Business Context and Reporting Period
Company: Associated Banc-Corp
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2001
Overview: Associated Banc-Corp is a financial holding company headquartered in Green Bay, Wisconsin. During the second quarter of 2001, the Corporation merged all of its Wisconsin bank affiliates into a single national banking charter, "Associated Bank, National Association." The report covers the three and six months ended June 30, 2001, comparing results to the same periods in 2000.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2001 | Six Months Ended June 30, 2000 |
|---|---|---|
| Total Assets | $13.21 billion | $13.00 billion |
| Total Loans | $8.98 billion | $8.70 billion |
| Total Deposits | $8.50 billion | $9.25 billion |
| Net Interest Income | $200.96 million | $194.71 million |
| Net Interest Margin | 3.45% | 3.41% |
| Noninterest Income | $95.35 million | $96.43 million |
| Noninterest Expense | $160.73 million | $159.64 million |
| Net Income | $88.11 million | $86.78 million |
| Earnings Per Share (Diluted) | $1.32 | $1.25 |
| Return on Average Assets (ROA) | 1.36% | 1.38% |
| Return on Average Equity (ROE) | 17.61% | 19.19% |
| Allowance for Loan Losses | $126.39 million (1.41% of loans) | $115.40 million (1.33% of loans) |
| Stockholders' Equity | $1.05 billion | $0.93 billion |
Material Changes vs. Prior Period
- Net Income Growth: Net income increased $1.33 million (1.5%) year-over-year for the six-month period, driven by higher net interest income and strong mortgage banking revenue, partially offset by lower trust fees and asset sale gains.
- Net Interest Margin Expansion: The net interest margin improved by 4 basis points to 3.45%. This was achieved despite a 2 basis point decline in the yield on earning assets, as the cost of interest-bearing liabilities decreased by 5 basis points to 4.81%.
- Deposit Decline: Total deposits decreased $745 million (8.1%) compared to June 2000. This decline was primarily due to a $644 million reduction in brokered CDs. Retail deposits (excluding brokered CDs) decreased only $101 million.
- Loan Portfolio Mix: Commercial loans grew $536 million (12%) to comprise 55% of the total loan portfolio, while residential real estate loans decreased $378 million (12%) due to high refinance activity.
- Noninterest Income Volatility: Mortgage banking income surged $15.1 million (158.8%) due to increased secondary market loan production. Conversely, trust service fees dropped $4.2 million (21.6%) due to lower asset values, and asset sale gains fell $20.4 million due to the absence of the credit card receivable sale gain recorded in 2000.
- Asset Quality: Nonperforming loans increased to $53.1 million (0.59% of total loans) from $40.0 million (0.46%) in the prior year, driven largely by the addition of several large commercial relationships to nonaccrual status.
Guidance, Outlook, and Risks
Management Commentary: Management notes that the softening economy has affected customers and is expected to continue for the remainder of the year. The Corporation has adopted SFAS No. 133 (Derivatives and Hedging) and anticipates adopting SFAS No. 141 and 142 (Business Combinations and Goodwill) in 2002, though the impact of the latter is not yet estimable.
Liquidity and Capital: The Corporation maintains strong liquidity with $200 million in available lines of credit and a $200 million commercial paper program. Capital ratios remain well above regulatory minimums, with a Tier 1 risk-based capital ratio of 9.64%.
Risks and Contingencies:
- Interest Rate Risk: The Corporation uses derivative instruments (interest rate swaps) to hedge variability in interest payments. At June 30, 2001, cash flow hedges had a notional amount of $500 million.
- Credit Risk: Potential problem loans totaled $156 million. While not concentrated in a specific industry, management monitors these closely for potential losses.
- Regulatory Changes: Future adjustments to the Allowance for Loan Losses (AFLL) may be required based on economic conditions or regulatory examinations.
Investor Verification Checklist
- Deposit Composition: Verify the sustainability of funding given the 8.1% decline in total deposits and the heavy reliance on wholesale funding to offset the drop in brokered CDs.
- Asset Quality Trends: Monitor the increase in nonperforming loans (up 32% year-over-year) and the adequacy of the allowance for loan losses (1.41% coverage) in a softening economy.
- Mortgage Banking Volatility: Assess the sustainability of the 158% increase in mortgage banking income, which was driven by a significant spike in secondary market production.
- Trust Fee Exposure: Evaluate the impact of continued market declines on trust service fees, which dropped 21.6% due to lower assets under management.
- Accounting Changes: Review the potential impact of the upcoming adoption of SFAS No. 142 on goodwill amortization and potential impairment charges.