Associated Banc-Corp — Q2 2021 Form 10-Q
Business context and period. Unaudited results cover the quarter and six months ended June 30, 2021. Associated Banc-Corp is a regional bank holding company. Comparisons below are with the corresponding 2020 period unless stated otherwise; balance-sheet comparisons are with December 31, 2020.
Financial performance
| Metric | Q2 2021 | Six months 2021 | Comparable-period change |
|---|---|---|---|
| Net interest income | $179.5 million | $355.4 million | Down 5% for Q2 and 10% year to date |
| Fully tax-equivalent net interest margin | 2.37% | 2.38% | Q2 down 12 basis points; YTD down 28 basis points |
| Provision for credit losses | $35.0 million benefit | $58.0 million benefit | Versus $61.0 million and $114.0 million of expense, respectively |
| Noninterest income | $73.4 million | $168.8 million | Down 71% for Q2 and 52% year to date |
| Noninterest expense | $174.5 million | $349.8 million | Down 5% for Q2 and 7% year to date |
| Net income | $91.0 million | $185.3 million | Down from $148.7 million and $194.6 million |
| Diluted earnings per common share | $0.56 | $1.13 | Compared with $0.94 and $1.20 |
Q2 total revenue was $253.0 million, versus $444.4 million a year earlier. The comparison is heavily affected by the $163 million pretax gain from the 2020 sale of Associated Benefits & Risk Consulting (ABRC). The sale also substantially reduced insurance commissions in 2021. Fee-based revenue increased 16% in Q2, including higher service-charge and card fees. Mortgage banking income was $8.1 million in Q2, down from $12.3 million, partly reflecting a first-quarter 2021 mortgage-servicing-rights valuation recovery that did not recur.
Lower rates and elevated liquidity weighed on net interest income and margin. Deposit interest expense fell, while stimulus-related customer deposits increased. The credit-loss provision benefit reflected improving credit quality and economic forecasts. YTD net charge-offs were $9.4 million, compared with $43.5 million a year earlier.
Financial position, funding, and capital
- Total assets were $34.2 billion, up 2% from year-end. Deposits were $27.3 billion, up 3%; management attributed deposit growth principally to government stimulus inflows.
- Loans were $23.9 billion, down 2% from year-end. PPP loans declined to $405 million from $768 million; excluding PPP, management expects 2021 commercial loan growth of 2%–4%.
- Cash and cash equivalents ended the six months at $1.77 billion, up $1.06 billion. Six-month cash provided by operating, investing, and financing activities was $230 million, $249 million, and $577 million, respectively.
- At June 30, the allowance for loan losses was $318.8 million; the separate allowance for unfunded commitments was $45.3 million. Combined allowance for credit losses was $364.1 million, or 1.52% of loans.
- Nonaccrual loans were $147.1 million, down from $210.9 million at year-end; total nonperforming assets were $171.1 million. Nonaccrual loans were 0.61% of loans, and nonperforming assets were 0.50% of assets.
- Total short- and long-term funding was $2.40 billion. This included $1.62 billion of FHLB advances and $549 million of other long-term funding. The $300 million bank senior notes due in 2021 were redeemed on July 13, 2021, after quarter-end.
- Regulatory capital ratios included a 10.70% CET1 ratio, 11.81% Tier 1 ratio, 14.02% total capital ratio, and 9.23% Tier 1 leverage ratio. Management reported ratios above regulatory minimums.
Changes, outlook, and management commentary
- Noninterest income and reported earnings were materially lower than 2020, chiefly because 2020 included the ABRC sale gain and related insurance revenue. Associated sold wealth manager Whitnell in March 2021, recording an approximately $2 million pretax gain, and sold one Wisconsin branch in February.
- The company redeemed all outstanding Series C preferred stock for $65 million during Q2. It repurchased approximately $30 million of common stock in open-market purchases during the quarter. The board later declared a quarterly common dividend of $0.20 per share, up $0.02, payable in September 2021.
- Management’s 2021 outlook: full-year net interest margin of 2.45%–2.55%; noninterest income of $315–$325 million; and effective tax rate of 19%–21%, assuming no change in the federal corporate tax rate. Management expects provision expense to vary with credit quality, economic conditions, and loan volumes.
- Management withdrew its prior full-year expense guidance while developing growth and efficiency initiatives expected to be announced later in Q3. Before the impact of those initiatives, it estimated 2021 total expense at approximately $695–$700 million.
- Liquidity was reported in compliance with internal objectives, with sufficient asset-based liquidity under a stressed scenario. The Bank had $5.3 billion available for future FHLB advances and $684 million available for Federal Reserve discount-window borrowing at quarter-end.
Risks, contingencies, and unusual items
- Credit-loss reserves depend on management estimates and economic forecasts. The filing identifies the allowance, mortgage-servicing-rights valuation, goodwill impairment, and income taxes as estimates particularly susceptible to change.
- Off-balance-sheet commitments included $10.3 billion of commitments to extend credit and $251 million of standby letters of credit. These amounts are contractual commitments, not necessarily expected funding needs.
- A putative class action alleges fiduciary-duty breaches involving proprietary investment options and fees in the company’s 401(k)/ESOP plan. Management intends to defend the case; it could not assess the probability of a material adverse outcome or reasonably estimate potential loss.
- The filing notes potential regulatory actions or customer remediation concerning consumer products and fees; potential mortgage repurchase obligations; and increased cybersecurity, climate/ESG, tax-law, and regulatory risks. Management could not estimate potential losses for the cited regulatory matters.
- Management stated that the unrealized losses on investment securities at June 30 were primarily related to interest-rate and market changes, not credit deterioration, and that it did not intend or expect to be required to sell the affected securities before recovery.
Most important facts for investors to verify
- Whether the projected 2%–4% commercial loan growth, 2.45%–2.55% full-year margin, and $315–$325 million noninterest-income outlook are achieved.
- How management’s forthcoming growth and efficiency initiatives affect the withdrawn expense outlook and the preliminary $695–$700 million expense estimate.
- Whether credit quality and reserve releases remain supportable, particularly as PPP balances run off and economic conditions or borrower performance change.
- The effect of deposit levels and mix, low interest rates, and liquidity on net interest income and margin.
- Developments in the ERISA lawsuit, regulatory matters, mortgage repurchase exposure, and cybersecurity and other disclosed risks.