Working Every Angle

Philip Flynn was never very receptive to job pitches. The Los Angeles native had spent his entire 30-year career climbing the ranks at Union Bank in California. He'd been approached by others, but as the $84 billion-asset company's L.A.-based chief operating officer-and the highest-ranking American at its parent company, UnionBanCal-he held out hope that he could become CEO of the bank he grew up with.

That changed in 2008, when Union's majority owner, Japan's Mitsubishi UFJ Financial Group, took UnionBanCal private. The parent company had regularly rotated in Japanese expats as CEO when it owned 65 percent of UnionBanCal. It seemed fair to conclude full ownership would do little to change this practice.

So when a headhunter called in mid-2009 to gauge Flynn's interest in the top spot at struggling Associated Banc-Corp in Green Bay, Wisc., he agreed to a meeting on his way home from a trip to New York. By December, Flynn was cashing in the sun and glitz of L.A. for an overcoat and an appetite for bratwurst in the land of Packer-loving cheeseheads.

There were plenty of good reasons for Flynn, 54, to turn the board down flat, none of which concerned weather or culture. Associated had spent decades nurturing a reputation as a relatively safe, profitable bet in an industry prone to cycles, but at the top of the most recent cycle, it reached for growth. Now, losses on commercial real estate and construction loans were mounting, capital was dwindling and the company was strategically adrift.

The sitting CEO, Paul Beideman, had been asked to retire ahead of schedule, while COO Lisa Binder had left unexpectedly a few months earlier. The lending process was frozen by fear and indecision, with the credit side of the house having clamped down on underwriting, and frontline lenders alternatively feeling hesitant to make new commitments, or frustrated that they couldn't.

Morale was at an all-time low, and many had begun to doubt that the $22 billion-asset Associated could survive the crisis as an independent company. At the very least, it would take aggressive writedowns and capital raising and the hard work of instilling big-bank disciplines in an organization that never had them before.

It should have been a tough sell to someone who was in a comfortable job at a much larger institution where he was, by all accounts, universally admired. But Flynn had long aspired to run a successful regional bank of his own, and after reviewing the loan book at Associated, he was confident this was his chance.

Under Flynn, Associated has now reported six consecutive quarters of profit, each one better than the last. Consensus estimates peg this year's earnings at 92 cents a share, which would represent a 40 percent increase from 2011.

Nonaccruals fell 38 percent last year to the lowest levels since before Flynn arrived, and nonperformers were 3.29 percent of loans at the end of 2011, compared with about 9.5 percent two years earlier. Net chargeoffs, meanwhile, had fallen to $23 million in the fourth quarter, down 69 percent from a year earlier and 25 percent from the quarter before.

More than cleaning up bad credits, Flynn's credibility as a successful outsider-and as someone who had worked through some serious credit issues at Union a decade earlier-gave confidence to an organization badly shaken by its recent woes.

"He had that experience-been there, done that-and could help us get out of trouble and positioned for the future," Judith Docter, Associated's chief human resources officer, and a 20-year company veteran, recalls thinking.

"Oftentimes, you have CEOs who are very good visionaries, but can't implement the vision," Docter adds. "Phil is the full package. He understands banking, and has expertise and experience on the operational aspects."

With an eye to the future, Flynn brought in sharp new managers-including about a half-dozen former Union colleagues-rallied his downtrodden troops, set firm lending parameters and plotted a comprehensive post-recovery strategy, replete with new business lines and an upgrade of its branches and technology.

"In the darkest moments of this organization's history, Phil was not just focused on survival. He already had his eye on the second, third and fourth chapter of the recovery," says Oliver Buechse, Associated's chief strategy officer. "That's the truly unique aspect to this story."

Helped along by the sale of its chief rival, troubled Milwaukee-based M&I, to Canada's BMO Financial Group, Associated has been on the growth trail. Anecdotal evidence suggests that being the largest Wisconsin-based bank has won Associated some new business. So, too, has the hiring of more than 100 former M&I hands, many of them lenders.

Total loans jumped 4 percent during the fourth quarter alone, and were up 13 percent for the year, led by pickups in commercial, commercial real estate and mortgage lending. That ranked best among a group of 11 regional bank peers compiled by SNL Financial. For 2012, Flynn is projecting loan growth of 3 percent a quarter.

Associated was born of the 1970 marriage of three northeastern Wisconsin community banks. Its reputation as a profitable, conservatively run shop gave it a swagger and the currency to acquire 20 banks and thrifts between 1991 and 2007.

