SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 ----- For the quarterly period ended June 30, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-5519
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Associated Banc-Corp
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1098068
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(State or other jurisdictionof (IRS employer identification no.)
incorporation or organization)
1200 Hansen Road, Green Bay, Wisconsin 54304
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(Address of principal executive offices) (Zip code)
(920) 491-7000
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(Registrant's telephone number, including area code)
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(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of registrant's common stock, par value $0.01
per share, at July 31, 2002, was 75,600,471 shares.
ASSOCIATED BANC-CORP
TABLE OF CONTENTS
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets -
June 30, 2002, June 30, 2001 and December 31, 2001 3
Consolidated Statements of Income -
Three and Six Months Ended June 30, 2002 and 2001 4
Consolidated Statement of Changes in
Stockholders' Equity - Six Months Ended June 30, 2002 5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 33
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 6. Exhibits and Reports on Form 8-K 36
Signatures 37
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
ASSOCIATED BANC-CORP
Consolidated Balance Sheets
(Unaudited)
June 30, June 30, December 31,
2002 2001 2001
-----------------------------------------------
(In Thousands, except share data)
ASSETS
Cash and due from banks $ 346,708 $ 309,521 $ 587,994
Interest-bearing deposits in other financial institutions 11,853 4,692 5,427
Federal funds sold and securities purchased under agreements
to resell 51,275 42,350 12,015
Investment securities available for sale, at fair value 3,424,127 3,249,373 3,197,021
Loans held for sale 123,520 128,192 301,707
Loans 9,882,669 8,983,678 9,019,864
Allowance for loan losses (148,733) (126,390) (128,204)
--------------------------------------------
Loans, net 9,733,936 8,857,288 8,891,660
Premises and equipment 134,766 122,592 119,528
Goodwill 211,611 95,638 92,397
Other intangible assets 47,239 41,118 37,991
Other assets 391,457 361,525 358,634
--------------------------------------------
Total assets $ 14,476,492 $ 13,212,289 $ 13,604,374
============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 1,566,487 $ 1,175,615 $ 1,425,109
Interest-bearing deposits, excluding Brokered CDs 7,225,789 7,001,753 6,897,502
Brokered CDs 233,968 322,858 290,000
--------------------------------------------
Total deposits 9,026,244 8,500,226 8,612,611
Short-term borrowings 2,301,853 2,958,835 2,643,851
Long-term debt 1,513,131 522,234 1,103,395
Company-obligated mandatorily redeemable
preferred securities 174,636 --- ---
Accrued expenses and other liabilities 185,383 180,316 174,101
--------------------------------------------
Total liabilities 13,201,247 12,161,611 12,533,958
Stockholders' equity
Preferred stock --- --- ---
Common stock (par value $0.01 per share,
authorized 100,000,000 shares, issued
76,727,110, 73,042,372 and 72,791,792 shares,
respectively) 767 664 662
Surplus 682,519 297,289 289,751
Retained earnings 552,230 710,052 760,031
Accumulated other comprehensive income 72,171 51,857 47,176
Treasury stock, at cost (981,469, 326,759 and 922,902
shares, respectively) (32,442) (9,184) (27,204)
--------------------------------------------
Total stockholders' equity 1,275,245 1,050,678 1,070,416
--------------------------------------------
Total liabilities and stockholders' equity $ 14,476,492 $ 13,212,289 $ 13,604,374
============================================
See accompanying notes to consolidated financial statements.
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-----------------------------------------------
(In Thousands, except per share data)
INTEREST INCOME
Interest and fees on loans $ 158,321 $ 178,236 $ 309,670 $ 362,611
Interest and dividends on investment securities:
Taxable 33,114 37,082 65,886 75,654
Tax exempt 9,988 10,042 19,968 20,206
Interest on deposits in other financial institutions 258 94 345 215
Interest on federal funds sold and securities
purchased under agreements to resell 176 194 294 641
----------------------------------------------
Total interest income 201,857 225,648 396,163 459,327
INTEREST EXPENSE
Interest on deposits 45,560 78,965 93,789 170,392
Interest on short-term borrowings 13,840 38,140 27,495 81,444
Interest on long-term debt, including preferred securities 16,689 4,591 31,684 6,536
----------------------------------------------
Total interest expense 76,089 121,696 152,968 258,372
----------------------------------------------
NET INTEREST INCOME 125,768 103,952 243,195 200,955
Provision for loan losses 12,003 6,365 23,254 11,947
----------------------------------------------
Net interest income after provision for loan losses 113,765 97,587 219,941 189,008
NONINTEREST INCOME
Trust service fees 7,722 7,339 15,093 15,411
Service charges on deposit accounts 11,733 9,550 21,613 18,295
Mortgage banking 9,637 15,504 22,241 24,689
Credit card and other nondeposit fees 7,094 7,121 13,166 13,896
Retail commissions 5,885 4,265 10,501 8,749
Bank owned life insurance income 3,469 3,184 6,739 6,318
Asset sale gains, net 41 383 372 915
Investment securities gains (losses), net --- (4) --- 242
Other 4,322 3,687 7,578 6,833
----------------------------------------------
Total noninterest income 49,903 51,029 97,303 95,348
NONINTEREST EXPENSE
Personnel expense 48,764 41,233 93,758 81,538
Occupancy 6,650 5,927 12,787 12,281
Equipment 3,727 3,650 7,217 7,330
Data processing 5,304 4,822 10,107 9,665
Business development and advertising 3,126 3,191 6,572 6,192
Stationery and supplies 1,786 2,330 3,830 4,062
FDIC expense 402 446 774 880
Mortgage servicing rights expense 3,874 2,710 6,771 6,609
Goodwill amortization expense --- 1,385 --- 2,769
Intangible amortization expense 884 717 1,599 1,434
Legal and professional fees 1,461 777 2,753 1,669
Other 15,459 15,090 27,936 26,299
----------------------------------------------
Total noninterest expense 91,437 82,278 174,104 160,728
----------------------------------------------
Income before income taxes 72,231 66,338 143,140 123,628
Income tax expense 20,048 20,319 39,658 35,523
----------------------------------------------
NET INCOME $ 52,183 $ 46,019 $ 103,482 $ 88,105
==============================================
Earnings per share:
Basic $ 0.69 $ 0.63 $ 1.39 $ 1.21
Diluted $ 0.68 $ 0.63 $ 1.37 $ 1.20
Average shares outstanding:
Basic 75,922 72,760 74,540 72,763
Diluted 77,041 73,360 75,510 73,344
See accompanying notes to consolidated financial statements.
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income Stock Total
--------------------------------------------------------------------------
(In Thousands, except per share data)
Balance, December 31, 2001 $ 662 $ 289,751 $ 760,031 $ 47,176 $ (27,204) $ 1,070,416
Comprehensive income:
Net income --- --- 103,482 --- --- 103,482
Net unrealized holding loss on
derivative instruments,
net of tax of $2.4 million --- --- --- (3,642) --- (3,642)
Net unrealized holding gains on
securities available for
sale, net of tax of $16.4 million --- --- --- 28,637 --- 28,637
-----------
Comprehensive income 128,477
-----------
Cash dividends, $0.59 per share --- --- (43,739) --- --- (43,739)
Common stock issued:
Business combinations 37 133,892 --- --- --- 133,929
Incentive stock options --- --- (8,904) --- 21,001 12,097
10% stock dividend 70 258,570 (258,640) --- --- ---
Purchase and retirement of treasury stock
in connection with repurchase program (2) (3,960) --- --- --- (3,962)
Purchase of treasury stock --- --- --- --- (26,239) (26,239)
Tax benefit of stock options --- 4,266 --- --- --- 4,266
--------------------------------------------------------------------------
Balance, June 30, 2002 $ 767 $ 682,519 $ 552,230 $ 72,171 $ (32,442) $ 1,275,245
==========================================================================
See accompanying notes to consolidated financial statements.
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements Of Cash Flows
(Unaudited)
For the Six Months Ended June 30,
2002 2001
---------------------------------
($ in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 103,482 $ 88,105
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 23,254 11,947
Depreciation and amortization 9,247 9,526
Amortization (accretion) of:
Mortgage servicing rights 6,771 6,609
Goodwill and other intangible assets 1,599 4,203
Investment premiums and discounts 4,938 (368)
Deferred loan fees and costs 419 (1,190)
Gain on sales of securities, net -- (242)
Gain on sales of assets, net (372) (915)
Gain on sales of loans held for sale, net (12,051) (9,545)
Mortgage loans originated and acquired for sale (1,099,984) (1,008,849)
Proceeds from sales of mortgage loans held for sale 1,307,327 914,795
Increase in interest receivable and other assets (27,457) (6,963)
Increase in interest payable and other liabilities 1,319 33,697
--------------------------
Net cash provided by operating activities 318,492 40,810
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (114,367) (76,638)
Capitalization of mortgage servicing rights (11,518) (9,735)
Purchases of:
Securities available for sale (575,928) (292,255)
Premises and equipment, net of disposals (6,106) (3,945)
Proceeds from:
Sales of securities available for sale -- 57,384
Maturities of securities available for sale 551,932 305,138
Sales of other real estate owned and other assets 2,239 13,467
Net cash acquired in business combination 17,982 --
--------------------------
Net cash used by investing activities (135,766) (6,584)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (369,811) (791,420)
Net increase (decrease) in short-term borrowings (444,761) 360,632
Repayment of long-term debt (27,262) (186)
Proceeds from issuance of long-term debt 525,351 400,000
Cash dividends (43,739) (39,695)
Proceeds from exercise of incentive stock options 12,097 3,468
Purchase and retirement of treasury stock (3,962) --
Purchase of treasury stock (26,239) (6,982)
--------------------------
Net cash used by financing activities (378,326) (74,183)
--------------------------
Net decrease in cash and cash equivalents (195,600) (39,957)
Cash and cash equivalents at beginning of period 605,436 396,520
--------------------------
Cash and cash equivalents at end of period $ 409,836 $ 356,563
==========================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 157,989 $ 270,221
Income taxes 45,529 32,856
Supplemental schedule of noncash investing activities:
Securities held to maturity transferred to
securities available for sale -- 372,873
Loans transferred to other real estate 1,873 1,740
See accompanying notes to consolidated financial statements.
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Notes to Consolidated Financial Statements
These interim consolidated financial statements have been prepared according to
the rules and regulations of the Securities and Exchange Commission and,
therefore, certain information and footnote disclosures normally presented in
accordance with accounting principles generally accepted in the United States of
America have been omitted or abbreviated. The information contained in the
consolidated financial statements and footnotes in the Corporation's 2001 annual
report on Form 10-K, should be referred to in connection with the reading of
these unaudited interim financial statements.
NOTE 1: Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly Associated
Banc-Corp's ("Corporation") financial position, results of operations, changes
in stockholders' equity, and cash flows for the periods presented, and all such
adjustments are of a normal recurring nature. The consolidated financial
statements include the accounts of all subsidiaries. All material intercompany
transactions and balances are eliminated. The results of operations for the
interim periods are not necessarily indicative of the results to be expected for
the full year.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Estimates that are particularly susceptible to significant change include the
determination of the allowance for loan losses, mortgage servicing rights,
derivative financial instruments and hedging activities, and income taxes.
On April 24, 2002, the Board of Directors declared a 10% stock dividend payable
on May 15, 2002, to shareholders of record at the close of business on April 29,
2002. Any fractional shares resulting from the dividend were paid in cash. All
share and per share financial information has been restated to reflect the
effect of this stock dividend (see Note 4 of the notes to consolidated financial
statements).
NOTE 2: Reclassifications
Certain items in the prior period consolidated financial statements have been
reclassified to conform with the June 30, 2002 presentation.
NOTE 3: Adoption of Statements of Financial Accounting Standards ("SFAS")
Effective July 1, 2001, the Corporation adopted SFAS No. 141, "Business
Combinations," ("SFAS 141"). The Corporation also adopted SFAS No. 142,
"Goodwill and Other Intangible Assets," ("SFAS 142") effective January 1, 2002.
SFAS 141 requires that all business combinations be accounted for using the
purchase method. Identifiable intangible assets such as core deposit intangibles
and mortgage servicing rights are recognized separately from goodwill on the
consolidated balance sheet as other intangible assets. Other identifiable
intangible assets with a definite life are amortized over their estimated useful
lives and are also tested for impairment periodically. Goodwill represents the
excess of the price paid for the acquisition of subsidiaries over the fair value
of the net assets acquired. Under SFAS 142, goodwill and indefinite life
intangibles are no longer amortized but are subject to impairment tests on at
least an annual basis. Any impairment of goodwill or intangibles will be
recognized as an expense in the period of impairment.
