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 September 30, 2002
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ----------------------
Commission file number 0-5519
Associated Banc-Corp
(Exact name of registrant as specified in its charter)
Wisconsin 39-1098068
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(State or other jurisdiction of (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 October 31, 2002, was 74,569,072 shares.
ASSOCIATED BANC-CORP
TABLE OF CONTENTS
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets -
September 30, 2002, September 30, 2001
and December 31, 2001 3
Consolidated Statements of Income -
Three and Nine Months Ended September 30,
2002 and 2001 4
Consolidated Statement of Changes in
Stockholders' Equity - Nine Months Ended
September 30, 2002 5
Consolidated Statements of Cash Flows -
Nine Months Ended September 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 34
Item 4. Controls and Procedures 36
PART II. Other Information
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)
September 30, September 30, December 31,
2002 2001 2001
----------------------------------------------
(In Thousands,except share data)
ASSETS
Cash and due from banks $ 404,660 $ 340,830 $ 587,994
Interest-bearing deposits in other financial institutions 5,451 25,379 5,427
Federal funds sold and securities purchased under
agreements to resell 109,650 305,825 12,015
Investment securities available for sale, at fair value 3,432,758 3,245,240 3,197,021
Loans held for sale 379,136 142,134 301,707
Loans 10,086,510 9,010,370 9,019,864
Allowance for loan losses (155,288) (126,631) (128,204)
--------------------------------------------
Loans, net 9,931,222 8,883,739 8,891,660
Premises and equipment 133,596 120,300 119,528
Goodwill 212,112 94,004 92,397
Other intangible assets 39,869 39,561 37,991
Other assets 396,248 367,813 358,634
--------------------------------------------
Total assets $ 15,044,702 $ 13,564,825 $ 13,604,374
============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 1,740,932 $ 1,213,541 $ 1,425,109
Interest-bearing deposits, excluding Brokered CDs 7,018,506 6,875,173 6,897,502
Brokered CDs 187,915 310,198 290,000
--------------------------------------------
Total deposits 8,947,353 8,398,912 8,612,611
Short-term borrowings 2,630,285 2,882,156 2,643,851
Long-term debt 1,830,260 1,020,116 1,103,395
Company-obligated mandatorily redeemable
preferred securities 186,739 -- --
Accrued expenses and other liabilities 179,374 184,767 174,101
--------------------------------------------
Total liabilities 13,774,011 12,485,951 12,533,958
Stockholders' equity
Preferred stock -- -- --
Common stock (par value $0.01 per share, authorized
100,000,000 shares, issued 75,885,210, 73,007,172 and
72,791,792 shares, respectively) 759 664 662
Surplus 655,540 296,381 289,751
Retained earnings 581,145 734,345 760,031
Accumulated other comprehensive income 76,644 65,147 47,176
Treasury stock, at cost (1,287,669, 621,403 and 922,902
shares, respectively) (43,397) (17,663) (27,204)
--------------------------------------------
Total stockholders' equity 1,270,691 1,078,874 1,070,416
--------------------------------------------
Total liabilities and stockholders' equity $ 15,044,702 $ 13,564,825 $ 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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------------------------------------
(In Thousands, except per share data)
INTEREST INCOME
Interest and fees on loans $158,886 $170,895 $468,556 $533,506
Interest and dividends on investment securities
and deposits with other financial institutions:
Taxable 30,918 36,170 97,149 112,039
Tax exempt 9,916 10,123 29,884 30,329
Interest on federal funds sold and securities
purchased under agreements to resell 45 246 339 887
-----------------------------------------
Total interest income 199,765 217,434 595,928 676,761
INTEREST EXPENSE
Interest on deposits 39,336 70,314 133,125 240,706
Interest on short-term borrowings 13,039 30,247 40,534 111,691
Interest on long-term debt, including preferred securities 19,032 9,862 50,716 16,398
-----------------------------------------
Total interest expense 71,407 110,423 224,375 368,795
-----------------------------------------
NET INTEREST INCOME 128,358 107,011 371,553 307,966
Provision for loan losses 12,831 6,966 36,085 18,913
-----------------------------------------
Net interest income after provision for loan losses 115,527 100,045 335,468 289,053
NONINTEREST INCOME
Trust service fees 6,722 6,627 21,815 22,038
Service charges on deposit accounts 12,261 9,672 33,874 27,967
Mortgage banking 20,468 11,506 42,709 36,195
Credit card and other nondeposit fees 7,045 6,534 20,211 20,430
Retail commissions 3,635 4,119 14,136 12,868
Bank owned life insurance income 3,545 3,308 10,284 9,626
Asset sale gains, net 658 59 1,030 974
Investment securities gains, net 374 476 374 718
Other 3,948 5,848 11,526 12,681
-----------------------------------------
Total noninterest income 58,656 48,149 155,959 143,497
NONINTEREST EXPENSE
Personnel expense 47,581 43,266 141,339 124,804
Occupancy 6,553 5,635 19,340 17,916
Equipment 3,909 3,493 11,126 10,823
Data processing 5,420 4,870 15,527 14,535
Business development and advertising 3,728 3,310 10,300 9,502
Stationery and supplies 1,395 959 5,225 5,021
FDIC expense 384 399 1,158 1,279
Mortgage servicing rights expense 13,372 5,703 20,143 12,312
Goodwill amortization expense -- 1,635 -- 4,904
Core deposit intangible amortization 576 466 1,674 1,400
Loan expense 3,967 2,598 10,280 7,997
Other 11,298 11,754 35,674 34,323
-----------------------------------------
Total noninterest expense 98,183 84,088 271,786 244,816
-----------------------------------------
Income before income taxes 76,000 64,106 219,641 187,734
Income tax expense 22,528 19,001 62,363 54,524
-----------------------------------------
NET INCOME $ 53,472 $ 45,105 $157,278 $133,210
=========================================
Earnings per share:
Basic $ 0.71 $ 0.62 $ 2.10 $ 1.83
Diluted $ 0.70 $ 0.62 $ 2.08 $ 1.82
Average shares outstanding:
Basic 75,158 72,692 74,748 72,739
Diluted 76,047 73,297 75,666 73,318
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 --- --- 157,278 --- --- 157,278
Net unrealized holding loss on
derivative instruments,
net of tax of $7.8 million --- --- --- (11,640) --- (11,640)
Net unrealized holding gain on
securities available for
sale, net of tax of $22.8 million --- --- --- 41,108 --- 41,108
--------
Comprehensive income 186,746
--------
Cash dividends, $0.90 per share --- --- (67,050) --- --- (67,050)
Common stock issued:
Business combinations 37 133,892 --- --- --- 133,929
Incentive stock options --- --- (10,474) --- 24,129 13,655
10% stock dividend 70 258,570 (258,640) --- --- ---
Purchase and retirement of treasury stock
in connection with repurchase program (10) (31,425) --- --- --- (31,435)
Purchase of treasury stock --- --- --- --- (40,322) (40,322)
Tax benefit of stock options --- 4,752 --- --- --- 4,752
------------------------------------------------------------------------
Balance, September 30, 2002 $759 $655,540 $581,145 $76,644 $(43,397) $1,270,691
========================================================================
See accompanying notes to consolidated financial statements.
