Associated Banc-Corp — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited consolidated results; balance-sheet comparisons are to December 31, 2021 unless stated otherwise. Dollar amounts below are in millions except per-share data and ratios.
Business context and financial performance
Associated Banc-Corp is a bank holding company. Its reportable businesses are Corporate and Commercial Specialty; Community, Consumer, and Business; and Risk Management and Shared Services.
| Metric | Q1 2022 | Comparable period |
|---|---|---|
| Total revenue | $262.2 | $271.2 in Q1 2021, down 3% |
| Net interest income | $187.7 | $175.9 in Q1 2021, up 7% |
| Fully tax-equivalent net interest margin | 2.42% | 2.39% in Q1 2021 |
| Provision for credit losses | $4.0 release | $23.0 release in Q1 2021 |
| Noninterest income | $74.5 | $95.3 in Q1 2021, down 22% |
| Noninterest expense | $173.3 | $175.3 in Q1 2021, down 1% |
| Net income | $74.3 | $94.3 in Q1 2021 |
| Net income available to common equity | $71.4 | $89.1 in Q1 2021 |
| Diluted EPS | $0.47 | $0.58 in Q1 2021 |
Net interest income benefited from higher investment income and lower funding costs, partly offset by lower PPP lending income. Noninterest income fell chiefly because mortgage banking revenue declined to $8.4 million from $23.9 million, reflecting fewer mortgage settlements and lower gains on loans sold. The provision release narrowed year over year. The effective tax rate was 20.07%, versus 20.69%.
Financial position, cash flow, and liquidity
- Total assets were $35.0 billion; loans were $24.5 billion, up $307 million from year-end. Deposits were $28.4 billion, down $61 million from year-end and up $728 million year over year. Average deposits were $28.6 billion, up 7% year over year.
- Cash and cash equivalents were $501 million, down $524 million during the quarter. Operating activities provided $246 million; investing activities used $640 million; financing activities used $131 million.
- Shareholders’ equity was $3.95 billion. CET1 was 10.22%, Tier 1 capital 10.91%, and total capital 12.41%; management said capital ratios exceeded regulatory minimums.
- Total short- and long-term funding, including FHLB advances, was $2.19 billion. The company prepaid $400 million of long-term FHLB advances during the quarter at no cost. Outstanding subordinated notes were $250 million, due 2025.
- Management reported compliance with internal liquidity objectives and sufficient asset-based liquidity under a stressed scenario. Available FHLB funding was $3.9 billion and Federal Reserve discount-window capacity was $742 million.
- Accumulated other comprehensive loss increased to $137 million, principally reflecting market-value declines in securities. The company transferred approximately $1.6 billion of mortgage-related securities from AFS to HTM; HTM securities had $275 million of gross unrealized losses at quarter-end.
Material changes versus prior periods
- Net income and diluted EPS declined year over year despite higher net interest income. The largest revenue pressure was mortgage banking; the year-ago period also included gains associated with the Whitnell sale and other asset gains.
- Loans grew 1% from year-end, with consumer loans increasing partly because auto finance balances expanded. Commercial loans were slightly lower. PPP loans declined to $18 million from $66 million.
- Nonaccrual loans rose to $143 million from $130 million at year-end, while remaining below $163 million a year earlier. Nonperforming assets were $161 million, or 0.46% of assets.
- The allowance for credit losses on loans was $318 million, or 1.30% of loans, down from $320 million and 1.32% at year-end.
- The company made an irrevocable election effective January 1, 2022 to measure mortgage servicing rights at fair value. The change increased beginning retained earnings by approximately $2 million; subsequent fair-value changes are recorded in earnings.
Outlook, commentary, risks, and unusual items
- Management’s 2022 outlook was net interest income above $840 million, assuming a 25-basis-point increase at each FOMC meeting during the year; noninterest income of $290 million to $300 million; and noninterest expense of approximately $725 million to $740 million. It expected auto finance loan growth above $1.2 billion and commercial loan growth, including asset-based lending and equipment finance, of $750 million to $1.0 billion. Full-year effective tax rate guidance was 19% to 21%.
- Management said the 2022 credit-loss provision would respond to risk grades, economic conditions, loan volumes, and other credit-quality indicators. The filing provides no earnings-per-share guidance.
- Interest-rate modeling showed estimated 12-month earnings-at-risk increases of 5.1% to 5.9% for a gradual 100-basis-point increase and 10.4% to 11.9% for 200 basis points. A 100-basis-point instantaneous increase was estimated to reduce market value of equity by 3.0%.
- Risks highlighted include inflation, rising rates, possible recession, Russia-Ukraine-related geopolitical and market volatility, and potential cybersecurity threats. The filing also notes heightened CFPB consumer-protection enforcement and uncertainty about possible regulatory action or customer remediation.
- Contingencies include a putative class action concerning fiduciary duties and proprietary investments in the company’s 401(k)/ESOP; management said it could not assess the probability or estimate potential loss. The company also disclosed possible consumer-product regulatory matters and an inadvertent purge of certain old documents relating to active accounts; potential losses could not be estimated. The mortgage repurchase reserve was $1 million.
- After quarter-end, the company announced plans to eliminate certain overdraft and nonsufficient-funds fees and reduce the daily overdraft-fee limit, with changes planned for Q3 2022. The board declared a $0.20-per-share common dividend for payment in June 2022.
Important facts for investors to verify
- Whether actual 2022 results meet the stated growth, revenue, expense, and rate assumptions in management’s outlook.
- How interest-rate changes affect net interest income, securities values, AOCI, and mortgage servicing rights; distinguish HTM unrealized losses from realized credit losses.
- Whether rising nonaccrual loans, potential problem credits, and commercial real estate exposures lead to higher provisions or charge-offs.
- Whether liquidity, deposits, funding costs, and capital ratios remain resilient as rates and market conditions change.
- Any developments or measurable financial effects from the disclosed litigation, regulatory matters, document incident, and planned overdraft-fee changes.