The Corporation was required to complete the transitional goodwill impairment
test within six months of adoption of SFAS 142 and to record the impairment, if
any, by the end of the fiscal year. Any loss resulting from the transitional
impairment test will be recorded as a cumulative effect of a change in
accounting principle and charged to net income for the three months ended March
31, 2002. The Corporation completed the transitional goodwill impairment test in
the second quarter of 2002 as of January 1, 2002 and May 1, 2002. No impairment
loss has been recorded as of January 1, 2002 or May 1, 2002. See Notes 4, 5, and
6 for disclosures about the impact SFAS 141 and SFAS 142 have on the
Corporation's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," ("SFAS 144") which supersedes both SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring
Events and Transactions," ("Opinion 30") for the disposal of a segment of a
business. SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This Statement requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized for the amount
by which the carrying amount of the assets exceeds the fair value of the asset.
SFAS 144 requires companies to separately report discontinued operations and
extends that reporting to a component of an entity that either has been disposed
of (by sale, abandonment, or in a distribution to owners) or is classified as
held for sale. Assets to be disposed of are reported at the lower of the
carrying amount or fair value, less costs to sell. The Corporation adopted SFAS
144 on January 1, 2002, as required. The adoption had no effect on the
Corporation's financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,"
("SFAS 145"). SFAS 145 rescinds Statement No. 4 ("SFAS 4"), which required all
gains and losses from extinguishment of debt to be classified as an
extraordinary item, net of the related income tax effect, if material in the
aggregate. Due to the rescission of SFAS 4, the criteria in Opinion 30 will now
be used to classify those gains and losses. Statement No. 64 amended SFAS 4, and
is no longer necessary because of the rescission of SFAS 4. Statement No. 44,
which established accounting requirements for the effects of transition
provisions of the Motor Carrier Act of 1980, is no longer necessary because the
transition has been completed. SFAS 145 also amends Statement No. 13 ("SFAS 13")
to require that certain lease modifications that have economic effects similar
to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. In addition, SFAS 145 also makes technical
corrections to existing pronouncements which are generally not substantive in
nature. The provisions of SFAS 145 related to the rescission of SFAS 4 are
effective for fiscal years beginning after May 15, 2002. Any gain or loss on
extinguishment of debt that was classified as an extraordinary item in prior
periods presented that does not meet the criteria for classification as an
extraordinary item will be reclassified. The provisions of SFAS 145 related to
SFAS 13 are effective for transactions occurring after May 15, 2002. All other
provisions of SFAS 145 shall be effective for financial statements issued on or
after May 15, 2002. The adoption had no effect on the Corporation's financial
position or results of operations.
NOTE 4: Earnings Per Share
Basic earnings per share is calculated by dividing net income available to
common stockholders by the weighted average number of common shares outstanding.
Diluted earnings per share is calculated by dividing net income by the weighted
average number of shares adjusted for the dilutive effect of outstanding stock
options.
On April 24, 2002, the Board of Directors declared a 10% stock dividend, payable
May 15 to shareholders of record at the close of business on April 29. All share
and per share data in the accompanying consolidated financial statements has
been adjusted to reflect the declaration of the 10% stock dividend. As a result
of the stock dividend, the Corporation distributed approximately 7.0 million
shares of common stock. Any fractional shares resulting from the dividend were
paid in cash.
Presented below are the calculations for basic and diluted earnings per share,
as reported, as well as adjusted to exclude the amortization of goodwill
affected by adopting SFAS 142.
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------------------------------------------
(In Thousands, except per share data)
Net income, as reported $ 52,183 $ 46,019 $ 103,482 $ 88,105
Adjustment: Goodwill amortization --- 1,385 --- 2,769
-------------------------------------------
Net income, adjusted $ 52,183 $ 47,404 $ 103,482 $ 90,874
===========================================
Weighted average shares outstanding 75,922 72,760 74,540 72,763
Effect of dilutive stock options outstanding 1,119 600 970 581
-------------------------------------------
Diluted weighted average shares outstanding 77,041 73,360 75,510 73,344
===========================================
Basic earnings per share:
Basic earnings per share, as reported $ 0.69 $ 0.63 $ 1.39 $ 1.21
Adjustment: Goodwill amortization --- 0.02 --- 0.04
-------------------------------------------
Basic earnings per share, adjusted $ 0.69 $ 0.65 $ 1.39 $ 1.25
===========================================
Diluted earnings per share:
Diluted earnings per share, as reported $ 0.68 $ 0.63 $ 1.37 $ 1.20
Adjustment: Goodwill amortization --- 0.02 --- 0.04
-------------------------------------------
Diluted earnings per share, adjusted $ 0.68 $ 0.65 $ 1.37 $ 1.24
===========================================
NOTE 5: Business Combination
There was one completed business combination during 2002 and none during 2001.
The acquisition was accounted for under the purchase method of accounting; thus,
the results of operations prior to the consummation date are not included in the
accompanying consolidated financial statements. Goodwill, core deposit
intangibles, and other purchase accounting adjustments are recorded upon the
consummation of a purchase acquisition where the purchase price exceeds the fair
value of net assets acquired.
On February 28, 2002, the Corporation consummated its acquisition of 100% of the
outstanding common shares of Signal Financial Corporation, a financial holding
company headquartered in Mendota Heights, Minnesota ("Signal"). Signal operated
banking branches in nine locations in the Twin Cities and Eastern Minnesota. As
a result of the acquisition, the Corporation expanded its Minnesota presence,
particularly in the Twin Cities area.
The Signal transaction was consummated through the issuance of approximately 4.1
million shares of common stock and $58.4 million in cash for a purchase price of
$192.5 million. The value of the shares was determined using the closing stock
price of the Corporation's stock on September 10, 2001, the initiation date of
the transaction.
The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of the acquisition.
$ in Millions
-------------
Investment securities available for sale $ 163.8
Loans 760.0
Allowance for loan losses (12.0)
Other assets 118.1
Intangible asset 5.6
Goodwill 119.7
----------
Total assets acquired $ 1,155.2
Deposits $ 784.8
Borrowings 165.5
Other liabilities 12.4
----------
Total liabilities assumed $ 962.7
----------
Net assets acquired $ 192.5
==========
The intangible asset represents a core deposit intangible with a ten-year
weighted-average useful life. The $119.7 million of goodwill was assigned to the
banking segment during first quarter of 2002, as part of the adoption of SFAS
142.
The following represents supplemental pro forma disclosure required by SFAS 141
of total revenue, net income, and earnings per share as though the business
combination had been completed at the beginning of the earliest comparable
period.
Six months ended June 30,
2002 2001
-------------------------------------
(In Thousands, except per share data)
Total revenue $ 350,322 $ 323,511
Net income 102,592 93,077
Basic earnings per share 1.35 1.21
Diluted earnings per share 1.33 1.20
NOTE 6: Goodwill and Other Intangible Assets
Upon the adoption of SFAS 142 effective January 1, 2002, the Corporation had
unamortized goodwill in the amount of $92.4 million, of which $85.0 million is
no longer being amortized under SFAS 142 and $7.4 million which will continue to
be amortized under the provisions of SFAS 72, "Accounting for Certain
Acquisitions of Banking and Thrift Institutions," as an identifiable intangible
asset subject to amortization. Also, at January 1, 2002, the Corporation had
other intangible assets consisting of core deposit intangibles of $5.9 million
and mortgage servicing rights of $32.1 million that will continue to be
amortized. The goodwill, core deposit intangibles, and mortgage servicing rights
are assigned to the Corporation's banking segment.
The change in the carrying amount of goodwill was as follows.
As of and for the year
As of and for the six months ended ended
Goodwill June 30, 2002 June 30, 2001 December 31, 2001
-------------------------------------------------------------
($ in Thousands)
Balance at beginning of year $ 92,397 $ 98,908 $ 98,908
Goodwill acquired during period 119,715 --- ---
Goodwill amortization (non-SFAS 72) --- (2,769) (5,509)
Goodwill amortization (SFAS 72) (501) (501) (1,002)
-------------------------------------------------------------
Balance at end of period $ 211,611 $ 95,638 $ 92,397
=============================================================
Amortization of goodwill (not related to SFAS 72) was zero for the six months
ended June 30, 2002, $2.8 million for the six months ended June 30, 2001, and
$5.5 million for the year ended December 31, 2001. See Note 4 of the notes to
consolidated financial statements for disclosure of net income and per share
amounts excluding goodwill amortization, net of any income tax effects.
Other intangible assets are comprised of core deposit intangibles and mortgage
servicing rights. The change in the carrying amount of core deposit intangibles,
gross carrying amount, accumulated amortization, and net book value was as
follows.
As of and for the year
As of and for the six months ended ended
Core deposit intangibles June 30, 2002 June 30, 2001 December 31, 2001
-----------------------------------------------------------
($ in Thousands)
Balance at beginning of year $ 5,925 $ 7,792 $ 7,792
Additions 5,600 --- ---
Amortization (1,098) (933) (1,867)
-----------------------------------------------------------
Balance at end of period $ 10,427 $ 6,859 $ 5,925
===========================================================
Gross carrying amount $ 28,166 $ 22,565 $ 22,565
Accumulated amortization 17,739 15,706 16,640
-----------------------------------------------------------
Net book value $ 10,427 $ 6,859 $ 5,925
===========================================================
A summary of changes in the balance of the mortgage servicing rights asset and
the mortgage servicing rights valuation allowance was as follows:
As of and for the year
As of and for the six months ended ended
Mortgage servicing rights June 30, 2002 June 30, 2001 December 31, 2001
-----------------------------------------------------------
($ in Thousands)
Balance at beginning of year $ 32,065 $ 36,269 $ 36,269
Additions 11,518 9,735 20,919
Sales of servicing --- (5,136) (5,136)
Amortization (6,021) (4,403) (9,267)
Change in valuation allowance (750) (2,206) (10,720)
-----------------------------------------------------------
Balance at end of period $ 36,812 $ 34,259 $ 32,065
===========================================================
Mortgage servicing rights valuation
allowance
Balance at beginning of year $ (10,720) $ --- $ ---
Additions (750) (2,206) (10,720)
-----------------------------------------------------------
Balance at end of period $ (11,470) $ (2,206) $ (10,720)
===========================================================
Intangible amortization expense was $1.6 million for the six months ended June
30, 2002, (of which, $1.1 million related to the amortization of core deposit
intangibles and $0.5 million related to the amortization of SFAS 72 goodwill),
$1.4 million for the six months ended June 30, 2001, and $2.9 million for the
year ended December 31, 2001. Mortgage servicing rights amortization expense,
which includes the amortization of the mortgage servicing rights asset and
increases or decreases to the valuation allowance associated with the mortgage
servicing rights asset, was $6.8 million and $6.6 million for the six months
ended June 30, 2002 and 2001 respectively, and $20.0 million for year ended
December 31, 2001. The following table shows the estimated future amortization
expense for amortizing intangible assets. The projections of amortization
expense are based on existing asset balances and the existing interest rate
environment as of June 30, 2002. The actual amortization expense the Corporation
recognizes in any given period may be significantly different depending upon
changes in mortgage interest rates, market conditions, and regulatory
requirements.
Estimated amortization expense ($ in Thousands)
Year ended December 31, SFAS 72 Goodwill Core Deposit Intangible Mortgage Servicing Rights
----------------------------------------------------------------------
2002 $ 1,002 $ 2,398 $ 16,716
2003 1,002 1,962 13,453
2004 992 1,734 10,283
2005 887 1,264 7,348
2006 887 1,162 482
======================================================================
NOTE 7: Derivatives and Hedging Activities
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," (collectively referred to as "SFAS 133")
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. All derivatives, whether designated in hedging relationships
or not, are required to be recorded on the balance sheet at fair value.
In accordance with the statement, the Corporation measures the effectiveness of
its hedges on a periodic basis. Any difference between the fair value change of
the hedge versus the fair value change of the hedged item is considered to be
the "ineffective" portion of the hedge. The ineffective portion of the hedge is
recorded as an increase or decrease in the related income statement
classification of the item being hedged. Ineffective portions of changes in the
fair value of cash flow hedges are recognized in earnings. For mortgage
derivatives, which are not accounted for as hedges, changes in fair value are
recorded as an adjustment to mortgage banking income.
