Associated Banc-Corp — Q3 2019 Form 10-Q
Business context and reporting period. Associated Banc-Corp is a Wisconsin-based bank holding company. This unaudited quarterly report covers the three and nine months ended September 30, 2019; balance-sheet comparisons are primarily with December 31, 2018. The Huntington Wisconsin branch acquisition closed June 14, 2019.
Financial performance and condition
| Metric | Q3 2019 | Comparable period / change |
|---|---|---|
| Net income | $83.3 million | $85.9 million in Q3 2018 |
| Net income available to common shareholders | $79.5 million | $83.5 million in Q3 2018 |
| Diluted EPS | $0.49 | $0.48 in Q3 2018 |
| Net interest income | $206.4 million | $219.4 million in Q3 2018 |
| Net interest margin, fully tax-equivalent | 2.81% | 2.92% in Q3 2018; 2.87% in Q2 2019 |
| Total noninterest income | $100.9 million | $88.3 million in Q3 2018 |
| Total noninterest expense | $200.9 million | $204.4 million in Q3 2018 |
| Provision for credit losses | $2.0 million | $5.0 million benefit in Q3 2018 |
For the first nine months, net income was $254.7 million versus $244.6 million; diluted EPS was $1.48 versus $1.38. Net interest income was $635.5 million, down 3%, and fully tax-equivalent net interest margin was 2.86% versus 2.95%. Total revenue was $923.4 million versus $927.1 million, while noninterest expense fell 6% to $590.4 million. Management attributed weaker net interest income mainly to lower Bank Mutual acquisition-related prepayments and accretion, and funding-cost reductions lagging LIBOR declines. Fee and mortgage banking income improved; lower acquisition costs and FDIC assessments reduced expenses.
Balance sheet and liquidity. At September 30, total assets were $32.6 billion, down 3% from year-end 2018. Loans were $22.8 billion, down 1%; deposits were $24.4 billion, down 2%. Investment securities totaled about $5.6 billion, down 16%. FHLB advances were $2.9 billion, down $697 million; total short- and long-term funding, including FHLB advances, was $3.8 billion. For the first nine months, operating activities provided $470 million and investing activities provided $1.6 billion, while financing activities used $2.2 billion; cash, cash equivalents and restricted cash ended at $759.5 million. Management reported compliance with internal liquidity objectives and $4.2 billion of available FHLB advances and $1.5 billion of discount-window capacity.
Capital and credit. The CET1 ratio was 10.21%, Tier 1 capital ratio 11.26%, total capital ratio 13.26%, and Tier 1 leverage ratio 8.57%; management stated regulatory capital ratios exceeded minimum requirements. The allowance for loan losses was $214.4 million, or 0.94% of loans. Nine-month net charge-offs were $41.1 million, 0.24% of average loans on an annualized basis, versus $30.1 million and 0.18% a year earlier. Nonaccrual loans were $128.9 million (0.57% of loans); nonperforming assets were $154.6 million (0.47% of assets). Oil-and-gas loans totaled $582 million, with $21 million of related allowance; oil-and-gas charge-offs were a significant contributor to higher year-to-date losses.
Material changes, outlook and notable items
- Management expected 2019 net loan growth below 3%, a loan-to-deposit ratio below 100%, full-year net interest margin of approximately 2.84%, and full-year noninterest expense of approximately $790–$795 million, including about $3 million of restructuring costs.
- CECL adoption was expected in Q1 2020. The company estimated a 30–40% increase in the allowance for credit losses relative to projected year-end 2019 levels, primarily due to economic uncertainty, and an approximately 25-basis-point after-tax reduction in tangible common equity. Management noted estimates remained subject to model validation and economic conditions.
- The company sold about $240 million of portfolio mortgages and $33 million of nonaccrual and restructured loans in Q3, citing deleveraging, lower interest-rate sensitivity, repayment of higher-cost funding, and preparation for CECL. It also sold securities and repositioned the investment portfolio for a declining-rate environment.
- Under ASU 2019-04, the company transferred municipal securities with $692 million amortized cost from held-to-maturity to available-for-sale. It reported no earnings or equity impact from this classification transfer. A $13.4 million write-up of remaining Visa Class B shares followed an observable market transaction and contributed to securities gains.
- The Huntington branch acquisition added $725 million of deposits and $116 million of loans. First Staunton, announced for approximately $76 million cash consideration, received OCC approval October 10 and was expected to close in Q1 2020, subject to customary conditions.
- On October 15, the company redeemed $250 million of 2.75% senior notes due November 2019. The board declared a common dividend of $0.18 per share for December, up $0.01 from the previous quarterly dividend. The company repurchased $60 million of common stock in Q3.
- Interest-rate risk disclosures show a slightly asset-sensitive earnings profile: a gradual 100-basis-point rate increase was estimated to raise 12-month earnings-at-risk 3.9% under the dynamic forecast. Management cautioned that actual outcomes depend on rate movements, balance-sheet mix and other assumptions.
- Risks include credit deterioration, particularly in oil and gas; interest-rate and funding-cost changes; CECL estimation uncertainty; acquisition execution; and consumer-product regulatory scrutiny. The company disclosed ordinary-course litigation and potential regulatory remediation, but said it could not estimate a material loss for the regulatory matters and did not believe current litigation would materially adversely affect the company.
Investor verification checklist
- Track net interest margin, deposit pricing and mix, and progress against the approximately 2.84% full-year NIM outlook.
- Verify CECL model assumptions, final allowance impact and tangible-common-equity effect at adoption.
- Monitor oil-and-gas exposure, charge-offs, nonaccrual loans, potential problem loans and allowance adequacy.
- Assess whether deposit trends, wholesale-funding reductions and stated liquidity sources remain sufficient as assets and loans change.
- Confirm First Staunton closing, integration costs and expected acquired loans, deposits and branches.
- Review the effect of securities portfolio repositioning, Visa share valuation and share repurchases on recurring earnings and capital.
- Follow the redeemed senior notes, dividends, capital ratios, and any developments in regulatory or legal contingencies.