SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
------- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
---------------------------------------
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
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Associated Banc-Corp
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Wisconsin 39-1098068
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(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
1200 Hansen Road, Green Bay, Wisconsin 54304
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(Address of principal executive offices) (Zip code)
(920) 491-7000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of registrant's common stock, par value $0.01
per share, at October 31, 2000, was 66,768,305 shares.
ASSOCIATED BANC-CORP
TABLE OF CONTENTS
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets -
September 30, 2000, September 30, 1999
and December 31, 1999
Consolidated Statements of Income -
Three and Nine Months Ended
September 30, 2000 and 1999
Consolidated Statement of Changes in
Stockholders' Equity - Nine Months
Ended September 30, 2000
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000 and 1999
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
ASSOCIATED BANC-CORP
Consolidated Balance Sheets
(Unaudited)
September 30, September 30, December 31,
2000 1999 1999
----------------------------------------
($ in Thousands, except share data)
ASSETS
Cash and due from banks $ 323,129 $ 305,626 $ 284,652
Interest-bearing deposits in
other financial institutions 20,052 5,539 4,394
Federal funds sold and securities
purchased under agreements
to resell 21,075 45,230 25,120
Investment securities:
Held to maturity-at amortized
cost (fair value of $382,796,
$443,297, and $413,107,
respectively) 382,617 440,804 414,037
Available for sale-at fair value
(amortized cost of $2,932,524,
$2,842,931, and $2,901,607,
respectively) 2,903,275 2,805,061 2,856,346
Loans held for sale 37,563 19,967 11,955
Loans 8,858,665 8,121,683 8,343,100
Allowance for loan losses (117,607) (110,241) (113,196)
---------------------------------------
Loans, net 8,741,058 8,011,442 8,229,904
Premises and equipment 130,977 138,890 140,100
Other assets 560,256 552,027 553,394
=======================================
Total assets $13,120,002 $12,324,586 $12,519,902
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 1,194,405 $ 1,098,339 $ 1,103,931
Interest-bearing deposits 8,136,911 7,880,193 7,587,898
---------------------------------------
Total deposits 9,331,316 8,978,532 8,691,829
Short-term borrowings 2,590,127 2,248,189 2,775,090
Long-term debt 122,463 24,473 24,283
Accrued expenses and other liabilities 145,913 142,269 118,911
---------------------------------------
Total liabilities 12,189,819 11,393,463 11,610,113
Stockholders' equity
Preferred stock --- --- ---
Common stock (par value $0.01 per
share, authorized 100,000,000
shares, issued 67,024,657,
70,572,192 and 69,728,707 shares,
respectively) 670 641 634
Surplus 311,239 254,602 226,042
Retained earnings 645,413 704,787 728,754
Accumulated other comprehensive loss (18,926) (24,450) (38,782)
Treasury stock at cost (299,219,
133,720 and 208,571
shares, respectively) (8,213) (4,457) (6,859)
---------------------------------------
Total stockholders' equity 930,183 931,123 909,789
---------------------------------------
Total liabilities and stockholders'
equity $13,120,002 $12,324,586 $12,519,902
=======================================
See accompanying notes to consolidated financial statements.
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------------------------------------------
(In Thousands, except per share data)
INTEREST INCOME
Interest and fees on loans $ 186,556 $ 157,296 $ 536,445 $ 459,255
Interest and dividends on investment securities:
Taxable 40,486 41,318 122,990 121,667
Tax exempt 10,170 6,092 27,537 16,112
Interest on deposits in other financial institutions 122 93 292 373
Interest on federal funds sold and securities
purchased under agreements to resell 558 386 1,699 855
-----------------------------------------
Total interest income 237,892 205,185 688,963 598,262
INTEREST EXPENSE
Interest on deposits 100,727 78,734 274,422 231,676
Interest on short-term borrowings 40,469 26,486 119,964 71,405
Interest on long-term debt 2,158 395 5,328 1,262
-----------------------------------------
Total interest expense 143,354 105,615 399,714 304,343
-----------------------------------------
NET INTEREST INCOME 94,538 99,570 289,249 293,919
Provision for loan losses 4,122 4,541 15,003 13,539
-----------------------------------------
Net interest income after provision for loan losses 90,416 95,029 274,246 280,380
NONINTEREST INCOME
Trust service fees 9,665 9,307 29,314 28,496
Service charges on deposit accounts 8,821 7,780 24,502 21,470
Mortgage banking 5,125 5,933 14,617 25,368
Credit card and other nondeposit fees 6,475 5,335 19,011 14,987
Retail commissions 4,632 5,077 15,577 13,860
Asset sale gains, net 3,179 74 24,486 677
Investment securities gains (losses), net (2) (50) (7,194) 4,562
Other 6,474 5,932 20,488 15,063
----------------------------------------
Total noninterest income 44,369 39,388 140,801 124,483
NONINTEREST EXPENSE
Salaries and employee benefits 40,380 36,862 117,934 114,245
Occupancy 5,733 5,776 17,549 17,283
Equipment 3,755 4,047 11,607 11,464
Data processing 5,313 5,385 17,700 15,847
Business development and advertising 3,353 3,023 9,852 9,352
Stationery and supplies 1,970 1,889 5,793 5,781
FDIC expense 462 714 1,360 2,292
Other 19,199 16,620 58,012 53,157
----------------------------------------
Total noninterest expense 80,165 74,316 239,807 229,421
----------------------------------------
Income before income taxes 54,620 60,101 175,240 175,442
Income tax expense 13,116 18,319 46,958 54,833
----------------------------------------
NET INCOME $ 41,504 $ 41,782 $ 128,282 $ 120,609
========================================
Earnings per share:
Basic $ 0.61 $ 0.60 $ 1.86 $ 1.73
Diluted $ 0.61 $ 0.59 $ 1.86 $ 1.71
Average shares outstanding:
Basic 68,031 70,183 68,815 69,799
Diluted 68,293 70,833 69,089 70,419
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 Loss Stock Total
------------------------------------------------------------------------------
($ in Thousands)
Balance, December 31, 1999 $ 634 $ 226,042 $ 728,754 $ (38,782) $ (6,859) $ 909,789
Comprehensive income:
Net income --- --- 128,282 --- --- 128,282
Net unrealized holding
gains arising during
the period --- --- --- 23,666 --- 23,666
Add back: reclassification
adjustment for net losses
realized in net income --- --- --- 7,194 --- 7,194
Income tax effect --- --- --- (11,004) --- (11,004)
-------
Comprehensive income 148,138
-------
Cash dividends, $0.82 per share --- --- (56,417) --- --- (56,417)
Common stock issued:
Stock options exercised --- --- (3,973) --- 6,865 2,892
10% stock dividend 63 151,170 (151,233) --- --- ---
Purchase and retirement of
treasury stock in
connection with repurchase
program (27) (66,472) --- --- 7,782 (58,717)
Tax benefit of stock options --- 499 --- --- --- 499
Purchase of treasury stock --- --- --- --- (16,001) (16,001)
----------------------------------------------------------------------------
Balance, September 30, 2000 $ 670 $ 311,239 $ 645,413 $ (18,926) $ (8,213) $ 930,183
============================================================================
See accompanying notes to consolidated financial statements.
