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Associated Banc-Corp’s (ASBC - Analyst Report) first-quarter 2013 earnings came in at 27 cents per share, marginally surpassing the Zacks Consensus Estimate of 25 cents. This also compares favorably with the year-ago earnings of 24 cents.

On a year-over-year basis, a reduction in top line was more than offset by a fall in operating expenses. Moreover, improved asset quality, and growth in loan and deposit balances were the other positives. However, deterioration in capital ratios was on the downside.

Net income available to shareholders for the reported quarter came in at $46.2 million, up 11.5% from $41.3 million in the year-ago quarter.

Performance in Detail

Associated’s total revenue declined marginally from the year-ago quarter to $257.4 million. However, revenues surpassed the Zacks Consensus Estimate of $243.0 million by 5.9%.

Net interest income improved 1.9% year over year to $157.7 million. The hike was mainly attributable to lower total interest expense. However, net interest margin decreased 14 basis points from the prior-year quarter to 3.17%.

Non-interest income stood at $82.0 million, rising 4.5% from $78.4 million in the prior-year quarter. The increase was primarily due to higher trust service fees, card-based and other non-deposit fees and insurance commissions. These positives were partially offset by lower service charges on deposit accounts and brokerage and annuity commissions.  

Non-interest expense was $166.9 million, down 1.7% from $169.8 million in the year-ago quarter. The fall mainly resulted from lower business development and advertising costs, other intangible amortization costs, legal and professional fees, foreclosure/ other real estate owned (OREO) expenses and other expenses.

However, these were partially offset by higher personnel expenses, occupancy costs, equipment costs, data processing expenditures, loan expenses, and Federal Deposit Insurance Corporation (FDIC) expenses.
 
The efficiency ratio decreased to 68.52% from 70.16% recorded in the prior-year quarter. The decline in efficiency ratio indicates better profitability.

Asset Quality

Asset quality displayed improvement in the quarter. Non-accrual loans declined 10.8% sequentially and 31.1% year over year to $225.4 million. Total nonperforming assets stood at $260.6 million, declining 9.4% from the last quarter and 27.9% from the year-ago quarter.

Moreover, ratio of net charge offs to annualized average loans came in at 0.38%, down from 0.55% in the previous quarter and 0.61% in the year-ago quarter.

Loans and Deposits

Associated’s total loans in the quarter were $15.6 billion, rising nearly 0.9% from the previous quarter and 9.1% from the prior-year quarter.

Total deposits for the quarter expanded 2.8% sequentially and 11.3% year over year to $17.4 billion. The increases were primarily due to the higher levels of interest-bearing deposits, savings deposits, money market deposits and brokered certificate of deposits.

Profitability and Capital Ratios

Though capital ratios remained strong, a slight deterioration was witnessed. As of Mar 31, 2013, tier 1 risk-based capital ratio was 12.03%, down from 14.33% as of Mar 31, 2012.

Total risk-based capital ratio came in at 13.45%, declining from 15.78% at the end of the prior-year quarter. Tangible common equity ratio stood at 8.64%, down from 9.01% as of Mar 31, 2012.

Profitability metrics displayed mixed movements. The return on average assets was 0.83%, stable compared with the end of prior quarter and up from 0.79% as of Mar 31, 2012. Book value per common share was recorded at $17.13, up from $16.97 in the prior quarter and $16.32 in the year-ago period.

Share Repurchase

During the reported quarter, Associated bought back 2 million shares at an aggregate price of $30 million.

Performance of Other Midwest Banks

Commerce Bancshares, Inc.’s (CBSH - Analyst Report) first-quarter earnings missed Zacks Consensus Estimate by a penny. The quarterly results were adversely affected by lower top-line, partially offset by a decline in operating expenses.

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

Our Viewpoint

Associated’s reduced expenses along with constantly improving credit quality and strong balance sheet are quite impressive. Significant capital deployment actions will reinforce investors’ confidence in the stock. However, we are concerned about the impact of the prevailing low interest rate environment, considerable exposure to commercial loans and concentration risk emanating from limited geographical diversification.

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

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