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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 March 31, 2003
-----------------------------------
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
- -------------------------------------------------------------------------------
(State or other jurisdiction (IRS employer identification no.)
of incorporation or organization)
1200 Hansen Road, Green Bay, Wisconsin 54304
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(920)491-7000
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(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
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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 April 30, 2003, was 73,970,806.
ASSOCIATED BANC-CORP
TABLE OF CONTENTS
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets -
March 31, 2003, March 31, 2002 and
December 31, 2002
Consolidated Statements of Income -
Three Months Ended March 31, 2003 and 2002
Consolidated Statement of Changes in
Stockholders' Equity - Three Months Ended
March 31, 2003
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2003 and 2002
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about
Market Risk
Item 4. Controls and Procedures
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
ASSOCIATED BANC-CORP
Consolidated Balance Sheets
(Unaudited)
March 31, March 31, December 31,
2003 2002 2002
----------------------------------------------
(In Thousands, except share data)
ASSETS
Cash and due from banks $ 401,012 $ 326,946 $ 430,691
Interest-bearing deposits in other financial institutions 13,640 6,028 5,502
Federal funds sold and securities purchased under
agreements to resell 27,815 76,140 8,820
Investment securities available for sale, at fair value 3,379,000 3,364,411 3,362,669
Loans held for sale 374,053 149,945 305,836
Loans 10,275,469 9,757,584 10,303,225
Allowance for loan losses (170,391) (144,350) (162,541)
---------------------------------------------
Loans, net 10,105,078 9,613,234 10,140,684
Premises and equipment 132,234 135,821 132,713
Goodwill 212,112 212,112 212,112
Other intangible assets 38,251 47,667 41,565
Other assets 405,971 395,847 402,683
---------------------------------------------
Total assets $ 15,089,166 $ 14,328,151 $ 15,043,275
=============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits $ 1,692,979 $ 1,437,798 $ 1,773,699
Interest-bearing demand deposits, excluding brokered
certificates of deposit 7,158,605 7,439,710 7,117,503
Brokered certificates of deposit 208,650 315,184 233,650
---------------------------------------------
Total deposits 9,060,234 9,192,692 9,124,852
Short-term borrowings 2,422,631 2,230,505 2,389,607
Long-term debt 1,954,715 1,477,855 1,906,845
Company-obligated mandatorily redeemable
preferred securities 188,263 11,000 190,111
Accrued expenses and other liabilities 177,457 185,117 159,677
---------------------------------------------
Total liabilities 13,803,300 13,097,169 13,771,092
Stockholders' equity
Preferred stock --- --- ---
Common stock (Par value $0.01 per share,
Authorized 100,000,000 shares, issued 74,786,910,
76,727,109, and 75,503,410 shares, respectively) 748 698 755
Surplus 621,616 421,570 643,956
Retained earnings 637,781 786,246 607,944
Accumulated other comprehensive income 56,302 48,966 60,313
Treasury stock, at cost (916,453, 878,333 and
1,222,812 shares, respectively) (30,581) (26,498) (40,785)
---------------------------------------------
Total stockholders' equity 1,285,866 1,230,982 1,272,183
---------------------------------------------
Total liabilities and stockholders' equity $ 15,089,166 $ 14,328,151 $ 15,043,275
=============================================
See accompanying notes to consolidated financial statements.
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
---------------------
2003 2002
---------------------
(In Thousands, except
per share data)
INTEREST INCOME
Interest and fees on loans $148,496 $151,349
Interest and dividends on investment securities
and deposits with other financial institutions:
Taxable 26,797 32,859
Tax exempt 10,055 9,980
Interest on federal funds sold and securities
purchased under agreements to resell 35 118
---------------------
Total interest income 185,383 194,306
INTEREST EXPENSE
Interest on deposits 31,990 48,229
Interest on short-term borrowings 8,567 13,655
Interest on long-term debt, including
capital securities 17,372 14,995
---------------------
Total interest expense 57,929 76,879
---------------------
NET INTEREST INCOME 127,454 117,427
Provision for loan losses 12,960 11,251
---------------------
Net interest income after provision for loan losses 114,494 106,176
NONINTEREST INCOME
Trust service fees 6,630 7,371
Service charges on deposit accounts 11,811 9,880
Mortgage banking 26,103 12,604
Credit card and other nondeposit fees 7,396 6,072
Retail commission income 3,303 4,616
Bank owned life insurance income 3,391 3,270
Asset sale gains, net 122 331
Investment securities losses, net (326) ---
Other 6,779 3,256
---------------------
Total noninterest income 65,209 47,400
NONINTEREST EXPENSE
Personnel expense 50,235 44,994
Occupancy 7,115 6,137
Equipment 3,244 3,490
Data processing 5,618 4,803
Business development and advertising 3,363 3,446
Stationery and supplies 1,679 2,044
FDIC expense 366 372
Mortgage servicing rights expense 11,598 2,897
Core deposit intangible amortization 350 464
Loan expense 3,348 2,779
Other 11,241 10,990
---------------------
Total noninterest expense 98,157 82,416
---------------------
Income before income taxes 81,546 71,160
Income tax expense 23,553 19,698
---------------------
NET INCOME $57,993 $51,462
=====================
Earnings per share:
Basic $ 0.78 $ 0.70
Diluted $ 0.77 $ 0.70
Average shares outstanding:
Basic 74,252 73,142
Diluted 74,974 74,042
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, 2002 $755 $643,956 $607,944 $60,313 $(40,785) $1,272,183
Comprehensive income:
Net income --- --- 57,993 --- --- 57,993
Net unrealized loss on derivative
instruments, net of tax of $0.5
million --- --- --- (839) --- (839)
Add: reclassification adjustment to
interest expense for interest
differential, net of tax of $0.03
million --- --- --- 49 --- 49
Net change in unrealized holding loss
on securities available for sale,
net of tax $2.6 million --- --- --- (3,221) --- (3,221)
----------
Comprehensive income 53,982
----------
Cash dividends, $0.31 per share --- --- (23,055) --- --- (23,055)
Common stock issued:
Incentive stock options --- --- (5,101) --- 10,564 5,463
Purchase and retirement of treasury stock
in connection with repurchase program (7) (24,130) --- --- --- (24,137)
Purchase of treasury stock --- --- --- --- (360) (360)
Tax benefit of stock options --- 1,790 --- --- --- 1,790
-----------------------------------------------------------------------------
Balance, March 31, 2003 $748 $621,616 $637,781 $56,302 $(30,581) $1,285,866
=============================================================================
See accompanying notes to consolidated financial statements.
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months
Ended March 31,
2003 2002
-------------- -----------
($ in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 57,993 $ 51,462
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses 12,960 11,251
Depreciation and amortization 4,119 4,466
Provision for valuation allowance on mortgage servicing rights 7,332 --
Amortization (accretion) of:
Mortgage servicing rights 4,266 2,897
Core deposit intangibles 350 464
Investment securities premiums, net 5,232 2,219
Deferred loan fees and costs 103 420
Loss on sales of investment securities, net 326 --
Gain on sales of assets, net (122) (331)
Gain on sales of loans held for sale, net (16,662) (7,697)
Mortgage loans originated and acquired for sale (1,097,520) (691,100)
Proceeds from sales of mortgage loans held for sale 1,045,965 867,664
Increase in interest receivable and other assets (1,902) (12,220)
Increase in interest payable and other liabilities 18,569 2,315
----------- -----------
Net cash provided by operating activities 41,009 231,810
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in loans 20,256 19,505
Capitalization of mortgage servicing rights (8,634) (7,437)
Purchases of:
Securities available for sale (487,329) (270,112)
Premises and equipment, net of disposals (3,339) (2,764)
Proceeds from:
Sales of securities available for sale 95 --
Calls and maturities of securities available for sale 459,879 262,397
Sales of other assets 1,751 1,093
Net cash acquired in business combination -- 17,982
----------- -----------
Net cash provided by (used in) investing activities (17,321) 20,664
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (64,617) (203,363)
Net increase (decrease) in short-term borrowings 33,025 (516,109)
Repayment of long-term debt (105,553) (1,177)
Proceeds from issuance of long-term debt 153,000 300,354
Cash dividends (23,055) (20,169)
Proceeds from exercise of incentive stock options 5,463 6,694
Purchase and retirement of treasury stock (24,137) (3,961)
Purchase of treasury stock (360) (11,065)
----------- -----------
Net cash used in financing activities (26,234) (448,796)
----------- -----------
Net decrease in cash and cash equivalents (2,546) (196,322)
Cash and cash equivalents at beginning of period 445,013 605,436
----------- -----------
Cash and cash equivalents at end of period $ 442,467 $ 409,114
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 59,898 $ 79,307
Income taxes 1,890 432
Supplemental schedule of noncash investing activities:
Loans transferred to other real estate 3,317 705
=========== ===========
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 Associated Banc-Corp's 2002
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 the financial
position, results of operations, changes in stockholders' equity, and cash flows
of Associated Banc-Corp and its subsidiaries (the "Corporation") 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.
NOTE 2: Reclassifications
Certain items in the prior period consolidated financial statements have been
reclassified to conform with the March 31, 2003 presentation.