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements Of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
2000 1999
-------------------------
($ in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 128,282 $ 120,609
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 15,003 13,539
Depreciation and amortization 14,633 13,966
Amortization (accretion) of:
Mortgage servicing rights 7,104 7,211
Intangibles 6,720 5,555
Investment premiums and
discounts (82) 1,534
Deferred loan fees and costs 1,964 1,289
(Gain) loss on sales of securities, net 7,194 (4,562)
Gain on sale of assets, net (24,486) (677)
Gain on sales of loans held for
sale, net (2,042) (10,411)
(Increase) Decrease in loans held
for sale, net (23,566) 63,599
Increase in interest receivable
and other assets (33,127) (19,580)
Increase in interest payable and
other liabilities 7,002 20,761
---------------------
Net cash provided by operating activities 104,599 212,833
---------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal
funds sold and securities purchased
under agreements to resell 4,045 (16,745)
Net (increase) decrease in interest-bearing
deposits in other financial
institutions (15,658) 195,040
Net increase in loans (656,165) (488,449)
Purchases of:
Securities available for sale (754,407) (962,005)
Premises and equipment, net of disposals (8,229) (10,373)
Bank-owned life insurance --- (100,000)
Proceeds from:
Sales of securities available for sale 458,612 38,279
Maturities of securities available for sale 272,825 606,655
Maturities of securities held to maturity 31,209 109,597
Sale of credit card receivables 156,376 ---
Sales of other real estate owned and other assets 9,643 10,561
Net cash received in acquisition of subsidiaries --- 33,497
----------------------
Net cash used by investing activities (501,749) (583,943)
----------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 748,687 (68,698)
Net increase (decrease) in short-term borrowings (184,963) 549,309
Repayment of long-term debt (1,820) (516)
Proceeds from issuance of long-term debt 100,000 53
Cash dividends (56,417) (55,195)
Proceeds from exercise of stock options 2,892 4,455
Sales of branch deposits (98,034) ---
Purchase of treasury stock (74,718) (84,204)
---------------------
Net cash provided by financing activities 435,627 345,204
---------------------
Net increase (decrease) in cash and due from banks 38,477 (25,906)
Cash and due from banks at beginning of period 284,652 331,532
---------------------
Cash and due from banks at end of period $ 323,129 $ 305,626
=====================
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $ 386,355 $ 308,965
Income taxes 43,582 39,984
Supplemental schedule of noncash investing activities:
Loans transferred to other real estate 5,809 7,318
Mortgage loans securitized and transferred to
securities available for sale --- 92,015
See accompanying notes to consolidated financial statements.
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1: Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly Associated
Banc-Corp's (the "Corporation") financial position, results of its operations
and cash flows for the periods presented, and all such adjustments are of a
normal recurring nature. The consolidated financial statements include the
accounts of all subsidiaries. All material intercompany transactions and
balances are eliminated. The results of operations for the interim periods are
not necessarily indicative of the results to be expected for the full year.
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 generally accepted accounting principles have been omitted or
abbreviated. The information contained in the consolidated financial statements
and footnotes in the Corporation's 1999 annual report on Form 10-K, should be
referred to in connection with the reading of these unaudited interim financial
statements.
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 and the valuation of investments
and mortgage servicing rights.
NOTE 2: Reclassifications
Certain items in the prior period consolidated financial statements have been
reclassified to conform with the September 30, 2000 presentation.
NOTE 3: Business Combinations
The following table summarizes completed business combination transactions
during 1999. There were no completed or pending business combination
transactions as of September 30, 2000.
Consideration Paid
----------------------
Shares of
Name of Acquired Date Method of Common Total
($ in millions) Acquired Accounting Stock Cash Assets Loans Deposits Intangibles
- -----------------------------------------------------------------------------------------------------------------------------
BNC Financial Corporation ("BNC") 12/31/99 Purchase --- $ 5.3 $ 35 $ 33 $ --- $ 1
St Cloud, Minnesota
Riverside Acquisition Corp. 8/31/99 Purchase 2,677,405 $ --- $ 374 $ 266 $ 337 $ 67
("Riverside")
Minneapolis, Minnesota
Windsor Bancshares, Inc. 2/3/99 Purchase 879,957 $ --- $ 182 $ 113 $ 152 $ 17
("Windsor")
Minneapolis, Minnesota
The consolidated financial statements include the results of operations for the
acquisitions accounted for under the purchase method since the date of
acquisition.
During the first quarter of 2000, Riverside and Windsor merged and became
Associated Bank Minnesota. Effective March 31, 2000, BNC operated as Associated
Commercial Finance, Inc.
NOTE 4: Adoption of Statements of Financial Accounting Standards ("SFAS")
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133," and SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," requires derivative instruments be carried at fair value on the
balance sheet. The statement requires that changes in the fair value of
derivatives be recognized currently in earnings unless specific hedge accounting
criteria are met. For derivative instruments that meet the hedge accounting
criteria, the statement provides for offsetting changes in fair value or cash
flows of both the derivative and the hedged asset or liability to be recognized
in earnings in the same period; however, any changes in fair value or cash flow
that represent the ineffective portion of a hedge are required to be recognized
in earnings and cannot be deferred. The Corporation plans to adopt the
provisions of this statement, as amended, for its quarterly and annual reporting
beginning January 1, 2001, the statement's effective date. The Corporation has
evaluated financial instruments that qualify for SFAS No. 133, and anticipates
that it will not have a material impact on the Corporation's financial position
or results of operations. However, several issues remain to be settled by the
Derivative Implementation Group that may alter the final impact of the new
standard at the time of adoption.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," replaces SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
and rescinds SFAS No. 127, "Deferral of the Effective Date of Certain Provisions
of SFAS No 125." The statement revises the standards for accounting for
securitizations and other transfers of financial assets and requires certain
disclosures, but it also carries over most of SFAS No. 125's provisions without
modification. The statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on the application of a financial components approach that focuses on
control. It is effective for transactions occurring after March 31, 2001.
Disclosures about securitizations are effective on December 31, 2000. The
adoption is not expected to be material to the Corporation's financial position
or results of operations.
NOTE 5: Earnings Per Share
Basic earnings per share is calculated by dividing net income available to
common stockholders by the weighted average number of common shares outstanding.
Diluted earnings per share is calculated by dividing net income by the weighted
average number of shares adjusted for the dilutive effect of outstanding stock
options.
On April 26, 2000, the Board of Directors declared a 10% stock dividend, payable
June 15 to shareholders of record at the close of business on June 1. All share
and per share data in the accompanying consolidated financial statements, except
for the share information in the consolidated statement of changes in
stockholders' equity, have been adjusted to reflect the 10% stock dividend paid.
As a result of the stock dividend, the Corporation distributed 6.3 million
shares of common stock, common stock was increased by $63,000, surplus was
increased by $151.2 million and retained earnings were decreased by $151.2
million. Any fractional shares resulting from the dividend were paid in cash.
Presented below are the calculations for basic and diluted earnings per share:
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------------------------------------
($ in Thousands, except per share data)
Net income available to
common stockholders $ 41,504 $ 41,782 $128,282 $120,609
=====================================
Weighted average shares outstanding 68,031 70,183 68,815 69,799
Effect of dilutive stock options
outstanding 262 650 274 620
-------------------------------------
Diluted weighted average shares
outstanding 68,293 70,833 69,089 70,419
=====================================
Basic earnings per common share $ 0.61 $ 0.60 $ 1.86 1.73
=====================================
Diluted earnings per common share $ 0.61 $ 0.59 $ 1.86 1.71
=====================================
NOTE 6: Interest Rate Swaps
As part of managing the Corporation's interest rate risk, a variety of
derivative financial instruments could be used to hedge market values and to
alter the cash flow characteristics of certain on-balance sheet instruments. The
Corporation has principally used interest rate swaps. The derivative instruments
used to manage interest rate risk are linked with a specific asset or liability
or a group of related assets or liabilities at the inception of the derivative
contract and currently have a high degree of correlation with the related
balance sheet item during the hedge period. The pay fixed interest rate swaps
hedge money market deposits, and the pay variable interest rate swap hedges
certificates of deposit.
Net interest income or expense on derivative contracts used for interest rate
risk management is recorded in the consolidated statements of income as a
component of interest income or interest expense depending on the financial
instrument to which the swap is designated. Realized gains and losses on
contracts, either settled or terminated, are deferred and are recorded as either
an adjustment to the carrying value of the related on-balance sheet asset or
liability or in other assets or other liabilities. Deferred amounts are
amortized into interest income or expense over either the remaining original
life of the derivative instrument or the expected life of the related asset or
liability that was being hedged. Unrealized gains or losses on these contracts
are not recognized on the balance sheet. The table below summarizes the
Corporation's interest rate swaps at September 30, 2000. There were no interest
rate swaps at September 30, 1999.
