| ASSOCIATED BANC-CORP ITEM 1A RISK FACTORS An investment in the Corporation’s common stock is subject to risks inherent to the Corporation’s business |
| The material risks and uncertainties that management believes affect the Corporation are described below |
| Before making an investment decision, you should carefully consider the risks and uncertainties described below, together with all of the other information included or incorporated by reference in this report |
| The risks and uncertainties described below are not the only ones facing the Corporation |
| Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Corporation’s business operations |
| This report is qualified in its entirety by these risk factors |
| ” If any of the following risks actually occur, the Corporation’s financial condition and results of operations could be materially and adversely affected |
| If this were to happen, the value of the Corporation’s common stock could decline significantly, and you could lose all or part of your investment |
| References to “we,” “us,” and “our” in this section refer to the Corporation and its subsidiaries, unless otherwise specified or unless the context otherwise requires |
| Risks Related To The Corporation’s Business We Are Subject To Interest Rate Risk The Corporation’s earnings and cash flows are largely dependent upon its net interest income |
| Interest rates are highly sensitive to many factors that are beyond the Corporation’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve |
| Changes in monetary policy, including changes in interest rates, could influence not only the interest the Corporation receives on loans and securities and the amount of interest it pays on deposits and borrowings, 7 _________________________________________________________________ [58]Table of Contents but such changes could also affect (i) the Corporation’s ability to originate loans and obtain deposits, (ii) the fair value of the Corporation’s financial assets and liabilities, and (iii) the average duration of the Corporation’s mortgage-backed securities portfolio and other interest-earning assets |
| If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Corporation’s net interest income, and therefore earnings, could be adversely affected |
| Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings |
| Although management believes it has implemented effective asset and liability management strategies, including the limited use of derivatives as hedging instruments, to reduce the potential effects of changes in interest rates on the Corporation’s results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on the Corporation’s financial condition and results of operations |
| Also, the Corporation’s interest rate risk modeling techniques and assumptions likely may not fully predict or capture the impact of actual interest rate changes on the Corporation’s balance sheet |
| See Part II sections “Net Interest Income” and “Interest Rate Risk” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for further discussion related to the Corporation’s management of interest rate risk |
| We Are Subject To Lending Risk As of December 31, 2005, approximately 61prca of the Corporation’s loan portfolio consisted of commercial, financial, and agricultural, real estate construction, and commercial real estate loans (collectively, “commercial loans”) |
| Commercial loans are generally viewed as having more inherent risk of default than residential mortgage loans or retail loans |
| Because the Corporation’s loan portfolio contains a growing number of commercial loans with balances over a dlra25 million internal threshold, the deterioration of one or a few of these loans could cause a significant increase in nonperforming loans |
| An increase in nonperforming loans could result in a net loss of earnings from these loans, an increase in the provision for loan losses, and an increase in loan charge offs, all of which could have a material adverse effect on the Corporation’s financial condition and results of operations |
| See Part II section “Loans” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for further discussion of credit risks related to different loan types |
| Our Allowance For Loan Losses May Be Insufficient The Corporation maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans |
| The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio |
| The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political, and regulatory conditions; and unidentified losses inherent in the current loan portfolio |
| The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires the Corporation to make significant estimates of current credit risks using existing qualitative and quantitative information, all of which may undergo material changes |
| Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of the Corporation’s control, may require an increase in the allowance for loan losses |
| In addition, bank regulatory agencies periodically review the Corporation’s allowance for loan losses and may require an increase in the provision for loan losses or the recognition of additional loan charge offs, based on judgments different than those of management |
| An increase in the allowance for loan losses results in a decrease in net income, and possibly capital, and may have a material adverse effect on the Corporation’s financial condition and results of operations |
| See Part II section “Allowance for Loan Losses” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion related to the Corporation’s process for determining the appropriate level of the allowance for loan losses |
| 8 _________________________________________________________________ [59]Table of Contents Our Profitability Depends Significantly On Economic Conditions In The States Within Which We Do Business The Corporation’s success depends on the general economic conditions of the specific local markets in which the Corporation operates |
| Local economic conditions have a significant impact on the demand for the Corporation’s products and services as well as the ability of the Corporation’s customers to repay loans, the value of the collateral securing loans, and the stability of the Corporation’s deposit funding sources |