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements Of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2002 2001
----------------------
($ in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 157,278 $ 133,210
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 36,085 18,913
Depreciation and amortization 14,141 14,185
Amortization (accretion) of:
Mortgage servicing rights 20,143 12,312
Goodwill and other intangible assets 1,674 6,304
Investment premiums and discounts 8,928 (154)
Deferred loan fees and costs 613 1,820
Gain on sales of securities, net (374) (718)
Gain on sales of assets, net (1,030) (974)
Gain on sales of loans held for sale, net (19,794) (15,357)
Mortgage loans originated and acquired
for sale (1,956,337) (1,498,709)
Proceeds from sales of mortgage loans held
for sale 1,915,807 1,396,525
Increase in interest receivable and other assets (38,721) (26,299)
Increase in interest payable and other liabilities 13,398 38,246
------------------------
Net cash provided by operating activities 151,811 79,304
-------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (315,701) (113,468)
Capitalization of mortgage servicing rights (18,096) (14,348)
Purchases of:
Securities available for sale (1,071,201) (504,686)
Premises and equipment (14,069) (6,558)
Proceeds from:
Sales of securities available for sale 27,793 135,627
Maturities of securities available for sale 1,027,202 478,481
Sales of other real estate owned, premises and
equipment, and other assets 8,854 5,752
Net cash acquired in business combination 17,982 --
-------------------------
Net cash used by investing activities (337,236) (19,200)
-------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (448,702) (892,734)
Net increase (decrease) in short-term borrowings (116,329) 283,953
Repayment of long-term debt (35,414) (864)
Proceeds from issuance of long-term debt 825,347 898,560
Cash dividends (67,050) (60,191)
Proceeds from exercise of incentive stock options 13,655 4,177
Purchase and retirement of treasury stock (31,435) --
Purchase of treasury stock (40,322) (17,491)
-------------------------
Net cash provided by financing activities 99,750 215,410
-------------------------
Net increase (decrease) in cash and
cash equivalents (85,675) 275,514
Cash and cash equivalents at beginning of period 605,436 396,520
-------------------------
Cash and cash equivalents at end of period $ 519,761 $ 672,034
=========================
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 230,194 $ 388,955
Income taxes 60,616 33,341
Supplemental schedule of noncash
investing activities:
Securities held to maturity transferred
to securities available for sale -- 372,873
Loans transferred to other real estate 4,684 2,143
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 September 30, 2002 presentation.
NOTE 3: 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. No impairment loss was
recorded as of January 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 October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions," ("SFAS 147"). SFAS 147 amends SFAS No. 72, "Accounting
for Certain Acquisitions of Banking or Thrift Institutions," ("SFAS 72") to
remove the acquisition of financial institutions from the scope of that
statement and provides guidance on the accounting for the impairment or disposal
of acquired long-term customer-relationship intangible assets. Except for
transactions between two or more mutual enterprises, SFAS 147 requires
acquisitions of financial institutions that meet the definition of a business
combination to be accounted for in accordance with SFAS 141 and SFAS 142. The
provisions of SFAS 147 are effective on October 1, 2002, with earlier
application permitted.
The Corporation adopted SFAS 147 effective September 30, 2002. At January 1,
2002, the Corporation had $7.4 million of goodwill from certain business
combinations that was continuing to be amortized in 2002 under SFAS 72, prior to
the issuance of SFAS 147. With the adoption of SFAS 147, which removed certain
acquisitions from the scope of SFAS 72 and included them under SFAS 142, the
Corporation ceased such amortization. The amount of such amortization was $0.25
million pre-tax per quarter, or approximately 0.3 of a cent of diluted earnings
per share per quarter in 2002. The Corporation discontinued such amortization
effective January 1, 2002, the same date as the Corporation's adoption of SFAS
142, and has restated any prior information as required. No impairment loss was
necessary from the January 1 and May 1, 2002, impairment tests described above
under the Corporation's adoption of SFAS 142, including the $7.4 million of
goodwill related to SFAS 147. See Note 6 for the required disclosures under SFAS
147 and Note 4 for related disclosures of SFAS 142 adjusted to include the
impact of SFAS 147.
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.
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.
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 and SFAS 147.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------------------------------------
(In Thousands, except per share data)
Net income, as reported $ 53,472 $ 45,105 $157,278 $133,210
Adjustment: Goodwill
amortization, net of tax -- 1,547 -- 4,640
-----------------------------------------
Net income, adjusted $ 53,472 $ 46,652 $157,278 $137,850
=========================================
Weighted average shares
outstanding 75,158 72,692 74,748 72,739
Effect of dilutive stock options
outstanding 889 605 918 579
-----------------------------------------
Diluted weighted average shares
outstanding 76,047 73,297 75,666 73,318
=========================================
Basic earnings per share:
Basic earnings per share,
as reported $0.71 $0.62 $2.10 $1.83
Adjustment: Goodwill amortization,
net of tax -- 0.02 -- 0.07
--------------------------------------
Basic earnings per share, adjusted $0.71 $0.64 $2.10 $1.90
=======================================
Diluted earnings per share:
Diluted earnings per share,
as reported $0.70 $0.62 $2.08 $1.82
Adjustment: Goodwill amortization,
net of tax -- 0.02 -- 0.06
--------------------------------------
Diluted earnings per share, adjusted $0.70 $0.64 $2.08 $1.88
======================================
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.
Nine months ended September 30,
2002 2001
-------------------- ----------------
(In Thousands, except per share data)
Total revenue $537,336 $492,583
Net income 156,388 140,818
Basic earnings per share 2.07 1.83
Diluted earnings per share 2.04 1.81
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. The $92.4 million of
goodwill included $7.4 million that was continuing to be amortized in 2002 under
SFAS 72, prior to the adoption of SFAS 147. With the early adoption of SFAS 147,
which removed certain acquisitions from the scope of SFAS 72 and included them
under SFAS 142 at September 30, 2002, the Corporation discontinued such
amortization effective January 1, 2002. The amount of such amortization was $.25
million pre-tax per quarter, or approximately 0.3 of a cent of diluted earnings
per share per quarter in 2002. The Corporation has restated all prior
information to remove this amortization expense as required. See also Note 4.
The change in the carrying amount of goodwill was as follows.
As of and for the year
As of and for the nine months ended ended
Goodwill September 30, 2002 September 30, 2001 December 31, 2001
- -------- -------------------------------------------------------------------
($ in Thousands)
Balance at beginning of year $ 92,397 $ 98,908 $ 98,908
Goodwill acquired during period 119,715 -- --
Goodwill amortization -- (4,904) (6,511)
-------------------------------------------------------------------
Balance at end of period $212,112 $ 94,004 $ 92,397
===================================================================
Goodwill amortization expense was zero for the nine months ended September 30,
2002, $4.9 million for the nine months ended September 30, 2001, and $6.5
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.
At January 1, 2002, the Corporation had other intangible assets consisting of
core deposit intangibles of $5.9 million and mortgage servicing rights of $32.1
million that continue to be amortized. The goodwill, core deposit intangibles,
and mortgage servicing rights are assigned to the Corporation's banking segment.
The change in the carrying amount of core deposit intangibles, gross carrying
amount, accumulated amortization, and net book value was as follows.
As of and for the year
As of and for the nine months ended ended
Core deposit intangibles September 30, 2002 September 30, 2001 December 31, 2001
- ------------------------ --------------------------------------------------------------------
($ in Thousands)
Balance at beginning of year $ 5,925 $ 7,792 $ 7,792
Additions 5,600 -- --
Amortization (1,674) (1,400) (1,867)
-------------------------------------------------------------------
Balance at end of period $ 9,851 $ 6,392 $ 5,925
===================================================================
Gross carrying amount $ 28,166 $ 22,565 $ 22,565
Accumulated amortization (18,315) (16,173) (16,640)
-------------------------------------------------------------------
Net book value $ 9,851 $ 6,392 $ 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 nine months ended ended
Mortgage servicing rights September 30, 2002 September 30, 2001 December 31, 2001
- ------------------------- -------------------------------------------------------------------
($ in Thousands)
Balance at beginning of year $ 32,065 $ 36,269 $ 36,269
Additions 18,096 14,348 20,919
Sales of mortgage servicing rights -- (5,136) (5,136)
Amortization (9,251) (6,733) (9,267)
Change in valuation allowance (10,892) (5,579) (10,720)
-------------------------------------------------------------------
Balance at end of period $ 30,018 $ 33,169 $ 32,065
===================================================================
Mortgage servicing rights valuation allowance
Balance at beginning of year $(10,720) $ -- $ --
Additions (10,892) (5,579) (10,720)
-------------------------------------------------------------------
Balance at end of period $(21,612) $ (5,579) $(10,720)
===================================================================
Core deposit intangible amortization was $1.7 million for the nine months ended
September 30, 2002, $1.4 million for the nine months ended September 30, 2001,
and $1.9 million for the year ended December 31, 2001. Mortgage servicing rights
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 $20.1 million and $12.3 million for the
nine months ended September 30, 2002 and 2001 respectively, and $20.0 million
for year ended December 31, 2001. The following table shows the estimated future
amortization expense for amortizing intangible assets. The projections of
amortization expense are based on existing asset balances and the existing
interest rate environment as of September 30, 2002. The actual amortization
expense the Corporation recognizes in any given period may be significantly
different depending upon changes in mortgage interest rates, market conditions,
regulatory requirements, and events or circumstances that indicate the carrying
amount of an asset may not be recoverable.
