DBRS Comments on Associated Banc-Corp’s 2Q11 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 2Q11 earnings. The trend on all ratings remains Stable. For the quarter, Associated reported net income to common shareholders of $25.6 million, up from $15.4 million in 1Q11. DBRS notes that Associated repaid $262.5 million, or half of its outstanding TARP preferred shares in the second quarter, which resulted in a noncash charge of $5 million.

DBRS sees Associated’s 2Q11 results as evidencing further success in executing on its various strategic initiatives. C&I loans grew a robust $230 million, or 7.7%, from 1Q11 and the total loan portfolio increased 3.4%. At the same time, deposits and other customer funding both continued to grow while brokered funds and network transaction deposits fell further in the quarter. In addition, and importantly, credit continued to improve in 2Q11 and the $15 million decline in provisions q-o-q was a key driver of the Company’s increased earnings.

DBRS views positively the continued positive earnings and the earnings growth Associated has shown over the last several quarters. As a result, the Company has maintained its solid capital levels and lowered its risk profile. Still, much of the improvement in earnings is owed to reserve releases as core profitability growth remains elusive in what remains a challenging operating environment. For the quarter, income before provisions and taxes (IBPT) was $60.0 million, down from $61.7 million in 1Q11. DBRS sees the ongoing pressure on core earnings as tempering any upward pressure on Associated’s ratings in the near term.

Associated’s total revenues declined 3% from 1Q11 to $218.9 million for 2Q11. The modest decline was driven by lower fee revenues. Specifically, net mortgage banking fees fell by $5.2 million due to a reduction in the value of MSRs and net capital market fees included a $4 million non-cash valuation reserve in 2Q11. Positively, the Company’s core fee revenues, which include trust fees, retail commissions, service charges and card-based and other non-deposit fees, increased somewhat in 2Q11, growing 0.8% to $61.3 million. Net interest income was up slightly from 1Q11 to $154.1 million in 2Q11, reflecting the noted decline in non-core funding, and higher levels of average earnings assets. The NIM for the quarter was 3.29%, down 3 bps from 1Q11, largely due to the cost of the debt Associated issued to finance the repayment of its TARP preferred shares.

Credit continued to improve in the quarter. Nonperforming assets (NPAs) declined 4.5% from the end of 1Q11 to $513 million, as nearly all loan categories reported lower nonaccrual balances. Combined with the noted loan growth, the ratio of NPAs to loans plus OREO declined 32 bps from March 31, 2011 to 3.91% of loans plus OREO. DBRS notes that $71.1 million of restructured loans were included in total NPAs at June 30, 2011, up 44% from 1Q11. Also, DBRS is mindful that total restructured loans were $171.4 million at the end of 2Q11, up $33.9 million from last quarter. Commercial restructured loans comprised 69% of total accruing restructured loans at period end.

In addition to the lower levels of nonaccrual balances, potential problem loans fell for a sixth consecutive quarter, declining 23.3% to $699.4 million. These trends and a 16.6% drop in net charge-offs to $44.5 million, supported the 2Q11 provision of $16 million that reduced the allowance by 6.3% to $426.0 million. At June 30, 2011, the allowance for loan losses remained adequate in DBRS’s view, representing 3.25% of loans and 91.1% 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 and the Company reduced its non-core network and brokered funding by 10% from the end of 1Q11. At quarter end, Associated reported an estimated Tier 1 common equity ratio of 12.61% and an estimated Tier 1 ratio of 16.03%, 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. DBRS views the repayment of half of its outstanding TARP capital in the quarter as an important step, highlighting the improving strength of the Associated franchise and 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: Steven Picarillo
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.