Associated Banc-Corp (ASBC) is a holding company for Associated Bank, which is a commercial bank that provides loans, deposit services, and asset management services. The firm has over 300 offices throughout the Illinois, Wisconsin, and Minnesota in the midwestern U.S. 90% of ASBC's revenue comes from banking services and 10% comes from the firm's managed investments segment.
ASBC competes with many firms throughout the financial services and asset management industries. However, as a firm serving the midwestern United States, ASBC competes with other such banks, including Marshall & Ilsley, TCF Financial, and US Bancorp. Like many asset managers, ASBC is still affected by the meltdown in mortgage-backed securities. Moreover, ASBC holds two thirds of its loan portfolio as commercial loans, whose greater risk for defaulting combined with upwards of $25 million loans make these risky. Finally, the credit crunch conditions have shifted customers away from the typical savings deposits and towards more flexible money market deposits. If these conditions persist, ASBC may have to adapt and shift its own focus towards being a more asset management oriented institution.
In 2007, ASBC revenue hit an all-time high of just over $1 billion, but net income slipped for the second year in a row since FY2005. This net income fall was driven by a decrease in taxable net interest income, as interest rate shifts cost the company $20 million. Moreover, deposits fell by 2.4%, as net $224 million deposits were sold and there was a $228 million drop in brokered CDs. By the conclusion of FY2007, loans totaled 81% of earning assets and wholesale funding (short-term borrowings and long-term funding) dropped to 28% of earning assets.
The operations of ASBC are divided into three segments:
In the longer run, ASBC revenue has increased every year since 2006. However, net income has continually dropped in the same time span. A pair of acqusitions (First National Bank of Hudson in 2007 and State Financial Services in 2005) each contributed to this slip, as the acquisitions cost Associated Banc Corp $46.5 million and $11 million respectively. Decreases in taxable net interest income also contributed to the three year skid, as mentioned above.
ASBC owns $3.7 billion in mortgage backed securities and the company took a $31 million write down on these securities in 4Q2008. ASBC's net income for the 2007 in total was just over $285 million. In comparison, one of ASBC's main competitors, US Bancorp was hit with a $411 million loss in 3Q2008 as a result of restructured investment securities and mortgage backed securities.. On the other hand, TCF Financial, another competitor, has been relatively unaffected by the credit crunch, as the company never made or bought subprime mortgage packages, credit card and automobile portfolios, or any derivative contracts. In fact, FY2008 was the 55th consecutive year where TCF has made a profit. So far, ASBC's assets in this category have taken a toll from the initial trading value of a little over 80 cents on the dollar to 50 cents on the dollar, resulting in the $31 million loss. The firm's average exposure to these mortgage-backed securities will continue to inhibit income and investment by ASBC.
Commercial loans are loans given to a business, and, in the case of ASBC, include agricultural, commercial real estate, real estate construction, and lease financing loans. In general, commercial loans are interpreted as riskier (having a greater risk of defaulting than home or retail loans. As of FY2007, 66% of ASBC's loan portfolio included commercial loans, and an increasing number of these loans contain a balance of $25 million or greater. Thus, with the increased chance of default combined with the large loan sums, ASBC having 66% of its loan portfolio being commercial loans is risky.
ASBC's main source of revenue is from interest income and FY2007 saw $14.0 billion in deposits, one of the firm's key interest income generators. However, since the dawn of the credit crisis, consumers have been less motivated to deposit funds in banks, leading to the 2.4% drop ($0.3 billion) in savings deposits from FY2006 for ASBC. However, ASBC customers shifted funds to higher-yielding and more flexible investments, leading to a 28% leap in money market funds as a percentage of total deposits. Should credit stay tight, ASBC may need to shift its focus towards more asset management options in order to hold customers.
ASBC competes with many firms in the financial services industry. However, its closest competitors include Marshall & Illsley, TCF Financial and US Bancorp. All four firms are headquartered in Wisconsin or Minnesota and compete for banking and asset management services throughout the midwestern United States. Below is a chart of relevant operating metrics for these companies:
|Company||Revenue ($ in millions)||Operating Margin (TTM)||Profit Margin (TTM)||Return on Assets (TTM)||Return on Equity (TTM)|
|Associated Banc Corp||$ 1,006.7||31.07||21.60||0.74||6.47|
|Marshall & Ilsley (MI)||$ 5,127.9^||(181.79)||(107.85)||(0.90)||(7.52)|
|TCF Financial (TCB)||$ 108.1||22.85||14.33||0.79||9.95|
|U.S. Bancorp (USB)||$ 13,936||38.33||25.74||1.17||12.44|
Note: Margins and Returns Data for all companies taken from Yahoo Finance on January 31, 2009. All revenue data from company 10-k's.
^As of FY2006