After a stellar year, earnings at Associated Banc-Corp (NYSE:ASB) will likely decline in 2022 as provisioning is likely to remain higher than normal. On the other hand, the rising interest rate environment will limit the decline in earnings. In addition, management’s initiatives to grow the business will drive loan growth, supporting net income. Overall, I expect Associated Banc-Corp to report earnings of $1.67 per share in 2022, down 23% year-over-year. The year-end target price is slightly above the current market price. Therefore, I adopt a retainer rating on Associated Banc-Corp.

Management efforts to increase the loan portfolio

Associated Banc-Corp’s loan portfolio finally recovered in the last quarter of 2021 after four consecutive quarters of decline. The growth trend is likely to remain positive this year due to the economic recovery across the country. In addition, management’s efforts to grow the business will likely bear fruit this year.

Associated Banc-Corp plans to expand its core business and small business segments by hiring new bankers, as mentioned in the investor presentation. Management is on track to hire approximately 15-20 bankers by the end of 2022. The company is particularly focused on hiring in equipment finance, a business line that has recently been added.

Additionally, management plans to focus on the newly added auto finance segment. As mentioned in the presentation, Associated Banc-Corp got off to a strong start and now works with approximately 665 active dealers in thirteen states. In fact, management expects greater loan growth from the auto finance segment than from other segments. Management is targeting auto finance loan growth of more than $1.2 billion in 2022, while targeting total commercial loan growth (including asset-backed lending and equipment finance) of $750 million to $1 billion.

Given these factors, I expect the loan book to grow by 8% in 2022. Meanwhile, deposits and other balance sheet items will likely grow along with loans. The following table shows my balance sheet estimates.

	EX17	EX18	FY19	FY20	FY21	FY22E
Financial situation
Net loans	20,519	22,702	22,620	24,068	23,945	25,919
Net loan growth	3.8%	10.6%	(0.4)%	6.4%	(0.5)%	8.2%
Other productive assets	6,971	7,638	6,077	5,577	7,576	8,200
Deposits	22,786	24,897	23,779	26,482	28,466	30,813
Loans and sub-debts	4,074	4,527	4,195	2,435	2,225	2,408
Common equity	3,078	3,524	3,665	3,737	3,832	3,962
Book value per share ($)	20.0	20.8	22.5	24.3	25.5	26.4
Tangible BVPS ($)	13.6	13.4	14.7	16.7	17.8	18.7
Source: SEC Filings, Author’s Estimates (In millions of dollars, unless otherwise indicated)

A balance sheet well positioned to take advantage of a rising interest rate environment

In addition to loan growth, revenue will likely also benefit from a rising interest rate environment. The Federal Reserve last forecast a 75 basis point interest rate hike in 2022 (or three rate hikes). As inflation is quite high, I think a 100 basis point increase in the fed funds rate cannot be ruled out.

Thanks to rapid revaluation of commercial loans and somewhat sticky non-interest-bearing deposits, Associated Banc-Corp’s balance sheet is moderately sensitive to assets. Based on management’s interest rate sensitivity analysis, a 100 basis point increase in interest rate can increase net interest income by 5.5%. The following table from the third quarter 10-Q filing shows the results of management’s interest rate sensitivity analysis.

Overall, I expect the margin to increase by seven basis points in 2022, compared to 2.4% in the fourth quarter of 2021. Based on the outlook for loan growth and margin expansion, I expect net interest income to grow 10.5% to $802 million in 2022. That’s more or less in line with management’s forecast.

Venture into riskier segments ahead at a higher cost of credit

Associated Banc-Corp has released a portion of its loan loss reserves for each of the past four quarters. Due to increased provisioning in 2020 and lower lending in 2021, the net reversal of provisions last year came as no surprise. Going forward, the provision charge will likely increase as expected loan growth will require a provision for expected loan losses.

Additionally, provisioning this year will likely be higher than in previous years as Associated Banc-Corp has now entered riskier lending segments, namely auto financing and equipment financing. Given these factors, I expect the company to report a provision charge of $48 million in 2022, representing 0.19% of total loans. In comparison, the provision charge averaged 0.14% of total loans from 2016 to 2019.

