ASSOCIATED BANC-CORP — Interim / Quarterly Report 2001

Aug 13, 2001

SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 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 incorporation or organization) (IRS employer 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 July 31, 2001, was 66,113,177 shares. ASSOCIATED BANC-CORP TABLE OF CONTENTS Page No. PART I. Financial Information Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets - June 30, 2001, June 30, 2000 and December 31, 2000 3 Consolidated Statements of Income - Three and Six Months Ended June 30, 2001 and 2000 4 Consolidated Statement of Changes in Stockholders' Equity - Six Months Ended June 30, 2001 5 Consolidated Statements of Cash Flows - Six Months Ended June 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 4. Submission of Matters to a Vote of Security Holders 27 Item 6. Exhibits and Reports on Form 8-K 28 Signatures 29 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements: ASSOCIATED BANC-CORP Consolidated Balance Sheets (Unaudited)

ITEM 1. Financial Statements Continued:

ITEM 1. Financial Statements Continued:

ITEM 1. Financial Statements Continued:

ITEM 1. Financial Statements Continued: ASSOCIATED BANC-CORP Notes to Consolidated Financial Statements NOTE 1: Basis of Presentation In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly Associated Banc-Corp's ("Corporation") financial position, results of its operations and cash flows for the periods presented, and all such adjustments are of a normal recurring nature. The consolidated financial statements include the accounts of all subsidiaries. All material intercompany transactions and balances are eliminated. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. These interim consolidated financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and, therefore, certain information and footnote disclosures normally presented in accordance with 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 June 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" or as the "statement"). 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. 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:

NOTE 5: Derivatives 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 on 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: o Under SFAS No. 133, the Corporation was allowed a one-time opportunity to reclassify investment assets from held-to-maturity ("HTM") to available-for-sale ("AFS"). Thus upon adoption, the Corporation reclassified all its HTM securities to AFS. The amortized cost and fair value of the securities transferred were $369 million and $373 million, respectively. o The Corporation designated its interest rate swaps existing at December 31, 2000, to qualify for hedge accounting. The 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. o The Corporation's commitments to sell groups of residential mortgage loans that it originates or purchases as part of its mortgage banking business, 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 statements 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 June 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 4.73%, respectively, and a weighted average maturity of 54 months. At June 30, 2001, the estimated fair value of the swaps was a $2.5 million loss, or $1.5 million, net of taxes of $1.0 million, carried as a component of other comprehensive income. There was no ineffective portion to be recorded. Currently, none of the existing amounts within other comprehensive income are expected to be reclassified into earnings within the next 12 months. At June 30, 2001, the swaps designated as fair value hedges have a notional amount of $29 million, a weighted average pay/receive rate of 7.48% and 6.19%, respectively, and a weighted average maturity of 62 months. At June 30, 2001, the estimated fair value of these swaps was a $128,000 gain. The change in fair value of the mortgage derivatives since adoption of SFAS 133 was a net gain of $924,000 and is recorded in mortgage banking income for the six months ended June 30, 2001. NOTE 6: 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 revenue. Selected segment information is presented below.

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 (the "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 consolidated 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. Results of Operations - Summary Net income for the first six months of 2001 ("YTD01") totaled $88.1 million, or $1.33 and $1.32 for basic and diluted earnings per share ("EPS"). Comparatively, net income for the first six months of 2000 ("YTD00") was $86.8 million, or $1.25 for basic and diluted EPS, respectively. YTD01 results generated an annualized return on average assets ("ROA") of 1.36% and an annualized return on average equity ("ROE") of 17.61%, compared to 1.38% and 19.19%, respectively, for the same period in 2000. YTD01 net interest margin was 3.45% compared to 3.41% for the comparable period in 2000.