NOTE 3: New Accounting Pronouncements
In July 2002, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). 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 had no
effect on the Corporation's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS 123" ("SFAS
148"). SFAS 148 permits two additional transition methods for entities that
adopt the fair value based method of accounting for stock-based employee
compensation. The Statement also requires new disclosures about the ramp-up
effect of stock-based employee compensation on reported results, and requires
that those effects be disclosed more prominently by specifying the form,
content, and location of those disclosures. The transition guidance and annual
disclosure provisions of SFAS 148 are effective for fiscal years ending after
December 15, 2002, with earlier application permitted in certain circumstances.
The interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002 and
have been provided herein. The Corporation has not decided yet if it will adopt
the fair value based method of accounting.
In November 2002, the FASB issued Interpretation No. 45, an interpretation of
FASB Statements No. 5, 57, and 107, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). This Interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements under certain
guarantees that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The disclosure requirements
of FIN 45 were effective as of December 31, 2002, and require disclosure of the
nature of the guarantee, the maximum potential amount of future payments that
the guarantor could be required to make under the guarantee, and the current
amount of the liability, if any, for the guarantor's obligations under the
guarantee. The recognition requirements of FIN 45 were effective beginning
January 1, 2003. The requirements of FIN 45 did not have a material impact on
the results of operations, financial position, or liquidity.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). The objective of this interpretation is
to provide guidance on how to identify a variable interest entity and determine
when the assets, liabilities, noncontrolling interests, and results of
operations of a variable interest entity need to be included in a company's
consolidated financial statements. A company that holds variable interests in an
entity will need to consolidate the entity if the company's interest in the
variable interest entity is such that the company will absorb a majority of the
variable interest entity's losses and/or receive a majority of the entity's
expected residual returns, if they occur. FIN 46 also requires additional
disclosures by primary beneficiaries and other significant variable interest
holders. The provisions of this interpretation are effective upon issuance. The
requirements of FIN 46 did not have a material impact on the results of
operations, financial position, or liquidity.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" (SFAS 149"). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement amends SFAS No. 133 for decisions made
as part of the Derivatives Implementation Group process and in connection with
implementation issues raised in relation to the application of the definition of
a derivative. SFAS 149 is effective for contracts entered into or modified after
June 30, 2003. The Corporation does not expect the requirements of SFAS 149 to
have a material impact on the results of operations, financial position, or
liquidity.
NOTE 4: Earnings Per Share
Basic earnings per share is calculated by dividing net income 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.
Presented below are the calculations for basic and diluted earnings per share.
For the three months ended
March 31,
2003 2002
--------------------------
(In Thousands, except per
share data)
Net income $57,993 $51,462
=========================
Weighted average shares outstanding 74,252 73,142
Effect of dilutive stock options outstanding 722 900
-------------------------
Diluted weighted average shares outstanding 74,974 74,042
=========================
Basic earnings per share $ 0.78 $ 0.70
=========================
Diluted earnings per share $ 0.77 $ 0.70
=========================
NOTE 5: Business Combinations
There was one pending business combination at March 31, 2003, which was
consummated on April 1, 2003. On April 1, 2003, the Corporation consummated its
cash acquisition of 100% of the outstanding shares of CFG Insurance Services,
Inc. ("CFG"), a closely-held insurance agency headquartered in Minnetonka,
Minnesota. CFG, an independent, full line insurance agency will enhance the
growth of the Corporation's existing insurance business. The acquisition was
accounted for under the purchase method of accounting; thus, the results of
operations of CFG are not included in the accompanying consolidated financial
statements. The acquisition is individually immaterial to the consolidated
financial results. Goodwill of approximately $12 million and other intangibles
of approximately $15 million recognized in the transaction will be assigned to
the wealth management segment.
There was one completed business combination during 2002. On February 28, 2002,
the Corporation consummated its acquisition of 100% of the outstanding common
shares of Signal Financial Corporation ("Signal"), a financial holding company
headquartered in Mendota Heights, Minnesota. 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 banking presence,
particularly in the Twin Cities area.
The Signal transaction was accounted for under the purchase method of
accounting; thus, the results of operations prior to the consummation date were
not included in the accompanying consolidated financial statements. 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
estimated life. The $119.7 million of goodwill was assigned to the banking
segment during first quarter of 2002.
The following represents required supplemental pro forma disclosure of total
revenue, net income, and earnings per share as though the business combination
had been completed at the beginning of the year of acquisition.
Three months ended
March 31, 2002
--------------------------
($ in Thousands, except
per share data)
Total revenue $174,651
Net income 50,572
Basic earnings per share 0.67
Diluted earnings per share 0.66
NOTE 6: Goodwill and Other Intangible Assets
Goodwill is not amortized, but rather is subject to impairment tests on at least
an annual basis. No impairment loss was necessary in 2002 or through March 31,
2003. Goodwill is assigned to the Corporation's banking segment. The change in
the carrying amount of goodwill was as follows.
Three months ended Year ended
---------------------------------------------------------
March 31, 2003 March 31, 2002 December 31, 2002
---------------------------------------------------------
($ in Thousands)
Goodwill:
- --------
Balance at beginning of period $212,112 $ 92,397 $ 92,397
Goodwill acquired --- 119,715 119,715
---------------------------------------------------------
Balance at end of period 212,112 $212,112 $212,112
=========================================================
The Corporation has other intangible assets consisting of core deposit
intangibles and mortgage servicing rights that are amortized. The other
intangible assets are assigned to the Corporation's banking segment. The change
in the carrying amount of core deposit intangibles, gross carrying amount,
accumulated amortization, and net book value was as follows.
Three months ended Year ended
---------------------------------------------------------
March 31, 2003 March 31, 2002 December 31, 2002
---------------------------------------------------------
($ in Thousands)
Core deposit intangibles:
- ------------------------
Balance at beginning of period $ 9,242 $ 5,925 $ 5,925
Core deposit intangibles acquired --- 5,600 5,600
Amortization (350) (464) (2,283)
--------------------------------------------------------
Balance at end of period $ 8,892 $ 11,061 $ 9,242
========================================================
Gross carrying amount $ 28,165 $ 28,165 $ 28,165
Accumulated amortization (19,273) (17,104) (18,923)
--------------------------------------------------------
Net book value $ 8,892 $ 11,061 $ 9,242
========================================================
A summary of changes in the balance of mortgage servicing rights and the
mortgage servicing rights valuation allowance was as follows:
Three months ended Year ended
---------------------------------------------------------
March 31, 2003 March 31, 2002 December 31, 2002
---------------------------------------------------------
($ in Thousands)
Mortgage servicing rights:
- -------------------------
Balance at beginning of period $ 32,323 $ 32,066 $ 32,066
Additions 8,634 7,437 30,730
Amortization (4,266) (2,897) (12,831)
Change in valuation allowance (7,332) --- (17,642)
---------------------------------------------------------
Balance at end of period $ 29,359 $ 36,606 $ 32,323
=========================================================
Mortgage servicing rights valuation
allowance:
- ---------
Balance at beginning of period $(28,362) $(10,720) $(10,720)
Additions (7,332) --- (17,642)
---------------------------------------------------------
Balance at end of period $(35,694) $(10,720) $(28,362)
=========================================================
At March 31, 2003, the Corporation was servicing 1- to 4- family residential
mortgage loans owned by other investors with balances totaling $5.45 billion,
compared to $5.42 billion and $5.44 billion at March 31 and December 31, 2002,
respectively. The fair value of servicing was approximately $29.4 million
(representing 54 basis points ("bp") of loans serviced) at March 31, 2003
compared to $36.6 million (or 68 bp of loans serviced) at March 31, 2002 and
$32.3 million (or 59 bp of loans serviced) at December 31, 2002.
Mortgage servicing rights expense, which includes the amortization of the
mortgage servicing rights and increases or decreases to the valuation allowance
associated with the mortgage servicing rights, was $11.6 million and $2.9
million for the three months ended March 31, 2003 and 2002, respectively, and
$30.5 million for the year ended December 31, 2002.
The following table shows the estimated future amortization expense for
amortizing intangible assets. The projections of amortization expense for the
next five years are based on existing asset balances and the existing interest
rate environment as of March 31, 2003. The actual amortization expense the
Corporation recognizes in any given period may be significantly different
depending upon changes in interest rates, market conditions, regulatory
requirements, and events or circumstances that indicate the carrying amount of
an asset may not be recoverable.
Estimated amortization expense:
Core Deposit Intangible Mortgage Servicing Rights
---------------------------------------------------
($ in Thousands)
Year ending December 31,
2003 $1,759 $15,800
2004 1,510 13,100
2005 1,040 10,900
2006 1,026 9,000
2007 1,026 6,500
======= ========
NOTE 7: Derivative and Hedging Activities
SFAS No. 133, as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," (collectively referred to as "SFAS
133") establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. All derivatives, whether designated in hedging relationships
or not, are required to be recorded on the balance sheet at fair value.
In accordance with the statement, the Corporation measures the effectiveness of
its hedges on a periodic basis. Any difference between the fair value change of
the hedge versus the fair value change of the hedged item is considered to be
the "ineffective" portion of the hedge. The ineffective portion of the hedge is
recorded as an increase or decrease in the related income statement
classification of the item being hedged. Ineffective portions of changes in the
fair value of cash flow hedges are recognized in earnings. For the mortgage
derivatives, which are not accounted for as hedges, changes in fair value are
recorded as an adjustment to mortgage banking income.
