Associated Banc-Corp (ASB) Q1 2023: Deposit Base Grows 7%, Liquidity Coverage Hits 177% Amid Industry Stress

April 20, 2023 | By EarningsIQ Research

ASB’s Q1 showcased deposit resilience and active liquidity management as regional bank volatility intensified. The bank’s diversified Midwest franchise weathered deposit outflows better than peers, with stable core funding and a granular, insured-heavy base. Management’s conservative lending and expense discipline signal a cautious stance, but margin compression and slower loan growth temper the outlook.

Summary

• Deposit Stability: ASB’s granular, insured-heavy deposit base buffered against March’s industry turmoil.
• Margin Compression: Rising funding costs outpaced asset yield gains, pressuring net interest margin and income.
• Strategic Discipline: Management’s focus on core relationships and expense control positions the bank for resilient, if slower, growth.

Business Overview

Associated Banc-Corp (ASB) is a Midwest regional bank with a primary footprint in Wisconsin, Minnesota, and Illinois. ASB generates revenue from net interest income (NII), the spread between loan yields and deposit costs, alongside non-interest fee income from services. Major segments include consumer banking, commercial lending, mortgage, auto finance, and wealth management, with a diversified customer base spanning individuals, businesses, and government agencies.

Performance Analysis

ASB’s Q1 results reflected a deliberate balance between growth and risk containment. The bank’s loan book expanded across most major categories, though the pace slowed from 2022’s highs, with management tightening underwriting and winding down lower-margin third-party mortgage originations. Deposit trends were a focal point: while industry-wide stress led to deposit outflows elsewhere, ASB’s core customer deposit balances declined less than 1%, and retail deposits even increased slightly. Total deposits grew 2% quarter-over-quarter and 7% year-over-year, signaling franchise stability amid sector volatility.

However, net interest margin (NIM) and net interest income (NII) came under pressure as rising funding costs outpaced asset yield gains. NIM compressed by 24 basis points versus Q4, and NII declined 5% sequentially, though both remain up significantly year-over-year. Non-interest income stabilized, but management now expects a full-year contraction due to fee waivers and market-driven headwinds. On costs, a 5% sequential decline in expenses and a 54.6% efficiency ratio reflect ongoing discipline, even as investment in people and technology continues.

• Loan Growth Moderation: Growth slowed in auto and commercial real estate, with a strategic exit from third-party mortgage origination.
• Deposit Base Granularity: Uninsured deposits represent just 24% of the base, and liquidity coverage stands at 177% of uninsured deposits.
• Expense Control: Non-interest expenses fell 5% QoQ, with further cost discipline signaled for 2023.

Credit quality remained stable, with non-performing assets down 18% YoY and net charge-offs at low levels. The allowance for credit losses increased modestly, reflecting conservative provisioning and macro uncertainty. Overall, ASB’s financial posture remains sound, but the environment is shifting toward slower growth and tighter margins.

Executive Commentary

Strategic Positioning

1. Deposit Franchise Resilience

ASB’s deposit base is highly granular, with a large share from insured retail and small business customers. Uninsured deposits comprise only 24% of the total, and the bank maintains immediate liquidity coverage of 103% for these, rising to 177% when all sources are considered. This conservative structure allowed ASB to weather March’s industry turmoil with minimal deposit flight and positions it favorably under potential future regulatory scrutiny.

2. Credit Risk and Lending Discipline

Loan growth is now more selective, with management prioritizing yield and relationship value over volume. The exit from third-party mortgage origination (TPO) and a focus on prime auto lending (average FICO 772) reflect a risk-aware approach. Commercial real estate exposure is concentrated in Midwest multifamily and industrial, with limited office exposure and a bias toward suburban class A properties, lowering risk from sector stress.

3. Margin and Rate Management

Asset sensitivity remains a core feature, but margin compression is now a reality. ASB has layered in swaps to dampen interest rate risk and is actively managing deposit betas, which have risen to just above 53% for interest-bearing deposits. The bank is not calling the peak in rates, instead focusing on gradual moves to lock in durable margin and reduce downside risk.