Weighted Average
Estimated -------------------------------------
Notional Fair Market Remaining
Amount Value Pay Rate Receive Rate Maturity
- --------------------------------------------------------------------------------
($ in Thousands)
Pay fixed swaps $ 300,000 $ 1,221 6.36% 6.75% 21 months
Pay variable swap $ 10,000 $ --- 6.37% 6.45% 6 months
- --------------------------------------------------------------------------------
NOTE 7: 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 replaces the "industry segment"
concept of SFAS No. 14 with 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 reportable segment is banking, conducted through its bank,
leasing, mortgage, insurance and brokerage subsidiaries. For purposes of segment
disclosure under this statement, these entities have similar economic
characteristics and the nature of their products, services, processes,
customers, delivery channels and regulatory environment are similar.
The "other" segment is comprised of smaller nonreportable segments, including
asset management, consumer finance, treasury, holding company investments, as
well as inter-segment 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 Eliminations Total
-----------------------------------------------------
As of and for the ($ in Thousands)
three months ended
September 30, 2000
Total assets $ 13,987,200 $ 1,226,193 $(2,093,391) $ 13,120,002
===================================================
Interest income $ 250,848 $ 5,269 $ (18,225) $ 237,892
Interest expense 157,541 4,038 (18,225) 143,354
---------------------------------------------------
Net interest income 93,307 1,231 --- 94,538
Provision for loan losses 3,880 242 --- 4,122
Noninterest income 43,173 32,290 (31,094) 44,369
Depreciation and
amortization 6,566 2,435 --- 9,001
Other noninterest expense 72,387 29,871 (31,094) 71,164
Income taxes 15,337 (2,221) --- 13,116
---------------------------------------------------
Net income $ 38,310 $ 3,194 $ --- $ 41,504
===================================================
As of and for the three
months ended
September 30, 1999
Total assets $ 13,151,511 $ 1,189,550 $(2,016,475) $ 12,324,586
===================================================
Interest income $ 212,768 $ 3,242 $ (10,825) $ 205,185
Interest expense 114,606 1,834 (10,825) 105,615
---------------------------------------------------
Net interest income 98,162 1,408 --- 99,570
Provision for loan losses 4,365 176 --- 4,541
Noninterest income 40,199 31,331 (32,142) 39,388
Depreciation and
amortization 4,825 2,392 --- 7,217
Other noninterest expense 72,537 26,704 (32,142) 67,099
Income taxes 16,914 1,405 --- 18,319
---------------------------------------------------
Net income $ 39,720 $ 2,062 $ --- $ 41,782
===================================================
- -------------------------------------------------------------------------------
Consolidated
Banking Other Eliminations Total
-----------------------------------------------------
As of and for the nine ($ in Thousands)
months ended
September 30, 2000
Total assets $ 13,987,200 $ 1,226,193 $(2,093,391) $ 13,120,002
===================================================
Interest income $ 726,757 $ 15,715 $ (53,509) $ 688,963
Interest expense 441,581 11,642 (53,509) 399,714
---------------------------------------------------
Net interest income 285,176 4,073 --- 289,249
Provision for loan losses 13,288 1,715 --- 15,003
Noninterest income 139,608 97,865 (96,672) 140,801
Depreciation and
amortization 20,422 7,386 --- 27,808
Other noninterest expense 221,966 86,705 (96,672) 211,999
Income taxes 48,264 (1,306) --- 46,958
---------------------------------------------------
Net income $ 120,844 $ 7,438 $ --- $ 128,282
===================================================
As of and for the nine
months ended
September 30, 1999
Total assets $ 13,151,511 $ 1,189,550 $(2,016,475) $ 12,324,586
===================================================
Interest income $ 615,380 $ 12,064 $ (29,182) $ 598,262
Interest expense 324,429 9,096 (29,182) 304,343
---------------------------------------------------
Net interest income 290,951 2,968 --- 293,919
Provision for loan losses 13,097 442 --- 13,539
Noninterest income 118,654 90,240 (84,411) 124,483
Depreciation and
amortization 14,531 6,486 --- 21,017
Other noninterest expense 220,160 72,655 (84,411) 208,404
Income taxes 49,718 5,115 --- 54,833
---------------------------------------------------
Net income $ 112,099 $ 8,510 $ --- $ 120,609
===================================================
- -------------------------------------------------------------------------------
ITEM 2. Management's Discussion and Analysis of Financial Condition
and the Results of Operations
Forward-Looking Statements
Forward-looking statements have been made in this document that are subject to
risks and uncertainties. These forward-looking statements describe future plans
or strategies and include Associated Banc-Corp's (the "Corporation")
expectations of future results of operations. The words "believes," "expects,"
"anticipates," or other similar expressions identify forward-looking statements.
Shareholders should note that many factors, some of which may be discussed
elsewhere in this document could affect the future financial results of
Associated Banc-Corp and could cause those results to differ materially from
those expressed in forward-looking statements contained in this document. These
factors include the following:
- - operating, legal, and regulatory risks;
- - economic, political, and competitive forces affecting the Corporation's
banking, securities, asset management, and credit services businesses; and
- - the risk that the Corporation's analyses of these risks and forces could be
incorrect and/or that the strategies developed to address them could be
unsuccessful.
These factors should be considered in evaluating the forward-looking statements,
and undue reliance should not be placed on such statements.
Overview
The following discussion and analysis is presented to assist in the
understanding and evaluation of the Corporation's financial condition and
results of operations. It is intended to complement the unaudited financial
statements, footnotes, and supplemental financial data appearing elsewhere in
this Form 10-Q and should be read in conjunction therewith.
On April 26, 2000, the Board of Directors declared a 10% stock dividend, payable
June 15 to shareholders of record at the close of business on June 1, 2000. All
share and per share financial information has been adjusted to reflect the 10%
stock dividend paid (see Note 5 of the Notes to Consolidated Financial
Statements).
The following discussion may refer to the impact of the Corporation's business
combination activity (see Note 3 of the Notes to Consolidated Financial
Statements).
Management continually evaluates strategic acquisition opportunities and other
various strategic alternatives that could involve the sale or acquisition of
branches or other assets, or the consolidation or creation of subsidiaries. As
part of its ongoing effort to reduce complexity and improve efficiency, the
Corporation intends to merge Associated Bank Illinois, National Association,
Associated Bank Lakeshore, National Association, Associated Bank, National
Association, Associated Bank Milwaukee, Associated Bank North, Associated Bank
South Central, and certain nonbank subsidiaries with Associated Bank Green Bay,
National Association, changing its legal name to Associated Bank, National
Association, during the second quarter of 2001. Such mergers are subject to the
approval of the board of directors of each bank and applicable regulatory
authorities.
Results of Operations - Summary
Net income for the first nine months of 2000 ("YTD00") totaled $128.3 million,
or $1.86 for basic and diluted earnings per share ("EPS"). Comparatively, net
income for the first nine months of 1999 ("YTD99") was $120.6 million, or $1.73
and $1.71 of basic and diluted EPS, respectively. YTD00 results generated an
annualized return on average assets ("ROA") of 1.35% and an annualized return on
average equity ("ROE") of 18.70%, compared to 1.40% and 17.70%, respectively,
for the same period in 1999. YTD00 net interest margin was 3.35% compared to
3.74% for the comparable period in 1999.