Net Interest Income and Net Interest Margin Net interest income on a fully taxable equivalent basis for the six months ended June 30, 2001, was $212.1 million, up $7.3 million or 3.6% from the comparable period last year. This increase was primarily attributable to the benefit of lower interest rates and a higher level of earning assets. Interest rates fell during the first six months of 2001, but rose during the same period in 2000. Comparatively, while the average Federal funds rate for YTD01 was 101 basis points ("bp") lower than for YTD00, the rate at June 30, 2001 was 275 bp lower than that at June 30, 2000. The net interest margin for YTD01 was 3.45%, up 4 bp from 3.41% for YTD00. This comparable period increase is attributable to a 3 bp increase in interest rate spread and a 1 bp higher contribution from net free funds. The yield on earning assets was 7.70% for YTD01, down 2 bp from the comparable period last year. The cost of interest-bearing liabilities was 4.81% for YTD01, down 5 bp compared to YTD00. The average cost of interest-bearing deposits excluding brokered CDs increased 12 bp and was offset by a reduction of 57 bp in the cost of wholesale funds (comprised of short-term borrowings and long-term debt). The increased cost of interest-bearing deposits was primarily due to longer-term CDs originated in the second half of 2000. Earning assets increased by $326 million (2.7%) over the comparable period last year, while interest-bearing liabilities grew $231 million (2.2%). Loans growth, particularly in commercial loans, was the primary contributor to the growth in earning assets, up an average of $497 million (5.8%). The ratio of average loans to earning assets increased, with loans making up 73.9% of earning assets for YTD01 compared to 71.8% for YTD00. Average investments decreased $171 million (5.1%), primarily in average U.S. government agencies and mortgage related securities. The 2.2% growth in interest-bearing liabilities was primarily attributable to increases in wholesale funding, which was up $501 million, offset by a $146 million reduction in interest-bearing deposits excluding brokered CDs and a $124 million decrease in brokered CDs.

Provision for Loan Losses YTD01 provision for loan losses was $11.9 million, up $1.0 million from YTD00. YTD01 net charge-offs as a percent of average loans (on an annualized basis) were 0.13% compared to YTD00 of 0.11%. 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 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 $95.3 million, down $1.1 million (1.1%) 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.

Trust service fees decreased $4.2 million, or 21.6%, between the comparable six-month periods. The change was predominantly due to a decrease in the market value of assets under management, 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 $2.6 million, or 16.7%, primarily due to YTD01 benefiting from the 2000 mid-year rate increases 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 $15.1 million, more than double the YTD00 level. The increase was primarily a result of a significant increase in secondary mortgage loan production and related sales between comparable periods ($1 billion of production in YTD01 versus $157 million in YTD00). The higher production levels positively impacted gains on sales (up $13.3 million, of which, $935,000 was related to gains in the fair value of mortgage derivatives and $4.0 million was due to the sale of mortgage servicing) and volume related fees (up $1.8 million). The portfolio of loans serviced for others was down ($5.0 billion at YTD01, down 9% from $5.5 billion at YTD00) due to the sales of mortgage servicing rights of a portion of the portfolio. Credit card and other nondeposit fees were $14.0 million for YTD01, an increase of $1.5 million or 11.8% 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. Retail commission income (which includes commissions from insurance and brokerage product sales) was down $2.2 million compared to YTD00, primarily due to a weaker stock market and lower interest rate environment between comparable periods. Insurance commissions declined $993,000, while brokerage commissions declined $1.2 million. Net asset sale gains decreased $20.4 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 five branches ($8.2 million) during YTD00. Other noninterest income decreased $1.2 million, or 14.4% from YTD00, of which $1.5 million was recognized during the second quarter of 2000 in connection with an interim servicing agreement with Citibank USA related to the credit card receivable sale. Net investment securities gains (losses) increased $7.4 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 Noninterest expense remained relatively unchanged between comparable periods, at $160.7 million for YTD01 versus $159.6 million for YTD00. Additionally, excluding a $2.2 million valuation adjustment on mortgage servicing rights in YTD01, noninterest expense was slightly lower (down $1.1 million, or 0.7%) than the same period last year.