The Corporation uses derivative instruments primarily to hedge the variability
in interest payments or protect the value of certain assets and liabilities
recorded in its consolidated balance sheet from changes in interest rates. The
predominant activities affected by the statement include the Corporation's use
of interest rate swaps, interest rate caps, and certain mortgage banking
activities.
Weighted Average
Notional Estimated Fair ----------------------------------------
Amount Market Value Receive Rate Pay Rate Maturity
-----------------------------------------------------------------------
March 31, 2003 ($ in Thousands)
- --------------
Swaps-receive fixed / pay variable (1), (4) $375,000 $ 23,332 7.21% 2.91% 220 months
Swaps-receive variable / pay fixed (1), (3) 200,000 (26,776) 1.38% 5.03% 98 months
Swaps-receive fixed / pay variable (2), (4) 312,119 (15,836) 3.54% 6.44% 56 months
Caps-written (1), (3) 200,000 2,219 Strike 4.72% --- 41 months
=======================================================================
March 31, 2002
Swaps-receive fixed / pay variable (1), (4) $200,000 $(19,513) 6.85% 4.60% 114 months
Swaps-receive variable / pay fixed (1), (3) 400,000 (7,990) 1.84% 5.47% 58 months
Swaps-receive fixed / pay variable (2), (4) 146,804 726 4.08% 6.96% 57 months
Caps-written (1), (3) 200,000 8,818 Strike 4.72% --- 53 months
=======================================================================
(1) Asset / Liability management hedge
(2) Customer / Loan-related hedge
(3) Cash flow hedges
(4) Fair value hedges
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 the mortgage derivatives at March 31, 2003 was $6.2
million, compared to $2.3 million at March 31, 2002. The net fair value change
is recorded in mortgage banking income in the consolidated statements of income.
The $6.2 million net fair value of mortgage derivatives at March 31, 2003, is
comprised of the net loss on commitments to sell approximately $926 million of
loans to various investors and the net gain on commitments to fund approximately
$880 million of loans to individual borrowers. The $2.3 million net fair value
of mortgage derivatives at March 31, 2002, is composed of the net loss on
commitments to sell approximately $233 million of loans to various investors and
the net gain on commitments to fund approximately $245 million of loans to
individual borrowers.
NOTE 8: Long-term Debt
Long-term debt at March 31 is as follows:
2003 2002
---------------------------
($ in Thousands)
Federal Home Loan Bank advances (1.21% to
6.81%, fixed rate, maturing in 2003
through 2017 for 2003; 3.30% to 6.81%,
fixed rate, maturing in
2002 through 2017 for 2002) $ 964,628 $1,077,840
Bank notes (1) 500,000 200,000
Subordinated debt, net (2) 208,817 179,085
Repurchase agreements (1.28% to 3.65%,
fixed rate, maturing in 2004 through 2005) 279,175 ---
Other borrowed funds 2,095 20,930
--------------------------
Total long-term debt $1,954,715 $1,477,855
==========================
(1) In April 2001, the Corporation issued $200 million of 2-year variable rate
bank notes. The April notes reprice quarterly at LIBOR plus 22 bp and were
1.60% at March 31, 2003. In May 2002, the Corporation issued $50 million of
18-month variable rate bank notes. The May notes reprice quarterly at LIBOR
plus 25 bp and were 1.59% at March 31, 2003. In September 2002, the
Corporation issued $100 million of 5-year, 3.70% fixed rate bank notes. In
December 2002, the Corporation issued $150 million of 2-year variable rate
bank notes. The December notes reprice quarterly at LIBOR plus 10 bp and
were 1.51% at March 31, 2003.
(2) In August 2001, the Corporation issued $200 million of 10-year subordinated
debt. This debt was issued at a discount and has a fixed interest rate of
6.75%. During 2001, the Corporation entered into a fair value hedge to
hedge the interest rate risk on the subordinated debt. As of March 31, 2003
and 2002, the fair value of the hedge was a $10.0 million gain and a $19.5
million loss, respectively. 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 Preferred Securities are
traded on the New York Stock Exchange under the symbol "ABW PRA." 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 March 31, 2003, the fair value of the hedge was a $13.3
million gain. Given the fair value hedge, the Preferred Securities are carried
on the balance sheet at fair value.
Signal 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: Stock-Based Compensation
As allowed under SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), the Corporation accounts for stock-based compensation cost under the
intrinsic value method of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25). Compensation expense for
employee stock options is generally not recognized if the exercise price of the
option equals or exceeds the fair value of the stock on the date of grant.
For purposes of providing the pro forma disclosures required under SFAS 123, the
fair value of stock options granted in the comparable first quarter periods of
2003 and 2002 was estimated at the date of grant using a Black-Scholes option
pricing model which was originally developed for use in estimating the fair
value of traded options which have different characteristics from the
Corporation's employee stock options. The model is also sensitive to changes in
the subjective assumptions which can materially affect the fair value estimate.
As a result, management believes the Black-Scholes model may not necessarily
provide a reliable single measure of the fair value of employee stock options.
The following table illustrates the effect on net income and earnings per share
if the Corporation had applied the fair value recognition provisions of SFAS
123.
For the Three Months
Ended March 31,
------------------------
2003 2002
------------------------
($ in Thousands, except
per share amounts)
Net income, as reported $57,993 $51,462
Adjustment: pro forma expense
related to options granted,
net of tax (673) (824)
----------------------
Net income, as adjusted $57,320 $50,638
======================
Basic earnings per share, as reported $ 0.78 $ 0.70
Adjustment: pro forma expense related
to options granted, net of tax (0.01) ( 0.01)
----------------------
Basic earnings per share, as adjusted $ 0.77 $ 0.69
======================
Diluted earnings per share, as reported $ 0.77 $ 0.70
Adjustment: pro forma expense related to
options granted, net of tax (0.01) (0.02)
----------------------
Diluted earnings per share, as adjusted $ 0.76 $ 0.68
======================
The following assumptions were used in estimating the fair value for options
granted in 2003 and 2002:
2003 2002
-----------------------
Dividend yield 3.84% 3.26%
Risk-free interest rate 3.27% 4.58%
Weighted average expected life 7 yrs 7 yrs
Expected volatility 28.11% 26.30%
The weighted average per share fair values of options granted in the comparable
first quarter periods of 2003 and 2002 were $7.24 and $7.64, respectively. The
annual expense allocation methodology prescribed by SFAS 123 attributes a higher
percentage of the reported expense to earlier years than to later years,
resulting in an accelerated expense recognition for proforma disclosure
purposes.
NOTE 11: 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),
lease financing, 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 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 three months ended ($ in Thousands)
March 31, 2003
Goodwill $ 212,112 $ --- $ 212,112
Total assets $15,062,897 $ 26,269 $15,089,166
=========================================
Net interest income $ 127,294 $ 160 $ 127,454
Provision for loan losses 12,960 --- 12,960
Noninterest income 55,764 9,445 65,209
Depreciation and amortization 16,023 44 16,067
Other noninterest expense 73,945 8,145 82,090
Income taxes 23,968 (415) 23,553
-----------------------------------------
Net income $ 56,162 $ 1,831 $ 57,993
=========================================
As of and for the three months ended
March 31, 2002
Goodwill $ 212,112 $ --- $ 212,112
Total assets $14,301,822 $ 26,329 $14,328,151
=========================================
Net interest income $ 117,403 $ 24 $ 117,427
Provision for loan losses 11,251 --- 11,251
Noninterest income 36,336 11,064 47,400
Depreciation and amortization 7,778 49 7,827
Other noninterest expense 66,867 7,722 74,589
Income taxes 19,469 229 19,698
-----------------------------------------
Net income $ 48,374 $ 3,088 $ 51,462
=========================================
NOTE 12: Contractual Obligations, Commitments, Off-Balance Sheet Risk,
and Contingent Liabilities
Commitments and Off-Balance Sheet Risk
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to manage its own exposure to interest rate risk. These financial
instruments include lending-related commitments.
Lending-related Commitments
Through the normal course of operations, the Corporation has entered into
certain contractual obligations and other commitments. Such obligations
generally relate to funding of operations through deposits or debt issuances, as
well as leases for premises and equipment. As a financial services provider the
Corporation routinely enters into commitments to extend credit. While
contractual obligations represent future cash requirements of the Corporation, a
significant portion of commitments to extend credit may expire without being
drawn upon. Such commitments are subject to the same credit policies and
approval process accorded to loans made by the Corporation.
