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, 2002
-----------------------------------------
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
- -------------------------------------------------------------------------------
(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)
(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 April 30, 2002, was 76,015,124.
ASSOCIATED BANC-CORP
TABLE OF CONTENTS
Page No.
PART I. Financial Information
Item 1.Financial Statements (Unaudited):
Consolidated Balance Sheets -
March 31, 2002, March 31, 2001 and
December 31, 2001 3
Consolidated Statements of Income -
Three Months Ended March 31, 2002 and 2001 4
Consolidated Statement of Changes in
Stockholders' Equity - Three Months
Ended March 31, 2002 5
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2.Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Item 3.Quantitative and Qualitative Disclosures about
Market Risk 29
PART II. Other Information
Item 6.Exhibits and Reports on Form 8-K 31
Signatures 32
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
ASSOCIATED BANC-CORP
Consolidated Balance Sheets
(Unaudited)
March31, March31, December31,
2002 2001 2001
--------------------------------------------
ASSETS (In Thousands, except share data)
Cash and due from banks $ 326,946 $ 298,766 $ 587,994
Interest-bearing deposits in
other financial institutions 6,028 10,201 5,427
Federal funds sold and securities
purchased under agreements to resell 76,140 38,150 12,015
Investment securities available
for sale, at fair value 3,364,411 3,230,949 3,197,021
Loans held for sale 149,945 121,820 301,707
Loans 9,757,584 8,935,543 9,019,864
Allowance for loan losses (144,350) (123,668) (128,204)
--------------------------------------------
Loans, net 9,613,234 8,811,875 8,891,660
Premises and equipment 135,821 124,555 119,528
Goodwill 211,861 97,273 92,397
Other intangible assets 11,061 7,325 5,925
Other assets 432,453 381,472 390,700
--------------------------------------------
Total assets $ 14,327,900 $ 13,122,386 $ 13,604,374
============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 1,437,798 $ 1,209,762 $ 1,425,109
Interest-bearing deposits, excluding Brokered CDs 7,439,710 6,975,362 6,897,502
Brokered CDs 315,184 502,567 290,000
--------------------------------------------
Total deposits 9,192,692 8,687,691 8,612,611
Short-term borrowings 2,230,505 3,150,476 2,643,851
Long-term debt 1,477,855 122,277 1,103,395
Company-obligated mandatorily redeemable
preferred securities 11,000 -- --
Accrued expenses and other liabilities 185,028 137,964 174,101
--------------------------------------------
Total liabilities 13,097,080 12,098,408 12,533,958
Stockholders' equity
Preferred stock -- -- --
Common stock (Par value $0.01 per share, authorized
100,000,000 shares, issued 76,727,109,
73,042,372, and 72,791,792 shares, respectively) 768 664 662
Surplus 680,140 296,479 289,751
Retained earnings 527,444 685,443 760,031
Accumulated other comprehensive income 48,966 49,220 47,176
Treasury stock, at cost (878,333, 294,346 and 922,902
shares, respectively) (26,498) (7,828) (27,204)
--------------------------------------------
Total stockholders' equity 1,230,820 1,023,978 1,070,416
--------------------------------------------
Total liabilities and stockholders'equity $ 14,327,900 $ 13,122,386 $ 13,604,374
============================================
See accompanying notes to consolidated financial statements.
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Income
(Unaudited)
Three Months Ended March 31,
-----------------------------
2002 2001
-------------- --------------
(In Thousands, except per
share data)
INTEREST INCOME
Interest and fees on loans $151,349 $ 84,375
Interest and dividends on investment
securities:
Taxable 32,772 38,572
Tax exempt 9,980 10,164
Interest on deposits in other financial institutions 87 121
Interest on federal funds sold and
securities purchased under agreements to resell 118 447
-------------------
Total interest income 194,306 233,679
INTEREST EXPENSE
Interest on deposits 48,229 91,427
Interest on short-term borrowings 13,655 43,304
Interest on long-term debt, including
capital securities 14,995 1,945
-------------------
Total interest expense 76,879 136,676
-------------------
NET INTEREST INCOME 117,427 97,003
Provision for loan losses 11,251 5,582
-------------------
Net interest income after provision
for loan losses 106,176 91,421
NONINTEREST INCOME
Trust service fees 7,371 8,072
Service charges on deposit accounts 9,880 8,745
Mortgage banking 12,604 9,185
Credit card and other nondeposit fees 6,072 6,775
Retail commission income 4,616 4,484
Bank owned life insurance income 3,270 3,134
Asset sale gains, net 331 532
Investment securities gains, net -- 246
Other 3,256 3,146
-------------------
Total noninterest income 47,400 44,319
NONINTEREST EXPENSE
Personnel expense 44,994 40,305
Occupancy 6,137 6,354
Equipment 3,490 3,680
Data processing 4,803 4,843
Business development and advertising 3,446 3,001
Stationery and supplies 2,044 1,732
FDIC expense 372 434
Mortgage servicing rights expense 2,897 3,898
Goodwill amortization expense -- 1,385
Intangible amortization expense 715 717
Legal and professional fees 1,292 892
Other 12,477 11,209
-------------------
Total noninterest expense 82,667 78,450
-------------------
Income before income taxes 70,909 57,290
Income tax expense 19,610 15,204
-------------------
NET INCOME $ 51,299 $ 42,086
===================
Earnings per share:
Basic $ 0.70 $ 0.58
Diluted $ 0.69 $ 0.57
Average shares outstanding:
Basic 73,142 72,765
Diluted 74,042 73,357
See accompanying notes to consolidated financial statements.
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income Stock Total
---------------------------------------------------------------
(In Thousands, except per share data)
Balance, December 31, 2001 $662 $289,751 $760,031 $47,176 $(27,204) $1,070,416
Comprehensive income:
Net income --- --- 51,299 --- --- 51,299
Net unrealized gain on derivative
instruments, net of tax of
$1.7 million --- --- --- 2,600 --- 2,600
Net unrealized holding loss on
securities available for sale,
net of tax $0.3 million --- --- --- (810) --- (810)
----------
Comprehensive income 53,089
----------
Cash dividends, $0.28 per share --- --- (20,169) --- --- (20,169)
Common stock issued:
Business combinations 37 133,892 --- --- --- 133,929
Incentive stock options --- --- (5,077 --- 11,771 6,694
Purchase and retirement of
treasury stock in connection with
repurchase program (1) (3,960) --- --- --- (3,961)
Purchase of treasury stock --- --- --- --- (11,065) (11,065)
Tax benefit of stock options --- 1,887 --- --- --- 1,887
---------------------------------------------------------------
Balance, March 31, 2002 $698 $421,570 $786,084 $48,966 $(26,498) $1,230,820
10% stock dividend (Note 4) 70 258,570 (258,640) --- --- ---
---------------------------------------------------- ----------
Balance, March 31, 2002, adjusted $768 $680,140 $527,444 $48,966 $(26,498) $1,230,820
===============================================================
See accompanying notes to consolidated financial statements.
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months Ended
March 31,
2002 2001
--------------------------
($ in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 51,299 $ 42,086
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Provision for loan losses 11,251 5,582
Depreciation and amortization 4,466 4,797
Amortization (accretion) of:
Mortgage servicing rights 2,897 3,898
Goodwill and intangibles 715 2,102
Investment securities premiums and
discounts 2,219 (355)
Deferred loan fees and costs 420 735
Gain on sales of investment securities, net -- (246)
Gain on sales of assets, net (331) (532)
Gain on sales of loans held for sale and
servicing rights, net (7,697) (3,926)
Mortgage loans originated and acquired
for sale (691,100) (344,712)
Proceeds from sales of mortgage loans
held for sale 867,664 251,411
(Increase) decrease in interest
receivable and other assets (12,219) 5,173
Increase (decrease) in interest payable
and other liabilities 2,227 (9,465)
-----------------------
Net cash provided by (used in) operating
activities 231,811 (43,452)
-----------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in loans 19,505 (26,245)
Capitalization of mortgage servicing rights (7,438) (2,208)
Purchases of:
Securities available for sale (270,112) (120,303)
Premises and equipment, net of disposals (2,764) (2,254)
Proceeds from:
Sales of securities available for sale -- 57,384
Calls and maturities of securities
available for sale 262,397 155,161
Sales of other assets 1,093 4,782
Net cash acquired in business combination 17,982 --
------------------------
Net cash provided by investing activities 20,663 66,317
------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits (203,363) (603,955)
Net increase (decrease) in short-term borrowings (516,109) 552,273
Repayment of long-term debt (1,177) (143)
Proceeds from issuance of long-term debt 300,354 --
Cash dividends (20,169) (19,184)
Proceeds from exercise of incentive stock options 6,694 2,224
Purchase and retirement of treasury stock (3,961) --
Purchase of treasury stock (11,065) (3,483)
-----------------------
Net cash used in financing activities (448,796) (72,268)
Net decrease in cash and cash equivalents (196,322) (49,403)
Cash and cash equivalents at beginning of period 605,436 396,520
-----------------------
Cash and cash equivalents at end of period $ 409,114 $ 347,117
========================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 79,307 $ 147,390
Income taxes 432 65
Supplemental schedule of noncash investing
activities:
Securities held to maturity transferred
to securities available for sale -- 372,873
Loans transferred to other real estate 705 1,200
========================
See accompanying notes to consolidated financial statements.
