ASSOCIATED BANC-CORP quarterly report, Q2 FY2022

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Associated Banc-Corp — Q2 2022 Form 10-Q

Business context and period: Regional bank holding company headquartered in Wisconsin. This unaudited report covers the quarter and six months ended June 30, 2022; balance-sheet comparisons are to December 31, 2021 unless noted. Amounts below are in U.S. dollars.

Financial performance and condition

  • Q2 earnings: Net interest income was $216.1 million, up 20% from Q2 2021. Net income was $86.8 million versus $91.0 million; net income available to common shareholders was $83.9 million, or $0.56 per diluted share, versus $86.1 million and $0.56 per share.
  • Six-month results: Net interest income was $403.9 million, up 14%; net income was $161.1 million, down 13%; and diluted EPS was $1.03 versus $1.13. Net interest margin on a fully tax-equivalent basis was 2.57%, compared with 2.38%.
  • Margin and revenue: Q2 fully tax-equivalent net interest margin was 2.71%, up 34 basis points year over year and 29 basis points sequentially. Q2 total revenue (net interest income plus noninterest income) was $291.6 million, up 15% year over year. Six-month noninterest income fell 11% to $149.9 million, mainly because mortgage banking declined as mortgage settlements and gains on loans sold fell.
  • Expenses and credit costs: Q2 noninterest expense was $181.4 million, up 4% year over year; six-month expense was $354.7 million, up 1%. The company recorded a $2 million Q2 provision release and a $4 million release for the first half, compared with releases of $35 million and $58 million, respectively, in the prior-year periods.
  • Balance sheet and lending: Total assets were $37.2 billion, up 6% from year-end. Loans were $26.5 billion, up 9%; deposits were $28.6 billion, up $110 million. Commercial loans were 63% of loans; consumer loans included $848 million of auto finance loans, up substantially as the business expanded.
  • Asset quality: Nonaccrual loans were $108.3 million, or 0.41% of loans, down from $130.4 million and 0.54% at year-end. Nonperforming assets totaled $126.3 million. Potential problem loans were $279.5 million, down from year-end but up from $196.2 million a year earlier. Allowance for credit losses on loans and unfunded commitments was $317.5 million, or 1.20% of loans.
  • Cash flow and liquidity: In the first half, operating cash flow was $489 million, investing cash use was $2.68 billion, and financing cash flow was $2.03 billion. Cash and cash equivalents ended at $867 million, down $158 million from year-end. Management said the company met internal liquidity objectives and had sufficient asset-based liquidity under a stressed scenario; available FHLB funding was $1.3 billion and discount-window capacity was $645 million.
  • Funding, capital and equity: FHLB advances rose to $3.26 billion from $1.62 billion at year-end, primarily supporting loan growth. CET1 was 9.70%, total risk-based capital was 11.74%, and the company said capital ratios exceeded regulatory minimums. Stockholders’ equity was $3.96 billion, down from $4.02 billion; accumulated other comprehensive loss widened to $182.8 million, substantially reflecting market-value declines in securities.

Material changes and unusual items

  • The company transferred approximately $1.62 billion of available-for-sale securities to held-to-maturity in Q1, citing intent and ability to hold them to maturity. At June 30, gross unrealized losses were $176 million on AFS securities and $480 million on HTM securities; management attributed AFS losses primarily to interest-rate and market changes, not credit deterioration, and said it did not expect to sell the securities before recovery.
  • Effective January 1, 2022, the company irrevocably elected fair-value accounting for mortgage servicing rights (MSRs). The election added approximately $2 million to opening retained earnings; subsequent fair-value changes flow through mortgage banking income. MSRs were $76.6 million at June 30, compared with $54.9 million at year-end.
  • Federal Reserve rate increases supported higher loan and investment income and an asset-sensitive earnings profile. However, the company’s market-value-of-equity analysis showed an estimated 3.0% decline under an instantaneous 100-basis-point rate increase.
  • On July 20, 2022, the company eliminated several overdraft-related fees and reduced the daily limit on overdraft fee occurrences. The board declared regular quarterly common and preferred dividends on July 26.

Guidance, risks and contingencies

  • 2022 outlook: Management expected commercial loan growth, including asset-based lending and equipment finance, of approximately $1.7 billion and auto-finance growth of approximately $1.3 billion. It expected net interest income above $890 million, assuming a 75-basis-point July rate increase and 25-basis-point increases at each remaining FOMC meeting; noninterest income of $290–$300 million; noninterest expense of approximately $730–$740 million; and a full-year effective tax rate near 21%. These are forward-looking estimates, not guarantees.
  • Management cited inflation, rising rates, geopolitical uncertainty, supply-chain disruption and possible recession as risks to credit quality, deposits, loan demand, collateral values and earnings. Real-estate exposure is material; management described no loan concentration above 10% of total loan exposure.
  • Interest-rate sensitivity estimates indicated a 5.4% increase in 12-month earnings at risk under a gradual 100-basis-point increase in the dynamic forecast, but a 3.0% decline in market value of equity under an instantaneous 100-basis-point increase. Results depend on assumptions and do not include all potential management actions.
  • Contingencies include an ERISA-related lawsuit for which management could not assess the likelihood or estimate potential loss; regulatory scrutiny of consumer products and fees with no estimable outcome; and inadvertent purging of some documents for active accounts, whose potential loss also could not be estimated. The mortgage repurchase reserve was $1 million.
  • Management said disclosure controls were effective at June 30, 2022. The filing cautions that interim results are not necessarily indicative of full-year results.

Important facts for investors to verify

  • Whether loan growth and the expected commercial and auto-finance expansion are achievable without weakening underwriting or asset quality.
  • How rising deposit and wholesale funding costs affect the projected net interest income and margin, particularly relative to the rate assumptions underlying guidance.
  • Whether unrealized securities losses, including those in the HTM portfolio, affect future liquidity, capital flexibility or interest income.
  • Trends in potential problem loans, commercial real-estate exposure, nonaccruals and the adequacy of credit-loss allowances as economic forecasts change.
  • Actual performance against 2022 income and expense guidance, and developments in the lawsuit, regulatory matters and document-retention incident.