DBRS Comments on Associated Banc-Corp’s 1Q11 Results – Senior Debt at BBB Unchanged; Trend Stable

DBRS Inc. (DBRS) has today commented that the ratings of Associated Banc-Corp (Associated or the Company), including its Issuer & Senior Debt rating of BBB, are unchanged following the release of the Company’s 1Q11 earnings. The trend on all ratings remains Stable. Associated reported net income to common shareholders of $15.4 million for the first quarter, up from $6.6 million in 4Q10.

Factored into DBRS’s recent confirmation of Associated’s ratings and the revision of the trend to Stable were DBRS’s expectations for improved earnings, reductions in charge-offs and further declines in non-performing assets in coming quarters. DBRS sees Associated’s 1Q11 results as in-line with these expectations. Still, revenue growth remains challenging. Income before provisions and taxes (IBPT) declined further in the quarter to $61.7 million from $68.7 million in 4Q10. Positively, the 51% linked quarter decline in the provision for loan losses enabled the Company to grow earnings from the prior quarter and the ratio of provisions to IBPT was much improved at 50%.

Associated’s quarterly revenues declined 4% from 4Q10 to $225.9 million in 1Q11. The modest decline was driven by the $11.3 million decline in mortgage banking revenue from the strong fourth quarter and lower capital markets fees. DBRS notes that Associated’s core fee revenues, which include trust fees, retail commissions, service charges and card-based and other non-deposit fees, were $60.9 million in 1Q11, up from $60.2 million in 4Q10. This was the first q-o-q increase in core revenues since Reg E went into effect, and it resulted from a strong quarter for retail commissions, which increased 13% q-o-q to $16.4 million. Net interest income was up 2% from 4Q10 to $153.7 million reflecting the benefit of the deposit and investment strategies Associated implemented last quarter as it deployed excess liquidity and reduced higher cost liabilities. As a result, the NIM improved 19 bps to 3.32% in 1Q11.

Credit continued to improve in the quarter. Whereas loan sales accounted for a substantial amount of the reduction in non-performing loans (NPLs) in prior periods, DBRS views positively that the improvement in 1Q11 was organic. NPLs declined 15% from year end to $488 million, as all loan categories reported lower non-accrual balances from year end. Highlighting the progress made in the last twelve months, total non-performing assets represented 4.23% of loans plus OREO at the end of 1Q11, down from 9.30% at the end of 1Q10.

Net charge-offs, which had been somewhat elevated in recent periods due in part to loan sales, also declined, falling 51% from 4Q10 to $53.4 million. DBRS notes that the 1Q11 total included a $10 million charge-off resulting from the Company’s decision to transfer $61 million of non-core consumer installment loans to held-for-sale. The sale of these loans is expected to close in 2Q11.

In addition to declining charge-offs and lower NPLs, early stage delinquencies and potential problem loans declined for the fifth consecutive quarter, supporting the 51% reduction in Associated’s provision for loan losses to $31 million in 1Q11. Reserve coverage remains adequate. At March 31, 2011, the allowance for loan losses represented 3.59% of loans and 93% of nonaccrual balances.

The Company’s funding and liquidity remain sound, in DBRS’s view, and capital remains strong. Deposits continue to fund the entire loan portfolio. As expected though, Associated further reduced its network transaction deposits in the quarter and it migrated customers from higher cost interest-bearing demand deposit and money market accounts into sweep accounts and term repos. Overall, total deposits declined 8% from year end, but the growth in sweep accounts and term repos more than offset the decline, and Associated maintained key customer relationships while reducing its funding costs following the expiration of the Government’s TAG program.

Pro forma for the April 6 repayment of half of the Company’s TARP preferred shares, Associated reported an estimated Tier 1 common equity ratio of 12.6% and an estimated Tier 1 ratio of 16.2%, which gives Associated increased flexibility as it executes on its various strategic initiatives while keeping its subsidiary comfortably in compliance with its MOU-stipulated capital requirements. The Company expects to repay its remaining $262.5 million of outstanding TARP preferred shares later this year.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments, and Rating Bank Preferred Shares and Equivalent Hybrids, all of which can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the company documents, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: William Schwartz
Approver: Roger Lister
Initial Rating Date: 14 January 2010
Most Recent Rating Update: 6 April 2011

For additional information on this rating, please refer to the linking document below.