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Associated Banc-Corp’s (ASBC - Analyst Report) second-quarter 2013 earnings came in at 28 cents per share, beating the Zacks Consensus Estimate of 25 cents. This also compares favorably with 24 cents earned in the year-ago quarter.

Better-than-expected results were driven by top-line growth, partially offset by higher operating expenses. Moreover, improvements in both asset quality as well as loan and deposit balances were the other positives. However, deterioration in capital ratios was the downside.

Net income available to shareholders for the reported quarter came in at $46.6 million, up 10.9% from $42.0 million in the year-ago quarter.

Performance in Detail

Associated’s total revenue appreciated 2.4% from the year-ago quarter to $260.7 million and beat the Zacks Consensus Estimate of $244.0 million by 6.8%.

Net interest income improved 3.8% year over year to $160.2 million. The increase was mainly attributable to lower total interest expense. However, net interest margin (NIM) decreased 14 basis points (bps) from the prior-year quarter to 3.16%. The pressure on NIM was primarily due to decline in asset yields, partially mitigated by liability cost management action.

Non-interest income was $84.3 million, up 11.0% from $76.0 million in the prior-year quarter. The increase was primarily due to higher trust service fees, service charges on deposit accounts, card-based and other non-deposit fees, mortgage banking, capital market fees and bank owned life insurance income. These positives were partly offset by a fall in insurance commissions, brokerage and annuity commissions, assets, investment securities and others.  

Non-interest expense was $170.0 million, up 2.4% from $166.0 million in the year-ago quarter. This was mainly due to rises in personnel expense, occupancy costs, equipment costs, data processing expenditure and loan expenses. However, these were partially offset by a fall in business development and advertising costs, other intangible amortization costs, legal and professional fees, losses other than loans, foreclosure/ other real estate owned (OREO) expenses, FDIC expenses and other expenses.

The efficiency ratio decreased to 67.73% from 68.77% recorded in the prior-year quarter. A decline in efficiency ratio indicates rise in profitability.

Asset Quality

Asset quality improved in the quarter. Non-accrual loans declined 31.6% year over year to $217.5 million. Total nonperforming assets were $245.0 million, declining 31.6% from the year-ago quarter.

Moreover, ratio of net charge-offs to annualized average loans came in at 0.35%, down from 0.65% in the year-ago quarter.

Loans and Deposits

Associated’s average loans in the quarter were $15.7 billion, rising nearly 7.7% from the prior-year quarter.

Average deposits increased 13.6% year over year to $17.1 billion. This was driven by rising average balances in checking and savings deposits, partially offset by decline in money market deposits and time deposits

Capital and Profitability Ratios

In the reported quarter, Associated witnessed deterioration in capital ratios. As of Jun 30, 2013, Tier 1 risk-based capital ratio was 11.86%, down from 13.64% as of Jun 30, 2012.

Total risk-based capital ratio came in at 13.27%, declining from 15.08% at the end of the prior-year quarter. Tangible common equity ratio was 8.25%, down from 8.99% as of Jun 30, 2012.

However, profitability metrics were decent. The return on average assets was 0.82%, up from 0.80% as of Jun 30, 2012. Book value per common share was recorded at $16.97, up from $16.59 in the year-ago period.

Share Repurchase

During the reported quarter, Associated bought back 2 million shares at an average price of $15.09.

About Other Midwest Banks

Commerce Bancshares, Inc.’s (CBSH - Analyst Report) second-quarter 2013 earnings of 72 cents per share were in line with the Zacks Consensus Estimate. This compared favorably with 67 cents earned in the prior quarter but was below 76 cents in the prior-year quarter.

First Interstate Bancsystem Inc. (FIBK - Snapshot Report) is scheduled to report earnings on Jul 22 and Heartland Financial USA, Inc. (HTLF - Snapshot Report) on Jul 29.

Our Viewpoint

We expect loan and deposit growth to continue and capital ratios to stabilize with the ongoing economic recovery. Moreover, significant capital deployment activities will reinstate investors’ confidence in the stock. However, higher operating expenses, considerable exposure to commercial loans and concentration risks arising from limited geographic diversification keep us apprehensive.

Associated currently carries a Zacks Rank #3 (Hold).

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