated to raise it by about $8 million.
  • Legacy debt-protection product remediation resulted in a $4 million reserve in 2014 and reduced insurance commissions; additional customer remediation and possible regulatory action remain risks. OCC and HUD examinations of fair-housing compliance were ongoing, and management said potential outcomes could not yet be estimated. A Ponzi-scheme-related lawsuit remained on appeal after dismissal of the complaint; management could not estimate potential loss. The wage class action was dismissed with prejudice after an immaterial payment.
  • Off-balance-sheet commitments included $6.7 billion of commitments to extend credit and $352 million of standby letters of credit. These contractual amounts do not necessarily represent expected funding requirements. The company also disclosed mortgage-loan repurchase and recourse exposure; its mortgage repurchase reserve was $3.4 million at quarter-end.
  • After quarter-end, the board declared a $0.10 common dividend and authorized an additional $120 million share repurchase. On October 29, the company repurchased about 3 million shares for $50 million through an accelerated share repurchase program.

Most important facts for investors to verify

  1. Whether loan growth can sustain net interest income as margin compresses and interest rates change.
  2. Whether mortgage banking and other fee income recover from the decline in refinancing activity, and the effects of remediation costs.
  3. Whether improving credit trends continue, particularly in commercial lending, nonaccrual loans, and troubled debt restructurings.
  4. How higher short-term funding and share repurchases affect liquidity and capital ratios; review the post-quarter repurchase and dividend actions.
  5. Developments in fair-housing examinations, legacy-product remediation, the appealed litigation, and mortgage repurchase claims.