Estimated amortization expense ($ in Thousands)
Core Deposit Mortgage Servicing
Intangible Rights
---------------------------------------
Quarter ended December 31, 2002 $ 724 $ 4,134
Year ended December 31, 2003 1,962 14,824
Year ended December 31, 2004 1,734 7,971
Year ended December 31, 2005 1,264 2,306
Year ended December 31, 2006 1,162 585
=======================================
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.
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, for example, converting a fixed coupon
financial instrument (such as loans or debt) to a variable rate.
In accordance with SFAS 133, 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.
Estimated Fair
Notional Market Value Weighted Average
Amount Gain / (Loss) Receive Rate Pay Rate Maturity
-----------------------------------------------------------------------
September 30, 2002 ($ in Thousands)
- ------------------
Interest Rate Risk Management hedges:
Swaps-receive variable / pay fixed (1), (3) $400,000 $(26,435) 1.85% 5.73% 52 months
Swaps-receive fixed / pay variable (2), (4) 375,000 20,710 7.21% 3.39% 226 months
Caps-written (1), (5) 200,000 3,477 Strike 4.72% --- 47 months
Swaps-receive variable / pay fixed (2), (6) 219,261 (12,617) 4.03% 6.74% 55 months
========================================================================
September 30, 2001
- ------------------
Interest Rate Risk Management hedges:
Swaps-receive variable / pay fixed (1), (7) $500,000 (17,623) 3.79% 5.61% 52 months
Swaps-receive variable / pay fixed (2), (6) 67,173 (2,342) 5.47% 7.20% 62 months
=========================================================================
(1) Cash flow hedges (2) Fair value hedges
(3) Hedges $400 million of variable rate 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 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 $6.3
million and $1.2 million, as of September 30, 2002 and 2001, respectively. The
change in fair value of these derivatives was a $2.2 million gain and a $1.2
million gain for the nine months ended September 30, 2002 and 2001,
respectively.
NOTE 8: Long-term Debt
Long-term debt at September 30 is as follows:
2002 2001
-----------------------------
($ in Thousands)
Federal Home Loan Bank advances (2.29% to 6.81%, fixed rate, maturing in 2002
through 2017 for 2002; 3.82% to 6.81%, fixed rate, maturing in 2001
through 2014 for 2001) $1,165,234 $ 614,596
Bank notes (1) 250,000 200,000
Bank notes (3.70% fixed rate, maturing in 2007) 100,000 ---
Subordinated debt (2) 207,643 200,000
Repurchase agreements (3.65% fixed rate, maturing in 2005) 100,000 ---
Other borrowed funds 7,383 5,520
----------------------------
Total long-term debt $1,830,260 $1,020,116
============================
(1) 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 2.08% at September 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 2.01% at September 30, 2002. During
2001, the Corporation entered into a cash flow hedge to hedge the interest
rate risk on the $200 million of bank notes issued April 2001. As of
September 30, 2002, the fair value of the hedge was a $26.0 million loss.
(2) 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 September 30,
2002, the fair value of the hedge was a $9.0 million gain. 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 September 30, 2002, the fair value of the hedge was a
$11.7 million gain.
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 nine months ended ($ in Thousands)
September 30, 2002
Goodwill $ 212,112 $ --- $ 212,112
Total assets $15,015,616 $ 29,086 $15,044,702
=======================================
Net interest income $ 371,539 $ 14 $ 371,553
Provision for loan losses 36,085 -- 36,085
Noninterest income 122,933 33,026 155,959
Depreciation and amortization 35,781 177 35,958
Other noninterest expense 212,333 23,495 235,828
Income taxes 61,742 621 62,363
---------------------------------------
Net income $ 148,531 $ 8,747 $ 157,278
=======================================
As of and for the nine months ended
September 30, 2001
Goodwill $ 94,004 $ -- $ 94,004
Total assets $13,537,920 $ 26,905 $13,564,825
=======================================
Net interest income $ 307,406 $ 560 $ 307,966
Provision for loan losses 18,913 -- 18,913
Noninterest income 109,436 34,061 143,497
Depreciation and amortization 32,597 204 32,801
Other noninterest expense 188,247 23,768 212,015
Income taxes 54,517 7 54,524
---------------------------------------
Net income $ 122,568 $ 10,642 $ 133,210
=======================================
- --------------------------------------------------------------------------------
Consolidated
Banking Other Total
- -----------------------------------------------------------------------------
As of and for the three months ended ($ in Thousands)
September 30, 2002
Goodwill $ 212,112 $ -- $ 212,112
Total assets $15,015,616 $ 29,086 $15,044,702
========================================
Net interest income $ 128,566 $ (208) $ 128,358
Provision for loan losses 12,831 -- 12,831
Noninterest income 49,231 9,425 58,656
Depreciation and amortization 18,791 51 18,842
Other noninterest expense 72,275 7,066 79,341
Income taxes 22,518 10 22,528
----------------------------------------
Net income $ 51,382 $ 2,090 $ 53,472
========================================
As of and for the three months ended
September 30, 2001
Goodwill $ 94,004 $ -- $ 94,004
Total assets $13,537,920 $ 26,905 $13,564,825
========================================
Net interest income $ 106,832 $ 179 $ 107,011
Provision for loan losses 6,966 -- 6,966
Noninterest income 37,720 10,429 48,149
Depreciation and amortization 12,407 57 12,464
Other noninterest expense 63,469 8,155 71,624
Income taxes 19,327 (326) 19,001
-----------------------------------------
Net income $ 42,383 $ 2,722 $ 45,105
=========================================
- --------------------------------------------------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition and 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. The Corporation
undertakes no obligation to update or revise any forward looking statements,
whether as a result of new information, future events, or otherwise.
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 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.
Allowance for Loan Losses: 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. 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. The Corporation
believes the allowance for loan losses is adequate and properly recorded in the
financial statements. See section "Allowance for Loan Losses."
Mortgage Servicing Rights Accounting: 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."
Derivative Financial Instruments and Hedge Accounting: 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."
Income Tax Accounting: 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 nine months of 2002 totaled $157.3 million, or $2.10
and $2.08 for basic and diluted earnings per share. Comparatively, net income
for the first nine months of 2001 was $133.2 million, or $1.83 and $1.82 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
1.49% and an annualized return on average equity of 17.28%, compared to 1.36%
and 17.41%, respectively, for the same period in 2001. For the first nine months
of 2002 net interest margin was 3.94% compared to 3.51% for the comparable
period in 2001.
Results include the contribution of the former Signal Financial Corporation
("Signal") of Minnesota since its acquisition on February 28, 2002, and may
impact the comparability of certain financial data (see Note 5 of the notes to
consolidated financial statements). Signal, which added $1.1 billion in total
assets, $765 million in loans, and $783 in deposits, was successfully integrated
into the Corporation's operating platform during June 2002.