Off-balance sheet lending-related commitments include commitments to extend
credit, commitments to originate residential mortgage loans held for sale,
commercial letters of credit, and standby letters of credit. These financial
instruments are exercisable at the market rate prevailing at the date the
underlying transaction will be completed, and thus are deemed to have no current
fair value, or the fair value is based on fees currently charged to enter into
similar agreements and is not material at March 31, 2003 or 2002. Commitments to
extend credit are agreements to lend to customers at predetermined interest
rates as long as there is no violation of any condition established in the
contracts. Commercial and standby letters of credit are conditional commitments
issued to guarantee the performance of a customer to a third party. Commercial
letters of credit are issued specifically to facilitate commerce and typically
result in the commitment being drawn on when the underlying transaction is
consummated between the customer and the third party, while standby letters of
credit generally are contingent upon the failure of the customer to perform
according to the terms of the underlying contract with the third party. The
following is a summary of lending-related off-balance sheet financial
instruments at March 31:
March 31,
-------------------------
2003 2002
-------------------------
($ in Thousands)
Commitments to extend credit, excluding
commitments to originate mortgage loans $3,504,201 $3,025,623
Commitments to originate residential
mortgage loans held for sale 880,421 244,503
------------------------
Total commitments to extend credit 4,384,622 3,270,126
Commercial letters of credit 47,825 57,600
Standby letters of credit 284,222 211,446
Loans sold with recourse 1,216 1,708
Forward commitments to sell residential
mortgage loans $ 925,950 $ 232,700
For commitments to extend credit, commitments to originate residential mortgage
loans held for sale, commercial letters of credit, and standby letters of
credit, the Corporation's associated credit risk is essentially the same as that
involved in extending loans to customers and is subject to normal credit
policies. The Corporation's exposure to credit loss in the event of
nonperformance by the other party to these financial instruments is represented
by the contractual amount of those instruments. The commitments generally have
fixed expiration dates or other termination clauses and may require payment of a
fee. The Corporation uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments. The
Corporation evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management's credit evaluation of the customer.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements.
Under SFAS 133, commitments to originate residential mortgage loans held for
sale and forward commitments to sell residential mortgage loans are defined as
derivatives and are therefore required to be recorded on the consolidated
balance sheet at fair value. The Corporation's derivative and hedging activity,
as defined by SFAS 133, is further summarized in Note 7.
As part of the Corporation's agency agreement with an outside vendor, the
Corporation has guaranteed certain credit card accounts provided the cardholder
is unable to meet the credit card obligations. At March 31, 2003, the
Corporation's estimated maximum exposure was approximately $1 million.
Contingent Liabilities
There are legal proceedings pending against the Corporation in the ordinary
course of business. Although litigation is subject to many uncertainties and the
ultimate exposure with respect to these matters cannot be ascertained,
management believes, based upon discussions with legal counsel, that the
Corporation has meritorious defenses, and any ultimate liability would not have
a material adverse affect on the consolidated financial position or results of
operations of the Corporation.
ITEM 2. Management's Discussion and Analysis of Financial Condition
and the Results of Operations
Special Note Regarding Forward-Looking Statements
Statements made in this document which are not purely historical are
forward-looking statements, as defined in the Private Securities Litigation
Reform Act of 1995, including any statements regarding descriptions of
management's plans, objectives, or goals for future operations, products or
services, and forecasts of its revenues, earnings, or other measures of
performance. Forward-looking statements are based on current management
expectations and, by their nature, are subject to risks and uncertainties. These
statements may be identified by the use of words such as "believe," "expect,"
"anticipate," "plan," "estimate," "should," "will," "intend," or similar
expressions.
Shareholders should note that many factors, some of which are discussed
elsewhere in this document, could affect the future financial results of
Associated Banc-Corp and its subsidiaries ("the Corporation") and could cause
those results to differ materially from those expressed in forward-looking
statements contained in this document. These factors, many of which are beyond
the Corporation's control, include the following:
o operating, legal, and regulatory risks;
o economic, political, and competitive forces affecting the Corporation's
banking, securities, asset management, and credit services businesses; and
o 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. Forward-looking
statements speak only as of the date they are made. 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.
The following discussion refers to the Corporation's business combination
activity that may impact the comparability of certain financial data (see Note
5, "Business Combinations," of the notes to consolidated financial statements).
In particular, consolidated financial results for first quarter 2002 reflect one
month's contribution from its February 28, 2002, purchase acquisition of Signal
Financial Corporation ("Signal").
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
valuation, derivative financial instruments and hedge accounting, and income tax
accounting.
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, actual results could differ from the estimates,
assumptions, and judgments reflected in the financial statements. 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
Corporation'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 qualitative and
quantitative 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 Valuation: 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, estimated prepayment speeds of the
underlying mortgages serviced, 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," of the notes to consolidated financial statements and
section "Noninterest Expense."
Derivative Financial Instruments and Hedge Accounting: In various aspects of its
business, the Corporation uses derivative financial instruments to modify
exposures to changes in interest rates and market prices for other financial
instruments. The interest rate swaps and caps used by the Corporation 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, "Derivative and Hedging
Activities," of the notes to consolidated financial statements.
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 tax 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 11, "Segment Reporting," the Corporation's primary
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), lease financing, 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 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 the banking segment results.
Results of Operations - Summary
Net income for the three months ended March 31, 2003 totaled $58.0 million, or
$0.78 and $0.77 for basic and diluted earnings per share, respectively.
Comparatively, net income for the first quarter of 2002 was $51.5 million, or
$0.70 for both basic and diluted earnings per share. For the first quarter of
2003 the annualized return on average assets was 1.58% and the annualized return
on average equity was 18.36%, compared to 1.54% and 18.46%, respectively, for
the comparable period in 2002. The net interest margin for the first three
months of 2003 was 3.87% compared to 3.91% for the first three months of 2002.
- -----------------------------------------------------------------------------------------------------------------------
TABLE 1
Summary Results of Operations: Trends
($ in Thousands, except per share data)
1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
2003 2002 2002 2002 2002
- ----------------------------------------------------------------------------------------------------------------------
Net income (Quarter) $ 57,993 $ 53,441 $ 53,472 $ 52,344 $ 51,462
Net income (Year-to-date) 57,993 210,719 157,278 103,806 51,462
Earnings per share - basic (Quarter) $ 0.78 $ 0.72 $ 0.71 $ 0.69 $ 0.70
Earnings per share - basic (Year-to-date) 0.78 2.82 2.10 1.39 0.70
Earnings per share - diluted (Quarter) $ 0.77 $ 0.71 $ 0.70 $ 0.68 $ 0.70
Earnings per share - diluted (Year-to-date) 0.77 2.79 2.08 1.37 0.70
ROA (Quarter) 1.58% 1.42% 1.47% 1.47% 1.54%
ROA (Year-to-date) 1.58 1.47 1.49 1.51 1.54
ROE (Quarter) 18.36% 16.62% 16.73% 16.79% 18.46%
ROE (Year-to-date) 18.36 17.10 17.28 17.58 18.46
Efficiency ratio (Quarter) * 49.29% 51.07% 51.14% 50.19% 48.32%
Efficiency ratio (Year-to-date) * 49.29 50.25 49.94 49.29 48.32
Net interest margin (Quarter) 3.87% 3.87% 3.96% 3.96% 3.91%
Net interest margin (Year-to-date) 3.87 3.95 3.94 3.94 3.91
* 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 taxable equivalent basis for the three months ended
March 31, 2003, was $133.7 million, an increase of $10.2 million or 8.3% over
the comparable quarter last year. As indicated in Tables 2 and 3, the $10.2
million increase in fully taxable equivalent net interest income was
attributable to volume (with balance sheet growth and differences in the mix of
average earning assets and average interest-bearing liabilities adding $11.6
million to taxable equivalent net interest income) and rate (as the impact of
changes in interest rates reduced taxable equivalent net interest income by $1.4
million).
The net interest margin for first quarter 2003 was 3.87%, down 4 basis points
("bp") from 3.91% in first quarter 2002. This comparable quarter decrease is the
result of a 7 bp increase in interest rate spread (the net of an 88 bp decrease
in the cost of interest-bearing liabilities and an 81 bp decrease in the yield
on earning assets), partially offset by an 11 bp lower contribution from net
free funds.
Interest rates were generally stable and historically low between the comparable
quarters. The average Federal funds rate of 1.25% for the first quarter of 2003
was 50 bp lower than the average Federal funds rate of 1.75% for the first
quarter of 2002.
The yield on earning assets was 5.56% for first quarter 2003, down 81 bp from
the comparable quarter 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
5.65%, down 82 bp from first quarter 2002. The average yield on investments and
other earning assets was 5.27%, down 80 bp, also impacted by the lower rate
environment and faster prepayments particularly on mortgage-related securities.
The cost of interest-bearing liabilities was 1.96% for first quarter 2003, down
88 bp compared to first quarter 2002, aided by the low interest rate
environment. The average cost of interest-bearing deposits excluding brokered
certificates of deposit ("CDs") was 1.76%, down 92 bp from first quarter 2002,
benefiting from a larger mix of lower-costing transaction accounts, as well as
from lower rates on interest-bearing deposit products in general. Brokered CDs
declined to represent 2.0% of interest-bearing liabilities (versus 3.0% for
first quarter 2002) and had lower costs (down 13 bp to 1.91% for first quarter
2003). The cost of wholesale funds (comprised of short-term borrowings and
long-term funding) was 2.28% (down 96 bp from first quarter 2002), also
attributable to the lower interest rate environment between comparable quarters.
Average earning assets increased by $1.2 billion (9.7%) over the comparable
quarter last year. Average loans represented 76.5% of average earning assets for
first quarter 2003 compared to 74.6% for first quarter 2002 and accounted for
the majority of the growth in earning assets, up an average of $1.2 billion
(12.5%), primarily in commercial loans. Commercial loans grew to represent 59.8%
of average loans for first quarter 2003 compared to 58.2% for first quarter
2002. Average investments and other earning assets were relatively unchanged (up
$47 million or 1.5%).
