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Associated Banc-Corp (ASB) New Strategic Plan to Boost Profits
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Associated Banc-Corp (ASB - Free Report) has announced a new strategic plan, which will expand its lending capabilities, support core businesses growth, and help transform digital capabilities. The efforts include the addition of “higher-margin” lending portfolios and digital investments. These are expected to bolster operating leverage and profitability over time.
In addition to announcing these initiatives, Associated Banc-Corp updated its guidance for 2021 and provided an outlook for the next two years.
Andy Harmening, president and CEO of Associated Bank, said, “Given the strength of our Midwest markets and our already solid foundation, we have a significant opportunity to strategically drive revenue growth across our core business lines while also expanding our portfolio. Building on our momentum over the last 120 days and capitalizing on the strengths of our franchise, our growth focused and digital forward initiatives will position us to deliver higher shareholder returns.”
Plan Details
1. Expansion of Lending Capabilities: Associated Banc-Corp intends to further build out its auto finance and asset-based lending (ABL) verticals, and foray into equipment finance. As the company expands into higher-yielding assets (targeting portfolio yields of approximately 3%), this will help drive incremental revenues and margins.
To further increase its auto lending capabilities, Associated Banc-Corp has already hired more than 40 people with solid expertise in this field. The team, led by Craig Stickney, has established agreements with more than 550 auto dealerships as of Sep 1, 2021. It is expected to start booking loans, effective early fourth-quarter 2021. The bank anticipates its auto loan balance to exceed $1 billion by 2022-end and more than $2 billion by 2023.
Additionally, Associated Banc-Corp is deepening its existing asset-based lending team, which already has origination and servicing systems in place. The bank plans to add several specialists to the team, which is headed by Raymond Temple. The company anticipates ABL portfolio balance to cross $150 million by next year end and $300 million by the end of 2023.
Now coming to equipment finance, the bank intends to launch it in the first quarter of 2022. The hiring for the team will begin in the next quarter, which has servicing systems already in place. The new vertical is expected to widen Associated Banc-Corp’s commercial loan mix while providing solid opportunities to “deepen relationships with our existing Midwest manufacturing client base.” The company projects equipment finance portfolio balance to be more than $150 million by the end of 2022 and exceed $300 million by 2023-end.
Apart from the expected core loan growth in existing commercial & industrial (C&I) and commercial real estate (CRE) loan portfolios, the above-mentioned initiatives will add more than $2.6 billion of “incremental balances” to the company’s 2023-end loan outstanding. Thus, Associated Banc-Corp anticipates incremental revenues of $20 million and $60 million for 2022 and 2023, respectively.
2. Focus on Core Businesses Growth: Associated Banc-Corp is focused on fast-tracking core Commercial Middle Market lending by expanding teams in Milwaukee, Chicago, and Northern Wisconsin. The company expects to add more than 10 commercial relationship managers across the footprint by next year-end, with the main focus on Milwaukee and Chicago. Driven by these efforts, it is projecting incremental loan growth to exceed $100 million annually.
Additionally, the company is enhancing Small Business and Consumer Direct lending, and broadening its wealth strategy. Through these initiatives, Associated Banc-Corp expects incremental growth of $50-$100 million per year in the small business and unsecured lending portfolios, and approximately $50 million in incremental loans and deposits annually due to the expansion of its wealth strategy.
3. Investment in Digital Transformation: The company’s digital transformation process is already underway and it has begun shifting the investment priorities to ensure that the bank has “a digital forward focus.” This process is phased out under two strategies – Digital Banking Transformation (to be completed in the first quarter of 2022) and Digital Sales Transformation (to be completed in the second quarter of 2022).
As part of the effort, Associated Banc-Corp expects to incur incremental costs of nearly $50 million over the next five years. To fund these additional expenses, the company has been undertaking certain efforts, including branch consolidation and back-office facilities consolidation. While these are expected to result in roughly $8 million charges (in aggregate) in the third and fourth quarters of 2021, it will annually save around $10 million going forward.
Updated 2021 Guidance
Let’s begin with the expense outlook. Non-interest expenses are now expected to be in the range of $705-$711 million to include the above-mentioned new initiative-related charges. Earlier, the company had guided costs to be between $695 million and $700 million.
