Associated Banc-Corp: A Great Price For A Stellar Bank (NYSE:ASB)

The more that I have researched the banking industry this year, the more I have come to realize that they make up a rather sizable portion of the oldest companies in this country. They may not be the household names of major corporations, but they do trace their roots back several decades and, in some cases, even more than 100 years. A great example of this can be seen by looking at Associated Banc-Corp (NYSE:ASB), a bank holding company that goes back to the Bank of Neenah in 1861. Since then, the institution has grown into a rather sizable regional bank, with (as of the end of last year) 202 branches spread across over 100 different communities. Its operations are centered in the Midwest, with the states of Wisconsin, Illinois, and Minnesota serving as its home.

Despite the turmoil that enveloped the banking sector earlier this year, deposits at the bank have continued to grow. Revenue and profits are also on the rise and, while debt was elevated at the start of this year, it has shown signs of coming down. Add on top of this how cheap shares of the company are, both relative to earnings and book value, and I do believe that Associated Banc-Corp makes for a very compelling prospect at this point in time. In fact, I would even go so far as to rate the bank a ‘strong buy’ today.

A great prospect to consider

In the introduction to this article, I already discussed a little bit about what Associated Banc-Corp is and where it operates. However, it would be helpful to dig into some of the services that the institution offers. Fundamentally, the bank operates through three different segments. The first of these is the Corporate and Commercial Specialty segment. This particular unit provides traditional lending and deposit solutions to larger businesses, developers, and other organizations like nonprofits, municipalities, financial firms, and more. Prior to early 2021, this segment also included a wealth management subsidiary. But management ultimately sold that off.

The next segment is called Community, Consumer, and Business. Instead of focusing on larger enterprises, this particular segment specializes in providing lending and deposit services to both individuals and small to medium-sized businesses. And lastly, there is the Risk Management and Shared Services segment. It is through this that the company runs its core corporate functions that do not fit easily within the other two segments. Any operation that might touch both segments at the same time is also included under this umbrella.

In recent years, management has done a really good job of growing the bank’s top and bottom lines. Between 2020 and 2022, net interest income at the bank nearly doubled, from $589 million to $924.3 million. Unfortunately, this was offset to some extent by a decline in non-interest income from $514.1 million to $282.4 million. But the vast majority of this fall came from a reduction in net asset gains that the company generates. The biggest chunk of this was $163 million worth of gains from a major sell that the company completed in 2020. Had it not been for this, the improvement on the bottom line would have been even better. But with it, net profits still managed to climb from $288.4 million to $354.6 million. Performance has remained strong into the 2023 fiscal year. Although non-interest income is still down year over year, both net interest income and net profits have risen nicely.

The kind of expansion the bank enjoyed is only made possible by continued growth in its balance sheet. And sure enough, that’s what it demonstrates. The value of loans grew from $24.45 billion in 2020 to $28.80 billion in 2022. Growth continued into the current year, hitting $29.85 billion as of the end of the second quarter. I do understand that one area that investors are worried about is office exposure. But the great news is that only 3.5% of the company’s loan portfolio falls under the office category. While the value of cash has jumped all over the map, the value of securities has also demonstrated rather consistent and significant growth. Securities went from $4.98 billion in 2020 to $6.70 billion at the end of 2022. By the end of the most recent quarter, securities have grown even more to $7.47 billion.

Of course, the value of securities and loans can only increase if deposits remain robust. And that is precisely what we have seen in recent years. Back in 2020, for instance, the company had deposits totaling $26.48 billion. Deposits grew to $29.64 billion by the end of last year. During the banking crisis, many institutions saw deposits either flat line or, in many cases, drop. But this was not the case when it came to Associated Banc-Corp. By the end of the first quarter of this year, deposits had grown by $695.6 million to $30.33 billion. And from the end of the first quarter until the end of the second quarter, they had grown another $1.69 billion to $32.02 billion. Along the way, uninsured deposit exposure has also been on the decline. Back in 2022, it came in at 26%. By the end of the second quarter of this year, it had fallen to 21%. This is comfortably below the 30% threshold that I typically aim for, which is great to see.

Now, when it comes to valuing the company, there are a couple of ways that we can do it. For starters, we can use the price to earnings multiple. I do know that this year is looking to be even better than last year was. But for the sake of conservatism, using the data from last year, we end up with a price to earnings multiple of 7x. This is not the lowest I have seen, but it is quite low. It’s also well below the 10.4 reading that the average bank seems to be trading at. Furthermore, we can also rely on the book value of the bank. At present, shares are trading at $16.45. The book value per share of the institution is $26.03. That means that the company is trading at just 63.2% of its book value. It is also trading at only 89.4% of its tangible book value. Both of these are quite low in the grand scheme of things, and upside from here just based on this alone could be quite attractive.

Takeaway

Based on all the data at my disposal, I must say that Associated Banc-Corp is one of the more appealing banking prospects that I have seen. Deposits are growing, and uninsured deposit exposure is quite low. Office exposure in the loan portfolio is low. Revenue and profits are growing nicely, and I see no reason to believe that the trend will reverse in the foreseeable future. Given the totality of the circumstances, this has led me to rate the bank a ‘strong buy’ for now.