Average interest-bearing liabilities increased $963 million (8.8%) over first
quarter 2002, supporting the growth in earning assets. Additionally average
noninterest-bearing demand deposits (a component of net free funds) increased by
$258 million, or 19.9%. The growth in interest-bearing liabilities came from
increases in wholesale funding sources, as average interest-bearing deposits
were level between comparable first quarter periods. Average wholesale funding
sources increased by $1.0 billion, representing 38.2% of average
interest-bearing liabilities for first quarter 2003, versus 32.4% for first
quarter 2002. In addition, to take
advantage of the low interest rate environment, the Corporation continued to
shift funds from short-term borrowing sources to longer-term funding, increasing
its long-term funding by $882 million (representing 18.2% of average
interest-bearing liabilities, compared to 11.8% in the prior year).
- ----------------------------------------------------------------------------------------------------------------------
TABLE 2
Net Interest Income Analysis
($ in Thousands)
- ----------------------------------------------------------------------------------------------------------------------
Three months ended March 31, 2003 Three months ended March 31, 2002
-------------------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ----------------------------------------------------------------------------------------------------------------------
Loans $10,578,430 $148,740 5.65% $ 9,405,417 $151,654 6.47%
Investments and other 3,257,672 42,920 5.27 3,210,623 48,715 6.07
-------------------------- -------------------------
Total earning assets 13,836,102 191,660 5.56 12,616,040 200,369 6.37
Other assets, net 1,031,237 922,562
------------ -----------
Total assets $14,867,339 $13,538,602
============ ============
Interest-bearing deposits,
excluding Brokered CDs $ 7,113,093 $ 30,896 1.76% $ 7,060,161 $ 46,588 2.68%
Brokered CDs 232,539 1,094 1.91 326,119 1,641 2.04
Wholesale funding 4,541,010 25,939 2.28 3,537,281 28,650 3.24
-------------------------- --------------------------
Total interest-bearing liabilities 11,886,642 57,929 1.96 10,923,561 76,879 2.84
------------ ------------
Demand, non-interest bearing 1,555,809 1,297,599
Other liabilities 143,938 186,728
Stockholders' equity 1,280,950 1,130,714
------------ ------------
Total liabilities and equity $14,867,339 $13,538,602
============ ============
Interest rate spread 3.60% 3.53%
Net free funds 0.27 0.38
----- -----
Net interest income and
net interest margin $133,731 3.87% $123,490 3.91%
==================== ===================
Taxable equivalent adjustment $ 6,277 $ 6,063
--------- ---------
Net interest income, as reported $127,454 $117,427
========= =========
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
TABLE 3
Volume / Rate Variance
($ in Thousands)
- -----------------------------------------------------------------------------------------------------------------------
Comparison of
Three months ended March 31, 2003 versus 2002
--------------------------------------------------------------
Variance Attributable to
----------------------------------------
Income/Expense Volume
Variance * Rate
- -----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ (2,914) $16,575 $(19,489)
Investments and other (5,795) 529 (6,324)
---------------------------------------------------
Total interest income (8,709) 17,104 (25,813)
INTEREST EXPENSE
Interest-bearing deposits, excluding Brokered CDs $(15,692) $ 314 $(16,006)
Brokered CDs (547) (436) (111)
Wholesale funding (2,711) 5,582 (8,293)
---------------------------------------------------
Total interest expense (18,950) 5,460 (24,410)
---------------------------------------------------
Net interest income $ 10,241 $11,644 $ (1,403)
===================================================
* 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 the first quarter of 2003 was $13.0 million,
down $1.6 million from the fourth quarter of 2002 of $14.6 million, and up $1.7
from the first quarter of 2002 of $11.3 million. Annualized net charge offs as a
percent of average loans for first quarter 2003 decreased to 0.20% from 0.28%
for fourth quarter 2002 and 0.31% for first quarter 2002. The ratio of the
allowance for loan losses to total loans was 1.66%, up from 1.58% at December
31, 2002 and 1.48% at March 31, 2002. See Table 8.
The provision for loan losses is predominantly a function of the methodology and
other qualitative and quantitative factors 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
sections "Allowance for Loan Losses," and "Nonperforming Loans and Other Real
Estate Owned."
Noninterest Income
Noninterest income for the first quarter of 2003 was $65.2 million, up $17.8
million or 37.6% from the first quarter of 2002. Primary components impacting
the change between comparable quarters were mortgage banking income and other
income. Continued strong activity in the mortgage and mortgage refinancing
market supported mortgage banking revenue of $26.1 million in the first quarter
of 2003, more than double that of the year-earlier period.
- ---------------------------------------------------------------------------------------
TABLE 4
Noninterest Income
($ in Thousands)
- ---------------------------------------------------------------------------------------
1st Qtr. 1st Qtr. Dollar Percent
2003 2002 Change Change
- ---------------------------------------------------------------------------------------
Trust service fees $ 6,630 $ 7,371 $ (741) (10.1)%
Service charges on deposit accounts 11,811 9,880 1,931 19.5
Mortgage banking income 26,103 12,604 13,499 107.1
Credit card and other nondeposit fees 7,396 6,072 1,324 21.8
Retail commission income 3,303 4,616 (1,313) (28.4)
Bank owned life insurance income 3,391 3,270 121 3.7
Asset sale gains, net 122 331 (209) (63.1)
Other 6,779 3,256 3,523 108.2
---------------------------------------------
Subtotal $65,535 $47,400 18,135 38.3
Investment securities gains, net (326) --- (326) N/M
---------------------------------------------
Total noninterest income $65,209 $47,400 $17,809 37.6%
=============================================
N/M - Not meaningful.
- ---------------------------------------------------------------------------------------
Trust service fees decreased $0.7 million between comparable first quarter
periods. The change was predominantly due to a decrease in the market value of
assets under management (from $4.0 billion at March 31, 2002, to $3.4 billion at
March 31, 2003), a function of the continued weak stock market performance,
competitive market conditions, and investor uncertainty.
Service charges on deposit accounts were up $1.9 million between comparable
first quarter periods, due in part to higher volumes associated with a larger
account base. The increase was also a result of lower earnings credit rates,
higher service charges on business accounts, and higher fees on
overdrafts/nonsufficient funds.
Mortgage banking income consists of servicing fees, the gain or loss on sales of
mortgage loans to the secondary market, and production-related fees
(origination, underwriting, and escrow waiver fees). Mortgage banking income was
$26.1 million, an increase of $13.5 million, more than double the comparable
quarter in 2002. The increase was driven primarily by secondary mortgage loan
production (mortgage loan production to be sold to the secondary market) which
increased 59% between comparable periods ($1.1 billion in the first quarter of
2003 versus $0.7 billion in the first quarter of 2002). The higher production
levels positively impacted production volume-related fees (up $1.4 million).
Also, gains on sales of the increased production were up $11.9 million (the net
of realized gains up $8.9 million and $3.0 million higher fair value of mortgage
derivatives). Servicing fees on the portfolio serviced for others were up $0.2
million between comparable periods, in line with the modest increase in the
portfolio serviced for others ($5.45 billion at March 31, 2003, versus $5.42
billion at March 31, 2002).
Credit card and other nondeposit fees were $7.4 million for the first quarter of
2003, an increase of $1.3 million or 21.8% from the first quarter of 2002,
attributable predominantly to increases in credit card fees (inclearing and
merchant discount fees) and partly to other nondeposit fees.
Retail commission income (which includes commissions from insurance and
brokerage product sales) was $3.3 million, down $1.3 million between comparable
periods. Brokerage commissions (including variable annuities) were down $0.3
million, while fixed annuities were down $0.6 million, affected largely by the
weaker financial markets. Insurance commissions declined $0.4 million, in part
due to legislation which became effective during late 2002 requiring single
premium credit insurance premiums on loans with real estate collateral to be
collected based on monthly outstanding balances.
Other noninterest income was $6.8 million for the first three months of 2003, up
$3.5 million over the comparable period in 2002, of which $3.4 million was
recognized in connection with a credit card merchant processing sale and
services agreement signed in March 2003. The agreement provides for revenue
sharing on new and existing merchant business over the ten-year life of the
agreement. The 2003 investment securities net losses of $0.3 million resulted
from an other than temporary write down on a security.
Noninterest Expense
Noninterest expense was $98.2 million, up $15.7 million or 19.1% compared to
last year, reflecting higher mortgage servicing rights expense, as well as the
Corporation's larger operating base between comparable quarters, especially in
personnel expense.
- ---------------------------------------------------------------------------------------
TABLE 5
Noninterest Expense
($ in Thousands)
- ---------------------------------------------------------------------------------------
1st Qtr. 1st Qtr. Dollar Percent
2003 2002 Change Change
- ---------------------------------------------------------------------------------------
Personnel expense $50,235 $44,994 $ 5,241 11.6%
Occupancy 7,115 6,137 978 15.9
Equipment 3,244 3,490 (246) (7.0)
Data processing 5,618 4,803 815 17.0
Business development and advertising 3,363 3,446 (83) (2.4)
Stationery and supplies 1,679 2,044 (365) (17.9)
FDIC expense 366 372 (6) (1.6)
Mortgage servicing rights expense 11,598 2,897 8,701 300.3
Other intangible amortization 350 464 (114) (24.6)
Loan expense 3,348 2,779 569 20.5
Other 11,241 10,990 251 2.3
--------------------------------------------
Total noninterest expense $98,157 $82,416 $15,741 19.1%
============================================
- ---------------------------------------------------------------------------------------
Personnel expense (including salary-related expenses and fringe benefit
expenses) increased $5.2 million or 11.6% over the first quarter of 2002.
