DBRS Comments on Associated Banc-Corp’s 3Q13 Results – Senior Debt at BBB; Trend Stable

DBRS, Inc. (DBRS) has today commented on the 3Q13 results of Associated Banc-Corp (ASBC or the Company). DBRS rates ASBC’s Issuer & Senior Debt at BBB with a Stable trend. For the quarter, the Company reported net income to common shareholders of $44.4 million, down slightly from $46.6 million in 2Q13 and $45.1 million in 3Q12. For 3Q13, results equated to a 0.78% ROAA and a 9.48% return on average tangible common equity, roughly in line with recent periods.

Average loan balances were flat over the quarter as growth in some areas was offset by shrinkage in others. Specifically, growth in residential mortgage, targeted national lending sectors and commercial real estate were primarily offset by lower home equity, installment loans, and mortgage warehouse lending. Positively, average deposits grew 3% QoQ and 13% YoY.

The decline in reported earnings was also accompanied by a decrease in core earnings power as measured by income before provisions and taxes (IBPT). Sequentially, DBRS-calculated IBPT (adjusted to exclude one-time gains and expenses) decreased 17% or $13.7 million to $66.8 million. The decline was primarily attributable to a sharp drop in mortgage banking income. Positively, earnings continue to benefit from improving credit quality, which supported no additional provisioning for loan losses for the quarter which was down from $4.0 million in the linked quarter.

Total net interest income was relatively flat QoQ. Like most peers, ASBC is facing margin pressure in the current rate environment. However, average balance sheet growth helped provide some offset. As a result of this, and with benefit of an additional day in the quarter, ASBC was able to report a modest $0.3 million increase in net interest income QoQ to $160.5 million. The net interest margin (NIM) was 3.13% in 3Q13, down three bps from 2Q13. ASBC had expected continued modest NIM compression in 2013 given asset repricing at lower yields and fewer opportunities to reduce funding costs.

Third quarter fee revenues decreased driven by the aforementioned and expected decline in mortgage banking reflecting lower loan volumes and gain on sale as well as the previous quarter increase in the MSR valuation. This drop in noninterest income was partially offset by higher insurance revenue and gain from sale of real estate.

The company has been focused on efficiency initiatives and expenses declined $5.6 million or 3.3% QoQ. The improvement included a favorable resolution of a legal matter, a reduction in BSA consultant expenses, and a reduction in personnel expense due to lower staffing levels. Following the close of the quarter, the Company announced a branch optimization and support services consolidation that should also be constructive to corporate cost reductions.

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 5.0% from 2Q13 to $208 million and represented 1.49% of total loans plus OREO. Potential problem loans fell 10.6% or $32.8 million QoQ to $277.1 million. Additionally, net charge-offs declined to $5.5 million, or a low 0.14% (annualized) of average total loans, down significantly from 0.35% in 2Q13. At quarter end, the allowance for loan losses represented 1.74% of total loans and covered 131% of nonaccrual balances. DBRS continues to view the current reserve coverage as ample.

The Company’s funding and liquidity remain sound, in DBRS’s view, and capital remains strong. At September 30, 2013, ASBC reported solid capital ratios which included an estimated Tier 1 common equity ratio of 11.64% and an estimated Tier 1 ratio of 12.02%, up 15 bps and 14 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 two previous quarters). Additionally, early in 4Q13 the company completed a similarly-sized repurchase in an accelerated share repurchase.

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

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