Management anticipates net total revenues to be $1.045-$1.060 billion. Net interest margin now is projected to be in the lower end of the 2.45-2.55% range. There isn’t any change in non-interest income projection, which is expected between $315 million and $325 million.
Commercial loan growth (excluding paycheck protection program) is now expected to be in the lower end of the 2-4% range.
Further, the company now projects target investments/total assets ratio in the range of 17-19%, up from the prior expectation of 15%.
Additionally, management anticipates further reserve release in the third quarter of 2021.
Medium-Term Targets (2022-2023)
Associated Banc-Corp’s new growth and efficiency strategies are expected to drive positive operating leverage and enhance pre-tax pre-provision income over the next several quarters.
The company projects net total revenues to witness a CAGR of approximately 8% from the end of 2021 through 2023. Over the same time frame, non-interest expenses are likely to record a CAGR of almost 3.5%.
Further, Associated Banc-Corp is targeting dividend payout ratio of 40-50% for 2022. The company doesn’t expect to raise additional preferred capital over the next two years.
Management expects tangible common equity ratio of 7.5% and common equity Tier 1 ratio of 9.5%.
Our Take
At present all banks big and small, including Associated Banc-Corp, Civista Bancshares, Inc. (CIVB - Free Report) , and East West Bancorp, Inc. (EWBC - Free Report) , are facing concerns related to lower interest rates and faltering loan demand. Associated Banc-Corp’s new strategic initiatives will support profitability, help garner market share, and strengthen its scale.
Last year, the company had undertaken business optimization initiatives as well, which improved operating efficiency and supported earnings. The bank is streamlining operations to focus on core businesses. In March 2021, Associated Banc-Corp sold its wealth management subsidiary Whitnell & Co., while in 2020, the company divested its insurance business, Associated Benefits & Risk Consulting.
Shares of Associated Banc-Corp have rallied 18% so far this year, outperforming the industry’s rise of 8%.
Similar to Associated Banc-Corp, last week, Texas Capital Bancshares, Inc. (TCBI - Free Report) announced updated strategic plans to expand its product offerings and coverage in the potential markets.
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Associated Banc-Corp (ASB) New Strategic Plan to Boost Profits
Associated Banc-Corp (ASB - Free Report) has announced a new strategic plan, which will expand its lending capabilities, support core businesses growth, and help transform digital capabilities. The efforts include the addition of “higher-margin” lending portfolios and digital investments. These are expected to bolster operating leverage and profitability over time.
In addition to announcing these initiatives, Associated Banc-Corp updated its guidance for 2021 and provided an outlook for the next two years.
Andy Harmening, president and CEO of Associated Bank, said, “Given the strength of our Midwest markets and our already solid foundation, we have a significant opportunity to strategically drive revenue growth across our core business lines while also expanding our portfolio. Building on our momentum over the last 120 days and capitalizing on the strengths of our franchise, our growth focused and digital forward initiatives will position us to deliver higher shareholder returns.”
Plan Details
1. Expansion of Lending Capabilities: Associated Banc-Corp intends to further build out its auto finance and asset-based lending (ABL) verticals, and foray into equipment finance. As the company expands into higher-yielding assets (targeting portfolio yields of approximately 3%), this will help drive incremental revenues and margins.
To further increase its auto lending capabilities, Associated Banc-Corp has already hired more than 40 people with solid expertise in this field. The team, led by Craig Stickney, has established agreements with more than 550 auto dealerships as of Sep 1, 2021. It is expected to start booking loans, effective early fourth-quarter 2021. The bank anticipates its auto loan balance to exceed $1 billion by 2022-end and more than $2 billion by 2023.
Additionally, Associated Banc-Corp is deepening its existing asset-based lending team, which already has origination and servicing systems in place. The bank plans to add several specialists to the team, which is headed by Raymond Temple. The company anticipates ABL portfolio balance to cross $150 million by next year end and $300 million by the end of 2023.
Now coming to equipment finance, the bank intends to launch it in the first quarter of 2022. The hiring for the team will begin in the next quarter, which has servicing systems already in place. The new vertical is expected to widen Associated Banc-Corp’s commercial loan mix while providing solid opportunities to “deepen relationships with our existing Midwest manufacturing client base.” The company projects equipment finance portfolio balance to be more than $150 million by the end of 2022 and exceed $300 million by 2023-end.
