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Associated Banc-Corp delivered an earnings beat in the first quarter of 2014 primarily driven by growth in interest income and prudent cost control. The company’s earnings per share of 27 cents outpaced the Zacks Consensus Estimate of 25 cents. Moreover, the reported figure was in line with the year-ago quarter earnings.

Results benefited from an increase in net interest income (NII) and almost unchanged operating expenses, partially offset by lower non-interest income and higher provisions. Moreover, steady growth in loans was a quarterly tailwind. Further, while capital ratios declined in the reported quarter, credit quality and profitability ratios were mixed.

Net income available to shareholders was $44.0 million, down 4.6% from $46.1 million in the prior-year quarter. Though net income declined on a year-over-year basis, there was an improvement in earnings per share. This was primarily due to a 3.7% fall in average common shares outstanding to 162.2 million in the reported quarter.

Performance in Detail

Associated Banc-Corp’s total revenue fell 2.2% from the year-ago quarter to $251.6 million. However, it beat the Zacks Consensus Estimate of $239.0 million.

NII improved 4.6% year over year to $165.0 million. The increase was due to a 1.5% increase in interest income and 26.0% decline in interest expense. However, net interest margin (NIM) fell 5 basis points (bps) from the prior-year quarter to 3.12%.

Non-interest income was $73.5 million, down 10.3% from $82.0 million in the prior-year quarter. The decrease was mainly due to a fall in both net mortgage banking fees and net asset gains, partially offset by rise in total core fee revenue and net investment securities gains.

Non-interest expense was $167.7 million, almost in line with the year-ago quarter figure.

The efficiency ratio on a fully taxable equivalent basis increased to 68.86% from 68.39% recorded in the prior-year quarter. A rise in efficiency ratio indicates fall in profitability.

Associated Banc-Corp’s total loans as of Mar 31, 2014 were $16.4 billion, up 5.7% year over year. Further, total deposits and customer funding of $18.1 billion was up 0.1% from the prior-year quarter figure.

Asset Quality

Associated Banc-Corp’s asset quality was a mixed bag in the quarter. Provision for loan losses was $5.0 million, up 25.0% from the prior-year quarter. However, non-accrual loans declined 21.1% year over year to $178.0 million. Total nonperforming assets were $197.2 million, decreasing 24.3% from the year-ago quarter.

Moreover, ratio of net charge-offs to annualized average loans came in at 0.14%, down 24 bps from the year-ago quarter.

Capital and Profitability Ratios

In the reported quarter, Associated Banc-Corp’s capital ratios deteriorated. As of Mar 31, 2014, Tier 1 risk-based capital ratio was 11.56%, down from 12.03% as of Mar 31, 2013.

Total risk-based capital ratio came in at 12.81% versus 13.45% at the end of the prior-year quarter. Tangible common equity ratio was 7.96%, compared with 8.64% as of Mar 31, 2013.

Profitability ratios were a mixed bag. The return on average assets was 0.76%, down from 0.83% as of Mar 31, 2013. However, book value per common share was recorded at $17.64, up from $17.13 in the year-ago period.

Share Repurchase

During the reported quarter, Associated Banc-Corp bought back 2.3 million shares worth $39 million. There are still shares worth $56 million to be repurchased under the 2013 share buyback program.

Further, in Mar 2014, the company’s board of directors authorized additional share repurchase of up to $120 million.

Our Viewpoint

Associated Banc-Corp’s organic growth strategy seems impressive. We believe that increase in loans and deposits will continue to support the top line in the coming quarters. However, considerable exposure to commercial loans and concentration risks arising from limited geographic diversification are likely to remain drags on profitability.

At present, Associated Banc-Corp has a Zacks Rank #3 (Hold).

Performance of Other Banks

Huntington Bancshares Incorporated (HBAN - Free Report) and Hancock Holding Company (HBHC - Free Report) reported better-than-expected results this quarter. While Huntington’s results were driven by top-line growth and lower provision for credit losses, Hancock’s earnings were aided by disciplined expense management and lower provision.

Westamerica Bancorp.’s earnings per share came in line with the Zacks Consensus Estimate. Results benefited from lower expenses and a decline in provisions.

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