Associated Banc-Corp (ASB) Announces Phase 2 of Strategic Plan
As noted during the third-quarter 2023 earnings conference call, Associated Banc-Corp ASB has come up with the second phase of its strategic plan. Further, in an effort to enhance liquidity and wholesale funding capacity, the company will report a net loss in the ongoing quarter because of a balance sheet repositioning transaction.
Before we go into details and long-term benefits from the second phase, let’s see how Associated Banc-Corp has fared in terms of the first phase of the strategic plan, which was announced in September 2021. In this phase, the company focused on enhancing its lending and deposit-gathering capabilities and invested heavily in digital transformation.
Hence, ASB’s loan balance surged 28% in the third quarter of 2023 to $30.2 billion from Sep 30, 2021 level. The company also exited the third-party originated (TPO) mortgage lending business in the first quarter of 2023. Further, efforts to attract and deepen customer relationships have resulted in strong deposit growth and lessened its dependence on higher-cost network and brokered deposits.
Loan & Deposit Growth Initiatives
Leveraging on the success of the first phase of the plan, ASB intends to focus on driving incremental loan and deposit growth by 2025. For this, the company is expanding its commercial middle market team by hiring more than 20 relationship managers in key markets like Milwaukee, Madison, Chicago, Twin Cities and St. Louis. Also, the company is advancing its private wealth strategy.
Further, ASB is capitalizing on customer feedback to deliver targeted product and service enhancements and supporting these efforts with customer acquisition-focused marketing and branding. This will enable it to retain and improve its customer base, thus helping to bolster the deposit balance. Management anticipates these efforts to result in cumulative incremental loan growth of $750 million and deposit growth of $475 million by 2025.
Associated Banc-Corp has announced many adjustments to its consumer lending strategy, too. These are likely to reduce its reliance on low-yielding portfolio mortgage loans and maintain capacity for more profitable growth in other areas. The company expects to lower its outstanding mortgage balance by $600 million by 2025-end through paydowns and a decline in originations.
Diligent Expense Discipline
Associated Banc-Corp, with the help of a third-party consultant, has identified cost savings, which will be reinvested into its growth strategy. It has identified $25-$30 million in non-interest expense reductions for 2024. This includes a 3% workforce reduction and vendor contract review (already completed), reduction in discretionary spending and branch closures (14 branches to be closed between November 2023 and March 2024).
In relation to these efforts, the company expects to incur a one-time charge of nearly $5 million in severance and other expenses in the fourth quarter of 2023.
ASB expects non-interest expenses to rise 3-4% in both 2023 and 2024, excluding one-time costs.
Balance Sheet Repositioning
To accelerate the financial impacts of its organic growth strategy, Associated Banc-Corp announced today a balance sheet repositioning transaction. As part of this transaction, the company divested nearly $0.8 billion of investment securities and agreed to sell roughly $1 billion in mortgage loans (expected to close by 2023-end).
This is projected to result in an after-tax loss of almost $157 million in the ongoing quarter, leading the company to report a net loss.
Nonetheless, the transaction is expected to substantially strengthen Associated Banc-Corp's wholesale funding capacity by paying down FHLB advances and other high-cost funding. Also, it will remove low-yielding assets from its books. The company intends to reinvest more than $700 million into investment securities at current rates and cash.
Conclusion
After the success of its first phase of the strategic plan, ASB’s new plan will further bolster profitability and improve market share.
The company President and CEO Andy Harmening, said, “While we continue to benefit from these initial efforts, we also plan to capitalize on our momentum through the next phase of our strategic plan. Already underway, this plan accelerates our efforts to attract and deepen relationships, enhance our return profile and drive improved shareholder returns over time. We look forward to sharing updates on our progress in 2024 and beyond.”
Shares of this Zacks Rank #3 (Hold) bank have gained 13.9% over the past six months, outperforming the industry’s rally of 12.6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Amid the current tough macroeconomic environment, regional banks, including ASB, Truist Financial TFC and Zions ZION, are grappling with a lot of challenges. In order to counter these and sustain profitability, lenders are resorting to several business restructuring and cost-saving initiatives.
In September, Truist announced a strategic expense-saving program. The company stated that the program will result in approximately $750 million of gross savings (excluding one-time severance charges), to be realized over 12 to 18 months.
As part of this program, TFC is planning "sizable reductions" in the workforce through consolidation of redundant/similar functions, geographical simplification of operations and business restructuring. These efforts have already commenced this quarter and will continue till the first quarter of 2024 and are expected to lead to roughly $300 million of cost savings.
Truist CEO Bill Rogers said, “Other cost savings initiatives include aggressively managing third-party spend, further reducing our corporate real estate footprint and rationalizing tech spend.” These will, in aggregate, result in almost $450 million in expense savings.
In the same month, Zions CEO Harris Simmons stated that the company’s headcount at the beginning of next year will be 3% lower than the prior year. While it is unclear whether the 3% includes attrition, the bank said that the reductions have been spread across its geographic and departmental footprints.
The cuts, impacting nearly 300 of 10,000 ZION’s employees, have majorly been in roles that do not deal directly with customers or generate revenues.
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