Personnel expense represented 51.1% of total noninterest expense in the first
quarter of 2003 compared to 54.6% in the first quarter of 2002. Salary-related
expenses increased $4.4 million or 12.7% between comparable quarters; due
primarily to merit increases between the periods and increases in incentive
compensation. Average full-time equivalent employees were 4,075 for first
quarter 2003 compared to 3,940 for first quarter 2002. Fringe benefits were up
$0.8 million or 8.2% over the first quarter of 2002, primarily attributable to
the larger employee base and the increased cost of benefit plans and premium
based benefits.
Occupancy expense increased 15.9% to support the larger branch network
attributable mostly to the Signal acquisition. Equipment expense declined
predominantly in computer depreciation expense. Data processing costs increased
to $5.6 million, up $0.8 million or 17.0% over the comparable period last year,
due to processing for a larger base operation and partly to Internet banking and
other technology enhancements.
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 $8.7 million between the comparable quarters, including a
$7.3 million addition to the valuation allowance and $1.4 million increase in
the amortization of the mortgage servicing rights asset. While the strong
mortgage refinance activity benefited mortgage banking income, it increased the
prepayment speeds of the Corporation's mortgage portfolio serviced for others, a
key factor behind the valuation of mortgage servicing rights. Mortgage servicing
rights is 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. 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 $29.4 million, net of
a $35.7 million valuation allowance at March 31, 2003. See section "Critical
Accounting Policies" and Note 6, "Goodwill and Other Intangible Assets," of the
notes to consolidated financial statements.
Loan expense was $3.3 million, up $0.6 million from first quarter 2002; due
predominantly to increased costs related to higher interchange and card costs
and mortgage loan expenses, commensurate with the increased revenue in these
areas. Other expense was up $0.3 million from the comparable quarter last year,
principally attributable to higher legal and professional fees.
Income Taxes
Income tax expense for the first quarter of 2003 was $23.6 million, up $3.9
million from first quarter 2002. The effective tax rate (income tax expense
divided by income before taxes) was 28.9% and 27.7% for the first three months
of 2003 and 2002, respectively. This increase is primarily attributable to the
increase in net income before tax and an increase in the effective tax rate.
Income tax expense recorded in the consolidated income statement 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 taxing authorities. Such taxing
authorities 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. See section "Critical Accounting Policies."
Balance Sheet
At March 31, 2003, total assets were $15.1 billion, an increase of $0.8 billion,
or 5.3%, over March 31, 2002. The growth in assets occurred primarily in loans,
which grew $518 million or 5.3% year over year, and loans held for sale, which
increased $224 million. The growth in loans was almost exclusively in commercial
loans, which grew $456 million (7.7% since March 31, 2002) and comprise 62% of
total loans at March 31, 2003.
Home equity loans grew $163 million or 23.5%, while residential mortgage loans
decreased 3.9%, strongly influenced by lower interest rates and high refinance
activity. Total deposits were down $132 million or 1.4%. Since March 31, 2002,
noninterest-bearing demand deposits grew $255 million (17.7%) to represent 19%
of total deposits, compared to 16% a year earlier. Brokered CDs and other time
deposits combined declined to 36% of deposits at March 31, 2003, compared to 40%
at March 31, 2002, due to scheduled maturities and the lower interest rate
environment. Short-term borrowings increased $192 million, primarily in
short-term bank notes. Since March 31, 2002, long-term debt grew $477 million
due to the issuance of $300 million of bank notes and $279 million of long-term
repurchase agreements, partially offset by the repayment of long-term Federal
Home Loan Bank advances (see Note 8, "Long-term Debt," of the notes to
consolidated financial statements). Additionally, during the second quarter of
2002 the Corporation issued $175 million of company-obligated mandatorily
redeemable preferred securities (see Note 9, "Company-obligated Mandatorily
Redeemable Preferred Securities," of the notes to consolidated financial
statements).
Since year-end 2002 the balance sheet has changed modestly. Total assets
increased $46 million, while loans remained relatively level at $10.3 billion
(down $28 million). Total deposits were down $65 million.
- ----------------------------------------------------------------------------------------------------------------------
TABLE 6
Period End Loan Composition
($ in Thousands)
- ----------------------------------------------------------------------------------------------------------------------
March 31, % of March 31, % of Dec. 31, % of
2003 Total 2002 Total 2002 Total
- ----------------------------------------------------------------------------------------------------------------------
Commercial, financial &
agricultural $ 2,238,657 22% $2,162,954 22% $2,213,986 22%
Real estate construction 912,510 9 801,467 8 910,581 9
Commercial real estate 3,188,907 31 2,920,865 30 3,128,826 30
Lease financing 38,712 -- 37,211 1 38,352 --
-------------------------------------------------------------------------------
Commercial 6,378,786 62 5,922,497 61 6,291,745 61
Residential mortgage 2,325,032 23 2,418,822 25 2,430,746 24
Home equity 858,928 8 695,519 7 864,631 8
-------------------------------------------------------------------------------
Residential real estate 3,183,960 31 3,114,341 32 3,295,377 32
Consumer 712,723 7 720,746 7 716,103 7
-------------------------------------------------------------------------------
Total loans $10,275,469 100% $9,757,584 100% $10,303,225 100%
===============================================================================
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
TABLE 7
Period End Deposit Composition
($ in Thousands)
- -----------------------------------------------------------------------------------------------------------------------
March 31, % of March 31, % of Dec. 31, % of
2003 Total 2002 Total 2002 Total
- -----------------------------------------------------------------------------------------------------------------------
Noninterest-bearing demand $ 1,692,979 19% $1,437,798 16% $ 1,773,699 19%
Savings 935,740 10 883,794 10 895,855 10
Interest bearing demand 1,540,757 17 989,519 11 1,468,193 16
Money market 1,658,735 18 2,084,671 23 1,754,313 19
Brokered CDs 208,650 2 315,184 3 233,650 3
Other time 3,023,373 34 3,481,726 37 2,999,142 33
--------------------------------------------------------------------------------
Total deposits $ 9,060,234 100% $9,192,692 100% $ 9,124,852 100%
================================================================================
Total deposits, excluding
brokered CDs $ 8,851,584 98% $8,877,508 97% $ 8,891,202 97%
================================================================================
- ------------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses
The loan portfolio is the primary asset subject to credit risk. Credit risks are
inherently different for each different loan type. 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
three months ended Year ended
March 31, December 31,
- -----------------------------------------------------------------------------------------------------
2003 2002 2002
- -----------------------------------------------------------------------------------------------------
Allowance for Loan Losses:
Balance at beginning of period $ 162,541 $ 128,204 $ 128,204
Balance related to acquisition -- 11,985 11,985
Provision for loan losses 12,960 11,251 50,699
Charge offs (5,754) (7,985) (32,179)
Recoveries 644 895 3,832
---------- --------- ---------
Net loan charge offs (5,110) (7,090) (28,347)
---------- --------- ---------
Balance at end of period $ 170,391 $ 144,350 $ 162,541
========== ========= =========
Nonperforming Assets:
Nonaccrual loans $ 90,384 $ 63,626 $ 94,132
Accruing loans past due 90 days or more 3,425 4,991 3,912
Restructured loans 844 3,097 1,258
---------- --------- ---------
Total nonperforming loans 94,653 71,714 99,302
Other real estate owned 12,949 2,782 11,448
---------- --------- ---------
Total nonperforming assets $ 107,602 $ 74,496 $ 110,750
========== ========= =========
Ratios:
Allowance for loan losses to net charge offs (annualized) 8.22x 5.02x 5.73x
Ratio of net charge offs to average loans (annualized) 0.20% 0.31% 0.28%
Allowance for loan losses to total loans 1.66% 1.48% 1.58%
Nonperforming loans to total loans 0.92% 0.73% 0.96%
Nonperforming assets to total assets 0.71% 0.52% 0.74%
Allowance for loan losses to nonperforming loans 180% 201% 164%
- ------------------------------------------------------------------------------------------------------
As of March 31, 2003, the allowance for loan losses was $170.4 million,
representing 1.66% of loans outstanding, compared to $144.4 million, or 1.48% of
loans, at March 31, 2002, and $162.5 million, or 1.58% at year-end 2002. The
allowance for loan losses at March 31, 2003 increased $26.0 million since March
31, 2002 and $7.9 million since December 31, 2002. At March 31, 2003, the
allowance for loan losses was 180% of nonperforming loans compared to 201% and
164% at March 31 and December 31, 2002, respectively. Table 8 provides
additional information regarding activity in the allowance for loan losses and
nonperforming assets.
Gross charge offs were $5.8 million for the three months ended March 31, 2003,
$8.0 million for the comparable period ended March 31, 2002 and $32.2 million
for year-end 2002, while recoveries for the corresponding periods were $0.6
million, $0.9 million and $3.8 million, respectively. As a result, the ratio of
net charge offs to average loans on an annualized basis was 0.20%, 0.31%, and
0.28% for the periods ended March 31, 2003 and March 31, 2002, and for the 2002
year, respectively.
