Add
ASBC to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| ASBC > SEC Filings for ASBC > Form 10-K on 15-Feb-2013 | All Recent SEC Filings |
15-Feb-2013
Annual Report
The following discussion is management's analysis to assist in the understanding and evaluation of the consolidated financial condition and results of operations of the Corporation. It should be read in conjunction with the consolidated financial statements and footnotes and the selected financial data presented elsewhere in this report.
The detailed financial discussion that follows focuses on 2012 results compared to 2011. Discussion of 2011 results compared to 2010 is predominantly in section "2011 Compared to 2010."
Overview
The Corporation is a bank holding company headquartered in Wisconsin, providing a diversified range of banking and nonbanking financial services to individuals and businesses primarily in its three-state footprint (Wisconsin, Illinois and Minnesota). The Corporation, principally through the Bank, provides a wide range of services, including business and consumer loan and depository services, as well as other traditional banking services. Through its nonbanking subsidiaries, the Corporation's wealth management business provides a variety of products and services to supplement the banking business including insurance, brokerage, and trust / asset management.
The Corporation's primary sources of revenue, through the Bank, are net interest income (predominantly from loans and investment securities), and noninterest income, particularly fees and other revenue from financial services provided to customers or ancillary services tied to loans and deposits. Business volumes and pricing drive revenue potential, and tend to be influenced by overall economic factors, including market interest rates, business spending, consumer confidence, economic growth, and competitive conditions within the marketplace.
2012 was a year for execution of growth initiatives and improving credit quality. Net income available to common equity for 2012 was $174 million or $1.00 per common share, an increase of 51% over 2011. Total loans increased $1.4 billion (10%) during 2012 with growth in most loan categories, while total deposits grew $1.8 billion (12%). The net interest margin for 2012 improved to 3.30%, compared to 3.26% for 2011, due to reductions in deposit and funding costs which slightly outpaced reductions in earning asset yields. Credit quality continued to improve with nonaccrual loans down 29% to $253 million and net charge offs down 44% to $84 million. The quarterly dividend increased to $0.05 per common share during the first quarter of 2012 and increased to $0.08 per common share during the fourth quarter of 2012. The Corporation repurchased $60 million, or approximately 4.7 million shares of common stock, at an average cost per share of $12.77 during 2012. For 2013, the Corporation is focused on growing the franchise and creating long-term shareholder value.
Performance Summary
• Net income available to common equity for 2012 was $174 million (compared to net income available to common equity of $115 million for 2011) or diluted earnings per common share of $1.00 (versus diluted earnings per common share of $0.66 for 2011).
• Total loans increased $1.4 billion (10%) between year-end 2012 and 2011, with growth in most loan categories (commercial and business lending was up $916 million, commercial real estate lending was up $414 million, and residential mortgage loans were up $426 million, while retail loans decreased $376 million). On average, loans increased $1.5 billion (11%) primarily in commercial and residential mortgage loans (up $1.2 billion and $510 million, respectively), while retail loans declined $262 million. For 2013, the Corporation expects full year loan growth in the high single digits.
• Total deposits increased $1.8 billion (12%) between year-end 2012 and 2011. Money market deposits and noninterest-bearing demand deposits increased (up 27% and 21%, respectively), while brokered CDs and
• Credit quality continued to improve during 2012. Nonaccrual loans were $253 million at December 31, 2012, a decrease of $104 million (29%) from December 31, 2011. Potential problem loans declined to $361 million, a decrease of $205 million (36%) from December 31, 2011. At December 31, 2012, the allowance for loan losses to total loans ratio was 1.93%, covering 118% of nonaccrual loans, compared to 2.70% at December 31, 2011, covering 106% of nonaccrual loans. The provision for loan losses was $3 million for 2012, with net charge offs to average loans of 0.57% (compared to a provision for loan losses of $52 million and a net charge off ratio of 1.13% for 2011). For 2013, the Corporation expects continuing improvement in credit trends and an increase in the provision for loan losses consistent with new loan growth.