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Notes to Consolidated Financial Statements
These interim consolidated financial statements have been prepared according to
the rules and regulations of the Securities and Exchange Commission and,
therefore, certain information and footnote disclosures normally presented in
accordance with accounting principles generally accepted in the United States of
America have been omitted or abbreviated. The information contained in the
consolidated financial statements and footnotes in the Corporation's 2001 annual
report on Form 10-K, should be referred to in connection with the reading of
these unaudited interim financial statements.
NOTE 1: Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly Associated
Banc-Corp's ("Corporation") financial position, results of operations, changes
in stockholders' equity, and cash flows for the periods presented, and all such
adjustments are of a normal recurring nature. The consolidated financial
statements include the accounts of all subsidiaries. All material intercompany
transactions and balances are eliminated. The results of operations for the
interim periods are not necessarily indicative of the results to be expected for
the full year.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Estimates that are particularly susceptible to significant change include the
determination of the allowance for loan losses, income taxes, and mortgage
servicing rights.
On April 24, 2002, the Board of Directors declared a 10% stock dividend payable
on May 15, 2002, to shareholders of record at the close of business on April 29,
2002. Any fractional shares resulting from the dividend will be paid in cash.
All share and per share financial information has been restated to reflect the
effect of this stock dividend (see Note 4 of the notes to consolidated financial
statements).
NOTE 2: Reclassifications
Certain items in prior period consolidated financial statements have been
reclassified to conform with the March 31, 2002 presentation.
NOTE 3: Adoption of Statements of Financial Accounting Standards ("SFAS")
Effective July 1, 2001, the Corporation adopted SFAS No. 41, "Business
Combinations," ("SFAS 141"). The Corporation also adopted SFAS No. 142,
"Goodwill and Other Intangible Assets," ("SFAS 142") effective January 1, 2002.
SFAS 141 requires that all business combinations be accounted for using the
purchase method. Identifiable intangible assets consist of core deposit
intangibles and are recognized separately from goodwill on the consolidated
balance sheet at other identifiable intangible assets. Goodwill represents the
excess of the price paid for the acquisition of subsidiaries over the fair value
of the net assets acquired. Under SFAS 142, goodwill and indefinite life
intangibles are no longer amortized but are subject to impairment tests on at
least an annual basis. Any impairment of goodwill or intangibles will be
recognized as an expense in the period of impairment. Other identifiable
intangible assets with a definite life are amortized over their estimated useful
lives and are also tested for impairment periodically.
The Corporation is required to complete the transitional goodwill impairment
test within six months of adoption of SFAS 142 and to record the impairment, if
any, by the end of the fiscal year. Any loss resulting from the transitional
impairment test will be recorded as a cumulative effect of a change in
accounting principle and charged to net income for the three months ended March
31, 2002. The Corporation is in the process of completing the transitional
goodwill impairment test and does not anticipate an impairment loss will be
incurred.
See Note 4 for disclosure of net income and per share amounts excluding goodwill
amortization, net of any income tax effects. See Note 5 for discussion of the
Corporation's 2002 business combination and related SFAS 141 disclosure. See
Note 6 for SFAS 142 related disclosure on goodwill and other intangible assets.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," ("SFAS 144") which supersedes both SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," ("SFAS 121") and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions," for the disposal of a segment
of a business. SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This Statement requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized for the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
SFAS 144 requires companies to separately report discontinued operations and
extends that reporting to a component of an entity that either has been disposed
of (by sale, abandonment, or in a distribution to owners) or is classified as
held for sale. Assets to be disposed of are reported at the lower of the
carrying amount or fair value, less costs to sell. The Corporation adopted SFAS
144 on January 1, 2002. The adoption was not material to the Corporation's
financial position or results of operations.
NOTE 4: Earnings Per Share
Basic earnings per share is calculated by dividing net income available to
common stockholders by the weighted average number of common shares outstanding.
Diluted earnings per share is calculated by dividing net income by the weighted
average number of shares adjusted for the dilutive effect of outstanding stock
options.
On April 24, 2002, the Board of Directors declared a 10% stock dividend, payable
May 15 to shareholders of record at the close of business on April 29. All share
and per share data in the accompanying consolidated financial statements has
been adjusted to reflect the declaration of the 10% stock dividend. As a result
of the stock dividend, the Corporation on the payable date will distribute 7.0
million shares of common stock. Any fractional shares resulting from the
dividend will be paid in cash.
Presented below are the calculations for basic and diluted earnings per share,
as reported, as well as adjusted to exclude the amortization of goodwill
affected by adopting SFAS 142.
For the three months
ended March 31,
2002 2001
----------------------
(In Thousands, except
per share data)
Net income, as reported $ 51,299 $ 42,086
Add back: Goodwill amortization -- 1,385
------------------------
Adjusted net income $ 51,299 $ 43,471
========================
Weighted average shares outstanding 73,142 72,765
Effect of dilutive stock options outstanding 900 592
------------------------
Diluted weighted average shares outstanding 74,042 73,357
========================
Basic earnings per share:
Basic earnings per share, as reported $ 0.70 $ 0.58
Adjustment: Goodwill amortization -- 0.02
------------------------
Basic earnings per share, adjusted $ 0.70 $ 0.60
========================
Diluted earnings per share:
Diluted earnings per share, as reported $ 0.69 $ 0.57
Adjustment: Goodwill amortization -- 0.02
------------------------
Diluted earnings per share, adjusted $ 0.69 $ 0.59
========================
NOTE 5: Business Combination
There was one completed business combination during 2002 and none during 2001.
The following acquisition was accounted for under the purchase method of
accounting; thus, the results of operations prior to the consummation date are
not included in the accompanying consolidated financial statements. Goodwill,
core deposit intangibles, and other purchase accounting adjustments are recorded
upon the consummation of a purchase acquisition where the purchase price exceeds
the fair value of net assets acquired.
On September 10, 2001, the Corporation announced the signing of a definitive
agreement to acquire Signal Financial Corporation, a financial holding company
headquartered in Mendota Heights, Minnesota ("Signal"). On February 28, 2002,
the Corporation consummated its acquisition of 100% of the outstanding common
shares of Signal. Signal operates banking branches in nine locations in the Twin
Cities and Eastern Minnesota. As a result of the acquisition, the Corporation
expanded its Minnesota presence, particularly in the Twin Cities area. It also
expects to reduce costs through efficiencies, particularly following the merger
planned in the second quarter of 2002 of Signal's banking subsidiaries with and
into Associated Bank Minnesota, to operate under a single national banking
charter named Associated Bank Minnesota, National Association.
The Signal transaction was accounted for under the purchase method of accounting
and was consummated through the issuance of 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. The Corporation is in
the process of finalizing a third-party valuation of the core deposit intangible
asset; thus, the allocation of the purchase price is subject to refinement.
$ 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 $5.6 million of core deposit intangibles with a
ten-year weighted-average useful life. The $119.7 million of goodwill was
assigned to the banking segment during first quarter of 2002, as part of the
adoption of SFAS 142.
The following represents supplemental pro forma disclosure required by SFAS 141
of total revenue, net income, and earnings per share as though the business
combination had been completed at the beginning of the earliest comparable
period.
