DBRS Comments on Associated Banc-Corp’s 2Q12 Results – Senior Debt at BBB; Trend Stable

DBRS, Inc. (DBRS) has today commented on the second 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 $42.0 million, up from $41.3 million in 1Q12.

Earnings growth in 2Q12 reflected lower expenses, a solid quarter for core fee revenues and still-low credit costs. DBRS views positively the Company’s ability to sustain earnings momentum and continue to grow loans despite the challenging rate environment and stiff competition for quality credits. In DBRS’s view, Associated continues to strengthen its earnings capacity as evidenced by loan growth, positive deposit trends, and well controlled expenses. That said, excluding $4 million of insurance reimbursements that flowed through expenses in the second quarter, DBRS calculated income before provisions and taxes declined about $3 million from the first quarter to approximately $60 million.

Once again the Company funded loan growth primarily with securities runoff, resulting in a very slight increase in average earning assets, but a better mix, in DBRS’s view. Nevertheless, given the rate environment the NIM did decline modestly, down 1 basis point q-o-q to 3.30%. Associated expects earning asset growth to pick up in the third quarter, which should help offset NIM pressure. Net interest income was $154.3 million in the quarter, down 0.3% from 1Q12. This quarter’s loan growth of 3% reflected solid growth of $594 million across CRE and Commercial and Business Lending that was offset somewhat by a $149 million decline in Retail and Resi Mortgage. The bulk of the decline was driven by the sale of a portfolio of residential loans, the proceeds of which were used to fund the deposits at the 3 branches in rural Western Illinois that were sold in the quarter.

Fee revenue trends were mostly positive in the quarter. Core fees increased $1.7 million from 1Q12 to $56.1 million and, while down q-o-q, net mortgage banking fees of $16.7 million were strong again in 2Q12. Overall, at $76.0 million, noninterest income declined 3.2% from a strong 1Q12, and represented 33% of Associated’s total 2Q12 revenues.

In general, credit continued to improve in the quarter, though loans 90+ days past due and still accruing more than doubled q-o-q to $5.2 million and net charge-offs did tick up slightly from 1Q12. That said, at $24 million, or 0.65% (annualized) of average loans, NCOs remain manageable. Also, total nonperforming assets declined 1% from 1Q12 to $357.9 million and potential problem loans fell 15% to $410 million. These trends supported another quarter with zero provision, and DBRS continues to view current reserve coverage as adequate. At quarter-end, the allowance for loan losses represented 2.26% of total loans and covered 105% of nonaccrual balances. DBRS notes that even with continued moderate loan growth Associated’s outlook is for very modest provisioning in coming quarters.

The Company’s funding and liquidity remain sound, in DBRS’s view, and capital remains strong. Average deposits grew modestly in the quarter (up 0.3% to $15.1 billion) despite the noted branch sale that closed in mid-May. The mix also improved as average time deposits declined 8% from 1Q12. Associated also reduced higher cost, collateralized public funds further this quarter. Benefiting from continued investment in branch upgrades as well as new treasury offerings, DBRS expects continued positive trends in core deposits.

At June 30, Associated reported solid capital ratios that included an estimated Tier 1 common equity ratio of 12.04% and an estimated Tier 1 ratio of 13.64%, down 45 bps and 69 bps, respectively, from the end of 1Q12. The decline form 1Q12 reflected loan growth, $30 million of stock repurchases and the redemption of $25 million of high cost trust preferreds in the quarter.

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 are 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 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: Michael Schaller
Approver: Alan G. Reid
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.