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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 (I.R.S. employer
incorporation or organization) identification no.)
1200 Hansen Road
Green Bay, Wisconsin 54304
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (920) 491-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
Common stock, par value - $0.01 per share
(Title of Class)
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of March 1, 2001, 66,172,712 shares of Common Stock were outstanding and the
aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $2,226,522,000. Excludes approximately $107,100,000
of market value representing the outstanding shares of the Registrant owned by
all directors and officers who individually, in certain cases, or collectively,
may be deemed affiliates. Includes approximately $182,708,000 of market value
representing 7.83% of the outstanding shares of the Registrant held in a
fiduciary capacity by the trust company subsidiary of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Portions of Documents are Incorporated
Proxy Statement for Annual Meeting of Part III
Shareholders on April 25, 2001
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ASSOCIATED BANC-CORP
2000 FORM 10-K TABLE OF CONTENTS
Page
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PART I
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 39
Item 8. Financial Statements and Supplementary Data 40
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 70
PART III
Item 10. Directors and Executive Officers of the Registrant 70
Item 11. Executive Compensation 70
Item 12. Security Ownership of Certain Beneficial Owners and
Management 70
Item 13. Certain Relationships and Related Transactions 70
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 71
Signatures
2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Forward-looking statements have been made in this document, and in documents
that are incorporated by reference, 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 similar expressions identify
forward-looking statements.
Shareholders should note that many factors, some of which are discussed
elsewhere in this document and in the documents that are incorporated by
reference, could affect the future financial results of Associated Banc-Corp and
could cause those results to differ materially from those expressed in
forward-looking statements contained or incorporated by reference in this
document. These factors include the following:
- - operating, legal, and regulatory risks;
- - economic, political, and competitive forces affecting Associated
Banc-Corp's banking, securities, asset management, and credit services
businesses; and
- - the risk that Associated Banc-Corp'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. Associated Banc-Corp
undertakes no obligation to update or revise any forward looking statements,
whether as a result of new information, future events, or otherwise.
PART I
ITEM 1 BUSINESS
GENERAL
Associated Banc-Corp (the "Corporation") is a bank holding company registered
pursuant to the Bank Holding Company Act of 1956, as amended (the "Act"). It was
incorporated in Wisconsin in 1964 and was inactive until 1969 when permission
was received from the Board of Governors of the Federal Reserve System to
acquire three banks. At December 31, 2000, the Corporation owned nine commercial
banks located in Illinois, Minnesota, and Wisconsin (the "affiliates") serving
their local communities and, measured by total assets held at December 31, 2000,
was the third largest commercial bank holding company headquartered in
Wisconsin. The Corporation also owned 31 nonbanking subsidiaries (the
"subsidiaries") located in Arizona, California, Illinois, Missouri, Nevada, and
Wisconsin.
Effective in the second quarter of 2001, the Corporation will merge all of the
Wisconsin bank affiliates into a single national banking charter, headquartered
in Green Bay, Wisconsin, under the name Associated Bank, National Association.
Certain subsidiaries will also merge with and into the resultant bank, becoming
departments of the Wisconsin national bank. At the completion of the foregoing
mergers, the Corporation will have four commercial bank affiliates and 20
subsidiaries.
SERVICES
The Corporation provides advice and specialized services to its affiliates in
banking policy and operations, including auditing, data processing,
marketing/advertising, investing, legal/compliance, personnel services, trust
services, risk management, facilities management, security, purchasing,
treasury, finance, accounting, and other financial services functionally related
to banking.
Responsibility for the management of the affiliates remains with their
respective Boards of Directors and officers. Services rendered to the affiliates
by the Corporation are intended to assist the local management of these
affiliates to expand the scope of services offered by them. Bank affiliates of
the Corporation at December 31, 2000, provided services through 214 locations in
149 communities.
The Corporation, through its affiliates, provides a complete range of banking
services to individuals and businesses. These services include checking,
savings, and money market deposit accounts, business, personal,
3
educational, residential, and commercial mortgage loans, other consumer-oriented
financial services, including IRA and Keogh accounts, and safe deposit and night
depository facilities. Automated Teller Machines (ATMs), which provide 24-hour
banking services to customers of the affiliates, are installed in many locations
in the affiliates' service areas. The affiliates are members of an interstate
shared ATM network, which allows their customers to perform banking transactions
from their checking, savings, or credit card accounts at ATMs in a multi-state
environment. Among the services designed specifically to meet the needs of
businesses are various types of specialized financing, cash management services,
and transfer/collection facilities.
The affiliates provide lending, depository, and related financial services to
individual, commercial, industrial, financial, and governmental customers. Term
loans, revolving credit arrangements, letters of credit, inventory and accounts
receivable financing, real estate construction lending, and international
banking services are available.