| A significant decline in general economic conditions, caused by inflation, recession, acts of terrorism, outbreak of hostilities, or other international or domestic occurrences, unemployment, changes in securities markets or other factors could impact local economic conditions and, in turn, have a material adverse effect on the Corporation’s financial condition and results of operations |
| We Are Subject To Extensive Government Regulation and Supervision The Corporation, primarily through Associated Bank, National Association, and certain nonbank subsidiaries, is subject to extensive federal and state regulation and supervision |
| Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds, and the banking system as a whole, not shareholders |
| These regulations affect the Corporation’s lending practices, capital structure, investment practices, dividend policy, and growth, among other things |
| Congress and federal regulatory agencies continually review banking laws, regulations, and policies for possible changes |
| Changes to statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies, could affect the Corporation in substantial and unpredictable ways |
| Such changes could subject the Corporation to additional costs, limit the types of financial services and products the Corporation may offer, and/or increase the ability of nonbanks to offer competing financial services and products, among other things |
| Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputation damage, which could have a material adverse effect on the Corporation’s business, financial condition, and results of operations |
| While the Corporation has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur |
| See the section “Supervision and Regulation” and Note 17, “Regulatory Matters,” of the notes to consolidated financial statements within Part II, Item 8 |
| Our Internal Controls May Be Ineffective Management regularly reviews and updates the Corporation’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures |
| Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met |
| Any failure or circumvention of the Corporation’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Corporation’s business, results of operations, and financial condition |
| New Lines of Business or New Products and Services May Subject Us to Additional Risks From time to time, we may implement new lines of business or offer new products and services within existing lines of business |
| There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed |
| In developing and marketing new lines of business and/or new products and services, the Corporation may invest significant time and resources |
| Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible |
| External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service |
| Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of the Corporation’s system of internal controls |
| Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Corporation’s business, results of operations and financial condition |
| 9 _________________________________________________________________ [60]Table of Contents We Rely On Dividends From Our Subsidiaries For Most Of Our Revenue The Parent Company is a separate and distinct legal entity from its subsidiaries |
| It receives substantially all of its revenue from dividends from its subsidiaries |
| These dividends are the principal source of funds to pay dividends on the Corporation’s common stock and interest and principal on the Corporation’s debt |
| Various federal and/or state laws and regulations limit the amount of dividends that Associated Bank, National Association, and certain nonbank subsidiaries may pay to the Corporation |
| Also, the Corporation’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors |
| In the event Associated Bank, National Association, is unable to pay dividends to the Corporation, the Corporation may not be able to service debt, pay obligations, or pay dividends on the Corporation’s common stock |
| The inability to receive dividends from Associated Bank, National Association, could have a material adverse effect on the Corporation’s business, financial condition, and results of operations |
| See the section “Supervision and Regulation” and Note 17, “Regulatory Matters,” of the notes to consolidated financial statements within Part II, Item 8 |
| Acquisitions May Disrupt Our Business and Dilute Stockholder Value The Corporation regularly evaluates merger and acquisition opportunities and conducts due diligence activities related to possible transactions with other financial institutions and financial services companies |
| As a result, negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities may occur at any time |
| The Corporation seeks merger or acquisition partners that are culturally similar, have experienced management, and possess either significant market presence or have potential for improved profitability through financial management, economies of scale, or expanded services |
| Acquiring other banks, businesses, or branches involves potential adverse impact to the Corporation’s financial results and various other risks commonly associated with acquisitions, including, among other things: • Difficulty in estimating the value of the target company |
| • Payment of a premium over book and market values that may dilute the Corporation’s tangible book value and earnings per share in the short and long term |
| • Potential exposure to unknown or contingent liabilities of the target company |
| • Exposure to potential asset quality issues of the target company |
| • There may be volatility in reported income as goodwill impairment losses could occur irregularly and in varying amounts • Difficulty and expense of integrating the operations and personnel of the target company |
| • Inability to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits • Potential disruption to the Corporation’s business |
| • Potential diversion of the Corporation’s management’s time and attention |
| • The possible loss of key employees and customers of the target company |