- ---------------------------------------------------------------------------------------------------------------------
TABLE 1 (1)
Summary Results of Operations: Trends
($ in Thousands, except per share data)
Three months ended Nine months ended
---------------------------------- --------------------------------
Sept 30, 2002 Sept 30, 2001
Sept 30, 2002 Sept 30, 2001
- ---------------------------------------------------------------------------------------------------------------------
Net income, as reported $ 53,472 $ 45,105 $ 157,278 $ 133,210
Net income, as adjusted (2) 53,472 46,652 157,278 137,850
Earnings per share - basic, as reported $ 0.71 $ 0.62 $ 2.10 $ 1.83
Earnings per share - basic, as adjusted (2) 0.71 0.64 2.10 1.90
Earnings per share - diluted, as reported $ 0.70 $ 0.62 $ 2.08 $ 1.82
Earnings per share - diluted, as adjusted (2) 0.70 0.64 2.08 1.88
Return on average assets, as reported 1.47% 1.36% 1.49% 1.36%
Return on average assets, as adjusted (2) 1.47 1.41 1.49 1.41
Return on average equity, as reported 16.73% 17.03% 17.28% 17.41%
Return on average equity, as adjusted (2) 16.73 17.61 17.28 18.01
Return on tangible average equity, as reported (3) 20.28% 18.85% 20.59% 19.37%
Return on tangible average equity, as adjusted
(2), (3) 20.28 19.49 20.59 20.05
Efficiency ratio, as reported (4) 51.14% 52.49% 49.94% 52.48%
Efficiency ratio, as adjusted (2), (4) 51.14 51.47 49.94 51.43
Net interest margin 3.96% 3.63% 3.94% 3.51%
(1) All per share financial information has been restated to reflect the effect
of the May 2002 stock dividend.
(2) Selected 2001 financial data has been adjusted to exclude the amortization
of goodwill affected by adopting SFAS 142 and 147 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 nine months
ended September 30, 2002, was $389.6 million, an increase of $65.0 million or
20.0% over the comparable period last year. As indicated in Tables 2 and 3, the
$65.0 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 $46.3 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 $18.7
million to fully taxable equivalent net interest income).
The net interest margin for the first nine months of 2002 was 3.94%, up 43 basis
points ("bp") from 3.51% for the comparable period in 2001. This comparable
period increase is attributable to a 61 bp increase in interest rate spread (the
net of a 191 bp decrease in the cost of interest-bearing liabilities and a 130
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 nine-month periods. In
contrast, the Federal funds rate was lowered eight times during year-to-date
2001, while being unchanged during 2002. The average Federal funds rate of 1.75%
for year-to-date 2002 was 274 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 6.22% for year-to-date 2002, down 130 bp from
the comparable nine-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 6.34%, down 149 bp from year-to-date 2001. The average yield on
investments and other earning assets was 5.87%, down 79 bp.
The cost of interest-bearing liabilities was 2.65% for year-to-date 2002, down
191 bp compared to the first nine months of 2001, impacted by the significantly
lower rate environment in 2002. The average cost of interest-bearing deposits
excluding brokered CDs was 2.39%, down 181 bp from year-to-date 2001, benefiting
in both lower-costing transaction accounts (down 144 bp in the aggregate) and
time deposits (down 178 bp). Brokered CD balances declined to represent 2.5% of
interest-bearing liabilities (versus 4.1% for year-to-date 2001) and had lower
costs (down 394 bp to 2.16% for year-to-date 2002). The cost of wholesale funds
(comprised of short-term borrowings and long-term debt) was 3.17% (down 194 bp
from year-to-date 2001), also primarily attributable to the lower rate
environment between comparable periods.
Average earning assets increased by $862 million (7.0%) over the comparable
nine-month period last year. The growth in earning assets came primarily from
loans, up an average of $762 million (8.4%). Due to the Corporation's focus on
commercial loan growth and composition of its loan portfolio; commercial loans
represented 59.5% of average loans for year-to-date 2002 compared to 53.3% for
year-to-date 2001. Average investments and other earning assets increased $100
million to $3.3 billion.
Average interest-bearing liabilities increased $492 million (4.6%) over the
comparable nine-month period last year, with net free funds (up $370 million,
including $315 million increase in average non-interest bearing demand deposits)
funding the remaining earning asset growth. The mix of interest-bearing
liabilities was notably different between comparable periods. Average
non-brokered interest-bearing deposits of $7.2 billion were up slightly, but
with a noticeable shift in year-to-date 2002 from time deposits (down $380
million and costing 178 bp less between comparable nine-month periods) to
transaction accounts (up $534 million collectively, and costing 144 bp less).
Interest-bearing deposits excluding brokered CDs represented 63.7% of average
interest-bearing liabilities compared to 65.2% for year-to-date 2001. The use of
brokered CDs, a comparatively costly funding source during 2001, was
intentionally reduced (down $150 million), representing 2.5% of average
interest-bearing liabilities versus 4.1% for year-to-date 2001. Therefore,
average wholesale funding increased (up $488 million and costing 194 bp less) to
represent 33.7% of interest-bearing liabilities for year-to-date 2002 compared
to 30.7% 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 13.7% of interest-bearing liabilities compared to
3.8% for year-to-date 2001. The growth in long-term debt since September 30,
2001 included the issuance of $175 million of trust preferred securities, $150
million of variable rate bank notes, $100 million of long-term repurchase
agreements, and increased use of long-term Federal Home Loan Bank advances.
- ----------------------------------------------------------------------------------------------------------------------
TABLE 2
Net Interest Income Analysis-Taxable Equivalent Basis
($ in Thousands)
- ----------------------------------------------------------------------------------------------------------------------
Nine Months ended September 30, 2002 Nine Months ended September 30, 2001
------------------------------------ --------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------------
Loans (1) $ 9,814,880 $ 469,403 6.34% $ 9,052,783 $ 534,366 7.83%
Investments and other (1) 3,285,634 144,616 5.87 3,185,888 159,117 6.66
------------------------- -------------------------
Total earning assets 13,100,514 614,019 6.22 12,238,671 693,483 7.52
Other assets, net 993,235 815,823
----------- -----------
Total assets $14,093,749 $13,054,494
=========== ===========
Interest-bearing deposits,
excluding brokered CDs $ 7,179,939 $ 128,495 2.39% $ 7,025,457 $ 220,729 4.20%
Brokered CDs 287,199 4,630 2.16 437,531 19,977 6.10
Wholesale funding 3,796,002 91,250 3.17 3,307,965 128,089 5.11
------------------------- -------------------------
Total interest-bearing liabilities 11,263,140 224,375 2.65 10,770,953 368,795 4.56
--------- -------
Demand, non-interest bearing 1,437,938 1,123,109
Other liabilities 175,506 137,342
Stockholders' equity 1,217,165 1,023,090
----------- -----------
Total liabilities and equity $14,093,749 $13,054,494
=========== ===========
Interest rate spread 3.57% 2.96%
Net free funds 0.37 0.55
----- -----
Net interest income, taxable
equivalent, and net interest margin $ 389,644 3.94% $ 324,688 3.51%
===================== ===================
Tax equivalent adjustment 18,091 16,722
--------- ------
Net interest income, as reported $ 371,553 $ 307,966
========= =========
(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 September 30, 2002 Three Months ended September 30, 2001
------------------------------------- ---------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------------
Loans (1) $10,128,826 $ 159,154 6.19% $ 9,107,577 $ 171,180 7.41%
Investments and other (1) 3,299,160 46,602 5.65 3,182,051 51,834 6.51
------------------------- -------------------------
Total earning assets 13,427,986 205,756 6.06 12,289,628 223,014 7.18
Other assets, net 1,032,372 823,842
----------- -----------
Total assets $14,460,358 $13,113,470
=========== ===========
Interest-bearing deposits,
excluding brokered CDs $ 7,135,385 $ 37,880 2.11% $ 6,995,925 $ 66,202 3.75%
Brokered CDs 246,676 1,456 2.34 304,289 4,112 5.36
Wholesale funding 4,077,612 32,071 3.09 3,446,910 40,109 4.56
------------------------- -------------------------
Total interest-bearing liabilities 11,459,673 71,407 2.46 10,747,124 110,423 4.06
---------- -----------
Demand, non-interest bearing 1,564,986 1,168,294
Other liabilities 167,344 146,988
Stockholders' equity 1,268,355 1,051,064
----------- -----------
Total liabilities and equity $14,460,358 $13,113,470
=========== ===========
Interest rate spread 3.60% 3.12%
Net free funds 0.36 0.51
----- -----
Net interest income, taxable
equivalent, and net interest margin $ 134,349 3.96% $ 112,591 3.63%
===================== ===================
Tax equivalent adjustment 5,991 5,580
--------- ---------
Net interest income, as reported $ 128,358 $ 107,011
========= =========
- ----------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
TABLE 3
Volume / Rate Variance - Taxable Equivalent Basis
($ in Thousands)
- ---------------------------------------------------------------------------------------------------
Comparison of
Nine months ended Sept. 30, 2002 versus 2001
Income/ Variance Attributable to
Expense
Variance * Volume Rate
- ---------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ (64,963) $31,954 $ (96,917)
Investments and other (14,501) 3,852 (18,353)
-------------------------------------------
Total interest income (79,464) 35,806 (115,270)
INTEREST EXPENSE
Interest-bearing deposits excluding brokered CDs $ (92,234) $ 2,764 $ (94,998)
Brokered CDs (15,347) (2,423) (12,924)
Wholesale funding (36,839) 16,773 (53,612)
-------------------------------------------
Total interest expense (144,420) 17,114 (161,534)
-------------------------------------------
Net interest income $ 64,956 $18,692 $ 46,264
============================================
* 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
Three months ended Sept. 30, 2002 versus 2001
Income/ Variance Attributable to
Expense
Variance * Volume Rate
- ---------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ (12,026) $15,081 $ (27,107)
Investments and other (5,232) 1,722 (6,954)
--------------------------------------------
Total interest income (17,258) 16,803 (34,061)
INTEREST EXPENSE
Interest-bearing deposits excluding brokered CDs $ (28,322) $ 842 $ (29,164)
Brokered CDs (2,656) (335) (2,321)
Wholesale funding (8,038) 5,461 (13,499)
--------------------------------------------
Total interest expense (39,016) 5,968 (44,984)
--------------------------------------------
Net interest income $ 21,758 $10,835 $ 10,923
============================================
* 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.