Lending involves credit risk. Credit risk is controlled and monitored through
active asset quality management and the use of lending standards, thorough
review of potential borrowers, and active asset quality administration. 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. The allowance for loan losses ("AFLL")
represents management's estimate of an amount adequate to provide for probable
losses inherent in the loan portfolio. 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, current economic conditions, the fair value of underlying collateral, and
other factors which could affect potential credit losses. Credit risk management
is discussed under sections "Loans," "Allowance for Loan Losses," and
"Nonperforming Loans, Potential Problem Loans, and Other Real Estate Owned" and
under Notes 1 and 5 in the notes to consolidated financial statements.
Additional emphasis is given to noncredit services for commercial customers,
such as advice and assistance in the placement of securities, corporate cash
management, and financial planning. The affiliates make available check
clearing, safekeeping, loan participations, lines of credit, portfolio analyses,
and other services to approximately 120 correspondent financial institutions.
A trust company subsidiary and an investment management subsidiary offer a wide
variety of fiduciary, investment management, advisory, and corporate agency
services to individuals, corporations, charitable trusts, foundations, and
institutional investors. They also administer (as trustee and in other fiduciary
and representative capacities) pension, profit sharing and other employee
benefit plans, and personal trusts and estates.
Investment subsidiaries provide discount and full-service brokerage services,
including the sale of fixed and variable annuities, mutual funds, and
securities, to the affiliates' customers and the general public. Insurance
subsidiaries provide commercial and individual insurance services and engage in
reinsurance. Various life, property, casualty, credit, and mortgage insurance
products are available to the affiliates' customers and the general public.
Seven investment subsidiaries located in Nevada hold, manage, and trade cash,
stocks, and securities transferred from the affiliates and reinvest investment
income. Three additional investment subsidiaries formed in Nevada and
headquartered and domiciled in the Cayman Islands provide investment services
for their parent bank, as well as provide management of their respective Real
Estate Investment Trust ("REIT") subsidiaries. A leasing subsidiary provides
lease financing for a variety of capital equipment for commerce and industry. An
appraisal subsidiary provides real estate appraisals for customers, government
agencies, and the general public.
The mortgage banking subsidiaries are involved in the origination, servicing,
and warehousing of mortgage loans, and the sale of such loans to investors. The
primary focus is on commercial and one- to four-family residential and
multi-family properties, which are generally salable into the secondary mortgage
market. The principal mortgage lending areas of these subsidiaries are Wisconsin
and Illinois. Nearly all long-term, fixed-rate real estate mortgage loans
generated are sold in the secondary market and to other financial institutions,
with the subsidiaries retaining the servicing of those loans.
4
In addition to real estate loans, the Corporation's affiliates and subsidiaries
originate and/or service consumer loans, business credit card loans, and student
loans. Consumer, home equity, and student lending activities are principally
conducted in Wisconsin and Illinois, while the credit card base and resulting
loans are principally centered in the Midwest. In April 2000, the Corporation
entered into an agreement with Citibank USA ("Citi") for the acquisition of the
Corporation's retail credit card portfolio. That agreement, along with a
five-year agency agreement entered into contemporaneously with Citi, provides
for agent fees and other income on new and existing card business.
The Corporation, its affiliates, and subsidiaries are not dependent upon a
single or a few customers, the loss of which would have a material adverse
effect on the Corporation. No material portion of the business of the
Corporation, its affiliates, or its subsidiaries is seasonal.
FOREIGN OPERATIONS
The Corporation, its affiliates, and subsidiaries do not engage in any
operations in foreign countries, other than three investment subsidiaries all
formed under the General Corporation Law of the State of Nevada. These
investment subsidiaries are headquartered and commercially domiciled in the
Cayman Islands. Each subsidiary has at least one employee who is a resident of
the Cayman Islands. In addition, Associated Bank Green Bay, National
Association, a banking affiliate of the Corporation, has established a branch in
the Cayman Islands under a Class B Banking License issued by the Cayman Islands
Monetary Authority. It has at least one employee who is a resident of the Cayman
Islands.
EMPLOYEES
At December 31, 2000, the Corporation, its affiliates, and subsidiaries, as a
group, had 3,835 full-time equivalent employees.
COMPETITION
The financial services industry is highly competitive. The Corporation competes
for loans, deposits, and financial services in all of its principal markets. The
Corporation competes directly with other bank and nonbank institutions located
within its markets, with out-of-market banks and bank holding companies that
advertise or otherwise serve the Corporation's markets, money market and other
mutual funds, brokerage houses, and various other financial institutions.
