Business Context and Reporting Period
Company: Associated Banc-Corp
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: Associated Banc-Corp operates primarily through two segments: Banking (lending, deposit gathering, and related services) and Wealth Management (fiduciary, investment, and insurance services). The Banking segment accounted for 94% of consolidated net income and 91% of total revenues for the quarter.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 | Dec 31, 2008 |
|---|---|---|---|
| Net Income | $42.7 million | $66.5 million | $16.9 million |
| Diluted EPS | $0.28 | $0.52 | $0.11 |
| Total Assets | $24.35 billion | $21.90 billion | $24.19 billion |
| Total Loans | $15.92 billion | $15.79 billion | $16.28 billion |
| Total Deposits | $15.87 billion | $13.88 billion | $15.15 billion |
| Net Interest Income | $189.3 million | $165.1 million | $191.8 million |
| Noninterest Income | $89.0 million | $82.6 million | $41.1 million |
| Noninterest Expense | $141.3 million | $136.3 million | $148.8 million |
| Provision for Loan Losses | $105.4 million | $23.0 million | $65.0 million |
| Net Charge-offs | $57.6 million | $16.0 million | $45.9 million |
| Allowance for Loan Losses | $313.2 million | $207.6 million | $265.4 million |
| Stockholders' Equity | $2.90 billion | $2.38 billion | $2.88 billion |
| Return on Average Assets | 0.71% | 1.25% | 0.30% |
| Return on Average Equity | 5.98% | 11.34% | 2.58% |
| Net Interest Margin | 3.59% | 3.58% | 3.88% |
Material Changes vs. Prior Period
- Profitability Decline Year-Over-Year: Net income decreased 36% compared to Q1 2008, driven primarily by a significant increase in the provision for loan losses ($105.4 million vs. $23.0 million) and lower noninterest income from Visa-related gains in the prior year.
- Sequential Improvement: Net income increased 153% compared to Q4 2008 ($16.9 million), largely due to a $17.0 million reduction in income tax valuation allowances and a swing in investment securities gains.
- Asset Quality Deterioration: Nonperforming loans rose to $452 million (2.84% of total loans) from $341 million at year-end 2008 and $207 million a year ago. Net charge-offs increased to $57.6 million, an annualized rate of 1.42%.
- Balance Sheet Growth: Total assets increased $0.16 billion from year-end 2008, fueled by a $268 million increase in loans held for sale and a $146 million increase in investment securities, partially offset by a $366 million decline in the loan portfolio.
- Deposit Growth: Total deposits grew $0.72 billion from year-end 2008, primarily due to increases in money market deposits and brokered certificates of deposit.
Guidance, Outlook, and Risks
- Outlook: Management anticipates downward pressure on net interest margin for the remainder of 2009 due to the low interest rate environment. Loan balances are expected to decline due to reduced demand from economic uncertainty.
- Asset Quality Risks: The Corporation expects net charge-offs and the provision for loan losses to remain elevated for the remainder of 2009. Stress is concentrated in commercial real estate, construction, and housing-related credits.
- Expense Outlook: FDIC expenses are projected to be approximately $33 million higher in 2009 than in 2008 due to a one-time special assessment and higher rates. Foreclosure and OREO expenses are expected to remain elevated.
- Capital: The Corporation issued $525 million of Senior Preferred Stock under the Capital Purchase Program (CPP) in November 2008. Capital ratios remain well above regulatory minimums.
- Accounting Changes: The Corporation is adopting new FASB guidance regarding other-than-temporary impairments (OTTI) and fair value measurements in Q2 2009, which may impact future earnings recognition.
Investor Verification Checklist
- Allowance Adequacy: Verify the sufficiency of the $313.2 million allowance for loan losses given the 2.84% nonperforming loan ratio and the specific concentration in commercial real estate and construction.
- Provision Volatility: Assess the sustainability of the $105.4 million provision for loan losses and its impact on future earnings stability.
- Investment Securities: Review the $10.6 million net gain on investment securities, noting it was driven by sales of mortgage-related securities and the potential for future other-than-temporary impairment write-downs under new accounting rules.
- Noninterest Income Quality: Distinguish between recurring fee income (which was relatively flat) and non-recurring gains from investment sales and Visa litigation settlements that boosted Q1 2009 results.
- Liquidity Position: Confirm the stability of the funding mix, noting the reliance on brokered CDs and wholesale funding, which increased as a percentage of total liabilities.