Associated Banc-Corp (ASB) Q2 2023: 21% PTPP Income Growth Highlights Margin Resilience Amid Deposit Shift
Associated Banc-Corp delivered 21% year-over-year PTPP income growth despite margin compression and funding cost headwinds, underscoring disciplined expense management and targeted loan expansion. Deposit stability and customer satisfaction gains signal progress on relationship banking and digital strategies, while leadership maintains a conservative stance on credit and capital allocation. Management’s guidance points to ongoing loan growth and cost discipline, but investors should watch for further deposit mix shifts and funding pressure as industry dynamics evolve.
Summary
- Margin Pressure Mitigated: Expense control and loan growth offset higher funding costs, supporting operating leverage.
- Deposit Stabilization: Relationship deepening and digital investments reduced attrition and improved customer acquisition.
- Strategic Shift Continues: CRE office exposure remains limited while prime consumer and C&I lending drive portfolio quality.
Business Overview
Associated Banc-Corp (ASB) is a Midwest-focused regional bank generating revenue primarily from net interest income on loans and fee-based services. The company’s major segments include commercial and industrial (C&I) lending, commercial real estate (CRE), and consumer lending, with a strategic emphasis on relationship-based banking, digital engagement, and disciplined credit risk management. ASB’s business model leverages a diversified loan book and stable deposit base, while ongoing initiatives target affluent customers and digital-first experiences to drive growth and retention.
Performance Analysis
ASB reported significant year-over-year growth in pre-tax, pre-provision (PTPP) income, up 21%, reflecting a combination of balance sheet expansion, stable credit trends, and strict expense management. Net interest margin (NIM) compressed sequentially due to elevated funding costs, but remained above the prior year, aided by asset yield increases from floating-rate loan portfolios. Non-interest income rose modestly, led by mortgage servicing and fee-based revenue, partially offsetting lower service charges and asset gains.
Loan growth was broad-based across C&I, auto finance, and consumer segments, with five consecutive quarters of expansion. However, management noted a deceleration in lending activity compared to 2022, as clients adopted a more cautious stance amid macro uncertainty. On the funding side, ASB temporarily increased reliance on wholesale and brokered deposits to support loan growth and liquidity, but expects this to recede as relationship-building initiatives gain traction.
- Loan Portfolio Diversification: C&I and auto finance growth offset the strategic wind-down of low-margin, third-party mortgage originations.
- Deposit Mix Shift: Core consumer deposits stabilized, while wholesale funding increased by $1.7 billion to buffer liquidity.
- Expense Discipline: Operating efficiency improved, with non-interest expense growth trailing revenue gains.
Credit quality remained robust, with minor upticks in non-performing loans attributed to normalization and isolated events, not systemic deterioration. The allowance for credit losses was increased marginally, reflecting loan growth and prudent provisioning aligned with a stable Midwest economic backdrop.
Executive Commentary
"We have become a company that has developed an ability to execute even amid a volatile quarter in banking. But importantly, we've reached these milestones without sacrificing our foundational discipline on credit quality and expense management."
Andy Harmoning, President & CEO
"Our total asset yields have continued to rise due to rising rates and floating rate nature over a large segment of our loan book... we continue to take significant actions on both sides of the balance sheet to drive more durable margin over time."
Derek Meyer, Chief Financial Officer
Strategic Positioning
1. Relationship Banking and Digital Platform Investment
ASB’s mass affluence strategy and digital upgrades are central to its customer retention and acquisition initiatives. The bank reported an 11% increase in consumer household acquisition and a 13% decrease in attrition, with digital satisfaction scores reaching a three-year high. Open-architecture digital banking enables rapid upgrades, supporting higher customer engagement and stickiness.
2. Loan Book Optimization and Risk Aversion
The exit from third-party mortgage originations and focus on prime, super prime consumer and core C&I lending have improved portfolio quality and returns. Management emphasized CRE office exposure is minimal (3.5% of total loans), with a tilt toward stable Midwest multifamily and industrial assets, reducing risk from sector volatility.
