Business Context and Reporting Period
Company: Associated Banc-Corp
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: Associated Banc-Corp operates primarily through two segments: Banking (lending, deposit gathering, and related services) and Wealth Management (fiduciary, investment, and insurance services). The Banking segment accounted for approximately 92% of total revenues and 83% of net income for the six months ended June 30, 2009.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Net Interest Income | $368.4 million | $337.8 million |
| Provision for Loan Losses | $260.4 million | $82.0 million |
| Noninterest Income | $190.9 million | $169.3 million |
| Noninterest Expense | $311.3 million | $272.1 million |
| Net Income | $25.4 million | $113.8 million |
| Diluted EPS | $0.08 | $0.89 |
| Total Assets (Period End) | $24.0 billion | $22.3 billion |
| Total Deposits (Period End) | $16.3 billion | $13.4 billion |
| Allowance for Loan Losses (Period End) | $407.2 million | $229.6 million |
| Net Interest Margin (YTD) | 3.49% | 3.61% |
| Return on Average Assets (YTD) | 0.21% | 1.05% |
| Return on Average Equity (YTD) | 1.76% | 9.67% |
Material Changes vs. Prior Period
- Profitability Decline: Net income dropped 78% year-over-year to $25.4 million, driven primarily by a significant increase in the provision for loan losses and higher noninterest expenses.
- Provision for Loan Losses: The provision surged to $260.4 million (up $178.4 million from the prior year) due to deteriorating asset quality, rising nonperforming loans, and increased net charge-offs ($118.7 million vs. $53.0 million).
- Asset Quality Deterioration: Nonperforming loans increased 154% to $733 million (4.79% of total loans) from $289 million. The allowance for loan losses to total loans ratio rose to 2.66% from 1.42%.
- Expense Increases: Noninterest expense rose 14.4% to $311.3 million. Key drivers included a $23.1 million increase in FDIC expense (due to higher assessment rates and a special assessment) and a $14.0 million increase in foreclosure/OREO expenses.
- Net Interest Income: Increased 9.1% to $368.4 million, aided by favorable volume variances (growth in earning assets) which offset unfavorable rate variances caused by the lower interest rate environment.
- Noninterest Income: Increased 12.8% to $190.9 million, largely due to a 163.9% increase in net mortgage banking income ($32.6 million vs. $12.3 million) driven by higher gains on loan sales.
Guidance, Outlook, and Risks
- Outlook: Management expects the net interest margin to remain stable but challenging for the remainder of 2009. Loan balances are anticipated to continue declining due to reduced demand from economic uncertainty.
- Asset Quality Risks: Management anticipates that net charge-offs and the provision for loan losses will remain elevated for the remainder of 2009 due to the weak real estate market and economic conditions. Criticized commercial loans increased 57% since year-end 2008.
- Expense Management: The Corporation expects total noninterest expense levels to return to levels approximating prior quarters for the remainder of 2009, excluding the one-time FDIC special assessment.
- Capital and Liquidity: The company remains well-capitalized with a Tier 1 risk-based capital ratio of 12.45%. Liquidity is supported by a strong core deposit base and access to wholesale funding, though credit ratings were downgraded by S&P in May 2009.
- Accounting Changes: The company adopted new FASB guidance (FSP FAS 115-2 and FAS 124-2) regarding other-than-temporary impairments, resulting in a $9.7 million cumulative effect adjustment to retained earnings.
Investor Verification Checklist
- Allowance Adequacy: Verify the sufficiency of the $407.2 million allowance for loan losses given the rapid increase in nonperforming loans to $733 million and the coverage ratio dropping to 56%.
- Commercial Real Estate Exposure: Review the concentration of nonperforming loans in commercial real estate and construction, which drove the majority of the increase in nonperforming assets.
- FDIC Expense Sustainability: Confirm the impact of the $11.3 million special FDIC assessment and higher assessment rates on future profitability.
- Mortgage Banking Volatility: Assess the sustainability of the surge in mortgage banking income, which is sensitive to interest rate changes and secondary market production volumes.
- Goodwill Impairment Risk: Monitor the $929 million goodwill balance, as management noted that depressed market valuations could necessitate future impairment testing.