Additionally, the Corporation competes with insurance companies, leasing
companies, regulated small loan companies, credit unions, governmental agencies,
and commercial entities offering financial services products. Competition
involves efforts to obtain new deposits, the scope and type of services offered,
interest rates paid on deposits and charged on loans, as well as other aspects
of banking. All of the affiliates also face direct competition from members of
bank holding company systems that have greater assets and resources than those
of the Corporation.
SUPERVISION AND REGULATION
Financial institutions are highly regulated both at the federal and state level.
Numerous statutes and regulations presently affect the business of the
Corporation, its affiliates, and its subsidiaries. Proposed comprehensive
statutory and regulatory changes could have an effect on the Corporation's
business.
As a registered bank holding company under the Act, the Corporation and its
nonbanking affiliates are regulated and supervised by the Board of Governors of
the Federal Reserve System (the "Board"). The affiliates of the Corporation with
a national charter are supervised and examined by the Comptroller of the
Currency. The affiliates with a state charter are supervised and examined by
their respective state banking agency, and either the Board, if such affiliate
is a member of the Federal Reserve System, or by the Federal Deposit Insurance
Corporation (the "FDIC"), if a nonmember. Currently, all affiliates with a state
charter are nonmember banks. All affiliates of the Corporation that accept
insured deposits are subject to examination by the FDIC.
5
The activities of the Corporation, its affiliates, and subsidiaries, are limited
by the Act to those activities that are banking or those nonbanking activities
that are closely related or incidental to banking. The Corporation is required
to act as a source of financial strength to each of its affiliates pursuant to
which it may be required to commit financial resources to support such
affiliates in circumstances when, absent such requirements, it might not do so.
The Act also requires the prior approval of the Board for the Corporation to
acquire direct or indirect control of more than five percent of any class of
voting shares of any bank or bank holding company. Further restrictions imposed
by the Act include capital requirements, restrictions on transactions with
affiliates, on issuances of securities, on dividend payments, on inter-affiliate
liabilities, on extensions of credit, and on expansion through merger and
acquisition.
The federal regulatory authorities have broad authority to enforce the
regulatory requirements imposed on the Corporation, its affiliates, and
subsidiaries. In particular, the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), and their implementing regulations, carry
greater enforcement powers. Under FIRREA, all commonly controlled FDIC insured
depository institutions may be held liable for any loss incurred by the FDIC
resulting from a failure of, or any assistance given by the FDIC to, any
commonly controlled institutions. Pursuant to certain provisions under FDICIA,
the federal regulatory agencies have broad powers to take prompt corrective
action if a depository institution fails to maintain certain capital levels.
Prompt corrective action may include the inability of the Corporation to pay
dividends, restrictions in acquisitions or activities, limitations on asset
growth, and other restrictions.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 contains
provisions which amended the Act to allow an adequately-capitalized and
adequately-managed bank holding company to acquire a bank located in another
state as of September 29, 1995. Effective June 1, 1997, interstate branching was
permitted. The Riegle-Neal Amendments Act of 1997 clarifies the applicability of
host state laws to any branch in such state of an out-of-state bank.
The FDIC maintains the Bank Insurance Fund (BIF) and the Savings Association
Insurance Fund (SAIF) by assessing depository institutions an insurance premium
twice a year. The amount each institution is assessed is based both on the
balance of insured deposits held during the preceding two quarters, as well as
on the degree of risk the institution poses to the insurance fund. FDIC assesses
higher rates on those institutions that pose greater risks to the insurance
funds. Effective April 1, 2000, the FDIC Board of Directors (FDIC Board) adopted
revisions to the FDIC's regulation governing deposit insurance assessments which
it believes enhance the present system by allowing institutions with improving
capital positions to benefit from the improvement more quickly while requiring
those whose capital is failing to pay a higher assessment sooner. The Federal
Deposit Insurance Act governs the authority of the FDIC Board to set BIF and
SAIF assessment rates and directs the FDIC Board to establish a risk-based
assessment system for insured depository institutions and set assessments to the
extent necessary to maintain the reserve ratio at 1.25%. The current BIF
assessment rate is 1.34% and the SAIF assessment rate is 1.44%.
The Gramm-Leach-Bliley Act of 1999, P.L. 106-102, enacted on November 12, 1999,
has made major amendments to the Act. The amendments, among other things, allow
certain qualifying bank holding companies to engage in activities that are
financial in nature and that explicitly include the underwriting and sale of
insurance. The amendments also amend the Act provisions governing the scope and
manner of the Board's supervision of bank holding companies, the manner in which
activities may be found to be financial in nature, and the extent to which state
laws on insurance will apply to insurance activities of banks and bank
affiliates. The Board has issued regulations implementing these provisions. The
amendments allow for the expansion of activities by banking organizations and
permit consolidation among financial organizations generally.
