The more I researched the banking industry this year, the more I realized that they make up a pretty sizable portion of the oldest companies in this country. They may not be They are household names of large corporations, but their roots go back several decades and, in some cases, even more than 100 years. A great example This can be seen by looking Associated Banc-Corp (New York Stock Exchange: ASB), a bank holding company that dates back to the Bank of Neenah in 1861. Since then, the institution has become quite a regional bank, with (as of late last year) 202 branches spread across more than 100 different communities. Its operations are centered in the Midwest, calling the states of Wisconsin, Illinois and Minnesota its home.
Despite the turmoil that engulfed the banking sector earlier this year, deposits at the bank have continued to grow. Revenue and profits are also rising, and while debt was high earlier this year, it has shown signs of declining. Add to that how cheap the company’s stock is, both relative to earnings and book value, and I think Associated Banc-Corp is a very compelling prospect right now. In fact, today I would even dare to rate the bank as a “strong buy.”
A great perspective to consider.
In the introduction to this article, I already talked a little about what Associated Banc-Corp is and where it operates. However, it would be useful to delve deeper into some of the services the institution offers. Fundamentally, the bank operates through three different segments. The first of them is the Corporate and Commercial Specialty segment. This particular unit provides traditional lending and deposit solutions to larger businesses, developers and other organizations such as non-profits, municipalities, financial companies and more. Prior to early 2021, this segment also included a wealth management subsidiary. But management eventually sold it.
The next segment is called Community, Consumer and Business. Rather than focusing on larger companies, this particular segment specializes in providing lending and deposit services to both individuals and small and medium-sized businesses. And finally, there is the Risk Management and Shared Services segment. It is through this that the company executes its core corporate functions that do not easily fit into the other two segments. Also included under this umbrella is any operation that could affect both segments at the same time.
Over the last few years, management has done a really good job of growing the bank’s revenue and bottom line. Between 2020 and 2022, the bank’s net interest income 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 decline was due to a reduction in the net asset gains the company generates. Most of this was $163 million worth of proceeds from a major sale the company completed in 2020. Had it not been for this, the improvement in the bottom line would have been even better. But with this, net profits managed to increase from $288.4 million to $354.6 million. Performance has remained strong through fiscal 2023. Although noninterest income continues to decline year-over-year, both net interest income and net profits have increased significantly.
The type of expansion the bank enjoyed is only possible thanks to the continued growth of its balance sheet. And indeed, that is what it shows. The value of loans grew from $24.45 billion in 2020 to $28.8 billion in 2022. The growth continued during the current year, reaching $29.85 billion at the end of the second quarter. I understand that one area of concern for investors is office exposure. But the good news is that only 3.5% of the company’s loan portfolio falls into the office category. While the value of cash has increased across the map, the value of securities has also shown fairly consistent and significant growth. Values went from $4.98 billion in 2020 to $6.7 billion at the end of 2022. By the end of the most recent quarter, values had grown even further to $7.47 billion.
Of course, the value of securities and loans can only increase if deposits remain strong. And that is precisely what we have seen in recent years. In 2020, for example, the company had deposits totaling $26.48 billion. Deposits grew to $29.64 billion at the end of last year. During the banking crisis, deposits at many institutions remained stable or, in many cases, fell. But that was not the case in the case of Associated Banc-Corp. At the end of the first quarter of this year, deposits had increased by $695.6 million to $30.33 billion. And from the end of the first quarter to the end of the second quarter, they had grown another $1.69 billion to $32.02 billion. Along the way, exposure to uninsured deposits has also been declining. In 2022, it was 26%. By the end of the second quarter of this year, it had fallen to 21%. This is comfortably below the 30% threshold I normally aim for, which is great to see.
Now, when it comes to valuing the company, there are a couple of ways we can do it. To start, we can use price to multiply profits. I know this year seems to be even better than last year. But for the sake of conservatism, using last year’s data, we ended up with a price-earnings multiple of 7x. This isn’t the lowest I’ve seen, but it’s pretty low. It is also well below the 10.4 reading that the average bank appears to be trading at. In addition, we can also rely on the book value of the bank. Shares are currently trading at $16.45. The book value per share of the institution is $26.03. This means that the company is trading at just 63.2% of its book value. It also trades at just 89.4% of its tangible book value. Both are pretty low in the grand scheme of things, and the upside from here, based solely on this, could be quite attractive.
Based on all the data I have, I have to say that Associated Banc-Corp is one of the most attractive banking prospects I have seen. Deposits are growing and exposure to uninsured deposits is quite low. Office exposure in the loan portfolio is low. Revenue and profits are growing at a good pace and I see no reason to believe 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.