Associated Banc-Corp — Q3 2021 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and nine months ended September 30, 2021. Associated Banc-Corp is a regional bank holding company. Comparisons below are year over year unless stated otherwise; balance-sheet comparisons are against December 31, 2020.
Financial performance
| Metric | Q3 2021 | Nine months 2021 | Comparable period |
|---|---|---|---|
| Net interest income | $183.7 million | $539.1 million | Q3: $182.2 million; nine months: $575.0 million |
| Net interest margin | 2.38% | 2.38% | Q3: 2.31%; nine months: 2.54% |
| Net income | $88.8 million | $274.1 million | Q3: $45.2 million; nine months: $239.8 million |
| Net income available to common equity | $84.7 million | $259.9 million | Q3: $40.0 million; nine months: $226.6 million |
| Diluted EPS | $0.56 | $1.69 | Q3: $0.26; nine months: $1.46 |
| Noninterest income | $82.1 million | $250.9 million | Q3: $75.5 million; nine months: $428.3 million |
| Noninterest expense | $177.9 million | $527.7 million | Q3: $227.6 million; nine months: $603.2 million |
- Q3 revenue (net interest income plus noninterest income) was $265.8 million, up 3%. Nine-month revenue was $790.0 million, down 21%, mainly reflecting the prior-year $163 million gain on the sale of ABRC and the loss of its insurance revenue.
- Credit-loss provision was a release of $24.0 million in Q3 and $82.0 million year to date, versus provision expense of $43.0 million and $157.0 million, respectively, in 2020. Q3 improvement reflected improving credit quality and economic forecasts.
- For the nine months, operating cash flow was $364 million, investing cash flow was negative $162 million, and financing cash flow was $768 million. Cash and cash equivalents increased about $970 million to $1.686 billion.
Balance sheet, funding and capital
- Total assets were $34.44 billion. Loans were $23.62 billion, down 3% from year-end; deposits were $27.85 billion, up 5%. Management attributed deposit growth largely to stimulus-related inflows and changed customer saving habits.
- Cash and interest-bearing deposits at other financial institutions totaled about $1.66 billion. The bank reported $5.1 billion of available FHLB borrowing capacity and $731 million available at the Federal Reserve discount window, and said it met internal liquidity objectives under stressed scenarios.
- Total short- and long-term funding was $2.19 billion, down from $2.43 billion at year-end. FHLB advances were $1.62 billion; the $300 million senior notes were redeemed in July 2021. The $250 million subordinated notes mature in 2025.
- Allowance for loan losses was $291.0 million; including the unfunded-commitment allowance, total allowance for credit losses on loans was $332.3 million, or 1.41% of loans. CET1, total risk-based capital and Tier 1 leverage ratios were 10.57%, 13.50% and 8.81%, respectively.
Material changes and management outlook
- Asset quality improved: nonaccrual loans declined to $135 million from $211 million at year-end, and nonperforming assets fell to $169 million from $225 million. Year-to-date net charge-offs were $17 million versus $73 million in 2020. Commercial real estate-investor lending still accounted for $62 million of nonaccrual loans.
- Net interest income declined 6% year to date and nine-month margin fell to 2.38% from 2.54%, principally due to low rates and excess liquidity held in lower-yielding assets. Q3 margin improved year over year and was broadly stable sequentially.
- Management’s 2021 expectations: commercial loan growth, excluding PPP, of about 2%; full-year net interest margin of about 2.40%; noninterest income at the upper end of $315–$325 million; noninterest expense of about $705–$711 million, including initiatives and proposed facilities-exit costs; and an effective tax rate of 19%–21%. Fourth-quarter provision was expected to vary with credit grades, economic conditions and loan volume.
- A September strategy emphasized commercial and consumer lending growth, new lending capabilities and digital transformation. The company plans to redirect $50 million over five years to digital investment, with incremental costs expected to be funded by savings from branch and back-office consolidation and legacy IT changes.
- In Q3 the company repurchased $60 million of common stock and redeemed $99 million of Series D preferred stock; it had also redeemed $65 million of Series C preferred stock in Q2. After quarter-end, the board authorized up to $100 million of additional common-stock repurchases and declared a $0.20-per-share common dividend.
- Other notable items: Whitnell was sold in March 2021, producing a $2 million pretax gain; the 2020 ABRC sale materially affects year-over-year comparisons. Unrealized AFS securities losses increased, primarily attributed by management to interest-rate and market changes rather than credit deterioration.
Risks, contingencies and items to monitor
- Interest-rate exposure is material: management described the balance sheet as asset-sensitive, with modeled 12-month earnings-at-risk gains of 5.8% under a gradual 100-basis-point increase and 12.1% under a 200-basis-point increase. Conversely, modeled market value of equity fell 1.2% and 2.6% under instantaneous increases of 100 and 200 basis points.
- Risks disclosed include credit deterioration and economic forecast uncertainty; LIBOR transition for certain adjustable-rate loans; cybersecurity and operational disruption; potential tax-law changes; heightened merger and consumer-data regulation; ESG and climate-related risks; and U.S. fiscal and debt-ceiling uncertainty. Moody’s outlook was negative; S&P’s was stable.
- The company disclosed a putative ERISA class action concerning investment options and fees in its retirement plan; management said it intends to defend the case and could not assess the probability or estimate potential loss. It also noted regulatory scrutiny of consumer products and fees, for which a material outcome could not be estimated.
- Commitments to extend credit were approximately $10.6 billion in the financial-statement note; the contractual-obligations table reports $11.0 billion. Verify the differing presentation and scope in the filing. These commitments are not necessarily expected cash outflows.
Important facts for investors to verify
- Whether loan and deposit trends, and the stated 2021 targets, were achieved; in particular, growth excluding PPP and the expected full-year margin.
- Whether improving nonaccrual loans, charge-offs and credit-loss releases remain sustainable, and how CRE-investor and other criticized exposures evolve.
- How rate changes affect both net interest earnings and securities values, including the reported AFS unrealized losses and the assumptions behind sensitivity estimates.
- Execution and costs of the digital, branch and back-office initiatives, including whether savings fund the planned investment and expense outlook.
- Developments in the ERISA litigation, consumer-product regulatory matters, cybersecurity exposure, and capital and liquidity ratings.