Business context and reporting period
Associated Banc-Corp is a Wisconsin bank holding company serving consumers and businesses primarily in Wisconsin, Illinois, and Minnesota through Associated Bank and related subsidiaries. This Form 10-K covers the fiscal year ended December 31, 2014; comparisons are primarily with 2013. The company reported three segments: Corporate and Commercial Specialty; Community, Consumer, and Business; and Risk Management and Shared Services.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Net interest income, reported | $681.0 million | $645.5 million |
| Noninterest income | $290.3 million | $313.1 million |
| Net income | $190.5 million | $188.7 million |
| Net income available to common equity | $185.5 million | $183.5 million |
| Diluted EPS | $1.16 | $1.10 |
| Net interest margin, taxable-equivalent basis | 3.08% | 3.17% |
| Efficiency ratio | 68.95% | 69.56% |
- Balance sheet: Year-end assets were $26.8 billion, loans $17.6 billion, deposits $18.8 billion, and investment securities $5.8 billion. Assets increased 11%, loans 11%, and deposits 9% year over year. The year-end loan-to-deposit ratio was 94%.
- Credit: Provision for credit losses was $16.0 million. Net charge-offs were $15.0 million, or 0.09% of average loans. Nonaccrual loans were $177.4 million (1.01% of loans); the allowance for loan losses was $266.3 million, or 1.51% of loans.
- Cash flow: Operating activities provided $212.7 million; investing activities used $2.119 billion; financing activities provided $2.336 billion. Cash and cash equivalents increased $429.8 million to $1.032 billion.
- Funding and liquidity: Short- and long-term funding totaled approximately $5.0 billion, including $3.93 billion of long-term funding. The company said it met internal liquidity objectives. It reported $3.5 billion of FHLB advances outstanding and $3.0 billion of remaining investment securities available to pledge or sell, subject to stated conditions.
- Capital: Total risk-based capital ratio was 12.66%, Tier 1 risk-based ratio 10.06%, and Tier 1 leverage ratio 7.48% at the holding-company level. The Bank was categorized as well capitalized; its total risk-based capital ratio was 13.26%. Tangible common equity to tangible assets was 6.97%.
Material changes versus 2013
- Common earnings increased about 1%; diluted EPS rose from $1.10 to $1.16. Average loans grew 8%, while net interest income on a taxable-equivalent basis rose 5% to $700 million, primarily from balance growth.
- Net interest margin declined 9 basis points to 3.08%, as asset yields fell more than funding costs. Management attributed pressure to low rates and competitive pricing.
- Noninterest income fell 7%, largely because net mortgage banking income declined 56% to $21.3 million as secondary mortgage production fell to $1.1 billion from $2.3 billion. Noninterest expense was nearly flat at $679.2 million.
- Credit quality improved: net charge-offs fell from $39.1 million to $15.0 million, and nonaccrual loans declined from $185.4 million to $177.4 million. The allowance-to-loans ratio also decreased, from 1.69% to 1.51%.
- Long-term funding increased, including issuance of $250 million of senior notes and $250 million of subordinated notes in November 2014. Common stock repurchases totaled $259 million for the year; year-end stockholders’ equity fell to $2.80 billion from $2.89 billion.
Outlook, risks, contingencies, and unusual items
- 2015 outlook: Management expected high-single-digit average loan growth, deposit growth sufficient to support lending and keep the loan-to-deposit ratio below 100%, modest net interest margin compression, mid-to-upper-single-digit noninterest income growth, and low-single-digit expense growth. These estimates included the pending Ahmann & Martin Co. acquisition.
- Acquisition: In January 2015, the company agreed to acquire Minnesota risk and benefits consulting firm Ahmann & Martin Co. for $48 million in stock, plus up to $8 million of contingent consideration. Closing was expected in February 2015.
- Credit and concentration risks: Commercial loans represented approximately 63% of the loan portfolio; oil and gas loans were approximately 4%. Management expected provision expense to increase with loan growth and changes in credit risk indicators. A prolonged oil and gas downturn or weaker regional economy could adversely affect borrowers and collateral.
- Interest-rate and securities exposure: Management identified a low-rate environment as a risk to margin. Its year-end simulation estimated net interest income would rise 1.6% under a 100-basis-point rate increase in the dynamic forecast, while market value of equity would decline 1.0%. A 1% rate increase was estimated to reduce the securities portfolio’s market value by approximately $220 million.
- Legal and regulatory matters: The OCC terminated the Bank’s 2012 BSA consent order in March 2014; the Bank paid a $500,000 civil money penalty in June. An appeal remained pending in the Oxford Ponzi-scheme lawsuit, and the OCC and HUD were examining fair-housing compliance; management could not estimate potential losses for either matter. The company was remediating legacy debt- and identity-protection products and had reserved for customer payments; further regulatory action remained possible.
- Other contingencies: The mortgage repurchase reserve was $3.3 million at year-end. The company disclosed $7.0 billion of commitments to extend credit, which it said generally may expire undrawn, and $353 million of standby letters of credit. Total contractual obligations and other commitments were $13.7 billion, including those lending commitments.
- Accounting estimates and controls: Key judgment areas include credit-loss allowances, mortgage servicing rights, goodwill, and taxes. Goodwill was $929 million, with no impairment recorded in 2014. Management and the independent auditor reported effective internal control over financial reporting; the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Whether projected 2015 loan and deposit growth materialized without weakening underwriting or liquidity, particularly given commercial and oil-and-gas exposures.
- Whether margin compression, mortgage banking trends, and fee-income growth aligned with management’s outlook.
- Whether credit quality and reserve coverage remained adequate as loans grew and the allowance-to-loans ratio declined.
- The subsequent outcomes and financial effects, if any, of the Ponzi-scheme appeal, fair-housing examination, and legacy-product remediation or enforcement risk.
- The completed acquisition’s actual consideration, integration costs, and contribution to revenue and expenses.
- The effect of funding growth, repurchases, dividends, and Basel III requirements on capital ratios and parent-company capacity to pay dividends or service debt.