Apart from the expected core loan growth in existing commercial & industrial (C&I) and commercial real estate (CRE) loan portfolios, the above-mentioned initiatives will add more than $2.6 billion of “incremental balances” to the company’s 2023-end loan outstanding. Thus, Associated Banc-Corp anticipates incremental revenues of $20 million and $60 million for 2022 and 2023, respectively.
2. Focus on Core Businesses Growth: Associated Banc-Corp is focused on fast-tracking core Commercial Middle Market lending by expanding teams in Milwaukee, Chicago, and Northern Wisconsin. The company expects to add more than 10 commercial relationship managers across the footprint by next year-end, with the main focus on Milwaukee and Chicago. Driven by these efforts, it is projecting incremental loan growth to exceed $100 million annually.
Additionally, the company is enhancing Small Business and Consumer Direct lending, and broadening its wealth strategy. Through these initiatives, Associated Banc-Corp expects incremental growth of $50-$100 million per year in the small business and unsecured lending portfolios, and approximately $50 million in incremental loans and deposits annually due to the expansion of its wealth strategy.
3. Investment in Digital Transformation: The company’s digital transformation process is already underway and it has begun shifting the investment priorities to ensure that the bank has “a digital forward focus.” This process is phased out under two strategies – Digital Banking Transformation (to be completed in the first quarter of 2022) and Digital Sales Transformation (to be completed in the second quarter of 2022).
As part of the effort, Associated Banc-Corp expects to incur incremental costs of nearly $50 million over the next five years. To fund these additional expenses, the company has been undertaking certain efforts, including branch consolidation and back-office facilities consolidation. While these are expected to result in roughly $8 million charges (in aggregate) in the third and fourth quarters of 2021, it will annually save around $10 million going forward.
Updated 2021 Guidance
Let’s begin with the expense outlook. Non-interest expenses are now expected to be in the range of $705-$711 million to include the above-mentioned new initiative-related charges. Earlier, the company had guided costs to be between $695 million and $700 million.
Management anticipates net total revenues to be $1.045-$1.060 billion. Net interest margin now is projected to be in the lower end of the 2.45-2.55% range. There isn’t any change in non-interest income projection, which is expected between $315 million and $325 million.
Commercial loan growth (excluding paycheck protection program) is now expected to be in the lower end of the 2-4% range.
Further, the company now projects target investments/total assets ratio in the range of 17-19%, up from the prior expectation of 15%.
Additionally, management anticipates further reserve release in the third quarter of 2021.
Medium-Term Targets (2022-2023)
Associated Banc-Corp’s new growth and efficiency strategies are expected to drive positive operating leverage and enhance pre-tax pre-provision income over the next several quarters.
The company projects net total revenues to witness a CAGR of approximately 8% from the end of 2021 through 2023. Over the same time frame, non-interest expenses are likely to record a CAGR of almost 3.5%.
Further, Associated Banc-Corp is targeting dividend payout ratio of 40-50% for 2022. The company doesn’t expect to raise additional preferred capital over the next two years.
Management expects tangible common equity ratio of 7.5% and common equity Tier 1 ratio of 9.5%.
Our Take
At present all banks big and small, including Associated Banc-Corp, Civista Bancshares, Inc. (CIVB - Free Report) , and East West Bancorp, Inc. (EWBC - Free Report) , are facing concerns related to lower interest rates and faltering loan demand. Associated Banc-Corp’s new strategic initiatives will support profitability, help garner market share, and strengthen its scale.
Last year, the company had undertaken business optimization initiatives as well, which improved operating efficiency and supported earnings. The bank is streamlining operations to focus on core businesses. In March 2021, Associated Banc-Corp sold its wealth management subsidiary Whitnell & Co., while in 2020, the company divested its insurance business, Associated Benefits & Risk Consulting.
Shares of Associated Banc-Corp have rallied 18% so far this year, outperforming the industry’s rise of 8%.
Image Source: Zacks Investment Research
Currently, Associated Banc-Corp carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Similar to Associated Banc-Corp, last week, Texas Capital Bancshares, Inc. (TCBI - Free Report) announced updated strategic plans to expand its product offerings and coverage in the potential markets.