The laws and regulations to which the Corporation, its affiliates, and
subsidiaries are subject are constantly under review by Congress, the federal
regulatory agencies, and the state authorities. These laws and regulations could
be changed drastically in the future, which could affect the profitability of
the Corporation, its ability to compete effectively, or the composition of the
financial services industry in which the Corporation competes.
6
GOVERNMENT MONETARY POLICIES AND ECONOMIC CONTROLS
The earnings and growth of the banking industry and the affiliates of the
Corporation are affected by the credit policies of monetary authorities,
including the Federal Reserve System. An important function of the Federal
Reserve System is to regulate the national supply of bank credit in order to
combat recession and curb inflationary pressures. Among the instruments of
monetary policy used by the Federal Reserve to implement these objectives are
open market operations in U.S. government securities, changes in reserve
requirements against member bank deposits, and changes in the Federal Reserve
discount rate. These means are used in varying combinations to influence overall
growth of bank loans, investments, and deposits, and may also affect interest
rates charged on loans or paid for deposits. The monetary policies of the
Federal Reserve authorities have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to have
such an effect in the future.
In view of changing conditions in the national economy and in the money markets,
as well as the effect of credit policies by monetary and fiscal authorities,
including the Federal Reserve System, no prediction can be made as to possible
future changes in interest rates, deposit levels, and loan demand, or their
effect on the business and earnings of the Corporation and its affiliates.
ITEM 2 PROPERTIES
The Corporation's headquarters were relocated to the Village of Ashwaubenon,
Wisconsin, in a leased facility with approximately 30,000 square feet of office
space in September 1998. The space is subject to a five-year lease with two
consecutive five-year extensions.
At December 31, 2000, the affiliates occupied 214 offices in 149 different
communities within Illinois, Minnesota, and Wisconsin. All affiliate main
offices are owned, except Associated Bank Milwaukee, Associated Bank Chicago,
Associated Bank Illinois, and Associated Bank Minnesota. The affiliate main
offices in downtown Milwaukee, Chicago, Rockford, and Minneapolis are located in
the lobbies of multi-story office buildings. Most affiliate branch offices are
free-standing buildings that provide adequate customer parking, including
drive-in facilities of various numbers and types for customer convenience. Some
affiliates also have branch offices in various supermarket locations, as well as
offices in retirement communities. In addition, the Corporation owns other real
property that, when considered in the aggregate, is not material to its
financial position.
ITEM 3 LEGAL PROCEEDINGS
There are legal proceedings pending against certain affiliates and subsidiaries
of the Corporation which arose in the normal course of their business. Although
litigation is subject to many uncertainties and the ultimate exposure with
respect to these matters cannot be ascertained, management believes, based upon
discussions with counsel, that the Corporation has meritorious defenses, and any
ultimate liability would not have a material adverse effect on the consolidated
financial position or results of operations of the Corporation.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ending December 31, 2000.
EXECUTIVE OFFICERS OF THE CORPORATION
Pursuant to General Instruction G of Form 10-K, the following list is included
as an unnumbered item in Part I of this report in lieu of being included in the
Proxy Statement for the Annual Meeting of Stockholders to be held April 25,
2001.
The following is a list of names and ages of executive officers of the
Corporation and affiliates indicating all positions and offices held by each
such person and each such person's principal occupation(s) or employment during
the past five years. The Date of Election refers to the date the person was
first elected an officer of the Corporation or its affiliates. Officers are
appointed annually by the Board of Directors at the meeting of
7
directors immediately following the Annual Meeting of Shareholders. There are no
family relationships among these officers nor any arrangement or understanding
between any officer and any other person pursuant to which the officer was
selected. No person other than those listed below has been chosen to become an
Executive Officer of the Corporation.