- ---------------------------------------------------------------------------------------------------
Provision for Loan Losses
The provision for loan losses for year-to-date 2002 was $36.1 million, up $17.2
million from year-to-date 2001 of $18.9 million. The provision for loan losses
reflects the increase in nonperforming assets and net charge offs. Annualized
net charge-offs as a percent of average loans for year-to-date 2002 increased to
0.29% from 0.18% 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 1.54%, up from 1.41%
at September 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 $156.0 million. Compared to
year-to-date 2001, noninterest income was up $12.5 million, or 8.7%. Primary
components impacting the change between comparable quarters were mortgage
banking income and service charges on deposit accounts.
- --------------------------------------------------------------------------------------------------------------------------
TABLE 4
Noninterest Income
($ in Thousands)
- --------------------------------------------------------------------------------------------------------------------------
3rd Qtr. 3rd Qtr. Dollar Percent YTD YTD Dollar Percent
2002 2001 Change Change 2002 2001 Change Change
- --------------------------------------------------------------------------------------------------------------------------
Trust service fees $ 6,722 $ 6,627 $ 95 1.4% $ 21,815 $ 22,038 $ (223) (1.0)%
Service charges on deposit 12,261 9,672 2,589 26.8 33,874 27,967 5,907 21.1
accounts
Mortgage banking 20,468 11,506 8,962 77.9 42,709 36,195 6,514 18.0
Credit card & other nondeposit 7,045 6,534 511 7.8 20,211 20,430 (219) (1.1)
fees
Retail commissions 3,635 4,119 (484) (11.8) 14,136 12,868 1,268 9.8
Bank owned life insurance income 3,545 3,308 237 7.2 10,284 9,626 658 6.8
Asset sale gains, net 658 59 599 N/M 1,030 974 56 5.7
Other 3,948 5,848 (1,900) (32.5) 11,526 12,681 (1,155) (9.1)
------------------------------------------------------------------------------------
Subtotal $ 58,282 $ 47,673 $ 10,609 22.3% $155,585 $142,779 $ 12,806 9.0%
Investment securities gains, net 374 476 (102) (21.4) 374 718 (344) (47.9)
------------------------------------------------------------------------------------
Total noninterest income $ 58,656 $ 48,149 $ 10,507 21.8% $155,959 $143,497 $ 12,462 8.7%
====================================================================================
N/M - Not meaningful.
- --------------------------------------------------------------------------------------------------------------------------
Trust service fees decreased $0.2 million, or 1.0%, between the comparable
nine-month periods. The change was primarily the result of decreases in
servicing fees on personal and employee benefit plans due to the lower market
value of assets under management (from $3.8 billion at September 30, 2001 to
$3.5 billion at September 30, 2002), reflecting both market conditions and
competitive factors.
Service charges on deposit accounts were up $5.9 million, or 21.1%, between the
comparable nine-month periods, impacted in part by higher volumes associated
with a larger account base. 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 increased $6.5 million compared to the first nine months
of 2001. The increase was primarily a result of increased income associated with
higher production volumes. Secondary mortgage loan production (mortgage loan
production to be sold to the secondary market) was $2.0 billion for year-to-date
2002, up 30% over $1.5 billion for the comparable period in 2001. Consequently,
production-related fees were up $5.5 million, and gains on sales of loans were
up $5.4 million, a function of the volume and loan sale pricing. Offsetting
these increases was $4.3 million in gains on the sales of mortgage servicing
rights during year-to-date 2001 versus none in year-to-date 2002. Servicing fees
on the portfolio serviced for others were down slightly ($0.1 million) between
comparable periods, given the minimal change in the average balance serviced
($5.4 billion at September 30, 2002 versus $5.2 billion at September 30, 2001).
Credit card and other nondeposit fees were down slightly ($0.2 million or 1.1%)
from year-to-date 2001, primarily in miscellaneous retail loan fees, offset
partially by increases in credit card merchant income.
Retail commission income (which includes commissions from insurance and
brokerage product sales) was up $1.3 million, or 9.8% compared to the first nine
months of 2001. This increase was attributable predominantly to commissions on
fixed annuities, a more attractive product given the lower rate environment.
Other noninterest income decreased $1.2 million, or 9.1% from year-to-date 2001.
The sale of stock in a regional ATM network during third quarter 2001 resulted
in a gain of $2.6 million, while a similar transaction on a different ATM
network stock during the first quarter of 2002 resulted in a gain of $0.5
million.
Noninterest Expense
Noninterest expense was $271.8 million, up $27.0 million or 11.0% compared to
the first nine months of 2001, influenced by the Corporation's larger cost base
with the February 28, 2002 acquisition of Signal. Adjusting for goodwill
amortization, which ceased on January 1, 2002 as a result of adopting SFAS 142
and SFAS 147, noninterest expense was up $31.9 million or 13.3%. Larger
increases were in mortgage servicing rights expense, loan expense and in
personnel and occupancy costs, given a larger employee base and broader branch
network as the Corporation assimilated Signal's businesses and operations.
During the second quarter of 2002, the Corporation completed its integration of
Signal's banking subsidiaries with Associated Bank Minnesota, to operate under a
single national charter named Associated Bank Minnesota, National Association.
