SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITI - ----- EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 ---------------------------------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) - ----- OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------- ---------------------- Commission file number 0-5519 -------------------------------------------------------- Associated Banc-Corp - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Wisconsin 39-1098068 - ------------------------------------------------------------------------------ (State or other jurisdiction of (IRS employer incorporation or organization) identification no.) 1200 Hansen Road, Green Bay, Wisconsin 54304 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip code) (920) 491-7000 - ------------------------------------------------------------------------------ (Registrant's telephone number, including area code) - ------------------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ -------- APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares outstanding of registrant's common stock, par value $0.01 per share, at October 31, 2001, was 65,682,659 shares. 1
ASSOCIATED BANC-CORP TABLE OF CONTENTS Page No. -------- PART I. Financial Information Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets - September 30, 2001, September 30, 2000 and December 31, 2000 3 Consolidated Statements of Income - Three and Nine Months Ended September 30, 2001 and 2000 4 Consolidated Statement of Changes in Stockholders' Equity - Nine Months Ended September 30, 2001 5 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K 27 Signatures 28 2
PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements: ASSOCIATED BANC-CORP Consolidated Balance Sheets (Unaudited) <TABLE> September 30, September 30, December 31, 2001 2000 2000 ----------------------------------------------- ($ in Thousands, except share data) ASSETS <S> <C> <C> <C> Cash and due from banks $ 340,830 $ 323,129 $ 368,186 Interest-bearing deposits in other financial institutions 25,379 20,052 5,024 Federal funds sold and securities purchased under agreements to resell 305,825 21,075 23,310 Investment securities: Held to maturity-at amortized cost (fair value of $382,796 and $372,873, in 2000, respectively) -- 382,617 368,558 Available for sale-at fair value (amortized cost of $3,127,117, $2,932,524, and $2,867,109, 2,891,647 respectively) 3,245,240 2,903,275 Loans held for sale 142,134 37,563 24,593 Loans 9,010,370 8,858,665 8,913,379 Allowance for loan losses (126,631) (117,607) (120,232) -------------------------------------------- Loans, net 8,883,739 8,741,058 8,793,147 Premises and equipment 120,300 130,977 127,600 Other assets 501,378 560,256 526,329 -------------------------------------------- Total assets $ 13,564,825 $ 13,120,002 $ 13,128,394 ============================================ LIABILITIES AND STOCKHOLDERS' EQUITY Noninterest-bearing deposits $ 1,213,541 $ 1,194,405 $ 1,243,949 Interest-bearing deposits, excluding Brokered CDs 6,875,173 7,113,917 7,131,637 Brokered CDs 310,198 1,022,994 916,060 -------------------------------------------- Total deposits 8,398,912 9,331,316 9,291,646 Short-term borrowings 2,882,156 2,590,127 2,598,203 Long-term debt 1,020,116 122,463 122,420 Accrued expenses and other liabilities 184,767 145,913 147,429 -------------------------------------------- Total liabilities 12,485,951 12,189,819 12,159,698 Stockholders' equity Preferred stock -- -- -- Common stock (par value $0.01 per share, authorized 100,000,000 shares, issued 66,370,157, 67,024,657 and 66,402,157 shares, respectively) 664 670 664 Surplus 296,381 311,239 296,479 Retained earnings 734,345 645,413 663,566 Accumulated other comprehensive income (loss) 65,147 (18,926) 15,581 Treasury stock at cost (564,912, 299,219 and 285,948 shares, respectively) (17,663) (8,213) (7,594) -------------------------------------------- Total stockholders' equity 1,078,874 930,183 968,696 -------------------------------------------- Total liabilities and stockholders' equity $ 13,564,825 $ 13,120,002 $ 13,128,394 ============================================ </TABLE> See accompanying notes to consolidated financial statements. 3
ITEM 1. Financial Statements Continued: ASSOCIATED BANC-CORP Consolidated Statements of Income (Unaudited) <TABLE> Nine Months Three Months Ended Ended September 30, September 30, 2001 2000 2001 2000 ---------------------------------------------- (In Thousands, except per share data) INTEREST INCOME <S> <C> <C> <C> <C> Interest and fees on loans $ 170,895 $ 186,556 $ 533,506 $ 536,445 Interest and dividends on investment securities: Taxable 36,079 40,486 111,733 122,990 Tax exempt 10,123 10,170 30,329 27,537 Interest on deposits in other financial institutions 91 122 306 292 Interest on federal funds sold and securities purchased under agreements to resell 246 558 887 1,699 ---------------------------------------------- Total interest income 217,434 237,892 676,761 688,963 INTEREST EXPENSE Interest on deposits 70,314 100,727 240,706 274,422 Interest on short-term borrowings 30,247 40,469 111,691 119,964 Interest on long-term debt 9,862 2,158 16,398 5,328 ---------------------------------------------- Total interest expense 110,423 143,354 368,795 399,714 ---------------------------------------------- NET INTEREST INCOME 107,011 94,538 307,966 289,249 Provision for loan losses 6,966 4,122 18,913 15,003 ---------------------------------------------- Net interest income after provision for loan losses 100,045 90,416 289,053 274,246 NONINTEREST INCOME Trust service fees 6,627 9,665 22,038 29,314 Service charges on deposit accounts 9,672 8,821 27,967 24,502 Mortgage banking 11,144 5,125 35,709 14,617 Credit card and other nondeposit fees 6,896 6,475 20,916 19,011 Retail commissions 4,119 4,632 12,868 15,577 Bank owned life insurance income 3,308 3,081 9,626 9,111 Asset sale gains, net 59 3,179 974 24,486 Investment securities gains (losses), net 476 (2) 718 (7,194) Other 5,848 3,393 12,681 11,377 ---------------------------------------------- Total noninterest income 48,149 44,369 143,497 140,801 NONINTEREST EXPENSE Personnel expense 43,266 40,380 124,804 117,934 Occupancy 5,635 5,733 17,916 17,549 Equipment 3,493 3,755 10,823 11,607 Data processing 4,870 5,313 14,535 17,700 Business development and advertising 3,310 3,353 9,502 9,852 Stationery and supplies 959 1,970 5,021 5,793 FDIC expense 399 462 1,279 1,360 Mortgage servicing rights amortization 5,703 2,324 12,312 7,103 Other 16,453 16,875 48,624 50,909 ---------------------------------------------- Total noninterest expense 84,088 80,165 244,816 239,807 ---------------------------------------------- Income before income taxes 64,106 54,620 187,734 175,240 Income tax expense 19,001 13,116 54,524 46,958 ---------------------------------------------- NET INCOME 45,105 $ 41,504 $ 133,210 $ 128,282 ============================================== Earnings per share: Basic $ 0.68 $ 0.61 $ 2.01 $ 1.86 Diluted $ 0.68 $ 0.61 $ 2.00 $ 1.86 Average shares outstanding: Basic 66,083 68,031 66,126 68,815 Diluted 66,633 68,293 66,653 69,089 </TABLE> See accompanying notes to consolidated financial statements. 4
ITEM 1. Financial Statements Continued: ASSOCIATED BANC-CORP Consolidated Statement of Changes in Stockholders' Equity (Unaudited) <TABLE> Accumulated Other Common Retained Comprehensive Treasury Stock Surplus Earnings Income Stock Total ------------------------------------------------------------------------------------- ($ in Thousands) <S> <C> <C> <C> <C> <C> <C> Balance, December 31, 2000 $ 664 $ 296,479 $ 663,566 $ 15,581 $ (7,594) $ 968,696 Comprehensive income: Net income -- -- 133,210 -- -- 133,210 Other comprehensive income (loss): Cumulative effect of accounting change, net of tax -- -- -- (1,265) -- (1,265) Change in net unrealized loss on derivative instruments, net of tax -- -- -- (9,285) -- (9,285) Change in net unrealized holding gains on securities available for sale, net of tax -- -- -- 60,116 -- 60,116 ---------- Comprehensive income 182,776 ----------- Cash dividends, $0.91 per share -- -- (60,191) -- -- (60,191) Common stock issued: Stock options exercised -- -- (2,240) -- 6,417 4,177 Purchase and retirement of treasury stock in connection with repurchase program -- (1,005) -- -- -- (1,005) Purchase of treasury stock -- -- -- -- (16,486) (16,486) Tax benefit of stock options -- 907 -- -- -- 907 ---------------------------------------------------------------------- ----------- Balance, September 30, 2001 $ 664 $ 296,381 $ 734,345 $ 65,147 $ (17,663) $ 1,078,874 ===================================================================================== </TABLE> See accompanying notes to consolidated financial statements. 5
