Business Context and Reporting Period
Company: Associated Banc-Corp (Associated Banc-Corp)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Associated Banc-Corp is a bank holding company headquartered in Green Bay, Wisconsin. It operates primarily through its subsidiary, Associated Bank, National Association, providing banking and wealth management services across Wisconsin, Illinois, and Minnesota. The company operates two reportable segments: Banking (approximately 90% of revenues) and Wealth Management (approximately 10% of revenues).
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Net Income | $168.5 million | $285.8 million |
| Net Income Available to Common Equity | $165.2 million | $285.8 million |
| Diluted Earnings Per Share (EPS) | $1.29 | $2.23 |
| Net Interest Income | $696.1 million | $643.8 million |
| Net Interest Margin | 3.65% | 3.60% |
| Noninterest Income | $285.7 million | $344.8 million |
| Noninterest Expense | $557.5 million | $534.9 million |
| Provision for Loan Losses | $202.1 million | $34.5 million |
| Total Assets | $24.2 billion | $21.6 billion |
| Total Loans | $16.3 billion | $15.5 billion |
| Total Deposits | $15.2 billion | $14.0 billion |
| Stockholders' Equity | $2.9 billion | $2.3 billion |
| Return on Average Assets (ROA) | 0.76% | 1.38% |
| Return on Average Equity (ROE) | 6.95% | 12.68% |
| Efficiency Ratio | 52.41% | 53.92% |
Material Changes Versus Prior Period
- Profitability Decline: Net income decreased 41.0% to $168.5 million, and diluted EPS fell 42.2% to $1.29. This was primarily driven by a significant increase in the provision for loan losses and other-than-temporary impairment (OTTI) write-downs on investment securities.
- Asset Quality Deterioration: The provision for loan losses surged 485.5% to $202.1 million. Net charge-offs increased to $137.3 million (0.85% of average loans) from $40.4 million in 2007. Nonperforming loans more than doubled to $341 million (2.09% of total loans) from $163 million.
- Investment Securities Losses: The company recorded $52.5 million in OTTI write-downs on investment securities in 2008, compared to net gains of $8.2 million in 2007. This included a $31.1 million write-down on a non-agency mortgage-related security and $13.2 million on FHLMC and FNMA preferred stocks.
- Capital Injection: In November 2008, the company participated in the U.S. Treasury's Capital Purchase Program (CPP), issuing $525 million of Senior Preferred Stock and warrants. This increased stockholders' equity by approximately $508 million (net of discount) and improved capital ratios.
- Net Interest Income Growth: Despite a falling rate environment, net interest income increased 8.1% to $696.1 million, and the net interest margin improved 5 basis points to 3.65%, driven by favorable volume/mix variances and a decrease in the cost of interest-bearing liabilities.
Guidance, Outlook, and Risks
- Outlook: Management anticipates that net charge-offs and the provision for loan losses will remain elevated in 2009 due to economic uncertainty and asset quality stress. Core fee-based revenues are expected to show moderate growth. Noninterest expense (exclusive of FDIC expense) is expected to remain relatively flat to up slightly (around 1%) compared to 2008.
- Dividend Restrictions: Due to the CPP participation, the company requires U.S. Treasury consent to increase its common stock dividend from the current quarterly amount of $0.32 per share prior to November 21, 2011, unless the preferred stock is redeemed or transferred.
- Key Risks:
- Credit Risk: Significant exposure to commercial loans (63% of portfolio) and real estate construction. Deteriorating economic conditions and declining real estate values pose risks to loan repayment and collateral values.
- Interest Rate Risk: The company is in an asset-sensitive position. While a rising rate environment could benefit net interest income, the current low-rate environment and competitive pressures may compress margins.
- Regulatory and Liquidity: The company relies on dividends from its bank subsidiary for liquidity. Regulatory capital requirements remain a focus, though the company maintains ratios well above "well-capitalized" standards.
Important Facts for Investor Verification
- Allowance Adequacy: Verify the adequacy of the $265.4 million allowance for loan losses, which covers only 78% of nonperforming loans (down from 123% in 2007), given the significant increase in commercial nonperforming assets.
- Investment Portfolio Quality: Review the remaining carrying values of securities with OTTI write-downs, particularly the $32.9 million non-agency mortgage-related security and trust preferred debt securities, for potential further impairment.
- Commercial Loan Concentration: Assess the impact of the 63% commercial loan concentration, specifically the $90 million increase in nonperforming real estate construction loans.
- CPP Impact: Monitor the impact of the $525 million preferred stock issuance on future earnings per share due to the 5% (rising to 9%) dividend requirement and restrictions on share repurchases and dividend increases.
- FDIC Assessment Increases: Note the expected increase in FDIC insurance costs of approximately $20 million in 2009 due to changes in deposit insurance coverage and assessment rates.