The Corporation uses derivative instruments primarily to hedge the variability
in interest payments or protect the value of certain assets and liabilities
recorded in its consolidated balance sheet from changes in interest rates. The
predominant activities affected by the statement include the Corporation's use
of interest rate swaps, interest rate caps, and certain mortgage banking
activities. Swaps used as cash flow hedges allow the Corporation to hedge the
variability in interest payments of a variable rate financial instrument, such
as converting variable rate debt to a fixed rate debt. Swaps used as fair value
hedges allow the Corporation to hedge the exposures to a change in fair value of
the underlying asset or liability, particularly converting a fixed coupon
financial instrument (such as loans or debt) to a variable rate.
Estimated Fair
Notional Market Value Weighted Average
Amount Gain / (Loss) Receive Rate Pay Rate Maturity
------------ ----------------- ---------------- ----------- -------------
June 30, 2002 ($ in Thousands)
Interest Rate Risk Management hedges:
Swaps-receive variable / pay fixed (1), (3) $ 400,000 $ (15,096) 1.98% 5.73% 55 months
Swaps-receive fixed / pay variable (2), (4) 375,000 (8,940) 7.21% 3.83% 230 months
Caps-written (1), (5) 200,000 5,499 Strike 4.72% --- 50 months
Swaps-receive variable / pay fixed (2), (6) 163,203 (3,816) 4.07% 6.99% 56 months
=========================================================================
June 30, 2001
Interest Rate Risk Management hedges:
Swaps-receive variable / pay fixed (1), (7) $ 500,000 (2,506) 4.73% 5.61% 55 months
Swaps-receive variable / pay fixed (2), (6) 28,828 128 6.09% 7.48% 63 months
==========================================================================
(1) Cash flow hedges
(2) Fair value hedges
(3) Hedges $400 million of variable rate, long-term debt
(4) Hedges $375 million of fixed rate, long-term debt
(5) Hedges variable rate, long-term debt
(6) Hedges longer-term fixed rate commercial loans
(7) Hedged $400 million of variable rate, long-term debt and $100 million of
institutional CDs
Commitments to sell loans to various investors and commitments to fund loans to
individual borrowers represent the Corporation's mortgage derivatives, the fair
value of which are included in other liabilities on the consolidated balance
sheet. The net fair value of these mortgage derivatives was a net gain of $1.7
million and $0.9 million, as of June 30, 2002 and 2001, respectively. The change
in fair value of these derivatives was a $2.4 million loss and a $0.9 million
gain for the six months ended June 30, 2002 and 2001, respectively.
NOTE 8: Long-term Debt
Long-term debt at June 30 is as follows:
2002 2001
-----------------------------
($ in Thousands)
Federal Home Loan Bank advances
(3.30% to 6.81%, fixed rate, maturing in
2002 through 2017 for 2002; 4.27% to
7.63%, fixed rate, maturing in 2001
through 2014 for 2001) (1) $ 1,065,537 $ 316,579
Bank notes (2) 250,000 200,000
Subordinated debt (3) 190,059 ---
Other borrowed funds 7,535 5,655
----------------------------
Total long-term debt $ 1,513,131 $ 522,234
============================
(1) The Corporation entered into a cash flow hedge to hedge the interest rate
risk on $100 million of Federal Home Loan Bank advances. As of June 30,
2002, the fair value of the hedge was a $1.2 million loss.
(2) On April 4, 2001, the Corporation issued $200 million of variable rate bank
notes that mature on April 10, 2003. The notes reprice quarterly at LIBOR
plus 22 basis points and was 2.21% at June 30, 2002. On May 16, 2002, the
Corporation issued an additional $50 million of variable rate bank notes
that mature on November 17, 2003. The May notes reprice quarterly at LIBOR
plus 25 basis points and was 2.15% at June 30, 2002. During 2001, the
Corporation entered into a cash flow hedge to hedge the interest rate risk
on $200 million of bank notes. As of June 30, 2002, the fair value of the
hedge was a $12.4 million loss.
(3) On August 6, 2001, the Corporation issued $200 million of subordinated
debt. This debt has a fixed interest rate of 6.75% and matures on August
15, 2011. During 2001, the Corporation entered into a fair value hedge to
hedge the interest rate risk on the subordinated debt. As of June 30, 2002,
the fair value of the hedge was a $8.6 million loss. The subordinated debt
qualifies under the risk-based capital guidelines as Tier 2 supplementary
capital for regulatory purposes.
NOTE 9: Company-obligated Mandatorily Redeemable Preferred Securities
On May 30, 2002, ASBC Capital I (the ASBC Trust), a Delaware business trust
wholly owned by the Corporation, completed the sale of $175 million of 7.625%
preferred securities (the Preferred Securities). The ASBC Trust used the
proceeds from the offering to purchase a like amount of 7.625% Junior
Subordinated Debentures (the Debentures) of the Corporation. The Debentures are
the sole assets of the ASBC Trust and are eliminated, along with the related
income statement effects, in the consolidated financial statements.
The Preferred Securities accrue and pay dividends quarterly at an annual rate of
7.625% of the stated liquidation amount of $25 per Preferred Security. The
Corporation has fully and unconditionally guaranteed all of the obligations of
the ASBC Trust. The guarantee covers the quarterly distributions and payments on
liquidation or redemption of the Preferred Securities, but only to the extent of
funds held by the ASBC Trust.
The Preferred Securities are mandatorily redeemable upon the maturity of the
Debentures, on June 15, 2032 or upon earlier redemption as provided in the
Indenture. The Corporation has the right to redeem the Debentures on or after
May 30, 2007.
The Preferred Securities qualify under the risk-based capital guidelines as Tier
1 capital for regulatory purposes. The Corporation used the proceeds from the
sales of the Debentures for general corporate purposes. Also during May 2002 the
Corporation entered into a fair value hedge to hedge the interest rate risk on
the Debentures. As of June 30, 2002, the fair value of the hedge was a $0.4
million loss.
Signal Financial Corporation on January 16, 1997 formed United Capital Trust I
(the UCTI Trust), a Delaware business trust wholly owned by the Corporation, and
completed the sale of $11 million of 9.75% preferred securities (the 9.75%
Preferred Securities). The UCTI Trust used the proceeds from the offering to
purchase a like amount of 9.75% Junior Subordinated Debentures (the 9.75%
Debentures) of the Corporation. The 9.75% Preferred Securities were mandatorily
redeemable upon the maturity of the 9.75% Debentures, on January 15, 2027 or
upon earlier redemption as provided in the Indenture. The Corporation had the
right to redeem the 9.75% Debentures on or after January 15, 2002. On June 20,
2002, the Corporation exercised this right and called the 9.75% Debentures for
redemption.
NOTE 10: Segment Reporting
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires selected financial and descriptive information about
reportable operating segments. The statement uses a "management approach"
concept as the basis for identifying reportable segments. The management
approach is based on the way that management organizes the segments within the
enterprise for making operating decisions, allocating resources, and assessing
performance. Consequently, the segments are evident from the structure of the
enterprise's internal organization, focusing on financial information that an
enterprise's chief operating decision-makers use to make decisions about the
enterprise's operating matters.
The Corporation's primary segment is banking, conducted through its bank and
lending subsidiaries. For purposes of segment disclosure under this statement,
these have been combined as one segment, as these segments have similar economic
characteristics and the nature of their products, services, processes,
customers, delivery channels and regulatory environment are similar. Banking
includes: a) community banking - lending and deposit gathering to businesses
(including business-related services such as cash management and international
banking services) and to consumers (including mortgages and credit cards); and
b) corporate banking - specialized lending (such as commercial real estate),
leasing and banking to larger businesses and metro or niche markets; and the
support to deliver banking services.
The "Other" segment is comprised of Wealth Management (including insurance,
brokerage, and trust/asset management), as well as intersegment eliminations and
residual revenues and expenses, representing the difference between actual
amounts incurred and the amounts allocated to operating segments.
Selected segment information is presented below.
Consolidated
Banking Other Total
- --------------------------------------------------------------------------------
As of and for the six months ended ($ in Thousands)
June 30, 2002
Goodwill $ 211,611 $ --- $ 211,611
Total assets $ 14,447,643 $ 28,849 $ 14,476,492
=========================================
Net interest income $ 242,973 $ 222 $ 243,195
Provision for loan losses 23,254 --- 23,254
Noninterest income 73,702 23,601 97,303
Depreciation and amortization 17,491 126 17,617
Other noninterest expense 140,058 16,429 156,487
Income taxes 39,047 611 39,658
-----------------------------------------
Net income $ 96,825 $ 6,657 $ 103,482
=========================================
As of and for the six months ended
June 30, 2001
Goodwill $ 95,638 $ --- $ 95,638
Total assets $ 13,185,401 $ 26,888 $ 13,212,289
=========================================
Net interest income $ 200,574 $ 381 $ 200,955
Provision for loan losses 11,947 --- 11,947
Noninterest income 71,716 23,632 95,348
Depreciation and amortization 20,191 147 20,338
Other noninterest expense 124,777 15,613 140,390
Income taxes 35,190 333 35,523
-----------------------------------------
Net income $ 80,185 $ 7,920 $ 88,105
=========================================
- --------------------------------------------------------------------------------
Consolidated
Banking Other Total
- --------------------------------------------------------------------------------
As of and for the three months ended ($ in Thousands)
June 30, 2002
Goodwill $ 211,611 $ --- $ 211,611
Total assets $ 14,447,643 $ 28,849 $ 14,476,492
=========================================
Net interest income $ 125,570 $ 198 $ 125,768
Provision for loan losses 12,003 --- 12,003
Noninterest income 37,366 12,537 49,903
Depreciation and amortization 9,462 77 9,539
Other noninterest expense 73,191 8,707 81,898
Income taxes 19,666 382 20,048
-----------------------------------------
Net income $ 48,614 $ 3,569 $ 52,183
=========================================
As of and for the three months ended
June 30, 2001
Goodwill $ 95,638 $ --- $ 95,638
Total assets $ 13,185,401 $ 26,888 $ 13,212,289
=========================================
Net interest income $ 103,764 $ 188 $ 103,952
Provision for loan losses 6,365 --- 6,365
Noninterest income 39,685 11,344 51,029
Depreciation and amortization 9,472 69 9,541
Other noninterest expense 65,045 7,692 72,737
Income taxes 20,283 36 20,319
----------------------------------------
Net income $ 42,284 $ 3,735 $ 46,019
========================================
- --------------------------------------------------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition and the
Results of Operations
Forward-Looking Statements
Forward-looking statements have been made in this document that are subject to
risks and uncertainties. These forward-looking statements describe future plans
or strategies and include Associated Banc-Corp's expectations of future results
of operations. The words "believes," "expects," "anticipates," or other similar
expressions identify forward-looking statements.
Shareholders should note that many factors, some of which may be discussed
elsewhere in this document, could affect the future financial results of
Associated Banc-Corp (the "Corporation") and could cause those results to differ
materially from those expressed in forward-looking statements contained in this
document. These factors include the following:
- - operating, legal, and regulatory risks;
- - economic, political, and competitive forces affecting the Corporation's
banking, securities, asset management, and credit services businesses; and
- - the risk that the Corporation's analyses of these risks and forces could be
incorrect and/or that the strategies developed to address them could be
unsuccessful.
These factors should be considered in evaluating the forward-looking statements,
and undue reliance should not be placed on such statements.
Overview
The following discussion and analysis is presented to assist in the
understanding and evaluation of the Corporation's financial condition and
results of operations. It is intended to complement the unaudited consolidated
financial statements, footnotes, and supplemental financial data appearing
elsewhere in this Form 10-Q and should be read in conjunction therewith.
On April 24, 2002, the Board of Directors declared a 10% stock dividend payable
on May 15, 2002 to shareholders of record at the close of business on April 29,
2002. Any fractional shares resulting from the dividend were paid in cash. All
share and per share financial information has been restated to reflect the
effect of this stock dividend (see Note 4 of the notes to consolidated financial
statements).
Management continually evaluates strategic acquisition opportunities and other
various strategic alternatives that could involve the sale or acquisition of
branches or other assets, or the consolidation or creation of subsidiaries.
Critical Accounting Policies
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Estimates that are particularly susceptible to significant change include the
determination of the allowance for loan losses, mortgage servicing rights,
derivative financial instruments and hedging activities, and income taxes.
