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Associated Banc-Corp (ASBC - Analyst Report) reported its third quarter 2012 earnings of 26 cents per share, which edged past the Zacks Consensus Estimate by a cent. The results also compares favorably with the prior-quarter earnings of 24 cents and prior-year quarter earnings of 20 cents.

The improvement in the quarterly results came on the back of increased top line, partially offset by a rise in operating expenses. Moreover, asset quality, loan, and deposit balances witnessed growth in the quarter. However, capital ratios were the dampeners.

Net income available to shareholders for the reported quarter came in at $45.1 million, up from $42.0 million in the prior quarter and $34.0 million in the year-ago quarter.  

Performance in Detail

Associated’s total revenue edged up 2.0% sequentially and 2.2% year over year to $259.6 million. Moreover, revenue surpassed the Zacks Consensus Estimate of $240.0 million by 8.2%.

Net interest income improved 0.9% sequentially to $155.6 million. The hike was mainly attributable to a marginal rise in total interest income and lower total interest expenses. However, net interest margin dipped 4 basis points from the prior quarter to 3.26%.

Non-interest income stood at $81.0 million, rising 6.6% from $76.0 million in the prior quarter. The increase was primarily due to higher core fee revenue, capital market fees, bank owned life insurance income, net gains from Investment securities and other income, partially offset by lower net mortgage banking income.

Non-interest expense was $169.7 million, up 2.2% from $166.0 million in the previous quarter. The rise was mainly a result of higher personnel expense, occupancy costs, equipment costs, loan expenses, legal and professional fees, losses other than

loans and Federal Deposit Insurance Corporation (FDIC) expenses. However, these were offset by lower data processing expenditure, business development and advertising costs, foreclosure/ other real estate owned (OREO) costs and other expenses.

The efficiency ratio increased to 70.22% from 69.21% recorded in the prior quarter. The hike in efficiency ratio indicates deterioration in profitability.

Asset Quality

Asset quality witnessed improvements in the quarter. Non-accrual loans dipped 12.5% sequentially and 31.0% on a year-over-year basis to $278.1 million.

Further, ratio of net charge offs to annualized average loans came in at 0.47% in the reported quarter, down from 0.65% in the previous quarter and 0.90% in the year-ago quarter. Total nonperforming assets stood at $314.2 million, declining 12.2% from last quarter and 29.5% from the year-ago quarter.

Loans and Deposits

Associated’s total loans in the reported quarter were nearly $15.0 billion, rising 1.8% from previous quarter and 10.8% from the prior-year quarter. The improvement was mainly driven by increases in commercial loans and residential mortgage loans.

Total deposits for the quarter expanded 8.9% sequentially and 11.3% on a year-over-year basis to $16.5 billion. The increases were primarily due to the higher levels of noninterest-bearing demand deposits and interest-bearing deposits

Profitability and Capital Ratios

Associated’s profitability and capital ratios witnessed mixed movements in the quarter. As of September 30, 2012, tier 1 risk-based capital ratio was 13.57% compared with 13.64% as of June 30, 2012 and 14.35% as of September 30, 2011. Total risk-based capital ratio came in at 15.0% as against 15.08% at the end of the prior quarter and 15.81% at the end of the prior-year quarter. Tangible common equity ratio stood at 8.91%, down from 8.99% as of June 30, 2012 but up from 8.77% as of September 30, 2011.

The return on average assets was 0.84% in the reported quarter compared with 0.80% as of June 30, 2012 and 0.75% as of September 30, 2011. As of September 30, 2012, return on average stockholders' equity came in at 6.29%, up from 5.98% as of June 30, 2012 and 5.49% as of September 30, 2011. Book value per common share was recorded at $16.82, up from $16.59 in the prior quarter and $16.07 in the year-ago period.

Our Viewpoint

Associated’s decent top-line growth as well as constantly improving credit quality and strong balance sheet were quite impressive. However, rising expenses keep us on the sidelines. Moreover, we are concerned about the impacts of the prevailing low interest rate environment, sluggish economic growth and stringent regulatory landscape on the company’s financials in the subsequent quarters.

Associated currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Other Zacks #3 Rank bank stocks include KeyCorp (KEY - Analyst Report).
 

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