Associated warns of a shrinking loan book in fourth quarter

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Associated Banc-Corp in Green Bay, Wis., which reported a big increase in quarterly earnings, warned that its results in the fourth quarter may not be as stellar.

The $33.5 billion-asset company said in a press release Thursday that its third-quarter profit rose 33% from a year earlier, to $84 million.

Average loans rose 10%, to $23 billion, but were flat from June 30. The commercial real estate portfolio fell $285 million from June 30, and CEO Philip Flynn said during a conference call to discuss quarterly results that the book would likely shrink more in the fourth quarter.

“Debt funds and nonbank entities have become more competitive, impacting both new production and contributing to higher-than-expected payoffs,” Flynn said. “We expect lower net CRE outstanding loans through the winter. While this will be partially offset by anticipated commercial and residential lending activity, our overall average loan balance is expected to be modestly lower in the fourth quarter.”

Flynn said he expects conditions to improve in 2019.

“We have a really strong CRE team in the upper Midwest," he said. "I have full confidence that they are out looking for and finding quality transactions for us. On top of that, the commercial-and-industrial pipeline looks really good, so we’re optimistic about that as well.”


Mortgage banking is also clouding Associated’s fourth-quarter outlook.

Net income from residential lending fell 33% from the second quarter and 43% from a year earlier, to $4 million.

“In general, we have less production in the fourth quarter, so the gain on sale will likely come down” even more, Flynn said.

On a positive note, Associated reported strong deposit growth and solid credit quality.

Deposits increased by 9% from a year earlier, to $24.7 billion. The growth “allowed us to further reduce our higher-cost network deposits,” Flynn said.

Associated reported a negative provision of $5 million. Nonaccrual loans fell 47% from a year earlier, to $154 million.

“If you think about this quarter, with essentially no loan growth and an improving portfolio, with nonaccruals coming down ... and all the other indicators getting better, you can see why we ended up with a negative provision,” Flynn said.

Associated, which completed its $485 million purchase of Bank Mutual in February, reported $3 million of merger-related charges in the third quarter. Flynn said there should be no more charges tied to that deal.

Acquisition-related expenses of $32 million were 20% lower than the $40 million Associated forecast when it announced the deal last year. The company is forecasting total noninterest expense of $196 million to $198 million in the fourth quarter, down from the $204 million it incurred in the third quarter.

Given the apparent success of its integration efforts, Flynn said any future acquisition activity would resemble the in-market Bank Mutual transaction.

“We are well aware of how the market seems to feel about … acquisitions which seem to extend a franchise," Flynn said. "That hasn’t been terribly successful for the acquirers — at least as far as the market is concerned."

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