ASB Q2 2024: Deposit Balances per New Household Up 26% as Relationship Banking Drives Growth
Associated Bank’s second quarter marked a pivotal shift in deposit quality and customer acquisition, with household growth and deposit balances per new checking account both hitting decade highs. Management’s disciplined approach to credit, expense, and relationship-focused growth is yielding tangible improvements in core profitability and customer metrics, even as macro headwinds persist. Phase two of the bank’s strategy is set to accelerate impact in the back half of 2024 and into 2025, with a focus on organic growth and digital engagement.
Summary
- Deposit Quality Inflection: New checking accounts delivered a 26% increase in average balances year-to-date.
- Relationship Banking Momentum: Net consumer household growth reached its fastest pace in over a decade.
- Strategic Execution Focus: Phase two initiatives and new talent are positioned to drive commercial and deposit growth into 2025.
Business Overview
Associated Bank (ASB) is a regional bank headquartered in the upper Midwest, primarily serving Wisconsin, Minnesota, and surrounding states. The bank generates revenue through net interest income from lending, as well as non-interest income from wealth management, treasury management, and fee-based services. Its business is organized around commercial lending, consumer banking, wealth management, and a diversified commercial real estate (CRE) portfolio, with a growing emphasis on digital banking and mass affluent segments.
Performance Analysis
Second quarter results highlight Associated Bank’s ability to strengthen core profitability and customer metrics in a challenging rate environment. The bank’s net interest income was stable, with modest loan growth of $211 million led by commercial and super prime auto portfolios, though the pace of growth slowed due to elevated CRE payoffs and softer auto demand. Average customer deposits decreased less than 1%, reflecting typical seasonal patterns and timing-related flows, but underlying trends remain positive for the back half of the year.
Non-interest income remained resilient, with wealth management and card-based fees offsetting lower investment securities gains. Expense discipline was evident, as non-interest expense decreased sequentially, even as the bank continued to invest in digital, marketing, and talent acquisition. Credit quality improved across all major metrics, with delinquencies, criticized loans, and net charge-offs all declining versus the prior quarter, reflecting both favorable Midwest economic conditions and a proactive credit management approach.
- Deposit Quality Shift: Average balances per new checking household rose 26% year-to-date, signaling higher-value customer acquisition.
- CRE Payoff Drag: Elevated payoffs in the CRE portfolio tempered overall loan growth, pushing guidance to the lower end of the 4%-6% range.
- Expense Control: Operating expenses were down $2 million from Q1, aided by a $2 million FDIC assessment adjustment.
Capital ratios improved meaningfully, with CET1 rising to 9.68%, the highest in two years, supported by stable core earnings and a one-time tax benefit from investment portfolio reallocation. Management’s guidance now anticipates modestly lower growth in both loans and deposits, reflecting current market conditions, but the foundation for improved returns is being set through ongoing strategic initiatives.
Executive Commentary
"We've seen household growth, where after several year period of negative trends, we've seen a net positive growth in consumer checking households in both Q1 and Q2 of this year. In fact, net households grew at a faster rate in the second quarter than they have in any other quarter in over a decade."
Andy Harmony, President and CEO
"Despite this pressure on NIM, our net interest income has remained stable. The $257 million we posted in Q2 was down just $1 million from Q1, and it was higher than our NII in the third and fourth quarters of last year. Based on our latest expectations for balance sheet growth, deposit betas, and Fed action, we expect sequential growth in our net interest income over the remainder of the year and NIM expansion by year end."
Derek Meyer, Chief Financial Officer
Strategic Positioning
1. Relationship-Driven Deposit Growth
ASB’s pivot to relationship banking is bearing fruit, with customer satisfaction and net promoter scores at multi-year highs. The bank reversed a decade-long trend of declining consumer checking households, not only growing accounts but also increasing the quality, as evidenced by the 26% jump in average balances per new household. These metrics are foundational for sustainable revenue growth, and management is leveraging digital tools and targeted marketing to deepen engagement.
2. Commercial Lending and Talent Expansion
Commercial and industrial (C&I) lending remains a core growth lever, with 29% expansion in the commercial relationship manager (RM) base since 2021. Phase two of the strategic plan includes hiring 26 additional RMs, with 10 net new hires already in place. Management expects these hires to drive incremental loan and deposit growth, especially as pipelines build and new relationships mature in late 2024 and 2025.
3. Mass Affluent and Digital Initiatives
The mass affluent program, launched in late 2022, has added over $1 billion in new deposits and now includes 58 specially trained bankers. Digital transformation remains a priority, with recent launches such as a credit monitoring tool and expanded social media campaigns aimed at attracting and retaining higher-value customers. These efforts are expected to accelerate in impact as phase two progresses.
