Associated Banc-Corp's surprise quarterly loss could portend an ugly earnings season for regional banks, especially when it comes to commercial real estate.
The Green Bay, Wis., lender said it would slash its dividend by 4 cents, to a penny, and seek to raise $400 million in a public offering to preserve capital as it braces for more pain in its $3.8 billion CRE portfolio, its largest loan book at 27% of loans.
Higher credit costs in CRE and problems in real estate construction drove the $23 billion-asset company to a net loss of $180.6 million in the fourth quarter, compared with a profit of $8.7 million in the third quarter and $13.6 million profit a year earlier. Analysts had expected a modest profit.
CRE chargeoffs rose more than 800% from the prior quarter, to $40.6 million, as retailers, office property owners and other borrowers dealt with higher vacancy rates, more bankruptcies and lower real estate values, Associated said Monday.
"The current macroeconomic environment continues to put pressure on other business sectors … but not to the degree seen in the commercial real estate sector," Associated said.
Peyton Green, a Sterne Agee & Leach Inc. analyst, said Associated's poor showing signals that regional banks' loan problems are shifting from residential construction to CRE. "They're starting to see problems increase on the commercial real estate front," Green said. "That is going to be 2010's asset class to worry about the most."
Associated said in regulatory filings announcing the capital raise that it was taking aggressive steps under its new chief executive, Philip Flynn, to get ahead of its credit issues. It declined a request to interview Flynn.
Flynn, who took over Dec. 1 after nearly 30 years with Union Bank in Los Angeles, told American Banker in November that taking a hard look at Associated's loan book was his first priority.
Provisions and chargeoffs rose drastically in the most recent quarter as a results of reappraisals of construction and CRE loans that reflected lower loan values. Associated also added $161 million to loan-loss reserves, bringing them to $517 million, or 4.06% of loans.
Flynn said in a press release Monday his priority in recent weeks was to ensure that reserves and capital levels "are appropriate to manage through the downturn" and to position Associated to "take advantage of opportunities as they arise."
In regulatory filings the company said it would eye deals for failed banks and consider repaying its $525 million in federal aid.
