Business Context and Reporting Period
Company: Associated Banc-Corp
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Overview: Associated Banc-Corp is a financial holding company operating primarily through its banking subsidiary, Associated Bank, National Association. The company operates two main segments: Banking (lending, deposit gathering, and related services) and Wealth Management (fiduciary, investment, and insurance services). The reporting period reflects continued economic stress, characterized by elevated loan losses and regulatory scrutiny.
Key Financial Metrics
| Metric | Q3 2009 (Quarter) | YTD 2009 (9 Months) | YTD 2008 (9 Months) |
|---|---|---|---|
| Net Income | $16.0 million | $41.4 million | $151.6 million |
| Net Income Available to Common Equity | $8.7 million | $19.4 million | $151.6 million |
| Earnings Per Share (Diluted) | $0.07 | $0.15 | $1.18 |
| Net Interest Income | $179.2 million | $547.7 million | $504.4 million |
| Net Interest Margin | 3.50% | 3.50% | 3.57% |
| Provision for Loan Losses | $95.4 million | $355.9 million | $137.0 million |
| Noninterest Income | $75.3 million | $266.2 million | $244.6 million |
| Noninterest Expense | $141.1 million | $452.4 million | $408.7 million |
| Total Assets | $22.9 billion | $22.9 billion | $24.2 billion (Dec 31, 2008) |
| Total Deposits | $16.4 billion | $16.4 billion | $15.2 billion (Dec 31, 2008) |
| Allowance for Loan Losses | $412.5 million | $412.5 million | $265.4 million (Dec 31, 2008) |
| Stockholders' Equity | $2.9 billion | $2.9 billion | $2.9 billion (Dec 31, 2008) |
Material Changes vs. Prior Period
- Profitability Decline: Net income available to common equity for the nine months ended September 30, 2009, dropped to $19.4 million from $151.6 million in the same period in 2008. This sharp decline is primarily driven by a significant increase in the provision for loan losses.
- Provision for Loan Losses: The provision increased to $355.9 million (YTD 2009) from $137.0 million (YTD 2008). This reflects deteriorating asset quality, with net charge-offs rising to $208.7 million (YTD 2009) compared to $91.4 million (YTD 2008).
- Asset Quality Deterioration: Nonperforming loans surged to $886 million (6.00% of total loans) at September 30, 2009, up from $305 million (1.87%) a year prior. The allowance for loan losses to total loans ratio increased to 2.79% from 1.51%.
- Balance Sheet Shifts: Total loans decreased by $1.5 billion since year-end 2008, driven by declines in commercial and home equity loans. Conversely, investment securities increased by $508 million, funded largely by deposit growth.
- Expense Increases: Noninterest expense rose 10.7% year-over-year, largely due to a $30.7 million increase in FDIC expense and a $20.3 million increase in foreclosure/OREO expenses.
Guidance, Outlook, Risks, and Contingencies
- Regulatory Action (MOU): On November 5, 2009, the subsidiary bank entered into a Memorandum of Understanding (MOU) with the Office of the Comptroller of the Currency (OCC). The MOU requires the bank to improve risk management processes and maintain higher minimum capital ratios (Tier 1 leverage ratio of 8% and total risk-based capital ratio of 12%) starting March 31, 2010. The parent company has committed to act as a primary or contingent source of capital.
- Asset Quality Outlook: Management anticipates that net charge-offs and the provision for loan losses will remain elevated due to the weak economy and stress on customers, particularly in the real estate sector. The duration of this stress is uncertain.
- Net Interest Margin: Management expects the net interest margin to remain stable for the remainder of 2009, though it remains at risk from yield curve changes and competitive pricing pressures.
- Goodwill Impairment Risk: While no impairment was recorded in the interim review, management notes that market valuations of financial services companies remain depressed. Future impairment charges are possible if market conditions do not improve.
- Visa Litigation: The company continues to monitor its exposure related to Visa litigation settlements, though recent impacts have been minimal gains.
Investor Verification Checklist
- Capital Adequacy: Verify the bank's ability to meet the enhanced capital ratios (8% leverage, 12% risk-based) mandated by the OCC MOU starting March 2010.
- Loan Loss Reserves: Assess the adequacy of the $412.5 million allowance for loan losses given the 6.00% nonperforming loan ratio and the specific exposure to commercial real estate and construction loans.
- FDIC Assessment Impact: Confirm the sustainability of the elevated FDIC expense levels, which increased significantly due to special assessments and rate hikes.
- Mortgage Servicing Rights (MSR): Review the valuation of MSR assets, which are sensitive to interest rate changes and prepayment speeds, and the associated valuation reserves.
- Dividend Policy: Note the reduction in common stock dividends to $0.05 per share in Q3 2009 (from $0.32 in Q3 2008) and the impact of preferred stock dividends on earnings available to common shareholders.