Business Context and Reporting Period
Company: Associated Banc-Corp
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Overview: Associated Banc-Corp is a financial holding company operating primarily through its banking subsidiary, Associated Bank, National Association. The company operates in two primary segments: Banking (lending, deposit gathering, and related services) and Wealth Management (fiduciary, investment, and insurance services). The reporting period reflects the first quarter of 2010, a time of continued economic uncertainty and elevated credit risk in the banking sector.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 | Dec 31, 2009 |
|---|---|---|---|
| Net Income (Loss) | $(26.4) million | $42.7 million | $(173.2) million |
| Net Income (Loss) Available to Common Equity | $(33.8) million | $35.4 million | $(180.6) million |
| Earnings Per Share (Basic & Diluted) | $(0.20) | $0.28 | $(1.41) |
| Total Assets | $23.1 billion | $24.3 billion | $22.9 billion |
| Total Loans | $13.3 billion | $15.9 billion | $14.1 billion |
| Total Deposits | $17.5 billion | $15.9 billion | $16.7 billion |
| Net Interest Income | $169.2 million | $189.3 million | $178.4 million |
| Net Interest Margin | 3.35% | 3.59% | 3.59% |
| Provision for Loan Losses | $165.3 million | $105.4 million | $394.8 million |
| Noninterest Income | $98.0 million | $89.0 million | $84.7 million |
| Noninterest Expense | $151.9 million | $141.3 million | $159.0 million |
| Efficiency Ratio | 62.32% | 52.78% | 60.35% |
| Stockholders' Equity | $3.18 billion | $2.90 billion | $2.74 billion |
Material Changes vs. Prior Period
- Profitability Reversal: The company reported a net loss of $26.4 million for Q1 2010, a significant deterioration from the $42.7 million net income in Q1 2009. However, this represents a substantial improvement from the $173.2 million net loss in Q4 2009.
- Provision for Loan Losses: The provision increased to $165.3 million in Q1 2010 compared to $105.4 million in Q1 2009, driven by elevated net charge-offs ($163.3 million) and the need to maintain an adequate allowance for loan losses (ALLL) amidst deteriorating asset quality.
- Asset Quality Deterioration: Nonperforming loans (NPLs) rose to $1.21 billion (9.10% of total loans) at March 31, 2010, up from $452 million (2.84%) at March 31, 2009. The ALLL to total loans ratio increased to 4.33% from 1.97% a year prior.
- Capital Raise: In January 2010, the company completed a public offering of 44.8 million shares of common stock, raising approximately $478.3 million in net proceeds. This significantly bolstered stockholders' equity and liquidity.
- Net Interest Margin Compression: The net interest margin declined to 3.35% in Q1 2010 from 3.59% in Q1 2009, primarily due to a 70 basis point decrease in the yield on earning assets and a 22 basis point reduction in net interest margin due to increased liquidity positions.
- Investment Securities Gains: Noninterest income was bolstered by $23.6 million in net gains on the sale of investment securities, compared to $10.6 million in Q1 2009.
Guidance, Outlook, Risks, and Contingencies
- Outlook: Management anticipates that loan balances will continue to decline in 2010 due to strategic exits from specific credit relationships (e.g., Shared National Credits) and reduced demand. The company expects the loan loss provision to moderate over the next few quarters, though charge-offs will remain elevated as problem loans are resolved.
- Liquidity Strategy: Following credit rating downgrades by S&P and Moody's in early 2010, the company implemented a liquidity plan to increase cash equivalents, focusing on growing network transaction accounts and brokered CDs. Unsecured funding has become severely limited, but the company maintains approximately $5 billion in secured borrowing capacity.
- Regulatory Matters:
- MOU with OCC: The subsidiary bank is subject to a Memorandum of Understanding with the Office of the Comptroller of the Currency (OCC), requiring improved risk management processes and maintenance of specific capital ratios (Tier 1 leverage ratio of 8% and total capital to risk-weighted assets of 12%). As of March 31, 2010, the bank exceeded these requirements.
- Memorandum with Federal Reserve: The holding company entered into a Memorandum with the Federal Reserve Bank of Chicago requiring plans to strengthen board oversight and risk management, and to maintain sufficient capital incorporating stress scenarios.
- Legal Proceedings: A class-action lawsuit was filed in April 2010 alleging unfair assessment and collection of overdraft fees. Management believes current proceedings will not have a material adverse effect, though outcomes are unpredictable.
- Dividend Policy: Due to the Capital Purchase Program (CPP) restrictions and the recent loss, the common stock dividend was reduced to $0.01 per share in Q1 2010, down from $0.32 per share in Q1 2009.
Key Facts for Investor Verification
- Asset Quality Trends: Verify the trajectory of nonperforming loans (currently 9.10% of total loans) and the adequacy of the allowance for loan losses (4.33% of total loans) given the high level of net charge-offs.
- Credit Rating Impact: Assess the long-term impact of the S&P and Moody's downgrades on the cost of funding and the ability to access unsecured wholesale markets.
- Capital Adequacy: Confirm continued compliance with the specific capital ratios mandated by the OCC MOU and the Federal Reserve Memorandum.
- Loan Portfolio Composition: Monitor the reduction in Shared National Credits and the concentration of nonperforming assets in commercial real estate and construction sectors.
- Dividend Sustainability: Evaluate the likelihood of dividend increases given the CPP restrictions (requiring U.S. Treasury consent for dividends above $0.32/share until November 2011) and the current loss position.