Business Context and Reporting Period
Company: Associated Banc-Corp
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
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 89% of consolidated net income and 90% of total revenues for the nine months ended September 30, 2008.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2007 |
|---|---|---|---|
| Net Income | $37.8 million | $151.6 million | $221.0 million |
| Earnings Per Share (Diluted) | $0.30 | $1.19 | $1.72 |
| Net Interest Income | $166.5 million | $504.4 million | $479.6 million |
| Provision for Loan Losses | $55.0 million | $137.0 million | $19.0 million |
| Noninterest Income | $75.3 million | $244.6 million | $259.1 million |
| Noninterest Expense | $136.6 million | $408.7 million | $394.8 million |
| Total Assets | $22.5 billion | $22.5 billion | $21.6 billion (Dec 31, 2007) |
| Total Deposits | $14.2 billion | $14.2 billion | $14.0 billion (Dec 31, 2007) |
| Stockholders' Equity | $2.4 billion | $2.4 billion | $2.3 billion (Dec 31, 2007) |
| Return on Average Assets (YTD) | 0.68% (Q3) | 0.93% | 1.44% |
| Return on Average Equity (YTD) | 6.38% (Q3) | 8.57% | 13.18% |
| Net Interest Margin (YTD) | 3.48% (Q3) | 3.57% | 3.59% |
Material Changes vs. Prior Period
- Profitability Decline: Net income for the nine months ended September 30, 2008, decreased by $69.4 million (31.4%) compared to the same period in 2007. The primary driver was a $118 million increase in the provision for loan losses.
- Credit Quality Deterioration: Nonperforming loans increased significantly to $305 million (1.87% of total loans) from $151 million (0.99%) a year ago. Net charge-offs for the nine-month period were $91.4 million, compared to $24.9 million in 2007.
- Investment Losses: The company recorded $17.2 million in net losses on investment securities for the nine months of 2008, primarily due to other-than-temporary impairment write-downs on FHLMC and FNMA preferred stock and trust preferred debt securities. This contrasts with $9.0 million in gains during the same period in 2007.
- Balance Sheet Growth: Total assets grew by $0.9 billion since year-end 2007, driven largely by a $0.8 billion increase in loans, particularly in home equity and commercial sectors. Funding shifted toward short-term borrowings and brokered CDs.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management anticipates that quarterly net charge-offs and nonperforming loans for the remainder of 2008 will approximate the levels experienced in the third quarter of 2008, citing continued economic stress and weak real estate markets.
- Unusual Items:
- Visa Litigation: The company recorded a $4.7 million gain related to Visa Inc. matters in the first nine months of 2008, stemming from the partial redemption of Class B stock and a pro-rata interest in a litigation escrow account.
- Impairment Write-downs: Significant write-downs of $12.3 million on FHLMC and FNMA preferred stocks occurred due to the conservatorship actions by the U.S. Treasury and Federal Housing Finance Authority.
- Risks and Contingencies:
- Credit Risk: Deteriorating collateral values in commercial real estate and housing-related industries have increased the allowance for loan losses to $246.2 million (1.51% of total loans).
- Liquidity: While the company remains compliant with internal liquidity objectives, market volatility may impact access to wholesale funding. The company has $100 million available under a revolving credit facility and $175 million available under a commercial paper program.
- Regulatory: The company is evaluating participation in the U.S. Treasury's TARP Capital Purchase Program and the FDIC's Temporary Liquidity Guarantee Program announced in October 2008.
Key Facts for Investor Verification
- Allowance Adequacy: Verify the sufficiency of the $246.2 million allowance for loan losses given the 102% year-over-year increase in nonperforming loans and the specific concentration of risk in real estate construction and commercial credits.
- Investment Portfolio Quality: Review the remaining carrying values of FHLMC and FNMA preferred stocks ($1.0 million combined) and trust preferred debt securities ($5.0 million) to assess potential for further impairment.
- Wholesale Funding Reliance: Monitor the shift in funding mix, as wholesale funding now represents 33.8% of average interest-bearing liabilities (up from 28.1% in 2007), increasing sensitivity to market liquidity conditions.
- Visa Exposure: Confirm the status of the remaining liability estimate for Visa litigation, which was $2.3 million at September 30, 2008, and the potential impact of the October 2008 Discover settlement.
- Capital Ratios: Verify that Tier 1 risk-based capital (9.22%) and Total risk-based capital (11.08%) remain well above regulatory minimums despite the earnings decline.