DBRS Comments on Associated Banc-Corp’s 4Q11 Results – Senior Debt at BBB Unchanged; Trend Stable

DBRS, Inc. 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 4Q11 earnings. The trend on all ratings remains Stable. For the quarter, Associated reported net income to common shareholders of $39.8 million, up from $34.0 million in 3Q11. Despite lower income before provisions and taxes (IBPT), Associated was able to improve earnings in the quarter thanks to resilient revenues, further improvement in credit and the absence of TARP related costs. It was the Company’s sixth consecutive profitable quarter and the fourth quarter it has grown net income available to common shareholders.

In the fourth quarter, Associated continued to execute on its various strategic initiatives. Loan growth continued and was a solid 4% (unannualized), while deposits also grew and the funding mix improved. DBRS notes that Associated has continued to use loans to replace securities, which DBRS views as a generally sound strategy given the substantial excess liquidity Associated added in 2010. At year-end, Associated’s $14.0 billion loan portfolio was still entirely funded by its core deposits and other customer funding. The reported loan growth was broad based, though there was notable growth in new specialized lending areas such as oil & gas, power & utilities, and mortgage warehousing. DBRS sees this growth as reflective of both an improving economy, but also as success with Associated’s strategic initiatives. While DBRS views positively the growth and diversity provided by the new specialty lending, which is in sectors that have generally displayed less volatile results in recent crises, DBRS is mindful that these are new lending areas for Associated. DBRS will continue to closely monitor these portfolios as they season in coming periods.

Associated was able to generate modest revenue growth in the fourth quarter. Total revenues were $225.7 million in 4Q11, up from $224.8 million in 3Q11. The growth was due to higher levels of noninterest income where a strong quarter for mortgage banking offset the expected $4 million impact of the Durbin amendment and some seasonal weakness in other fees. Net interest income remains pressured by the low rate environment. Despite an improving asset mix, 4Q11 net interest income was down 0.9% from 3Q11 to $151.9 million. For the quarter, NIM was 3.21%, down 2 bps from 3Q11.

Sustained improvement in underlying earnings, including core fee-based revenues, would be viewed positively, though DBRS acknowledges that headwinds remain. With competition and low rates pressuring net interest income while new regulations will continue to weigh on certain fee lines, DBRS anticipates cost control will be important as Associated seeks to sustain its earnings momentum. That said, Associated’s fourth quarter noninterest expense increased 7.7% from 3Q11 to $174.7 million, and, as a result, IBPT declined 18.6% q-o-q to $51.0 million. DBRS notes that a significant portion ($10 million) of the $12.5 million increase in quarterly expenses was attributed to a previously disclosed legal settlement and Associated is targeting positive operating leverage in 2012, even as it continues to invest in its franchise.

Credit improved further this quarter as nonperforming assets (NPAs), net charge-offs (NCOs) and potential problem loans all declined from the third quarter. After jumping somewhat in 3Q11, early stage delinquencies also fell sharply, down 69.5% to $43.9 million at year end. At year end, the ratio of NPAs to loans plus OREO declined 46 bps q-o-q to 2.83%. NCOs of $22.6 million represented 0.64% of average fourth quarter loans. These trends all supported a lower provision in the quarter that was down $3 million q-o-q to $1 million. At year end, the allowance for loan losses remained adequate in DBRS’s view, representing 2.70% of loans. Coverage of nonaccrual balances improved to 106% at the end of 4Q11, up from 99% at September 30.

The Company’s funding and liquidity remain sound, in DBRS’s view, and capital remains strong. Average total deposits were up 2.1% q-o-q, led by strong growth in demand deposits, and overall deposit costs continued to decline, reflecting an improving mix. This solid deposit franchise anchors an ample funding profile and Associated’s liquidity continues to be supported by its high quality securities portfolio that represented 22.5% of total assets at year end. Associated achieved several important capital-related milestones in 2011, in DBRS’s view, which increase flexibility and signal improving strength. Specifically, the Company repaid TARP and had its MOU with the OCC terminated, though the less onerous Federal Reserve MOU remains in place. At year end, Associated reported solid capital ratios, including an estimated Tier 1 common equity ratio of 12.24% and an estimated Tier 1 ratio of 14.08%.

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 DBRS Criteria – 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 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 see the linking document under Related Research.