10-Q: Associated Banc-Corp Reports Strong Net Interest Income Growth and Improved Capital Ratios in Q2 2025

Associated Banc-Corp announced increased net income and net interest margin for the second quarter and first half of 2025, driven by strategic balance sheet repositioning and loan growth, while maintaining robust capital levels.

Summary

• Net income for the six months ended June 30, 2025, increased to $212.916 million, up 8.2% from $196.742 million in the same period of 2024.
• Net income available to common equity for the six months ended June 30, 2025, rose to $207.166 million, an 8.5% increase from $190.992 million in the prior year.
• Basic earnings per common share decreased slightly to $1.25 for the six months ended June 30, 2025, from $1.27 in 2024, while diluted EPS also saw a minor decline from $1.26 to $1.24.
• Average loans grew by $828.3 million, or 3%, to $30.302 billion for the first six months of 2025, primarily due to increases in commercial and business lending and auto finance loans.
• Average deposits increased by $1.568 billion, or 4.8%, to $34.516 billion for the first six months of 2025, with growth across most deposit types.
• Net interest income for the six months ended June 30, 2025, was $585.940 million, a significant increase of $71.489 million (13.9%) from $514.451 million in 2024.
• Net interest margin (fully tax-equivalent) improved to 3.01% for the first six months of 2025, up 24 basis points from 2.77% in the comparable 2024 period.
• Provision for credit losses decreased by $16.010 million (34.1%) to $30.999 million for the first six months of 2025, compared to $47.009 million in 2024.
• Noninterest income decreased by $4.390 million (3.4%) to $125.754 million for the first six months of 2025, primarily due to a $6.976 million loss on mortgage portfolio sale.
• Noninterest expense increased by $26.453 million (6.7%) to $419.971 million for the first six months of 2025, driven by higher personnel, legal and professional, and OREO write-down expenses.
• Total assets at June 30, 2025, reached $43.993 billion, an increase of $970.7 million (2%) from December 31, 2024.
• Total deposits at June 30, 2025, were $34.147 billion, a decrease of $500.9 million (1%) from December 31, 2024, attributed to seasonality and shifts in deposit types.
• FHLB advances significantly increased by $2.025 billion (109%) to $3.879 billion at June 30, 2025, to support loan growth and manage deposit outflows.
• Nonaccrual loans decreased by $10.3 million (8%) to $112.999 million at June 30, 2025, compared to December 31, 2024.
• Net charge-offs for the six months ended June 30, 2025, were $21.531 million, a decrease of $21.7 million from the same period in 2024.
• The CET1 capital ratio stood at 10.20% at June 30, 2025, an improvement from 9.68% at June 30, 2024, with all capital ratios exceeding regulatory minimums.

Sentiment

Score: 7

Explanation: The company demonstrates solid financial performance with strong net interest income growth, improved net interest margin, and healthy capital ratios, indicating operational efficiency and financial stability. The reduction in credit loss provision and net charge-offs suggests good asset quality management. However, the decline in EPS, increased noninterest expenses, and the MVE sensitivity exceeding policy limits for a significant rate increase present areas of concern. The overall picture is stable with some positive momentum, but not compelling enough for a strong buy, nor are there severe enough issues for a sell. The stock is likely to perform in line with the broader market or its sector, warranting a 'hold' recommendation for seasoned investors.

Positives

• Net income and net income available to common equity increased year-over-year for the six months ended June 30, 2025, demonstrating improved profitability.
• Net interest income grew significantly by 13.9% and net interest margin improved by 24 basis points year-over-year, primarily due to successful balance sheet repositioning and reinvestment in higher-yielding assets.
• Average loans increased by 3% year-over-year, driven by strong growth in commercial and business lending and auto finance loans.
• Average deposits increased by 4.8% year-over-year, indicating continued customer funding strength across most deposit categories.
• Provision for credit losses decreased by 34.1% year-over-year, reflecting stable credit quality and favorable macroeconomic trends.
• Total nonaccrual loans decreased both sequentially and year-over-year, indicating effective problem loan identification and management.
• Net charge-offs decreased year-over-year, further supporting the stability of the loan portfolio's credit quality.
• Capital ratios, including CET1 (10.20%), Tier 1 (10.77%), and Total Capital (12.83%), all remain above regulatory minimum requirements and generally improved year-over-year, showcasing strong capital adequacy.
• The Tangible Common Equity to Tangible Assets ratio improved significantly to 8.06% at June 30, 2025, from 7.18% at June 30, 2024.
• Return on average assets improved to 1.00% for the six months ended June 30, 2025, from 0.97% in the prior year.
• The Corporation maintains diverse and readily available liquidity sources, with strong coverage ratios for uninsured and uncollateralized deposits (132% with secured funding available within one business day, 173% with total funding).