ITEM 1. Financial Statements Continued: ASSOCIATED BANC-CORP Consolidated Statements Of Cash Flows (Unaudited) <TABLE> For the Nine Months Ended September 30, 2001 2000 ---------------------------- ($ in Thousands) <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 133,210 $ 128,282 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 18,913 15,003 Depreciation and amortization 14,185 14,633 Amortization (accretion) of: Mortgage servicing rights 12,312 7,103 Intangibles 6,305 6,720 Investment premiums and discounts (154) (82) Deferred loan fees and costs 1,820 1,964 (Gain) loss on sales of securities, net (718) 7,194 Gain on sale of assets, net (974) (24,486) Gain on sales of loans held for sale, net (15,357) (2,042) Mortgage loans originated and acquired for sale (1,498,709) (282,308) Proceeds from sales of mortgage loans held for sale 1,396,525 258,742 Increase in interest receivable and other assets (26,299) (30,343) Increase in interest payable and other liabilities 38,245 7,002 -------------------------- Net cash provided by operating activities 79,304 107,382 -------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net increase in loans (113,468) (656,165) Capitalization of mortgage servicing rights (14,348) (2,783) Purchases of: Securities available for sale (504,686) (754,407) Premises and equipment, net of disposals (6,558) (8,229) Proceeds from: Sales of securities available for sale 135,627 458,612 Maturities of securities available for sale 478,481 272,825 Maturities of securities held to maturity -- 31,209 Sale of credit card receivables -- 156,376 Sales of other real estate owned and other assets 5,752 9,643 -------------------------- Net cash used by investing activities (19,200) (492,919) -------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits (892,734) 748,687 Net increase (decrease) in short-term borrowings 283,953 (184,963) Repayment of long-term debt (864) (1,820) Proceeds from issuance of long-term debt 898,560 100,000 Cash dividends (60,191) (56,417) Proceeds from exercise of stock options 4,177 2,892 Sales of branch deposits -- (98,034) Purchase of treasury stock (17,491) (74,718) -------------------------- Net cash provided by financing activities 215,410 435,627 -------------------------- Net increase in cash and cash equivalents 275,514 50,090 Cash and cash equivalents at beginning of period 396,520 314,166 -------------------------- Cash and cash equivalents at end of period $ 672,034 $ 364,256 ========================== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 388,955 $ 386,355 Income taxes 33,341 43,582 Supplemental schedule of noncash investing activities: Securities held to maturity transferred to 372,873 -- securities available for sale Loans transferred to other real estate 2,143 5,809 </TABLE> See accompanying notes to consolidated financial statements. 6
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 ("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. 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 2000 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 investment securities 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, 2001 presentation. NOTE 3: Adoption of Statements of Financial Accounting Standards ("SFAS") As required, on January 1, 2001, the Corporation adopted 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," (collectively referred to as "SFAS 133"). The adoption of SFAS 133 had an immaterial impact on the consolidated financial statements. See Note 5 of the notes to consolidated financial statements for a more detailed discussion. 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 the provisions of SFAS No. 125 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 was effective for transactions occurring after March 31, 2001, and was to be applied prospectively with certain exceptions. The adoption was not material to the Corporation's financial position or results of operations. 7
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. Presented below are the calculations for basic and diluted earnings per share: <TABLE> Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ----------------------------------------- (In Thousands, except per share data) <S> <C> <C> <C> <C> Net income $ 45,105 $ 41,504 $133,210 $128,282 ========================================= Weighted average shares outstanding 66,083 68,031 66,126 68,815 Effect of dilutive stock options outstanding 550 262 527 274 ----------------------------------------- Diluted weighted average shares outstanding 66,633 68,293 66,653 69,089 ========================================= Basic earnings per share $ 0.68 $ 0.61 $ 2.01 $ 1.86 ========================================= Diluted earnings per share $ 0.68 $ 0.61 $ 2.00 $ 1.86 ========================================= </TABLE> NOTE 5: Derivative and Hedging Activities Effective January 1, 2001, the Corporation adopted SFAS 133, which 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. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. 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 balance sheet from changes in interest rates. The predominant activities affected by the statement include the Corporation's use of interest rate swaps and certain mortgage banking activities. The adoption of the statement included the following: - - Under SFAS No. 133, the Corporation was allowed a one-time opportunity to reclassify investment assets from held-to-maturity to available-for-sale. Thus, upon adoption, the Corporation reclassified all its held-to-maturity securities to available-for-sale securities. The amortized cost and fair value of the securities transferred were $369 million and $373 million, respectively. - - The Corporation designated its interest rate swaps existing at December 31, 2000, to qualify for hedge accounting. These swaps hedge the exposure to variability in interest payments of variable rate liabilities. These hedges represent cash flow hedges and were highly effective at adoption. On adoption, the cumulative effect, net of taxes of $843,000, was recorded as a decrease to other comprehensive income of $1.3 million. 8
- - The Corporation's commitments to sell groups of residential mortgage loans that it originates or purchases as part of its mortgage banking operations, as well as its commitments to originate residential mortgage loans are considered derivatives under SFAS No. 133. The fair value of these derivatives at adoption, an $11,000 net gain, was recorded directly to the consolidated statement of income in mortgage banking income. 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. For the mortgage derivatives, which are not accounted for as hedges, changes in the fair value are recorded as an adjustment to mortgage banking income. At September 30, 2001, the swaps designated as cash flow hedges have a notional amount of $500 million, have a weighted average pay/receive rate of 5.61% and 3.79%, respectively, and a weighted average maturity of 52 months. At September 30, 2001, the estimated fair value of the swaps was a $17.6 million loss, or $10.6 million, net of taxes of $7.0 million, carried as a component of other comprehensive income. There was no ineffective portion to be recorded through the statements of income. Currently, none of the existing amounts within other comprehensive income are expected to be reclassified into earnings within the next 12 months. At September 30, 2001, the swaps designated as fair value hedges have a notional amount of $67 million, a weighted average pay/receive rate of 7.20% and 5.47%, respectively, and a weighted average maturity of 62 months. At September 30, 2001, the estimated fair value of these swaps was a $2.3 million loss, carried as a component of other liabilities. The change in fair value of the mortgage derivatives since adoption of SFAS 133 was a net gain of $1.2 million and is recorded in mortgage banking income for the nine months ended September 30, 2001. The $1.2 million net gain is composed of a $2.1 million gain on commitments to fund approximately $210.0 million of loans to individual borrowers and a $944,000 loss on commitments to sell approximately $235.3 million of loans to various investors. NOTE 6: Long-term Debt <TABLE> Long-term debt at September 30 is as follows: 2001 2000 ------------------------ ($ in Thousands) <S> <C> <C> Federal Home Loan Bank advances (3.82% to 6.81%, fixed rate, maturing in 2002 through 2014 for 2001; 4.95% to 7.63%, fixed rate, maturing in 2001 through 2014 for 2000) $614,596 $116,808 Bank Note (4.03%, variable rate, maturing in 2003) 200,000 -- Subordinated Debt (6.75%, fixed rate, maturing in 2011) 200,000 -- Other borrowed funds 5,520 5,655 ----------------------- Total long-term debt $1,020,116 $ 122,463 ======================= </TABLE> 9