For the three months
ended March 31,
2002 2001
-------------------------
(In Thousands, except
per share data)
Total revenue $ 174,651 $ 154,098
Net income 50,409 44,237
Basic earnings per share 0.66 0.58
Diluted earnings per shae 0.65 0.57
NOTE 6: Goodwill and Other Intangible Assets
Upon the adoption of SFAS 142 effective January 1, 2002, the Corporation had
unamortized goodwill in the amount of $92.4 million, of which $85.0 million is
no longer being amortized under SFAS 142 and $7.4 million which will continue to
be amortized under the provisions of SFAS 72, "Accounting for Certain
Acquisitions of Banking and Thrift Institutions," as an identifiable intangible
asset subject to amortization. Also, at January 1, 2002, the Corporation had
core deposit intangibles of $5.9 million that will continue to be amortized. The
goodwill and core deposit intangibles are assigned to the Corporation's banking
segment.
The change in the carrying amount of goodwill for the quarter ended March 31,
2002, was as follows. Impairment testing is in progress.
$ in Millions
---------------
Balance at January 1, 2002 $ 92.4
Goodwill acquired during period 119.7
Goodwill amortization (SFAS 72) (0.2)
---------------
Balance at March 31, 2002 $ 211.9
===============
Amortization of non-SFAS 72 goodwill was zero and $1.4 million for the three
months ended March 31, 2002 and 2001, respectively. See Note 4 for disclosure of
net income and per share amounts excluding goodwill amortization, net of any
income tax effects.
Intangible amortization expense was $0.7 million for the three months ended
March 31, 2002, (of which, $0.5 million related to the amortization of core
deposit intangibles and $0.2 million related to the amortization of SFAS 72
goodwill), $0.7 million for the three months ended March 31, 2001, and $2.9
million for the year ended December 31, 2001.
Other intangible assets are composed of core deposit intangibles. The gross
carrying amount, accumulated amortization, net book value and estimated
amortization expense for the core deposit intangibles is as follows.
Core deposit intangibles March 31, March 31, December 31,
2002 2001 2001
---------------------------------------
$ in Thousands
Gross carrying amount $ 28,166 $ 22,565 $ 22,565
Accumulated amortization 17,105 15,240 16,640
---------------------------------------
Net book value $ 11,061 $ 7,325 $ 5,925
=======================================
Estimated amortization expense
For the year ended December 31, (InThousands)
2002 $ 3,400
2003 3,123
2004 2,726
2005 2,151
2006 2,049
==========
NOTE 7: Derivatives and Hedging Activities
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," (collectively referred to as "SFAS 133")
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. All derivatives, whether designated in hedging relationships
or not, are required to be recorded on the balance sheet at fair value.
In accordance with the statement, the Corporation measures the effectiveness of
its hedges on a periodic basis. Any difference between the fair value change of
the hedge versus the fair value change of the hedged item is considered to be
the "ineffective" portion of the hedge. The ineffective portion of the hedge is
recorded as an increase or decrease in the related income statement
classification of the item being hedged. Ineffective portions of changes in the
fair value of cash flow hedges are recognized in earnings. For 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.
Notional Estimated Fair Weighted Average
-----------------------------------
Amount Market Value Receive Rate Pay Rate Maturity
---------------------------------------------------------------
March 31, 2002 ($ in Thousands)
- --------------
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
===============================================================
March 31, 2001
- --------------
Swaps-receive fixed / pay variable (1), (4) $ 10,000 $ 3 6.35% 5.25% 1 month
Swaps-receive variable / pay fixed (1), (3) 300,000 (6,190) 6.06% 6.36% 15 months
Swaps-receive fixed / pay variable (2), (4) 3,350 (56) 7.49% 7.55% 60 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 these mortgage derivatives was a net gain of $2.3
million and $0.6 million, as of March 31, 2002 and 2001, respectively. The
change in fair value of these derivatives was a $1.8 million loss and a $0.6
million gain for the three months ended March 31, 2002 and 2001, respectively.
NOTE 8: Long-term Debt
Long-term debt at March 31 is as follows:
2002 2001
----------------------
($ in Thousands)
Federal Home Loan Bank advances (3.30% to 6.81%,
fixed rate, maturing in 2002 through 2017 for 2002;
4.95% to 7.63%, fixed rate, maturing in 2001
through 2014 for 2001) $ 1,077,840 $ 116,622
Bank notes (1) 200,000 --
Subordinated debt (2) 179,085 --
Other borrowed funds 20,930 5,655
----------------------
Total long-term debt $ 1,477,855 $ 122,277
======================
(1) On April 4, 2001, the Corporation issued $200 million of variable rate bank
notes that matures on April 10, 2003. The note reprices quarterly at LIBOR
plus 22 basis points and was 2.06% at March 31, 2002.
(2) On August 6, 2001, the Corporation issued $200 million of subordinated
debt. This debt has a fixed interest rate of 6.75% and matures on August
15, 2011. During 2001, the Corporation entered into a fair value hedge to
hedge the interest rate risk on the subordinated debt. As of March 31,
2002, the fair value of the hedge was a $19.5 million loss. The
subordinated debt qualifies under the risk-based capital guidelines as Tier
2 supplementary capital for regulatory purposes.
NOTE 9: Company-obligated Mandatorily Redeemable Preferred Securities
On January 16, 1997, United Capital Trust I (the Trust), a Delaware business
trust wholly owned by the Corporation, completed the sale of $11 million of
9.75% preferred securities (the Preferred Securities). The Trust used the
proceeds from the offering to purchase a like amount of 9.75% Junior
Subordinated Deferrable Interest Debentures (the Debentures) of the Corporation.
The Debentures are the sole assets of the 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
9.75% of the stated liquidation amount of $25 per Preferred Security. The
Corporation has fully and unconditionally guaranteed all of the obligations of
the Trust. The guarantee covers the quarterly distributions and payments on
liquidation or redemption of the Preferred Securities, but only to the extent of
funds held by the Trust.
The Preferred Securities are mandatorily redeemable upon the maturity of the
Debentures, on January 15, 2027 or upon earlier redemption as provided in the
Indenture. The Corporation has the right to redeem the Debentures on or after
January 15, 2002.
NOTE 10: Mortgage Servicing Rights
A summary of changes in the balance of mortgage servicing rights for the quarter
ended March 31, 2002 and 2001, is as follows:
2002 2001
---------------------
($ in Thousands)
Balance at beginning of year $ 32,065 $ 36,269
Additions 7,438 2,912
Sales of servicing -- (704)
Amortization (2,897) (2,253)
Change in valuation allowance -- (1,645)
--------------------
Balance at end of period $ 36,606 $ 34,579
=====================
A summary of changes in the valuation allowance for the quarter ended March 31,
2002 and 2001, is as follows.
2002 2001
---------------------
($ in Thousands)
Balance at beginning of year $ 10,720 $ --
Additions -- 1,645
Reversals -- --
---------------------
Balance at end of period $ 10,720 $ 1,645
=====================
At March 31, 2002, the Corporation was servicing 1- to 4- family residential
mortgage loans owned by other investors with balances totaling $5.42 billion
compared to $5.53 billion at March 31, 2001.
The mortgage servicing rights have a weighted average amortization period of
five years and the estimated amortization expense is as follows.
Estimated amortization expense (In Thousands)
For the year ended December 31,
2002 $ 12,959
2003 10,974
2004 9,075
2005 7,300
2006 5,566
==============
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),
leasing and banking to larger businesses and metro or niche markets.
The "Other" segment is comprised of a smaller segment, Wealth Management
(including insurance, brokerage, and trust/asset management), as well as
intersegment eliminations and residual revenues and expenses, representing the
difference between actual amounts incurred and the amounts allocated to
operating segments.
Selected segment information is presented below.
Consolidated
Banking Other Total
-----------------------------------------
As of and for the three months ($ in Thousands)
ended March 31, 2002
Goodwill $ 211,861 $ -- $ 211,861
Total assets $ 14,301,571 $ 26,329 $ 14,327,900
========================================
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 8,029 49 8,078
Other noninterest expense 66,867 7,722 74,589
Income taxes 19,381 229 19,610
----------------------------------------
Net income $ 48,211 $ 3,088 $ 51,299
========================================
As of and for the three months
ended March 31, 2001
Goodwill $ 97,397 $ -- $ 97,397
Total assets $ 13,096,094 $ 26,292 $ 13,122,386
========================================
Net interest income $ 96,810 $193 97,003
Provision for loan losses 5,582 -- 5,582
Noninterest income 32,031 12,288 44,319
Depreciation and amortization 10,719 78 10,797
Other noninterest expense 59,732 7,921 67,653
Income taxes 14,907 297 15,204
----------------------------------------
Net income $ 37,901 $ 4,185 $ 42,086
========================================
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 consolidated
financial statements, footnotes, and supplemental financial data appearing
elsewhere in this Form 10-Q and should be read in conjunction therewith.
