It has been about a month since the last earnings report for Associated Banc-Corp (ASB). Shares have added about 7.6% 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 drivers.
Associated Banc-Corp Q1 Earnings Beat, Provisions Rise
Associated Banc-Corp’s first-quarter 2020 adjusted earnings of 28 cents per share comfortably outpaced the Zacks Consensus Estimate of a breakeven. However, the figure declined 46% from the prior-year reported number. Earnings in the reported quarter excluded certain acquisition-related costs.
Rise in non-interest income, improvement in loan and deposit balances, as well as relatively stable operating expenses supported the results. However, lower interest rates and a significant rise in provisions were the undermining factors.
Net income available to common shareholders (on a GAAP basis) was $42 million, down 49% year over year.
Revenues Down, Expenses Stable
Net revenues were $301.2 million, down 2% year over year. However, the figure beat the Zacks Consensus Estimate of $293.7 million.
Net interest income was $202.9 million, reflecting fall of 6% from the year-ago quarter. Net interest margin was 2.84%, down 6 basis points (bps).
Non-interest income totaled $98.3 million, up 8% year over year. Significant increase in mortgage banking income and net capital markets fees primarily drove the same.
Non-interest expenses remained relatively stable year over year at $192.2 million.
Efficiency ratio (on a fully tax-equivalent basis) was 68.47%, up from 61.83% in the prior-year quarter. Rise in efficiency ratio indicates deterioration in profitability.
As of Mar 31, 2020, net loans were $24 billion, up 6% on a sequential basis. Total deposits increased 8% from the prior quarter to $25.7 billion.
Credit Quality: Mixed Bag
The company reported provision for credit losses of $53 million, up substantially from $6 million in the prior-year quarter. The rise was mainly due to a reserve build, done to combat coronavirus-related woes. Also, the ratio of net charge-offs to annualized average loans was 0.29% in the first quarter, up 16 bps. However, as of Mar 31, 2020, total non-performing assets were $165.3 million, down 2% year over year. Further, total non-accrual loans were $136.7 million, down 12%.
Capital & Profitability Ratios Deteriorate
As of Mar 31, 2020, Tier 1 risk-based capital ratio was 10.35%, down from 11.36% in the corresponding period of 2019. In addition, common equity Tier 1 capital ratio was 9.36% compared with 10.30% at the end of the prior-year quarter.
Annualized return on average assets was 0.57%, down from 1.05% in the comparable prior-year period. Moreover, return on average tangible common equity was 7.31% compared with 14.52% in the corresponding year-ago period.
Share Repurchase Update
During the first quarter, Associated Banc-Corp repurchased nearly 4 million shares for $71 million. In mid-March, it suspended the share buyback plan “until economic conditions improve and stabilize” to enhance liquidity levels amid coronavirus concerns.
Management is withdrawing the prior 2020 outlook “due to extraordinary economic uncertainty” and plans to update the same as “conditions become more clear.”
The company expects to maintain loan-to-deposit ratio of less than 100%, excluding the paycheque protection program (PPP). Further, it expects the ratio of investments to total assets (excluding PPP) to be 15%.
Among fee income components, mortgage banking fees are expected to remain solid driven by elevated refinancing activities. Service charges and other fee-based revenues are anticipated to be low due to the company’s “COVID-19 Relief Program”. Muted market conditions for assets under management will likely result in lower wealth management fees.
Operating expenses for the remaining quarters of 2020 are projected to be relatively stable with the first-quarter level.
Effective tax rate will likely be in the range of 18-20%.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted 197.3% due to these changes.
Currently, Associated Banc-Corp has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions looks promising. It's no surprise Associated Banc-Corp has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.
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