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 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. The segments reflect the structure of the internal organization, focusing on financial information that the enterprise uses to make decisions about the operating matters. The Corporation's reportable segment is banking, conducted through its bank, 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. The net loss for the "other" segment in 2001 versus 2000 was predominantly driven by the lower trust service fees. Selected segment information is presented below. <TABLE> Consolidated Banking Other Eliminations Total ---------------------------------------------------------- As of and for the three months ended ($ in Thousands) September 30, 2001 <S> <C> <C> <C> <C> Total assets $14,440,670 $ 1,417,000 $(2,292,845) $13,564,825 ======================================================= Interest income $ 224,098 $ 4,680 $ (11,344) $ 217,434 Interest expense 118,747 3,020 (11,344) 110,423 ------------------------------------------------------- Net interest income 105,351 1,660 -- 107,011 Provision for loan losses 6,636 330 -- 6,966 Noninterest income 56,258 16,307 (24,416) 48,149 Depreciation and amortization 12,193 271 -- 12,464 Other noninterest expense 76,806 19,234 (24,416) 71,624 Income taxes 19,277 (276) -- 19,001 ------------------------------------------------------- Net income $ 46,697 $ (1,592) $ --- $ 45,105 ======================================================= As of and for the three months ended September 30, 2000 Total assets $14,032,520 $ 1,180,873 $(2,093,391) $13,120,002 ======================================================= Interest income $ 250,848 $ 5,269 $ (18,225) $ 237,892 Interest expense 158,232 3,347 (18,225) 143,354 ------------------------------------------------------- Net interest income 92,616 1,922 -- 94,538 Provision for loan losses 3,880 242 -- 4,122 Noninterest income 57,377 18,084 (31,092) 44,369 Depreciation and amortization 8,956 274 -- 9,230 Other noninterest expense 84,582 17,445 (31,092) 70,935 Income taxes 14,969 (1,853) -- 13,116 ------------------------------------------------------- Net income $ 37,606 $ 3,898 $ --- $ 41,504 ======================================================= - ---------------------------------------------------------------------------------------------- </TABLE> 10
<TABLE> Consolidated Banking Other Eliminations Total --------------------------------------------------------- As of and for the nine months ended ($ in Thousands) September 30, 2001 <S> <C> <C> <C> <C> Total assets $14,440,670 $ 1,417,000 $(2,292,845) $13,564,825 ======================================================= Interest income $ 706,650 $ 13,345 $ (43,234) $ 676,761 Interest expense 404,056 7,973 (43,234) 368,795 ------------------------------------------------------- Net interest income 302,594 5,372 -- 307,966 Provision for loan losses 18,836 77 -- 18,913 Noninterest income 186,587 49,062 (92,152) 143,497 Depreciation and amortization 31,969 833 -- 32,802 Other noninterest expense 247,627 56,539 (92,152) 212,014 Income taxes 53,446 1,078 -- 54,524 ------------------------------------------------------- Net income $ 137,303 $ (4,093) $ --- $ 133,210 ======================================================= As of and for the nine months ended September 30, 2000 Total assets $14,032,520 $ 1,180,873 $(2,093,391) $13,120,002 ======================================================= Interest income $ 726,758 $ 15,714 $ (53,509) $ 688,963 Interest expense 443,549 9,674 (53,509) 399,714 ------------------------------------------------------- Net interest income 283,209 6,040 -- 289,249 Provision for loan losses 13,288 1,715 -- 15,003 Noninterest income 182,514 54,960 (96,673) 140,801 Depreciation and amortization 27,608 849 -- 28,457 Other noninterest expense 256,088 51,935 (96,673) 211,350 Income taxes 48,144 (1,186) -- 46,958 ------------------------------------------------------- Net income $ 120,595 $ 7,687 $ --- $ 128,282 ======================================================= - ---------------------------------------------------------------------------------------------- </TABLE> 11
ITEM 2. Management's Discussion and Analysis of Financial Condition and the Results of Operations Forward-Looking Statements Forward-looking statements have been made in this document that are subject to risks and uncertainties. These forward-looking statements describe future plans or strategies and include Associated Banc-Corp's expectations of future results of operations. The words "believes," "expects," "anticipates," or other similar expressions identify forward-looking statements. Shareholders should note that many factors, some of which may be discussed elsewhere in this document could affect the future financial results of Associated Banc-Corp ("Corporation") and could cause those results to differ materially from those expressed in forward-looking statements contained in this document. These factors include the following: - - operating, legal, and regulatory risks; - - economic, political, and competitive forces affecting the Corporation's banking, securities, asset management, and credit services businesses; and - - the risk that the Corporation's analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. Overview The following discussion and analysis is presented to assist in the understanding and evaluation of the Corporation's financial condition and results of operations. It is intended to complement the unaudited financial statements, footnotes, and supplemental financial data appearing elsewhere in this Form 10-Q and should be read in conjunction therewith. 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. In the second quarter of 2001, the Corporation merged all of the Wisconsin bank affiliates (Associated Bank South Central, Associated Bank North, Associated Bank Milwaukee, Associated Bank, National Association, Associated Bank Lakeshore, National Association, and Associated Bank Green Bay, National Association) into a single national banking charter, headquartered in Green Bay, Wisconsin, under the name Associated Bank, National Association. Certain nonbank subsidiaries (Associated Leasing, Inc. and Associated Banc-Corp Services, Inc.) also merged with and into the resultant bank, becoming operating divisions of Associated Bank, National Association. Pending Business Combination On September 10, 2001, the Corporation announced the signing of a definitive agreement to acquire Signal Financial Corporation ("Signal") of Mendota Heights, Minnesota. Based upon the Corporation's closing stock price on September 10, 2001 (the date of public announcement of the acquisition) and other terms of the Merger Agreement, the acquisition price is approximately $192.3 million, of which, $58.4 million will be paid in cash and the remainder in the Corporation's stock. Signal has approximately $1.1 billion in total assets, and operates in nine locations in the Twin Cities and Eastern 12