4. Expense and Capital Discipline

Operating leverage is a clear priority. Management has already taken action to reduce staffing in mortgage and slow strategic hiring, requiring CFO sign-off for new positions. Non-interest expense growth is targeted at 4% for 2023, below expected revenue growth. Capital ratios (CET1, TCE) are managed toward target ranges, with no plans for share buybacks or M&A in the current environment.

5. Digital and Relationship Initiatives

Investment in digital sales, mass affluent strategies, and branding campaigns continues. These initiatives are aimed at deepening primary relationships, growing low-cost deposits, and supporting treasury management and HSA (health savings account) growth. Early results are positive, but execution will be critical as competition for deposits intensifies.

Key Considerations

Q1’s results underscore ASB’s franchise stability, but also highlight the headwinds regional banks face in a higher-rate, more volatile environment. The bank’s ability to maintain deposit stability and credit quality stands out, but margin compression and slower loan growth are likely to persist.

Key Considerations:

• Deposit Mix Shift: Continued migration from non-interest-bearing to higher-cost deposits will pressure margins if not offset by core growth.
• Interest Rate Sensitivity: Further Fed moves and deposit beta increases could compress NIM beyond current guidance.
• Expense Flexibility: Management’s willingness to pull cost levers quickly is a positive, but further cuts could impact growth initiatives if conditions worsen.
• Credit Quality Watch: While current trends are favorable, any macro deterioration or sector-specific stress (e.g., CRE) could require higher provisioning.

Risks

Key risks include ongoing deposit competition, rising funding costs, and potential regulatory changes targeting uninsured deposit concentrations and liquidity coverage. Further margin compression is possible if deposit betas climb faster than asset yields, while slowing loan demand and tightening credit could cap growth. Although ASB’s Midwest focus insulates it from some market volatility, it is not immune to broader economic downturns or industry-wide shifts in consumer and business behavior.

Forward Outlook

For Q2 2023, ASB expects:

• Flat to modestly lower net interest income, as funding cost pressures persist and loan growth slows.
• Continued modest loan and deposit growth, led by core customer relationships and digital initiatives.

For full-year 2023, management maintained guidance:

• Net interest income growth of 13-15%.
• Loan growth of 6-8%.
• Core customer deposit growth of 1-3%.
• Non-interest expense growth of approximately 4%.

Management highlighted several factors that could impact results:

• Deposit mix and beta trends will be critical for margin trajectory.
• Regulatory and macroeconomic developments could drive further changes in strategy and risk posture.

Takeaways

ASB’s Q1 demonstrated the value of a conservative, relationship-driven banking model in turbulent times.

• Deposit Franchise Buffer: High granularity and insured-heavy deposits allowed ASB to withstand sector volatility and maintain funding stability.
• Margin and Growth Headwinds: Rising funding costs, deposit mix shifts, and slower loan demand will likely constrain earnings growth for the remainder of 2023.
• Execution in Focus: Investors should watch for further margin compression, deposit trends, and management’s ability to balance growth with expense and risk discipline in a changing macro environment.

Conclusion

ASB enters the remainder of 2023 with a strong liquidity position and a stable, diversified deposit base, but faces persistent pressure on margins and growth. The bank’s disciplined approach to credit and expenses offers downside protection, yet the path forward will require careful navigation of rate, funding, and regulatory headwinds.

Industry Read-Through

ASB’s Q1 reinforces several themes for regional banks: deposit base granularity and liquidity depth are now critical differentiators, especially as uninsured deposit scrutiny rises. Margin compression from rising deposit betas and mix shifts is likely to persist across the sector, with asset-sensitive balance sheets no longer guaranteeing NIM expansion. Banks with strong local franchises, conservative credit, and expense flexibility are best positioned to weather ongoing volatility, but industry-wide growth will be harder to achieve without a shift in rate or competitive dynamics. Regulatory changes targeting liquidity and uninsured deposits are increasingly probable, raising the bar for franchise stability in the months ahead.

ASB Financials Regional Banking Deposits Liquidity Margin Credit Expense Management