Associated Banc-Corp — Q3 2023 Form 10-Q
Business context and period. Regional bank holding company headquartered in Wisconsin. This unaudited 10-Q covers the quarter and nine months ended September 30, 2023; comparisons below are with Q3 or the first nine months of 2022 unless stated otherwise. Reportable segments are Corporate and Commercial Specialty; Community, Consumer, and Business; and Risk Management and Shared Services.
Financial performance and position
| Metric | Q3 2023 | Comparable period / change |
|---|---|---|
| Net interest income | $254.2 million | Down 4% year over year; fully tax-equivalent NII was $259.1 million, down 4% |
| Net interest margin | 2.71% fully tax-equivalent | Down 42 basis points year over year and 9 basis points sequentially |
| Net income | $83.2 million | $96.3 million in Q3 2022 |
| Net income available to common shareholders; diluted EPS | $80.4 million; $0.53 | $93.4 million; $0.62 in Q3 2022 |
| Provision for credit losses | $21.9 million | $17.0 million in Q3 2022 |
| Noninterest income / expense | $66.6 million / $196.2 million | Income down 6%; expense approximately flat year over year |
For the first nine months, net interest income rose 18% to $786.2 million and fully tax-equivalent net interest margin was 2.86%, versus 2.77%. Net income was $273.8 million, up from $257.4 million; diluted EPS was $1.75 versus $1.65. Noninterest income declined 12% to $194.2 million, while noninterest expense increased 4% to $574.3 million. Higher loan yields and balances supported interest income, but rising deposit and borrowing costs pressured quarterly margin. Fee income weakness included lower deposit fees and capital markets revenue; personnel, technology, and FDIC assessment costs increased.
Balance sheet at September 30, 2023: Assets were $41.6 billion; loans $30.2 billion, up 5% from year-end 2022; deposits $32.1 billion, up 8%. Noninterest-bearing deposits were $6.4 billion, down from $7.8 billion at year-end. Shareholders’ equity was $4.1 billion. The allowance for loan losses was $345.8 million, or 1.26% of loans; including unfunded commitments, the allowance for credit losses was $380.6 million.
Funding and liquidity: FHLB advances were $3.7 billion and other long-term funding was $529.5 million; the latter increased primarily after issuance of $300 million of 6.625% subordinated notes in February 2023. Total short- and long-term funding, excluding deposits, was $4.7 billion. Cash and cash equivalents were $712.8 million at quarter-end. For the nine months, operating cash flow was $378.1 million, investing cash outflow $2.2 billion, and financing cash inflow $1.9 billion. Management reported compliance with internal liquidity objectives and $12.4 billion of total available liquidity; that equaled 172% coverage of estimated uninsured and uncollateralized deposits. Such deposits were 22.4% of total deposits.
Capital and securities: The CET1 ratio was 9.55%, and the total capital ratio was 12.25%; management said capital ratios exceeded regulatory minimums. AFS securities had $324.7 million of gross unrealized losses and HTM securities $806.6 million at quarter-end, primarily attributed by management to interest rates and market conditions rather than credit deterioration. Accumulated other comprehensive loss was $339.1 million. HTM fair value was about 80.7% of amortized cost.
Material changes and credit developments
- Average loans for the first nine months increased 15% year over year to $29.4 billion. Period-end loans were up 9% year over year, with growth across major categories, including auto finance.
- Funding costs rose sharply: the nine-month cost of interest-bearing liabilities increased 249 basis points year over year. Average noninterest-bearing demand deposits fell 17%.
- Nonaccrual loans rose to $168.6 million from $111.5 million at year-end 2022; nonaccrual loans were 0.56% of loans. Nonperforming assets were $177.7 million, or 0.43% of assets.
- Potential problem loans reached $385.4 million, up 45% from year-end, primarily reflecting commercial and industrial and investor CRE exposures. Nine-month net charge-offs were $32.9 million, compared with $0.1 million in the prior-year period.
- Investor CRE was 17% of total loan exposure; office represented 21% of investor CRE exposure, or 3% of total loan exposure. Management reported no individual concentration above 10% of total loan exposure.
Outlook, risks, and contingencies
- Management’s 2023 outlook was 5%–6% period-end loan growth; 8%–10% net interest income growth; 8%–10% compression in noninterest income; 3%–4% growth in noninterest expense; and 20%–21% full-year effective tax rate. It also expected 3% core customer deposit compression for 2023, with 2% growth in the second half. These are filing-date expectations, not guarantees.
- The bank described its earnings-at-risk profile as asset-sensitive. Its modeled 12-month earnings response to a gradual 200-basis-point rate increase was positive 4.0% dynamically; however, modeled market value of equity fell 18.0% under an instantaneous 200-basis-point increase, outside the stated policy limit and reported to the Board.
- The FDIC had proposed a two-year special assessment of 12.5 basis points on certain uninsured deposits. The company expected additional expense if approved; it said the full two-year expense would then be recognized.
- The company was reviewing overdraft practices involving authorized-positive/settled-negative fees and repeat insufficient-funds fees. A July 2023 arbitration request seeks recovery of such fees on behalf of approximately 1,400 current and former customers. Management said it could not assess the probability or estimate potential loss.
- Various legal proceedings remain pending; management did not expect currently pending matters to materially adversely affect consolidated financial condition, while acknowledging outcomes could exceed reserves or affect results in a particular period. Mortgage repurchase reserve was approximately $0.7 million.
- After quarter-end, the Board declared a common dividend of $0.22 per share, up $0.01 from the previous quarterly dividend. The company cautioned that forward-looking statements are subject to risks and actual results may differ.
Important facts for investors to verify
- Whether deposit pricing, deposit mix, and funding costs stabilize enough to support net interest margin and the stated 2023 NII outlook.
- Subsequent trends in nonaccrual and potential problem loans, charge-offs, and allowance adequacy—especially in C&I, CRE, and auto finance.
- Liquidity and uninsured-deposit trends, including continued access to secured borrowing capacity and brokered funding.
- Exposure to persistent unrealized securities losses and interest-rate sensitivity, including the MVE policy-limit breach under the 200-basis-point up scenario.
- Any decision, regulatory action, or settlement related to overdraft-fee practices and the arbitration request, and the timing and cost of a potential FDIC special assessment.