Minnesota. The transaction will be accounted for under the purchase method and is expected to be completed in the first quarter of 2002, pending approval by regulators and Signal shareholders. Results of Operations - Summary Net income for the first nine months of 2001 ("YTD01") totaled $133.2 million, or $2.01 and $2.00 of basic and diluted earnings per share, respectively. Comparatively, net income for the first nine months of 2000 ("YTD00") was $128.3 million, or $1.86 of basic and diluted earnings per share. YTD01 results generated an annualized return on average assets of 1.36% and an annualized return on average equity of 17.41%, compared to 1.35% and 18.70%, respectively, for the same period in 2000. YTD01 net interest margin was 3.51% compared to 3.35% for the comparable period in 2000. <TABLE> - ----------------------------------------------------------------------------------------------------------- TABLE 1 Summary Results of Operations: Trends ($ in Thousands, except per share data) Sept. 30, June 30, March 31, Dec. 31, Sept. 30 2001 2001 2001 2000 2000 - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Net income (Qtr) $ 45,105 $ 46,019 $ 42,086 $ 39,701 $ 41,504 Net income (YTD) $ 133,210 $ 88,105 $ 42,086 $ 167,983 $ 128,282 Earnings per share - basic (Qtr) $ 0.68 $ 0.70 $ 0.64 $ 0.60 $ 0.61 Earnings per share - basic (YTD) $ 2.01 $ 1.33 $ 0.64 $ 2.46 $ 1.86 Earnings per share - diluted (Qtr) $ 0.68 $ 0.69 $ 0.63 $ 0.60 $ 0.61 Earnings per share - diluted (YTD) $ 2.00 $ 1.32 $ 0.63 $ 2.46 $ 1.86 Return on average assets (Qtr) 1.36% 1.42% 1.31% 1.21% 1.28% Return on average assets (YTD) 1.36% 1.36% 1.31% 1.31% 1.35% Return on average equity (Qtr) 17.03% 18.02% 17.18% 16.95% 17.75% Return on average equity (YTD) 17.41% 17.61% 17.18% 18.26% 18.70% Efficiency ratio (Qtr) * 52.49% 51.38% 53.68% 54.08% 56.63% Efficiency ratio (YTD) * 52.48% 52.48% 53.68% 55.48% 55.95% Net interest margin (Qtr) 3.63% 3.56% 3.34% 3.20% 3.25% Net interest margin (YTD) 3.51% 3.45% 3.34% 3.36% 3.35% * 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. - ------------------------------------------------------------------------------------------------------------ </TABLE> Net Interest Income and Net Interest Margin Net interest income on a fully taxable equivalent basis for the nine months ended September 30, 2001, was $324.7 million, up $19.6 million or 6.4% from the comparable period last year. This increase was primarily attributable to the benefit of lower interest rates, particularly on the cost of interest-bearing liabilities, and a higher level of earning assets. Interest rates fell steadily during the first nine months of 2001, but were generally rising during the same period in 2000. Comparatively, the average Federal funds rate for YTD01 was 166 basis points ("bp") lower than for YTD00, while the rate at September 30, 2001 was 350 bp lower than that at September 30, 2000. The net interest margin for YTD01 was 3.51%, up 16 bp from 3.35% for YTD00. This comparable period increase is attributable to an 18 bp increase in interest rate spread (i.e. a 45 bp decrease in the cost of interest-bearing liabilities, net of a 27 bp decrease in the yield on earning assets), partially offset by a 2 bp lower contribution from net free funds. The yield on earning assets was 7.52% for YTD01, down 27 bp from the comparable period last year, driven primarily by a 41 bp decrease in the loan yield. Pressure on loan yields was the result of the repricing of variable rate loans as well as a lower interest rate environment and competitive factors on new and refinanced loans. The yield on investments and other earning assets was up 1 bp, supported by portfolio strategies that started during 2000 to mitigate interest rate risk. 13
The cost of interest-bearing liabilities was 4.56% for YTD01, down 45 bp compared to YTD00, impacted strongly by the declining rate environment during 2001. The average cost of interest-bearing deposits excluding brokered CDs decreased 23 bp, primarily from carrying a higher proportion of lower costing transaction accounts during YTD01 versus YTD00. Brokered CDs fell to represent 4.0% of interest-bearing liabilities (versus 7.0% for YTD00) and cost less (down 34 bp to 6.10% for YTD01). The cost of wholesale funds (comprised of short-term borrowings and long-term debt) was 5.11% (down 103 bp from YTD00), also attributable primarily to the declining rate environment during 2001. Average earning assets increased by $273 million (2.3%) over the comparable nine month period last year, while interest-bearing liabilities grew $161 million (1.5%). An increase in average loans of $443 million (5.1%) over YTD00, with 14% growth in commercial loans, was the primary contributor to the growth in earning assets. The ratio of average loans to earning assets increased, with loans representing 74.0% of earning assets for YTD01 compared to 72.0% for YTD00. Average investments decreased $170 million, primarily in U.S. government agency securities and mortgage related securities. Interest-bearing liabilities grew $161 million (1.5%) over the YTD00 average, with notable changes in the mix. The use of brokered CDs was reduced, down $311 million on average, representing 4.0% of interest-bearing liabilities for YTD01 versus 7.0% last year. Interest-bearing deposits excluding brokered CDs were down $154 million (principally in other time deposits). Wholesale funding increased $626 million (predominantly in long-term debt) to 30.7% of interest-bearing liabilities for YTD01 compared to 25.3% for YTD00. 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 4.0% of total interest-bearing liabilities compared to 1.0% last year, including the issuance of $200 million of fixed rate subordinated debt, $200 million of variable rate bank notes and the use of long-term FHLB advances during YTD01. <TABLE> - ----------------------------------------------------------------------------------------------------------------------- TABLE 2 Net Interest Income Analysis-Taxable Equivalent Basis ($ in Thousands) - ----------------------------------------------------------------------------------------------------------------------- Nine Months ended September 30, 2001 Nine Months ended September 30, 2000 ------------------------------------ ------------------------------------ Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Loans $ 9,052,783 $534,366 7.83% $ 8,609,637 $537,399 8.24% Investments and other 3,185,888 159,117 6.66 3,356,167 167,442 6.65 ---------- ------- ---------- ------- Total earning assets 12,238,671 693,483 7.52 11,965,804 704,841 7.79 Other assets, net 815,823 751,585 ---------- --------- Total assets $13,054,494 $12,717,389 ========== ========== Interest-bearing deposits, excluding brokered CDs $ 7,025,457 $220,729 4.20% $ 7,179,758 $238,355 4.43% Brokered CDs 437,531 19,977 6.10 748,138 36,067 6.44 Wholesale funding 3,307,965 128,089 5.11 2,682,370 125,292 6.14 ---------- ------- --------- -------- Total interest-bearing liabilities 10,770,953 368,795 4.56 10,610,266 399,714 5.01 ------- -------- Demand, non-interest bearing 1,123,109 1,063,391 Other liabilities 137,342 127,423 Stockholders' equity 1,023,090 916,309 ---------- ---------- Total liabilities and equity $13,054,494 $12,717,389 ========== ========== Interest rate spread 2.96% 2.78% Net free funds 0.55 0.57 ---- ---- Net interest income, taxable equivalent, and net interest margin $324,688 3.51% $305,127 3.35% ================== ================= Tax equivalent adjustment 16,722 15,878 ------- ------ Net interest income, as reported $307,966 $289,249 ======== ======= - ----------------------------------------------------------------------------------------------------------------------- </TABLE> 14
<TABLE> - ----------------------------------------------------------------------------------------------------------------------- TABLE 2 (Continued) Net Interest Income Analysis-Taxable Equivalent Basis ($ in Thousands) - ----------------------------------------------------------------------------------------------------------------------- Three Months ended September 30, 2001 Three Months ended September 30, 2000 ------------------------------------- ------------------------------------- Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate Balance Expense Rate - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Loans $ 9,107,577 $171,180 7.41% $ 8,771,251 $186,884 8.37% Investments and other 3,182,051 51,834 6.51 3,351,628 56,848 6.78 --------- ------- ----------------------- Total earning assets 12,289,628 223,014 7.18 12,122,879 243,732 7.93 Other assets, net 823,842 780,665 ---------- ---------- Total assets $13,113,470 $12,903,544 ========== ========== Interest-bearing deposits, excluding Brokered CDs $ 6,995,925 $ 66,202 3.75% $ 7,166,268 $ 84,153 4.67% Brokered CDs 304,289 4,112 5.36 981,916 16,574 6.71 Wholesale funding 3,446,910 40,109 4.56 2,576,545 42,627 6.47 ----------------------- ----------------------- Total interest-bearing liabilities 10,747,124 110,423 4.06 10,724,729 143,354 5.29 -------- ------- Demand, non-interest bearing 1,168,294 1,104,719 Other liabilities 146,988 143,840 Stockholders' equity 1,051,064 930,256 ---------- ---------- Total liabilities and equity $13,113,470 $12,903,544 ========== ========== Interest rate spread 3.12% 2.64% Net free funds 0.51 0.61 ---- ---- Net interest income, taxable equivalent, and net interest margin $112,591 3.63% $100,378 3.25% ================= ================= Tax equivalent adjustment 5,580 5,840 ------ ----- Net interest income, as reported $107,011 $ 94,538 ======== ======== - ---------------------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> - ------------------------------------------------------------------------------------------- TABLE 3 Volume / Rate Variance - Taxable Equivalent Basis ($ in Thousands) - ------------------------------------------------------------------------------------------- Comparison of Nine months ended September 30, 2001 versus 2000 Income/ Variance Attributable to Expense Variance* Volume Rate - ------------------------------------------------------------------------------------------- INTEREST INCOME <S> <C> <C> <C> Loans $ (3,033) $ 25,444 $(28,477) Investments and other (8,326) (8,411) 85 -------------------------------- Total interest income (11,359) 17,033 (28,392) INTEREST EXPENSE Interest-bearing deposits, excluding Brokered CDs $(17,626) $ (5,056) $(12,570) Brokered CDs (16,090) (10,174) (5,916) Wholesale funding 2,796 24,243 (21,447) -------------------------------- Total interest expense (30,920) 9,013 (39,933) -------------------------------- Net interest income $ 19,561 $ 8,020 $ 11,541 ================================ - ------------------------------------------------------------------------------------------- </TABLE> 15