- ---------------------------------------------------------------------------------------------------------
TABLE 1
Summary Results of Operations: Trends
($ in Thousands, except per share data)
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2000 2000 2000 1999 1999
- ---------------------------------------------------------------------------------------------------------
Net income (Qtr) $ 41,504 $ 43,697 $ 43,081 $ 44,334 $ 41,782
Net income (YTD) $ 128,282 $ 86,778 $ 43,081 $ 164,943 $ 120,609
Earnings per share - basic (Qtr) $ 0.61 $ 0.63 $ 0.62 $ 0.63 $ 0.60
Earnings per share - basic (YTD) $ 1.86 $ 1.25 $ 0.62 $ 2.36 $ 1.73
Earnings per share - diluted (Qtr) $ 0.61 $ 0.63 $ 0.62 $ 0.63 $ 0.59
Earnings per share - diluted (YTD) $ 1.86 $ 1.25 $ 0.62 $ 2.34 $ 1.71
Earnings per share - cash diluted (Qtr) * $ 0.64 $ 0.66 $ 0.65 $ 0.66 $ 0.61
Earnings per share - cash diluted (YTD) * $ 1.94 $ 1.31 $ 0.65 $ 2.43 $ 1.77
ROA (Qtr) 1.28% 1.39% 1.38% 1.42% 1.40%
ROA (YTD) 1.35% 1.38% 1.38% 1.41% 1.40%
ROE (Qtr) 17.75% 19.06% 19.33% 19.05% 18.01%
ROE (YTD) 18.70% 19.19% 19.33% 18.04% 17.70%
Efficiency ratio (Qtr) ** 56.63% 56.03% 55.19% 52.31% 52.15%
Efficiency ratio (YTD) ** 55.95% 55.61% 55.19% 53.78% 54.28%
Efficiency ratio excluding amortization(Qtr)** 52.50% 52.35% 51.87% 49.41% 49.64%
Efficiency ratio excluding 52.24% 52.11% 51.87% 51.37% 52.04%
amortization(YTD)**
Net interest margin (Qtr) 3.25% 3.37% 3.46% 3.65% 3.70%
Net interest margin (YTD) 3.35% 3.41% 3.46% 3.74% 3.74%
* Cash diluted EPS excludes the after-tax effect of the amortization of
goodwill-related intangibles in net income.
** 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
YTD00 net interest income on a fully taxable equivalent basis ("FTE NII") was
$305.1 million, up $1.7 million or 0.6% over YTD99. As indicated in Tables 2 and
3, changes in the volume and mix of average earning assets ("EAs") and
interest-bearing liabilities ("IBLs") contributed $29.0 million to FTE NII,
while changes in the rate environment impacted FTE NII unfavorably by $27.3
million. The purchase acquisitions, net of the cost to fund them, added
approximately $16.5 million to FTE NII.
The net interest margin ("NIM") was 3.35% for YTD00, down 39 basis points ("bp")
from 3.74% for YTD99, reflecting the sensitivity to rising interest rates (six
increases in the Fed Fund rate since July, 1999, with the average Fed Fund rate
up 128 bp between the nine-month periods) embodied within the balance sheet,
greater reliance on more costly wholesale funds and brokered CDs, and certain
balance sheet sales. The impact from balance sheet sales includes the sale of
the higher-yielding credit card receivables, branch deposit sales replaced with
more costly wholesale funds, and certain investment securities sales sold to
mitigate interest rate risk and enhance future yields. In addition, the lower
NIM reflects the cost of funding the Corporation's share repurchases during late
1999 and YTD00 and the May 1999 purchase of an additional $100 million in bank
owned life insurance ("BOLI") (a noninterest earning asset). The Corporation may
continue to experience further compression due to interest rate increases and
competitive pricing pressures.
The interest rate spread (the difference between the EA yield and the average
rate paid on IBLs) dropped 45 bp to 2.79%, attributable to a 28 bp rise in the
yield on EAs and a 74 bp increase in the rate on IBLs. Yields increased on both
loans and investments and other (up 27 bp to 8.24% for loans and 27 bp to 6.65%
for investments and other). See Table 2. Wholesale funding costs climbed 119 bp
(to 6.14% in YTD00). The rate on total interest-bearing deposits increased 52 bp
(to 4.62%), a combination of a 113 bp increase in brokered CDs and a 36 bp
increase in retail interest-bearing deposits. Reliance on wholesale funding and
brokered CDs, whose cost increased faster than total retail deposits (combined
cost up 122 bp over YTD99), has increased to 32.3% for YTD00 compared to 22.1%
last year.
On average, total assets for YTD00 increased to $12.7 billion, $1.2 billion
(10.8%) over YTD99, predominantly from EAs. Year-to-date average EAs increased
by $1.2 billion (11.3%) over the comparable period last year. EA growth occurred
in both loans and investments, with loans representing 72.0% of EAs for YTD00
compared to 71.3% for YTD99. Average loans were $8.6 billion, up $945 million
(12.3%) over the comparable nine-month period last year. Excluding the net
impact of the purchase acquisitions and the sale of the credit card receivables,
average loans grew 9.7% year-over-year. As a result of the Corporation's focus
on increasing the mix of commercial lending in its portfolio, the majority of
loan growth has come from commercial loans. See Table 6. Total average
investments (including short-term investments) were up $266 million (of which
$294 million was in municipal securities).
Total average deposits for YTD00 were $9.0 billion, up $479 million (5.6%) over
YTD99. During YTD00, six branches with a total of $109 million in deposits were
sold, and three branches with a total of $56 million in deposits were sold
during 4Q99. Excluding the net impact of the purchase acquisitions and the
deposit sales, average total deposits grew 3.5% year-over-year. YTD00 IBLs were
$10.6 billion, up $1.1 billion (11.8%) over YTD99, principally in wholesale
funding which increased $747 million (38.6%). Interest-bearing deposits grew
$373 million (4.9%) over YTD99, with brokered CDs up $586 million on average
between the nine-month periods.Average noninterest-bearing demand deposits grew
$95 million (11.0%).
- -----------------------------------------------------------------------------------------------------------------------
TABLE 2
Net Interest Income Analysis-Taxable Equivalent Basis
($ in Thousands)
- -----------------------------------------------------------------------------------------------------------------------
Three Months ended September 30, 2000 Three Months ended September 30, 1999
------------------------------------- -------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------------------
Loans $ 8,771,251 $ 186,884 8.37% $ 7,848,876 $ 157,520 7.93%
Investments and other 3,351,628 56,848 6.78 3,222,019 51,237 6.36
------------------------- --------------------------
Total earning assets 12,122,879 243,732 7.93 11,070,895 208,757 7.47
Other assets, net 780,665 760,063
----------- -----------
Total assets $ 12,903,544 $ 11,830,958
=========== ===========
Interest-bearing deposits $ 8,148,184 $ 100,727 4.92% $ 7,721,084 $ 78,734 4.05%
Wholesale funding 2,576,545 42,627 6.47 2,065,644 26,881 5.09
------------------------- --------------------------
Total interest-bearing
liabilities 10,724,729 143,354 5.29 9,786,728 105,615 4.26
--------- --------
Demand, non-interest bearing 1,104,719 1,009,463
Other liabilities 143,840 114,440
Stockholders' equity 930,256 920,327
----------- -----------
Total liabilities and equity $ 12,903,544 $ 11,830,958
=========== ============
Interest rate spread 2.64% 3.21%
Net free funds 0.61 0.49
======= =======
Net interest income and net
interest margin $ 100,378 3.25% $ 103,142 3.70%
=================== ===================
Tax equivalent adjustment $ 5,840 $ 3,572
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
TABLE 2 (Continued)
Net Interest Income Analysis-Taxable Equivalent Basis
($ in Thousands)
- -----------------------------------------------------------------------------------------------------------------------
Nine Months ended September 30, 2000 Nine Months ended September 30, 1999
------------------------------------ ------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------------------
Loans $ 8,609,637 $ 537,399 8.24% $ 7,664,466 $ 459,908 7.97%
Investments and other 3,356,167 167,443 6.65 3,089,873 147,831 6.38
------------------------- --------------------------
Total earning assets 11,965,804 704,842 7.79 10,754,339 607,739 7.51
Other assets, net 751,585 723,795
----------- -----------
Total assets $ 12,717,389 $ 11,478,134
=========== ===========
Interest-bearing deposits $ 7,927,896 $ 274,422 4.62% $ 7,554,493 $ 231,676 4.10%
Wholesale funding 2,682,370 125,293 6.14 1,935,821 72,667 4.95
------------------------- --------------------------
Total interest-bearing
liabilities 10,610,266 399,715 5.01 9,490,314 304,343 4.27
--------- ---------
Demand, non-interest bearing 1,063,391 958,037
Other liabilities 127,423 118,780
Stockholders' equity 916,309 911,003
----------- -----------
Total liabilities and equity $ 12,717,389 $ 11,478,134
=========== ===========
Interest rate spread 2.78% 3.24%
Net free funds 0.57 0.50
---- ----
Net interest income and net
interest margin $ 305,127 3.35% $ 303,396 3.74%
=================== ===================
Tax equivalent adjustment $ 15,878 $ 9,477
- -----------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE 3
Volume / Rate Variance - Taxable Equivalent Basis
($ in Thousands)
- --------------------------------------------------------------------------------
Comparison of
Three months ended September 30, 2000 versus 1999
Income/ Variance Attributable to
Expense Variance * Volume Rate
- --------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 29,364 $ 19,950 $ 9,414
Investments and other 5,611 2,167 3,444
-----------------------------------------------
Total interest income 34,975 22,117 12,858
INTEREST EXPENSE
Interest-bearing deposits $ 21,993 $ 4,640 $ 17,353
Wholesale funding 15,746 7,514 8,232
-----------------------------------------------
Total interest expense 37,739 12,154 25,585
-----------------------------------------------
Net interest income $ (2,764) $ 9,963 $ (12,727)
===============================================
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE 3 (continued)
Volume / Rate Variance - Taxable Equivalent Basis
($ in Thousands)
- --------------------------------------------------------------------------------
Comparison of
Nine months ended September 30, 2000 versus 1999
Income/ Variance Attributable to
Expense Variance * Volume Rate
- --------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 77,491 $ 60,791 $ 16,700
Investments and Other 19,612 13,215 6,397
-----------------------------------------------
Total interest income 97,103 74,006 23,097
INTEREST EXPENSE
Interest-bearing deposits $ 42,746 $ 12,578 $ 30,168
Wholesale funding 52,626 32,418 20,208
-----------------------------------------------
Total interest expense 95,372 44,996 50,376
-----------------------------------------------
Net interest income $ 1,731 $ 29,010 $(27,279)
===============================================
* 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
YTD00 provision for loan losses ("PFLL") was $15.0 million, up $1.5 million from
YTD99. YTD00 net charge-offs as a percent of average loans (on an annualized
basis) were 0.10% compared to YTD99 of 0.18%. See Table 8.
