Loan growth helps Associated Banc-Corp (ASB) despite high costs

Associated Bank-CorpASB’s solid loan growth, efforts to focus on fee income and inorganic expansion initiatives should continue to support financials. Its strong balance sheet and efforts to improve operational efficiency are commendable.

Additionally, analysts seem optimistic about its earnings growth potential. Zacks’ consensus estimate for the company’s current-year earnings has been revised higher in the past 30 days.

However, relatively low interest rates, high costs and the company’s exposure to lending to sectors, which are hardest hit by the COVID-19 chaos, are major concerns.

In terms of fundamentals, while Associated Banc-Corp’s total revenue declined in 2021 and the first quarter of 2022, it recorded a compound annual growth rate (CAGR) of 4.8% over the five-year period. years ending in 2020.

In addition, the continued shift in the composition of deposits due to the increase in non-interest bearing deposit accounts (non-interest bearing demand deposits as a percentage of total deposits were 29.3% in March 31, 2022) was impressive.

ASB has taken steps to improve operational efficiency. In September 2021, the company announced a strategic expansion plan, which will strengthen operating leverage and profitability over time.

In 2020, it announced branch optimization efforts, which should result in continued annual cost savings. In 2021, Associated Banc-Corp sold its wealth management subsidiary Whitnell & Co., while in 2020 it spun off its insurance business, Associated Benefits & Risk Consulting.

Associated Banc-Corp also experienced inorganic growth. In 2020 it acquired First Staunton Bancshares and in 2019 it acquired 32 branches in Wisconsin. In the first half of 2018, it acquired Anderson Insurance, Diversified Insurance Solutions and Bank Mutual. These agreements should be accretive to the profits of the company.

However, the company’s net interest margin (NIM) has been under pressure in recent years. Although the NIM rose in the first quarter of 2022, the company’s margins are expected to remain under pressure for some time in the near term due to relatively lower rates despite expectations of rate hikes in 2022.

While ASB’s spending declined in the first quarter of 2022, it also recorded a CAGR of 0.2% over the past six years (2016-2021). This increase is mainly due to the increase in personnel costs and technological expenses. Operating expenses are expected to remain elevated in the near term, given the company’s inorganic growth efforts, digitalization and franchise investments.

In addition, a large portion of Associated Banc-Corp’s loan portfolio – 63.4% as of March 31, 2022 – comprised total commercial loans (commercial and corporate loans, as well as commercial real estate loans). A higher concentration of commercial loans can pose regulatory and market issues for the company.

Actions worth a look

A few actions from the same space that are worth checking out are Independent banking company IBCP and Civista Bancshares, Inc. CIVB.

The independent bank’s Zacks consensus estimate for current-year earnings has been revised higher in the past 30 days. Over the past two years, IBCP shares have gained more than 30%.

Civista Bancshares has also seen an upward revision to 2022 earnings estimates over the past 30 days. CIVB shares have gained more than 40% over the past two years.

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