<TABLE> - ---------------------------------------------------------------------------------------- TABLE 3 (continued) Volume / Rate Variance - Taxable Equivalent Basis ($ in Thousands) - ----------------------------------------------------------------------------------------- Comparison of Three months ended September 30, 2001 versus 2000 Income/ Variance Attributable to Expense Variance* Volume Rate - ----------------------------------------------------------------------------------------- INTEREST INCOME <S> <C> <C> <C> Loans $(15,704) $ 6,487 $(22,191) Investments and Other (5,014) (2,864) (2,150) --------------------------------- Total interest income (20,718) 3,623 (24,341) INTEREST EXPENSE Interest-bearing deposits, excluding Brokered CDs $(17,951) $ (1,426) $(16,525) Brokered CDs (12,462) (6,527) (5,935) Wholesale funding (2,518) 10,636 (13,154) --------------------------------- Total interest expense (32,931) 2,683 (35,614) --------------------------------- Net interest income $ 12,213 $ 940 $ 11,273 ================================= * The change in interest due to both rate and volume has been allocated proportionately to volume variance and rate variance based on the relationship of the absolute dollar change in each. - ----------------------------------------------------------------------------------------- </TABLE> Provision for Loan Losses YTD01 provision for loan losses was $18.9 million, up $3.9 million from YTD00. YTD01 net charge-offs as a percent of average loans (on an annualized basis) were 0.18% compared to YTD00 of 0.10%. The ratio of the allowance for loan losses to total loans was 1.41%, up from the 1.33% for YTD00. See Table 8. The provision for loan losses results from 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 the 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 YTD01 noninterest income was $143.5 million, up $2.7 million (1.9%) compared to YTD00. Primary categories that have impacted the change between comparable periods were mortgage banking, net gains (losses) on both investment securities and asset sales, and trust service fees. 16
<TABLE> - ---------------------------------------------------------------------------------------------------------------------------------- TABLE 4 Noninterest Income ($ in Thousands) - ---------------------------------------------------------------------------------------------------------------------------------- 3rd Qtr. 3rd Qtr. Dollar Percent YTD YTD Dollar Percent 2001 2000 Change Change 2001 2000 Change Change - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Trust service fees $ 6,627 $ 9,665 $ (3,038) (31.4)% $ 22,038 $ 29,314 $ (7,276) (24.8)% Service charges on deposit 9,672 8,821 851 9.6 27,967 24,502 3,465 14.1 accounts Mortgage banking 11,144 5,125 6,019 117.4 35,709 14,617 21,092 144.3 Credit card & other nondeposit fees 6,896 6,475 421 6.5 20,916 19,011 1,905 10.0 Retail commissions 4,119 4,632 (513) (11.1) 12,868 15,577 (2,709) (17.4) Bank owned life insurance income 3,308 3,081 227 7.4 9,626 9,111 515 5.7 Asset sale gains, net 59 3,179 (3,120) (98.1) 974 24,486 (23,512) (96.0) Other 5,848 3,393 2,455 72.4 12,681 11,377 1,304 11.5 ----------------------------------------------------------------------------------------------- Subtotal $ 47,673 $ 44,371 $ 3,302 7.4% $ 142,779 $ 147,995 $ (5,216) (3.5)% Investment securities gains (losses), net 476 (2) 478 N/M 718 (7,194) 7,912 N/M ----------------------------------------------------------------------------------------------- Total noninterest income $ 48,149 $ 44,369 $ 3,780 8.5% $ 143,497 $ 140,801 $ 2,696 1.9% =============================================================================================== Subtotal, net of asset sale gains $ 47,614 $ 41,192 $ 6,422 15.6% $ 141,805 $ 123,509 $ 18,296 14.8% =============================================================================================== N/M = not meaningful - ---------------------------------------------------------------------------------------------------------------------------------- </TABLE> Trust service fees decreased $7.3 million, or 24.8%, between the comparable nine-month periods. The change was predominantly due to a decrease in the market value of assets under management (from $4.9 billion at YTD00 to $3.8 billion at YTD01), primarily from the declines in the stock and bond markets between the comparable periods, and competitive market conditions. Service charges on deposit accounts were up $3.5 million, or 14.1%, primarily due to YTD01 benefiting from the 2000 mid-year increases and changes in non-sufficient fund/overdraft charges and other service charges. 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 increased $21.1 million, more than double the YTD00 level. The increase was primarily the result of a significant increase in secondary mortgage loan production and related sales between comparable periods ($1.5 billion of production in YTD01 versus $282 million in YTD00). The higher production levels positively impacted gains on sales (up $18.7 million, of which, $1.2 million was related to gains in the fair value of mortgage derivatives and $4.3 million was due to the sale of mortgage servicing rights) and volume related fees (up $2.9 million). Servicing fees were down $0.5 million compared to YTD00, in line with the decline in the portfolio serviced for others (down 5% to $5.2 billion from $5.5 billion at September 30, 2000), due primarily to the sales of mortgage servicing rights on a portion of the portfolio. Credit card and other nondeposit fees were $20.9 million for YTD01, an increase of $1.9 million or 10.0% over YTD00. Credit card revenue was enhanced by the April 2000 acquisition agreement and five-year agency agreement with Citibank USA which provide for agent fees and other income on new and existing card business, as well as increased merchant income. Retail commission income (which includes commissions from insurance and brokerage product sales) was down $2.7 million compared to YTD00, primarily due to a weaker stock market and lower interest rate environment between comparable periods. Brokerage commissions declined $1.7 million, while insurance commissions declined $1.0 million. Net asset sale gains decreased $23.5 million versus YTD00, due to the gain on sale of $128 million credit card receivables ($12.9 million) and the net premium on the sales of deposits of six branches ($11.1 million) during YTD00. 17
Other noninterest income increased $1.3 million, or 11.5% from YTD00. The sale of stock in a regional ATM network resulted in a gain of $2.6 million in the third quarter of 2001. During the second quarter of 2000, $1.5 million was recognized in connection with an interim servicing agreement with Citibank USA related to the credit card receivable sale. Net investment securities gains (losses) increased $7.9 million versus YTD00. The YTD00 net losses of $7.2 million were from securities sold to mitigate interest rate risk and enhance future yields. Noninterest Expense YTD01 noninterest expense was $244.8 million, up $5.0 million, or 2.1%, compared to YTD00. Excluding a $5.6 million valuation adjustment on mortgage servicing rights in YTD01, noninterest expense was relatively unchanged (down $570,000 or 0.2%) between comparable periods.
