Associated Banc-Corp — Q1 2023 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2023, compared mainly with Q1 2022; balance-sheet comparisons are to December 31, 2022. Associated Banc-Corp is a regional banking holding company. Amounts below are in U.S. dollars; “million” and “billion” are abbreviated as applicable.
Key financial results and position
| Metric | Q1 2023 / Mar. 31, 2023 | Comparable period / change |
|---|---|---|
| Net interest income | $274.0 million | Up 46% from $187.7 million in Q1 2022 |
| Net interest margin | 3.07% fully tax-equivalent | 2.42% in Q1 2022; down from 3.31% in Q4 2022 |
| Net income / diluted EPS | $103.4 million / $0.66 | $74.3 million / $0.47 in Q1 2022 |
| Noninterest income / expense | $62.1 million / $187.4 million | Income down 17%; expense up 8% year over year |
| Provision for credit losses | $18.0 million | $4.0 million release in Q1 2022 |
| Loans / deposits | $29.2 billion / $30.3 billion | Loans up 19% year over year; deposits up 7% |
| Cash and cash equivalents | $822.8 million | Up $201.4 million from year-end 2022 |
| Funding | FHLB advances $5.0 billion; short-term funding $226.6 million; other long-term funding $544.1 million | FHLB advances up $666 million from year-end; long-term funding increase primarily reflects a February subordinated-note issuance |
| Capital | CET1 ratio 9.45%; total capital ratio 12.22% | Both above regulatory minimums, according to the filing |
Cash flows were $47.5 million provided by operating activities, $1.08 billion used in investing activities, and $1.23 billion provided by financing activities. Financing included deposit growth, increased FHLB advances, and $292.7 million of proceeds from long-term funding.
Material changes and credit quality
- Higher rates and loan growth lifted interest income, but funding costs rose sharply: interest expense was $168.8 million versus $14.5 million in Q1 2022. Sequentially, higher interest-bearing liability costs reduced fully tax-equivalent net interest income by 5% and margin by 24 basis points from Q4 2022.
- Average loans were $28.8 billion, up $4.7 billion year over year; average deposits were $29.9 billion, up $1.2 billion. Noninterest-bearing demand deposits declined, while interest-bearing deposits and funding costs increased.
- Noninterest income fell, notably mortgage banking (down 58%), capital markets (down 41%), and service charges and deposit fees (down 23%), year over year. Lower mortgage activity, MSR valuation expense, reduced swap and syndication activity, and fee reductions contributed.
- Noninterest expense rose 8%, chiefly from personnel, technology, and FDIC assessment costs. Management cited staffing and strategic investments.
- The allowance for credit losses on loans was $326.4 million, or 1.25% of loans, and the allowance including unfunded commitments was $366.2 million. Nonaccrual loans were $117.6 million, up $6.1 million from year-end; nonperforming assets were $132.8 million. Potential problem loans were $258.7 million, down $7.9 million from year-end.
- Gross unrealized losses were $226.4 million on available-for-sale securities and $547.3 million on held-to-maturity securities. Management attributed AFS losses primarily to interest rates and market conditions, and stated it did not intend or expect to be required to sell the securities before recovery.
Outlook, risks and notable items
- Management’s 2023 expectations: period-end loan growth of 6%–8%; average core customer deposit growth of 1%–3%; net interest income growth of 13%–15%; noninterest income compression of 8%–10%; and noninterest expense growth of 4%. It expects a full-year effective tax rate of 20%–21%. Credit-loss provision will be adjusted for risk grades, economic conditions, loan volumes, and other credit indicators.
- At March 31, estimated uninsured and uncollateralized deposits were $7.34 billion, or 24.3% of deposits. The bank reported $13.8 billion in total available liquidity and coverage of those deposits of 87% from secured funding and 188% from total funding. Management said liquidity objectives were met, including under a stressed scenario.
- After quarter-end, Moody’s downgraded the company’s and bank’s long-term ratings one notch on April 21. From April 14–19, the company issued $1.8 billion of brokered CDs at 4.75%–4.95%, with maturities of one to 15 months, to repay comparably priced FHLB advances. As of April 19, secured-funding coverage of uninsured and uncollateralized deposits was 103%, and total-funding coverage was 177%.
- Management identifies risks from regional-bank-sector volatility, deposit outflows and uninsured deposits, reliance on brokered funding, rising funding costs, potential additional FDIC assessments or regulatory changes, interest-rate movements, and credit quality. CRE investor loans totaled $5.1 billion; office exposure was 24% of that portfolio and 3% of total loan exposure.
- Other items: the company issued $300 million of 6.625% subordinated notes due 2033 in February. The Board declared a $0.21 common dividend payable June 15, 2023. First-quarter share repurchases were $5 million, all for equity-compensation tax withholding; there were no open-market purchases. Management disclosed pending legal matters and regulatory scrutiny of certain consumer products but said it could not estimate potential losses for the regulatory matters.
Important facts for investors to verify
- Deposit stability, uninsured balances, brokered-CD levels and pricing, and liquidity availability following the April funding actions and ratings downgrade.
- Whether management’s 2023 loan, deposit, net-interest-income, fee-income, and expense expectations remain achievable as funding costs and deposit mix evolve.
- Credit performance, particularly changes in nonaccrual and potential problem loans, CRE office exposures, charge-offs, and the adequacy of the allowance under changing economic conditions.
- Interest-rate sensitivity and the effect of unrealized securities losses on liquidity and capital if securities must be sold; review the filing’s AOCI treatment and capital disclosures.
- Potential impacts of additional FDIC assessments, regulatory changes, consumer-product remediation, and legal contingencies; the filing does not provide a clear estimate of possible losses for these matters.