The PFLL is a function of the methodology used to determine the adequacy of the
allowance for loan losses. See additional discussion under the "Allowance for
Loan Losses" section.
Noninterest Income
YTD00 noninterest income was $140.8 million, up $16.3 million (13.1%) compared
to YTD99. Primary categories that have impacted the change between comparable
periods were mortgage banking, and net gains (losses) on both investment
securities and asset sales. Excluding these categories, noninterest income was
$108.9 million, or $15.0 million (16.0%) higher than the comparable 1999 period,
with all other noninterest income categories showing increases over the same
period last year (See Table 4). The purchase acquisitions added approximately
$2.7 million of incremental noninterest income in YTD00 compared to YTD99.
- ---------------------------------------------------------------------------------------------------------------------------
TABLE 4
Noninterest Income
($ in Thousands)
- ---------------------------------------------------------------------------------------------------------------------------
3rd Qtr. 3rd Qtr. Dollar Percent YTD YTD Dollar Percent
2000 1999 Change Change 2000 1999 Change Change
- ---------------------------------------------------------------------------------------------------------------------------
Trust service fees $ 9,665 $ 9,307 $ 358 3.8% $ 29,314 $ 28,496 $ 818 2.9%
Service charges on deposit 8,821 7,780 1,041 13.4 24,502 21,470 3,032 14.1
accounts
Mortgage banking 5,125 5,933 (808) (13.6) 14,617 25,368 (10,751) (42.4)
Credit card & other nondeposit 6,475 5,335 1,140 21.4 19,011 14,987 4,024 26.8
fees
Retail commissions 4,632 5,077 (445) (8.8) 15,577 13,860 1,717 12.4
BOLI income 3,081 2,895 186 6.4 9,111 6,442 2,669 41.4
Asset sale gains, net 3,179 74 3,105 N/M 24,486 677 23,809 N/M
Other 3,393 3,037 356 11.7 11,377 8,621 2,756 32.0
----------------------------------------------------------------------------------------
Subtotal $ 44,371 $ 39,438 $ 4,933 12.5% $ 147,995 $ 119,921 $ 28,074 23.4%
Investment securities gains
(losses), net (2) (50) 48 (96.0) (7,194) 4,562 (11,756) N/M
----------------------------------------------------------------------------------------
Total noninterest income $ 44,369 $ 39,388 $ 4,981 12.6% $ 140,801 $ 124,483 $ 16,318 13.1%
========================================================================================
Subtotal, net of asset sale
gains $ 41,192 $ 39,364 $ 1,828 4.6% $ 123,509 $ 119,244 $ 4,265 3.6%
Subtotal, net of asset sale
gains and mortgage banking
income $ 36,067 $ 33,431 $ 2,636 7.9% $ 108,892 93,876 $ 15,016 16.0%
===========================================================================================================================
N/M = not meaningful
Trust service fees increased $818,000, or 2.9%, over the comparable period
nine-month period last year. The rising rate environment, the short-term impact
of volatility in the stock market, and competitive market conditions have slowed
growth in trust business for 2000.
Service charges on deposit accounts were up $3.0 million, or 14.1%, primarily
due to YTD00 benefiting from the 2000 mid-year increases and changes in NSF and
other service charges.
Mortgage banking income consists of servicing fees, the gain or loss on sales of
mortgage loans to the secondary market, and production-related revenue
(origination, underwriting and escrow waiver fees). Mortgage banking income for
YTD00 decreased $10.8 million, or 42.4% from YTD99. Secondary mortgage
production was down 74% from the year-earlier period which adversely impacted
gains on sales of mortgages (down $8.4 million, or 80%), and volume-related fees
(down $2.3 million, or 65%). Servicing fees were relatively unchanged between
periods given that the portfolio serviced for others was $5.5 billion at both
September 30, 2000 and 1999.
Credit card and other nondeposit fees increased $4.0 million, or 26.8%, compared
to YTD99, with $1.3 million in increased merchant income, $2.2 million in all
other credit card revenue, and $0.5 million in other nondeposit charges. The
other credit card revenue was enhanced by the April 2000 acquisition agreement
and five-year agency agreement with Citibank USA ("Citi") which provide for
agent fees and other income on new and existing card business.
Retail commission income (brokerage and insurance commissions) increased $1.7
million, or 12.4% compared to the same period last year. The majority of the
increase is insurance related (up $1.5 million), primarily in fixed annuity
income.
BOLI income increased $2.7 million, or 41.4%, between comparable periods. The
increase was primarily attributable to the timing of the BOLI investments
purchased, with $100 million in October 1998 and an additional $100 million
investment made in May of 1999, and rate increases effective in March 2000. BOLI
income is included in other noninterest income in the consolidated statements of
income.
Net asset sale gains increased $23.8 million over YTD99, due to the $12.9
million gain on sale of $128 million credit card receivables to Citi and the
$11.1 million net premium on the sales of $109 million in deposits from six
branches during YTD00. Other noninterest income increased $2.8 million, or 32.0%
from YTD99, of which $1.5 million was recognized in connection with an interim
servicing agreement with Citi related to the credit card receivable sale which
concluded in June 2000.
Net investment securities gains (losses) decreased $11.8 million versus YTD99.
The YTD00 net losses of $7.2 million were from securities sold to mitigate
interest rate risk and enhance future yields. The YTD99 net gains of $4.6
million were primarily due to the partial sale of an agency security.
Noninterest Expense
YTD00 noninterest expense ("NIE") was $239.8 million, up $10.4 million, or 4.5%,
compared to YTD99. Expenses in YTD99 reflected the partial reversal of the
mortgage servicing rights (MSR) valuation allowance and a reduction in profit
sharing expense, totaling $6.9 million. Not including these items, NIE was up
$3.5 million, or 1.5% over the comparable nine-month period, despite $11.1
million or incremental expense added from the Riverside and BNC acquisitions.
Primary categories that have impacted the change between comparable periods are
noted below. See Table 5.