On April 24, 2002, the Board of Directors declared a 10% stock dividend payable
on May 15, 2002, to shareholders of record at the close of business on April 29,
2002. Any fractional shares resulting from the dividend will be paid in cash.
All share and per share financial information has been restated to reflect the
effect of this stock dividend (see Note 4 of the notes to consolidated financial
statements).
The following discussion refers to the Corporation's business combination
activity that may impact the comparability of certain financial data (see Note 5
of the notes to consolidated financial statements).
Results of Operations - Summary
Net income for the three months ended March 31, 2002 ("1Q02") totaled $51.3
million, or $0.70 and $0.69 for basic and diluted earnings per share,
respectively. Comparatively, net income for the first quarter of 2001 ("1Q01")
was $42.1 million, or $0.58 and $0.57 for both basic and diluted earnings per
share, respectively. For 1Q02 the annualized return on average assets was 1.54%
and the annualized return on average equity was 18.40%, compared to 1.31% and
17.18%, respectively, for the comparable period in 2001. The net interest margin
for 1Q02 was 3.91% compared to 3.34% for 1Q01.
The results of 1Q02 include the Corporation's acquisition of Signal Financial
Corporation ("Signal") of Minnesota on February 28, 2002, which added $1.1
billion in total assets, $765 million in loans, and $783 million in deposits.
The inclusion of Signal's financial results for one month of 1Q02 had a minimal
impact on earnings per share.
- --------------------------------------------------------------------------------
TABLE 1 (1)
Summary Results of Operations: Trends
($ in Thousands, except per share data)
1st Qtr. 1st Qtr.
2002 2001
- --------------------------------------------------------------------------------
Net income, as reported $ 51,299 $ 42,086
Net income, as adjusted (3) $ 51,299 $ 43,471
Earnings per share - basic, as reported $ 0.70 $ 0.58
Earnings per share - basic, as adjusted (3) $ 0.70 $ 0.60
Earnings per share - diluted, as reported $ 0.69 $ 0.57
Earnings per share - diluted, as adjusted (3) $ 0.69 $ 0.59
Return on average assets, as reported 1.54% 1.31%
Return on average assets, as adjusted (3) 1.54% 1.35%
Return on average equity, as reported 18.40% 17.18%
Return on average equity, as adjusted (3) 18.40% 17.75%
Efficiency ratio, as reported (2) 48.47% 53.68%
Efficiency ratio, as adjusted (2), (3) 48.47% 52.73%
Net interest margin 3.91% 3.34%
- --------------------------------------------------------------------------------
(1) All share and per share financial information has been restated to reflect
the effect of the stock dividend.
(2) Noninterest expense divided by sum of taxable equivalent net interest
income plus noninterest income, excluding investment securities gains, net,
and asset sales gains, net.
(3) Selected 2001 financial data has been adjusted to exclude the amortization
of goodwill affected by adopting SFAS 142.
- --------------------------------------------------------------------------------
Net Interest Income and Net Interest Margin
Net interest income on a fully taxable equivalent basis for the three months
ended March 31, 2002, was $123.5 million, an increase of $20.9 million or 20.4%
over the comparable quarter last year, with the Signal acquisition contributing
approximately $3.6 million, net of the cost to fund the transaction. As
indicated in Tables 2 and 3, the $20.9 million increase in fully taxable
equivalent net interest income was attributable to rate (as the impact of
changes in the interest rate environment improved fully taxable equivalent net
interest income by $18.9 million) and, to a lesser degree, volume (with balance
sheet growth and differences in the mix of average earning assets and average
interest-bearing liabilities adding $2.0 million to fully taxable equivalent net
interest income).
The net interest margin for 1Q02 was 3.91%, up 57 bp from 3.34% in 1Q01, of
which, approximately 2 bp is attributable to the Signal acquisition. This
comparable quarter increase is the result of a 77 bp increase in interest rate
spread (the net of a 227 bp decrease in the cost of interest-bearing liabilities
and a 150 bp decrease in the yield on earning assets), partially offset by a 20
bp lower contribution from net free funds.
Interest rates fell significantly between the comparable quarters. The average
Federal funds rate of 1.75% for 1Q02 was 386 bp lower than the average for 1Q01.
Both fully taxable equivalent net interest income and net interest margin
benefited from the lower interest rate environment, particularly by lower costs
of interest-bearing liabilities.
The yield on earning assets was 6.37% for 1Q02, down 150 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 6.47%, down 178 bp
from 1Q01. The average yield on investments and other earning assets was 6.07%,
down 74 bp.
The cost of interest-bearing liabilities was 2.84% for 1Q02, down 227 bp
compared to 1Q01, impacted by the significantly lower rate environment in 1Q02.
The average cost of interest-bearing deposits excluding brokered CDs was 2.68%,
down 197 bp from 1Q01, benefiting from a larger mix of lower-costing transaction
accounts, as well as from lower rates on all interest-bearing deposit products
in 1Q02 versus 1Q01. Brokered CD balances declined to represent 3.0% of
interest-bearing liabilities (versus 6.1% for 1Q01) and had lower costs (down
449 bp to 2.04% for 1Q02). The cost of wholesale funds (comprised of short-term
borrowings and long-term debt) was 3.24% (down 259 bp from 1Q01), also
attributable to the lower rate environment between comparable quarters.
Average earning assets increased by $419 million (3.4%) over the comparable
quarter last year. The growth in earning assets came from loans, up an average
of $420 million (4.7%); excluding the one month average impact of Signal, loans
were up $155 million (1.7%). The Corporation maintains a commercial focus to the
composition of its loan portfolio; commercial loans represented 58.2% of average
loans for 1Q02 compared to 51.8% for 1Q01. Average investments and other earning
assets were relatively unchanged (down $1.0 million).
Average interest-bearing liabilities increased $118 million (1.1%) over 1Q01.
While relatively unchanged in balance, the mix of interest-bearing liabilities
is significantly different between the comparable quarters. The use of
higher-costing brokered CDs was reduced by more than half (down $337 million),
representing 3.0% of average interest-bearing liabilities versus 6.1% for 1Q01.
Interest-bearing deposits excluding brokered CDs were down slightly, but with a
notable shift from time deposits to transaction accounts. Therefore, average
wholesale funding increased $435 million (predominantly in long-term debt) to
32.4% of interest-bearing liabilities for 1Q02 compared to 28.7% for 1Q01. To
take advantage of the lower rate environment, improve liquidity and mitigate
interest rate risk, the Corporation increased its long-term debt, on average, to
11.8% of interest-bearing liabilities compared to 1.1% for 1Q01. The growth in
long-term debt included the issuance of $200 million of fixed rate subordinated
debt, $200 million of variable rate bank notes, $900 million of long-term FHLB
advances and $11 million of trust preferred debt acquired from Signal.
