Associated Banc-Corp — Q3 2022 Form 10-Q
Business context and reporting period. Associated Banc-Corp is a Wisconsin-based bank holding company. This unaudited quarterly report covers the three and nine months ended September 30, 2022; balance-sheet comparisons are primarily with December 31, 2021.
Key financial metrics
| Metric | Q3 2022 / Sep. 30, 2022 | Comparable period / change |
|---|---|---|
| Net interest income | $264.4 million for Q3 | Up 44% from Q3 2021; nine-month total $668.3 million, up 24% |
| Net interest margin | 3.13% fully tax-equivalent (FTE) | 2.38% in Q3 2021; nine-month FTE margin 2.76% versus 2.38% |
| Net income | $96.3 million for Q3 | $88.8 million in Q3 2021; nine-month net income was $257.4 million versus $274.1 million |
| Net income available to common equity / diluted EPS | $93.4 million / $0.62 | $84.7 million / $0.56 in Q3 2021; nine-month EPS was $1.65 versus $1.69 |
| Noninterest income / expense | $70.8 million / $195.8 million for Q3 | Q3 noninterest income fell 14% year over year; expense rose 10%. Nine-month totals were $220.7 million and $550.5 million |
| Loans / deposits | $27.8 billion / $29.2 billion | Loans up 15% and deposits up 3% from year-end 2021 |
| Cash and cash equivalents | $502.4 million | Down $523.1 million from year-end 2021 |
| Capital | CET1 ratio 9.41%; total capital ratio 11.41% | CET1 was 10.22% at year-end 2021; management reported ratios above regulatory minimums |
For the nine months, operating cash flow was $722.3 million, investing cash flow was negative $4.0 billion, and financing cash flow was positive $2.7 billion. Total assets were $38.0 billion. FHLB advances were $3.8 billion, up $2.2 billion from year-end 2021; deposits remained the company’s largest funding source.
Material changes versus prior periods
- Rate increases and balance growth lifted Q3 FTE net interest income to $269.3 million, 22% above Q2 2022 and 43% above Q3 2021. Interest expense also increased, including deposit costs.
- Mortgage banking income fell 61% for the first nine months, primarily as lower mortgage settlements reduced gains on loan sales. Total noninterest income declined 12% year over year for the same period.
- Loan growth included expansion in commercial lending, residential mortgages, and auto finance. Auto finance balances rose to $1.1 billion from $143 million at year-end 2021.
- The allowance for credit losses on loans was $292.9 million, or 1.20% of loans, versus $280.0 million at year-end. Nine-month provision was $13.0 million, compared with an $82.0 million release in 2021. Nonaccrual loans were $116.4 million, down from $130.4 million at year-end.
- Accumulated other comprehensive loss widened to $255.4 million from $10.3 million, largely reflecting market-value declines in securities as interest rates rose. The company transferred approximately $1.6 billion of AFS securities to HTM during Q1; management said unrealized losses were principally rate- and market-related and it did not intend or expect to need to sell impaired-position securities before recovery.
Outlook, risks, and unusual items
- Management expected 2022 net interest income above $935 million, assuming a 75-basis-point rate increase in November and 50-basis-point increase in December. It expected full-year noninterest expense of approximately $740–$750 million and an effective tax rate of about 21%.
- Management described the balance sheet as asset-sensitive: its 12-month dynamic earnings-at-risk estimate indicated a 4.6% increase for a gradual 100-basis-point rate increase. Conversely, an instantaneous 100-basis-point increase was estimated to reduce market value of equity by 4.2%.
- Liquidity management reported compliance with internal objectives and sufficient asset-based liquidity under a stressed scenario. Available borrowing capacity included $1.4 billion from the FHLB and $566 million at the Federal Reserve discount window.
- Q3 included a $5.7 million gain related to Visa Class B shares and a $6 million charitable remainder trust contribution recorded in other expense. The company also changed MSR accounting to fair value effective January 1, 2022, recording a $2.3 million cumulative-effect increase to retained earnings; subsequent valuation changes flow through mortgage banking income.
- Risks include interest-rate and securities valuation exposure, potential deterioration in credit quality, deposit funding costs, and uncertain consumer-product regulatory matters. The company said potential regulatory outcomes could not be assessed or reasonably estimated. It also disclosed an inadvertent purge of certain older documents for active accounts; impact was immaterial to date, but potential losses could not be estimated.
- A putative ERISA class action was dismissed on September 30, 2022; plaintiffs agreed not to appeal. The filing also describes ordinary-course legal proceedings and mortgage-loan repurchase obligations; the repurchase reserve was $1 million.
Important facts for investors to verify
- Whether loan growth and rate-driven net interest income can offset rising deposit and wholesale funding costs, and whether management’s 2022 outlook assumptions were achieved.
- Capital and liquidity trends, including the CET1 decline and increased reliance on FHLB advances as lending expands.
- Credit trends in commercial real estate, auto finance, and criticized or potential-problem loans, alongside the adequacy of the credit-loss allowance under changing economic conditions.
- The scale and persistence of unrealized securities losses, the effects of the AFS-to-HTM transfer, and sensitivity of MSR valuations to interest rates and prepayments.
- Developments in consumer-product regulatory reviews and the customer-document incident, for which the filing states potential losses cannot currently be estimated.