DBRS Confirms Associated Banc-Corp at BBB; Maintains Positive Trend Then Withdraws Ratings

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 of R-2 (middle). At the same time, DBRS maintained the Positive trend on all ratings. Subsequent to the confirmation, DBRS withdrew the ratings of Associated. The decision to withdraw the ratings was made at DBRS’s discretion.

Associated’s ratings are underpinned by its well-established Midwest super-community banking franchise, which includes a solid low-cost core deposit base. Associated’s current management team has made significant investments in the franchise including hiring experienced lenders, completing branch upgrades, as well as enhancing treasury management offerings. With previous asset quality problems now in the past and the continued maintenance of solid levels of capital and liquidity, DBRS sees Associated’s financial profile as improved.

The Positive trend reflects some success in growing the franchise and revenues, as well as reducing expenses. Additionally, Associated has maintained consistent, albeit still below higher rated peers, profitability levels. Most recently, Associated reported 2Q14 net income to common shareholders of $45.1 million, up 2.6% on a linked quarter basis. Positively, the Company’s DBRS-calculated income before provision and taxes has increased in the last three quarters.

Like all banks, Associated is faced with a difficult operating environment including ongoing net interest margin pressures. As such, improving core earnings capacity while continuing to invest in growing the business remains an ongoing challenge for the Company. To counteract this, Associated has focused on improving its operating efficiency and has undertaken a number of initiatives to reduce costs and remains committed to keeping expenses flat in 2014. DBRS views improving the level of earnings as the last piece required to fully complete its turnaround.

Earnings have benefited from improving credit quality that has supported a modest loan loss provision in recent quarters. During 1H14, nonperforming assets (excluding performing restructured loans) declined 3% from YE13 to $197.0 million and by over half from its peak in YE11. Meanwhile, net charge-offs also declined to a very low 0.10% of average loans in 1H14. At June 30, 2014, the allowance for loan losses remained solid representing 1.59% of total loans and covered 152% 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 1H14 and through July 2014, the Company repurchased $159 million of common stock and increased the common stock dividend. Still, at the end of June 30, 2014, Associated reported solid capital ratios, which included a Tier 1 common equity ratio of 10.72%. 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 $25.7 billion in assets as of June 30, 2014 and operates over 225 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 (June 2014). Other applicable methodologies include the DBRS Criteria – Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies.

The primary 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: Alan G. Reid
Initial Rating Date: 14 January 2010
Most Recent Rating Update: 29 January 2014

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