ASB

Associated Banc-Corp 10-Q Summary: Period Ended September 30, 2002

Business Context and Reporting Period

This is a quarterly report (Form 10-Q) for Associated Banc-Corp, a financial holding company headquartered in Green Bay, Wisconsin. The reporting period covers the three and nine months ended September 30, 2002. The results include the full impact of the acquisition of Signal Financial Corporation, consummated on February 28, 2002, which expanded the company's presence in Minnesota. The company declared a 10% stock dividend in May 2002, and all per-share data has been restated to reflect this.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income for the nine months ended September 30, 2002, increased 18.1% to $157.3 million compared to $133.2 million in the prior year. Diluted EPS rose to $2.08 from $1.82.
• Net Interest Income: Increased 20.6% year-over-year to $371.6 million. The net interest margin expanded 43 basis points to 3.94%, driven primarily by a 191 basis point decrease in the cost of interest-bearing liabilities, which outpaced the 130 basis point decline in asset yields.
• Asset Growth: Total assets grew 10.9% to $15.0 billion, and loans grew 11.9% to $10.1 billion. Commercial loans now represent 61% of the total loan portfolio, up from 56% a year ago.
• Expense Management: Noninterest expense increased 11.0% to $271.8 million, largely due to the integration of Signal Financial Corporation. However, the efficiency ratio improved to 49.94% from 52.48% in the prior year.
• Asset Quality: The provision for loan losses increased 90.8% to $36.1 million. Nonperforming loans rose to $100.3 million (0.99% of total loans) from $68.3 million (0.76%) in the prior year, driven by specific commercial credits and the acquisition.

Guidance, Outlook, and Risks

Management Commentary: Management attributes the strong performance to the successful integration of Signal Financial Corporation and favorable funding costs in a lower interest rate environment. The company shifted its balance sheet from liability-sensitive to asset-sensitive over the past year. Mortgage banking income surged due to higher production volumes.

Accounting Changes: The company adopted SFAS 142 and SFAS 147, ceasing the amortization of goodwill effective January 1, 2002. This resulted in a one-time benefit to earnings compared to the prior year, which included $4.9 million in goodwill amortization.

Risks and Contingencies:

• Credit Risk: The allowance for loan losses was increased to $155.3 million (1.54% of loans) to cover rising nonperforming assets and net charge-offs, particularly in the commercial sector.
• Interest Rate Risk: The company utilizes derivatives (swaps and caps) to hedge interest rate risk. While the current environment has been favorable, future rate volatility could impact net interest income.
• Market Risk: The company faces exposure to changes in interest rates, managed through static gap analysis and asset/liability committee limits.

Investor Verification Checklist

• Acquisition Integration: Verify the ongoing cost synergies and revenue accretion from the Signal Financial Corporation acquisition.
• Asset Quality Trends: Monitor the trajectory of nonperforming loans and the adequacy of the allowance for loan losses, given the recent increase in commercial charge-offs.
• Net Interest Margin Sustainability: Assess the ability to maintain the expanded net interest margin if the low-interest-rate environment persists or if funding costs rise.
• Capital Ratios: Confirm that Tier 1 and total risk-based capital ratios remain well above regulatory minimums (currently 10.50% and 13.66%, respectively).
• Stock Repurchases: Review the remaining authorization for share repurchases and the company's capital allocation strategy between dividends and buybacks.