The consolidated financial statements of Associated Banc-Corp (the
"Corporation") are prepared in conformity with accounting principles generally
accepted in the United States of America and follow general practices within the
industries in which it operates. This preparation requires management to make
estimates, assumptions and judgments that affect the amounts reported in the
financial statements and accompanying notes. These estimates, assumptions and
judgments are based on information available as of the date of the financial
statements; accordingly, as this information changes, the financial statements
could reflect different estimates, assumptions and judgments. Certain policies
inherently have a greater reliance on the use of estimates, assumptions and
judgments and, as such, have a greater possibility of producing results that
could be materially different than originally reported. Management believes the
following policies are both important to the portrayal of the company's
financial condition and results and require subjective or complex judgments and
therefore, management considers the following to be critical accounting
policies.
Subject to the use of estimates, assumptions and judgments is management's
evaluation process used to determine the adequacy of the allowance for loan
losses which combines several factors: management's ongoing review and grading
of the loan portfolio, consideration of past loan loss experience, trends in
past due and nonperforming loans, risk characteristics of the various
classifications of loans, existing economic conditions, the fair value of
underlying collateral, and other factors which could affect probable credit
losses. Because current economic conditions can change and future events are
inherently difficult to predict, the anticipated amount of estimated loan
losses, and therefore the adequacy of the allowance, could change significantly.
The Corporation believes the allowance for loan losses is adequate and properly
recorded in the financial statements. See section "Allowance for Loan Losses."
The fair value of the Corporation's mortgage servicing rights asset is important
to the presentation of the consolidated financial statements in that mortgage
servicing rights are subject to a fair value-based impairment standard. Mortgage
servicing rights do not trade in an active open market with readily observable
prices. As such, like other participants in the mortgage banking business, the
Corporation relies on an internal discounted cash flow model to estimate the
fair value of its mortgage servicing rights. While the Corporation believes that
the values produced by its internal model are indicative of the fair value of
its mortgage servicing rights portfolio, these values can change significantly
depending upon the then current interest rate environment and other economic
conditions. The proceeds that might be received should the Corporation actually
consider a sale of the mortgage servicing rights portfolio could differ from the
amounts reported at any point in time. The Corporation believes the mortgage
servicing rights asset is properly recorded in the financial statements. See
Note 6, "Goodwill and Other Intangible Assets" and section "Noninterest
Expense."
In various aspects of its business the Corporation uses derivative financial
instruments to reduce exposure to changes in interest rates and market prices
for financial instruments. Substantially all of these derivative financial
instruments are designated as hedges for financial reporting purposes. The
application of the hedge accounting policy requires judgment in the assessment
of hedge effectiveness, identification of similar hedged item groupings and
measurement of changes in the fair value of hedged items. However, if in the
future the derivative financial instruments used by the Corporation no longer
qualify for hedge accounting treatment and, consequently, the change in the fair
value of hedged items could be recognized in earnings, the impact on the
consolidated results of operations and reported earnings could be significant.
The Corporation believes hedge effectiveness is evaluated properly in the
consolidated financial statements. See Note 7, "Derivatives and Hedging
Activities."
The assessment of tax liabilities involves the use of estimates, assumptions,
interpretations, and judgments concerning certain accounting pronouncements and
federal and state codes. There can be no assurance that future events, such as
court decisions or positions of federal and state taxing authorities, will not
differ from management's current assessment, the impact of which could be
significant to the consolidated results of operations and reported earnings. The
Corporation believes the tax liabilities are adequate and properly recorded in
the consolidated financial statements. See section "Income Taxes."
Segment Review
As described in Note 10, "Segment Reporting," the Corporation's reportable
segment is banking, conducted through its bank and lending subsidiaries. Banking
includes: a) community banking - lending and deposit gathering to businesses
(including business-related services such as cash management and international
banking services) and to consumers (including mortgages and credit cards); and
b) corporate banking - specialized lending (such as commercial real estate),
leasing and banking to larger businesses and metro or niche markets; and the
support to deliver banking services.
The Corporation's profitability is primarily dependent on the net interest
income, noninterest income, the level of the provision for loan losses,
noninterest expense and taxes of its banking segment. The consolidated
discussion is therefore predominantly describing our banking segment results.
Results of Operations - Summary
Net income for the first six months of 2002 totaled $103.5 million, or $1.39 and
$1.37 for basic and diluted earnings per share. Comparatively, net income for
the first six months of 2001 was $88.1 million, or $1.21 and $1.20 for basic and
diluted earnings per share, respectively. See Note 4 of the notes to
consolidated financial statements for disclosure of net income and per share
amounts excluding goodwill amortization, net of any income tax effects.
Year-to-date 2002 results generated an annualized return on average assets of
1.50% and an annualized return on average equity of 17.52%, compared to 1.36%
and 17.61%, respectively, for the same period in 2001. For the first six months
of 2002 net interest margin was 3.94% compared to 3.45% for the comparable
period in 2001.
The following discussion refers to the Corporation's business combination
activity that may impact the comparability of certain financial data (see Note 5
of the notes to consolidated financial statements). Results include the
contribution of the former Signal Financial Corporation ("Signal") of Minnesota
since its acquisition on February 28, 2002. Signal, which added $1.1 billion in
total assets, $765 million in loans, and $783 in deposits, was successfully
integrated into the Corporation's operating platform during June 2002. While the
comparability of certain line items are affected, Signal had a modest impact on
the Corporation's overall results through June 30, 2002.
- ---------------------------------------------------------------------------------------------------------------------
TABLE 1 (1)
Summary Results of Operations: Trends
($ in Thousands, except per share data)
Three months ended Six months ended
---------------------------------- ---------------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
- ---------------------------------------------------------------------------------------------------------------------
Net income, as reported $ 52,183 $ 46,019 $ 103,482 $ 88,105
Net income, as adjusted (2) 52,183 47,404 103,482 90,874
Earnings per share - basic, as reported $ 0.69 $ 0.63 $ 1.39 $ 1.21
Earnings per share - basic, as adjusted (2) 0.69 0.65 1.39 1.25
Earnings per share - diluted, as reported $ 0.68 $ 0.63 $ 1.37 $ 1.20
Earnings per share - diluted, as adjusted (2) 0.68 0.65 1.37 1.24
Return on average assets, as reported 1.47% 1.42% 1.50% 1.36%
Return on average assets, as adjusted (2) 1.47 1.46 1.50 1.41
Return on average equity, as reported 16.73% 18.02% 17.52% 17.61%
Return on average equity, as adjusted (2) 16.73 18.56 17.52 18.16
Return on tangible average equity, as reported (3) 20.36% 20.05% 20.68% 19.65%
Return on tangible average equity, as adjusted
(2), (3) 20.36 20.65 20.68 20.27
Efficiency ratio, as reported (4) 50.33% 51.38% 49.43% 52.48%
Efficiency ratio, as adjusted (2), (4) 50.33 50.51 49.43 51.57
Net interest margin 3.96% 3.56% 3.94% 3.45%
(1) All per share financial information has been restated to reflect the effect
of the stock dividend.
(2) Selected 2001 financial data has been adjusted to exclude the amortization
of goodwill affected by adopting SFAS 142 in 2002.
(3) Net income divided by average stockholders' equity excluding goodwill and
core deposit intangibles. (4) Noninterest expense divided by sum of taxable
equivalent net interest income plus noninterest income, excluding
investment securities gains (losses), net, and asset sales gains, net.
- ---------------------------------------------------------------------------------------------------------------------
Net Interest Income and Net Interest Margin
Net interest income on a fully taxable equivalent basis for the six months ended
June 30, 2002, was $255.3 million, an increase of $43.2 million or 20.4% over
the comparable period last year, with the Signal acquisition contributing
approximately $14 million. As indicated in Tables 2 and 3, the $43.2 million
increase in fully taxable equivalent net interest income was attributable to
rate (as the impact of changes in the interest rate environment improved fully
taxable equivalent net interest income by $35.0 million) and, to a lesser
degree, volume (with balance sheet growth and differences in the mix of average
earning assets and average interest-bearing liabilities adding $8.2 million to
fully taxable equivalent net interest income).
The net interest margin for the first six months of 2002 was 3.94%, up 49 basis
points ("bp") from 3.45% for the comparable period in 2001. This comparable
period increase is attributable to a 67 bp increase in interest rate spread (the
net of a 206 bp decrease in the cost of interest-bearing liabilities and a 139
bp decrease in the yield on earning assets), partially offset by a 18 bp lower
contribution from net free funds.
Interest rates fell significantly between the comparable six-month periods. The
average Federal funds rate of 1.75% for year-to-date 2002 was 321 bp lower than
the average for year-to-date 2001. Both fully taxable equivalent net interest
income and net interest margin benefited from the lower interest rate
environment, particularly by lower costs of interest-bearing liabilities.
The yield on earning assets was 6.31% for year-to-date 2002, down 139 bp from
the comparable six-month period last year. Competitive pricing on new and
refinanced loans, as well as the repricing of variable rate loans in a lower
interest rate environment put downward pressure on loan yields. The average loan
yield was 6.42%, down 162 bp from year-to-date 2001. The average yield on
investments and other earning assets was 5.98%, down 75 bp.
The cost of interest-bearing liabilities was 2.75% for year-to-date 2002, down
206 bp compared to the first six months of 2001, impacted by the significantly
lower rate environment in 2002. The average cost of interest-bearing deposits
excluding brokered CDs was 2.54%, down 189 bp from year-to-date 2001,
benefitting from a larger mix of lower-costing transaction accounts, as well as
from lower rates on all interest-bearing deposit products in year-to-date 2002
versus year-to-date 2001. Brokered CD balances declined to represent 2.8% of
interest-bearing liabilities (versus 4.7% for year-to-date 2001) and had lower
costs (down 425 bp to 2.08% for year-to-date 2002). The cost of wholesale funds
(comprised of short-term borrowings and long-term debt) was 3.22% (down 219 bp
from year-to-date 2001), also primarily attributable to the lower rate
environment between comparable periods.
Average earning assets increased by $722 million (5.9%) over the comparable
period last year. The growth in earning assets came primarily from loans, up an
average of $631 million (7.0%). The Corporation maintains a commercial focus to
the composition of its loan portfolio; commercial loans represented 59.2% of
average loans for year-to-date 2002 compared to 52.5% for year-to-date 2001.
Average investments and other earning assets increased $91 million to $3.3
billion.
Average interest-bearing liabilities increased $380 million (3.5%) over the
comparable period last year. While the growth in interest-bearing liabilities
was modest, the mix is significantly different between comparable periods. The
use of brokered CDs, a comparatively costly funding source during 2001, was
intentionally reduced 39.1% (down $197 million), representing 2.8% of average
interest-bearing liabilities versus 4.7% for year-to-date 2001. Interest-bearing
deposits excluding brokered CDs were up slightly, but with a notable shift in
year-to-date 2002 from time deposits to transaction accounts. Average wholesale
funding increased $416 million (predominantly in long-term debt) to 32.7% of
interest-bearing liabilities for year-to-date 2002 compared to 30.0% for
year-to-date 2001. To take advantage of the lower rate environment, improve
liquidity and mitigate interest rate risk, the Corporation increased its
long-term debt, on average, to 12.7% of interest-bearing liabilities compared to
2.1% for year-to-date 2001. The growth in long-term debt since year-to-date 2001
included the issuance of $200 million of fixed rate subordinated debt, $50
million of variable rate bank notes, increased use of long-term Federal Home
Loan Bank advances, and $175 million of trust preferred debt.
