DBRS Comments on Associated Banc-Corp’s 2Q13 Results – Senior Debt at BBB; Trend Stable

DBRS, Inc. (DBRS) has today commented on the 2Q13 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 $46.6 million, up slightly from $46.1 million in 1Q13 and $42.0 million in 2Q12. This quarter marked the Company’s 10th consecutive improvement in quarterly earnings. For 2Q13, results equated to a 0.82% ROAA and a 9.76% return on average tangible common equity in line with recent periods.

In DBRS’s view, ASBC’s second quarter reflected continued good balance sheet trends indicating success of the Company’s various strategic initiatives. Highlights for the quarter include average loan growth of 2% during the quarter and 8% over the year ago quarter. Steady growth in commercial loans and commercial real estate loans drove the increase. Growth was partially offset by lower retail balances, primarily from home equity and installment loans. Loans in these categories saw an average balance decline of $135 million or 5% in the quarter. Additionally, average deposit growth was relatively flat QoQ although up 14% from 2Q12. However, the deposit mix improved during the quarter with growth in checking and savings offset by a decline in money market and time deposits.

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 3.8% or $2.8 million to $75.5 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 and unchanged from the linked quarter. As further loan growth materializes, the provision expense is likely to increase in future periods.

Total revenues, increased $4.8 million QoQ and would have increased more excluding $5.0 million of expected one-time items (including a $3.0 third-party products reserve which affected insurance revenue and a $2.0 million loss following consolidation of some of the Company’s real estate holdings). 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 of this and with benefit of an additional day in the quarter, ASBC was able to show a $2.5 million increase in net interest income QoQ to $160.2 million. The NIM was 3.16% in 2Q13, down just 1 basis point (bp) from 1Q13. Nonetheless, ASBC expects modest NIM compression in 2013 given asset repricing at lower yields and fewer opportunities to reduce funding costs.

Second quarter fee revenues increased even with the aforementioned one-time charges. The increase was broad-based across most fee categories with particularly strong increases in capital market fees and mortgage banking. In fact, despite increasing mortgage rates during the quarter, the Company’s mortgage banking business had a record quarter. With continued higher long-term interest rates, DBRS expects mortgage banking revenue will likely decline in future periods. While mortgage banking is an important source of fee income for ASBC, representing approximately 23% of noninterest income, ASBC is less reliant on mortgage banking income than some of its peers.

DBRS anticipates that, given a still relatively slow-growth revenue environment, consistent positive operating leverage will be important for sustaining growth in core profitability. ASBC’s DBRS-adjusted QoQ revenue growth of 2.0% outpaced the adjusted 1.2% increase in non-interest expense generating positive operating leverage over the quarter. Reflecting these trends, the Company’s efficiency ratio showed improvement in the quarter.

ASBC’s asset quality has continued to improve with nonperforming assets, net charge-offs, and potential problem loans all declining during the quarter. Nonperforming assets declined 6.0% from 1Q13 to $244.9 million and represented 1.55% of total loans plus OREO. Potential problem loans fell 9.9% or $34.0 million QoQ to $309.9 million. Additionally, net charge-offs declined to $13.7 million, or 0.35% (annualized) of average total loans, down slightly from 0.38% in 1Q13. At quarter end, the allowance for loan losses represented 1.76% of total loans and covered 127% of nonaccrual balances. DBRS continues to view the current reserve coverage as adequate.

The Company’s funding and liquidity remain sound, in DBRS’s view, and capital remains strong. At June 31, 2013, ASBC reported solid capital ratios that included an estimated Tier 1 common equity ratio of 11.48% and an estimated Tier 1 ratio of 11.86%, down 16 bps and 17 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 (the same amount as the linked quarter).

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

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