A month has gone by since the last earnings report for Associated Banc-Corp (ASB). Shares have added about 10% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Associated Banc-Corp due for a pullback? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Associated Banc-Corp Q3 Earnings Beat, Provisions Up
Associated Banc-Corp’s third-quarter 2020 adjusted earnings of 24 cents per share topped the Zacks Consensus Estimate of 19 cents. The bottom line, nevertheless, slumped 51% year over year.
Improvement in loan and deposit balances, and lower adjusted operating expenses supported the results. However, lower interest rates, decline in fee income and a significant rise in provisions were the headwinds.
Results excluded restructuring charges pertaining to optimization of operations and improving efficiency, and tax benefits. After considering these, net income available to common shareholders was $40 million, down 50% year over year.
Revenues & Adjusted Expenses Fall
Net revenues were $257.7 million, down 16% year over year. Moreover, the top line missed the Zacks Consensus Estimate of $262.4 million.
Net interest income summed $182.2 million, down 12% from the year-ago quarter. NIM was 2.31%, down 50 basis points (bps).
Non-interest income declined 25% to $75.5 million. Decrease in insurance commissions and fees, and service charges and deposit account fees, along with net asset losses were the primary reasons for the fall.
Non-interest expenses increased 13% year over year to $227.6 million. This included costs related to restructuring initiatives undertaken during the quarter. Excluding these, expenses declined 16% to $167 million.
Efficiency ratio (on a fully tax-equivalent basis) was 83.25%, up from 64.78% in the prior-year quarter. A rise in efficiency ratio indicates deterioration in profitability.
As of Sep 30, 2020, both net loans and total deposits grew marginally on a sequential basis to $24.6 billion and $26.7 billion, respectively.
Credit Quality Deteriorates
Provision for credit losses were $43 million, up substantially from $2 million in the year-ago quarter. This rise was mainly due to a reserve build done to combat the coronavirus crisis. Also, the ratio of net charge-offs to annual average loans was 0.40% in the third quarter, up 26 bps from the year-ago quarter.
Moreover, as of Sep 30, 2020, total non-performing assets were $251.5 million, up 63% year over year. Further, total non-accrual loans were $231.6 million, jumping 80%.
Capital Ratios Improve & Profitability Ratios Down
As of Sep 30, 2020, Tier 1 risk-based capital ratio was 11.57%, up from the 11.26% recorded in the corresponding period of 2019. In addition, common equity Tier 1 capital ratio was 10.22% compared with 10.21% as of Sep 30, 2019.
Annualized return on average assets was 0.51%, down from the prior-year period’s 1.00%. Moreover, return on average tangible common equity was 6.36% compared with the year-ago quarter’s 13.27%.
Business Optimization Initiatives
During third-quarter 2020, Associated Banc-Corp started several initiatives that are expected to improve efficiency and earnings in 2021.
1. Branch optimization: Management plans to divest/consolidate roughly 9% of its branches following the changes in consumer behavior owing the coronavirus pandemic and rise in active mobile users. The company will be closing approximately 15 branches in Wisconsin with around $380 million in total deposits. Most of these branches are within three-mile radius of each other. Also, the company expects to retain nearly 80% of these deposits and will likely incur $4 million in restructuring charges.
Additionally, Associated Banc-Corp announced the sale of five Peoria branches to Morton Community Bank, with $208 million worth of deposits. Further, the bank will be selling two branches in SW Wisconsin to Royal Bank with $56 million in deposits. Both these deals are expected to close in December. The company will be receiving a 4% premium on deposits transferred.
These efforts are projected to result in $10 million in annual savings effective 2021 and generate net savings of $5-$7 million at close.
2. Internal efficiency initiatives: The company plans to strategically streamline corporate, managerial and back office functions, which will result in reduction in about 200 employees by 2020-end. Through this, management intends to save $30 million in cost effective 2021.
3. FHLB liability restructuring & Business Reorganization: The company repaid $950 million of Federal Home Loan Bank (FHLB) advances and incurred a $45 million prepayment charge in the third quarter of 2020. Further, Associated Banc-Corp reorganized its securities and real estate lending subsidiaries, which generated net income tax benefit of $49 million in the third quarter.
Notably, these initiatives are anticipated to improve NII by nearly $20 million next year and improve NIM by 6-7 bps in 2021 and 2022.
Management expects NIM in fourth-quarter 2020 to be approximately 2.50%. Further, fee revenues are likely to continue growing through the end of 2020.
Expenses are expected to be $175 million (including $3 million related to restructuring charges) in the fourth quarter and $685 million for 2021 (after taking in to consideration above-mentioned business optimization plan).
Effective tax rate is expected to be in low to mid-single digit for 2020 and 15-17% in 2021.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 61.82% due to these changes.
At this time, Associated Banc-Corp has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren’t focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Associated Banc-Corp has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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