- -----------------------------------------------------------------------------------------------------------------------
TABLE 2
Net Interest Income Analysis-Taxable Equivalent Basis
($ in Thousands)
- -----------------------------------------------------------------------------------------------------------------------
Six Months ended June 30, 2002 Six Months ended June 30, 2001
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------------------
Loans (1) $ 9,655,626 $ 310,249 6.42% $ 9,024,936 $ 363,185 8.04%
Investments and other (1) 3,278,759 98,014 5.98 3,187,837 107,284 6.73
------------------------- -------------------------
Total earning assets 12,934,385 408,263 6.31 12,212,773 470,469 7.70
Other assets, net 972,877 811,744
------------ ----------
Total assets $ 13,907,262 $ 13,024,517
============ ============
Interest-bearing deposits,
excluding brokered CDs $ 7,202,585 $ 90,615 2.54% $ 7,040,467 $ 154,527 4.43%
Brokered CDs 307,796 3,174 2.08 505,257 15,866 6.33
Wholesale funding 3,652,863 59,179 3.22 3,237,342 87,979 5.41
------------------------- -------------------------
Total interest-bearing liabilities 11,163,244 152,968 2.75 10,783,066 258,372 4.81
--------- -------
Demand, non-interest bearing 1,373,361 1,100,142
Other liabilities 179,594 132,438
Stockholders' equity 1,191,063 1,008,871
------------ ------------
Total liabilities and equity $ 13,907,262 $ 13,024,517
============ ============
Interest rate spread 3.56% 2.89%
Net free funds 0.38 0.56
---- ----
Net interest income, taxable
equivalent, and net interest margin $ 255,295 3.94% $ 212,097 3.45%
=================== ===================
Tax equivalent adjustment 12,100 11,142
--------- ---------
Net interest income, as reported $ 243,195 $ 200,955
========= =========
(1) The yield on tax exempt loans and securities is computed on a
tax-equivalent basis using a tax rate of 35% for all periods presented and
is net of the effects of certain disallowed interest deductions.
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
TABLE 2 (continued)
Net Interest Income Analysis-Taxable Equivalent Basis
($ in Thousands)
- -----------------------------------------------------------------------------------------------------------------------
Three Months ended June 30, 2002 Three Months ended June 30, 2001
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------------------
Loans (1) $ 9,902,462 $ 158,595 6.37% $ 9,063,780 $ 178,525 7.84%
Investments and other (1) 3,346,128 49,299 5.89 3,164,578 52,664 6.66%
------------------------- --------------------------
Total earning assets 13,248,590 207,894 6.25 12,228,358 231,189 7.53%
Other assets, net 1,024,642 808,237
------------ ------------
Total assets $ 14,273,232 $ 13,036,595
============ ============
Interest-bearing deposits,
excluding brokered CDs $ 7,343,444 $ 44,027 2.40% $ 7,040,448 $ 73,778 4.20%
Brokered CDs 289,676 1,533 2.12 348,965 5,187 5.96
Wholesale funding 3,767,182 30,529 3.21 3,371,135 42,731 5.01
------------------------- --------------------------
Total interest-bearing liabilities 11,400,302 76,089 2.66 10,760,548 121,696 4.51
--------- -------
Demand, non-interest bearing 1,448,314 1,115,347
Other liabilities 173,868 136,413
Stockholders' equity 1,250,748 1,024,287
------------ ------------
Total liabilities and equity $ 14,273,232 $ 13,036,595
============ ============
Interest rate spread 3.59% 3.02%
Net free funds 0.37 0.54
---- ----
Net interest income, taxable
equivalent, and net interest
margin $ 131,805 3.96% $ 109,493 3.56%
=================== ==================
Tax equivalent adjustment 6,037 5,541
--------- ---------
Net interest income, as reported $ 125,768 $ 103,952
========= =========
- ----------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
TABLE 3
Volume / Rate Variance - Taxable Equivalent Basis
($ in Thousands)
- ---------------------------------------------------------------------------------------------
Comparison of
Six months ended June 30, 2002 versus 2001
Income/ Variance Attributable to
Expense
Variance * Volume Rate
- ---------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ (52,936) $ 16,830 $ (69,766)
Investments and other (9,270) 2,100 (11,370)
-----------------------------------
Total interest income (62,206) 18,930 (81,136)
INTEREST EXPENSE
Interest-bearing deposits excluding brokered CDs $ (63,912) $ 2,039 $ (65,951)
Brokered CDs (12,692) (2,036) (10,656)
Wholesale funding (28,800) 10,747 (39,547)
-----------------------------------
Total interest expense (105,404) 10,750 (116,154)
-----------------------------------
Net interest income $ 43,198 $ 8,180 $ 35,018
===================================
* The change in interest due to both rate and volume has been allocated
proportionately to volume variance and rate variance based on the
relationship of the absolute dollar change in each.
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
TABLE 3 (continued)
Volume / Rate Variance - Taxable Equivalent Basis
($ in Thousands)
- ---------------------------------------------------------------------------------------------
Comparison of
Six months ended June 30, 2002 versus 2001
Income/ Variance Attributable to
Expense
Variance * Volume Rate
- ---------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ (19,930) $ 11,940 $ (31,870)
Investments and other (3,365) 2,234 (5,599)
-----------------------------------
Total interest income (23,295) 14,174 (37,469)
INTEREST EXPENSE
Interest-bearing deposits excluding brokered CDs $ (29,751) $ 1,932 $ (31,683)
Brokered CDs (3,654) (309) (3,345)
Wholesale funding (12,202) 5,248 (17,450)
-----------------------------------
Total interest expense (45,607) 6,871 (52,478)
-----------------------------------
Net interest income $ 22,312 $ 7,303 $ 15,009
=============================================================================================
Provision for Loan Losses
The provision for loan losses for year-to-date 2002 was $23.3 million, up $11.3
million from year-to-date 2001 of $11.9 million. The provision for loan losses
reflects the increase in nonperforming assets and charge offs. Annualized net
charge-offs as a percent of average loans for year-to-date 2002 increased to
0.31% from 0.13% for year-to-date 2001 and 0.22% for the full year 2001. The
ratio of the allowance for loan losses to total loans was 1.50%, up from 1.41%
at June 30, 2001 and 1.42% at December 31, 2001. See Table 8.
The provision for loan losses is predominantly a function of the methodology
used to determine the adequacy of the allowance for loan losses which focuses on
changes in the size and character of the loan portfolio, changes in levels of
impaired and other nonperforming loans, historical losses on each portfolio
category, the risk inherent in specific loans, concentrations of loans to
specific borrowers or industries, existing economic conditions, the fair value
of underlying collateral, and other factors which could affect potential credit
losses. See additional discussion under the "Allowance for Loan Losses" section.
Noninterest Income
Year-to-date 2002 noninterest income was $97.3 million, with Signal adding
approximately $5 million to 2002 results. Compared to year-to-date 2001,
noninterest income was up $2.0 million, or 2.1%. Increases in service charges on
deposit accounts and retail commissions were offset, in part, by lower mortgage
banking revenue.
- ----------------------------------------------------------------------------------------------------------------------------
TABLE 4
Noninterest Income
($ in Thousands)
- ---------------------------------------------------------------------------------------------------------------------------
2nd Qtr. 2nd Qtr. Dollar Percent YTD YTD Dollar Percent
2002 2001 Change Change 2002 2001 Change Change
- ---------------------------------------------------------------------------------------------------------------------------
Trust service fees $ 7,722 $ 7,339 $ 383 5.2% $ 15,093 $ 15,411 $ (318) (2.1)%
Service charges on deposit fee
accounts 11,733 9,550 2,183 22.9 21,613 18,295 3,318 18.1
Mortgage banking 9,637 15,504 (5,867) (37.8) 22,241 24,689 (2,448) (9.9)
Credit card & other nondeposit fees 7,094 7,121 (27) (0.4) 13,166 13,896 (730) (5.3)
Retail commissions 5,885 4,265 1,620 38.0 10,501 8,749 1,752 20.0
Bank owned life insurance income 3,469 3,184 285 9.0 6,739 6,318 421 6.7
Asset sale gains, net 41 383 (342) (89.3) 372 915 (543) (59.3)
Other 4,322 3,687 635 17.2 7,578 6,833 745 10.9
-------------------------------------------------------------------------------------
Subtotal $ 49,903 $ 51,033 $ (1,130) (2.2)% $ 97,303 $ 95,106 $ 2,197 2.3%
Investment securities gains
(losses), net --- (4) 4 (100.0) --- 242 (242) (100.0)
-------------------------------------------------------------------------------------
Total noninterest income $ 49,903 $ 51,029 $ (1,126) (2.2)% $ 97,303 $ 95,348 $ 1,955 2.1%
=====================================================================================
- ---------------------------------------------------------------------------------------------------------------------------
Trust service fees decreased $0.3 million, or 2.1%, between the comparable
six-month periods. The change was the net of an increase in tax return fee
revenue and decreases in servicing fees on personal and employee benefit plans
due to the lower market value of assets under management (from $4.1 billion at
June 30, 2001 to $3.7 billion at June 30, 2002), reflecting both market
conditions and competitive factors.
Service charges on deposit accounts were up $3.3 million, or 18.1%, between the
comparable six-month periods. The increase was a function of higher service
charges on business accounts and higher fees on overdrafts/nonsufficient funds
due, in part, to an increase in fee rates during the first quarter of 2002.
Mortgage banking income consists of servicing fees, the gain or loss on sales of
mortgage loans to the secondary market, gains on sales of servicing, and
production-related fees (origination, underwriting and escrow waiver fees).
Mortgage banking income decreased $2.4 million compared to the first six months
of 2001. The decrease was primarily a result of $4.0 million in gains on the
sales of mortgage servicing rights during year-to-date 2001 versus none in
year-to-date 2002. Secondary mortgage loan production was $1.1 billion in
year-to-date 2002 versus $1.0 billion in year-to-date 2001. As a result,
production-related fees were up $2.7 million. Gains on sales of loans were down
$0.8 million, primarily a function of loan sale pricing and decreases in the
fair value of mortgage derivatives. Servicing fees on the portfolio serviced for
others were down slightly ($0.3 million) between comparable periods, given the
minimal change in the average balance serviced.
Credit card and other nondeposit fees were $13.2 million for the first six
months of 2002, a decrease of $0.7 million or 5.3% from year-to-date 2001,
primarily in miscellaneous retail loan fees.
Retail commission income (which includes commissions from insurance and
brokerage product sales) was $10.5 million, up $1.8 million compared to the
first six months of 2001. This increase was attributable principally to
commissions on fixed annuities, a more attractive product to consumers given the
lower rate environment.
Other noninterest income increased $0.7 million, or 10.9% from year-to-date
2001. The sale of stock in a regional ATM network resulted in a gain of $0.5
million during the first quarter of 2002.
Noninterest Expense
Noninterest expense was $174.1 million, up $13.4 million or 8.3% compared to the
first six months of 2001, with Signal adding approximately $11 million of
expense. Adjusting for goodwill amortization, which ceased on January 1, 2002 as
a result of adopting SFAS 142, noninterest expense was up $16.1 million or
10.2%. Large increases were in personnel and occupancy costs, given a larger
employee base and broader branch network as the Corporation assimilated Signal's
businesses and operations. The Corporation expects to realize operating
efficiency savings, particularly following the integration, which occurred
during the second quarter of 2002, of Signal's banking subsidiaries with and
into Associated Bank Minnesota, to operate under a single national charter named
Associated Bank Minnesota, National Association.
- ---------------------------------------------------------------------------------------------------------------------------
TABLE 5
Noninterest Expense
($ in Thousands)
- ---------------------------------------------------------------------------------------------------------------------------
2nd Qtr. 2nd Qtr. Dollar Percent YTD YTD Dollar Percent
2002 2001 Change Change 2002 2001 Change Change
- ---------------------------------------------------------------------------------------------------------------------------
Personnel expense $ 48,764 $ 41,233 $ 7,531 18.3% $ 93,758 $ 81,538 $ 12,220 15.0%
Occupancy 6,650 5,927 723 12.2 12,787 12,281 506 4.1
Equipment 3,727 3,650 77 2.1 7,217 7,330 (113) (1.5)
Data processing 5,304 4,822 482 10.0 10,107 9,665 442 4.6
Business development & advertising 3,126 3,191 (65) (2.0) 6,572 6,192 380 6.1
Stationery and supplies 1,786 2,330 (544) (23.3) 3,830 4,062 (232) (5.7)
FDIC expense 402 446 (44) (9.9) 774 880 (106) (12.0)
Mortgage servicing rights expense 3,874 2,710 1,164 43.0 6,771 6,609 162 2.5
Intangible amortization expense 884 717 167 23.3 1,599 1,434 165 11.5
Legal and professional fees 1,461 777 684 88.0 2,753 1,669 1,084 64.9
Other 15,459 15,090 369 2.4 27,936 26,299 1,637 6.2
-------------------------------------------------------------------------------------
Subtotal $ 91,437 $ 80,893 $ 10,544 13.0% $ 174,104 $ 157,959 $ 16,145 10.2%
Goodwill amortization expense --- 1,385 (1,385) (100.0) --- 2,769 (2,769) (100.0)
-------------------------------------------------------------------------------------
Total noninterest expense $ 91,437 $ 82,278 $ 9,159 11.1% $ 174,104 $ 160,728 $ 13,376 8.3%
====================================================================================
- ---------------------------------------------------------------------------------------------------------------------------
Personnel expense increased $12.2 million or 15.0% over the first six months of
2001, and represented 53.9% of total noninterest expense in year-to-date 2002
compared to 50.7% in year-to-date 2001. Average full-time equivalent employees
were 4,043 for year-to-date 2002 (with Signal adding, on average, 239 for
year-to-date 2002) compared to 3,850 for year-to-date 2001, an increase of 5%.