Negatives

• Basic and diluted earnings per common share decreased year-over-year despite higher net income, likely due to an increase in average common shares outstanding.
• Noninterest income decreased by 3.4% year-over-year, primarily due to a $6.976 million loss recognized from the settlement of a mortgage portfolio sale.
• Noninterest expense increased by 6.7% year-over-year, driven by higher personnel expenses due to annual merit increases, increased legal and professional fees from consultant and IT staff augmentation, and additional OREO write-downs.
• Total deposits decreased sequentially by $500.9 million (1%) from December 31, 2024, primarily due to seasonality and a decrease in interest-bearing demand deposits and brokered CDs.
• FHLB advances increased significantly by $2.025 billion (109%) from December 31, 2024, to fund loan growth and offset seasonal deposit outflows.
• Other long-term funding decreased by $244.1 million (29%) due to the maturity and repayment of subordinated notes in January 2025.
• The effective tax rate increased significantly to 18.34% for the first six months of 2025, compared to 3.59% in the same period of 2024, partly due to a strategic reallocation of the investment portfolio and a legal entity rationalization plan in 2024 that resulted in deferred benefits.
• The Market Value of Equity (MVE) measure in the 200 basis point increase in interest rates scenario is outside of the Corporation's policy limit, indicating sensitivity to significant upward rate movements.

Risks

• Interest Rate Risk: Potential for reduced net interest income from adverse changes in interest rates; the MVE sensitivity shows a decrease in net balance sheet value due to instantaneous upward changes in rates, with the 200 basis point increase scenario exceeding policy limits.
• Credit Risk: Inherent in the loan portfolio, influenced by general economic conditions and borrower operations or collateral value; significant concentrations exist in Real Estate (9% of total loan exposure) and Utilities (8% of total loan exposure).
• Liquidity Risk: The need to generate sufficient cash to meet obligations, managed through diverse funding, stress testing, and marketable assets.
• Regulatory Risk: Increased regulatory scrutiny on consumer products, fees, and charges could lead to enforcement actions, civil money penalties, or remediation payments; the impact of the newly enacted H.R.1 One Big Beautiful Bill Act is currently being evaluated.
• Legal Proceedings: The Corporation is party to various pending and threatened claims and legal proceedings, some involving substantial amounts, with inherently unpredictable outcomes that could materially affect operating results.
• Fair Value Estimates: Inherent limitations exist in fair value estimates and their underlying assumptions.
• Accounting Classifications: Inherent limitations of accounting classifications of certain investments and their effect on measurement.
• Macroeconomic Conditions: External macroeconomic conditions can affect capital and the Corporation's ability to raise or refinance capital commitments.
• Goodwill Impairment: Goodwill is subject to impairment tests at least annually, and more frequently if circumstances change, which could result in impairment charges.
• Mortgage Repurchase Risk: Obligations to repurchase loans or reimburse GSEs for losses due to underwriting deficiencies or documentation defects on sold residential mortgage loans.

Future Outlook

The Corporation is currently evaluating the impact of the recently signed H.R.1 One Big Beautiful Bill Act on its financial position and operations, with an estimate of the impact not yet available. Unrecognized compensation costs related to restricted stock awards are expected to be recognized through the first quarter of 2029. An estimated $2.2 million is expected to be reclassified as an increase to interest income from cash flow hedge derivatives over the next 12 months.

Management Comments

• Management continually evaluates strategic acquisition opportunities and various other strategic alternatives that could involve the sale or acquisition of branches or other assets, or the consolidation or creation of subsidiaries.
• The increase in net interest income and net interest margin was driven by the actions taken by the Corporation as part of the balance sheet repositioning announced in the fourth quarter of 2024 which sold lower yielding residential mortgage loans and investment securities allowing for reinvestment in higher yielding investment securities.
• The decrease in provision for credit losses was driven by nominal credit movement coupled with general macroeconomic trends.
• Management believes the level of the Allowance for Credit Losses on Loans (ACLL) to be appropriate at June 30, 2025.
• The MVE measure in the 200 bp increase in interest rates scenario is outside of the policy limit, which has been reported to the Corporation's Board.
• Based on contractual obligations and ongoing operations, the Corporation's sources of liquidity are sufficient to meet present and future liquidity needs.