• Taxable equivalent net interest income was $647 million for 2012, $13 million or 2% higher than 2011, including favorable volume variances (increasing taxable equivalent net interest income by $39 million), partially offset by unfavorable rate variances (decreasing taxable equivalent net interest income by $26 million). The net interest margin for 2012 was 3.30%, 4 bp higher than 3.26% in 2011, attributable to a 8 bp increase in interest rate spread, partially offset by a 4 bp lower contribution from net free funds. For 2013, the Corporation anticipates modest compression on the net interest margin over the course of the year.
• Noninterest income was $313 million for 2012, $40 million or 15% higher than 2011. Core fee-based revenues (including trust service fees, service charges on deposit accounts, card-based and other nondeposit fees, insurance commissions, and brokerage and annuity commissions) totaled $220 million for 2012, down $16 million or 7% from $236 million for 2011. Net mortgage banking income was $64 million for 2012, an increase of $51 million from 2011. Collectively, all remaining noninterest income categories were $30 million, up $5 million compared to 2011. For additional discussion concerning noninterest income see section, "Noninterest Income." For 2013, the Corporation expects modest improvement in core fee-based revenues and lower net mortgage banking revenues.
• Noninterest expense of $682 million grew $31 million (5%) over 2011. Personnel expense was $381 million, up $21 million (6%) versus 2011, while nonpersonnel noninterest expenses on an aggregate basis were up modestly (3%) compared to 2011. The efficiency ratio (as defined under Part II, Item 6, "Selected Financial Data") was 70.42% for 2012 and 70.66% for 2011, respectively. For additional discussion regarding noninterest expense see section, "Noninterest Expense." For 2013, the Corporation expects flat year over year noninterest expense with reduced regulatory costs offset by continued investments in the franchise.
• Income tax expense for 2012 was $75 million, compared to income tax expense of $44 million for 2011. The increase in income tax was primarily due to the increase in pretax income between the years. The effective tax rate was 29.7% for 2012, compared to an effective tax rate of 23.8% for 2011. For additional discussion concerning income tax see section, "Income Taxes."
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income in the consolidated statements of income (loss) (which excludes the taxable equivalent adjustment) was $626 million in 2012 compared to $613 million in 2011. The taxable equivalent adjustments (the adjustments to bring tax-exempt interest to a level that would yield the same after-tax income had that income been subject to a taxation using a 35% tax rate) of $21 million for both 2012 and 2011, respectively, resulted in fully taxable equivalent net interest income of $647 million in 2012 and $634 million in 2011.
Net interest income is the primary source of the Corporation's revenue. Net interest income is the difference between interest income on interest-earning assets, such as loans and investment securities, and the interest expense on interest-bearing deposits and other borrowings used to fund interest-earning and other assets or activities. Net interest income is affected by changes in interest rates and by the amount and composition of earning assets and interest-bearing liabilities, as well as the sensitivity of the balance sheet to changes in interest rates, including characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, repricing frequencies, loan prepayment behavior, and the use of interest rate derivative financial instruments.
Interest rate spread and net interest margin are utilized to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on earning assets and the rate paid for interest-bearing liabilities that fund those assets. The net interest margin is expressed as the percentage of net interest income to average earning assets. The net interest margin exceeds the interest rate spread because noninterest-bearing sources of funds ("net free funds"), principally noninterest-bearing demand deposits and stockholders' equity, also support earning assets. To compare tax-exempt asset yields to taxable yields, the yield on tax-exempt loans and investment securities is computed on a taxable equivalent basis. Net interest income, interest rate spread, and net interest margin are discussed on a taxable equivalent basis.
Table 2 provides average balances of earning assets and interest-bearing liabilities, the associated interest income and expense, and the corresponding interest rates earned and paid, as well as net interest income, interest rate spread, and net interest margin on a taxable equivalent basis for the three years ended December 31, 2012. Tables 3 through 5 present additional information to facilitate the review and discussion of taxable equivalent net interest income, interest rate spread, and net interest margin.
