Associated Banc-Corp — 2013 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods unless stated otherwise. Financial amounts are in U.S. dollars; millions unless otherwise noted. The unaudited interim statements include normal recurring adjustments, and interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $160.5 | $155.6 | $478.3 | $464.5 |
| Provision for loan losses | $0 | $0 | $8.0 | $0 |
| Noninterest income | $70.9 | $81.0 | $237.2 | $235.4 |
| Noninterest expense | $164.4 | $169.7 | $501.3 | $505.5 |
| Net income | $45.7 | $46.4 | $140.9 | $132.3 |
| Net income available to common equity | $44.4 | $45.1 | $137.0 | $128.4 |
| Diluted earnings per common share | $0.27 | $0.26 | $0.82 | $0.74 |
- Q3 net income was nearly flat year over year, while nine-month net income rose about 6.5%. Q3 noninterest income fell 12%, chiefly reflecting weaker mortgage banking and lower securities gains; lower expenses partly offset that decline.
- Net interest margin was 3.13% in Q3 versus 3.26% a year earlier, and 3.15% year to date versus 3.29%. Year-to-date taxable-equivalent net interest income increased 3%, as balance-sheet growth more than offset adverse rate and pricing effects.
- Asset quality improved: nine-month net charge-offs were $33.7 million versus $63.0 million, and annualized net charge-offs were 0.29% of average loans versus 0.58%. The allowance was $271.7 million, or 1.74% of loans, compared with 2.11% a year earlier.
Financial position, liquidity and capital
- At September 30, 2013, total assets were $23.69 billion, loans were $15.59 billion, deposits were $18.34 billion, and stockholders’ equity was $2.87 billion. Versus December 31, 2012, loans rose 1%, deposits rose 8%, and equity declined $64 million.
- Deposit growth was concentrated in interest-bearing accounts, particularly money-market deposits. Noninterest-bearing demand deposits fell to 24% of deposits from 28% at year-end. Short- and long-term funding together declined to $2.24 billion from $3.34 billion, including lower FHLB advances.
- For the first nine months, operating cash flow was $371.6 million, investing cash flow was negative $440.1 million, and financing cash flow was $159.8 million. Cash and cash equivalents increased $91.3 million to $829.2 million.
- Reported capital measures included a 13.44% total risk-based capital ratio, 12.02% Tier 1 risk-based ratio, 11.64% Tier 1 common equity to risk-weighted assets, and 8.76% Tier 1 leverage ratio. Management said the company and bank exceeded regulatory minimums and believed they would meet fully phased-in Basel III requirements.
- Q3 return on average assets was 0.78%, return on average equity 6.33%, and fully taxable-equivalent efficiency ratio 69.75%. These include management-defined or non-GAAP measures as indicated in the filing.
Material changes and management outlook
- Commercial lending growth supported net interest income, but yields continued to compress. Management expected continued net interest margin pressure for the remainder of 2013 as asset yields declined and further reductions in funding costs became more difficult.
- Management expected full-year 2013 noninterest expense to be flat year over year, and anticipated modest further credit improvement, with provision expense generally consistent with quarterly loan growth.
- Mortgage banking income was materially lower: nine-month net mortgage banking income was $40.6 million, down 18.8%; Q3 was $3.5 million, down 77.3%. Management cited reduced refinancing-related gains and a $5.7 million year-to-date provision for mortgage repurchase claims, partly offset by mortgage-servicing-rights valuation recoveries.
- Available-for-sale securities produced an $87.7 million after-tax other comprehensive loss in the first nine months, chiefly from unrealized valuation changes. Accumulated other comprehensive income moved from $48.6 million at year-end to a $37.1 million loss; management attributed securities unrealized losses primarily to interest rates and market conditions rather than credit deterioration.
- Subsequent events: the company repurchased $30 million of shares on October 4 and redeemed $26 million of subordinated debt on October 15. It announced consolidation of eight branches and some support functions. In October, the board declared a $0.09 quarterly common dividend, up $0.01 from the prior quarterly rate.
Risks, contingencies and unusual items
- 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.
- Mortgage-loan representations and warranties generated repurchases and reimbursement claims. The reserve was $6.2 million at quarter-end, up from $3.3 million at year-end, amid increased claims activity.
- The overdraft-fee class action settlement required a $13 million payment; it received final court approval and had previously been accrued. A separate Oxford Global Partners-related case was dismissed on September 30; the filing said the outcome and potential loss had previously been unestimable.
- Management identified allowance for loan losses, goodwill, mortgage servicing rights, derivatives and income taxes as areas involving significant estimates and judgment. Mortgage-servicing-rights valuations are sensitive to interest rates and prepayment assumptions; a 50-basis-point decline in refinance rates was estimated to reduce value by about $8 million.
- Interest-rate simulation indicated net interest income could increase approximately 0.9% under an immediate 100-basis-point rate increase, compared with 3.4% at year-end 2012. Management said modeled risk remained within policy limits. The filing also cautions that forward-looking statements are subject to risks and actual results may differ.
Most important facts for investors to verify
- Whether deposit growth and funding mix can sustain earnings as margins face continued pressure.
- Whether mortgage production, gain-on-sale income, servicing-rights valuations and repurchase claims develop as expected.
- Whether asset-quality improvement continues, and whether the allowance remains adequate relative to loan growth and credit trends.
- The outcome of the OCC’s BSA review and any resulting penalty, and developments in other legal or mortgage-related contingencies.
- Capital and liquidity after share repurchases, debt redemption, dividends and implementation of Basel III requirements.