- --------------------------------------------------------------------------------------------------------------------------
TABLE 5
Noninterest Expense
($ in Thousands)
- --------------------------------------------------------------------------------------------------------------------------
3rd Qtr. 3rd Qtr. Dollar Percent YTD YTD Dollar Percent
2000 1999 Change Change 2000 1999 Change Change
- --------------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits $ 40,380 $ 36,862 $ 3,518 9.5% $ 117,934 $ 114,245 $ 3,689 3.2%
Occupancy 5,733 5,776 (43) (0.7) 17,549 17,283 266 1.5
Equipment 3,755 4,047 (292) (7.2) 11,607 11,464 143 1.2
Data processing 5,313 5,385 (72) (1.3) 17,700 15,847 1,853 11.7
Business development &
advertising 3,353 3,023 330 10.9 9,852 9,352 500 5.3
Stationery and supplies 1,970 1,889 81 4.3 5,793 5,781 12 0.2
FDIC expense 462 714 (252) (35.3) 1,360 2,292 (932) (40.7)
MSR amortization 2,324 190 2,134 N/M 7,103 1,530 5,573 N/M
Intangible amortization expense 2,229 2,077 152 7.3 6,720 5,556 1,164 21.0
Legal and professional fees 1,806 508 1,298 N/M 5,602 6,849 (1,247) (18.2)
Other 12,840 13,845 (1,005) (7.3) 38,587 39,222 (635) (1.6)
==========================================================================================================================
Total noninterest expense $ 80,165 $ 74,316 $ 5,849 7.9% $ 239,807 $ 229,421 $ 10,386 4.5%
==========================================================================================================================
N/M = not meaningful
Salaries and employee benefit expenses increased to $117.9 million, up $3.7
million, or 3.2%, from YTD99. Of the $3.7 million increase in total personnel
costs, $1.8 million was due to the year-over-year swing in profit sharing
expense, and $1.5 million was attributable to higher premium-based insurance
benefits in 2000. Despite the additional staff of acquired entities, which added
approximately 177 full time equivalent employees ("FTEs"), the number of FTEs
has been reduced primarily in operational areas as centralization of processes
and other operational-related synergies were achieved throughout 1999 and 2000
(with approximately 115 fewer average FTEs for YTD00 compared to YTD99).
Occupancy and equipment, on a combined basis, increased to $29.2 million, up
$409,000, or 1.4%, over the comparable period last year. The increase is
primarily due to higher rental expenses and computer depreciation expense
associated with computer upgrades during 1999 and 2000.
Data processing increased to $17.7 million, up $1.9 million, or 11.7%, compared
to the same period last year. The majority of the increase is attributable to
software and system enhancements, volume-driven increases in processing costs
and higher software maintenance.
FDIC expense decreased to $1.4 million, down $932,000, or 40.7%, from YTD99,
reflective, in part, of the net rate reduction in the combined banking insurance
fund (BIF) and savings association insurance fund (SAIF) effective for 2000.
Other expenses were up $4.9 million, or 9.1%, over YTD99. MSR amortization
increased $5.6 million since YTD99 included the reversal of $5.7 million of MSR
valuation reserve, and intangible amortization expense increased $1.2 million
due to the acquisitions. These increases were offset by lower legal and
professional fees (down $1.2 million between periods, principally due to Y2K
consulting expenses in YTD99) and lower loan expenses (down $906,000, primarily
in line with lower mortgage production during 2000).
Income Taxes
Income tax expense for YTD00 was $47.0 million, down $7.9 million or 14.4% from
YTD99. The effective tax rate (income tax expense divided by income before
taxes) was 26.8% and 31.3% for YTD00 and YTD99, respectively. This decrease was
attributable to tax valuation allowance adjustments and the tax benefits of
increased municipal securities (average balances of municipal securities were
61% higher than YTD99), BOLI income, and real estate investment trusts.
Balance Sheet
At September 30, 2000, total assets reached $13.1 billion, an increase of $795
million, or 6.5%, over September 30, 1999. The growth was in part due to the
purchase acquisitions (see Note 3 in the notes to consolidated financial
statements). BNC accounted for $36 million (including intangibles) of the
increase between the comparable year-to-date periods.
Period end loans grew $737 million, or 9.1%, since September 30, 1999. Excluding
the net of the $33 million of loans acquired with BNC and the $128 million of
credit card receivables sold, loans grew year-over-year by approximately $832
million or 10.3%. The growth in loans was predominantly in commercial-oriented
loans (see Table 6), up $842 million and representing 51% of total loans at
September 30, 2000, compared to 46% a year ago.
Period end deposits grew $353 million, or 3.9%, since September 30, 1999,
primarily in brokered CDs (up $543 million). Total deposits excluding brokered
CDs ("retail deposits") were down $190 million or 2.2%; however, excluding the
branch sales that occurred since September 30, 1999 ($165 million), retail
deposits were down approximately $25 million, or 0.3%. One of the primary
factors influencing deposit growth has been competitive pressures from other
financial institutions, as well as other investment opportunities available to
customers.
Since year-end 1999, total assets grew $600 million, primarily in loans. Loans
increased $516 million (8.3% annualized), to $8.9 billion at September 30, 2000.
Deposits increased $639 million (9.8% annualized), to $9.3 billion at September
30, 2000.
- --------------------------------------------------------------------------------
TABLE 6
Period End Loan Composition
($ in Thousands)
- --------------------------------------------------------------------------------
September 30, % of September 30, % of Dec. 31, % of
2000 Total 1999 Total 1999 Total
- --------------------------------------------------------------------------------
Commercial, financial
& agricultural
("CF&A loans") $1,625,358 18% $1,347,736 17% $1,412,338 17%
Real estate-
construction 633,834 7 520,201 7 560,450 7
Real estate-
mortgage/commercial 2,276,206 26 1,817,924 22 1,903,633 23
Lease financing 15,613 -- 23,415 -- 23,229 --
-----------------------------------------------------
Commercial 4,551,011 51 3,709,276 46 3,899,650 47
Real estate-
mortgage/residential 3,195,865 36 3,279,177 40 3,274,767 39
Home equity * 474,481 6 376,236 5 408,577 5
-----------------------------------------------------
Residential mortgage 3,670,346 42 3,655,413 45 3,683,344 44
Consumer 637,308 7 756,994 9 760,106 9
-----------------------------------------------------
Total loans $8,858,665 100% $8,121,683 100% $8,343,100 100%
=====================================================
* - Management considers these to be consumer loans.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE 7
Period End Deposit Composition
($ in Thousands)
- --------------------------------------------------------------------------------
September 30, % of September 30, % of Dec. 31, % of
2000 Total 1999 Total 1999 Total
- --------------------------------------------------------------------------------
Demand $ 1,194,405 13% $ 1,098,339 12% $ 1,103,931 13%
Savings 932,020 10 904,676 10 838,201 9
NOW 785,062 8 796,892 9 868,514 10
Money Market 1,455,117 16 1,480,874 17 1,483,779 17
Brokered CDs 1,022,994 11 480,221 5 337,243 4
Other time 3,941,718 42 4,217,530 47 4,060,161 47
--------------------------------------------------------------
Total deposits $ 9,331,316 100 $ 8,978,532 100% $ 8,691,829 100%
==============================================================
- --------------------------------------------------------------------------------
Allowance For Loan Losses
The loan portfolio is the Corporation's primary asset subject to credit risk.
Credit risk is controlled and monitored through the use of lending standards, a
thorough review of potential borrowers, and on-going review of loan payment
performance. Active asset quality administration, including early problem loan
identification and timely resolution of problems, further ensures appropriate
management of credit risk and minimization of loan losses.