- --------------------------------------------------------------------------------------------------
TABLE 2
Net Interest Income Analysis
($ in Thousands)
- ---------------------------------------------------------------------------------------------------
Three months ended March 31, Three months ended March 31,
2002 2001
-------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ---------------------------------------------------------------------------------------------------
Loans $ 9,405,417 $ 151,654 6.47% $ 8,985,659 $ 184,661 8.25%
Investments and other 3,210,623 48,715 6.07 3,211,356 54,619 6.81
----------------------- ------------------------
Total earning assets 12,616,040 200,369 6.37 12,197,015 239,280 7.87
Other assets, net 922,562 817,488
------------ ------------
Total assets $ 13,538,602 $ 13,014,503
============ ============
Interest-bearing deposits,
excluding Brokered CDs $ 7,060,161 $ 46,588 2.68% $ 7,040,486 $ 80,748 4.65%
Brokered CDs 326,119 1,641 2.04 663,285 10,679 6.53
Wholesale funding 3,537,281 28,650 3.24 3,102,062 45,249 5.83
----------------------- ------------------------
Total interest-bearing
liabilities 10,923,561 76,879 2.84 10,805,833 136,676 5.11
--------- ---------
Demand, non-interest bearing 1,297,599 1,084,769
Other liabilities 186,728 130,617
Stockholders' equity 1,130,714 993,284
------------- ------------
Total liabilities and
equity $ 13,538,602 $ 13,014,503
============= ============
Interest rate spread 3.53 2.76
Net free funds 0.38 0.58
---- ----
Net interest income and net
interest margin $ 123,490 3.91% $ 102,604 3.34%
========= =========
Tax equivalent adjustment $ 6,063 $ 5,601
--------- ----------
Net interest income, as reported $ 117,427 $ 97,003
========= ==========
- ---------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
TABLE 3
Volume / Rate Variance
($ in Thousands)
- -------------------------------------------------------------------------------------------
Comparison of
Three months ended March 31, 2002 versus
2001
--------------------------------------------
Variance Attributable to
---------------------------
Income/Expense
Variance* Volume Rate
- -------------------------------------------------------------------------------------------
INTEREST INCOME
Loans $ (33,007) $ 5,056 $ (38,063)
Investments and other (5,904) (170) (5,734)
-----------------------------------------
Total interest income (38,911) 4,886 (43,797)
INTEREST EXPENSE
Interest-bearing deposits, excluding
Brokered CDs $ (34,160) $ 257 $ (34,417)
Brokered CDs (9,038) (1,689) (7,349)
Wholesale funding (16,599) 4,283 (20,882)
-----------------------------------------
Total interest expense (59,797) 2,851 (62,648)
-----------------------------------------
Net interest income $ 20,886 $ 2,035 $ 18,851
=========================================
* 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 1Q02 was $11.3 million, up $2.0 million from
the fourth quarter of 2001 ("4Q01") of $9.3 million, and up $5.7 from 1Q01 of
$5.6 million. Annualized net charge-offs as a percent of average loans for 1Q02
decreased to 0.31% from 0.33% for 4Q01, but increased compared to 0.10% for
1Q01. The ratio of the allowance for loan losses to total loans was 1.48%, up
from 1.38% at December 31, 2001 and 1.42% at March 31, 2001. See Table 8.
The provision for loan losses is predominantly a function of the methodology
used to determine the adequacy of the allowance for loan losses which focuses on
changes in the size and character of the loan portfolio, changes in levels of
impaired and other nonperforming loans, historical losses on each portfolio
category, the risk inherent in specific loans, concentrations of loans to
specific borrowers or industries, existing economic conditions, the fair value
of underlying collateral, and other factors which could affect potential credit
losses. See additional discussion under the "Allowance for Loan Losses" section.
Noninterest Income
Noninterest income for 1Q02 was $47.4 million, up $3.1 million or 7.0% from
1Q01. Excluding Signal, noninterest income for 1Q02 was $46.3 million, an
increase of $1.9 million or 4.4% over 1Q01. Primary components impacting the
change between comparable quarters were mortgage banking income, service charges
on deposit accounts, credit card and other nondeposit fees, and trust service
fees.
- --------------------------------------------------------------------------------
TABLE 4
Noninterest Income
($ in Thousands)
- --------------------------------------------------------------------------------
1st Qtr. 1st Qtr. Dollar Percent
2002 2001 Change Change
- ------------------------------------------------------------------ -------------
Trust service fees $ 7,371 $ 8,072 $ (701) (8.7)%
Service charges on deposit accounts 9,880 8,745 1,135 13.0
Mortgage banking income 12,604 9,185 3,419 37.2
Credit card and other nondeposit fees 6,072 6,775 (703) (10.4)
Retail commission income 4,616 4,484 132 2.9
Bank owned life insurance income 3,270 3,134 136 4.3
Asset sale gains, net 331 532 (201) (37.8)
Other 3,256 3,146 110 3.5
-----------------------------------------
Subtotal $ 47,400 44,073 3,327 7.5
Investment securities gains, net -- 246 (246) (100.0)
-----------------------------------------
Total noninterest income $ 47,400 $ 44,319 $ 3,801 7.0%
=========================================
- --------------------------------------------------------------------------------
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 $4.1 billion at 1Q01 to $4.0 billion at 1Q02), a
function of the market and competitive market conditions.
Service charges on deposit accounts were up $1.1 million between comparable
first quarter periods, primarily due to changes in the service charge fee
structure.
Mortgage banking income consists of servicing fees, the gain or loss on sales of
mortgage loans to the secondary market, gains on sales of servicing, and
production-related revenue (origination, underwriting, and escrow waiver fees).
Mortgage banking income was $12.6 million, an increase of $3.4 million or 37.2%
over 1Q01. The increase was driven primarily by secondary mortgage loan
production which doubled between comparable periods ($691 million in 1Q02 versus
$345 million in 1Q01). The higher production levels positively impacted
production volume-related fees (up $2.3 million). Also, gains on sales of the
increased production were up $2.4 million (the net of realized gains up $4.9
million and $2.5 million lower fair value of mortgage derivatives). There was a
$1.1 million gain on the sale of servicing rights in 1Q01, versus none in 1Q02.
Servicing fees were down $0.2 million or 6.6% compared to 1Q01, in line with the
decline in the portfolio serviced for others. The portfolio serviced for others
was down 2.1% to $5.4 billion from $5.5 billion at March 31, 2001, due to sales
of mortgage servicing rights on a portion of the portfolio in 1Q01, partially
offset by increases attributable to higher sales volume.
Credit card and other nondeposit fees were $6.1 million for 1Q02, a decrease of
$0.7 million or 10.4% from 1Q01, attributable to decreases in credit card,
commercial, and other retail fees.
Retail commission income (which includes commissions from insurance and
brokerage product sales) was $4.6 million, up slightly compared to 1Q01.
Insurance commissions increased $0.4 million, while brokerage commissions
declined $0.3 million.
Noninterest Expense
Noninterest expense was $82.7 million, up $4.2 million or 5.4% compared to 1Q01.
Adjusting first for goodwill amortization, which ceased on January 1, 2002, as a
result of adopting SFAS 142, noninterest expense was up $5.6 million or 7.3%.
Adjusted further, however, for Signal which was not part of 1Q01, noninterest
expense was up $2.8 million or 3.7% over the comparable quarter last year.
- --------------------------------------------------------------------------------
TABLE 5
Noninterest Expense
($ in Thousands)
- --------------------------------------------------------------------------------
1st Qtr. 1st Qtr. Dollar Percent
2002 2001 Change Change
- --------------------------------------------------------------------------------
Personnel expense $ 44,994 $ 40,305 $ 4,689 11.6%
Occupancy 6,137 6,354 (217) (3.4)
Equipment 3,490 3,680 (190) (5.2)
Data processing 4,803 4,843 (40) (0.8)
Business development and advertising 3,446 3,001 445 14.8
Stationery and supplies 2,044 1,732 312 18.0
FDIC expense 372 434 (62) (14.3)
Mortgage servicing rights expense 2,897 3,898 (1,001) (25.7)
Intangible amortization expense 715 717 (2) (0.3)
Legal and professional fees 1,292 892 400 44.8
Other 12,477 11,209 1,268 11.3
------------------------------------------
Subtotal $ 82,667 $ 77,065 $ 5,602 7.3%
Goodwill amortization expense -- 1,385 (1,385) (100.0)
------------------------------------------
Total noninterest expense $ 82,667 $ 78,450 $ 4,217 5.4%
==========================================
- --------------------------------------------------------------------------------
Personnel expense increased $4.7 million or 11.6% over 1Q01, however, excluding
Signal, personnel expense rose $2.8 million or 7.0%. Personnel expense
represented 54.4% of noninterest expense before goodwill in 1Q02 compared to
52.3% in 1Q01. Salary expenses increased $3.1 million or 9.8% (5.0% excluding
Signal) between comparable quarters, due primarily to merit increases and
increases in incentive compensation. Average full-time equivalent employees were
3,940 for 1Q02 (3,823 excluding Signal) compared to 3,840 for 1Q01. Fringe
benefits, were up $1.6 million or 18.1% (13.8% without Signal) over 1Q01,
primarily attributable to higher profit sharing expenses and the increased cost
of premium based benefits.
Occupancy expense decreased primarily due to lower utilities. Equipment expense
declined predominantly in computer depreciation expense. Business development
and advertising increased, primarily in additional advertising efforts.
Mortgage servicing rights expense includes the amortization of the mortgage
servicing rights asset and increases or decreases to the valuation allowance
associated with the mortgage servicing rights asset. Amortization of mortgage
servicing rights decreased by $1.0 million between the comparable quarters,
predominantly driven by the addition of a $1.6 million valuation adjustment
during 1Q01. 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 assets on the consolidated balance sheet,
were $36.6 million, net of a $10.7 million valuation allowance at March 31,
2002.