- --------------------------------------------------------------------------------------------------------------------------
TABLE 5
Noninterest Expense
($ in Thousands)
- --------------------------------------------------------------------------------------------------------------------------
3rd Qtr. 3rd Qtr. Dollar Percent YTD YTD Dollar Percent
2002 2001 Change Change 2002 2001 Change Change
- --------------------------------------------------------------------------------------------------------------------------
Personnel expense $ 47,581 $ 43,266 $ 4,315 10.0% $141,339 $124,804 $ 16,535 13.2%
Occupancy 6,553 5,635 918 16.3 19,340 17,916 1,424 7.9
Equipment 3,909 3,493 416 11.9 11,126 10,823 303 2.8
Data processing 5,420 4,870 550 11.3 15,527 14,535 992 6.8
Business development & 3,728 3,310 418 12.6 10,300 9,502 798 8.4
advertising
Stationery and supplies 1,395 959 436 45.5 5,225 5,021 204 4.1
FDIC expense 384 399 (15) (3.8) 1,158 1,279 (121) (9.5)
Mortgage servicing rights
expense 13,372 5,703 7,669 134.5 20,143 12,312 7,831 63.6
Core deposit intangible
amortization 576 466 110 23.6 1,674 1,400 274 19.6
Loan expense 3,967 2,598 1,369 52.7 10,280 7,997 2,283 28.5
Legal and professional fees 1,260 925 335 36.2 4,013 2,593 1,420 54.8
Other 10,038 10,829 (791) (7.3) 31,661 31,730 (69) (0.2)
-------------------------------------------------------------------------------------
Subtotal $ 98,183 $ 82,453 $ 15,730 19.1% $271,786 $239,912 $ 31,874 13.3%
Goodwill amortization expense -- 1,635 (1,635) (100.0) -- 4,904 (4,904) (100.0)
-------------------------------------------------------------------------------------
Total noninterest expense $ 98,183 $ 84,088 $ 14,095 16.8% $271,786 $244,816 $ 26,970 11.0%
=====================================================================================
- --------------------------------------------------------------------------------------------------------------------------
Personnel expense increased $16.5 million or 13.2% over the first nine months of
2001, and represented 52.0% of total noninterest expense in year-to-date 2002,
the same as for year-to-date 2001 (using noninterest expense excluding goodwill
amortization). Average full-time equivalent employees were 4,071 for
year-to-date 2002 (with Signal adding approximately 350 at the time of
acquisition), compared to 3,856 for year-to-date 2001, an increase of 5.6%.
Total salary-related expenses increased $11.8 million or 12.1% between
comparable periods, primarily a function of higher base salaries and incentive
compensation given the overall increase in full-time equivalent employees,
attributable principally to the Signal acquisition, and merit increases between
years. Fringe benefits increased $4.7 million or 17.4% over year-to-date 2001,
attributable also to the larger employee base (primarily due to the Signal
acquisition), and to the increased cost of premium based benefits and higher
profit sharing expenses.
Occupancy expense increased 7.9% to support the larger branch network
attributable mostly to the Signal acquisition. Data processing costs were up due
to processing for a larger base operation, and for 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 $7.8 million between comparable periods, including a $2.5
million increase in the base amortization of the mortgage servicing rights asset
and a $5.3 million larger 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 $30.0 million, net of a $21.6 million
valuation allowance at September 30, 2002. See Note 6, "Goodwill and Other
Intangible Assets" for additional disclosure.
Loan expense was $10.3 million, up $2.3 million from year-to-date 2001, due
primarily to higher merchant interchange fees (in line with increased credit
card revenues) and commercial loan expenses. Legal and professional fees were up
$1.4 million between comparable periods with most categories showing increases,
including legal fees, consultant fees and exam/audit fees. Goodwill amortization
expense decreased $4.9 million due to the adoption of SFAS 142 and SFAS 147,
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 nine months of 2002 was $62.4 million, up $7.8
million or 14.4% from the comparable period in 2001. The effective tax rate
(income tax expense divided by income before taxes) was 28.4% and 29.0% 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 and SFAS 147 in 2002, which required the amortization of goodwill to
cease.
Income tax expense, recorded in the consolidated statements 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 September 30, 2002, total assets were $15.0 billion, an increase of $1.5
billion, or 10.9%, over September 30, 2001. Signal added $1.1 billion in total
assets, $765 million in loans, and $783 million in deposits on September 30,
2002. Loan growth since September 30, 2001 was $1.1 billion or 11.9%,
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 $349 million decline
in residential mortgage loans, attributable to lower interest rates and high
refinance activity. Total deposits were up $548 million or 6.5%, principally due
to the acquisition of Signal. Noninterest-bearing demand deposits grew $527
million (43.5%), to represent 19% 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 $252 million,
primarily in short-term Federal Home Loan Bank advances, as longer-term funding
sources were utilized. Since September 30, 2001, long-term debt grew $810
million, including the issuance of $150 million of bank notes, $100 million of
long-term repurchase agreements, 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 $1.4 billion, again attributable to the
Signal acquisition, with loans up $1.1 billion predominantly in commercial loans
(up $922 million). Deposits increased $335 million to $8.9 billion at September
30, 2002, led by noninterest-bearing demand deposits, which increased $316
million since year-end 2001. See Tables 6 and 7 for period end loan and deposit
composition, respectively. Short-term borrowings were down less than 1%, while
long-term debt increased $727 million since year-end 2001, including the debt
issuances noted above.
- ----------------------------------------------------------------------------------------------------------------
TABLE 6
Period End Loan Composition
($ in Thousands)
- -----------------------------------------------------------------------------------------------------------------
September 30, % of September 30, % of Dec. 31, % of
2002 Total 2001 Total 2001 Total
- -----------------------------------------------------------------------------------------------------------------
Commercial, financial & agricultural $ 2,175,931 22% $ 1,760,412 19% $ 1,783,300 20%
Real estate-construction 850,287 8 787,112 9 797,734 9
Commercial real estate 3,082,890 31 2,488,711 28 2,630,964 29
Lease financing 36,274 -- 13,759 -- 11,629 --
------------------------------------------------------------------------
Commercial 6,145,382 61 5,049,994 56 5,223,627 58
Residential mortgage 2,381,120 24 2,729,833 30 2,524,199 28
Home equity 831,169 8 571,513 7 609,254 7
------------------------------------------------------------------------
Residential real estate 3,212,289 32 3,301,346 37 3,133,453 35
Consumer 728,839 7 659,030 7 662,784 7
------------------------------------------------------------------------
Total loans $10,086,510 100% $ 9,010,370 100% $ 9,019,864 100%
========================================================================
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
TABLE 7
Period End Deposit Composition
($ in Thousands)
- -----------------------------------------------------------------------------------------------------------------
September 30, % of September 30, % of Dec. 31, % of
2002 Total 2001 Total 2001 Total
- -----------------------------------------------------------------------------------------------------------------
Noninterest-bearing demand $ 1,740,932 19% $ 1,213,541 14% $ 1,425,109 17%
Savings 916,039 10 837,967 10 801,648 9
Interest-bearing demand 1,212,672 14 791,914 9 922,164 11
Money market 1,760,334 20 1,733,427 21 1,814,098 21
Brokered CDs 187,915 2 310,198 4 290,000 3
Other time 3,129,461 35 3,511,865 42 3,359,592 39
------------------------------------------------------------------------
Total deposits $ 8,947,353 100% $ 8,398,912 100% $ 8,612,611 100%
========================================================================
Total deposits, excluding
Brokered CDs $ 8,759,438 98% $ 8,088,714 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
Nine months ended year ended
September 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 36,085 18,913 28,210
Charge-offs (24,295) (14,343) (22,639)
Recoveries 3,309 1,829 2,401
----------------------------------------
Net charge-offs (20,986) (12,514) (20,238)
----------------------------------------
Balance at end of period $ 155,288 $ 126,631 $ 128,204
========================================
Nonperforming Assets:
Nonaccrual loans $ 93,250 $ 56,651 $ 48,238
Accruing loans past due 90 days or more 5,981 11,376 3,649
Restructured loans 1,110 241 238
----------------------------------------
Total nonperforming loans 100,341 68,268 52,125
Other real estate owned 3,331 2,396 2,717
----------------------------------------
Total nonperforming assets $ 103,672 $ 70,664 $ 54,842
========================================
Ratios:
Allowance for loan losses to net
charge-offs (annualized) 5.53x 7.57x 6.33x
Net charge-offs to average loans (annualized) 0.29% 0.18% 0.22%
Allowance for loan losses to total loans 1.54% 1.41% 1.42%
Nonperforming loans to total loans 0.99% 0.76% 0.58%
Nonperforming assets to total assets 0.69% 0.52% 0.40%
Allowance for loan losses to nonperforming loans 155% 185% 246%
- -------------------------------------------------------------------------------------------------
As of September 30, 2002, the allowance for loan losses was $155.3 million,
representing 1.54% of loans outstanding, compared to $126.6 million, or 1.41% of
loans, at September 30, 2001, and $128.2 million, or 1.42% at year-end 2001. At
September 30, 2002, the allowance for loan losses was 155% of nonperforming
loans compared to 185% and 246% at September 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 September 30, 2002 increased $28.7 million
(22.6%) since September 30, 2001 and $27.1 million (21.1%) 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
September 30, 2002 grew $1.1 billion (11.9%) since September 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 $1.1 billion since year-end. The mix of commercial loans
increased as a percent of total loans to 61% at September 30, 2002 compared to
56% at September 30, 2001 and 58% at December 31, 2001.