NAME OFFICES AND POSITIONS HELD DATE OF ELECTION
Harry B. Conlon Chairman of Associated Banc-Corp March 1, 1975
Age: 65
Prior to April 2000, Chairman and Chief
Executive Officer of Associated Banc-Corp
Prior to October 1998, Chairman, President,
and Chief Executive Officer of Associated
Banc-Corp
Robert C. Gallagher President, Chief Executive Officer, and April 28, 1982
Age: 62 Director of Associated Banc-Corp
Prior to April 2000, President, Chief
Operating Officer, and Director of
Associated Banc-Corp
Prior to October 1998, Vice Chairman of
Associated Banc-Corp; Chairman and Chief
Executive Officer of Associated Bank Green
Bay (affiliate)
Prior to April 1996, Executive Vice
President and Director of Associated
Banc-Corp; Chairman, President and Chief
Executive Officer of Associated Bank Green
Bay (affiliate)
Brian R. Bodager Chief Administrative Officer, General July 22, 1992
Age: 45 Counsel and Corporate Secretary of
Associated Banc-Corp
Prior to July 1997, Senior Vice President,
General Counsel, and Corporate Secretary of
Associated Banc-Corp
Joseph B. Selner Chief Financial Officer of Associated January 25, 1978
Age: 54 Banc-Corp
Arthur E. Olsen, III General Auditor of Associated Banc-Corp July 28, 1993
Age: 49
Mary Ann Bamber Director of Retail Banking of Associated January 22, 1997
Age: 50 Banc-Corp
From January 1996 to January 1997,
independent consultant
From January 1996 to January 1997, Senior
Officer of an Iowa-based bank
Robert J. Johnson Director of Human Resources of Associated January 22, 1997
Age: 55 Banc-Corp
Prior to January 1997, Officer of a
Wisconsin manufacturing company
8
NAME OFFICES AND POSITIONS HELD DATE OF ELECTION
Donald E. Peters Director of Systems and Operations of October 27, 1997
Age: 51 Associated Banc-Corp
From October 1997 to November 1998, Director
of Systems and Operations of Associated
Banc-Corp; Executive Vice President of First
Financial Bank (former affiliate)
Prior to October 1997, Executive Vice
President of First Financial Corporation
(former affiliate); Executive Vice President
of First Financial Bank (former affiliate)
Cindy K. Moon-Mogush Director of Marketing of Associated Banc-Corp April 20, 1998
Age: 39
From July 1997 to April 1998, Senior Vice
President of a Michigan-based bank holding
company
From March 1995 to July 1997, Officer of a
Michigan-based bank holding company
Teresa A. Rosengarten Treasurer of Associated Banc-Corp October 25, 2000
Age: 40
From March 1994 to August 2000, Treasurer
of a Tennessee-based bank holding company
David E. Cleveland President and Director of Associated Bank August 31, 1999
Age: 67 Minnesota (affiliate)
John P. Evans Chief Executive Officer and Director of August 16, 1993
Age: 51 Associated Bank North (affiliate)
David J. Handy President, Chief Executive Officer, and May 31, 1991
Age: 61 Director of Associated Bank, National
Association (affiliate)
Michael B. Mahlik President, Chief Operating Officer, and January 1, 1991
Age: 48 Director of Associated Trust Company
(affiliate);Director of Associated Bank,
National Association (affiliate)
Prior to July 1999, Executive Vice
President, Managing Trust Officer, and
Director of Associated Bank, National
Association (affiliate)
George J. McCarthy President, Chief Executive Officer, and November 11, 1983
Age: 50 Director of Associated Bank Chicago
(affiliate)
Mark J. McMullen Chairman and Chief Executive Officer of June 2, 1981
Age: 52 Associated Trust Company (affiliate)
Prior to July 1999, Senior Executive Vice
President and Director of Associated Bank
Green Bay (affiliate)
Prior to July 1996, Executive Vice President
and Director of Associated Bank Green Bay
(affiliate)
Randall J. Peterson President, Chief Executive Officer, and August 2, 1982
Age: 55 Director of Associated Bank Green Bay
(affiliate)
From July 1996 to October 1998, President
and Director of Associated Bank Green Bay
(affiliate)
Prior to July 1996, Executive Vice President
and Director of Associated Bank Green Bay
(affiliate)
Gary L. Schaefer President and Director of Associated Bank March 1, 1995
Age: 51 South Central (affiliate)
9
NAME OFFICES AND POSITIONS HELD DATE OF ELECTION
Thomas R. Walsh President, Chief Executive Officer, and January 1, 1994
Age: 43 Director of Associated Bank Illinois
(affiliate)
From January 1994 to November 12, 1998,
President, Chief Executive Officer, and
Director of Associated Bank Lakeshore
(affiliate)
Gordon J. Weber President, Chief Executive Officer, and December 15, 1993
Age: 53 Director of Associated Bank Milwaukee
(affiliate); Director of Associated Bank
South Central (affiliate)
Scott A. Yeoman President, Chief Executive Officer, and October 1, 1994
Age: 43 Director of Associated Bank Lakeshore
(affiliate)
From October 1, 1994, to September 15, 1998,
Senior Vice President of Associated Bank
Lakeshore (affiliate)
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information in response to this item is incorporated by reference to the table
"Market Information" on Page 70 and the discussion of dividend restrictions in
Note 11 "Stockholders' Equity" of the notes to consolidated financial statements
included under Item 8 of this document. The Corporation's common stock is
currently being traded on The Nasdaq Stock Market under the symbol ASBC.
