Associated Banc-Corp: Don't Bank On More Massive Upside (Rating Downgrade)

Summary

• Associated Banc-Corp received a "strong buy" rating last year and has seen a 27.7% increase in shares since then.
• The bank's deposits and loans have grown, but there has been a decrease in net interest income and profits.
• The bank is still considered a good value investment, but further significant upside may be more difficult to achieve.

One of the best feelings in the world is seeing an opportunity that you were very bullish about appreciate materially in a rather short window of time. Last year, because of the plunge in financial stocks that came about because of the banking crisis, I found myself gravitating toward banks of all shapes and sizes. In many of these cases, I was bullish, rating most of the companies a "buy." But a select few ended up receiving a "strong buy" rating from me. One such firm was Associated Banc-Corp (NYSE:ASB), a regional bank with a history dating back to 1861.

Because of how cheap the bank was and because of how well it was holding up during and after the banking sector collapse, I ended up assigning it my most bullish rating possible. Although I never went so far as to buy shares of the enterprise, that rating signified my belief that the stock would materially outperform the broader market for the foreseeable future.

Since rating the company that way back in the middle of October of last year, shares have seen tremendous upside of 27.7%. That's almost double the 16.8% increase seen by the S&P 500 (SP500) over the same window of time.

Unfortunately, nothing can be a perfect investment opportunity forever. At some point, shares warrant a downgrade. Unfortunately, for ASB, that point is now. Although the institution does still offer some attractive prospects for value-oriented investors, I would argue that downgrading the firm to simply a solid "buy" makes sense at this time.

Time to become a little less bullish

When I wrote about Associated Banc-Corp back in October of last year, we only had data covering through the second quarter of the 2023 fiscal year. Today, that data now extends through the rest of the year. The first thing that we should probably touch on would be the key balance sheet items of the institution. At the top of my mind would be the deposits. These ended 2023 at $33.47 billion. This implies continuous growth from the $29.64 billion the company ended the 2022 fiscal year at. In every single quarter between these two windows of time, the value of deposits at the institution increased.

What's also exciting is that, although we have seen an increase in uninsured deposit exposure over the last couple quarters now, it still remains at a reasonable level at 22.7%. That's comfortably below the 30% upper threshold that I like to see.

Outside of deposits, there are other things we should be paying attention to as well. The value of loans, for instance, has also grown from $28.80 billion at the end of 2022 to $29.22 billion at the end of 2023. It is worth noting, however, that loans actually peaked in the third quarter when they totaled $30.19 billion. I understand that many investors who are focused on the banking sector are worried about exposure to office properties. The good news for investors is that, as of the end of last year, only 3.6% of the loans owned by Associated Banc-Corp are dedicated to office assets.

The value of securities has remained in a fairly narrow range for much of the time. After rising from $6.70 billion at the end of 2022 to $7.38 billion in the first quarter of last year, the value of securities hasn't moved all that much. By the end of 2023, it had increased to $7.46 billion. The value of cash, meanwhile, has been all over the map. It was as low as $593.7 million and it was as high as the $909.5 million that it ended 2023 at.

What's really positive is that, even with the value of cash rising, the value of debt on the company's books has dropped. The firm ended 2022 with $4.59 billion in debt. By the end of last year, that had fallen to $2.48 billion.

This is not to say that everything has been going great with the institution. There has been a bit of a bump in the road when it comes to revenue and profits. Take the final quarter of 2023 as an example. During that quarter, net interest income totaled $232.4 million. That's down from the $269 million reported one year earlier. But the bigger problem was the fact that non-interest income went from $61.7 million to negative $131 million. That helped to push net profits down from $105.9 million to negative $93.7 million. The good news about this is that much of this change was driven by a $136.2 million loss on the sale of some of its mortgage portfolio. Management did this as part of a strategic move to better align its operations moving forward. The company also booked a $59 million loss associated with investment securities. As you can see in the chart above, this did impair results for 2023 as a whole. The good news is that the one-time nature of these items makes it easy to figure out what the picture for the business should be like moving forward. On an adjusted basis, I calculated net profits for 2023 as a whole at $344.7 million.

Using these numbers, I was able to calculate a price to adjusted earnings multiple for the institution of 8.9. Although this is definitely not the cheapest I have seen in the banking sector, it is in the range that I tend to prefer. In the chart above, you can see how the institution stacks up against five similar firms on this front. When it comes to the price to earnings approach, only two of the five enterprises I compared it to ended up being cheaper than it.

But there are other ways to value the company. In the chart below, for instance, you can see the picture through the lens of both the price to book multiple and the price to tangible book multiple. Only one of the five firms was cheaper than Associated Banc-Corp when it came to the price to book approach, with the same statement holding true for the price to tangible book approach.

While Associated Banc-Corp might not be the cheapest out there, it is definitely tilted toward the cheap end of the spectrum. However, some institutions deserve to trade on the cheap, while others do not. To see which is the case here, I decided to compare Associated Banc-Corp to the same 5 firms using the return on equity of the institutions. With a reading of 8.26%, Associated Banc-Corp it's decent, but not exactly great. Three of the five companies ended up being better than that. In the next chart below that, I did the same thing using the return on assets. In this case, four of the five companies ended up being higher than Associated Banc-Corp.

Takeaway

As things stand, I continue to believe that Associated Banc-Corp stock offers investors with some attractive opportunities. However, it's clear that the easy money has already been made. This does not mean that additional upside does not exist. But more likely than not, it will be more difficult to significantly beat the market moving forward.

I do think that enough upside still exists to warrant the bank a "buy" rating. But I would continue to keep an eye out on the institution to see if a further downgrade might eventually be required.