The allowance for loan losses represents management's estimate of an amount
adequate to provide for probable credit losses in the loan portfolio at the
balance sheet date. To assess the adequacy of the allowance for loan losses, an
allocation methodology is applied by the Corporation, which focuses on changes
in the size and character of the loan portfolio, changes in levels of impaired
or other nonperforming loans, the risk inherent in specific loans,
concentrations of loans to specific borrowers or industries, existing economic
conditions, underlying collateral, historical losses on each portfolio category,
and other qualitative and quantitative factors which could affect probable
credit losses. Assessing these numerous factors involves significant judgment.
Management considers the allowance for loan losses a critical accounting policy
(see section "Critical Accounting Policies"). Thus, in general, 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).
The allocation methods used for March 31, 2003, March 31, 2002, and December 31,
2002 were comparable, using specific allocations or factors for criticized loans
and for non-criticized loan categories. Current economic and political
conditions at each period end carried various uncertainties requiring
management's judgment as to the possible impact on the business results of
numerous individual borrowers and certain industries. Total loans at March 31,
2003, were up $518 million (5.3%) since March 31, 2002, with commercial loans
accounting for the majority of growth (up $456 million, or 7.7% versus last
year). Total loans compared to December 31, 2002, were relatively unchanged at
$10.3 billion; however, the commercial portfolio grew $87 million (5.6%
annualized) to represent 62% of total loans versus 61% at December 31, 2002 (see
Table 6). Commercial loans carry a higher inherent risk of credit loss. Net
charge offs were 0.20% or higher for the three periods noted (see Table 8).
Changes in nonperforming loans are primarily due to changes in nonperforming
commercial loans (see Table 8 and section "Nonperforming Loans and Other Real
Estate Owned"). Nonperforming loans grew since March 31, 2002, particularly with
the addition of a large commercial manufacturing credit ($22 million at March
31, 2002) to nonaccrual status beginning in the second quarter of 2002, and $10
million of the allowance identified for this credit. At March 31, 2003, the $10
million allowance remains identified for this $20 million credit, which has
remained current but management has continued doubts concerning the future
collectibility of the loan. Nonperforming loans were down modestly since
December 31, 2002, representing 0.92% of total loans at March 31, 2003, compared
to 0.96% at December 31, 2002. Other real estate owned increased since March 31,
2002, particularly with the addition of two commercial real estate properties
(an $8.0 million property during fourth quarter 2002 and a $1.5 million property
in first quarter 2003). Finally, criticized loans for March 31, 2003 increased
from a year ago, in part from the large commercial manufacturing credit noted
above, as well as a larger portion of loans moving into higher-risk categories,
increasing portfolio risk. Criticized loans were down modestly since December
31, 2002; however, several larger loans moved to higher-risk categories due to
deterioration. Portfolio risk is a predominant characteristic in determining the
allowance for loan losses. The allowance for loan losses to loans was 1.66%,
1.48% and 1.58% for March 31, 2003, and March 31 and December 31, 2002,
respectively.
Management believes the allowance for loan losses to be adequate at March 31,
2003.
Consolidated net income could be affected if management's estimate of the
allowance for loan losses are materially different, requiring additional
provision for loan losses to be recorded. Management carefully considers
numerous detailed and general factors, its assumptions, and the likelihood of
materially different conditions that could alter its assumptions. 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 an aggressive nonaccrual and problem loan
identification philosophy. This philosophy is implemented 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 from its definition of nonperforming loans 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. The Corporation had $17 million, $20 million and $20
million of these loans at March 31, 2003, March 31, 2002, and December 31, 2002,
respectively.
Table 8 provides detailed information regarding nonperforming assets, which
include nonperforming loans and other real estate owned. Nonperforming assets to
total assets were 0.71%, 0.52%, and 0.74% at March 31, 2003, March 31, 2002, and
December 31, 2002, respectively.
Total nonperforming loans at March 31, 2003 were up $22.9 million from March 31,
2002 and down $4.6 million from year-end 2002. The ratio of nonperforming loans
to total loans was 0.92% at March 31, 2003, as compared to 0.73% and 0.96% at
March 31, 2002, and year-end 2002, respectively. Nonaccrual loans account for
the majority of the $22.9 million increase in nonperforming loans between the
comparable first quarter periods. Nonaccrual loans increased $26.8 million,
while accruing loans past due 90 or more days were down $1.6 million, and
restructured loans decreased $2.3 million (primarily attributable to the
transfer of one large commercial credit from restructured to nonaccrual). The
increase in nonaccrual loans between the comparable first quarter periods is
predominantly attributable to the addition, during the second quarter of 2002,
of one commercial manufacturing credit (totaling approximately $22 million at
March 31, 2002) for which payments are current; however, the Corporation has
continued doubts concerning the future collectibility of the loan given the
current economic conditions and has set aside $10 million of the allowance for
loan losses for this credit. Nonaccrual loans account for the majority of the
$4.6 million decrease in nonperforming loans since year-end 2002. Nonaccrual
loans decreased $3.7 million (in part from one large credit reclassified to
other real estate owned); accruing loans past due 90 or more days decreased $0.5
million, and restructured loans were down $0.4 million.
Other real estate owned increased to $12.9 million at March 31, 2003, compared
to $2.8 million at March 31, 2002, and $11.4 million at year-end 2002. The
increases are predominantly due to the addition of an $8.0 million commercial
real estate property during the fourth quarter of 2002 and a $1.5 million
commercial real estate property during the first quarter of 2003.
In addition to nonperforming loans, 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 include performing loans in
potential problem loans does not necessarily mean that the Corporation expects
losses to occur, but that management recognizes a higher degree of risk
associated with these loans. The level of potential problem loans is a
predominate factor in determining the relative level of risk in the loan
portfolio and in the determination of the level of the allowance for loan
losses. The loans that have been reported as potential problem loans are not
concentrated in a particular industry, but rather cover a diverse range of
businesses. At March 31, 2003, potential problem loans totaled $275 million,
compared to $212 million at December 31, 2002. Five credit relationships
accounted for $52 million of the increase since year-end 2002, including a $20
million loan that has remained current to a contractor experiencing receivables
collection issues, creating liquidity issues for the contractor. While
management does not expect significant losses from credits in this category, the
customer relationship noted above could result in a loss, the extent of which
cannot be determined at this time.
Liquidity
The objective of liquidity management is to ensure that the Corporation has the
ability to generate sufficient cash or cash equivalents in a timely and
cost-effective manner to meet its commitments as they fall due. Funds are
available from a number of sources, primarily from the core deposit base and
from loans and securities repayments and maturities. Additionally, liquidity is
provided from sales of the securities portfolio, lines of credit with major
banks, the ability to acquire large and brokered deposits, and the ability to
securitize or package loans for sale.
While core deposits and loan and investment repayment are principal sources of
liquidity, funding diversification is another key element of liquidity
management. Diversity is achieved by strategically varying depositor type, term,
funding market, and instrument. The parent company and certain banks are 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.
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 service fees from subsidiaries, borrowings with major banks,
commercial paper issuance, and proceeds from the issuance of equity. 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.
In addition to subsidiary 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. 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 March 31, 2003. In
addition, $200 million of commercial paper was available at March 31, 2003,
under the parent company's commercial paper program.
In May 2002, the parent company filed a "shelf" registration statement 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% fixed coupon rate. At March 31, 2003,
$125 million was available under the trust preferred shelf. In May 2001, the
parent company filed a "shelf" registration statement 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% fixed coupon rate
and 10-year maturity. At March 31, 2003, $300 million was available under the
shelf registration.
Investment securities are an important tool to the Corporation's liquidity
objective. All securities are classified as available for sale and are reported
at fair value on the consolidated balance sheet. Of the $3.4 billion investment
portfolio at March 31, 2003, $1.9 billion were 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.
The bank subsidiaries have a variety of funding sources (in addition to key
liquidity sources, such as core deposits, loan sales, loan repayments, and
investment portfolio sales) available to increase financial flexibility. A $2
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
March 31, 2003, $500 million of long-term bank notes and $200 million of
short-term bank notes were outstanding. At March 31, 2003, $1.3 billion was
available under this program. The banks have also established federal funds
lines with major banks totaling approximately $3.2 billion and the ability to
borrow approximately $1.8 billion from the Federal Home Loan Bank ($1.1 billion
was outstanding at March 31, 2003). In addition, the bank subsidiaries also
accept Eurodollar deposits, issue institutional certificates of deposit, and
from time to time offer brokered certificates of deposit.
For the three months ended March 31, 2003, net cash provided from operating
activities was $41.0 million, while investing and financing activities used net
cash of $17.3 million and $26.2 million, respectively, for a net decrease in
cash and cash equivalents of $2.5 million since year-end 2002. Generally, during
first quarter 2003, anticipated maturities of time deposits occurred and net
asset growth since year-end 2002 was modest (less than 1%). Thus, other funding
sources were utilized, particularly long-term debt, to replenish the net
decrease in deposits, repay long-term debt, and to provide for common stock
repurchases and the payment of cash dividends to the Corporation's stockholders.
For the three months ended March 31, 2002, net cash provided from operating and
investing activities was $231.8 million and $20.7 million, respectively, while
financing activities used net cash of $448.8 million, for a net decrease in cash
and cash equivalents of $196.3 million since year-end 2001. Generally, during
first quarter 2002, anticipated maturities of time deposits occurred and net
asset growth since year-end 2001 was strong due to the Signal acquisition. Thus,
other funding sources were utilized, particularly long-term debt, to finance the
Signal acquisition, replenish the net decrease in deposits, repay short-term
borrowings, and to provide for common stock repurchases and the payment of cash
dividends to the Corporation's stockholders.