- --------------------------------------------------------------------------------
TABLE 8
Allowance for Loan Losses and Nonperforming Assets
($ in Thousands)
- --------------------------------------------------------------------------------
At and for the At and for the
Nine months ended year ended
September 30, December 31,
- --------------------------------------------------------------------------------
2000 1999 1999
------------------------------------------
Allowance for Loan Losses (AFLL):
Balance at beginning of period $ 113,196 $ 99,677 $ 99,677
Balance related to acquisitions --- 7,447 8,016
Decrease from sale of credit
card receivables (4,216) --- ---
Provision for loan losses 15,003 13,539 19,243
Charge-offs (7,954) (12,292) (16,621)
Recoveries 1,578 1,870 2,881
------------------------------------------
Net charge-offs (NCOs) (6,376) (10,422) (13,740)
------------------------------------------
Balance at end of period $ 117,607 $ 110,241 $ 113,196
==========================================
Nonperforming Assets (NPAs):
Nonaccrual loans $ 39,907 $ 40,330 $ 32,076
Accruing loans past due 90 days or more 5,520 6,539 4,690
Restructured loans 23 840 148
------------------------------------------
Total nonperforming loans (NPLs) 45,450 47,709 36,914
Other real estate owned (OREO) 3,710 4,105 3,740
==========================================
Total nonperforming assets $ 49,160 $ 51,814 $ 40,654
==========================================
Ratios:
AFLL to NCOs (annualized) 13.81 7.91 8.24
NCOs to average loans (annualized) 0.10% 0.18% 0.18%
AFLL to total loans 1.33% 1.36% 1.36%
NPLs to total loans 0.51% 0.59% 0.44%
NPAs to total assets 0.37% 0.42% 0.32%
AFLL to NPLs 259% 231% 307%
- --------------------------------------------------------------------------------
As of September 30, 2000, the allowance for loan losses ("AFLL") was $117.6
million, representing 1.33% of loans outstanding, compared to $110.2 million (or
1.36% of loans) at September 30, 1999, and $113.2 million (or 1.36% of loans) at
year-end 1999.
The AFLL at September 30, 2000 was up $7.4 million since September 30, 1999, of
which $569,000 was acquired with the purchase transaction during the fourth
quarter of 1999, offset by a $4.2 million decrease related to the sale of credit
card receivables in the second quarter of 2000. Period end loans grew $737
million since September 30, 1999, predominantly in commercial-oriented loans (as
shown in Table 6) which by their nature carry greater inherent credit risk. The
mix of commercial-oriented loans increased as a percent of total loans to 51% at
September 30, 2000, compared to 46% last year.
The AFLL at September 30, 2000, increased $4.4 million since December 31, 1999.
Since year-end 1999, the AFLL was decreased by $4.2 million related to the
aforementioned sale of the credit card portfolio, but increased through
provision for loan losses in connection with loan growth. Period end loans grew
$516 million since year-end, commercial-oriented loans increased to 51% of total
loans at September 30, 2000, compared to 47% at December 31, 1999. The AFLL was
259% of nonperforming loans compared to 231% and 307% at September 30 and
December 31, 1999, respectively. Table 8 provides additional information
regarding activity in the AFLL.
Charge-offs were $8.0 million for YTD00, $12.3 million for YTD99 and $16.6
million for year-end 1999, while recoveries for the corresponding periods were
$1.6 million, $1.9 million and $2.9 million, respectively. The decrease in net
charge-offs between September 30, 2000, and September 30, 1999, and between
September 30, 2000, and December 31, 1999, is attributable primarily to the sale
of the credit card receivables in 2Q00.
The AFLL represents management's estimate of an amount adequate to provide for
losses inherent in the loan portfolio. Management's evaluation of the adequacy
of the AFLL is based on management's ongoing review and grading of the loan
portfolio, consideration of past loan loss experience, trends in past due and
nonperforming loans, risk characteristics of the various classifications of
loans, current economic conditions, the fair value of underlying collateral, and
other factors which could affect credit losses.
Management believes the AFLL to be adequate at September 30, 2000. While
management uses available information to recognize losses on loans, future
adjustments to the AFLL 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
AFLL. Such agencies may require that changes in the AFLL be recognized 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's philosophy of the identification of nonaccrual and problem loans is
embodied through the ongoing monitoring and reviewing of all pools of risk in
the loan portfolio to ensure that problem loans are identified quickly and the
risk of loss is minimized.
Nonperforming loans ("NPLs") are considered an indicator of future loan losses.
NPLs are defined as nonaccrual loans, loans 90 days or more past due but still
accruing and restructured loans. The Corporation specifically excludes student
loan balances that are 90 days or more past due and still accruing and that have
contractual government guarantees as to collection of principal and interest,
from its definition of NPLs. The Corporation had $19 million, $15 million and
$17 million of these loans at September 30, 2000, September 30, 1999, and
December 31, 1999, respectively.
Table 8 provides detailed information regarding nonperforming assets. Total NPLs
at September 30, 2000 were $45.5 million, down $2.3 million and up $8.5 million,
from September 30 and December 31, 1999, respectively. The ratio of
nonperforming loans to total loans for the corresponding periods was .51%, .59%
and .44% at September 30, 2000, September 30, 1999 and December 31, 1999,
respectively. Accruing loans past due 90+ days and restructured loans account
for approximately $1.8 million of the $2.3 million decrease in NPLs between
comparable periods, with accruing loans past due 90+ days decreasing $1.0
million, restructured loans down $800,000 and nonaccrual loans decreasing
$500,000. Nonaccrual loans account for the majority of the $8.5 million increase
in NPLs since year-end 1999, with nonaccrual loans increasing $7.8 million (of
which $6.6 million was attributable to the addition of two large commercial
credits), accruing loans past due 90+ days up $800,000, and restructured loans
down $100,000.
OREO was $3.7 million at September 30, 2000, down slightly ($395,000) from a
year ago, and relatively unchanged (down $30,000) from December 31, 1999.
Potential problem loans are loans where there are doubts as to the ability of
the borrower to comply with present repayment terms. The decision of management
to place loans in this category does not necessarily mean that the Corporation
expects losses to occur but that management recognizes that a higher degree of
risk is associated with these performing loans. At September 30, 2000, potential
problem loans totaled $148 million. The loans that have been reported as
potential problem loans are not concentrated in a particular industry.
Management does not presently expect significant losses from credits in this
category.
Liquidity
Effective liquidity management ensures the cash flow requirements of depositors
and borrowers, as well as the operating cash needs of the Corporation, are met.
Funds are available from a number of sources, including the securities
portfolio, the core deposit base, lines of credit with major banks, the ability
to acquire large deposits from customers and through brokers, and the ability to
securitize or package loans for sale. Additionally, liquidity is provided from
loans and securities repayments and maturities.
The parent company's primary funding sources to meet its liquidity requirements
are dividends and service fees from subsidiaries, borrowings with major banks,
and proceeds from the issuance of equity. 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. Additionally, the parent company had $225
million of established lines of credit with nonaffiliated banks, of which $134
million was outstanding at September 30, 2000.
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.
The parent company and its four largest subsidiary 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.
Capital
On April 26, 2000, the Board of Directors declared a 10% stock dividend, payable
June 15 to shareholders of record at the close of business on June 1. All share
and per share data in the accompanying consolidated financial statements has
been adjusted to reflect the 10% stock dividend paid. As a result of the stock
dividend, the Corporation distributed 6.3 million shares of common stock, common
stock was increased by $63,000, surplus was increased by $151.2 million and
retained earnings were decreased by $151.2 million. Any fractional shares
resulting from the dividend were paid in cash.
Stockholders' equity at September 30, 2000 decreased to $930.2 million, compared
to $931.1 million at September 30, 1999. The decrease in equity between the two
periods was primarily composed of the repurchase of common stock and the payment
of dividends, with partially offsetting increases to equity from the retention
of earnings and the exercise of stock options. Additionally, stockholders'
equity at September 30, 2000, was reduced by a $18.9 million equity component
(included in accumulated other comprehensive loss) related to unrealized losses
on securities available-for-sale, net of the tax effect, predominantly due to
the impact of the rising rate environment on that portfolio. At September 30,
1999, stockholders' equity included $24.5 million related to unrealized losses
on securities available-for-sale, net of the tax effect. The ratio of period-end
equity to assets at September 30, 2000 was 7.09%, compared to 7.56% at September
30, 1999.
