DBRS Comments on Associated Banc-Corp’s 3Q12 Results – Senior Debt at BBB; Trend Stable

DBRS, Inc. (DBRS) has today commented on the 3Q12 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 $45.1 million, up from $42.0 million in 2Q12.

In DBRS’s view, Associated’s third quarter reflected good balance sheet trends that evidenced continued success with its various strategic initiatives. Highlights included average deposit growth of 4% QoQ, which DBRS sees as reflecting success with its treasury management product as well as rewards from investments made in the branch network. Third quarter deposit growth was entirely in core deposits as time deposits continued to decline. In addition, average loans grew 2% in the quarter, despite a sluggish environment. This quarter’s loan growth was driven by growth in mortgage loans (primarily in-footprint hybrid ARMs) as well as 3% growth in commercial balances. This growth was offset by lower retail balances, which include home equity loans.

Importantly, earnings growth also reflected increased core earnings power as measured by income before provisions and taxes (IBPT). DBRS-calculated IBPT (adjusted to exclude securities gains and other one-time items) increased $3.8 million from 2Q12 to $63.4 million. DBRS notes that a sustained increase in IBPT could put upward pressure on the Company’s ratings provided it is not the result of a materially higher risk profile. DBRS notes also that earnings continue to benefit from improvement in credit quality, which supported a provision for loan losses of zero for the third consecutive quarter.

Total revenues, excluding $3.5 million of securities gains, increased approximately 1.5% from 2Q12 to $233.1 million. Like most peers, Associated is facing some margin pressure in the current rate environment. However, in 3Q12, the noted balance sheet trends helped offset the pressure on yields, and Associated was able to grow net interest income modestly QoQ to $155.6 million. The NIM was 3.26% in 3Q12, down 4 bps from 2Q12. Associated expects to maintain the NIM around current levels in 4Q12.

Third quarter fee revenues were similar to last quarter and benefited from continued strong mortgage banking results. Core fees declined 1.8% from 2Q12 to $56.1 million due to lower insurance and brokerage commissions. Total non-interest income, excluding securities gains was $77.5 million in 3Q12, up about $2.1 million from 2Q12.

DBRS anticipates that, given a sluggish revenue environment, consistent positive operating leverage will be important for sustaining growth in core profitability. Excluding securities gains, QoQ revenue growth of 1.5%, was outpaced by 2.2% growth in non-interest expense. Higher expenses in the third quarter reflected continued elevated costs related to BSA enhancements as well as higher occupancy and equipment expenses.

As noted, credit continued to improve in the quarter. Net charge-offs (NCOs) were $17.5 million, or 0.47% (annualized) of total loans, down from 0.67% in 2Q12. Nonperforming assets declined 12% from 2Q12 to $314.2 million and represented 2.09% of total loans plus OREO. Potential problem loans were relatively stable QoQ, declining $6 million to $404 million. At quarter end, the allowance for loan losses represented 2.11% of total loans and covered 113% of non-accrual balances. DBRS continues to view current reserve coverage as adequate.

The Company’s funding and liquidity remain sound, in DBRS’s view, and capital remains strong. The loan growth in the quarter was funded by deposit growth and, as noted the Company’s deposit mix continued to improve over the quarter. At September 30, Associated reported solid capital ratios that included an estimated Tier 1 common equity ratio of 12.01% and an estimated Tier 1 ratio of 13.57%. Based on current proposed rules, the Company is already in compliance with fully phased in Basel III 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 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 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.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Michael Schaller
Approver: Roger Lister
Initial Rating Date: 14 January 2010
Most Recent Rating Update: 14 September 2012

For additional information on this rating, please refer to the linking document under Related Research.