"Associated's story had been one of constant growth, constantly meeting or exceeding expectations," Buechse says. "There was a strong sense of pride among the colleagues, and a great deal of confidence among the investor base."

Under Beideman, however, the company veered off course at precisely the wrong time. It stretched for growth in Chicago condos, Denver construction and shared national credits.

When the details were revealed, analysts were shocked. "It was, 'I didn't know they lent money there. I didn't know they were in that segment,'" says Scott Siefers, an analyst with Sandler O'Neill & Partners. "It became a head-scratcher very quickly."

Flynn doesn't mince words when describing what he inherited. "There was a fairly undisciplined process of granting loans and building the loan portfolio," he explains with a hint of disdain. "In the constant search for earnings and earning assets, a fateful decision was made-and it was a conscious decision-to become much more aggressive in the commercial real estate and construction areas, both inside and outside of the footprint."

Flynn's arrival on Dec. 1, 2009, immediately gave way to a blur of activity. Days before he started the job, the Office of the Comptroller of the Currency slapped Associated with a memorandum of understanding, ordering the bank to beef up risk-management capabilities and capital levels.

Flynn attacked the balance sheet problems aggressively, bringing in outside consultants to review the loan book and boosting loss provisions by $395 million in the fourth quarter of 2009, up from $356 million in the previous three quarters.

Associated charged off $234 million of bad loans that quarter-more than two and a half times what it had charged off the previous quarter-and commenced a wholesale disposal of $4 billion in bad loans. It posted a net loss of $180 million, or $1.41 a share, for the quarter.

In his second month on the job, Flynn raised $478 million in new capital, boosting the Tier 1 capital ratio to 10.57 percent-more than many analysts thought was necessary-and he cut the quarterly dividend to a penny. A year earlier, it had been 32 cents.

The speed and magnitude of these initial moves raised eyebrows. Some shareholders weren't happy with the losses and the dilution of their holdings.

Even Flynn concedes that, with hindsight, Associated might have raised too much capital. "But in early 2010, no one was complaining about having too much capital," he adds. "We needed to take the issue of survivability off the table."

The day after the capital raise, Standard & Poor's hit Associated with a credit downgrade over concerns that high nonperformer levels would persist. The move effectively closed off access to the subordinated debt market, and forced Associated to pay up for brokered deposits to maintain liquidity, raising operating costs.

Flynn took such bumps in stride. Colleagues describe him as unflappable and a "straight shooter," who values solid, honest communications and delivers on what he says-the kind of guy who actually fits in well in northeastern Wisconsin.

Flynn has dealt with adversity before, in the early 2000s guiding UnionBanCal through big credit losses from syndicated and power-company loans. "Phil fixed those issues and reestablished the organization's credibility with the market," recalls Buechse, who worked with Flynn at Union.

Flynn also has the operational background to run a big company. After graduating in 1979 from Claremont McKenna College, a small liberal arts school a half-hour west of L.A., Flynn landed in the credit training program at Union Bank-the same program that launched the careers of industry notables Jerry and Jack Grundhofer and Carl Reichardt.

As he progressed at Union, Flynn had a hand in nearly every aspect of the business. At one time or another, he served as chief credit officer, ran the specialized lending unit and took on broad responsibilities for commercial and wholesale banking. In 2005, he was promoted to COO.

Under Flynn's operational leadership, UnionBanCal dodged the worst of the credit crisis and outperformed most of its peers in that period. Flynn also got plaudits for being a tough negotiator on behalf of minority shareholders during Mitsubishi UFJ Financial's tender offer, securing a price of $73.50 per share, 27 percent higher than the $58 initially offered.

At Associated, Flynn has made transparency a linchpin of the overhaul. During the shareholders meeting in 2010, he offered a mea culpa to investors and to the community for Associated having been "very inwardly focused" before his arrival. "To those customers who are here today-and I'm sure some of our shareholders are our customers-I want to apologize for that."

The more pressing need was reinvigorating loan production, which had all but shut down by the time Flynn arrived because of a paralyzing communications breakdown between risk managers and front-line lenders, who didn't understand tighter new risk parameters and were hesitant to make commitments to clients.

"If you're a relationship manager in the field looking for new customers, or servicing existing ones, the last thing you want to do is make promises you can't deliver on," a sympathetic Flynn explains now. "The result is, you tend to hunker down and be a lot less aggressive."

To get everyone on the same page, Flynn put himself on a listening tour of sorts. He surveyed employees across the organization, seeking their thoughts on what the company could do better, and then formed cross-disciplinary working groups to tackle specific initiatives.