Total salary expense increased $8.9 million or 14.0% (4% excluding Signal)
between comparable periods, primarily a function of merit increases between
years, and higher base salaries and incentive compensation given the overall
increase in full-time equivalent employees. Fringe benefits increased $3.3
million or 18.3% (12% without Signal) over year-to-date 2001, attributable also
to the larger employee base, and to higher profit sharing expenses and the
increased cost of premium based benefits.
Occupancy expense increased 4.1% to support the larger branch network
attributable mostly to the Signal acquisition. Data processing costs were up due
to the conversion of Signal to the Corporation's common operating platforms in
the second quarter of 2002.
Mortgage servicing rights expense includes both the amortization of the mortgage
servicing rights asset and increases or decreases to the valuation allowance
associated with the mortgage servicing rights asset. Mortgage servicing rights
expense increased by $0.2 million between comparable periods, the net of a $1.6
million increase in the amortization of the mortgage servicing rights asset and
a $1.4 million smaller addition to the valuation allowance between periods.
Mortgage servicing rights are considered a critical accounting policy given that
estimating the fair value of the mortgage servicing rights involves judgment,
particularly of estimated prepayment speeds of the underlying mortgages serviced
and the overall level of interest rates. A valuation allowance is established to
the extent the carrying value of the mortgage servicing rights exceeds the
estimated fair value. Net income could be affected if management's estimate of
the prepayment speeds or other factors differ materially from actual
prepayments. Mortgage servicing rights, included in other intangible assets on
the consolidated balance sheet, were $36.8 million, net of an $11.5 million
valuation allowance at June 30, 2002. See Note 6, "Goodwill and Other Intangible
Assets" for additional disclosure.
Legal and professional fees were up $1.1 million between comparable periods with
most categories showing increases (legal fees, consultant fees and exam/audit
fees). Other expense was $27.9 million, up $1.6 million from year-to-date 2001,
due primarily to higher loan expenses (notably credit card and commercial loan
expenses) and higher office expense (predominantly courier and communication
expenses). Goodwill amortization expense decreased $2.8 million due to the
adoption of SFAS 142, which required the amortization of goodwill to cease. See
Note 3, "Adoption of Statements of Financial Accounting Standards" and Note 6,
"Goodwill and Other Intangible Assets" for additional disclosure.
Income Taxes
Income tax expense for the first six months of 2002 was $39.7 million, up $4.1
million or 11.6% from the comparable period in 2001. The effective tax rate
(income tax expense divided by income before taxes) was 27.7% and 28.7% for
year-to-date 2002 and year-to-date 2001, respectively. The decline in the
effective tax rate was a result of tax benefits realized due to the merger of
the Wisconsin banks into a single national charter during 2001 and the adoption
of SFAS 142 in 2002, which required the amortization of goodwill to cease.
Income tax expense recorded in the consolidated statement of income involves the
interpretation and application of certain accounting pronouncements and federal
and state tax codes, and is, therefore, considered a critical accounting policy.
The Corporation undergoes examination by various regulatory taxing authorities.
Such agencies may require that changes in the amount of tax expense or valuation
allowance be recognized when their interpretations differ from those of
management, based on their judgments about information available to them at the
time of their examinations.
Balance Sheet
At June 30, 2002, total assets were $14.5 billion, an increase of $1.3 billion,
or 9.6%, over June 30, 2001. Signal, acquired on February 28, 2002, added $1.1
billion in total assets, $765 million in loans, and $783 million in deposits on
the date of acquisition. Loan growth since June 30, 2001 was $899 million or
10.0%, predominantly attributable to the Signal acquisition. The growth in loans
was primarily in commercial loans, which grew $1.1 billion and now comprise 61%
of total loans. However, overall loan growth was tempered by a $499 million
decline in residential real estate loans, attributable to high refinance
activity and sales of current production into the secondary market. Total
deposits were up $526 million or 6.2%, principally due to the acquisition of
Signal. Demand deposits grew $391 million (33.2%), to represent 17% of total
deposits, compared to 14% a year earlier. Given the low rate environment, other
time deposit balances have declined, as maturing balances have moved to more
liquid deposit products or to alternative investment options. Short-term
borrowings decreased $657 million, primarily in short-term Federal Home Loan
Bank advances, as longer-term funding sources were utilized. Since June 30,
2001, long-term debt grew $991 million due to the issuance of $200 million of
subordinated debt, $50 million of bank notes, and the increased use of long-term
Federal Home Loan Bank advances. Additionally, during the second quarter of 2002
the Corporation issued $175 million of company-obligated mandatorily redeemable
preferred securities.
Since year-end 2001, total assets grew $872 million, again attributable to the
Signal acquisition, with loans up $863 million predominantly in commercial loans
(up $801 million). Deposits increased $414 million to $9.0 billion at June 30,
2002, led by interest-bearing demand deposits, which increased $191 million
since year-end 2001. See Tables 6 and 7 for period end loan and deposit
composition, respectively.
- ---------------------------------------------------------------------------------------------------------
TABLE 6
Period End Loan Composition
($ in Thousands)
- ---------------------------------------------------------------------------------------------------------
June 30, % of June 30, % of Dec. 31, % of
2002 Total 2001 Total 2001 Total
- ------------------------------------------ -------------- ---------- --------------- --------- ----------
Commercial, financial &agricultural $ 2,127,665 21% $ 1,774,451 20% $ 1,783,300 20%
Real estate-construction 821,658 8 749,185 8 797,734 9
Commercial real estate 3,037,284 31 2,401,869 27 2,630,964 29
Lease financing 38,212 1 14,026 -- 11,629 --
----------------------------------------------------------------
Commercial 6,024,819 61 4,939,531 55 5,223,627 58
Residential real estate 2,364,373 24 2,863,382 32 2,524,199 28
Home equity 777,347 8 535,525 6 609,254 7
----------------------------------------------------------------
Residential mortgage 3,141,720 32 3,398,907 38 3,133,453 35
Consumer 716,130 7 645,240 7 662,784 7
----------------------------------------------------------------
Total loans $ 9,882,669 100% $ 8,983,678 100% $ 9,019,864 100%
================================================================
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
TABLE 7
Period End Deposit Composition
($ in Thousands)
- ---------------------------------------------------------------------------------------------------------
June 30, % of June 30, % of Dec. 31, % of
2002 Total 2001 Total 2001 Total
- ---------------------------------------------------------------------------------------------------------
Noninterest-bearing demand $ 1,566,487 17% $ 1,175,615 14% $ 1,425,109 17%
Savings 912,019 10 839,538 10 801,648 9
Interest-bearing demand 1,113,342 12 762,910 9 922,164 11
Money market 1,888,165 21 1,759,104 21 1,814,098 21
Brokered CDs 233,968 3 322,857 4 290,000 3
Other time 3,312,263 37 3,640,202 42 3,359,592 39
-----------------------------------------------------------------
Total deposits $ 9,026,244 100% $ 8,500,226 100% $ 8,612,611 100%
=================================================================
Total deposits, excluding
Brokered CDs $ 8,792,276 97% $ 8,177,369 96% $ 8,322,611 97%
=================================================================
- ---------------------------------------------------------------------------------------------------------
Allowance For Loan Losses
The loan portfolio is the Corporation's primary asset subject to credit risk.
Credit risk is controlled and monitored through the use of lending standards, a
thorough review of potential borrowers, and on-going review of loan payment
performance. Active asset quality administration, including early problem loan
identification and timely resolution of problems, further ensures appropriate
management of credit risk and minimization of loan losses.
- ----------------------------------------------------------------------------------------------------------
TABLE 8
Allowance for Loan Losses and Nonperforming Assets
($ in Thousands)
- ----------------------------------------------------------------------------------------------------------
At and for the At and for the
Six months ended year ended
June 30, December 31,
- ----------------------------------------------------------------------------------------------------------
2002 2001 2001
--------------------------------------
Allowance for Loan Losses:
Balance at beginning of period $ 128,204 $ 120,232 $ 120,232
Balance related to acquisition 11,985 --- ---
Provision for loan losses 23,254 11,947 28,210
Charge-offs (16,787) (7,216) (22,639)
Recoveries 2,077 1,427 2,401
-------------------------------------
Net charge-offs (14,710) (5,789) (20,238)
-------------------------------------
Balance at end of period $ 148,733 $ 126,390 $ 128,204
=====================================
Nonperforming Assets:
Nonaccrual loans $ 82,474 $ 49,147 $ 48,238
Accruing loans past due 90 days or more 4,683 3,779 3,649
Restructured loans 115 143 238
-------------------------------------
Total nonperforming loans 87,272 53,069 52,125
Other real estate owned 2,610 2,603 2,717
-------------------------------------
Total nonperforming assets $ 89,882 $ 55,672 $ 54,842
=====================================
Ratios:
Allowance for loan losses to net charge-offs (annualized) 5.01x 10.83x 6.33x
Net charge-offs to average loans (annualized) 0.31% 0.13% 0.22%
Allowance for loan losses to total loans 1.50% 1.41% 1.42%
Nonperforming loans to total loans 0.88% 0.59% 0.58%
Nonperforming assets to total assets 0.62% 0.42% 0.40%
Allowance for loan losses to nonperforming loans 170% 238% 246%
- ----------------------------------------------------------------------------------------------------------
As of June 30, 2002, the allowance for loan losses was $148.7 million,
representing 1.50% of loans outstanding, compared to $126.4 million, or 1.41% of
loans, at June 30, 2001, and $128.2 million, or 1.42% at year-end 2001. At June
30, 2002, the allowance for loan losses was 170% of nonperforming loans compared
to 238% and 246% at June 30 and December 31, 2001, respectively. Table 8
provides additional information regarding activity in the allowance for loan
losses.
The allowance for loan losses at June 30, 2002 increased $22.3 million (17.7%)
since June 30, 2001 and $20.5 million (16.0%) since December 31, 2001, with
approximately $12 million of the increase attributable to the Signal
acquisition. The remainder of the increase is, in part, in response to continued
growth in total loans, the increase in nonperforming loans and net charge offs
between comparable periods (see Table 8 and section "Nonperforming Loans and
Other Real Estate Owned), and the continued soft economic conditions. Loans at
June 30, 2002 grew $899 million (10.0%) since June 30, 2001, predominantly in
commercial loans (see commercial, financial and agricultural; commercial real
estate and real estate construction loans included in Table 6). Period end loans
grew $863 million since year-end. The mix of commercial loans increased as a
percent of total loans to 61% at June 30, 2002 compared to 55% at June 30, 2001
and 58% at December 31, 2001.
Gross charge-offs were $16.8 million for the six months ended June 30, 2002,
$7.2 million for the comparable period ended June 30, 2001, and $22.6 million
for the year 2001, while recoveries for the corresponding periods were $2.1
million, $1.4 million, and $2.4 million, respectively. The rise in net charge
offs is largely due to the charge off of several large commercial credits
(accountable for approximately $9.1 million of the charge offs) during 2002. As
a result, the ratio of net charge-offs to average loans on an annualized basis
was 0.31%, 0.13%, and 0.22% for year-to-date 2002, year-to-date 2001, and for
the year 2001, respectively.
The allowance for loan losses represents management's estimate of an amount
adequate to provide for probable credit losses in the loan portfolio at the
balance sheet date. Management's evaluation of the adequacy of the allowance for
loan losses is based on management's ongoing review and grading of the loan
portfolio, consideration of past loan loss experience, trends in past due and
nonperforming loans, risk characteristics of the various classifications of
loans, existing economic conditions, the fair value of underlying collateral,
and other factors which could affect probable credit losses. Assessing these
numerous factors involves judgment. The change in the allowance for loan losses
is a function of a number of factors, including but not limited to changes in
the loan portfolio (see Table 6), net charge-offs and nonperforming loans (see
Table 8 and section "Nonperforming Loans and Other Real Estate Owned").
Management considers the allowance for loan losses a critical accounting policy.
