Associated Banc-Corp — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2010. Amounts are in U.S. dollars; financial statement figures are unaudited. The company is a bank holding company whose principal business is banking, alongside wealth management.
Financial results and position
- Third-quarter earnings: Net income was $14.3 million, versus $16.0 million in Q3 2009 and a $2.8 million loss in Q2 2010. Net income available to common shareholders was $6.9 million, or $0.04 per diluted share, compared with $8.7 million, or $0.07 per share, a year earlier.
- Nine-month earnings: Net loss was $14.9 million, versus net income of $41.4 million in the first nine months of 2009. The loss available to common equity was $37.0 million, or $0.22 per diluted share, versus income of $19.4 million, or $0.15 per share.
- Interest income and margin: Nine-month net interest income was $482.9 million, down 11.8% from $547.7 million. Net interest margin declined to 3.22% from 3.50%; Q3 margin was 3.08%, versus 3.50% a year earlier and 3.22% in Q2 2010. Management attributed pressure to lower asset yields, liquidity-related asset mix, loan runoff, and market pricing.
- Credit costs: Nine-month provision for loan losses was $327.0 million, compared with $355.9 million. Net charge-offs rose to $378.5 million from $208.7 million; the annualized net charge-off ratio increased to 3.78% from 1.75%. Q3 provision was $64.0 million, while annualized charge-offs were 3.39% of average loans.
- Fees and expenses: Nine-month noninterest income was $260.8 million, down 2.0%; noninterest expense was $463.5 million, up 2.4%. Core fee-based revenue fell 3.3%, including a 12.9% decline in deposit service charges. Net mortgage banking income fell 37.1% to $19.9 million. The efficiency ratio increased to 64.65% from 56.22%.
- Assets, loans, and deposits: Total assets were $22.5 billion at September 30, down $349 million from year-end 2009. Loans were $12.4 billion, down $1.8 billion, reflecting runoff, sales, charge-offs, and weak demand. Deposits were $16.8 billion, up $76 million; brokered CDs increased to $442 million from $142 million at year-end.
- Liquidity and cash flow: Cash and cash equivalents were $2.54 billion at September 30, up $1.72 billion since year-end. Nine-month operating cash flow was $350.9 million, investing cash flow was $1.76 billion, and financing used $396.7 million. Management reported more than $4 billion of secured borrowing capacity and compliance with internal liquidity objectives.
- Funding and capital: Short-term borrowings declined to $539 million from $1.23 billion at year-end; long-term funding fell to $1.71 billion from $1.95 billion. Stockholders’ equity was $3.20 billion, including $514 million of preferred equity. The January common-stock offering raised $478 million net. The Bank’s Tier 1 leverage and total risk-based capital ratios were 9.17% and 16.48%, respectively; company-wide ratios were 10.78% and 19.16%.
Material changes versus comparable periods
- Despite a lower year-to-date loan-loss provision, elevated charge-offs contributed to a nine-month net loss. Nonperforming loans declined from $1.12 billion at December 31, 2009, to $817 million at September 30, 2010, but remained high at 6.61% of loans, versus 6.00% a year earlier.
- The allowance for loan losses was $522 million, or 4.22% of loans, compared with $573.5 million and 4.06% at year-end 2009. Coverage was 64% of nonperforming loans, versus 51% at year-end.
- Management sold nonperforming loans with a $434 million net book value during 2010; the sales generated $147 million of charge-offs. Problem assets improved from year-end, while consumer nonperforming loans increased year over year.
- Compared with Q3 2009, Q3 2010 net interest income fell and expenses rose, while total noninterest income increased, helped by mortgage banking and securities gains. Compared sequentially with Q2 2010, earnings returned to profit as provision expense declined, although net interest margin continued to narrow.
- The January 2010 common-stock issuance increased common shares outstanding by about 44.8 million. Common dividends were $0.03 per share for the first nine months of 2010, versus $0.42 in the comparable 2009 period.
Outlook, risks, and unusual items
- Management expected charge-offs to remain elevated through the rest of 2010 while it worked through problem loans. It anticipated that Q3 growth in commercial and industrial, home-equity, and residential mortgage lending would continue, potentially moderated by efforts to resolve problem credits.
- Management warned that low rates, loan runoff, nonperforming loans, liquidity needs, and competition could continue to pressure net interest margin. Its interest-rate simulation projected a 3.9% increase in next-12-month net interest income under an immediate, sustained 100-basis-point rate increase; this is a model scenario, not earnings guidance.
- The Bank was subject to an OCC Memorandum of Understanding, including minimum capital requirements of an 8% Tier 1 leverage ratio and 12% total risk-based capital ratio. The holding company also had a Federal Reserve agreement requiring prior approval for certain dividends, debt payments, borrowing increases, guarantees, and share repurchases.
- Credit-rating downgrades had constrained unsecured funding. The company relied on a liquidity plan that included network transaction accounts and brokered CDs. It was exploring replacement funding for subordinated debt maturing in 2011.
- The Dodd-Frank Act was expected to create additional compliance costs; management said the ultimate effects were uncertain pending rulemaking. The company also identified possible implications for FDIC assessments, deposit pricing, mortgage risk retention, derivatives, and capital requirements.
- Unusual expenses included $3.2 million of early-termination penalties on long-term funding repayments. Securities gains included $2.1 million of credit-related impairment write-downs. The company recorded a $31.9 million nine-month income tax benefit; deferred tax asset realization remains dependent on future results.
- A class-action lawsuit alleged unfair overdraft-fee assessment and collection; class certification was pending. Management could not estimate a possible loss range for proceedings generally, and said current proceedings were not expected to materially affect the financial statements, while acknowledging uncertain future effects.
- Management said disclosure controls were effective as of September 30, 2010. It reported no material change to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether credit quality continues to improve, particularly commercial real estate and construction exposures, and whether charge-offs remain elevated.
- Whether loan-loss reserves remain adequate relative to impaired, nonperforming, and potential-problem loans.
- Whether liquidity, ratings, and funding access remain stable, including reliance on brokered and network deposits and secured borrowing capacity.
- How the OCC and Federal Reserve agreements affect capital distributions, debt servicing, and operating flexibility, and whether required Bank capital thresholds continue to be met.
- Whether net interest margin, fee income, and expenses stabilize, and how new Dodd-Frank rules and the overdraft-fee litigation affect costs or results.