<TABLE> - --------------------------------------------------------------------------------------------------------------------------- TABLE 5 Noninterest Expense ($ in Thousands) - --------------------------------------------------------------------------------------------------------------------------- 3rd Qtr. 3rd Qtr. Dollar Percent YTD YTD Dollar Percent 2001 2000 Change Change 2001 2000 Change Change - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Personnel expense $ 43,266 $ 40,380 $ 2,886 7.1% $124,804 $117,934 $ 6,870 5.8% Occupancy 5,635 5,733 (98) (1.7) 17,916 17,549 367 2.1 Equipment 3,493 3,755 (262) (7.0) 10,823 11,607 (784) (6.8) Data processing 4,870 5,313 (443) (8.3) 14,535 17,700 (3,165) (17.9) Business development & 3,310 3,353 (43) (1.3) 9,502 9,852 (350) (3.6) advertising Stationery and supplies 959 1,970 (1,011) (51.3) 5,021 5,793 (772) (13.3) FDIC expense 399 462 (63) (13.6) 1,279 1,360 (81) (6.0) Mortgage servicing rights 5,703 2,324 3,379 145.4 12,312 7,103 5,209 73.3 amortization Intangible amortization expense 2,102 2,229 (127) (5.7) 6,305 6,720 (415) (6.2) Legal and professional fees 925 1,806 (881) (48.8) 2,593 5,602 (3,009) (53.7) Other 13,426 12,840 586 4.6 39,726 38,587 1,139 3.0 --------------------------------------------------------------------------------------- Total noninterest expense $ 84,088 $ 80,165 $ 3,923 4.9% $244,816 $239,807 $ 5,009 2.1% ======================================================================================= - --------------------------------------------------------------------------------------------------------------------------- </TABLE> Personnel expense increased $6.9 million or 5.8% over YTD00, and represented 51.0% of total noninterest expense in YTD01 compared to 49.2% in YTD00. Salary expense increased $3.6 million or 3.9% between comparable periods, due primarily to merit increases, partially offset by the decline in full-time equivalent employees. Average full-time equivalent employees were down 2.2% to 3,856 for YTD01. Fringe benefits increased $3.3 million (13.6%) over YTD00, primarily the result of higher premium-based benefits. Occupancy expense increased primarily due to rate increases in utilities, while equipment expense declined predominantly in computer depreciation expense. Data processing costs decreased due to lower overall vendor costs and lower credit card processing costs given the sale of the credit card receivables in April 2000. Mortgage servicing rights amortization 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 increased by $5.2 million between comparable periods, predominantly driven by an increase of $5.6 million to the valuation reserve during YTD01, reflecting the decline in interest rates in 2001 and the acceleration in prepayment speeds in the portfolio of loans serviced for others. The mortgage servicing rights asset balance, included in other assets on the consolidated balance sheet, was $33.2 million, net of a $5.6 million valuation allowance, at September 30, 2001. Legal and professional fees were down $3.0 million between comparable periods, principally in consultant fees. Other expense was $39.7 million, up $1.1 million from YTD00, due principally to increased mortgage loan expenses related to the higher secondary mortgage loan production during 2001 versus 2000. 18
Income Taxes Income tax expense for YTD01 was $54.5 million, up $7.6 million or 16.1% from YTD00. The effective tax rate (income tax expense divided by income before taxes) was 29.0% and 26.8% for YTD01 and YTD00, respectively. Balance Sheet At September 30, 2001, total assets were $13.6 billion, an increase of $445 million, or 3.4%, over September 30, 2000. Loans grew $152 million, or 1.7%, since September 30, 2000. Commercial loans (up $499 million or 11.0%) now comprise 56% of total loans, consistent with Corporate strategic objectives, while residential real estate loans tempered overall loan growth (down $466 million or 14.6%) given the high refinance activity that occurred in 2001. Loans held for sale grew $105 million as a result of the increased residential mortgage loan activity between periods. Total deposits were down $932 million or 10.0%, primarily in brokered CDs, which were down $713 million since September 30, 2000. Total deposits excluding brokered CDs were down $220 million or 2.6%. Demand deposits grew $19 million (1.6%), representing 14% of total deposits and 15% of retail deposits at September 30, 2001, compared to 13% and 14%, respectively, a year earlier. Short-term borrowings increased $292 million between comparable periods, predominantly in treasury, tax and loan notes, which was a key driver to the increase in federal funds sold at September 30, 2001. Since September 30, 2000, long-term debt grew $898 million due to the issuance of $200 million of subordinated debt, $200 million of bank notes and the use on long-term FHLB advances. Since year-end 2000, total assets grew $436 million. Loans increased $97 million (1.5% annualized), to $9.0 billion at September 30, 2001, with continued mix changes as noted in Table 6. Deposits decreased $893 million (12.8% annualized) to $8.4 billion at September 30, 2001, led by brokered CDs, which decreased $606 million since year-end 2000. <TABLE> - ----------------------------------------------------------------------------------------------------------- TABLE 6 Period End Loan Composition ($ in Thousands) - ----------------------------------------------------------------------------------------------------------- September 30, % of September 30, % of Dec. 31, % of 2001 Total 2000 Total 2000 Total - ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Commercial, financial & agricultural $1,760,412 19% $1,625,358 18% $1,657,322 19% Real estate-construction 787,112 9 633,834 7 660,732 7 Commercial real estate 2,488,711 28 2,276,206 26 2,287,946 26 Lease financing 13,759 -- 15,613 -- 14,854 -- -------------------------------------------------------------------- Commercial 5,049,994 56 4,551,011 51 4,620,854 52 Residential real estate 2,729,833 30 3,195,865 36 3,158,721 35 Home equity 571,513 7 474,481 6 508,979 6 -------------------------------------------------------------------- Residential mortgage 3,301,346 37 3,670,346 42 3,667,700 41 Consumer 659,030 7 637,308 7 624,825 7 -------------------------------------------------------------------- Total loans $9,010,370 100% $8,858,665 100% $8,913,379 100% ==================================================================== - ----------------------------------------------------------------------------------------------------------- </TABLE> <TABLE> - ---------------------------------------------------------------------------------------------------------------------- TABLE 7 Period End Deposit Composition ($ in Thousands) - ---------------------------------------------------------------------------------------------------------------------- September 30, % of September 30, % of Dec. 31, % of 2001 Total 2000 Total 2000 Total - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Demand $1,213,541 14% $1,194,405 13% $1,243,949 14% Savings 837,967 10 932,020 10 857,247 9 Interest-bearing demand 791,914 9 785,062 8 850,280 9 Money market 1,733,427 21 1,455,117 16 1,492,628 16 Brokered CDs 310,198 4 1,022,994 11 916,060 10 Other time deposits 3,511,865 42 3,941,718 42 3,931,482 42 ----------------------------------------------------------------------------- Total deposits $8,398,912 100% $9,331,316 100% $9,291,646 100% ============================================================================= Total deposits excluding Brokered CDs $8,088,714 96% $8,308,322 89% $8,375,586 90% ============================================================================= - ------------------------------------------------------------------------------------------------------------------------- </TABLE> 19
On average, total assets for YTD01 increased to $13.1 billion, or $337 million (2.7%) over YTD00. Average earning assets for YTD01 were $12.2 billion, an increase of $273 million over YTD01. Loan growth accounted for essentially all the earning asset growth. Average interest-bearing liabilities for YTD01 grew $161 million (1.5%) over the YTD00 average, predominantly in long-term debt. For more information on average balances, refer to the section titled "Net Interest Income and Net Interest Margin." Allowance For Loan Losses The loan portfolio is the Corporation's primary asset subject to credit risk. Credit risk is controlled and monitored through the use of lending standards, a thorough review of potential borrowers, and on-going review of loan payment performance. Active asset quality administration, including early problem loan identification and timely resolution of problems, further ensures appropriate management of credit risk and minimization of loan losses. <TABLE> - --------------------------------------------------------------------------------------------- TABLE 8 Allowance for Loan Losses and Nonperforming Assets ($ in Thousands) - --------------------------------------------------------------------------------------------- At and for At and for the the Nine months ended year ended September 30, December 31, - ------------------------------------------------- -------------------------- ---------------- <S> <C> <C> <C> 2001 2000 2000 ---------------------------------------- Allowance for Loan Losses (AFLL): Balance at beginning of period $ 120,232 $ 113,196 $ 113,196 Decrease from sale of credit card receivables -- (4,216) (4,216) Provision