3. Funding and Liquidity Management
Wholesale funding was used tactically to support loan growth and liquidity needs, but leadership expects to reduce reliance as organic deposit initiatives mature. Loan-to-deposit ratios remain within management’s target range, and deposit stability is expected to improve further in the back half of the year.
4. Expense and Capital Discipline
Expense growth is tightly managed, with guidance lowered to 3-4% for 2023, ensuring positive operating leverage. Capital ratios improved sequentially, and management is comfortable with current levels, prioritizing organic growth and dividends over near-term buybacks.
Key Considerations
The quarter underscores ASB’s ability to balance margin headwinds with operational discipline and targeted growth. Several dynamics merit close investor attention as the bank navigates a fluid funding and credit environment:
- Deposit Granularity and Digital Engagement: Improved digital satisfaction and mass affluent targeting are reducing attrition and supporting core deposit growth, but further stabilization is needed as funding costs remain elevated.
- Loan Mix and Yield Optimization: Shift toward higher-yielding, relationship-based lending (C&I, auto) is replacing non-core, lower-yield assets, but growth pace is moderating as clients turn cautious.
- Funding Structure Evolution: Temporary wholesale funding solutions are expected to phase out as customer deposit initiatives scale, but near-term cost pressure persists.
- Credit Normalization Watch: Minor increases in delinquencies and non-accruals are currently non-systemic, but continued vigilance is warranted given macro uncertainty and potential for broader credit normalization.
Risks
ASB faces ongoing risk from deposit mix shifts, elevated funding costs, and potential macroeconomic deterioration. While Midwest markets are relatively stable, a sudden change in consumer health or competitive deposit pricing could challenge guidance. CRE office exposure is limited, but broader credit normalization and regulatory changes for regional banks may introduce future uncertainty. Management’s guidance assumes no rate cuts in 2023, and deviation from this scenario could impact margin and loan growth expectations.
Forward Outlook
For the second half of 2023, ASB guided to:
- Loan growth of 6% to 8% for the full year
- Net interest income growth of 10% to 12% for 2023
- Core customer deposit contraction of 3% for the year, but positive 2% growth in the back half
- Expense growth lowered to 3% to 4% for 2023
Management highlighted that margin pressure is expected to stabilize, with NIM in the 2.70-2.80% range for H2, and that deposit initiatives and digital engagement are expected to drive improved funding cost dynamics.
- Loan growth will be primarily funded by organic deposit gains, with wholesale funding as a backstop if needed.
- Credit quality and capital ratios are expected to remain stable, barring significant macro shocks.
Takeaways
ASB’s performance demonstrates operational resilience and a disciplined approach to growth, even as the industry contends with funding volatility and rising deposit betas.
- Margin Resilience: Strong balance sheet growth and expense control offset funding headwinds, supporting positive operating leverage and stable credit metrics.
- Strategic Realignment: The pivot away from low-value mortgage originations to high-yield, relationship-based loans is enhancing portfolio quality and risk-adjusted returns.
- Future Watchpoint: Investors should monitor the pace of deposit stabilization and the impact of further rate or competitive changes on funding costs and margin trajectory.
Conclusion
Associated Banc-Corp’s Q2 results reflect a measured, disciplined execution of its strategic plan, with margin management, digital engagement, and targeted lending as key levers. While funding costs and deposit mix remain watchpoints, the company’s operational momentum and credit discipline position it for continued resilience as the banking landscape evolves.
Industry Read-Through
ASB’s experience this quarter highlights several industry-wide themes: Regional banks are contending with elevated funding costs and a rapid shift in deposit mix, forcing greater reliance on digital engagement and relationship banking to defend margins. The tactical use of wholesale funding is becoming more common, but sustainability depends on successful core deposit initiatives. Credit normalization is emerging, but disciplined underwriting and sectoral de-risking (notably in CRE office) can buffer volatility. For peers, digital satisfaction, expense control, and portfolio optimization are increasingly critical to navigate the ongoing margin squeeze and shifting regulatory landscape.