Business Context and Reporting Period
Company: Associated Banc-Corp
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2006
Overview: Associated Banc-Corp is a financial services company operating primarily through its banking subsidiary, Associated Bank, National Association, and a wealth management segment. The reporting period reflects the integration of the State Financial acquisition (consummated October 2005) and the ongoing execution of a strategy to reduce wholesale funding by utilizing cash flows from maturing investments.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2005 |
|---|---|---|---|
| Net Income | $76.9 million | $242.1 million | $232.5 million |
| Earnings Per Share (Diluted) | $0.58 | $1.81 | $1.79 |
| Net Interest Income | $168.2 million | $503.5 million | $496.7 million |
| Noninterest Income | $73.0 million | $221.0 million | $210.0 million |
| Noninterest Expense | $123.7 million | $371.8 million | $354.9 million |
| Net Interest Margin (YTD) | 3.63% (Q3) | 3.56% | 3.62% |
| Return on Average Assets (YTD) | 1.46% (Q3) | 1.52% | 1.51% |
| Return on Average Equity (YTD) | 13.36% (Q3) | 14.12% | 15.33% |
| Total Assets | $20.9 billion | $20.9 billion | $20.7 billion |
| Total Loans | $15.3 billion | $15.3 billion | $14.1 billion |
| Total Deposits | $14.2 billion | $14.2 billion | $12.2 billion |
| Stockholders' Equity | $2.27 billion | $2.27 billion | $2.06 billion |
Material Changes vs. Prior Period
- Profitability: Net income for the nine months ended September 30, 2006, increased by $9.6 million (4.1%) compared to the same period in 2005. However, third-quarter net income decreased by $4.1 million (5.1%) year-over-year.
- Net Interest Income: Taxable equivalent net interest income increased $7.8 million year-to-date, driven by favorable volume variances ($24.5 million) partially offset by unfavorable rate variances ($16.7 million) due to a flattening yield curve and competitive pricing.
- Noninterest Income: Increased $10.9 million (5.2%) year-to-date. Core fee-based revenues rose 7.8%, while net mortgage banking income declined 46.1% due to a slowdown in the real estate market and lower secondary mortgage production.
- Noninterest Expense: Increased $16.9 million (4.8%) year-to-date, primarily due to the larger operating base from the State Financial acquisition. Personnel expense rose 4.3%, including $0.7 million in stock-based compensation expense resulting from the adoption of SFAS 123R.
- Asset Quality: Nonperforming loans increased to $128.6 million (0.84% of total loans) from $110.7 million (0.78%) a year ago. The allowance for loan losses remained stable at $203.4 million, representing 1.33% of total loans.
- Balance Sheet Strategy: The company successfully reduced wholesale funding by $2.4 billion since September 2005 (adjusted for acquisitions), lowering the ratio of wholesale funding to total funding from 34% to 23%. Investment securities decreased by $1.3 billion as cash flows were used to pay down debt and repurchase stock.
Guidance, Outlook, and Risks
- Outlook: Management aims to continue moving the interest rate profile toward a more liability-sensitive posture for the remainder of 2006. The company intends to maintain its strategy of reducing wholesale funding and repurchasing common stock when opportunistic.
- Capital Actions: The Board authorized the repurchase of up to 6.8 million shares in March 2006. As of September 30, 2006, approximately 3.3 million shares remained authorized. A dividend of $0.29 per share was declared on October 25, 2006.
- Market Risk: The company is currently neutral to interest rate changes. Simulations indicate that a 100 basis point rise in rates would decrease net interest income by approximately 0.2%, while a 100 basis point decline would decrease it by 0.5%.
- Key Risks:
- Interest Rate Risk: Flattening yield curves and competitive pricing pressures continue to compress net interest margins.
- Credit Risk: An increase in potential problem loans to $402 million reflects uncertainty regarding the economic environment's impact on borrowers.
- Accounting Changes: The adoption of SFAS 123R (Share-Based Payment) and upcoming adoption of SFAS 158 (Pension Accounting) and FIN 48 (Income Taxes) may impact future financial reporting.
Investor Verification Checklist
- Asset Quality Trends: Verify the trajectory of nonperforming loans (up 16% year-over-year) and the adequacy of the allowance for loan losses relative to the increase in potential problem loans.
- Mortgage Banking Volatility: Assess the sustainability of noninterest income given the 46% year-over-year decline in net mortgage banking income and the sensitivity of mortgage servicing rights valuation to interest rate changes.
- Net Interest Margin Pressure: Monitor the impact of the flattening yield curve and rising cost of funds on future net interest margins, which declined 6 basis points year-to-date.
- Wholesale Funding Reduction: Confirm the continued execution of the strategy to replace wholesale funding with core deposits to improve earnings quality.
- Stock Repurchase Activity: Track the utilization of the remaining 3.3 million shares authorized for repurchase and the impact on earnings per share.