Gross charge offs were $24.3 million for the nine months ended September 30,
2002, $14.3 million for the comparable period ended September 30, 2001, and
$22.6 million for the year 2001, while recoveries for the corresponding periods
were $3.3 million, $1.8 million, and $2.4 million, respectively. Thus, net
charge offs (and the ratio of net charge offs to average loans on an annualized
basis) were $21.0 million (0.29%), $12.5 million (0.18%), and $20.2 million
(0.22%) for year-to-date 2002, year-to-date 2001, and for the year 2001,
respectively. The rise in net charge offs is largely due to the charge off of
several large commercial credits (accountable for approximately $11.4 million of
the charge offs) during 2002.
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 September
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 nonperforming 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 September 30, 2002, September 30, 2001, and December 31, 2001, respectively.
Table 8 provides detailed information regarding nonperforming assets, which
include nonperforming loans and other real estate owned. Nonperforming assets to
total assets were 0.69%, 0.52%, and 0.40% at September 30, 2002, September 30,
2001, and December 31, 2001, respectively, affected predominantly by
nonperforming loans. Other real estate owned was $3.3 million at September 30,
2002, up from $2.4 million at September 30, 2001 and $2.7 million at December
31, 2001.
Total nonperforming loans at September 30, 2002 were up $32.1 million and $48.2
million from September 30 and December 31, 2001, respectively. The ratio of
nonperforming loans to total loans was 0.99% at September 30, 2002, as compared
to 0.76% and 0.58% at September 30 and December 31, 2001, respectively.
Nonaccrual loans account for the majority of the $32.1 million increase in
nonperforming loans between comparable September 30 periods, where nonaccrual
loans increased by $36.6 million, restructured loans increased $.9 million, and
loans past due 90 or more days decreased $5.4 million. Nonaccrual loans also
account for the majority of the $48.2 million increase in nonperforming loans
since year-end 2001. Nonaccrual loans increased $45.0 million and restructured
loans increased $0.9 million, while accruing loans past due 90 or more days
increased $2.3 million. The increase in nonaccrual loans for both the comparable
September 30 periods and September versus year-end 2001, 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. The
remaining rise in nonaccrual loans for both comparable periods is predominantly
attributable to the commercial loan portfolio and is not concentrated within the
same industry.
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 September 30, 2002, potential
problem loans totaled $208 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 nine months ended September 30, 2002, net cash provided from operating
and financing activities was $151.8 million and $99.7 million, respectively,
while investing activities used net cash of $337.2 million, for a net decrease
in cash and cash equivalents of $85.7 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 nine months ended September 30, 2001, net cash provided from operating
and financing activities was $79.3 million and $215.4 million, respectively,
while investing activities used net cash of $19.2 million, for a net increase in
cash and cash equivalents of $275.5 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
moderate. Thus, other financing sources increased, particularly long-term debt
and other short-term borrowings, to help replenish 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 September 30, 2002.
In addition, $200 million of commercial paper was available at September 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 issued
$175 million of trust preferred securities, bearing a 7.625% coupon rate. At
September 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
September 30, 2002, $300 million was available under the shelf registration.
Investment securities are an important tool to the Corporation's liquidity
objective. As of September 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.
A $2.0 billion bank note program associated with Associated Bank Illinois,
National Association and Associated Bank, National Association was established
during 2000. Under this program, short-term and long-term debt may be issued. As
of September 30, 2002, $350 million of long-term bank notes were outstanding
($200 million, variable rate, were issued in April 2001; $50 million, variable
rate, were issued in May 2002; and $100 million, fixed rate, were issued in
September 2002). At September 30, 2002, $1.65 billion was available under this
program. The banks have also established federal fund lines with major banks
totaling approximately $2.9 billion at September 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 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 September 30, 2002 increased to $1.3 billion, compared
to $1.1 billion at September 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
September 30, 2002, included $76.6 million of accumulated other comprehensive
income, predominantly related to unrealized gains on securities available for
sale, net of the tax effect. At September 30, 2001, stockholders' equity
included $65.1 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 8.45% and 7.95% at
September 30, 2002 and 2001, respectively.
Stockholders' equity grew $200.3 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 September 30, 2002 was 8.45%, compared to 7.87% at December
31, 2001.
Cash dividends of $0.9018 per share were paid in year-to-date 2002, compared to
$0.8272 per share in year-to-date 2001, representing an increase of 9.0%.
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, 1,130,000 shares were
repurchased under this authorization, at an average cost of $34.93 per share,
while during year-to-date 2001 550,000 shares were repurchased at an average
cost of $29.75 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 965,650 shares were repurchased during
year-to-date 2002, at an average cost of $32.55 per share, while during
year-to-date 2001 35,200 shares were repurchased at an average cost of $28.53
per share. At September 30, 2002, approximately 2.5 million shares remain
authorized to repurchase under the two authorizations of 2000. 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)
- -------------------------------------------------------------------------------------------------------------------------
Sept. 30, June 30, March 31,
Dec. 31, Sept. 30, 2002 2002
2002 2001 2001
- -------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 1,270,691 $ 1,275,245 $ 1,230,820 $ 1,070,416 $ 1,078,874
Tier 1 capital 1,147,045 1,155,995 969,888 924,871 913,281
Total capital 1,492,619 1,498,328 1,309,433 1,253,036 1,238,673
Market capitalization 2,366,995 2,856,382 2,622,307 2,305,672 2,230,131
-----------------------------------------------------------------------
Book value per common share $ 17.03 $ 16.84 $ 16.23 $ 14.89 $ 14.90
Cash dividend per common share 0.31 0.31 0.28 0.28 0.28
Stock price at end of period 31.73 37.71 34.57 32.08 30.81
Low closing stock price for the period 30.64 33.63 30.37 28.89 27.12
High closing stock price for the period 36.96 38.25 35.29 32.71 33.55
-----------------------------------------------------------------------
Total equity / assets 8.45% 8.81% 8.59% 7.87% 7.95%
Tangible common equity / assets 7.08 7.39 7.15 7.20 7.27
Tier 1 leverage ratio 8.06 8.23 7.28 7.03 7.02
Tier 1 risk-based capital ratio 10.50 10.96 9.43 9.71 9.73
Total risk-based capital ratio 13.66 14.20 12.73 13.15 13.19
-----------------------------------------------------------------------
Shares outstanding (period end) 74,598 75,746 75,849 71,869 72,386
Basic shares outstanding (average) 75,158 75,922 73,142 72,137 72,692
Diluted shares outstanding (average) 76,047 77,041 74,042 72,746 73,297
- ------------------------------------------------------------------------------------------------------------------------
Third Quarter Results
Net income for third quarter of 2002 was $53.5 million, up $8.4 million from the
$45.1 million net income earned in the third quarter of 2001. Return on average
equity was 16.73%, down 30 bp from the third quarter of 2001, while return on
average assets increased 11 bp to 1.47% (see Table 1).
