Business Context and Reporting Period
Company: Associated Banc-Corp (Associated Banc-Corp)
Reporting Period: Fiscal year ended December 31, 2009
Overview: Associated Banc-Corp is a bank holding company headquartered in Wisconsin, operating primarily in Wisconsin, Illinois, and Minnesota. The company operates through two reportable segments: Banking (91% of 2009 revenues) and Wealth Management (9% of 2009 revenues). The 2009 fiscal year was characterized by severe economic deterioration, leading to significant asset quality stress, elevated loan losses, and a regulatory Memorandum of Understanding (MOU) with the Office of the Comptroller of the Currency (OCC).
Key Financial Metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Net Interest Income | $726.0 million | $696.1 million | +4.3% |
| Provision for Loan Losses | $750.6 million | $202.1 million | +271.5% |
| Net Income (Loss) | $(131.9) million | $168.5 million | Loss vs. Income |
| Net Income (Loss) Available to Common Equity | $(161.2) million | $165.2 million | Loss vs. Income |
| Diluted Earnings (Loss) Per Share | $(1.26) | $1.29 | N/A |
| Total Assets | $22.87 billion | $24.19 billion | -5.4% |
| Total Loans | $14.13 billion | $16.28 billion | -13.2% |
| Total Deposits | $16.73 billion | $15.15 billion | +10.4% |
| Stockholders' Equity | $2.74 billion | $2.88 billion | -4.8% |
| Return on Average Assets | -0.56% | 0.76% | -132 bps |
| Return on Average Equity | -4.54% | 6.95% | -1,149 bps |
| Efficiency Ratio | 55.73% | 52.41% | +332 bps |
| Net Interest Margin | 3.52% | 3.65% | -13 bps |
Material Changes Versus Prior Period
- Asset Quality Deterioration: Nonperforming loans surged to $1.12 billion (7.94% of total loans) from $341 million (2.09%) in 2008. Net charge-offs increased to $442.5 million (2.84% of average loans) from $137.3 million (0.85%).
- Provision for Loan Losses: The provision increased to $750.6 million, driven by rapid collateral value erosion in commercial real estate and real estate construction, as well as higher loss content in commercial and industrial loans.
- Allowance for Loan Losses: The allowance increased to $573.5 million (4.06% of total loans) from $265.4 million (1.63%). The coverage ratio of the allowance to nonperforming loans dropped to 51% from 78%.
- Loan Portfolio Contraction: Total loans decreased by $2.2 billion, primarily due to declines in commercial loans ($1.6 billion) and consumer-based loans ($0.6 billion).
- Deposit Growth: Total deposits grew by $1.6 billion, driven by increases in money market and interest-bearing demand deposits, partially offset by a decrease in brokered certificates of deposit.
- Noninterest Expense: Expenses rose 9.7% to $611.4 million, largely due to a $39.4 million increase in FDIC expense, a $24.4 million increase in foreclosure/OREO expenses, and higher legal fees.
Guidance, Outlook, and Risks
- Regulatory Oversight (MOU): On November 5, 2009, the bank subsidiary entered into an MOU with the OCC. This requires the bank to maintain higher minimum capital ratios (Tier 1 leverage ratio of 8% and total capital ratio of 12%) starting March 31, 2010, and to improve risk management processes.
- Capital Raise: On January 15, 2010, the company closed a public offering of approximately 44.8 million shares of common stock, raising net proceeds of approximately $478.3 million to support the bank and meet regulatory capital requirements.
- Dividend Reduction: The Board reduced the quarterly common stock dividend to $0.01 per share, effective February 17, 2010, down from $0.05 per share. Dividends are restricted under the TARP Capital Purchase Program agreement.
- Outlook: Management expects provision for loan losses and charge-offs to remain elevated in 2010 compared to historical levels due to continued economic weakness and uncertainty regarding real estate values. Net interest income growth is expected to face pressure from competitive pricing and lower loan demand.
- Key Risks:
- Credit Risk: High concentration in commercial loans (62% of portfolio) and exposure to declining real estate values.
- Regulatory Risk: Compliance with the MOU and potential for further regulatory action if capital levels are not maintained.
- Liquidity Risk: Credit rating downgrades by S&P in late 2009 and early 2010 have limited access to unsecured funding markets.
Important Facts for Investor Verification
- MOU Compliance: Verify the bank's ability to maintain the required Tier 1 leverage ratio of 8% and total capital ratio of 12% under the OCC MOU.
- Asset Quality Trends: Monitor the trajectory of nonperforming loans and net charge-offs, particularly in the commercial real estate and construction sectors, to assess if the $751 million provision was sufficient.
- Capital Adequacy: Confirm the utilization of the $478 million raised in January 2010 and its impact on tangible common equity and regulatory capital ratios.
- FDIC Assessments: Review the impact of increased FDIC insurance premiums and the prepayment of 13 quarters of premiums ($103.4 million) on future liquidity and expenses.
- Dividend Policy: Note the severe restriction on common dividends due to the TARP agreement and the recent reduction to $0.01 per share.