Goodwill amortization expense decreased $1.4 million due to the adoption of SFAS
142, which required the amortization of goodwill to cease. See Note 3, "Adoption
of Statements of Financial Accounting Standards" and Note 6, "Goodwill and Other
Intangible Assets" for additional discussion.
Other expense was up $1.3 million from 1Q01, principally attributable to higher
loan expenses (notably volume-driven credit card and residential mortgage loan
costs).
Income Taxes
Income tax expense for 1Q02 was $19.6 million, up $4.4 million from 1Q01. The
effective tax rate (income tax expense divided by income before taxes) was 27.7%
and 26.5% for 1Q02 and 1Q01, respectively. This increase is primarily
attributable to the increase in net income before tax and an increase in state
tax expense.
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 regulatory taxing authorities.
Such agencies may require that changes in the amount of tax expense or valuation
allowance be recognized when their interpretations differ from those of
management, based on their judgments about information available to them at the
time of their examinations.
Balance Sheet
At March 31, 2002, total assets were $14.3 billion, an increase of $1.2 billion,
or 9.2%, over March 31, 2001. The growth in assets is predominantly attributable
to the acquisition of Signal, which contributed $1.1 billion to period end
assets. Excluding Signal, total assets were relatively unchanged from 1Q01. Loan
growth since 1Q01 was $822 million or 9.2%, with $753 million attributable to
the Signal acquisition. Excluding the Signal acquisition, loans grew less than
1% over the comparable quarter last year. The growth in loans was almost
exclusively in commercial loans, which grew $1.2 billion (with $560 million
attributable to Signal) and now comprise 61% of total loans. However, loan
growth was tempered by a $630 million decline in residential real estate
attributable to high refinance activity and sales of current production into the
secondary market. Total deposits were up $505 million or 5.8%; however, total
deposits excluding Signal were down $290 million or 3.3%, with $188 million
attributable to a reduction in brokered CDs and $12 million to a 4Q01 branch
deposit sale. Demand deposits grew $228 million (18.8%), with $168 million
attributable to the Signal acquisition, to represent 16% of total deposits,
compared to 14% a year earlier. Short-term borrowings decreased $920 million,
primarily in short-term Federal Home Loan Bank advances, as longer-term funding
sources were utilized. Since March 31, 2001, long-term debt grew $1.4 billion
due to the issuance of $200 million of subordinated debt, $200 million of bank
notes, the increased use of long-term Federal Home Loan Bank advances, and $77
million attributable to the Signal.
Since year-end 2001, total assets, excluding Signal, decreased $457 million,
while loans, excluding Signal, remained level at $9.0 billion. Total deposits
without Signal were down $215 million.
- -------------------------------------------------------------------------------------------------
TABLE 6
Period End Loan Composition
($ in Thousands)
- -------------------------------------------------------------------------------------------------
March 31, % of March 31, % of Dec. 31, % of
2002 Total 2001 Total 2001 Total
- -------------------------------------------------------------------------------------------------
Commercial, financial &
agricultural $ 2,162,954 22% $ 1,704,514 19% $ 1,783,300 20%
Real estate-construction 801,467 8 689,496 8 797,734 9
Commercial real estate 2,920,865 30 2,328,863 26 2,630,964 29
Lease financing 37,211 1 14,639 -- 11,629 --
------------------------------------------------------------------
Commercial 5,922,497 61 4,737,512 53 5,223,627 58
Residential real estate 2,418,822 25 3,048,955 34 2,524,199 28
Home equity 695,519 7 511,911 6 609,254 7
------------------------------------------------------------------
Residential mortgage 3,114,341 32 3,560,866 40 3,133,453 35
Consumer 720,746 7 637,165 7 662,784 7
------------------------------------------------------------------
Total loans $ 9,757,584 100% $ 8,935,543 100% $ 9,019,864 100%
==================================================================
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
TABLE 7
Period End Deposit Composition
($ in Thousands)
- -------------------------------------------------------------------------------------------------
March 31, % of March 31, % of Dec. 31, % of
2002 Total 2001 Total 2001 Total
- -------------------------------------------------------------------------------------------------
Noninterest-bearing demand $ 1,437,798 16% $ 1,209,762 14% $ 1,425,109 17%
Savings 883,794 10 849,605 10 801,648 9
Interest bearing demand 989,519 11 790,819 9 922,164 11
Money market 2,084,671 23 1,628,030 19 1,814,098 21
Brokered CDs 315,184 3 502,567 6 290,000 3
Other time 3,481,726 37 3,706,908 42 3,359,592 39
------------------------------------------------------------------
Total deposits $ 9,192,692 100% $ 8,687,691 100% $ 8,612,611 100%
==================================================================
Total deposits, excluding
Brokered CDs $ 8,877,508 97% $ 8,185,124 94% $ 8,322,611 97%
==================================================================
- -------------------------------------------------------------------------------------------------
Allowance for Loan Losses
The loan portfolio is the Corporation's primary asset subject to credit risk.
Credit risk is controlled and monitored through the use of lending standards, a
thorough review of potential borrowers, and on-going review of loan payment
performance. Active asset quality administration, including early problem loan
identification and timely resolution of problems, further ensures appropriate
management of credit risk and minimization of loan losses.
- --------------------------------------------------------------------------------
TABLE 8
Allowance for Loan Losses and Nonperforming Assets
($ in Thousands)
- --------------------------------------------------------------------------------
At and for the At and for
three months ended the Year ended
March 31, December 31,
- --------------------------------------------------------------------------------
2002 2001 2001
- --------------------------------------------------------------------------------
Allowance for Loan Losses:
Balance at beginning of period $ 128,204 $ 120,232 $ 120,232
Balance related to acquisitions 11,985 -- --
Provision for loan losses 11,251 5,582 28,210
Charge-offs (7,985) (2,910) (22,639)
Recoveries 895 764 2,401
-----------------------------------
Net loan charge-offs (7,090) (2,146) (20,238)
-----------------------------------
Balance at end of period $ 144,350 $ 123,668 $ 128,204
===================================
Nonperforming Assets:
Nonaccrual loans $ 63,626 $ 50,310 $ 48,238
Accruing loans past due 90 days or more 4,991 4,788 3,649
Restructured loans 3,097 146 238
-----------------------------------
Total nonperforming loans 71,714 55,244 52,125
Other real estate owned 2,782 3,285 2,717
-----------------------------------
Total nonperforming assets $ 74,496 $ 58,529 $ 54,842
===================================
Ratios:
Allowance for loan losses to net
charge-offs (annualized) 5.02x 14.21x 6.33x
Ratio of net charge-offs to average
loans (annualized) 0.31% 0.10% 0.22%
Allowance for loan losses to total loans 1.48% 1.38% 1.42%
Nonperforming loans to total loans 0.73% 0.62% 0.58%
Nonperforming assets to total assets 0.52% 0.45% 0.40%
Allowance for loan losses to
nonperforming loans 201% 224% 246%
- --------------------------------------------------------------------------------
As of March 31, 2002, the allowance for loan losses was $144.4 million,
representing 1.48% of loans outstanding, compared to $123.7 million, or 1.38% of
loans, at March 31, 2001, and $128.2 million, or 1.42% at year-end 2001. At
March 31, 2002, the allowance for loan losses was 201% of nonperforming loans
compared to 224% and 246% at March 31 and December 31, 2001, respectively. Table
8 provides additional information regarding activity in the allowance for loan
losses.
The allowance for loan losses at March 31, 2002 increased $20.7 million (16.7%)
since March 31, 2001 and $16.1 million (12.6%) since December 31, 2001, with
approximately $12.0 million of the increase attributable to the Signal
acquisition. The remainder of the increase is, in part, in response to continued
growth in loans and the increase in nonperforming loans between comparable
periods (see Table 8 and section "Nonperforming Loans and Other Real Estate
Owned"). Loans at March 31, 2002, grew $822 million (9.2%) since March 31, 2001,
predominantly in commercial loans (see commercial, financial and agricultural;
commercial real estate and real estate construction loans included in Table 6).
Period end loans grew $738 million since year-end. The mix of commercial loans
increased as a percent of total loans to 61% at March 31, 2002 compared to 53%
at March 31, 2001 and 58% at December 31, 2001.