Stockholders' equity grew $20.4 million since year-end 1999. 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 1999, was reduced by a $38.8 million equity
component (included in accumulated other comprehensive loss) related to
unrealized losses on securities available-for-sale, net of the tax effect,
predominantly due to the impact of the rising rate environment on that
portfolio. The ratio of period-end equity to assets at September 30, 2000 was
7.09%, compared to 7.27% at December 31, 1999.
The Board of Directors ("BOD") 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 BOD authorized the repurchase of up to 330,000
shares per quarter in 2000. In March 2000, the BOD also authorized the
repurchase and cancellation of up to 5% of the Corporation's outstanding shares,
not to exceed approximately 3.5 million shares. During the nine months of 2000,
317,801 and 2,704,050 shares were repurchased under these two authorizations,
respectively, at a combined average cost of $24.73 per share. In October 2000,
the BOD authorized the repurchase and cancellation of additional shares (see
"Subsequent Events").
Cash dividends of $0.82 per share were paid, representing a payout ratio of
43.94% for YTD00.
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)
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Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2000 2000 2000 1999 1999
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Total stockholders' equity $ 930,183 $ 930,223 $ 920,788 $ 909,789 $ 931,123
Tier 1 capital 840,180 861,874 850,931 831,907 837,279
Total capital 957,530 971,089 959,208 941,005 948,244
Tangible common equity / assets 7.15% 7.22% 7.30% 7.34% 7.63%
Total equity / assets 7.09% 7.16% 7.23% 7.27% 7.56%
Tier 1 leverage ratio 6.57% 6.86% 6.83% 6.80% 7.15%
Tier 1 risk-based capital ratio 9.41% 10.03% 9.97% 9.72% 10.03%
Total risk-based capital ratio 10.72% 11.30% 11.24% 10.99% 11.36%
Book value per common share 13.94 13.57 13.30 13.09 13.22
Shares repurchased during period 1,874 705 440 868 1,772
Shares outstanding (period end) 66,725 68,536 69,229 69,520 70,438
Diluted shares outstanding (average) for period 68,293 69,206 69,812 70,657 70,833
Stock price at end of period $ 26.25 $ 21.81 $ 27.16 $ 31.14 $ 32.90
High closing price for the period 26.63 27.27 30.06 36.70 37.44
Low closing price for the period 22.13 21.81 20.29 30.68 31.90
Dividend paid per share 0.29 0.26 0.26 0.26 0.26
Market capitalization 1,752 1,495 1,880 2,165 2,317
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Third Quarter Results
Net income for third quarter 2000 ("3Q00") was $41.5 million, or $0.61 per
diluted share, compared to $41.8 million net income, or $0.59 per diluted share,
for the third quarter of 1999 ("3Q99"). ROE was 17.75%, down 26 bp from 3Q99,
while ROA decreased 12 bp to 1.28%. Acquisition activity (further described in
Note 3 of the notes to consolidated financial statements) impacted the
comparable quarter analysis. Financial results of 3Q99 do not include results of
BNC and include only one month of Riverside, while 3Q00 included full quarter
results of both acquisitions. Net of funding costs, these acquisitions accounted
for approximately $0.6 million of incremental net income between comparable
quarters.
FTE NII for 3Q00 was $100.4 million, $2.8 million lower than 3Q99. The NIM of
3.25% in 3Q00 was 45 bp lower than the NIM of 3.70% in 3Q99 (see Tables 2 and
3). The decline in NIM reflected the balance sheet's sensitivity to rising
interest rates (the average Fed funds rate for 3Q00 was 140 bp higher than
3Q99), greater reliance on more costly wholesale funds and brokered CDs, and the
sale of the higher-yielding credit card receivables in 2Q00, offset by positive
NIM contributions from acquisitions, security reinvestment opportunities, and
earning asset growth.
Average EAs grew $1.1 billion over the comparable quarter last year. Excluding
the net impact of the acquisitions and the credit card sale, the year-over-year
increase in average EAs was approximately $919 million (8.3%), with loans up
$838 million (10.7%). Average IBLs rose $938 million and net free funds
increased $114 million. Average total deposits for 3Q00 were $9.3 billion, up
$522 million (6.0%) over 3Q99, predominantly from growth in brokered CDs (which
represented 10.6% of average deposits for 3Q00 compared to 4.3% for 3Q99).
Wholesale funding increased $511 million over the comparable quarter last year.
The provision for loan losses was up $419,000 over the provision for 3Q99. The
AFLL to loans at September 30, 2000 was 1.33% compared to 1.36% at September 30,
1999 (see Table 8).
Noninterest income was $44.4 million for 3Q00, up $5.0 million over 3Q99 (see
Table 4). Noninterest income for 3Q00 includes a $2.9 million net premium on $26
million of deposits from a branch sale. Excluding securities and asset sale
gains from both periods, noninterest income rose $1.8 million (4.6%). Credit
card & other nondeposit fees were up $1.1 million (21.1%), attributable to
increases in merchant income and all other credit card revenue, including the
Citi relationship. Service charges on deposit accounts were up $1.0 million
(13.4%) due to rate increases, greater efforts to control waivers and refunds,
and other targeted initiatives. Mortgage banking income declined $808,000
(13.6%) from the same period last year. A $75 million (37%) reduction in
secondary mortgage production from 1999 levels resulted in lower gains on sales
and less production related fee income, while servicing fees remained level
between periods. All other income categories were relatively unchanged from
3Q99.
Noninterest expense for 3Q00 was up $5.8 million over 3Q99 (see Table 5).
Expenses in 3Q99 included the partial reversal of MSR valuation allowance and a
reduction in profit sharing expense, totaling $3.5 million; excluding these
items, noninterest expense was $2.3 million (3.0%) higher than last year.
Personnel expense was up $3.5 million; excluding profit sharing expense from
both quarters, the increase was $1.3 million (3.3%) between comparable quarters.
Despite the additional staff of acquired entities, which added approximately 136
FTEs, the average FTEs of 3,979 in 3Q00 were 85 (2.1%) lower than 3Q99. Legal
and professional fees were up $1.3 million compared to the same quarter last
year, primarily in consultant fees associated with software and system
enhancements in 3Q00. The Other expense category decreased by $1.0 million, with
loan expenses representing the majority of the decrease. The remaining expense
categories tracked closely to 3Q99 results.
Taxes were down $5.2 million between comparable quarters, due to the decrease in
income before taxes and the decrease in the effective tax rate, at 24.0% for
3Q00 compared to 30.5% for 3Q99. This decrease was attributable to tax valuation
allowance adjustments and the tax benefits of increased municipal securities,
BOLI income, and real estate investment trusts.
Fourth Quarter Outlook
The Corporation expects fourth quarter 2000 (4Q00) results to be similar to
3Q00. Loan and deposit growth for 4Q00 are expected to continue at levels seen
in 3Q00. Noninterest income, excluding gains and losses on securities and asset
sales, is expected to be up slightly from 3Q00 levels. Expenses are expected to
be similar to 3Q00. The effective tax rate is expected to be higher than that of
3Q00. The Corporation expects 4Q00 earnings in the range of $0.59 to $0.61 per
diluted share, similar to 3Q00 earnings.
Subsequent Events
On October 25, 2000, the BOD authorized the repurchase and cancellation of 3.2
million shares, representing approximately five percent of the Corporation's
outstanding shares, anticipated to begin during 4Q00.
On October 25, 2000, the BOD declared a $0.29 per share dividend payable
November 15, 2000, to shareholders of record at the close of business on
November 1, 2000.
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, 1999, from that disclosed in the Corporation's 1999
Form 10-K Annual Report.
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11, Statement regarding computation of per-share
earnings. See Note 5 of the notes to consolidated financial
statements in Part I Item I.
Exhibit 27, Financial data schedule. Included in the
electronically filed document as required.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the nine months ended
September 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ASSOCIATED BANC-CORP
(Registrant)
Date: November 14, 2000 /s/ Robert C. Gallagher
-----------------------------------------
Robert C. Gallagher
President and Chief Executive Officer
Date: November 14, 2000 /s/ Joseph B. Selner
-----------------------------------------
Joseph B. Selner
Principal Financial Officer