DBRS Comments on Associated Banc-Corp’s 3Q11 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 3Q11 earnings. The trend on all ratings remains Stable. For the quarter, Associated reported net income to common shareholders of $34.0 million, up from $25.6 million in 2Q11.

In DBRS’s view, Associated’s 3Q11 results evidenced further success in executing on its various strategic initiatives. The Company continues to invest in people and in new product areas, which supported solid q-o-q loan growth of 3% in the third quarter. Core deposits continued to grow, with demand deposits showing noteworthy 15% growth in the third quarter, while the Company further reduced higher cost Brokered CDs. In addition, capital levels remained strong, credit costs continued to decline, and nonaccrual balances continued to fall. Associated also completed the repurchase of TARP shares in the quarter, a key achievement. The repurchase, funded by senior debt and a preferred share offering, resulted in a pre-tax charge of $4 million. Excluding TARP repayment charges from both second and third quarter results, earnings were approximately $38 million in 3Q11, up about $7.4 million from 2Q11.

Importantly from DBRS’s perspective, third quarter results also reflected growth in underlying profitability. Whereas prior period results were driven by reserve releases, Associated was able to generate revenue and IBPT growth in 3Q11, despite the still-challenging environment. For the quarter, total revenues were up 2.7% to $224.8 million; income before provisions and taxes (IBPT) was $62.7 million, up from $60.0 million in 2Q11. Further success in growing underlying earnings, including core fee-based revenues, would be viewed positively, though DBRS acknowledges that headwinds remain. The rate environment remains challenging and fee revenues will be pressured as the Durbin amendment comes into effect in 4Q11.

Associated’s revenue growth in the third quarter was driven by improvement in noninterest income as net mortgage banking fees and net capital markets fees rebounded from a weak second quarter. Combined these two items produced 3Q11 revenues of $7.8 million, a $12.0 million improvement from 2Q11. Core fee revenues, which include trust fees, retail commissions, service charges and card-based and other non-deposit fees, decreased 2.1% from 2Q11 to $60.1 million. DBRS notes that the Durbin amendment is expected to reduce fee revenues by around $4 million in 4Q11.

Net interest income remains pressured by the low rate environment. Despite growth in average earning assets and an improved asset mix, as loan growth has been funded by runoff in the securities portfolio and reductions in excess liquidity, 3Q11 net interest income was down 0.6% from 2Q11 to $153.2 million. For the quarter, NIM was 3.23%, down 6 basis points (bps) from 2Q11.

Credit improved further this quarter as nonperforming assets (NPAs) were the lowest in ten quarters, down 13.2% to $445.5 million. Potential problem balances also fell another 5.7% from 2Q11. Combined with the noted loan growth, the ratio of NPAs to loans plus OREO declined 62 bps q-o-q to 3.29% of loans plus OREO. These trends and a 32.0% drop in net charge-offs to $30.2 million, supported the 3Q11 provision of $4.0 million that reduced the allowance by $26.2 million to $399.7 million. At September 30, the allowance for loan losses remained adequate in DBRS’s view, representing 2.96% of loans. Coverage of nonaccrual balances improved to 99.1% at the end of 3Q11, up from 91.1% at June 30.

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 Associated maintains a high quality securities portfolio that represented 24.9% of total assets at the end of 3Q11. At quarter end, Associated reported an estimated Tier 1 common equity ratio of 12.44% and an estimated Tier 1 ratio of 14.35%, which give Associated ample loss absorption capacity and increased flexibility as it executes on its various strategic initiatives. These capital levels also keep its subsidiary comfortably in compliance with its MOU-stipulated capital requirements.

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: Alan G. Reid
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 under Related Research.