Management believes the allowance for loan losses to be adequate at June 30,
2002. While management uses available information to recognize losses on loans,
future adjustments to the allowance for loan losses may be necessary based on
changes in economic conditions and the impact of such change on the
Corporation's borrowers. As an integral part of their examination process,
various regulatory agencies also review the allowance for loan losses. Such
agencies may require that certain loan balances be charged off when their credit
evaluations differ from those of management, based on their judgments about
information available to them at the time of their examination.
Nonperforming Loans And Other Real Estate Owned
Management is committed to promptly identifying and resolving nonaccrual and
problem loans. This philosophy is embodied through the ongoing monitoring and
reviewing of all pools of risk in the loan portfolio to ensure that problem
loans are identified quickly and the risk of loss is minimized.
Nonperforming loans are considered an indicator of potential future loan losses.
Nonperforming loans are defined as nonaccrual loans, loans 90 days or more past
due but still accruing and restructured loans. The Corporation specifically
excludes student loan balances that are 90 days or more past due and still
accruing and that have contractual government guarantees as to collection of
principal and interest, from its definition of nonperforming loans. The
Corporation had $20 million, $18 million and $21 million of these student loans
at June 30, 2002, June 30, 2001, and December 31, 2001, respectively.
Table 8 provides detailed information regarding nonperforming assets. Total
nonperforming loans at June 30, 2002 were up $34.2 million and $35.1 million
from June 30 and December 31, 2001, respectively. The ratio of nonperforming
loans to total loans was .88% at June 30, 2002, as compared to .59% and .58% at
June 30 and December 31, 2001, respectively. Nonaccrual loans account for the
majority of the $34.2 million increase in nonperforming loans between comparable
June 30 periods, with nonaccrual loans increasing $33.3 million and loans past
due 90 or more days increasing $0.9 million. The increase in nonaccrual loans is
predominantly attributable to the addition, during the second quarter of 2002,
of one commercial manufacturing credit (totaling $22 million) for which payments
are current; however, the Corporation has doubts concerning the future
collectibility of the loan given the current economic conditions and has set
aside $10 million of the allowance for loan losses for this credit. Nonaccrual
loans also account for the majority of the $35.1 million increase in
nonperforming loans since year-end 2001. Nonaccrual loans increased $34.2
million (again primarily attributable to the credit discussed above), while
accruing loans past due 90 or more days increased $1.0 million.
Other real estate owned was $2.6 million at June 30, 2002, unchanged from June
30, 2001 and down $0.1 million from December 31, 2001.
Potential problem loans are loans where there are doubts as to the ability of
the borrower to comply with present repayment terms. The decision of management
to place loans in this category does not necessarily mean that the Corporation
expects losses to occur but that management recognizes that a higher degree of
risk is associated with these performing loans. At June 30, 2002, potential
problem loans totaled $205 million. The loans that have been reported as
potential problem loans are not concentrated in a particular industry.
Management does not presently expect significant losses from credits in this
category.
Liquidity
Effective liquidity management ensures the cash flow requirements of depositors
and borrowers, as well as the operating cash needs of the Corporation, are met.
Funds are available from a number of sources, including the securities
portfolio, the core deposit base, lines of credit with major banks, the ability
to acquire large and brokered deposits, and the ability to securitize or package
loans for sale. Additionally, liquidity is provided from loans and investment
securities repayments and maturities.
The subsidiary banks are subject to regulation and, among other things, may be
limited in their ability to pay dividends or transfer funds to the parent
company. Accordingly, consolidated cash flows as presented in the consolidated
statements of cash flows may not represent cash immediately available for the
payment of cash dividends to the Corporation's stockholders or for other cash
needs.
For the six months ended June 30, 2002, net cash provided from operating
activities was $318.5 million, while investing and financing activities used net
cash of $135.8 million and $378.3 million, respectively, for a net decrease in
cash and cash equivalents of $195.6 million since year-end 2001. Generally,
during year-to-date 2002, anticipated maturities of time deposits occurred and
net asset growth since year-end 2001 was up due to the Signal acquisition. Other
funding sources were utilized, particularly long-term debt, to finance the
Signal acquisition, replenish the net decrease in deposits, repay short-term
borrowings, to provide for common stock repurchases, and for payment of cash
dividends to the Corporation's stockholders.
For the six months ended June 30, 2001, net cash provided from operating
activities was $40.8 million, while investing and financing activities used net
cash of $6.6 million and $74.2 million, respectively, for a net decrease in cash
and cash equivalents of $40.0 million since year-end 2000. Generally, during
year-to-date 2001, anticipated maturities of time deposits (predominantly in
brokered CDs) occurred, while total asset growth since year-end 2000 was minimal
(less than 1%). Other financing sources increased, particularly long-term debt
and other short-term borrowings, to replace the net decrease in deposits and to
provide for common stock repurchases and payment of cash dividends to the
Corporation's stockholders.
The parent company manages its liquidity position to provide the funds necessary
to pay dividends to stockholders, service debt, invest in subsidiaries,
repurchase common stock, and satisfy other operating requirements. The parent
company's primary funding sources to meet its liquidity requirements are
dividends and management fees from subsidiaries, borrowings with major banks,
commercial paper issuance, and proceeds from the issuance of equity.
In addition to affiliate dividends, the parent company has multiple funding
sources that could be used to increase liquidity and provide additional
financial flexibility. These sources include a revolving credit facility,
commercial paper, and two shelf registrations to issue debt and preferred
securities or a combination thereof. The parent company has available a $100
million revolving credit facility with established lines of credit from
nonaffiliated banks, of which $100 million was available at June 30, 2002. In
addition, $200 million of commercial paper was available at June 30, 2002 under
the parent company's commercial paper program.
In May 2002, the parent company filed a registration statement to utilize a
"shelf" registration, under which the parent company may offer up to $300
million of trust preferred securities. In May 2002, the parent company obtained
$175 million of trust preferred securities, bearing a 7.625% coupon rate. At
June 30, 2002, $125 million was available under the trust preferred shelf. In
May 2001, the parent company filed a registration statement utilizing a "shelf"
registration process, whereby the parent company may offer up to $500 million of
any combination of the following securities, either separately or in units: debt
securities, preferred stock, depositary shares, common stock, and warrants. In
August 2001, the parent company obtained $200 million in a subordinated note
offering, bearing a 6.75% coupon rate and 10-year maturity. At June 30, 2002,
$300 million was available under the shelf registration.
Investment securities are an important tool to the Corporation's liquidity
objective. As of June 30, 2002, all securities are classified as available for
sale. Of the $3.4 billion investment portfolio, $1.8 billion was pledged as
collateral for repurchase agreements, public deposits, treasury, tax and loan
notes, and other requirements. The remaining securities could be pledged or sold
to enhance liquidity if necessary.
During 2000, the four largest subsidiary banks (Associated Bank Illinois,
National Association, Associated Bank Milwaukee, Associated Bank Green Bay,
National Association, and Associated Bank North) established a $2.0 billion bank
note program. During 2001 the Corporation merged its Wisconsin banks into a
single national charter named Associated Bank, National Association; thus,
subsequently the program is associated with Associated Bank Illinois, National
Association and Associated Bank, National Association. Under this program,
short-term and long-term debt may be issued. As of June 30, 2002, $250 million
of long-term, variable rate bank notes were outstanding ($50 million were issued
in May 2002 and $200 million were issued in April 2001), and $1.75 billion
remains available under this program. The banks have also established federal
fund lines with major banks totaling approximately $2.9 billion at June 30,
2002.
The parent company and certain banks were rated by Moody's, Standard and Poor's
(S&P), and Fitch. These ratings, along with the Corporation's other ratings,
provide opportunity for greater funding capacity and funding alternatives.
During the second quarter of 2002, all three of the rating agencies affirmed the
Corporation's year-end 2001 ratings. Also affirmed were the ratings of
Associated Bank, National Association and Associated Bank Illinois, National
Association.
Capital
On April 24, 2002, the Board of Directors declared a 10% stock dividend, payable
May 15 to shareholders of record at the close of business on April 29. All share
and per share data in the accompanying consolidated financial statements has
been adjusted to reflect the 10% stock dividend paid. As a result of the stock
dividend, the Corporation distributed approximately 7.0 million shares of common
stock. Any fractional shares resulting from the dividend were paid in cash.
Stockholders' equity at June 30, 2002 increased to $1.3 billion, compared to
$1.1 billion at June 30, 2001. The increase in equity between the two periods
was primarily composed of the retention of earnings, the issuance of common
stock in connection with the Signal acquisition, and the exercise of stock
options, with offsetting decreases to equity from the payment of dividends and
the repurchase of common stock. Additionally, stockholders' equity at June 30,
2002, included $72.2 million of accumulated other comprehensive income,
predominantly related to unrealized gains on securities available for sale, net
of the tax effect. At June 30, 2001, stockholders' equity included $51.9 million
of accumulated other comprehensive income, primarily related to unrealized gains
on securities available for sale, net of the tax effect. The ratio of
stockholders' equity to assets was 8.81% and 7.95% at June 30, 2002 and 2001,
respectively.
Stockholders' equity grew $204.8 million since year-end 2001. The increase in
equity between the two periods was primarily composed of the retention of
earnings, the issuance of common stock in connection with the Signal
acquisition, and the exercise of stock options, with offsetting decreases to
equity from the payment of dividends and the repurchase of common stock.
Additionally, stockholders' equity at year-end 2001 included $47.2 million of
accumulated other comprehensive income, predominantly related to unrealized
gains on securities available for sale, net of the tax effect. Stockholders'
equity to assets at June 30, 2002 was 8.81%, compared to 7.87% at December 31,
2001.
Cash dividends of $0.5918 per share were paid in year-to-date 2002, compared to
$0.5454 per share in year-to-date 2001, representing an increase of 8.5%.
The Board of Directors has authorized management to repurchase shares of the
Corporation's common stock each quarter in the market, to be made available for
issuance in connection with the Corporation's employee incentive plans and for
other corporate purposes. During year-to-date 2002, 730,000 shares were
repurchased under this authorization, at an average cost of $34.78 per share,
while during year-to-date 2001 220,000 shares were repurchased at an average
cost of $31.32 per share. Additionally, under two separate actions in 2000, the
Board of Directors authorized the repurchase and cancellation of the
Corporation's outstanding shares, not to exceed 7.3 million shares on a combined
basis. Under these authorizations 123,750 shares were repurchased during
year-to-date 2002, at an average cost of $32.01 per share, while approximately
3.3 million shares remain authorized to repurchase at June 30, 2002. No shares
were repurchased under the 2000 authorizations during year-to-date 2001. The
repurchase of shares will be based on market opportunities, capital levels,
growth prospects, and other investment opportunities.
The adequacy of the Corporation's capital is regularly reviewed to ensure that
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. The assessment of overall capital
adequacy depends on a variety of factors, including asset quality, liquidity,
stability of earnings, changing competitive forces, economic conditions in
markets served and strength of management. The capital ratios of the Corporation
and its banking affiliates are greater than minimums required by regulatory
guidelines. The Corporation's capital ratios are summarized in Table 9.
- -------------------------------------------------------------------------------------------------------------------
TABLE 9
Capital Ratios
(In Thousands, except per share data)
- -------------------------------------------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
2002 2002 2001 2001 2001
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 1,275,245 $ 1,230,820 $ 1,070,416 $ 1,078,874 $ 1,050,678
Tier 1 capital 1,155,995 969,888 924,871 913,281 896,276
Total capital 1,498,328 1,309,433 1,253,036 1,238,673 1,020,620
Market capitalization 2,856,382 2,622,307 2,305,672 2,230,131 2,379,119
-----------------------------------------------------------------------
Book value per common share $ 16.84 $ 16.23 $ 14.89 $ 14.90 $ 14.45
Cash dividend per common share 0.31 0.28 0.28 0.28 0.28
Stock price at end of period 37.71 34.57 32.08 30.81 32.72
Low closing stock price for the period 33.63 30.37 28.89 27.12 28.75
High closing stock price for the period 38.25 35.29 32.71 33.55 32.72
-----------------------------------------------------------------------
Total equity/assets 8.81% 8.59% 7.87% 7.95% 7.95%
Tangible common equity/assets 7.39 7.15 7.20 7.27 7.23
Tier 1 leverage ratio 8.23 7.28 7.03 7.02 6.93
Tier 1 risk-based capital ratio 10.96 9.43 9.71 9.73 9.64
Total risk-based capital ratio 14.20 12.73 13.15 13.19 10.98
-----------------------------------------------------------------------
Shares outstanding (period end) 75,746 75,849 71,869 72,386 72,716
Basic shares outstanding (average) 75,922 73,142 72,137 72,692 72,760
Diluted shares outstanding (average) 77,041 74,042 72,746 73,297 73,360
- -------------------------------------------------------------------------------------------------------------------
Second Quarter Results
Net income for second quarter 2002 was $52.2 million, up $6.2 million from the
$46.0 million net income earned in the second quarter of 2001. ROE was 16.73%,
down 129 bp from the second quarter of 2001, while ROA remained virtually
unchanged with an increase of 5 bp to 1.47%.
