ASSOCIATED BANC-CORP quarterly report, Q3 FY2020

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Associated Banc-Corp — Q3 2020 Form 10-Q

Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2020. Associated Banc-Corp is a regional banking company. Results reflect COVID-19 disruption, PPP lending, the June sale of its ABRC insurance business, and the adoption of CECL accounting in January 2020.

Key financial results

  • Q3 revenue and earnings: Total revenue was $257.7 million, down 16% year over year. Net income was $45.2 million, versus $83.3 million; net income available to common shareholders was $40.0 million, or $0.26 per diluted share, versus $79.5 million, or $0.49.
  • YTD results: Total revenue was $1.003 billion, up 9%; net income was $239.8 million versus $254.7 million, and diluted EPS was $1.46 versus $1.48. YTD revenue includes a $163 million pretax gain on the ABRC sale.
  • Net interest and margins: Q3 net interest income was $182.2 million, down 12% year over year; fully tax-equivalent net interest margin was 2.31%, down 50 basis points. YTD net interest income was $575.0 million, down 10%, and margin was 2.54% versus 2.86%.
  • Credit costs and asset quality: Q3 provision for credit losses was $43.0 million versus $2.0 million a year earlier; YTD provision was $157.0 million versus $16.0 million. The allowance for credit losses on loans was $442.0 million, or 1.77% of loans. Nonaccrual loans rose to $231.6 million from $118.4 million at year-end 2019; nonperforming assets were $251.5 million, or 0.72% of assets.
  • Balance sheet and liquidity: Assets were $34.7 billion, loans $25.0 billion, and deposits $26.7 billion at quarter-end. Compared with year-end 2019, loans grew 10% and deposits 12%; deposits benefited partly from stimulus-related inflows. Cash and cash equivalents were $1.114 billion. Management reported compliance with internal liquidity objectives and $5.1 billion available for future FHLB advances, plus $943 million available at the Federal Reserve discount window.
  • Funding and capital: FHLB advances were $1.7 billion, down 46% from year-end; PPPLF borrowings were $1.0 billion. Total stockholders’ equity was $4.05 billion. The reported CET1 ratio was 10.22%, total capital ratio 13.78%, and tier 1 leverage ratio 9.02%; ratios exceeded regulatory minimums.
  • Cash flows: For the first nine months, operating activities provided $423 million, investing activities used $1.573 billion, and financing activities provided $1.674 billion, increasing cash, cash equivalents, and restricted cash by $525 million.

Material changes, outlook, and notable items

  • Q3 pretax loss was $12.9 million, despite positive net income, reflecting a $44.7 million loss from prepaying $950 million of long-term FHLB advances. A $58.1 million income tax benefit contributed to reported net income. YTD effective tax rate was 1.37%; management expected a low-to-mid-single-digit full-year 2020 rate.
  • ABRC was sold for $266 million cash, generating a $163 million pretax gain in Q2. The sale reduced insurance commissions and fees; YTD insurance commissions fell 35% year over year.
  • CECL adoption increased the allowance for credit losses by $131 million and reduced common equity by $98 million after tax at adoption. Further reserve changes depend on economic conditions and forecasts.
  • Management expected Q4 2020 net interest margin of approximately 2.50%, Q4 noninterest expense of $175 million (including $3 million of restructuring costs), and FY2021 expenses of $685 million. It also expected fee revenue to continue a positive trend through year-end.
  • COVID-19 forbearances totaled $662 million across 1,644 loans at September 30. Potential problem loans were $292.8 million, up 82% from year-end. Management highlighted risks from pandemic-related economic weakness, borrower payment relief, low interest rates, and industry exposures. Key reported exposures included $1.1 billion to retailers and shopping centers, $247 million to hotels, and $116 million to restaurants.
  • Oil and gas loans totaled $333 million outstanding; the portfolio is in run-off. Its allowance for credit losses was 15.3% of outstanding loans. The company also identified PPP forgiveness timing, possible fraud or guarantee issues, and servicing demands as risks.
  • Three branch sale agreements covered approximately $302 million of deposits, with closings expected in December 2020 and Q1 2021. The common-stock repurchase program remained suspended for the rest of 2020. The board declared a $0.18 quarterly common dividend payable in December.

Important facts for investors to verify

  • Whether nonaccrual, potential problem, and forborne loans continue to rise, and whether CECL reserves remain adequate as the economic outlook changes.
  • PPP forgiveness and repayment timing, including how quickly SBA payments reduce low-yield PPP loans and related PPPLF funding.
  • Whether margin, fee income, and expense trends meet management’s Q4 2020 and FY2021 expectations.
  • The sustainability of reported earnings excluding the ABRC gain, tax-planning benefits, and FHLB prepayment charge.
  • Progress and final deposit impacts from the announced branch sales, and capital and liquidity levels amid ongoing uncertainty.