for loan losses 18,913 15,003 20,206 Charge-offs (14,343) (7,954) (11,155) Recoveries 1,829 1,578 2,201 -------------------------------------- Net charge-offs (12,514) (6,376) (8,954) -------------------------------------- Balance at end of period $ 126,631 $ 117,607 $ 120,232 ====================================== Nonperforming Assets: Nonaccrual loans $ 56,651 $ 39,907 $ 41,045 Accruing loans past due 90 days or more 11,376 5,520 6,492 Restructured loans 241 23 159 -------------------------------------- Total nonperforming loans $ 68,268 $ 45,450 $ 47,696 Other real estate owned 2,396 3,710 4,032 -------------------------------------- Total nonperforming assets $ 70,664 $ 49,160 $ 51,728 ====================================== Ratios: Net charge-offs to average loans (annualized) 0.18% 0.10% 0.10% AFLL to total loans 1.41% 1.33% 1.35% Nonperforming loans to total loans 0.76% 0.51% 0.54% Nonperforming assets to total assets 0.52% 0.37% 0.39% AFLL to nonperforming loans 185% 259% 252% - ------------------------------------------------------------------------------------------- </TABLE> As of September 30, 2001, the allowance for loan losses ("AFLL") was $126.6 million, representing 1.41% of loans outstanding, compared to $117.6 million (or 1.33% of loans) at September 30, 2000, and $120.2 million (or 1.35% of loans) at year-end 2000. At September 30, 2001, the AFLL was 185% of nonperforming loans compared to 259% and 252% at September 30 and December 31, 2000, respectively. The AFLL at September 30, 2001 increased $9.0 million (7.7%) since September 30, 2000, and $6.4 million (5.3%) since December 31, 2000. The increase is, in part, in response to continued growth in and changes in the mix of total loans and the increase in nonperforming loans between comparable 20
periods. Loans at September 30, 2001 grew $152 million (1.7%) since September 30, 2000. Commercial loans were up $499 million, while residential real estate loans were down $466 million, tempering overall loan growth. Period end loans grew $97 million (1.5% annualized) since year-end. The mix of commercial loans increased as a percent of total loans to 56% at September 30, 2001 compared to 51% at September 30, 2000 and 52% at December 31, 2000. Charge-offs were $14.3 million for the nine months ended September 30, 2001, $8.0 million for the comparable period ended September 30, 2000, and $11.2 million for the year 2000, while recoveries for the corresponding periods were $1.8 million, $1.6 million and $2.2 million, respectively. As a result, the ratio of net charge-offs to average loans on an annualized basis was 0.18%, 0.10%, and 0.10% for YTD01, YTD00, and for the year 2000, respectively. The softening economy has affected the Corporation's customers and will likely continue for the remainder of the year. The AFLL 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 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, existing economic conditions, the fair value of underlying collateral, and other factors which could affect probable credit losses. Thus, in general, the change in the AFLL 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 AFLL to be adequate at September 30, 2001. 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 is committed to an aggressive nonaccrual and problem loan identification philosophy. 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 $18 million, $19 million and $20 million of these loans at September 30, 2001, September 30, 2000, and December 31, 2000, respectively. Table 8 provides detailed information regarding nonperforming assets. Total nonperforming loans at September 30, 2001 were $68.3 million, up $22.8 million and up $20.6 million, from September 30 and December 31, 2000, respectively. The ratio of nonperforming loans to total loans was .76%, .51% and .54% at September 30, 2001, September 30, 2000 and December 31, 2000, respectively. Nonaccrual loans account for the majority of the $22.8 million increase in nonperforming loans between comparable September 30 periods, with nonaccrual loans increasing $16.7 million (of which, $14.4 million was attributable to the addition of several large commercial relationships) and accruing loans past due 90 or more days increasing $5.9 million (due primarily to the addition of two large commercial credits). Nonaccrual loans also account for the majority of the $20.6 million increase in nonperforming loans since year-end 2000. Nonaccrual loans increased $15.6 million (attributable to the addition of several 21
large commercial relationships during 2001) and accruing loans past due 90 or more days increased $4.9 million (due to the addition of two large commercial credits). Economic conditions continue to soften and, as such, credit trends will be watched carefully and necessary actions will be taken to preserve the strength of the balance sheet and credit loss reserve. Other real estate owned was $2.4 million at September 30, 2001, down $1.3 million from a year ago, and down $1.6 million from December 31, 2000. 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, 2001, potential problem loans totaled $167 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 or for other cash needs. For the nine months ended September 30, 2001, net cash provided from operating and financing activities was $69.9 million and $215.4 million, respectively, while investing activities used net cash of $9.8 million, for a net increase in cash and cash equivalents of $275.5 million since year-end 2000. Generally, during YTD01, 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 long-term debt and other short-term borrowings, to help replenish the net decrease in deposits and to provide for common stock repurchases and payment of cash dividends to the Corporation's stockholders. For the nine months ended September 30, 2000, net cash was provided from both operating and financing activities ($107.4 million and $435.6 million, respectively), while investing activities used net cash of $492.9 million, for a net increase in cash and cash equivalents of $50.1 million since year-end 1999. Generally, total assets grew during the first nine months of 2000, primarily in loans, and cash was also needed for payment of cash dividends and for common stock repurchases. These needs were funded by increased deposits (primarily brokered CDs) net of deposits sold, and by proceeds from the sale of credit card receivables. During YTD00 proceeds from the sales and maturities of investment securities were predominantly reinvested by the Corporation to mitigate interest rate risk and enhance future investment yields. 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 funding sources are varied, including dividends and service fees from subsidiaries, borrowings with major banks, commercial paper issuance, and proceeds from the issuance of equity. The parent company had $200 million of established lines of credit with nonaffiliated banks, of which $200 million was available at September 30, 2001. During 2000, a $200 22
million commercial paper program was initiated, of which $200 million was available at September 30, 2001. Additionally, effective in May 2001, the parent 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 the third quarter of 2001, the parent company obtained $200 million in a subordinated notes offering, bearing a 6.75% fixed coupon rate and 10-year maturity. 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. As noted in the section titled "Overview," during the second quarter of 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 September 30, 2001, $200 million of long-term, variable rate bank notes was outstanding 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 Stockholders' equity at September 30, 2001 increased to $1.1 billion (or 7.95% of total assets), compared to $930.2 million (or 7.09% of total assets) at September 30, 2000. 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 September 30, 2001, included $65.1 million of accumulated other comprehensive income, predominantly related to unrealized gains on securities available-for-sale, net of the tax effect. At September 30, 2000, stockholders' equity was reduced by $18.9 million of accumulated other comprehensive loss, related to unrealized losses on securities available-for-sale, net of the tax effect. Excluding the accumulated other comprehensive income (loss), stockholders' equity to assets would be 7.51% and 7.22% at September 30, 2001 and 2000, respectively. Stockholders' equity grew $110.2 million since year-end 2000. 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 2000, included $15.6 million of accumulated other comprehensive income, related to unrealized gains on securities available-for-sale, net of the tax effect. Excluding the accumulated other comprehensive income, stockholders' equity to assets would be 7.51% and 7.27% at September 30, 2001 and December 31, 2000, respectively. Cash dividends of $0.91 per share were paid in YTD01, compared to $0.8172 per share in YTD00, representing an increase of 11.4%. 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. During YTD01, 500,000 shares were repurchased under this authorization, at an average cost of $32.73 per share. Additionally, under two separate actions in 2000, the BOD authorized the repurchase and cancellation of the Corporation's outstanding shares, not to exceed approximately 6.7 million shares on a combined basis. Under these authorizations 32,000 shares were repurchased during YTD01, at an average cost of $31.39 per share, while approximately 3.3 million shares remain authorized to repurchase at September 30, 2001. The repurchase of shares will be based on market opportunities, capital levels, growth prospects, 23