Taxable equivalent net interest income of $647 million for 2012 was $13 million or 2% higher than 2011. The increase in taxable equivalent net interest income was a function of favorable volume variances (as balance sheet changes in both volume and mix increased taxable equivalent net interest income by $39 million) and unfavorable interest rate changes (as the impact of changes in the interest rate environment and product pricing decreased taxable equivalent net interest income by $26 million). The change in mix and volume of earning assets increased taxable equivalent interest income by $23 million, while the change in volume and composition of interest-bearing liabilities decreased interest expense by $16 million, for a net favorable volume impact of $39 million on taxable equivalent net interest income. Rate changes on earning assets reduced interest income by $47 million, while changes in rates on interest-bearing liabilities lowered interest expense by $21 million, for a net unfavorable rate impact of $26 million. See additional discussion in section "Interest Rate Risk."
The Federal Reserve left the targeted Federal funds rate unchanged at 0.25% during 2012 and 2011. In December 2012, the Federal Reserve affirmed that it is unlikely that the short-term interest rates will increase until at least mid-2015.
For 2012, the yield on average earning assets of 3.77% was 15 bp lower than 2011. Loan yields decreased 34 bp (to 4.07%), due to the repricing of adjustable rate loans and competitive pricing pressures in a low interest rate environment. The yield on securities and short-term investments decreased 1 bp to 2.86%.
The cost of average interest-bearing liabilities of 0.62% in 2012 was 23 bp lower than 2011. The average cost of interest-bearing deposits was 0.36% in 2012, 24 bp lower than 2011, reflecting the low rate environment and a reduction of higher cost deposit products. The cost of short and long-term funding increased 1 bp to 1.55% for 2012, with short-term funding down 18 bp, while long-term funding increased 27 bp.
Average earning assets of $19.6 billion in 2012 were $172 million (1%) higher than 2011. Average loans increased $1.5 billion (11%), including a $1.2 billion increase in commercial loans and a $510 million increase in residential mortgage loans, partially offset by a $262 million decrease in retail loans. Average securities and short-term investments decreased $1.3 billion, reflecting the Corporation's strategy of funding loan growth primarily through investment securities run-off.
Average interest-bearing liabilities of $14.9 billion in 2012 were down $215 million (1%) versus 2011. On average, interest-bearing deposits increased $614 million, while average noninterest-bearing demand deposits (a principal component of net free funds) increased by $568 million. Average short and long-term funding decreased $829 million, consisting of a $580 million decrease in short-term funding and a $249 million decrease in long-term funding.
The net interest margin for 2012 was 3.30%, compared to 3.26% in 2011. The 4 bp improvement in net interest margin was attributable to a 8 bp increase in interest rate spread (the net of a 15 bp decrease in the yield on earning assets and a 23 bp decrease in the cost of interest-bearing liabilities), partially offset by a 4 bp lower contribution from net free funds (due principally to lower rates on interest-bearing liabilities reducing the value of noninterest-bearing deposits and other net free funds).