The approximate number of equity security holders of record of common stock,
$.01 par value, as of March 1, 2001, was 10,000. Certain of the Corporation's
shares are held in "nominee" or "street" name and the number of beneficial
owners of such shares is approximately 23,700.
Payment of future dividends is within the discretion of the Corporation's Board
of Directors and will depend, among other factors, on earnings, capital
requirements, and the operating and financial condition of the Corporation. At
the present time, the Corporation expects that dividends will continue to be
paid in the future.
10
ITEM 6 SELECTED FINANCIAL DATA
TABLE 1: EARNINGS SUMMARY AND SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
% 5-YEAR
CHANGE COMPOUND
1999 TO GROWTH
YEARS ENDED DECEMBER 31, 2000 2000 1999 1998 1997 1996 1995 RATE
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income $ 931,157 14.3% $ 814,520 $ 785,765 $ 787,919 $ 731,763 $ 696,858 6.0%
Interest expense 547,590 30.8 418,775 411,028 411,637 375,922 360,499 8.7
-------------------------------------------------------------------------------------------------
Net interest income 383,567 (3.1) 395,745 374,737 376,282 355,841 336,359 2.7
Provision for loan losses 20,206 5.0 19,243 14,740 31,668 13,695 14,029 7.6
-------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 363,361 (3.5) 376,502 359,997 344,614 342,146 322,330 2.4
Noninterest income 184,196 11.0 165,906 167,928 94,854 115,265 104,989 11.9
Noninterest expense 317,736 4.1 305,092 294,962 323,200 292,222 252,927 4.7
-------------------------------------------------------------------------------------------------
Income before income taxes and
extraordinary item 229,821 (3.2) 237,316 232,963 116,268 165,189 174,392 5.7
Income tax expense 61,838 (14.6) 72,373 75,943 63,909 57,487 62,381 (0.2)
Extraordinary item --- --- --- --- --- (686) --- N/M
-------------------------------------------------------------------------------------------------
NET INCOME $ 167,983 1.8% $ 164,943 $ 157,020 $ 52,359 $ 107,016 $ 112,011 8.4%
=================================================================================================
Basic earnings per share (1):
Income before extraordinary
item $ 2.46 4.2% $ 2.36 $ 2.26 $ 0.76 $ 1.55 $ 1.66 8.2%
Net income 2.46 4.2 2.36 2.26 0.76 1.54 1.66 8.2
Diluted earnings per share (1):
Income before extraordinary
item 2.46 5.1 2.34 2.24 0.74 1.52 1.63 8.6
Net income 2.46 5.1 2.34 2.24 0.74 1.51 1.63 8.6
Cash dividends per share (1) 1.11 5.0 1.05 0.95 0.81 0.69 0.59 13.4
Weighted average shares
outstanding:
Basic 68,186 (2.4) 69,858 69,438 69,172 69,526 67,525 0.2
Diluted 68,410 (2.9) 70,468 70,168 70,329 70,818 68,720 (0.1)
SELECTED FINANCIAL DATA
Year-End Balances:
Loans $ 8,913,379 6.8% $ 8,343,100 $ 7,272,697 $ 7,072,550 $ 6,654,914 $ 6,366,706 7.0%
Allowance for loan losses 120,232 6.2 113,196 99,677 92,731 71,767 68,560 11.9
Investment securities 3,260,205 (0.3) 3,270,383 2,907,735 2,940,218 2,753,938 2,266,895 7.5
Assets 13,128,394 4.9 12,519,902 11,250,667 10,690,442 10,120,413 9,393,609 6.9
Deposits 9,291,646 6.9 8,691,829 8,557,819 8,395,277 7,959,240 7,570,201 4.2
Long-term debt 122,420 404.1 24,283 26,004 15,270 33,329 36,907 27.1
Stockholders' equity 968,696 6.5 909,789 878,721 813,692 803,562 725,211 6.0
Book value per share (1) 14.65 12.0 13.09 12.70 13.35 14.74 13.57 1.5
---------------------------------------------------------------------------------------------------
Average Balances:
Loans $ 8,688,086 11.4% $ 7,800,791 $ 7,255,850 $ 6,959,018 $ 6,580,758 $ 6,157,655 7.1%
Investment securities 3,317,499 6.3 3,119,923 2,737,556 2,905,921 2,526,571 2,421,379 6.5
Assets 12,810,235 9.5 11,698,104 10,628,695 10,391,718 9,640,471 9,123,981 7.0
Deposits 9,102,940 5.5 8,631,652 8,430,701 8,121,945 7,778,177 7,409,409 4.2
Stockholders' equity 920,169 0.7 914,082 856,425 839,859 775,180 674,368 6.4
---------------------------------------------------------------------------------------------------
Financial Ratios:
Return on average equity (2) 18.26% 22bp 18.04% 18.33% 16.93% 16.64% 17.21%
Return on average assets (2) 1.31 (10) 1.41 1.48 1.37 1.35 1.27
Net interest margin
(tax-equivalent) 3.36 (38) 3.74 3.79 3.86 3.95 3.95
Average equity to average
assets 7.18 (63) 7.81 8.06 8.08 8.04 7.39
Dividend payout ratio (2)(3) 45.01 33 44.68 41.93 39.38 37.07 35.71
===================================================================================================
(1) Per share data adjusted retroactively for stock splits and stock dividends.