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> - -------------------------------------------------------------------------------------------------------------- TABLE 9 Capital Ratios (In Thousands, except per share data) - -------------------------------------------------------------------------------------------------------------- Sept. 30, June 30, March 31, Dec. 31, Sept. 30, 2001 2001 2001 2000 2000 - -------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Total stockholders' equity $1,078,874 $1,050,678 $1,023,978 $ 968,696 $ 930,183 Tier 1 capital 913,281 896,276 870,096 846,371 840,180 Total capital 1,238,673 1,020,620 989,683 966,994 957,530 Market capitalization 2,230,131 2,379,119 2,198,989 2,008,274 1,751,531 --------------------------------------------------------------------- Book value per share $ 16.39 $ 15.89 $ 15.48 $ 14.65 $ 13.94 Cash dividend per share 0.31 0.31 0.29 0.29 0.29 Stock price at end of period 33.89 35.99 33.25 30.38 26.25 Low closing price for the period 29.83 31.63 29.75 21.84 22.13 High closing price for the period 36.91 35.99 36.19 30.63 26.63 --------------------------------------------------------------------- Total equity / assets 7.95% 7.95% 7.80% 7.38% 7.09% Total equity / assets, adjusted (1) 7.51 7.59 7.46 7.27 7.22 Tangible equity / assets 7.27 7.23 7.06 6.62 6.31 Tier 1 leverage ratio 7.02 6.93 6.74 6.52 6.57 Tier 1 risk-based capital ratio 9.73 9.64 9.69 9.37 9.41 Total risk-based capital ratio 13.19 10.98 11.02 10.70 10.72 --------------------------------------------------------------------- Shares outstanding (period end) 65,805 66,105 66,135 66,116 66,725 Basic shares outstanding (average) 66,083 66,146 66,150 66,314 68,031 Diluted shares outstanding (average) 66,633 66,691 66,688 66,542 68,293 ===================================================================== (1) - Ratio is based upon total equity and assets excluding the unrealized gains (losses) arising during the year, net of income tax. - -------------------------------------------------------------------------------------------------------------- </TABLE> Third Quarter Results Net income for third quarter 2001 ("3Q01") was $45.1 million, or $0.68 per diluted share, compared to $41.5 million net income, or $0.61 per diluted share, for the third quarter of 2000 ("3Q00"). Return on average equity was 17.03%, down 72 bp from 3Q00 (influenced primarily by the increase in equity from the swing in other comprehensive income). The return on average assets increased 8 bp to 1.36%, given the increased net income and moderate average asset growth. Fully taxable equivalent net interest income for 3Q01 was $112.6 million, $12.2 million higher than 3Q00. The net interest margin of 3.63% in 3Q01 was 38 bp higher than the net interest margin of 3.25% in 3Q00 (see Tables 2 and 3). Changes in the rate environment contributed $11.3 million to taxable equivalent net interest income, and changes in the volume and mix of average earning assets also impacted taxable equivalent net interest income favorably by $940,000 (see Table 3). Average earning assets growth (up $167 million to $12.3 billion), a decrease in interest-bearing deposits excluding brokered CDs (down $170 million), and a decrease in brokered CDs (down $678 million), was funded primarily by wholesale funds (up $870 million). The net interest margin rose 38 bp to 3.63% for 3Q01, attributed primarily to declining interest rates (the average Fed funds rate for 3Q01 was 294 bp lower than 3Q00), and greater reliance on wholesale funds (which represented 32.1% of interest-bearing liabilities for 3Q01 compared to 24.0% for 3Q00). The 38 bp increase in net interest margin was the result of a 123 bp decrease in rate on interest-bearing liabilities, offset partly by a 75 bp drop in earning asset yield and 10 bp lower contribution from net free funds. 24
The provision for loan losses was up $2.8 million over the provision for 3Q00. The AFLL to loans at September 30, 2001 was 1.41% compared to 1.33% at September 30, 2000 (see Table 8). Noninterest income was $48.1 million for 3Q01, up $3.8 million over 3Q00 (see Table 4). The change between comparable quarters was impacted by three primary components: a) net asset sale gains (down $3.1 million, attributable to the $2.9 million net premium on deposits of one branch sold during 3Q00), b) mortgage banking income (up $6.0 million, primarily due to a dramatic increase in secondary mortgage loan production, positively impacting gains on the sale of mortgages and volume related fees), and c) trust service fees (down $3.0 million, as the result of declines in the market value of assets under management). Service charges on deposit accounts in 3Q01 were up $851,000 (9.6%) and include fee increases and changes in non-sufficient fund and other service charges. Other income increased $2.5 million, primarily due to $2.6 million recognized in connection with the sale of stock in a regional ATM network. Noninterest expense for 3Q01 was up $3.9 million over 3Q00 (see Table 5), in part due to a $2.9 million (7.1%) increase in personnel expense and a $3.4 million increase in mortgage servicing rights amortization (predominantly driven by an increase of $3.4 million to the valuation allowance during 3Q01). Partially offsetting these expense increases were lower stationery and supplies (due to lower overall vendor costs) and legal and professional fees (attributable to higher consultant fees during 3Q00). Income taxes were up $5.9 million between comparable quarters, due to the increase in income before taxes and the increase in the effective tax rate, at 29.6% for 3Q01 compared to 24.0% for 3Q00. Current Accounting Pronouncements In July 2001, the FASB issued Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria which intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite lives no longer be amortized, but instead tested for impairment at least annually. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of." The Corporation is required to adopt the provisions of SFAS No. 141 immediately and SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of SFAS No. 142. SFAS No. 141 will require upon adoption of SFAS No. 142, that the Corporation evaluate its existing goodwill and intangible assets that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, the Corporation will be required to assess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite 25
useful life, the Corporation will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. As of the date of adoption, the Corporation expects to have unamortized goodwill in the amount of $92 million that will be subject to the transition provisions of SFAS No. 141 and SFAS No. 142. Amortization expense related to this goodwill was $4.9 million ($4.7 million after tax) and $6.6 million ($6.3 million after tax) for the nine months ended September 30, 2001 and the year ended December 31, 2000. Due to the extensive nature and effort in adopting SFAS No. 141 and SFAS No. 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Corporation's financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which supersedes both SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. SFAS No. 144 retains the fundamental provisions in SFAS No. 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS No. 121. For example, SFAS No. 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. SFAS No. 144 retains the basic provisions of Opinion No. 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under SFAS No. 142, "Goodwill and Other Intangible Assets." The Corporation is required to adopt SFAS No. 144 for fiscal years beginning after December 15, 2001. Management does not expect the adoption of SFAS No. 144 to have a material impact on the Corporation's financial statements. Subsequent Events On October 24, 2001, the BOD declared a $0.31 per share dividend payable November 15, 2001, to shareholders of record at the close of business on November 1, 2001. During the fourth quarter of 2001, the Corporation expects to close on the sale of the deposits of the Evansville, Wisconsin branch of Associated Bank, National Association to another financial institution. As of September 30, 2001, the Evansville branch had total deposits of approximately $12 million. 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, 2000, from that disclosed in the Corporation's 2000 Form 10-K Annual Report. 26
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. (b) Reports on Form 8-K: A report on Form 8-K dated July 19, 2001, was filed under Item 5, Other Events, and under Item 7, Financial Statements and Exhibits, reporting Associated's announcement of earnings for the quarter and six months ended June 30, 2001. A report on Form 8-K dated August 1, 2001, was filed under Item 5, Other Events, and under Item 7, Financial Statements and Exhibits, indicating Associated's announcement that a Terms Agreement had been entered into between Associated Banc-Corp and Credit Suisse First Boston Corporation. 27
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, 2001 /s/ Robert C. Gallagher ----------------------------------------- Robert C. Gallagher President and Chief Executive Officer Date: November 14, 2001 /s/ Joseph B. Selner ----------------------------------------- Joseph B. Selner Principal Financial Officer 28