Fully taxable equivalent net interest income for the second quarter of 2002 was
$131.8 million, $22.3 million higher than the second quarter of 2001, with
approximately $10 million from Signal. The net interest margin of 3.96% in the
second quarter of 2002 was 40 bp higher than the net interest margin of 3.56% in
the second quarter of 2001 (see Tables 2 and 3). Changes in the rate environment
contributed $15.0 million to taxable equivalent net interest income, while
changes in the volume and mix of average earning assets also impacted fully
taxable equivalent net interest income favorably by $7.3 million (see Table 3).
Growth in average earning assets (up $1.0 billion to $13.2 billion) and
interest-bearing liabilites (up $640 million to $11.4 billion) was primarily
attributable to the acquisition of Signal in February 2002. Average loans grew
9.3% to $9.9 billion, while noninterest-bearing demand deposits grew 29.9% to
$1.4 billion and wholesale funding increased $396 million to $3.8 billion (and
represented 33.0% of interest-bearing liabilities for the second quarter of 2002
compared to 31.3% for the second quarter of 2001).
The net interest margin rose 40 bp to 3.96% for the second quarter of 2002,
attributed primarily to falling interest rates (the average Fed funds rate for
the second quarter of 2002 was 257 bp lower than the second quarter of 2001).
The 40 bp increase in net interest margin was the result of a 57 bp improvement
in interest rate spread (i.e. a 185 bp decrease in rate on interest-bearing
liabilities, partially offset by a 128 bp drop in earning asset yield) and 17 bp
lower contribution from net free funds.
The provision for loan losses was up $5.6 million over the provision for the
second quarter of 2001, in part due to loan growth, particularly in commercial
loans (commercial, financial and agricultural loans; commercial real estate; and
real estate construction loans), the increase in nonperforming loans and net
charge offs between comparable periods, and the continued soft economic
conditions. The allowance for loan losses to loans at June 30, 2002 was 1.50%
compared to 1.41% at June 30, 2001. See Tables 6 and 8. See also Section
"Nonperforming Loans and Other Real Estate Owned" which discusses the increase
in nonperforming loans at June 30, 2002.
Noninterest income was $49.9 million for the second quarter of 2002, down $1.1
million from the second quarter of 2001 (see Table 4), with Signal contributing
approximately $4 million in the second quarter of 2002. Mortgage banking income
was down $5.9 million, primarily due to a $2.9 million gain from the sale of
mortgage servicing during the second quarter of 2001 (versus none in the second
quarter of 2002) and a decrease in secondary mortgage loan production ($409
million for the second quarter of 2002 versus $665 million for the second
quarter of 2001), resulting in reduced production-related fees and lower gains
on the sale of mortgage loans. Service charges on deposit accounts increased
$2.2 million as the result of changes in the service charge fee structure
between comparable quarters. Retail commissions were up $1.6 million, with
insurance commissions (including fixed annuity income) up $1.8 million and
brokerage commissions down $0.2 million. Trust service fees were up $.4 million
due to increased rates on tax return fee revenue.
Noninterest expense for the second quarter of 2002 was up $9.2 million over the
second quarter of 2001 (see Table 5), directly influenced by the acquisition of
Signal, which added approximately $9 million in the second quarter of 2002.
Large increases were in personnel and occupancy costs, given a larger employee
base and broader branch network as the Corporation assimilated Signal's
businesses and operations. Personnel expense increased $7.5 million (of which,
$5.8 million was due to higher salary expense and $1.7 million was attributable
to higher fringe benefits). Mortgage servicing rights expense was up $1.2
million, the result of a $1.0 million increase in the amortization of mortgage
servicing rights and a $0.2 million larger addition to the valuation allowance.
Occupancy expense grew $0.7 million due to the addition of the Signal branch
network. Legal and professional fees increased $0.7 million, with most
categories showing increases (legal fees, consultant fees, and exam/audit fees).
Income taxes were down $0.3 million between comparable quarters, due to the
decrease in the effective tax rate, at 27.8% for the second quarter of 2002
compared to 30.6% for the second quarter of 2001. The decline in the effective
tax rate was a result of tax benefits realized due to the merger of the
Wisconsin banks into a single national charter during 2001 and the adoption of
SFAS 142 in 2002, which required the amortization of goodwill to cease.
Current Accounting Pronouncements
In July 2002 the FASB issued Statement of Financial Accounting Standard ("SFAS")
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The
standard requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. The Corporation is required to adopt the provisions of
SFAS 146 for exit or disposal activities initiated after December 31, 2002. The
adoption is not expected to be material to the Corporation's financial position
or results of operations.
Subsequent Event
On July 24, 2002, the Board of Directors declared a $0.31 per share dividend
payable August 15, 2002, to shareholders of record as of August 1, 2002.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk arises from exposure to changes in interest rates, exchange rates,
commodity prices, and other relevant market rate or price risk. The Corporation
faces market risk in the form of interest rate risk through other than trading
activities. Market risk from other than trading activities in the form of
interest rate risk is measured and managed through a number of methods. The
Corporation uses financing modeling techniques that measure the sensitivity of
future earnings due to changing rate environments to measure interest rate risk.
Policies established by the Corporation's Asset/Liability Committee and approved
by the Corporation's Board of Directors limit exposure of earnings at risk.
General interest rate movements are used to develop sensitivity as the
Corporation feels it has no primary exposure to a specific point on the yield
curve. These limits are based on the Corporation's exposure to a 100 bp and 200
bp immediate and sustained parallel rate move, either upward or downward.
In order to measure earnings sensitivity to changing rates, the Corporation uses
static gap analysis. The static gap analysis starts with contractual repricing
information for assets, liabilities, and off-balance sheet instruments. These
items are then combined with repricing estimations for administered rate
(interest-bearing demand deposits, savings, and money market accounts) and
non-rate related products (demand deposit accounts, other assets, and other
liabilities) to create a baseline repricing balance sheet. In addition to the
contractual information, residential mortgage whole loan products and
mortgage-backed securities are adjusted based on industry estimates of
prepayment speeds that capture the expected prepayment of principal above the
contractual amount based on how far away the contractual coupon is from market
coupon rates.
The following table represents the Corporation's consolidated static gap
position as of June 30, 2002.
Interest Rate Sensitivity Analysis
June 30, 2002
-----------------------------------------------------------------------------------
Interest Sensitivity Period
91-180 181-365 Total Within
0-90 Days Days Days 1 Year Over 1 Year Total
------------ ------------ ------------- -------------- ------------- --------------
($ in Thousands)
Earning assets:
Loans, held for sale $ 123,520 $ --- $ --- $ 123,520 $ --- $ 123,520
Investment securities, at fair value 599,883 166,106 306,250 1,072,239 2,351,888 3,424,127
Loans 5,425,385 479,582 761,625 6,666,592 3,216,077 9,882,669
Other earning assets 63,128 --- --- 63,128 --- 63,128
---------------------------------------------------------------------------------
Total earning assets $ 6,211,916 $ 645,688 $ 1,067,875 $ 7,925,479 $ 5,567,965 $ 13,493,444
=================================================================================
Interest-bearing liabilities:
Interest-bearing deposits(1) (2) $ 1,346,139 $ 985,565 $ 1,424,163 $ 3,755,867 $ 5,036,409 $ 8,792,276
Other interest-bearing
liabilities (2) 2,600,258 293,268 185,425 3,078,951 1,144,637 4,223,588
Interest rate swaps (25,000) 200,000 --- 175,000 (175,000) ---
---------------------------------------------------------------------------------
Total interest-bearing liabilities $ 3,921,397 $ 1,478,833 $ 1,609,588 $ 7,009,818 $ 6,006,046 $ 13,015,864
=================================================================================
Interest sensitivity gap $ 2,290,519 $ (833,145) $ (541,713) $ 915,661 $ (438,081) $ 477,580
Cumulative interest sensitivity gap $ 2,290,519 $ 1,457,374 $ 915,661
12 Month cumulative gap as a
percentage of earning assets
at June 30, 2002 17.0% 10.8% 6.8%
=================================================================================
(1) The interest rate sensitivity assumptions for demand deposits, savings
accounts, money market accounts, and interest-bearing demand deposit
accounts are based on current and historical experiences regarding
portfolio retention and interest rate repricing behavior. Based on these
experiences, a portion of these balances are considered to be long-term and
fairly stable and are therefore included in the "Over 1 Year" category.
(2) For analysis purposes, Brokered CDs of $234 million have been included with
other interest-bearing liabilities and excluded from interest-bearing
deposits.
The static gap analysis in the table above provides a representation of the
Corporation's earnings sensitivity to changes in interest rates. It is a static
indicator that does not reflect various repricing characteristics and may not
necessarily indicate the sensitivity of net interest income in a changing
interest rate environment. Since December 31, 2001, the Corporation has moved
from a liability sensitive balance sheet to an asset sensitive balance sheet as
measured at the 12 month cumulative gap position. The predominant reasons for
this change in market risk since year-end include the impact of the Signal
acquisition, higher loan prepayment, and the continued replacement of short-term
borrowings with long-term debt.
ASSOCIATED BANC-CORP
PART II - OTHER INFORMATION
ITEM 4: Submission of matters to a vote of security holders
(a) The corporation held its Annual Meeting of Shareholders on April
24, 2002. Proxies were solicited by corporation management
pursuant to Regulation 14A under the Securities Exchange Act of
1934.
(b) Directors elected at the Annual Meeting were William R.
Hutchinson, George R. Leach, and John C. Seramur.
(c) The matters voted upon and the results of the voting were as
follows:
(i) Election of the below-named nominees to the Board of
Directors of the Corporation:
FOR WITHHELD
All Nominees: 54,007,961 671,015
By Nominee:
William R. Hutchinson 53,700,908 978,868
George R. Leach 53,579,658 1,100,118
John C. Seramur 53,990,895 688,881
(ii) Approval of the Associated Banc-Corp Amended and Restated
Long-Term Incentive Stock Plan.
FOR AGAINST ABSTAIN
47,507,059 6,338,564 834,153
(iii)Ratification of the selection of KPMG LLP as independent
auditors of Associated for the year ending December 31,
2002.
FOR AGAINST ABSTAIN
53,091,629 1,398,176 189,971
(d) Not applicable
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11, Statement regarding computation of per-share
earnings. See Note 4 of the notes to consolidated financial
statements in Part I Item I.
Exhibit 99, Certification by the Chief Executive Officer and
Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
is attached hereto.
(b) Reports on Form 8-K:
A report on Form 8-K dated May 23, 2002, was filed under Item 5,
Other Events, and under Item 7, Financial Statements and
Exhibits, indicating Associated's announcement that an
Underwriting Agreement and a Terms Agreement had been entered
into between Associated Banc-Corp and Merrill Lynch, Pierce,
Fenner & Smith Incorporated. As a result of these agreements, the
Corporation was authorized to issue up to $300 million of trust
preferred securities, of which, $175 million were issued at June
30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ASSOCIATED BANC-CORP
----------------------------------------
(Registrant)
Date: August 14, 2002 /s/ Robert C. Gallagher
----------------------------------------
Robert C. Gallagher
President and Chief Executive Officer
Date: August 14, 2002 /s/ Joseph B. Selner
----------------------------------------
Joseph B. Selner
Chief Financial Officer
Exhibit 99
Certification by the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, each of the undersigned officers of Associated
Banc-Corp, a Wisconsin corporation (the "Company"), does hereby certify that:
1. The accompanying Quarterly Report of the Company on Form 10-Q for the period
ended June 30, 2002 (the "Report"), fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. Information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Robert C. Gallagher
----------------------------------------
Robert C. Gallagher
Chief Executive Officer
August 14, 2002
/s/ Joseph B. Selner
----------------------------------------
Joseph B. Selner
Chief Financial Officer
August 14, 2002