Personnel expense increased $4.0 million or 5.1% over YTD00, and represented 50.7% of total noninterest expense in YTD01 compared to 48.6% in YTD00. Salary expense increased $1.7 million or 2.7% 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 1.9% to 3,850 for YTD01. Fringe benefits increased $2.3 million (14.8%) 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. Business development and advertising declined, primarily in television advertising. 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 $1.8 million between comparable periods, predominantly driven by the addition of a $2.2 million valuation adjustment during YTD01, reflecting the decline in interest rates in 2001. Legal and professional fees were down $2.1 million between comparable periods, principally in consultant fees. Other expense was $26.3 million, up $552,000 from YTD00, due primarily to increased mortgage loan expenses related to the higher secondary mortgage loan production during 2001 versus 2000. Income Taxes Income tax expense for YTD01 was $35.5 million, up $1.7 million or 5.0% from YTD00. The effective tax rate (income tax expense divided by income before taxes) was 28.7% and 28.1% for YTD01 and YTD00, respectively. Balance Sheet At June 30, 2001, total assets were $13.2 billion, an increase of $214 million, or 1.6%, over June 30, 2000. Loans grew $287 million, or 3.3%, since June 30, 2000. Commercial loans (up $536 million or 12%), now comprise 55% of total loans, consistent with Corporate strategic objectives, while residential real estate loans tempered overall loan growth (down $378 million or 12%) given the high refinance activity that occurred in 2001. Loans held for sale grew $116 million as a result of the increased residential mortgage loan activity between periods. Total deposits were down $745 million or 8.1%, primarily in brokered CDs which were down $644 million since June 30, 2000. Total deposits excluding brokered CDs ("retail deposits") were down $101 million or 1.2%. Demand deposits grew $44 million (3.9%), representing 14% to total deposits and to retail deposits at June 30, 2001, compared to 12% and 14%, respectively, a year earlier. Since year-end 2000, total assets grew $84 million, primarily in loans. Loans increased $70 million (1.6% annualized), to $9.0 billion at June 30, 2001, with continued mix changes as noted in Table 6. Deposits decreased $791 million (17.2% annualized), to $8.5 billion at June 30, 2001, led by brokered CDs which decreased $593 million since year-end 2000 (see Table 7).

On average, total assets for YTD01 increased to $13.0 billion, or $401 million (3.2%) over YTD00. Average earning assets for YTD01 were $12.2 million, an increase of $326 million over YTD00. Loan growth accounted for essentially all the earning asset growth. 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.