Gross charge-offs were $8.0 million for the three months ending March 31, 2002,
$2.9 million for the comparable period ending March 31, 2001 and $22.6 million
for year-end 2001, while recoveries for the corresponding periods were $0.9
million, $0.8 million and $2.4 million, respectively. As a result, the ratio of
net charge-offs to average loans on an annualized basis was 0.31%, 0.10%, and
0.22% for 1Q02, 1Q01, and for the 2001 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. Management's evaluation of the adequacy of the allowance for
loan losses is based on management's ongoing review and grading of the loan
portfolio, consideration of past loan loss experience, trends in past due and
nonperforming loans, risk characteristics of the various classifications of
loans, existing economic conditions, the fair value of underlying collateral,
and other factors which could affect probable credit losses. Assessing these
numerous factors involves significant judgment, and therefore, management
considers the allowance for loan losses a critical accounting policy. 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).
Management believes the allowance for loan losses to be adequate at March 31,
2002. While management uses available information to recognize losses on loans,
future adjustments to the allowance for loan losses may be necessary based on
changes in economic conditions and the impact of such change on the
Corporation's borrowers. As an integral part of their examination process,
various regulatory agencies also review the allowance for loan losses. Such
agencies may require that certain loan balances be charged off when their credit
evaluations differ from those of management, based on their judgments about
information available to them at the time of their examination.
Nonperforming Loans and Other Real Estate Owned
Management is committed to promptly identifying and resolving nonaccrual and
problem loans. This philosophy is embodied through the ongoing monitoring and
reviewing of all pools of risk in the loan portfolio to ensure that problem
loans are identified quickly and the risk of loss is minimized.
Nonperforming loans are considered an indicator of potential future loan losses.
Nonperforming loans are defined as nonaccrual loans, loans 90 days or more past
due but still accruing and restructured loans. The Corporation specifically
excludes student loan balances that are 90 days or more past due and still
accruing and that have contractual government guarantees as to collection of
principal and interest, from its definition of nonperforming loans. The
Corporation had $20 million, $21 million and $20 million of these loans at March
31, 2002, December 31, 2001, and March 31, 2001, respectively.
Table 8 provides detailed information regarding nonperforming assets. Total
nonperforming loans at March 31, 2001 were up $19.6 million and $16.5 million,
from year-end 2001, and 1Q01, respectively. The ratio of nonperforming loans to
total loans was .73% at 1Q02, as compared to .58% and .62% at year-end 2001, and
1Q01, respectively. Nonaccrual loans account for the majority of the $16.5
million increase in nonperforming loans between the comparable first quarter
periods. Nonaccrual loans increased $13.3 million (of which, $7.6 million was
acquired with the Signal acquisition and the remainder was primarily
attributable to the addition of two large commercial credits), accruing loans
past due 90 or more days were relatively unchanged, and restructured loans
increased $3.0 million (primarily attributable to the addition of one large
commercial credit). Nonaccrual loans also account for the majority of the $19.6
million increase in nonperforming loans since year-end 2001. Nonaccrual loans
increased $15.4 million (of which, $7.6 million was acquired with the Signal
acquisition and $7.6 million was attributable to the addition of two large
commercial credits), accruing loans past due 90 or more days increased $1.3
million (of which, $1.1 million was attributable to the Signal acquisition), and
restructured loans were up $2.9 million (predominantly due to the addition of
one large commercial credit).
Other real estate owned was $2.8 million at 1Q02, relatively unchanged from
December 31, 2001, and down slightly ($503,000) from 1Q01.
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 March 31, 2002, potential
problem loans totaled $193 million. The loans that have been reported as
potential problem loans are not concentrated in a particular industry.
Management does not presently expect significant losses from credits in this
category.
Liquidity
Effective liquidity management ensures the cash flow requirements of depositors
and borrowers, as well as the operating cash needs of the Corporation, are met.
Funds are available from a number of sources, including the securities
portfolio, the core deposit base, lines of credit with major banks, the ability
to acquire large and brokered deposits, and the ability to securitize or package
loans for sale. Additionally, liquidity is provided from loans and securities
repayments and maturities.
The subsidiary banks are subject to regulation and, among other things, may be
limited in their ability to pay dividends or transfer funds to the parent
company. Accordingly, consolidated cash flows as presented in the consolidated
statements of cash flows may not represent cash immediately available for the
payment of cash dividends to the Corporation's stockholders.
For the three months ended March 31, 2002, net cash provided from operating and
investing activities was $231.8 million and $1.2 million, respectively, while
financing activities used net cash of $429.3 million, for a net decrease in cash
and cash equivalents of $196.3 million since year-end 2001. Generally, during
1Q02, 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.
For the three months ended March 31, 2001, net cash was provided by investing
activities ($66.3 million), while net cash was used by both operating and
financing activities ($43.4 million and $72.3 million, respectively), for a net
decrease in cash and cash equivalents of $49.4 million since year-end 2000.
Generally, during 1Q01, anticipated maturities of time deposits (primarily in
brokered CDs) occurred, while total asset growth since year-end 2000 was
moderate. Thus, other financing sources increased, particularly short-term
borrowings, to help replenish the net decrease in deposits and to provide for
common stock repurchases and payment of cash dividends to the Corporation's
stockholders.
The parent company manages its liquidity position to provide the funds necessary
to pay dividends to stockholders, service debt, invest in subsidiaries,
repurchase common stock, and satisfy other operating requirements. The parent
company's primary funding sources to meet its liquidity requirements are
dividends and service fees from subsidiaries, borrowings with major banks,
commercial paper issuance, and proceeds from the issuance of equity.
In addition to affiliate dividends, the parent company has multiple funding
sources that could be used to increase liquidity and provide additional
financial flexibility. These sources include a revolving credit facility,
commercial paper, and a shelf registration. 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, 2002.
During 2000, a $200 million commercial paper program was initiated, of which
$200 million was available at March 31, 2002. Additionally, effective in May
2001, the parent company filed a registration statement utilizing a "shelf"
registration process. Under this shelf process, 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 notes offering, bearing a 6.75% fixed coupon rate and
a 10-year maturity. At March 31, 2002, $300 million was available under the
shelf registration. In May 2002, the parent company filed a preliminary
registration statement to utilize a "shelf" registration. Under this shelf
process, the parent company may offer up to $300 million of trust preferred
securities.
During 2000, the four largest subsidiary banks (Associated Bank Illinois,
National Association, Associated Bank Milwaukee, Associated Bank Green Bay,
National Association, and Associated Bank North) established a $2.0 billion bank
note program. During 2001 the Corporation merged its Wisconsin banks into a
single national charter named Associated Bank, National Association; thus,
subsequently the program is associated with Associated Bank Illinois, National
Association and Associated Bank, National Association. Under this program,
short-term and long-term debt may be issued. As of March 31, 2002, $200 million
of long-term, variable rate bank notes were outstanding, and $1.8 billion remain
available under this program.
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.
Capital
On April 24, 2002, the Board of Directors declared a 10% stock dividend, payable
May 15 to shareholders of record at the close of business on April 29. All share
and per share data in the accompanying consolidated financial statements has
been adjusted to reflect the 10% stock dividend paid. As a result of the stock
dividend, the Corporation on the payable date will distribute 7.0 million shares
of common stock. Any fractional shares resulting from the dividend will be paid
in cash.
Stockholders' equity at March 31, 2002 increased to $1.2 billion, compared to
$1.0 billion at March 31, 2001. The increase in equity between the two periods
was primarily composed of the retention of earnings, the issuance of common
stock in connection with the Signal acquisition, and the exercise of stock
options, with offsetting decreases to equity from the payment of dividends and
the repurchase of common stock. Additionally, stockholders' equity at March 31,
2002 included $49.0 million of accumulated other comprehensive income,
predominantly related to unrealized gains on securities available for sale, net
of the tax effect. At March 31, 2001, stockholders' equity included $49.2
million of accumulated other comprehensive income, primarily related to
unrealized gains on securities available for sale, net of the tax effect.
Stockholders' equity to assets was 8.59% and 7.80% at March 31, 2002 and 2001,
respectively.
Stockholders' equity grew $160.4 million since year-end 2001. The increase in
equity between the two periods was primarily composed of the retention of
earnings, the issuance of common stock in connection with the Signal
acquisition, and the exercise of stock options, with offsetting decreases to
equity from the payment of dividends and the repurchase of common stock.