4. CRE Portfolio Diversification and Risk Control
ASB’s CRE portfolio is deliberately structured to minimize risk, with only 3.4% exposure to office loans, primarily in Class A, non-urban properties, and no exposure to New York City rent-controlled markets. The majority of CRE is concentrated in stable Midwest multifamily and industrial assets, and management continues to proactively manage maturities and underwriting standards to maintain credit quality.
5. Capital and Funding Mix Optimization
Management is actively remixing the balance sheet to enhance returns, reducing reliance on wholesale funding and brokered CDs, which are targeted to remain under 15% of liabilities. Deposit growth is expected to fund loan expansion, but contingency plans allow for flexibility if deposit growth lags, ensuring profitable loan origination remains prioritized.
Key Considerations
This quarter’s results underscore a business model shift toward higher-quality growth and operational discipline, even as macro and industry headwinds persist. The interplay between deposit growth, loan origination, and expense management is central to ASB’s ability to deliver improved returns through 2025.
Key Considerations:
- Customer Metrics as Leading Indicators: Sustained growth in net households and satisfaction scores are early signals of future deposit and revenue expansion.
- Hiring and Productivity Lag: The full impact of new commercial RMs will materialize in late 2024 and 2025, with current pipelines already building.
- CRE Payoff and Loan Mix: Elevated CRE payoffs and softer auto loan demand are moderating overall loan growth, but risk-adjusted returns remain a focus.
- Expense Flexibility: Management is proactively identifying cost offsets to fund strategic hires and digital investments, maintaining discipline amid inflationary pressures.
- Capital Strength: CET1 and TCE ratios are at multi-year highs, providing a buffer for growth and potential volatility.
Risks
Persistent competition for deposits, elevated wholesale funding costs, and uncertain macroeconomic conditions pose ongoing risks to margin expansion and loan growth. CRE office exposure, while limited, still requires vigilant management as maturities approach and market valuations fluctuate. The pace of customer acquisition and retention improvements must be sustained to offset potential revenue headwinds from slower loan demand and ongoing rate pressure.
Forward Outlook
For the third and fourth quarters, ASB guided to:
- Sequential growth in net interest income and margin expansion in both quarters.
- Loan and deposit growth expected to accelerate, with full-year totals at the lower end of prior guidance ranges.
For full-year 2024, management maintained or updated guidance:
- Net interest income growth of 1% to 3%.
- Non-interest income growth of plus or minus 1% from 2023’s adjusted base.
- Non-interest expense growth of 2% to 3%, excluding FDIC special assessment impacts.
- CET1 ratio targeted at 9% to 10%, TCE at 6.75% to 7.75%.
Management noted that the full impact of phase two initiatives and new hires will become increasingly visible in late 2024 and into 2025, with deposit and loan pipelines supporting the outlook. Loan growth is not strictly dependent on deposit growth, as balance sheet flexibility and funding mix allow for profitable expansion regardless of timing variances.
- Deposit and household growth trends are expected to support long-term profitability improvements.
- Credit quality and expense control remain central to delivering on return targets.
Takeaways
ASB’s Q2 results reflect a disciplined, relationship-driven pivot that is translating into higher-value customer growth and improving profitability metrics.
- Deposit Quality Inflection: The 26% increase in balances per new checking household signals a step-change in customer value and retention, setting the stage for future revenue gains.
- Strategic Talent and Digital Investments: The ongoing hiring of commercial RMs and rollout of digital tools are expected to drive incremental growth, with phase two initiatives gaining momentum into 2025.
- Macro and Execution Watchpoints: Investors should monitor the pace of CRE payoffs, deposit acquisition, and the realization of commercial lending pipelines as key variables for the next two quarters.
Conclusion
Associated Bank’s second quarter demonstrates clear progress in transforming its deposit franchise and commercial banking platform, with improving customer metrics and disciplined execution underpinning the outlook for profitable growth. The next year will be a test of the bank’s ability to convert leading indicators into sustainable financial outperformance as market conditions evolve.
Industry Read-Through
ASB’s results offer a template for regional banks navigating a higher-for-longer rate environment: Relationship-driven deposit growth, tight expense management, and targeted talent acquisition are proving critical for margin defense and capital strength. CRE risk remains a sector-wide concern, but deliberate portfolio construction and proactive management can mitigate headline risk. The bank’s digital and mass affluent strategies highlight the need for regional players to differentiate beyond rate competition, with customer experience and quality of accounts emerging as key battlegrounds. Peers should note the lag between strategic hiring and revenue realization, emphasizing the importance of patience and execution discipline in a slow-growth environment.