Industry Context

The financial results reflect the ongoing impact of the Federal Reserve's interest rate policies, including a 100 basis point decrease in the federal funds target interest rate in the second half of 2024, which influenced the rate environment. The Corporation's strategic balance sheet repositioning, shifting from lower-yielding to higher-yielding assets, is a direct response to these market conditions. The company operates within the broader banking regulatory framework, adhering to Basel III capital requirements and facing increased regulatory scrutiny on consumer products, a trend observed across the industry.

Comparison to Industry Standards

• The Corporation's capital ratios (CET1, Tier 1, Total Capital, Tier 1 Leverage) are all in excess of regulatory minimum requirements established under Basel III, indicating strong compliance and financial health relative to industry benchmarks.
• Loan-to-Value (LTV) guidelines for Commercial Real Estate (CRE) and real estate construction lending, with a maximum standard of 80% (and lower for higher-risk types like raw land at 50%), are in compliance with regulatory supervisory limits.
• Residential mortgage products are generally underwritten using Federal Home Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association (FNMA) secondary marketing guidelines, aligning with common industry practices for mortgage origination.
• The Corporation performs dynamic scenario analysis for liquidity management in accordance with industry best practices, ensuring robust liquidity risk assessment.

Management Changes

Corporate Governance

Legal Proceedings

• The Corporation is party to various pending and threatened claims and legal proceedings arising in the normal course of business activities, some of which involve claims for substantial amounts.
• Management believes it has meritorious defenses to the claims asserted and intends to defend itself vigorously.
• Accruals for probable and reasonably estimable losses are established and adjusted quarterly based on available information.
• Resolution of legal claims is inherently unpredictable, and factors such as unsubstantiated damages, class action status, incomplete discovery, legal uncertainties, and multiple parties can exacerbate this unpredictability.
• Management believes current legal proceedings should not have a material adverse effect on the Corporation's consolidated financial condition, but acknowledges that ultimate resolution could significantly exceed current reserves or have material reputational consequences.

Stakeholder Impact

• Shareholders: Positively impacted by increased net income, improved net interest margin, and strong capital ratios. Dividends declared and share repurchase programs offer direct returns and capital management benefits. Potential for share price influence due to overall positive financial performance.
• Employees: Covered by a noncontributory defined benefit retirement plan and stock-based compensation plans. Compensation expense for restricted stock awards is recognized over vesting periods. Employment transition agreements for key personnel indicate ongoing organizational adjustments.
• Customers: Benefit from the Corporation's stable financial condition and diverse loan and deposit product offerings. Increased regulatory scrutiny on consumer products and fees could lead to potential remediation payments or changes in product terms.
• Creditors: The Corporation's strong capital ratios and diverse liquidity sources, including FHLB advances and various debt programs, enhance its ability to meet financial obligations, providing security for creditors.
• Regulatory Authorities: The Corporation's compliance with Basel III capital requirements and ongoing evaluation of new tax laws (H.R.1 One Big Beautiful Bill Act) demonstrate adherence to regulatory frameworks. Increased regulatory scrutiny on consumer products highlights potential for future enforcement actions.

Next Steps

• Evaluation of the impact of the H.R.1 One Big Beautiful Bill Act on the Corporation's financial position and operations.
• Recognition of unrecognized compensation costs related to restricted stock awards, expected to continue through the first quarter of 2029.
• Reclassification of an estimated $2.2 million from cash flow hedge derivatives as an increase to interest income over the next 12 months.
• Payment of regular quarterly cash dividends for common and preferred stock on September 15, 2025.

Key Dates

Recommendation

The company demonstrates solid financial performance with strong net interest income growth, improved net interest margin, and healthy capital ratios, indicating operational efficiency and financial stability. The reduction in credit loss provision and net charge-offs suggests good asset quality management. However, the decline in EPS, increased noninterest expenses, and the MVE sensitivity exceeding policy limits for a significant rate increase present areas of concern. The overall picture is stable with some positive momentum, but not compelling enough for a strong buy, nor are there severe enough issues for a sell. The stock is likely to perform in line with the broader market or its sector, warranting a 'hold' recommendation for seasoned investors.

Keywords

Banking, Financial Services, SEC Filing, 10-Q, Quarterly Report, Net Interest Income, Net Interest Margin, Loan Growth, Deposits, Credit Quality, Capital Ratios, Liquidity, Interest Rate Risk, Commercial Lending, Consumer Lending, Mortgage Banking, Regulatory Compliance, Shareholder Equity