The effort, dubbed "Project Phoenix," focused on six big-picture objectives, including defining a uniform risk appetite and setting target allocations for the loan portfolio. "We tried to spell out very deliberately what the loan composition should look like, the geographic representation, where we wanted to play on the risk curve," Buechse explains.

"Many of these attributes were inherent in the thinking of individuals, but they had never been put on paper," he adds. "Once that occurred, it served as a powerful guideline for everyone to say, 'This is the kind of bank we want to be.'"

To reinforce the message, Flynn instituted monthly telephonic "town hall meetings" open to Associated's 5,000 employees-hardly a groundbreaking tactic in the annals of management science, but an important step for a bank lacking a sense of cohesiveness.

With 280 branches in three states, Associated remained in many ways a federation of acquired community banks, comprised of geographic "mini-cultures," as Docter describes it. "The company had spent a lot of time on conversion of systems and products, but we hadn't spent a lot of time on the cultural integration-having a common direction and purpose."

Flynn also has put his stamp on the culture by reshaping the senior management team. He has made several key hires from Union-including Buechse, Deputy CFO Christopher Del Moral-Niles (set to become CFO later this year), and John Utz, head of a new specialized industries group catering to insurance companies, universities and other niche businesses. Flynn also brought in Arthur Heise, former director of enterprise risk services at U.S. Bancorp, as Associated's first chief risk officer.

Things are moving in the right direction, but Flynn concedes that Associated still faces some significant headwinds. Its net interest margin has been contracting, ending 2011 at 3.22 percentage points, down 8 basis points from the start of the year and the worst among banks in Associated's peer group, according to SNL.

Despite growing the loan book last year from $12.2 billion to $13.9 billion, net interest income was flat. Noninterest income is under pressure, too, dropping 14 percent in the fourth quarter to $74.2 million, compared with $86.6 million a year earlier. The decline included $4 million of fees lost to the Durbin amendment's regulation of debit-card interchange.

Meanwhile, Associated's noninterest expenses were up 24 percent in the fourth quarter, compared to a year earlier. Associated has been spiffing up old branches and upgrading its technology infrastructure, including its enterprise risk-management systems, portfolio analytics, online banking applications and customer-facing teller systems. It also closed 20 branches in 2011, at a savings of about $300,000 per location.

Squeezed between falling revenues and higher expenses, Associated's efficiency ratio, once below 50 percent, hit 71 percent in 2011, the highest among its SNL peer group. Pre-tax, pre-provision return on assets stands at about 1.35 percent, near the bottom of the pack; before the crisis, it was a peer best at around 2.25 percent.

"In terms of safety and soundness, I can't find anything to complain about. But when it comes to profitability, there are some questions," Siefers says. "This will be the enduring issue for Phil, and how well he manages through these conditions will ultimately determine how successful he's perceived to be as a CEO."

Buechse says expenses are up short term because the former management team consistently underinvested in the franchise-Associated even had two different versions of signage in use across its three-state franchise. The low investment levels of the past "helped with the cosmetics of the efficiency ratio," Buechse says, "but they weren't sustainable."

Flynn says Associated is as fit as it can be right now. It paid off the last of its $525 million from the Troubled Asset Relief Program in September, S&P has boosted its credit ratings, and he's talking about returning some capital to shareholders. "I'm very happy with the progress we've made," Flynn says. "We're taking market share in our Midwest markets. We've opened loan production offices, which are growing. We're doing well at gathering deposits. We're very well-capitalized. Our credit metrics continue to improve. We view ourselves as being very well-positioned for growth."

Well-positioned, perhaps. But will the economy cooperate? As Guggenheim Securities analyst Jeff Davis observes, "The big question for any regional bank, Associated included, is, where do they find more revenues from here?"

Flynn notes that he has two big, relatively healthy markets-Chicago and the Twin Cities-in his footprint. He has put the new loan production offices in places like Indianapolis, and he has even opened an oil-and-gas lending operation in Houston, staffed by former Union bankers, which booked $170 million in loans during its first year.

Flynn admits that a Wisconsin bank making energy loans in Texas "is not a natural," especially given the troubles caused to so many banks by out-of-market lending. But Flynn once ran Union's energy lending shop, and is comfortable with the dynamics. "It's not going to become a dominant business, but as a way of growing profitable assets, it makes a lot of sense."

If tactics like these help Flynn to get the company over the revenue hurdles, Associated's revival will be complete. That would make giving up the L.A. sun for Wisconsin's winters worth it.

John Engen is a freelancer based in Minneapolis.