Capital
Stockholders' equity at March 31, 2003 increased to $1.3 billion, compared to
$1.2 billion at March 31, 2002. The increase in equity between the two periods
was primarily composed of the retention of earnings 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 March 31,
2003 included $56.3 million of accumulated other comprehensive income versus
$49.0 million at March 31, 2002. The increase in accumulated other comprehensive
income was predominantly related to increased unrealized gains on securities
available for sale and offset by higher unrealized losses on cash flow hedges,
net of the tax effect. Stockholders' equity to assets was 8.52% and 8.59% at
March 31, 2003 and 2002, respectively.
Stockholders' equity remained level at $1.3 billion since year-end 2002. The
increase in equity between the two periods was primarily composed of the
retention of earnings 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, included $60.3 million of
accumulated other comprehensive income versus $56.3 million at March 31, 2003.
The decrease in accumulated other comprehensive income was predominantly related
to unrealized gains on securities available for sale and unrealized losses on
cash flow hedges, net of the tax effect. Stockholders' equity to assets at March
31, 2003 was 8.52%, compared to 8.46% at December 31, 2002.
Cash dividends of $0.31 per share were paid in the first quarter of 2003,
compared to $0.28 per share in the first quarter of 2002, an increase of 10.0%.
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. The Board of Directors authorized the repurchase of up
to 300,000 shares per quarter in 2003. No shares were repurchased under this
authorization in first quarter 2003. During first quarter 2002, 330,000 shares
were authorized and repurchased, at an average cost of $31.86 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 approximately 7.3 million shares on a combined basis.
Under these authorizations 716,500 shares were repurchased during first quarter
2003 at an average cost of $33.69 per share, while 123,750 shares were
repurchased during first quarter 2002 at an average cost of $32.01. At March 31,
2003, approximately 1.4 million shares remain authorized to repurchase. 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.
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TABLE 9
Capital Ratios
(In Thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------------------
At or For the Quarter Ended
- --------------------------------------------------------------------------------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
2003 2002 2002 2002 2002
- --------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity $1,285,866 $1,272,183 $1,270,691 $1,275,569 $1,230,982
Tier 1 capital 1,180,593 1,165,481 1,147,045 1,155,995 969,888
Total capital 1,527,435 1,513,424 1,492,619 1,498,328 1,309,433
Market capitalization 2,388,217 2,521,097 2,366,995 2,856,382 2,622,307
---------------------------------------------------------------------------
Book value per common share $ 17.41 $ 17.13 $ 17.03 $ 16.84 $ 16.23
Cash dividend per common share 0.31 0.31 0.31 0.31 0.28
Stock price at end of period 32.33 33.94 31.73 37.71 34.57
Low closing price for the period 32.33 27.20 30.64 33.63 30.37
High closing price for the period 35.22 34.21 36.96 38.25 35.29
---------------------------------------------------------------------------
Total equity / assets 8.52% 8.46% 8.45% 8.81% 8.59%
Tier 1 leverage ratio 8.06 7.94 8.06 8.23 7.28
Tier 1 risk-based capital ratio 10.64 10.52 10.50 10.96 9.43
Total risk-based capital ratio 13.77 13.66 13.66 14.20 12.73
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Shares outstanding (period end) 73,870 74,281 74,598 75,746 75,849
Basic shares outstanding (average) 74,252 74,497 75,158 75,922 73,142
Diluted shares outstanding (averag) 74,974 75,202 76,047 77,041 74,042
- -------------------------------------------------------------------------------------------------------------------------
Sequential Quarter Results
Net income for the first quarter of 2003 was $58.0 million, up $4.6 million or
8.5% over fourth quarter 2002 net income of $53.4 million. Return on average
equity was 18.36%, up 174 bp from the fourth quarter of 2002, while return on
average assets increased 16 bp to 1.58% (see Table 1).
- -------------------------------------------------------------------------------------------------------------------------
TABLE 10
Selected Quarterly Information
($ in Thousands)
- -------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended
-------------------------------------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
2003 2002 2002 2002 2002
- -------------------------------------------------------------------------------------------------------------------------
Summary of Operations:
Net interest income $ 127,454 $ 129,713 $ 128,358 $ 125,768 $ 117,427
Provision for loan losses 12,960 14,614 12,831 12,003 11,251
Noninterest income 65,209 64,349 58,656 49,903 47,400
Noninterest expense 98,157 102,763 98,183 91,187 82,416
Income taxes 23,553 23,244 22,528 20,137 19,698
--------------------------------------------------------------------------
Net income $ 57,993 $ 53,441 $ 53,472 $ 52,344 $ 51,462
==========================================================================
Taxable equivalent net interest income $ 133,731 $ 135,694 $ 134,349 $ 131,805 $ 123,490
Net interest margin 3.87% 3.87% 3.96% 3.96% 3.91%
Average Balances:
Assets $14,867,339 $14,901,747 $14,460,358 $14,273,232 $13,538,602
Earning assets 13,836,102 13,870,491 13,427,986 13,248,590 12,616,040
Interest-bearing liabilities 11,886,642 11,792,552 11,459,673 11,400,302 10,923,561
Loans 10,578,430 10,559,154 10,128,826 9,902,462 9,405,417
Deposits 8,901,441 8,934,668 8,947,047 9,081,434 8,683,879
Stockholders' equity 1,280,950 1,275,914 1,268,355 1,250,748 1,130,714
- -------------------------------------------------------------------------------------------------------------------------
Taxable equivalent net interest income for the first quarter of 2003 was $133.7
million, $2.0 million lower than fourth quarter 2002. The day variance (first
quarter 2003 had two fewer days than fourth quarter 2002) reduced taxable
equivalent net interest income by approximately $1.5 million. Changes in the
volume and
mix of average earning assets and interest-bearing liabilities lowered taxable
equivalent net interest income by $0.5 million, while changes in the rate
environment had minimal impact. Average earning assets decreased slightly (down
$34 million, less than 1% annualized) between the sequential quarters,
attributable to a $54 million decline in average investments, partially offset
by a $20 million increase in average loans (the net of a $131 million increase
in commercial loans and a $111 million decrease in all other loans). Growth in
average interest-bearing liabilities, up $94 million, occurred primarily in
interest-bearing deposits (up $88 million). Demand deposits were down $121
million reflecting the usual cyclical first quarter downturn in balances.
Noninterest income increased $0.9 million to $65.2 million between sequential
quarters. First quarter 2003 includes $3.4 million recognized in connection with
a credit card merchant processing sale and services agreement. Trust service
fees were up $0.6 million. Mortgage banking income decreased $2.1 million,
primarily attributable to a $0.8 million decline in gains on the sales of loans
and a $1.2 million decrease in volume-related fees (directly related to the
decline in secondary mortgage production, at $1.1 billion for first quarter 2003
versus $1.2 billion for fourth quarter 2002). Retail commission income was down
$0.8 million, predominantly in insurance.
On a sequential quarter basis, noninterest expense decreased $4.6 million.
Personnel expense was down $1.3 million, including a $1.1 million decline in
incentive-related expenses. Loan expense decreased $0.9 million, predominantly
in mortgage loan expense (in line with the decline in mortgage loan production
noted above). Other expense (including donation expense, legal and professional
fees, losses other than loans, and other expenses) was down $3.2 million. These
decreases were mitigated, in part, by a $1.3 million increase in mortgage
servicing rights expense (the combination of a $0.7 million increase in the
amortization of the mortgage servicing rights asset and a $0.6 million addition
to the valuation allowance).
Recent Accounting Pronouncements
The recent accounting pronouncements have been described in Note 3, "New
Accounting Pronouncements," of the notes to consolidated financial statements.
Subsequent Events
On April 23, 2003, the Board of Directors declared a $0.34 per share dividend
payable on May 15, 2003, to shareholders of record as of May 1, 2003. This cash
dividend has not been reflected in the accompanying consolidated financial
statements.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The Corporation has not experienced any material changes to its market risk
position since December 31, 2002, from that disclosed in the Corporation's 2002
Form 10-K Annual Report.
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 the Corporation 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 that 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 Chairman of the Board, 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, Chairman of
the Board, is attached hereto.
Exhibit 99 (c), Certification Under Section 302 of the
Sarbanes-Oxley Act of 2002 by Paul S. Beideman, Chief Executive
Officer, is attached hereto.
Exhibit 99 (d), Certification Under Section 302 of the
Sarbanes-Oxley Act of 2002 by Joseph B. Selner, Chief Financial
Officer, is attached hereto.
(b) Reports on Form 8-K:
A report on Form 8-K dated January 24, 2003, was filed under Item
5, Other Events, indicating the Board of Directors of Associated
Banc-Corp elected Robert C. Gallagher Chairman of the Board on
January 22, 2003, at its regularly scheduled quarterly meeting.
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: May 13, 2003 /s/ Robert C. Gallagher
---------------------------------------------
Robert C. Gallagher
Chairman of the Board
Date: May 13, 2003 /s/ Paul S. Beideman
---------------------------------------------
Paul S. Beideman
President and Chief Executive Officer
Date: May 13, 2003 /s/ Joseph B. Selner
---------------------------------------------
Joseph B. Selner
Chief Financial Officer