Associated Banc-Corp — Q1 2020 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2020, compared with Q1 2019 unless noted. Associated Banc-Corp is a Wisconsin-based regional bank. The quarter coincided with the onset of the COVID-19 pandemic and included the February 14 acquisition of First Staunton.
Key financial metrics
| Metric | Q1 2020 | Comparison |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $301.2 million | Down 2% from $306.7 million |
| Net interest income | $202.9 million | Down 6% from $215.5 million |
| Net interest margin | 2.84% | 2.90% in Q1 2019; 2.83% in Q4 2019 |
| Provision for credit losses | $53.0 million | $6.0 million in Q1 2019 |
| Net income | $45.8 million | Down from $86.7 million |
| Net income available to common equity; diluted EPS | $42.0 million; $0.27 | $82.9 million; $0.50 in Q1 2019 |
| Noninterest income / expense | $98.3 million / $192.2 million | Income up 8%; expense approximately flat year over year |
| Total assets / loans / deposits at quarter-end | $33.9 billion / $24.4 billion / $25.7 billion | From year-end 2019: assets up 5%, loans up 7%, deposits up 8% |
| Allowance for credit losses on loans, including unfunded commitments | $394.1 million | $223.3 million at year-end 2019 |
| Nonaccrual loans / nonperforming assets | $136.7 million / $165.3 million | Nonaccrual loans were $118.4 million at year-end |
| Regulatory capital | CET1 9.36%; total capital 12.56%; leverage 8.50% | CET1 was 10.21% at year-end 2019 |
| Cash flows | Operating $(20) million; investing $(928) million; financing $1.04 billion | Cash and restricted cash increased $90 million to $679 million |
Funding at March 31 included $3.21 billion of FHLB advances and $550 million of senior and subordinated notes, net of related adjustments, within $3.93 billion of total short- and long-term funding. Management reported $3.6 billion available for future FHLB advances and $1.3 billion available for Federal Reserve discount-window borrowing. It said liquidity objectives were met, including under internal stress scenarios.
Material changes versus the prior comparable period
- Lower interest rates reduced loan yields and net interest income; lower funding costs partly offset the decline. The Federal Reserve cut its target rate by 150 basis points in March.
- The $53 million credit-loss provision reflected CECL adoption and an increased expected-loss outlook amid COVID-19. CECL adoption added $131 million to allowances and reduced common equity by $98 million after tax; the allowance increase from year-end to quarter-end was $171 million.
- Noninterest income increased, including $6.1 million of net securities gains and stronger capital-markets and mortgage activity. Mortgage banking also included a $9.1 million MSR valuation allowance charge as rates fell.
- Commercial loans grew as customers drew on credit lines; First Staunton added approximately $370 million of loans and $439 million of deposits. March customer deposit inflows also contributed to deposit growth.
- Net charge-offs were $17.0 million, versus $7.4 million in Q1 2019. Nonaccrual loans increased $18 million from year-end, while potential problem loans increased $73 million to $233.9 million.
- Cash and cash equivalents increased, supported by deposit growth and reduced short-term funding. Associated repurchased approximately $77 million of common stock in Q1, then suspended its repurchase program on March 13, expecting the suspension to continue through 2020.
Outlook, management commentary, and risks
- Management expected 2020 mortgage banking to remain solid due to elevated refinancing, but anticipated lower service charges and other fee-based revenue from customer relief measures and lower wealth-management fees from weaker asset markets. It expected noninterest expense to remain at roughly the Q1 run rate for the rest of 2020.
- Management expected the loan-to-deposit ratio to remain below 100%, excluding PPP loans. No full-year earnings or margin guidance is provided in the supplied filing text.
- By May 6, the company reported 6,422 PPP loans originated for $1.02 billion, with $982 million outstanding, and anticipated most would be forgiven by the SBA by September 30. PPP loans carry a 1% rate if not forgiven; the filing notes potential forgiveness, fraud, documentation, and supervisory risks.
- As of May 6, COVID-19 deferrals covered 2,545 loans with $1.32 billion in balances; more than 800 additional consumer deferral requests were in process. The company warned that deferrals and forbearance could reduce borrower payments and fee income and that reserves might need to rise further.
- COVID-19, unemployment, business closures, reduced market rates, and uncertainty about economic reopening pose material credit, earnings, liquidity, operational, and market risks. Elevated-risk lending exposures identified by the company included retail and shopping centers, oil and gas, hotels, and restaurants. Oil-and-gas loans totaled $466 million outstanding; the related allowance was 16.6% of that portfolio at quarter-end.
- After quarter-end, the company agreed to sell Associated Benefits & Risk Consulting for $265.755 million in cash, subject to adjustments and customary closing conditions; closing was expected late Q2 or early Q3 2020. The board declared a $0.18-per-share common dividend for June 2020.
- Management reported no material adverse legal proceeding known to it, but noted consumer-product regulatory matters for which potential loss could not be estimated. It also identified goodwill impairment, mortgage-servicing-rights valuation, credit estimates, and taxes as judgment-sensitive areas.
Important facts for investors to verify
- How much of the credit allowance increase reflects CECL adoption versus the worsening COVID-19 outlook, and how reserves evolve as borrower performance and economic forecasts change.
- Actual performance of deferred loans, particularly commercial real estate and industries identified as vulnerable, and trends in nonaccrual and potential problem loans.
- PPP loan forgiveness, repayment, yield, and any related fraud, compliance, or supervisory issues.
- Whether low rates, deposit pricing, and loan mix continue to pressure net interest income and margin, and whether fee income matches management’s expectations.
- Capital and liquidity trends, including the CET1 decline, the effects of CECL transition relief, funding costs, and use of available borrowing capacity.
- Completion and proceeds of the proposed insurance-consulting business sale, and any associated changes to earnings or capital.