TABLE 2: Average Balances and Interest Rates (interest and rates on a taxable equivalent basis)
Years Ended December 31,
2012 2011 2010
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
($ in Thousands)
ASSETS
Earning assets:
Loans:(1)(2)(3)
Commercial and business lending $ 5,139,155 $ 202,444 3.94 % $ 4,301,377 $ 182,362 4.24 % $ 4,257,475 $ 187,729 4.41 %
Commercial real estate lending 3,350,190 140,881 4.21 2,973,351 132,789 4.47 3,533,079 151,866 4.30
Total commercial 8,489,345 343,325 4.04 7,274,728 315,151 4.33 7,790,554 339,595 4.36
Residential mortgage 3,330,123 121,399 3.65 2,819,702 116,207 4.12 2,059,156 99,163 4.82
Retail 2,922,317 135,094 4.62 3,184,418 154,793 4.86 3,337,002 173,015 5.18
Total loans 14,741,785 599,818 4.07 13,278,848 586,151 4.41 13,186,712 611,773 4.64
Investment securities:
Taxable 3,676,914 86,945 2.36 4,701,482 123,371 2.62 4,579,182 155,032 3.39
Tax-exempt(1) 792,627 45,848 5.78 795,815 47,899 6.02 860,547 54,264 6.31
Other short-term investments 402,451 6,719 1.67 666,118 5,575 0.84 1,942,054 8,692 0.45
Investments and other 4,871,992 139,512 2.86 6,163,415 176,845 2.87 7,381,783 217,988 2.95
Total earning assets $ 19,613,777 $ 739,330 3.77 % $ 19,442,263 $ 762,996 3.92 % $ 20,568,495 $ 829,761 4.03 %
Allowance for loan losses (342,313 ) (442,034 ) (582,881 )
Cash and due from banks 352,735 318,650 331,775
Other assets 2,352,158 2,269,741 2,307,676
Total assets $ 21,976,357 $ 21,588,620 $ 22,625,065
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits $ 1,096,692 $ 851 0.08 % $ 987,198 $ 1,091 0.11 % $ 898,019 $ 1,176 0.13 %
Interest-bearing demand deposits 2,148,459 3,741 0.17 1,947,506 3,429 0.18 2,780,525 6,314 0.23
Money market deposits 6,148,663 15,336 0.25 5,147,437 16,385 0.32 6,374,071 33,417 0.52
Time deposits 2,239,709 21,503 0.96 2,937,858 44,843 1.53 3,798,995 65,116 1.71
Total interest-bearing deposits 11,633,523 41,431 0.36 11,019,999 65,748 0.60 13,851,610 106,023 0.77
Federal funds purchased and securities sold
under agreements to repurchase 1,177,105 2,687 0.23 1,926,474 6,196 0.32 570,141 7,196 1.26
Other short-term funding 936,376 3,294 0.35 767,230 6,215 0.81 117,216 787 0.67
Total short-term funding 2,113,481 5,981 0.28 2,693,704 12,411 0.46 687,357 7,983 1.16
Total long-term funding 1,158,731 44,880 3.87 1,407,121 50,632 3.60 1,765,253 58,341 3.30
Total short and long-term funding 3,272,212 50,861 1.55 4,100,825 63,043 1.54 2,452,610 66,324 2.70
Total interest-bearing liabilities $ 14,905,735 $ 92,292 0.62 % $ 15,120,824 $ 128,791 0.85 % $ 16,304,220 $ 172,347 1.06 %
Noninterest-bearing demand deposits 3,948,846 3,381,128 3,094,691
Accrued expenses and other liabilities 172,788 89,378 42,582
Stockholders' equity 2,948,988 2,997,290 3,183,572
Total liabilities and stockholders' equity $ 21,976,357 $ 21,588,620 $ 22,625,065
Net interest income and rate spread(1) $ 647,038 3.15 % $ 634,205 3.07 % $ 657,414 2.97 %
Net interest margin(1) 3.30 % 3.26 % 3.20 %
Taxable equivalent adjustment $ 21,046 $ 21,374 $ 23,635
|
(1) The yield on tax-exempt loans and securities is computed on a taxable equivalent basis using a tax rate of 35% for all periods presented and is net of the effects of certain disallowed interest deductions.
(2) Nonaccrual loans and loans held for sale have been included in the average balances.
(3) Interest income includes net loan fees.
