DBRS Comments on Associated Banc-Corp’s 1Q13 Results – Senior Debt at BBB; Trend Stable

DBRS, Inc. (DBRS) has today commented on the 1Q13 results of Associated Banc-Corp (ASBC or the Company). ASBC has an Issuer & Senior Debt rating of BBB with a Stable trend. For the quarter, the Company reported net income to common shareholders of $46.1 million, up from $45.3 million in 4Q12, and $41.3 million in 1Q12.

In DBRS’s view, ASBC’s first quarter reflected good balance sheet trends indicating continued success with its various strategic initiatives. Highlights for the quarter include average deposit growth of 3% QoQ, which DBRS sees as reflecting success with its treasury management product, as well as rewards from previous investments in the branch network. Additionally, first quarter deposit growth came entirely from core deposits with the largest percentage increase seen in interest bearing demand deposits. Meanwhile, time deposits continued to decline. Additionally, average loans grew 2% during the quarter, driven by steady growth in commercial loans, mortgage loans (50% in 15 year or less fixed rate loans and 50% in hybrid (3/5/7) ARMs), and commercial real estate. This growth was partially offset by lower retail balances, primarily from home equity loans, which declined $129 million in the quarter.

Importantly, earnings growth also reflected increased core earnings power as measured by income before provisions and taxes (IBPT). Sequentially, DBRS-calculated IBPT (adjusted to exclude one-time gains and expenses) increased 8.5% or $5.7 million to $72.7 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 and represents true core earnings improvement. Positively, earnings continue to benefit from improving credit quality, which supported a provision for loan losses of just $4 million for the quarter reflecting new loan growth, not credit quality deterioration.

Total revenues, excluding the previous quarter’s $2.0 million of non-recurring interest income related to an income tax refund and modest securities gains in both quarters, were relatively flat compared to the linked quarter increasing just $0.3 million to $239.7 million. Like most peers, ASBC is facing continued margin pressure in the current rate environment. However, growth in the average balance sheet helped offset continued net interest margin (NIM) pressure. As a result, ASBC was able to show just a modest decline in net interest income QoQ to $157.7 million despite fewer days in the quarter and one-time items in the linked quarter. The NIM was 3.17% in 1Q13, down 15 bps from 4Q12 which was elevated due to the aforementioned income tax refund. Nonetheless, ASBC expects modest NIM compression in 2013 given the asset repricing at current lower yields that will be somewhat offset by the maturity of higher cost funding including $300 million of FHLB advances maturing in 2Q13.

First quarter fee revenues were relatively flat, excluding the prior quarters establishment of the $3 million repurchase reserve. Increases in mortgage banking and insurance commissions were offset by declines in capital markets and seasonally lower card-based fees. However, the Company expects service charge revenues to improve over time, as the customer base grows.

DBRS anticipates that, given a sluggish revenue environment, consistent positive operating leverage will be important for sustaining growth in core profitability. ASBC’s modest DBRS-adjusted QoQ revenue growth of 0.1% outpaced the adjusted 3.1% decline in in non-interest expense generating positive operating leverage over the quarter.

On the credit side, ASBC continued to take actions to improve its credit posture. In 1Q13, the Company completed a note sale of $16 million small commercial loans resulting in $4 million of incremental charge-offs. DBRS sees these actions as neutral; essentially an acceleration of future losses. Even including the note sale, net charge-offs declined to $14.5 million, or 0.38% (annualized) of average total loans, down from 0.55% in 4Q12. Nonperforming assets declined 9.4% from 4Q12 to $260.6 million and represented 1.67% of total loans plus OREO. Potential problem loans also declined falling 4.8% or $17 million QoQ to $343 million. At quarter end, the allowance for loan losses represented 1.84% of total loans and covered 127% of nonaccrual 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 the deposit to loan ratio improved to 114%. At March 31, 2013, ASBC reported solid capital ratios that included an estimated Tier 1 common equity ratio of 11.64% and an estimated Tier 1 ratio of 12.03%, up 3 basis points (bps) and 2 bps in the quarter respectively. Based on current proposed rules, the Company is already in compliance with fully phased in Basel III requirements. During the quarter, the company repurchased $30 million of common stock and paid $238 million in cash dividends from Associated Bank to the parent company improving its liquidity and enhancing financial flexibility.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]