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Moody’s Investor Services, a rating arm of Moody’s Corp (MCO - Analyst Report), has maintained its ratings for Associated Banc-Corp (ASBC - Analyst Report) and its bank subsidiary Associated Bank, N.A. The rating agency maintained senior unsecured rating at Baa1 and commercial paper rating at Prime-2 on Associated Bank-Corp. The subsidiary bank holds A3 and Prime-2 rating, owing to its long-term and short-term deposits, respectively.

What Do the Ratings Indicate?

All the ratings reaffirm a stable outlook. According to the rating agency, the rating affirmation reflects Associated Bank-Corp’s efforts towards rebalancing its loan portfolio, a strong liquidity profile and superior asset quality ratios. These positives partially offset the company’s reduced core profitability.

Since 2010, asset quality has exhibited continuous improvement. As of Sep 30, non-accrual loans declined 25.4% year over year to $207.6 million and total nonperforming assets declined 26.0% from the year-ago quarter. Additionally, the company has lessened its exposure in the construction sector, although its presence remains in real estate.

Associated Banc-Corp’s strong balance sheet reflects a healthy liquidity profile. As of Sep 30, average loans rose nearly 5.4% from the prior-year quarter and average deposits increased 3.0% year over year. Its ratio of core deposits to average gross loans is better than its peers. Alongside, the company enjoys substantial deposit market share in Wisconsin.

Core profitability has been hampered by a moderate net interest margin and surging operating costs and costs related to restructuring of the company’s branch network, business portfolio and upgrade of its technology platforms. Moreover, a streamlined exposure in the construction sector, a prolonged low interest environment, reduced loan spreads and an elevated level of floating-rate loans have lead to the decline in NIM and ratio of pre-tax pre-provision income to risk-weighted assets since 2010.

Outlook

Associated Banc-Corp remains well capitalized. As of Sep 30, 2013, Tier 1 common risk-based capital ratio was 11.64%, significantly above most large regional banks. However, capital ratios have declined from 2011 owing to increased capital returns. The payout ratio in 2012 soared to 57%. As the company intends to enhance shareholder value, capital ratios are expected to decline further. The company expects to return almost 100% of earnings to shareholders in 2013.

Among others in the banking sector, Moody's recently rated First Horizon National Corp. (FHN - Analyst Report) and its subsidiaries. The agency downgraded the senior unsecured debt rating of First Horizon National Corporation to Baa3 from Baa2.

Associated Banc-Corp currently carries a Zacks Rank #3 (Hold). Private Bancorp Inc. (PVTB - Snapshot Report) is a better-performing banking stock in the Mid-West region with a Zacks Rank #1 (Strong Buy).

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