Fully taxable equivalent net interest income for the third quarter of 2002 was
$134.3 million, $21.7 million higher than the third quarter of 2001. The net
interest margin of 3.96% in the third quarter of 2002 was 33 bp higher than the
net interest margin of 3.63% in the third quarter of 2001 (see Tables 2 and 3).
Changes in the rate environment contributed $10.9 million to taxable equivalent
net interest income, while changes in the volume and mix of average earning
assets and interest-bearing liabilities also impacted fully taxable equivalent
net interest income favorably by $10.8 million (see Table 3). Growth in average
earning assets, up $1.1 billion to $13.4 billion, and interest-bearing
liabilities, up $0.7 billion to $11.5 billion, was primarily attributable to the
acquisition of Signal in February 2002. Average loans grew 11.2% to $10.1
billion, while wholesale funding increased $0.6 billion to $4.1 billion (and
represented 35.6% of interest-bearing liabilities for the third quarter of 2002
compared to 32.1% for the third quarter of 2001). Noninterest-bearing demand
deposits grew 34.0% to $1.6 billion.
The net interest margin rose 33 bp to 3.96% for the third quarter of 2002,
attributed primarily to falling interest rates (the average Fed funds rate for
the third quarter of 2002 was 181 bp lower than the third quarter of 2001). The
33 bp increase in net interest margin was the result of a 48 bp improvement in
interest rate spread (i.e. a 160 bp decrease in rate on interest-bearing
liabilities, partially offset by a 112 bp drop in earning asset yield) and 15 bp
lower contribution from net free funds.
The provision for loan losses was up $5.9 million over the provision for the
third 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 September 30, 2002 was
1.54% compared to 1.41% at September 30, 2001. See Tables 6 and 8. See also
Section "Allowance for Loan Losses" and "Nonperforming Loans and Other Real
Estate Owned" which discusses the increase in nonperforming loans at September
30, 2002.
Noninterest income was $58.7 million for the third quarter of 2002, up $10.5
million from the third quarter of 2001 (see Table 4). Mortgage banking income
was up $9.0 million, primarily due to a notable increase in secondary mortgage
loan production ($856 million for the third quarter of 2002 versus $490 million
for the third quarter of 2001), resulting in higher production-related fees and
higher gains on the sale of mortgage loans. Service charges on deposit accounts
increased $2.6 million as the result of changes in the service charge fee
structure between comparable quarters and higher volumes associated with
increases in the number of demand deposit accounts. Other noninterest income was
down $1.9 million as the result of a $2.6 million gain on the sale of stock in a
regional ATM network during third quarter 2001 versus none in third quarter
2002.
Noninterest expense for the third quarter of 2002 was $98.2 million, up $14.1
million over the third quarter of 2001 (see Table 5). 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 $4.3 million (of which, $2.9 million was due to
higher salary-related expenses and $1.4 million was attributable to higher
fringe benefits). Occupancy expense grew $0.9 million due predominantly to the
addition of the Signal branch network. Mortgage servicing rights expense was up
$7.7 million, the result of a $6.8 million larger addition to the valuation
allowance ($10.1 million for third quarter 2002 versus $3.3 million for third
quarter 2001) and a $0.9 million increase in the amortization of mortgage
servicing rights. Loan expense increased $1.4 million, primarily in credit card
and mortgage loan expenses. Income taxes were up $3.5 million between comparable
quarters, primarily attributable to the increase in net income before tax.
Current Accounting Pronouncements
The current accounting pronouncements have been described in Note 3, "Statements
of Financial Accounting Standards."
Subsequent Event
On October 23, 2002, the Board of Directors declared a $0.31 per share dividend
payable November 15, 2002, to shareholders of record as of November 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 September 30, 2002.
Interest Rate Sensitivity Analysis
September 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 $ 379,136 $ -- $ -- $ 379,136 $ -- $ 379,136
Investment securities, at fair value 761,007 269,710 434,789 1,465,506 1,967,252 3,432,758
Loans 5,484,801 448,198 1,089,874 7,022,873 3,063,637 10,086,510
Other earning assets 115,101 -- -- 115,101 -- 115,101
---------------------------------------------------------------------------------------
Total earning assets $ 6,740,045 $ 717,908 $ 1,524,663 $ 8,982,616 $ 5,030,889 $ 14,013,505
=======================================================================================
Interest-bearing liabilities:
Interest-bearing deposits(1) (2) $ 1,234,429 $ 826,526 $ 1,410,865 $ 3,471,820 $ 5,287,618 $ 8,759,438
Other interest-bearing
liabilities (2) 2,961,308 345,651 285,545 3,592,504 1,242,695 4,835,199
Interest rate swaps (25,000) 200,000 -- 175,000 (175,000) --
---------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 4,170,737 $ 1,372,177 $ 1,696,410 $ 7,239,324 $ 6,355,313 $ 13,594,637
=======================================================================================
Interest sensitivity gap $ 2,569,308 $ (654,269) $ (171,747) $ 1,743,292 $ (1,324,424) $ 418,868
Cumulative interest sensitivity gap $ 2,569,308 $ 1,915,039 $ 1,743,292
12 Month cumulative gap
as a percentage of earning assets
at September 30, 2002 18.3% 13.7% 12.4%
=======================================================================================
(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 $188 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 of (8.7%) to an asset sensitive balance
sheet of 12.4%, 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 continued extension of the wholesale borrowings position, higher
mortgage loan prepayments, and the Signal acquisition.
ITEM 4. Controls and Procedures
We maintain a system of internal controls and procedures designed to provide
reasonable assurance as to the reliability of our published financial statements
and other disclosures included in this report. Within the 90-day period prior to
the date of this report, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule 13a-14 of
the Securities Exchange Act of 1934. Based upon that evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that our disclosure
controls and procedures are effective in timely alerting them to material
information relating to Associated Banc-Corp (including its consolidated
subsidiaries) required to be included in this quarterly report on Form 10-Q.
There have been no significant changes in our internal controls or in other
factors which could significantly affect internal controls subsequent to the
date that we carried out our evaluation.
PART II - OTHER INFORMATION
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 (a), 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.
Exhibit 99 (b), Certification Under Section 302 of the
Sarbanes-Oxley Act of 2002 by Robert C. Gallagher, Chief Executive
Officer, is attached hereto.
Exhibit 99 (c), Certification Under Section 302 of the
Sarbanes-Oxley Act of 2002 by Joseph B. Selner, Chief Financial
Officer, is attached hereto.
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: November 12, 2002 /s/ Robert C. Gallagher
--------------------------------------------
Robert C. Gallagher
President and Chief Executive Officer
Date: November 12, 2002 /s/ Joseph B. Selner
--------------------------------------------
Joseph B. Selner
Chief Financial Officer
Exhibit 99 (a)
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 September 30, 2002 (the "Report"), fully complies with the requirements of
Section 13(a) 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
November 6, 2002
/s/ Joseph B. Selner
--------------------------------------------
Joseph B. Selner
Chief Financial Officer
November 6, 2002
Exhibit 99 (b)
Certification under Section 302 of the
Sarbanes-Oxley Act of 2002
CERTIFICATION
I, Robert C. Gallagher, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Associated
Banc-Corp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present in all material
respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintain disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 6, 2002 /s/ Robert C. Gallagher
----------------------------- ---------------------------------------
Robert C. Gallagher,
Chief Executive Officer
Exhibit 99 (c)
Certification under Section 302 of the
Sarbanes-Oxley Act of 2002
CERTIFICATION
I, Joseph B. Selner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Associated
Banc-Corp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report fairly present in all material
respects the financial condition, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintain disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 6, 2002 /s/ Joseph B. Selner
----------------------------- ---------------------------------------
Joseph B. Selner
Chief Financial Officer