DBRS Comments on Associated Banc-Corp’s 1Q12 Results – Senior Debt at BBB; Trend Stable

DBRS, Inc. (DBRS) has today commented on the first quarter 2012 results of Associated Banc-Corp (Associated or the Company). Associated has an Issuer & Senior Debt rating of BBB. The ratings trend is Stable. For the quarter, the Company reported net income to common shareholders of $41.3 million, up from $39.8 million in 4Q11. This was the fifth consecutive quarter that Associated reported increased net income available to common shareholders.

Earnings growth in the quarter reflected a strong quarter for fee revenues, lower expenses, and still-low credit costs. Though the pace of loan growth slowed from recent quarters, Associated continues to rebuild its earnings power. DBRS calculated income before provisions and taxes (IBPT) increased $12.4 million from the fourth quarter to $63.4 million. IBPT also increased 2.6% from 1Q11.

The first quarter’s 1.6% loan growth (to $14.3 billion) was again funded by securities runoff (average securities down 8% q-o-q), and the Company continued to grow deposits, while reducing funding costs. As a result, Associated’s NIM expanded 10 bps from 4Q11 to 3.31%, supporting a 2% increase in net interest income to $155 million. Moreover, a strong quarter for mortgage banking, up $8.0 million from 4Q11, drove 10.4% linked-quarter growth in fee revenues. DBRS notes positively that core fee-based revenues also increased from the fourth quarter. In total, revenues increased $10.5 million from 4Q11 to $236.2 million.

Nevertheless, with competition and low rates pressuring net interest income, and given the expectation that mortgage banking revenues will decline from 1Q12 levels, DBRS anticipates cost control will be important as Associated seeks to sustain its earnings momentum. In the first quarter, despite seasonally higher compensation and benefits, non-interest expense declined 1.1% from 4Q11 to $172.9 million. DBRS notes that the improvement in expenses benefited from the absence of a $10 million legal settlement that increased 4Q11 expenses. Still, Associated is targeting positive operating leverage in 2012, even as it continues to invest in its franchise.

The steady improvement in credit continued in the first quarter as nonperforming assets declined another 9% from 4Q11 to $362 million and were at their lowest level since 4Q09. Potential problem loans also declined further, down 15% from year-end to $480.1 million. Early stage delinquencies were up $17.3 million from December 31, 2011, but, at $61.2 million, are considerably below year ago levels. NCOs of $21.9 million, declined 3.2% q-o-q, and represented 0.61% of average 1Q12 loans. These trends supported a provision of zero in the quarter, compared to $1 million in the prior quarter. At March 31, the allowance for loan losses remained adequate in DBRS’s view, representing 2.50% of loans. Coverage of nonaccrual balances improved to a solid 109%.

The Company’s funding and liquidity remain sound, in DBRS’s view, and capital remains strong. Average total deposits were up 3.7% q-o-q, led by strong growth in money market deposits as the Company has migrated some business clients out of term repos and into money market accounts. Associated’s solid deposit franchise which continues to fund the entire loan portfolio, anchors a solid funding profile and Associated’s liquidity continues to be supported by its high quality securities portfolio that represented 21.3% of total assets at period end. At March 31, Associated reported solid capital ratios that included an estimated Tier 1 common equity ratio of 12.49% and an estimated Tier 1 ratio of 14.33%, both up 25 bps from year end.

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

The principal applicable methodology is 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 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: Michael Schaller
Approver: Steven Picarillo
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.