As of June 30, 2001, the allowance for loan losses ("AFLL") was $126.4 million, representing 1.41% of loans outstanding, compared to $115.4 million, or 1.33% of loans, at June 30, 2000, and $120.2 million, or 1.35% at year-end 2000. At June 30, 2001, the AFLL was 238% of nonperforming loans compared to 288% and 252% at June 30 and December 31, 2000, respectively. Table 8 provides additional information regarding activity in the AFLL. The AFLL at June 30, 2001 increased $11.0 million (9.5%) since June 30, 2000 and $6.2 million (5.1%) since December 31, 2000. The increase is, in part, in response to continued growth in total loans and the increase in nonperforming loans between comparable periods. Loans at June 30, 2001, grew $287 million (3.3%) since June 30, 2000. Commercial loans (see CF&A loans, commercial real estate and real estate construction loans included in Table 6) were up $536 million, while residential real estate loans were down $378 million, tempering overall loan growth. Period end loans grew $70 million (1.6% annualized) since year-end. The mix of commercial loans increased as a percent of total loans to 55% at June 30, 2001 compared to 50% at June 30, 2000 and 52% at December 31, 2000. Charge-offs were $7.2 million for the six months ended June 30, 2001, $5.8 million for the comparable period ended June 30, 2000, and $11.2 million for the year 2000, while recoveries for the corresponding periods were $1.4 million, $1.3 million, and $2.2 million, respectively. As a result, the ratio of net charge-offs to average loans on an annualized basis was 0.13%, 0.11%, 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 June 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, $17 million and $20 million of student loans at June 30, 2001, June 30, 2000, and December 31, 2000, respectively. Table 8 provides detailed information regarding nonperforming assets. Total nonperforming loans at June 30, 2001 were up $5.4 million and $13.0 million from year-end 2000 and YTD00, respectively. The ratio of nonperforming loans to total loans was .59% at YTD01, as compared to .54% and .46% at year-end 2000, and YTD00, respectively. Nonaccrual loans account for the majority of the $13.0 million increase in nonperforming loans between comparable June 30 periods, with nonaccrual loans increasing $14.0 million (of which, $10.0 million was attributable to the addition of several large commercial relationships), partially offset by a $1.1 million decrease in accruing loans past due 90 or more days. Nonaccrual loans also account for the majority of the $5.4 million increase in nonperforming loans since year-end 2000. Nonaccrual loans increased $8.1 million (of which, $7.0 million was attributable to the addition of a few large commercial credits), while accruing loans past due 90 or more days decreased $2.7 million (due to the transfer of one large commercial credit from this category to the nonaccrual category). Other real estate owned was $2.6 million at YTD01, down $1.4 million from both December 31 and June 30, 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 June 30, 2001, potential problem loans totaled $156 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 six months ended June 30, 2001, net cash provided from operating activities was $40.8 million, while investing and financing activities used net cash of $6.6 million and $74.2 million, respectively, for a net decrease in cash and cash equivalents of $40.0 million since year-end 2000. Generally, during YTD01, anticipated maturities of time deposits (predominantly in brokered CDs) occurred, while total asset growth since year-end 2000 was minimal (less than 1%). Thus, other financing sources increased, particularly long-term debt and other short-term borrowings, to replace the net decrease in deposits and to provide for common stock repurchases and payment of cash dividends to the Corporation's stockholders. For the six months ended June 30, 2000, net cash was provided from both operating and financing activities ($83.5 million and $378.2 million, respectively), while investing activities used net cash of $316.1 million for a net increase in cash and cash equivalents of $145.6 million since year-end 1999. Generally, total assets grew during the first half 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 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 June 30, 2001. During 2000, a $200 million commercial paper program was initiated, of which $29.7 million was outstanding at June 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. While there was nothing outstanding at June 30, 2001 under the shelf offerings, effective in August 2001, the parent company obtained $200 million in a subordinated notes offering, bearing a 6.75% 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 June 30, 2001, $200 million was outstanding under this program. The parent company and certain banks were 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 June 30, 2001 increased to $1.1 billion, compared to $930.2 million at June 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 June 30, 2001, included $51.9 million of accumulated other comprehensive income, predominantly related to unrealized gains on securities available-for-sale, net of the tax effect. At June 30, 2000, stockholders' equity included $42.9 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 7.59% and 7.46% at June 30, 2001 and 2000, respectively. Stockholders' equity grew $82.0 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, 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 7.59% and 7.27% at June 30, 2001 and December 31, 2000, respectively. Cash dividends of $0.60 per share were paid in YTD01, compared to $0.5272 per share in YTD00, representing an increase of 13.8%. 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, 200,000 shares were repurchased under this authorization, at an average cost of $34.45 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 6.7 million shares on a combined basis. Under these authorizations no shares were repurchased during YTD01, and approximately 3.4 million shares remain authorized to repurchase at June 30, 2001. The repurchase of shares will be based on market opportunities, capital levels, growth prospects, and other investment opportunities. The adequacy of the Corporation's capital is regularly reviewed to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. The assessment of overall capital adequacy depends on a variety of factors, including asset quality, liquidity, stability of earnings, changing competitive forces, economic conditions in markets served and strength of management. The capital ratios of the Corporation and its banking affiliates are greater than minimums required by regulatory guidelines. The Corporation's capital ratios are summarized in Table 9.