Additionally, stockholders' equity at year-end, included $47.2 million of
accumulated other comprehensive income, predominantly related to unrealized
gains on securities available for sale, net of the tax effect. Stockholders'
equity to assets at March 31, 2002 was 8.59%, compared to 7.87% at December 31,
2001.
Cash dividends of $0.28 per share were paid in 1Q02, compared to $0.26 per share
in 1Q01, an increase of 6.9%.
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 330,000 shares per quarter in 2002. During 1Q02, 330,000 shares were
repurchased under this authorization, 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. Under this authorization
123,750 shares were repurchased during 1Q02, at an average cost of $32.01 per
share, while approximately 3.3 million shares remain authorized to repurchase at
March 31, 2002. No shares were repurchased under the 2000 authorizations during
1Q01. The repurchase of shares will be based on market opportunities, capital
levels, growth prospects, and other investment opportunities.
The adequacy of the Corporation's capital is regularly reviewed to ensure that
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. The assessment of overall capital
adequacy depends on a variety of factors, including asset quality, liquidity,
stability of earnings, changing competitive forces, economic conditions in
markets served and strength of management. The capital ratios of the Corporation
and its banking affiliates are greater than minimums required by regulatory
guidelines. The Corporation's capital ratios are summarized in Table 9.
TABLE 9
Capital Ratios
(In Thousands, except per share data)
- -------------------------------- ------------- ------------ ------------ ----------- -------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
2002 2001 2001 2001 2001
- -------------------------------- ------------- ------------ ------------ ----------- -------------
Total stockholders' equity $ 1,230,820 $ 1,070,416 $ 1,078,874 $ 1,050,678 $ 1,023,978
Tier 1 capital 969,888 924,871 913,281 896,276 870,096
Total capital 1,309,433 1,253,036 1,238,673 1,020,620 989,683
Market capitalization 2,622,307 2,305,672 2,230,131 2,379,119 2,198,989
----------------------------------------------------------------
Book value per common share $ 16.23 $ 14.89 $ 14.90 $ 14.45 $ 14.08
Cash dividend per common share 0.28 0.28 0.28 0.28 0.26
Stock price at end of period 34.57 32.08 30.81 32.72 30.23
Low closing price for the period 30.37 28.89 27.12 28.75 27.05
High closing price for the period 35.29 32.71 33.55 32.72 32.90
----------------------------------------------------------------
Total equity / assets 8.59% 7.87% 7.95% 7.95% 7.80%
Tangible common equity / assets 7.15 7.20 7.27 7.23 7.06
Tier 1 leverage ratio 7.28 7.03 7.02 6.93 6.74
Tier 1 risk-based capital ratio 9.43 9.71 9.73 9.64 9.69
Total risk-based capital ratio 12.73 13.15 13.19 10.98 11.02
----------------------------------------------------------------
Shares outstanding (period end) 75,849 71,869 72,386 72,716 72,748
Basic shares outstanding (average) 73,142 72,137 72,692 72,760 72,765
Diluted shares outstanding (average) 74,042 72,746 73,297 73,360 73,357
- --------------------------------------------------------------------------------------------------
Subsequent Events
On April 24, 2002, the Board of Directors declared a 10% stock dividend payable
on May 15, 2002, to shareholders of record at the close of business on April 29,
2002. Any fractional shares resulting from the dividend will be paid in cash.
All share and per share data amounts contained in the consolidated financial
statements have been restated to reflect the effect of this stock dividend.
On April 24, 2002, the Board of Directors declared a $0.31 per share dividend
payable on May 15, 2002, to shareholders of record as of May 3, 2002. This cash
dividend has not been reflected in the accompanying consolidated financial
statements.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk arises from exposure to changes in interest rates, exchange rates,
commodity prices, and other relevant market rate or price risk. The Corporation
faces market risk in the form of interest rate risk through other than trading
activities. Market risk from other than trading activities in the form of
interest rate risk is measured and managed through a number of methods. The
Corporation uses financing modeling techniques that measure the sensitivity of
future earnings due to changing rate environments to measure interest rate risk.
Policies established by the Corporation's Asset/Liability Committee and approved
by the Corporation's Board of Directors limit exposure of earnings at risk.
General interest rate movements are used to develop sensitivity as the
Corporation feels it has no primary exposure to a specific point on the yield
curve. These limits are based on the Corporation's exposure to a 100 bp and 200
bp immediate and sustained parallel rate move, either upward or downward.
In order to measure earnings sensitivity to changing rates, the Corporation uses
static gap analysis. The static gap analysis starts with contractual repricing
information for assets, liabilities, and off-balance sheet instruments. These
items are then combined with repricing estimations for administered rate
(interest-bearing demand deposits, savings, and money market accounts) and
non-rate related products (demand deposit accounts, other assets, and other
liabilities) to create a baseline repricing balance sheet. In addition to the
contractual information, residential mortgage whole loan products and
mortgage-backed securities are adjusted based on industry estimates of
prepayment speeds that capture the expected prepayment of principal above the
contractual amount based on how far away the contractual coupon is from market
coupon rates.
The following table represents the Corporation's consolidated static gap
position as of March 31, 2002.
Interest Rate Sensitivity Analysis
March 31, 2002
------------------------------------------------------------------------------------
Interest Sensitivity Period
91-180 181-365 Total Within
0-90 Days Days Days 1 Year Over 1 Year Total
------------------------------------------------------------------------------------
($ in Thousands)
Earning assets:
Loans, held for sale $ 149,945 $ -- $ -- $ 149,945 $ -- $ 149,945
Investment securities,
at amortized cost 623,554 131,016 282,974 1,037,544 2,326,867 3,364,411
Loans 4,817,485 746,970 749,220 6,313,675 3,443,909 9,757,584
Other earning assets 82,168 -- -- 82,168 -- 82,168
------------------------------------------------------------------------------------
Total earning assets $ 5,673,152 $ 877,986 $ 1,032,194 $ 7,583,332 $ 5,770,776 $ 13,354,108
====================================================================================
Interest-bearing liabilities:
Interest-bearing deposits(1)(2) $ 1,798,780 $ 1,074,549 $ 1,588,365 $ 4,461,694 $ 4,415,814 $ 8,877,508
Other interest-bearing
liabilities (2) 2,568,266 202,859 312,744 3,083,869 950,675 4,034,544
Interest rate swaps (403,814) 200,000 200,000 (3,814) 3,814 --
------------------------------------------------------------------------------------
Total interest-bearing
liabilities $ 3,963,232 $ 1,477,408 $ 2,101,109 $ 7,541,749 $ 5,370,303 $ 12,912,052
====================================================================================
Interest sensitivity gap $ 1,709,920 $ (599,422) $(1,068,915) $ 41,583 $ 400,473 $ 442,056
Cumulative interest
sensitivity gap $ 1,709,920 $ 1,110,498 $ 41,583
12 Month cumulative gap as a
percentage of earning assets at
March 31, 2002 12.8% 8.3% 0.3%
====================================================================================
(1) The interest rate sensitivity assumptions for demand deposits, savings
accounts, money market accounts, and interest-bearing demand deposit
accounts are based on current and historical experiences regarding
portfolio retention and interest rate repricing behavior. Based on these
experiences, a portion of these balances are considered to be long-term and
fairly stable and are therefore included in the "Over 1 Year" category.
(2) For analysis purposes, Brokered CDs of $315 million have been included with
other interest-bearing liabilities and excluded from interest-bearing
deposits.
The static gap analysis in the table above provides a representation of the
Corporation's earnings sensitivity to changes in interest rates. It is a static
indicator that does not reflect various repricing characteristics and may not
necessarily indicate the sensitivity of net interest income in a changing
interest rate environment. Since December 31, 2001, the Corporation has moved
from a liability sensitive balance sheet to a slightly asset sensitive balance
sheet as measured at the 12 month cumulative gap position. The predominant
reasons for this change in market risk since year-end include the impact of the
Signal acquisition, stronger loan prepayment, and the continued replacement of
short-term borrowings with long-term debt.
ASSOCIATED BANC-CORP
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.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed
for the three months ended March 31, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ASSOCIATED BANC-CORP
--------------------------------------
(Registrant)
Date: May 13, 2002 /s/ Robert C. Gallagher
--------------------------------------
Robert C. Gallagher
President and Chief Executive Officer
Date: May 13, 2002 /s/ Joseph B. Selner
--------------------------------------
Joseph B. Selner
Principal Financial Officer