(2) Ratio is based upon income prior to merger integration and other one-time
charges or extraordinary items for 1997, 1996, and 1995.
(3) Ratio is based upon basic earnings per share.
N/M = not meaningful
11
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is management's analysis to assist in the understanding
and evaluation of the consolidated financial condition and results of operations
of Associated Banc-Corp (the "parent company"), together with its affiliates and
subsidiaries (the "Corporation"). It should be read in conjunction with the
consolidated financial statements and footnotes and the selected financial data
presented elsewhere in this report.
The financial discussion that follows may refer to the impact of the
Corporation's business combination activity, detailed under section "Business
Combinations," and Note 2 of the notes to consolidated financial statements. The
detailed financial discussion focuses on 2000 results compared to 1999.
Discussion of 1999 results to 1998 is predominantly in section "1999 Compared to
1998."
PERFORMANCE SUMMARY
The Corporation recorded net income of $168.0 million for the year ended
December 31, 2000, an increase of $3.0 million or 1.8% over the $164.9 million
earned in 1999. Basic earnings per share for 2000 were $2.46, a 4.2% increase
over 1999 basic earnings per share of $2.36. Earnings per diluted share were
$2.46, a 5.1% increase over 1999 diluted earnings per share of $2.34. Return on
average assets ("ROA") and return on average equity ("ROE") for 2000 were 1.31%
and 18.26%, respectively, compared to 1.41% and 18.04%, respectively, for 1999.
Cash dividends paid in 2000 increased by 5.0% to $1.11 per share over the $1.05
per share paid in 1999. Key factors behind these results were:
- - Taxable equivalent net interest income was $405.3 million for 2000, $4.1
million or 1.0% lower than 1999. Taxable equivalent interest income
increased by $124.7 million, while interest expense increased $128.8
million. The volume of average earning assets increased $1.1 billion to
$12.0 billion, which exceeded the $1.0 billion increase in interest-bearing
liabilities. Although increases in the volume of earning assets and
interest-bearing liabilities, as well as changes in product mix, added
$32.4 million to taxable equivalent net interest income, changes in
interest rates resulted in a $36.5 million decrease.
- - Net interest income and net interest margin were also impacted in 2000 by
the rising interest rate environment, competitive pricing pressures, branch
deposit and credit card receivable sales, and funding of stock repurchases.
The Federal Reserve raised interest rates six times between July 1999 and
December 2000, producing an average Federal funds rate for 2000 that was
131 basis points ("bp") higher than the average for 1999.
- - The net interest margin was 3.36% for 2000, a 38 bp decline from 3.74% for
1999, the net result of the 45 bp decrease in interest rate spread, offset
by a 7 bp improvement in the net free funds contribution. Rates on
interest-bearing liabilities in 2000 were 80 bp higher than last year,
while the yield on earning assets increased 35 bp, bringing the interest
rate spread down by 45 bp.
- - Total loans were $8.9 billion at December 31, 2000, an increase of $570
million or 6.8% over December 31, 1999, predominantly in commercial loans.
Excluding the sale of $128 million of credit card loan receivables in 2000,
total loans were 8.4% higher at year-end 2000 than a year earlier. Total
deposits were $9.3 billion at December 31, 2000, $600 million higher than
December 31, 1999, despite the sale of six Illinois branch offices in 2000
with deposits totaling $109 million. The growth was predominantly in
brokered CDs.
- - Asset quality remained relatively strong. The provision for loan losses
("PFLL") increased to $20.2 million compared to $19.2 million in 1999. Net
charge-offs ("NCOs") decreased $4.8 million, primarily due to fewer NCOs on
credit cards between the years, given the sale of credit card receivables
in April 2000. NCOs were 0.10% of average loans compared to 0.18% in 1999.
The ratio of allowance for loan losses to loans was 1.35% and 1.36% at
December 31, 2000 and 1999, respectively. Nonperforming loans were $47.7
million, representing 0.54% of total loans at year-end 2000, compared to
$36.9 million or 0.44% of total loans last year.