Second Quarter Results Net income for second quarter 2001 ("2Q01") was $46.0 million, up $2.3 million from the $43.7 million net income earned in the second quarter of 2000 ("2Q00"). ROE was 18.02%, down 104 bp from 2Q00, while ROA remained virtually unchanged with an increase of 3 bp to 1.42%. Fully taxable equivalent net interest income for 2Q01 was $109.5 million, $7.8 million higher than 2Q00. The net interest margin of 3.56% in 2Q01 was 19 bp higher than the net interest margin of 3.37% in 2Q00 (see Tables 2 and 3). Changes in the volume and mix of average earning assets contributed $4.5 million to taxable equivalent net interest income, and changes in the rate environment also impacted taxable equivalent net interest income favorably by $3.3 million (see Table 3). Average earning assets growth (up $297 million to $12.2 billion), a decrease in interest-bearing deposits excluding brokered CDs (down $115 million), and a decrease in brokered CDs (down $524 million), was funded primarily by wholesale funds (up $836 million). The net interest margin rose 19 bp to 3.56% for 2Q01, attributed primarily to falling interest rates (the average Fed funds rate for 2Q01 was 194 bp lower than 2Q00), and greater reliance on wholesale funds (which represented 31.3% of interest-bearing liabilities for 2Q01 compared to 24.0% for 2Q00). The 19 bp increase in net interest margin was the result of a 49 bp decrease in rate on interest-bearing liabilities, offset partly by a 26 bp drop in earning asset yield and 4 bp lower contribution from net free funds. The provision for loan losses was up $1.2 million over the provision for 2Q00, in part due to loan growth particularly in commercial loans (CF&A loans, commercial real estate and real estate construction loans) and the increase in nonperforming loans between comparable periods. The AFLL to loans at June 30, 2001 was 1.41% compared to 1.33% at June 30, 2000. See Tables 6 and 8. Noninterest income was $51.0 million for 2Q01, up $541,000 over 2Q00 (see Table 4). The change between comparable quarters was impacted by three primary components: a) net asset sale gains (down $12.7 million, as a result of the $12.9 million gain recorded on the sale of the credit card receivables in 2Q00), b) net investment gains (losses) (up $5.5 million, principally due to losses incurred on mortgage-related securities sales in 2Q00), and c) mortgage banking income (up $10.5 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 $2.9 million gain from sale of mortgage servicing). Excluding these three components, noninterest income was down $2.8 million, or 7.3%. Trust service fees were down $2.2 million due to declines in the market value of assets under management. Service charges on deposit accounts in 2Q01 were up $1.3 million (16.4%) and include fee increases and changes in NSF and other service charges. Other income decreased $885,000, primarily due to $1.5 million recognized in connection with an interim servicing agreement with Citibank USA related to the credit card receivable sale. Noninterest expense for 2Q01 was up $1.2 million over 2Q00 (see Table 5), in part due to a $2.3 million increase in personnel expense (of which, $1.2 million was due to higher fringe benefits and $1.1 million was attributable to higher salary expense from 2001 merit increases) and a $1.6 million increase in other expense (primarily in loan expense related to the higher secondary mortgage loan production during 2Q01 versus 2Q00). Partially offsetting these expense increases were lower data processing (due to software and system enhancement costs incurred in 2Q00) and legal and professional fees (attributable to higher consultant fees during 2Q00). Income taxes were up $3.4 million between comparable quarters, due to the increase in income before taxes and the increase in the effective tax rate, at 30.6% for 2Q01 compared to 28.0% for 2Q00. 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 useful 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 intangible assets and goodwill 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 141 for recognition apart from goodwill. Upon adoption of SFAS 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 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 which will be subject to the transition provisions of SFAS No. 141 and SFAS No. 142. Amortization expense related to this goodwill was $6.6 million ($6.3 million after tax) and $3.3 million ($3.1 million after tax) for the year ended December 31, 2000 and the six months ended June 30, 2001. 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. Subsequent Event On July 25, 2001, the Board of Directors declared a $0.31 per share dividend payable August 15, 2001, to shareholders of record as of August 1, 2001. 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. ASSOCIATED BANC-CORP PART II - OTHER INFORMATION ITEM 4: Submission of matters to a vote of security holders (a) The corporation held its Annual Meeting of Shareholders on April 25, 2001. Proxies were solicited by corporation management pursuant to Regulation 14A under the Securities Exchange Act of 1934. (b) Directors elected at the Annual Meeting were Robert S. Gaiswinkler, Robert C. Gallagher, Robert P. Konopacky, and John C. Meng. (c) The matters voted upon and the results of the voting were as follows: (i) Election of the below-named nominees to the Board of Directors of the Corporation: FOR WITHHELD All Nominees: 54,708,819 971,700 By Nominee: Robert S. Gaiswinkler 54,635,604 1,044,915 Robert C. Gallagher 54,597,272 1,083,247 Robert P. Konopacky 54,404,712 1,275,807 John C. Meng 54,506,974 1,173,545 (ii) Ratification of the selection of KPMG LLP as independent auditors of Associated for the year ending December 31, 2001. FOR AGAINST ABSTAIN --- ------- ------- 55,248,884 194,134 237,501 (d) Not applicable ITEM 6: Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 11, Statement regarding computation of per-share earnings. See Note 4 of the notes to consolidated financial statements in Part I Item I. (b) Reports on Form 8-K: There were no reports on Form 8-K filed for the six months ended June 30, 2001. 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: August 13, 2001 /s/ Robert C. Gallagher ---------------------------------------- Robert C. Gallagher President and Chief Executive Officer Date: August 13, 2001 /s/ Joseph B. Selner --------------------------------------- Joseph B. Selner Principal Financial Officer