TABLE 3: Rate/Volume Analysis(1)
2012 Compared to 2011 2011 Compared to 2010
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Net Volume Rate Net
($ in Thousands)
Interest income:
Loans:(2)
Commercial and business
lending $ 33,726 $ (13,644 ) $ 20,082 $ 2,454 $ (7,821 ) $ (5,367 )
Commercial real estate
lending 16,186 (8,094 ) 8,092 (24,812 ) 5,735 (19,077 )
Total commercial 49,912 (21,738 ) 28,174 (22,358 ) (2,086 ) (24,444 )
Residential mortgage 19,552 (14,360 ) 5,192 32,827 (15,783 ) 17,044
Retail (12,350 ) (7,349 ) (19,699 ) (7,702 ) (10,520 ) (18,222 )
Total loans 57,114 (43,447 ) 13,667 2,767 (28,389 ) (25,622 )
Investment securities
Taxable (30,639 ) (5,787 ) (36,426 ) 6,159 (37,820 ) (31,661 )
Tax-exempt(2) (191 ) (1,860 ) (2,051 ) (3,966 ) (2,399 ) (6,365 )
Other short-term investments (2,832 ) 3,976 1,144 (7,849 ) 4,732 (3,117 )
Investments and other (33,662 ) (3,671 ) (37,333 ) (5,656 ) (35,487 ) (41,143 )
Total earning assets(2) $ 23,452 $ (47,118 ) $ (23,666 ) $ (2,889 ) $ (63,876 ) $ (66,765 )
Interest expense:
Savings deposits $ 112 $ (352 ) $ (240 ) $ 110 $ (195 ) $ (85 )
Interest-bearing demand
deposits 350 (38 ) 312 (1,649 ) (1,236 ) (2,885 )
Money market deposits 2,870 (3,919 ) (1,049 ) (5,600 ) (11,432 ) (17,032 )
Time deposits (8,589 ) (14,751 ) (23,340 ) (12,999 ) (7,274 ) (20,273 )
Total interest-bearing
deposits (5,257 ) (19,060 ) (24,317 ) (20,138 ) (20,137 ) (40,275 )
Federal funds purchased and
securities sold under
agreements to repurchase (2,010 ) (1,499 ) (3,509 ) 7,405 (8,405 ) (1,000 )
Other short-term funding 1,159 (4,080 ) (2,921 ) 5,233 195 5,428
Total short-term funding (851 ) (5,579 ) (6,430 ) 12,638 (8,210 ) 4,428
Total long-term funding (9,429 ) 3,677 (5,752 ) (12,567 ) 4,858 (7,709 )
Total short and long-term
funding (10,280 ) (1,902 ) (12,182 ) 71 (3,352 ) (3,281 )
Total interest-bearing
liabilities $ (15,537 ) $ (20,962 ) $ (36,499 ) $ (20,067 ) $ (23,489 ) $ (43,556 )
Net interest income(2) $ 38,989 $ (26,156 ) $ 12,833 $ 17,178 $ (40,387 ) $ (23,209 )
|
(1) The change in interest due to both rate and volume has been allocated in proportion to the relationship to the dollar amounts of the change in each.
(2) The yield on tax-exempt loans and securities is computed on a fully taxable equivalent basis using a tax rate of 35% for all periods presented and is net of the effects of certain disallowed interest deductions.
TABLE 4: Interest Rate Spread and Interest Margin (on a taxable equivalent basis)
2012 Average 2011 Average 2010 Average
% of % of % of
Earning Yield / Earning Yield / Earning Yield /
Balance Assets Rate Balance Assets Rate Balance Assets Rate
($ in Thousands)
Total loans $ 14,741,785 75.2 % 4.07 % $ 13,278,848 68.3 % 4.41 % $ 13,186,712 64.1 % 4.64 %
Securities and short-term investments 4,871,992 24.8 % 2.86 % 6,163,415 31.7 % 2.87 % 7,381,783 35.9 % 2.95 %
Earning assets $ 19,613,777 100.0 % 3.77 % $ 19,442,263 100.0 % 3.92 % $ 20,568,495 100.0 % 4.03 %
Financed by:
Interest-bearing funds $ 14,905,735 76.0 % 0.62 % $ 15,120,824 77.8 % 0.85 % $ 16,304,220 79.3 % 1.06 %
Noninterest-bearing funds 4,708,042 24.0 % 4,321,439 22.2 % 4,264,275 20.7 %
Total funds sources $ 19,613,777 100.0 % 0.47 % $ 19,442,263 100.0 % 0.66 % $ 20,568,495 100.0 % 0.84 %
Interest rate spread 3.15 % 3.07 % 2.97 %
Contribution from net free funds 0.15 % 0.19 % 0.23 %
Net interest margin 3.30 % 3.26 % 3.20 %
Average prime rate* 3.25 % 3.25 % 3.25 %
. . .
|
|
|