Revenues are expected to fall 23% in 2022

The higher provision charge will likely reduce year-over-year earnings. In addition, non-interest income will likely decline due to mortgage bank income. Rising interest rates will discourage mortgage refinancing activity, which in turn will reduce mortgage bank income.

On the other hand, strong loan growth and expanding margins will likely limit the decline in earnings. Additionally, management’s expense reduction initiatives will likely improve the efficiency ratio. Management said on the conference call that it expects its spending initiatives to reduce operating expenses by $10 million.

Overall, I expect Associated Banc-Corp to report earnings of $1.67 per share in 2022, down 23% year-over-year. This EPS estimate is quite close to the previous estimate given in my last ASB report which was released before the fourth quarter results. The following table shows my income statement estimates.

	EX17	EX18	FY19	FY20	FY21	FY22E
income statement
Net interest income	741	880	836	763	726	802
Allowance for loan losses	26	–	16	174	(88)	48
Non-interest income	333	356	381	514	332	312
Non-interest charges	709	822	794	776	710	738
Net income – Common Sh.	220	323	312	286	334	251
BPA – Diluted ($)	1.43	1.90	1.91	1.86	2.18	1.67
Source: SEC Filings, Author’s Estimates (In millions of dollars, unless otherwise indicated)

Actual earnings may differ materially from estimates due to risks and uncertainties related to the COVID-19 pandemic, particularly the Omicron variant.

The current market price is above the target price for the coming year

Associated Banc-Corp offers a dividend yield of 3.3% at the current quarterly dividend rate of $0.20 per share. Earnings and dividend estimates suggest a payout ratio of 48% for 2022, which is easily manageable. Therefore, I don’t think there is a threat of a dividend cut, even though the expected payout ratio is well above the five-year average of 35%.

I use historical price/tangible (“P/TB”) and price/earnings (“P/E”) multiples to value Associated Banc-Corp. The stock has traded at an average P/TB ratio of 1.45 in the past, as shown below.

	EX17	EX18	FY19	FY20	FY21	Medium
T. Book value per share ($)	13.6	13.4	14.7	16.7	17.8
Average market price ($)	24.5	25.6	21.0	15.0	21.3
Historical P/TB	1.80x	1.91x	1.43x	0.90x	1.20x	1.45x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple by the expected tangible book value per share of $18.7 yields a price target of $27.0 for the end of 2022. This price target implies an upside of 11.0% compared to the closing price on January 21. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB	1.25x	1.35x	1.45x	1.55x	1.65x
TBVPS – Dec 2022 ($)	18.7	18.7	18.7	18.7	18.7
Target price ($)	23.3	25.1	27.0	28.9	30.7
Market price ($)	24.3	24.3	24.3	24.3	24.3
Up/(down)	(4.3)%	3.3%	11.0%	18.7%	26.3%
Source: Author’s estimates

The stock has traded at an average P/E ratio of around 11.9x in the past, as shown below.

	EX17	EX18	FY19	FY20	FY21	Medium
Earnings per share ($)	1.4	1.9	1.9	1.9	2.2
Average market price ($)	24.5	25.6	21.0	15.0	21.3
Historical PER	17.1x	13.5x	11.0x	8.0x	9.8x	11.9x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple by the expected earnings per share of $1.67 yields a price target of $19.9 for the end of 2022. This price target implies an 18.4% decline from at the closing price on January 21. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E	9.9x	10.9x	11.9x	12.9x	13.9x
EPS 2022 ($)	1.67	1.67	1.67	1.67	1.67
Target price ($)	16.5	18.2	19.9	21.5	23.2
Market price ($)	24.3	24.3	24.3	24.3	24.3
Up/(down)	(32.1)%	(25.3)%	(18.4)%	(11.5)%	(4.7)%
Source: Author’s estimates

Equal weighting of the target prices from the two valuation methods yields a combined target price of $23.4, implying a 3.7% decline from the current market price. Adding the forward dividend yield gives an expected total return of minus 0.4%. Therefore, I adopt a Hold rating on Associated Banc-Corp.