| • Potential changes in banking or tax laws or regulations that may affect the target company |
| Details of the Corporation’s recent acquisition activity is presented in Note 2, “Business Combinations,” of the notes to consolidated financial statements within Part II, Item 8 |
| We May Not Be Able To Attract and Retain Skilled People The Corporation’s success depends, in large part, on its ability to attract and retain skilled people |
| Competition for the best people in most activities engaged in by the Corporation can be intense and the Corporation may not be able to hire sufficiently skilled people or to retain them |
| The unexpected loss of services of one or more of the Corporation’s key personnel could have a material adverse impact on the Corporation’s business 10 _________________________________________________________________ [61]Table of Contents because of their skills, knowledge of the Corporation’s market, years of industry experience, and the difficulty of promptly finding qualified replacement personnel |
| The Corporation does not currently have employment agreements with any of its senior officers |
| Our Information Systems May Experience An Interruption Or Breach In Security The Corporation relies heavily on communications and information systems to conduct its business |
| Any failure, interruption, or breach in security of these systems could result in failures or disruptions in the Corporation’s customer relationship management, general ledger, deposit, loan, and other systems |
| While the Corporation has policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of its information systems, we cannot assure you that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed |
| The occurrence of any failures, interruptions, or security breaches of the Corporation’s information systems could damage the Corporation’s reputation, result in a loss of customer business, subject the Corporation to additional regulatory scrutiny, or expose the Corporation to civil litigation and possible financial liability, any of which could have a material adverse effect on the Corporation’s financial condition and results of operations |
| We Continually Encounter Technological Change The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services |
| The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs |
| The Corporation’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Corporation’s operations |
| Many of the Corporation’s competitors have substantially greater resources to invest in technological improvements |
| The Corporation may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers |
| Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on the Corporation’s business and, in turn, the Corporation’s financial condition and results of operations |
| We Are Subject To Claims and Litigation Pertaining To Fiduciary Responsibility From time to time, customers make claims and take legal action pertaining to the Corporation’s performance of its fiduciary responsibilities |
| Whether customer claims and legal action related to the Corporation’s performance of its fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to the Corporation, they may result in significant financial liability and/or adversely affect the market perception of the Corporation and its products and services, as well as impact customer demand for those products and services |
| Any financial liability or reputation damage could have a material adverse effect on the Corporation’s business, which, in turn, could have a material adverse effect on the Corporation’s financial condition and results of operations |
| Severe Weather, Natural Disasters, Acts Of War Or Terrorism, and Other External Events Could Significantly Impact Our Business Severe weather, natural disasters, acts of war or terrorism, and other adverse external events could have a significant impact on the Corporation’s ability to conduct business |
| Such events could affect the stability of the Corporation’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Corporation to incur additional expenses |
| For example, during 2005, numerous hurricanes made landfall and subsequently caused extensive flooding and destruction in various parts of the country |
| While the impact of these hurricanes did not significantly affect the Corporation, other severe weather or natural disasters, acts of war or terrorism, or other adverse external events may occur in the future |
| Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material 11 _________________________________________________________________ [62]Table of Contents adverse effect on the Corporation’s business, which, in turn, could have a material adverse effect on the Corporation’s financial condition and results of operations |
| We Are Subject To Environmental Liability Risk Associated With Lending Activities A significant portion of the Corporation’s loan portfolio is secured by real property |
| During the ordinary course of business, the Corporation may foreclose on and take title to properties securing certain loans |
| In doing so, there is a risk that hazardous or toxic substances could be found on these properties |
| If hazardous or toxic substances are found, the Corporation may be liable for remediation costs, as well as for personal injury and property damage |
| Environmental laws may require the Corporation to incur substantial expenses and may materially reduce the affected property’s value or limit the Corporation’s ability to use or sell the affected property |
| In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase the Corporation’s exposure to environmental liability |
| Although the Corporation has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards |
| The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on the Corporation’s financial condition and results of operations |
| Risks Associated With The Corporation’s Common Stock Our Stock Price Can Be Volatile Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive |
| The Corporation’s stock price can fluctuate significantly in response to a variety of factors including, among other things: • Actual or anticipated variations in quarterly results of operations |
