Associated Banc-Corp — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The filing is unaudited. Dollar amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2023 | Comparable period |
|---|---|---|
| Net interest income | $257.9 million | $216.1 million in Q2 2022 |
| Net interest margin | 2.80% | 2.71% in Q2 2022; 3.07% in Q1 2023 |
| Total revenue | $323.5 million | $291.6 million in Q2 2022 |
| Net income | $87.2 million | $86.8 million in Q2 2022; $103.4 million in Q1 2023 |
| Diluted earnings per share | $0.56 | $0.56 in Q2 2022; $0.66 in Q1 2023 |
| Provision for credit losses | $22.1 million | Negligible release in Q2 2022; $18.0 million provision in Q1 2023 |
| Noninterest income | $65.5 million | $75.5 million in Q2 2022 |
| Noninterest expense | $190.7 million | $181.4 million in Q2 2022 |
For the first six months, net income was $190.5 million, up from $161.1 million; diluted EPS was $1.22 versus $1.03. Net interest income increased 32% to $531.9 million and net interest margin rose to 2.93% from 2.57%. The Q2 sequential decline in margin reflected higher interest-bearing funding costs. Personnel, technology and FDIC assessment costs contributed to higher expenses.
Balance sheet, funding and liquidity
- At June 30, total assets were $41.2 billion, loans were $29.8 billion, and deposits were $32.0 billion. Loans rose 4% from year-end 2022; deposits rose 8%.
- Noninterest-bearing deposits were $6.6 billion, down from $7.8 billion at year-end. Brokered CDs were $3.8 billion, versus $542 million at year-end; management cited brokered CDs, other time deposits and network transaction deposits as sources of deposit growth.
- FHLB advances were $3.6 billion, down from $4.3 billion at year-end. Total short- and long-term funding, including FHLB advances, was $4.5 billion. The company issued $300 million of 6.625% subordinated notes in February.
- Cash and cash equivalents were $629.7 million. Six-month operating cash flow was $178.8 million; investing activities used $1.8 billion and financing activities provided $1.6 billion.
- Management reported compliance with internal liquidity objectives. Available liquidity was $12.0 billion, including $7.6 billion estimated available within one business day. Total available liquidity equaled 179% of estimated uninsured and uncollateralized deposits; secured funding alone covered 114%.
- Regulatory capital ratios included CET1 of 9.48%, Tier 1 capital of 10.07%, and total capital of 12.22%. These exceeded regulatory minimum requirements.
Credit quality and securities
- The allowance for loan losses was $338.8 million; the total allowance for credit losses on loans, including unfunded commitments, was $377.0 million, or 1.26% of loans. The first-half provision was $40.1 million, compared with a $4.0 million release in first-half 2022.
- Nonaccrual loans were $131.3 million, 0.44% of loans, versus $111.5 million and 0.39% at year-end. Nonperforming assets were $139.2 million, or 0.34% of assets. Potential problem loans rose to $343.2 million from $266.7 million at year-end, primarily reflecting commercial and industrial and investor CRE loans.
- Investor CRE totaled $5.3 billion; office represented 21% of that portfolio and 3% of total loan exposure. Management reported no loan concentration exceeding 10% of total loan exposure.
- AFS securities had $268.0 million of gross unrealized losses; HTM securities had $593.3 million. HTM fair value was $3.4 billion against $3.9 billion amortized cost. Management attributed unrealized losses primarily to interest rates and market conditions, and said it did not intend, and did not believe it would be required, to sell the securities before recovery.
Outlook, risks and unusual items
- For 2023, management expected period-end loan growth of 6%–8%, net interest income growth of 10%–12%, noninterest income compression of 8%–10%, and noninterest expense growth of 3%–4%. It expected core customer deposits to contract 3% for the year, with 2% growth in the second half, and a full-year effective tax rate of 20%–21%.
- The filing describes the company as asset-sensitive. A gradual 100-basis-point rate increase was estimated to raise 12-month earnings at risk by 1.9% in the dynamic forecast. An instantaneous 100-basis-point increase was estimated to reduce market value of equity by 8.8%; a 200-basis-point increase was estimated to reduce it by 17.5%, outside the policy limit and reported to the Board.
- The FDIC had proposed a special assessment of 12.5 basis points annually for two years on certain uninsured deposits, excluding the first $5 billion. Associated expected additional assessment expense; the full two-year expense would be recognized if the proposal is approved.
- The company disclosed an inadvertent lapse in registering ESPP share issuances: it estimated approximately 1.2 million shares were issued after registered shares were insufficient, beginning around mid-2018. It filed a Form S-8 on June 30, 2023 for an additional 1.0 million shares. The company said the matter created no additional dilution and was not expected to be material financially, but acknowledged possible regulatory penalties or claims.
- Management said pending legal proceedings were not expected to materially affect consolidated financial condition, while noting outcomes are uncertain. It also cited increased regulatory scrutiny of consumer mortgage and deposit products and fees; potential loss cannot currently be assessed or estimated.
- On July 25, 2023, the Board declared quarterly dividends of $0.21 per common share and the stated regular dividends on Series E and Series F preferred shares.
Important facts for investors to verify
- Whether deposit costs, brokered-CD usage and core deposit trends evolve in line with management’s outlook, and how they affect net interest margin.
- Whether nonaccrual and potential problem loans, especially commercial and investor CRE exposures, continue to rise and require additional provisioning.
- The treatment and potential cost of the proposed FDIC special assessment, and any developments related to the ESPP registration lapse or consumer-product regulatory matters.
- Whether unrealized securities losses, interest-rate sensitivity and the MVE policy-limit breach change materially, including any effects on capital or liquidity.
- Progress against the 2023 loan growth, net interest income, fee income, expense and deposit outlook; the filing notes that interim results are not necessarily indicative of full-year results.