Associated Banc-Corp — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated results. Comparisons are with the corresponding 2019 period unless otherwise noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $189.9 million | $213.6 million | $392.8 million | $429.2 million |
| Provision for credit losses | $61.0 million | $8.0 million | $114.0 million | $14.0 million |
| Noninterest income | $254.5 million | $95.8 million | $352.8 million | $187.0 million |
| Noninterest expense | $183.4 million | $197.8 million | $375.6 million | $389.5 million |
| Net income | $148.7 million | $84.7 million | $194.6 million | $171.3 million |
| Diluted EPS | $0.94 | $0.49 | $1.20 | $0.99 |
| Net interest margin, fully tax-equivalent | 2.49% | 2.88% | 2.66% | 2.89% |
Financial position, liquidity and capital
- At June 30, total assets were $35.5 billion, up 10% from year-end 2019. Loans were $24.8 billion, up 9%, including $1.0 billion of Paycheck Protection Program (PPP) loans. Deposits were $26.6 billion, up 12% from year-end.
- Cash and cash equivalents were $2.0 billion. Management reported compliance with internal liquidity objectives and $4.7 billion available for future Federal Home Loan Bank advances and $1.2 billion available through the Federal Reserve discount window.
- Total short- and long-term funding, including FHLB advances and the Paycheck Protection Program Liquidity Facility (PPPLF), was $4.4 billion. PPPLF borrowings were $1.0 billion; the filing expects the underlying PPP loans and related funding to pay down mostly in late 2020 and early 2021.
- Six-month operating cash flow was $286 million; investing activities used $1.3 billion and financing activities provided $2.5 billion. Cash, cash equivalents and restricted cash increased $1.4 billion from year-end.
- Regulatory capital ratios at June 30: CET1 10.25%, Tier 1 capital 11.62%, total capital 13.83%, and Tier 1 leverage 9.08%. The company issued $100 million of Series F preferred stock for approximately $97 million net proceeds.
Material changes and unusual items
- Q2 and six-month earnings include a $163 million pretax gain on the June 30 sale of Associated Benefits & Risk Consulting (ABRC). The stated purchase price was $266 million in cash, subject to adjustments; net cash received was $257 million. The company also expects no insurance revenue after the sale.
- Net interest income and margin declined as market rates fell and low-yielding PPP loans and excess cash increased. Average interest-bearing liability cost fell to 0.83% for the first half from 1.53% a year earlier.
- Noninterest income also reflected stronger mortgage banking activity, with higher loan-sale gains and a $17 million MSR valuation charge for the first half. Service charges and card fees weakened, which management attributed in part to COVID-19 effects.
- The company adopted CECL on January 1, increasing the allowance for loan losses by $112 million and the allowance for unfunded commitments by $19 million, with a $98 million after-tax reduction to common equity. At June 30, the allowance for loan losses was $363.8 million; the separate allowance for unfunded commitments was $64.8 million.
- Nonperforming loans rose to $171.6 million from $118.4 million at year-end; potential problem loans rose to $306.8 million from $161.1 million. Six-month net charge-offs were $43.5 million, including significant oil-and-gas-related charge-offs.
- The First Staunton acquisition closed in February, adding approximately $370 million of loans and $439 million of deposits. The company completed the sale of $261 million of less-liquid securities in Q2, reinvesting proceeds in more liquid securities.
Outlook, commentary and risks
- Management expects full-year 2020 net interest margin of 2.55%–2.60%, and provision for loan losses to be lower in the second half than the first half. It expects mortgage banking to remain elevated in Q3, service charges to return to more normal levels in the second half, and quarterly noninterest expense of about $175 million for the remainder of 2020.
- Management expects a 2020 loan-to-deposit ratio of approximately 90%, excluding PPP loans, and an effective tax rate of 18% or less if planned tax strategies are successfully completed.
- COVID-19 remains the principal uncertainty: borrowers faced deferrals, forbearance and disrupted business activity. At June 30, $1.55 billion of loans were in COVID-19 deferral programs. Management cautioned that credit losses could materially exceed current reserves.
- Oil and gas exposure was $432 million outstanding across 35 credits, with an ACLL equal to 19.4% of that exposure. Other identified vulnerable exposures included retail and shopping centers, hotels and restaurants.
- Other risks include prolonged low rates pressuring net interest income, PPP forgiveness and guarantee/operational risks, cybersecurity and vendor disruption from remote work, possible goodwill impairment, legal or regulatory actions, and uncertainty around the LIBOR transition. Management reported no material adverse legal proceeding expected at the time of filing.
- The board declared a regular $0.18 common dividend for September 2020. The common share repurchase program remained suspended for the rest of 2020.
Important facts for investors to verify
- How PPP loan forgiveness, timing of paydowns and PPPLF repayment develop, and the resulting effects on loan balances, yields and deposits.
- Whether credit quality and criticized loans continue to deteriorate, particularly in commercial real estate, oil and gas, and other COVID-affected industries; assess reserve adequacy against future conditions.
- Whether the forecast second-half provision, full-year margin range and expense run rate are achieved, given economic and interest-rate uncertainty.
- Whether the ABRC sale proceeds and gain, planned tax strategies, and expected tax rate are consistent with reported results and subsequent disclosures.
- How liquidity, funding costs, capital ratios and dividend capacity evolve as stimulus-related deposits and temporary funding unwind.