| • Recommendations by securities analysts |
| • Operating and stock price performance of other companies that investors deem comparable to the Corporation |
| • News reports relating to trends, concerns, and other issues in the financial services industry |
| • Perceptions in the marketplace regarding the Corporation and/or its competitors |
| • New technology used or services offered by competitors |
| • Significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving the Corporation or its competitors |
| • Failure to integrate acquisitions or realize anticipated benefits from acquisitions |
| • Changes in government regulations |
| • Geopolitical conditions such as acts or threats of terrorism or military conflicts |
| General market fluctuations, industry factors, and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, or credit loss trends, could also cause the Corporation’s stock price to decrease regardless of operating results |
| An Investment In Our Common Stock Is Not An Insured Deposit The Corporation’s common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund, or by any other public or private entity |
| Investment in the Corporation’s common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company |
| As a result, if you acquire the Corporation’s common stock, you may lose some or all of your investment |
| 12 _________________________________________________________________ [63]Table of Contents Our Articles Of Incorporation, Bylaws, and Certain Banking Laws May Have An Anti-Takeover Effect Provisions of the Corporation’s articles of incorporation, bylaws, and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire the Corporation, even if doing so would be perceived to be beneficial to the Corporation’s shareholders |
| The combination of these provisions may prohibit a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of the Corporation’s common stock |
| Risks Associated With The Corporation’s Industry We Operate In A Highly Competitive Industry and Market Area The Corporation faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources |
| Such competitors primarily include national, regional, and internet banks within the various markets the Corporation operates |
| The Corporation also faces competition from many other types of financial institutions, including, without limitation, savings and loans, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries |
| The financial services industry could become even more competitive as a result of legislative, regulatory, and technological changes and continued consolidation |
| Banks, securities firms, and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking |
| Also, technology has lowered barriers to entry and made it possible for nonbanks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems |
| Many of the Corporation’s competitors have fewer regulatory constraints and may have lower cost structures |
| Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Corporation can |
| The Corporation’s ability to compete successfully depends on a number of factors, including, among other things: • The ability to develop, maintain, and build upon long-term customer relationships based on top quality service, high ethical standards, and safe, sound assets |
| • The ability to expand the Corporation’s market position |
| • The scope, relevance, and pricing of products and services offered to meet customer needs and demands |
| • The rate at which the Corporation introduces new products and services relative to its competitors |
| • Customer satisfaction with the Corporation’s level of service |
| • Industry and general economic trends |
| Failure to perform in any of these areas could significantly weaken the Corporation’s competitive position, which could adversely affect the Corporation’s growth and profitability, which, in turn, could have a material adverse effect on the Corporation’s financial condition and results of operations |
| The Earnings Of Financial Services Companies Are Significantly Affected By General Business And Economic Conditions The Corporation’s operations and profitability are impacted by general business and economic conditions in the United States and abroad |
| These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, and the strength of the US economy and the local economies in which the Corporation operates, all of which are beyond the Corporation’s control |
| A deterioration in economic conditions could result in an increase in loan delinquencies and nonperforming assets, decreases in loan collateral values, and a decrease in demand for the Corporation’s products and services, among other 13 _________________________________________________________________ [64]Table of Contents things, any of which could have a material adverse impact on the Corporation’s financial condition and results of operations |
| Financial Services Companies Depend On The Accuracy And Completeness Of Information About Customers And Counterparties In deciding whether to extend credit or enter into other transactions, the Corporation may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports, and other financial information |
| The Corporation may also rely on representations of those customers, counterparties, or other third parties, such as independent auditors, as to the accuracy and completeness of that information |
| Reliance on inaccurate or misleading financial statements, credit reports, or other financial information could cause us to enter into unfavorable transactions, which would have a material adverse effect on the Corporation’s financial condition and results of operations |
| Consumers May Decide Not To Use Banks To Complete Their Financial Transactions Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods |
| For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds |
| Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks |
| The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits |
| The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on the Corporation’s financial condition and results of operations |