DBRS Confirms Associated Banc-Corp at BBB; Revises Trend to Positive

DBRS Inc. (DBRS) has today confirmed the ratings of Associated Banc-Corp (Associated or the Company) and its related entities, including Associated’s Issuer & Senior Debt rating of BBB and Short-Term Instruments rating at R-2 (middle). At the same time, DBRS has revised the trend on all ratings to Positive from Stable. DBRS has also assigned a BB Rating to Associated’s Preferred Stock. The rating actions follow a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

Associated’s ratings are underpinned by its well-established Midwest super-community banking franchise which includes a strong core deposit business. Associated’s current management team has made significant investments in this franchise including hiring experienced lenders, completing branch upgrades as well as enhancing treasury management offerings. With the bulk of its asset quality problems behind it and with still solid levels of capital and liquidity, DBRS sees Associated’s financial profile as improved.

The revision of the ratings trend to Positive reflects some success in growing the franchise and revenues and further asset quality improvements. Additionally, Associated has returned to consistent, although certainly not best in class, profitability, generating steady and improving earnings for the last three fiscal years. Most recently, Associated reported net income to common shareholders of $188.7 million for 2013 up 5.4% from $179.0 million in 2012. Recent results are encouraging and are a contributing factor to the positive trend placed on the ratings. For instance, the DBRS-calculated income before provision and taxes (IBPT) has increased in five of the last six quarters.

For a rating upgrade to occur, DBRS will look for a continuation of improving earnings, positive operating leverage and for returns to become more in line with higher rated peers. Additionally, DBRS will look for continuance of the positive asset quality trends and maintenance of solid capital levels.

Like all banks, Associated is faced with a difficult operating environment and, while continuing to invest in the business, DBRS sees further improvement in core earnings capacity as an ongoing challenge for the Company as well as the industry. To counteract this, Associated has focused on operating efficiency and has undertaken a number of initiatives to take costs out of the business and is committed to keeping expenses flat in 2014. Improving core earnings generation, in DBRS’s view, will further signal the Company’s successful turnaround.

As noted, earnings have benefited from improving credit quality that has supported a modest loan loss provision and reserve releases in recent quarters. During 2013, nonperforming assets declined 29% from YE12 to $203.5 million and were $155.4 million below 2Q11 levels. Additionally, potential problem loans were $235.4 million at YE13, down 35% from YE12. Net charge-offs also declined to a very manageable 0.25% of average loans in 2013 from 0.57% of average loans in 2012. At year-end, the allowance for loan losses remained solid representing 1.68% of total loans and covered 145% of nonaccrual loans. DBRS notes that even with continued moderate loan growth, Associated’s outlook is for very modest provisioning in coming quarters.

Associated’s capitalization remains solid despite ongoing capital management activities During the year, the company repurchased $120 million, or approximately 7.7 million shares, of common stock and with the increased common stock dividend, the Company returned about 100% of earnings to shareholders and a similar level of return to shareholders is expected in 2014. Still, at December 31, 2013, ASBC reported solid capital ratios which included an estimated Tier 1 common equity ratio of 11.46%. Based on current proposed rules, the Company is already in compliance with fully phased in Basel III requirements. DBRS anticipates that Associated will maintain solid capital levels, even as it seeks to deploy excess capital.

Headquartered in Green Bay, Wisconsin, Associated had $24.2 billion in assets as of December 31, 2013 and operates over 200 branches in Wisconsin, Minnesota, and Illinois.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria:Support Assessment for Banks and Banking Organisations and DBRS Criteria: Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. All DBRS methodologies and criteria can be found on DBRS website under Methodologies.

The sources of information used for this rating include company documents 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: William Schwartz
Rating Committee Chair: 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.