It has been about a month since the last earnings report for Associated Banc-Corp (ASB). Shares have lost about 2.9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Associated Banc-Corp due for a breakout? 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 drivers.
Associated Banc-Corp Q2 Earnings In Line, Provisions Rise
Associated Banc-Corp’s second-quarter 2020 adjusted earnings of 26 cents per share came in line with the Zacks Consensus Estimate. The bottom-line figure, nevertheless, slumped 49%, year on year.
Rise in non-interest income, improvement in loan and deposit balances, as well as decreasing operating expenses supported the results. However, lower interest rates and a significant rise in provisions were the undermining factors.
Including gain on sale of Associated Benefits and Risk Consulting in the reported quarter, net income available to common shareholders was $145 million, up 79% year over year.
Revenues Improve, Expenses Fall
Net revenues were $444.4 million, significantly up 43.6% year over year. Moreover, the revenue figure beat the Zacks Consensus Estimate of $323.8 million.
Net interest income summed $190 million, reflecting a fall of 11.1% from the year-ago quarter. Net interest margin (NIM) was 2.49%, down 39 basis points (bps).
Non-interest income totaled $254.5 million, up significantly year over year. Increase in gains from asset sales, mortgage banking income and net capital markets fees primarily drove this uptick.
Non-interest expenses decreased 7.3% year over year at $183 million.
Efficiency ratio (on a fully tax-equivalent basis) was 42.46%, down from the prior-year quarter’s 61.13%. Fall in efficiency ratio indicates increase in profitability.
As of Jun 30, 2020, net loans were $24.5 billion, up 1.8% on a sequential basis. Total deposits increased 3.5% from the prior quarter to $26.5 billion.
Credit Quality Deteriorates
The company reported provision for credit losses of $61 million, up substantially from the year-ago quarter’s $8 million. 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 0.36% in the second quarter, up 18 bps from the year-ago quarter.
Moreover, as of Jun 30, 2020, total non-performing assets were $192.8 million, up 4.2% year over year. Further, total non-accrual loans were $172 million, up 3%.
Capital & Profitability Ratios Improve
As of Jun 30, 2020, Tier 1 risk-based capital ratio was 11.62%, up from the 11.19% witnessed in the corresponding period of 2019. In addition, common equity Tier 1 capital ratio was 10.25% compared with the 10.14% recorded at the end of the prior-year quarter.
Annualized return on average assets was 1.78%, up from 1.05% in the prior-year period. Moreover, return on average tangible common equity was 25.45% compared with the year-ago quarter’s 13.81%.
Management expects to maintain a loan-to-deposit ratio of about 90% for 2020, excluding the paycheque protection program (PPP). Further, the ratio of investments to total assets (excluding PPP) is projected to be 15%.
Additionally, the company expects PPP loans to be paid off mostly in fourth-quarter 2020 and early 2021.
It expects NIM to stabilize in the third quarter and somewhat recover in the fourth quarter. Overall, NIM is anticipated in the 2.55-2.60% range for 2020.
Among the fee income components, mortgage banking fees are expected to remain solid on increased refinancing activities in the third quarter. Service charges and other fee-based revenues are anticipated to return to normal levels over the remaining quarters of the year.
Operating expenses for the remaining quarters are projected at $175 million, given the $15 million quarterly reduction in the same following the sale of the insurance unit.
Loan loss provisions for the second half of 2020 are expected to be lower than the first-half level.
Effective tax rate for 2020 is expected to be 18% or less.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 8.7% due to these changes.
At this time, Associated Banc-Corp has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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 broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Associated Banc-Corp has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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