12
- - Noninterest income was $184.2 million for 2000, $18.3 million or 11.0%
higher than 1999. Net gains on the sales of assets and investment
securities totaled $16.8 million in 2000 compared to net gains of $8.0
million in 1999. Key sales in 2000 included a $12.9 million gain on the
sale of the credit card receivables, the $11.1 million net premium on the
sales of deposits of six branches, and $7.6 million net losses on the sale
of investment securities. Excluding these asset and security sales,
noninterest income was $167.4 million, or $9.5 million (6.0%) higher than
1999. With the exception of mortgage banking, which was impacted by a
year-over-year slowdown in secondary mortgage production, all other
noninterest income categories collectively increased $20.0 million or 15.7%
in 2000 compared to 1999.
- - Noninterest expense was $317.7 million, up $12.6 million or 4.1% over 1999.
However, 1999 expenses were reduced by two large items totaling $12.0
million, namely the reversal of mortgage servicing rights ("MSR") valuation
allowance and a reduction in profit sharing expense. Not including these
items, noninterest expense was relatively unchanged (up $0.6 million or
0.2%), despite adding $10.9 million of incremental expenses in 2000 from
the 1999 purchase acquisitions. Excluding the acquisitions, as well as the
two 1999 items noted above, noninterest expense was $10.3 million (3.4%)
lower than 1999.
- - Income tax expense decreased to $61.8 million, down $10.5 million from
1999. The effective tax rate in 2000 was 26.9% compared to 30.5% for 1999,
due to the tax benefits of additional municipal securities, real estate
investment trusts, bank owned life insurance, and tax valuation allowance
adjustments.
BUSINESS COMBINATIONS
There were no completed or pending business combination transactions during
2000. During 1999, the Corporation acquired $591 million in assets through three
acquisition transactions. All were accounted for under the purchase method, and
therefore the financial position and results of operations of each entity were
included in the consolidated financial statements as of the consummation date of
each transaction. The Corporation's business combination activity is further
summarized in Note 2 of the notes to consolidated financial statements. Share
repurchase activity related to the acquisitions is described under the section
"Capital."
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
Net interest income is the primary source of the Corporation's revenue. Net
interest income is the difference between interest income on earning assets
("EAs"), such as loans and securities, and the interest expense on
interest-bearing deposits and other borrowings, used to fund those and other
assets or activities. The amount of net interest income is affected by changes
in interest rates and by the amount and composition of EAs and interest-bearing
liabilities ("IBLs"). Additionally, net interest income is impacted by the
sensitivity of the balance sheet to changes in interest rates which factors in
characteristics such as the fixed or variable nature of the financial
instruments, contractual maturities, and repricing frequencies.
Net interest income in the consolidated statements of income (which excludes the
taxable equivalent adjustment on tax exempt assets) was $383.6 million, compared
to $395.7 million last year. The taxable equivalent adjustments (the adjustments
to bring tax-exempt interest to a level that would yield the same after-tax
income had that income been subject to taxation, using a 35% tax rate) of $21.7
million for 2000 and $13.7 million for 1999, resulted in fully taxable
equivalent ("FTE") net interest income of $405.3 million and $409.4 million,
respectively. The $8.0 million increase in the taxable equivalent adjustment
between years was in line with the 52% growth in average municipal securities
balances. The impact of carrying more tax exempt assets in 2000 is reflected in
the consolidated statements of income as a reduction to income tax expense
between the years.
FTE net interest income was $405.3 million for 2000, a decrease of $4.1 million
or 1.0% from 1999. The 1999 acquisitions, net of the cost to fund them,
contributed approximately $15 million more net interest income in 2000 than in
1999. For 2000 compared to 1999, the decrease in FTE net interest income was due
to the combination of a number of factors, including a rising interest rate
environment, an inverted yield curve during
13
the year, funding of stock repurchases, greater average bank owned life
insurance ("BOLI") balances, the sale of branch deposits and credit card
receivables, and continued competitive pressures for both loan and deposit
products.
Interest rate spread and net interest margin are utilized to measure and explain
changes in net interest income. Interest rate spread is the difference between
the yield on EAs and the rate paid for IBLs that fund those assets. The net
interest margin is expressed as the percentage of net interest income to average
EAs. The net interest margin exceeds the interest rate spread because
noninterest-bearing sources of funds (net free funds), principally demand
deposits and stockholders' equity, also support EAs. To compare tax-exempt asset
yields to taxable yields, the yield on tax-exempt loans and securities is
computed on an FTE basis. Net interest income, interest rate spread, and net
interest margin are discussed further on an FTE basis.
Table 2 provides average balances of EAs and IBLs, the associated interest
income and expense, and the corresponding interest rates earned and paid, as
well as net interest income, interest rate spread, and net interest margin on an
FTE basis for the three years ended December 31, 2000. Tables 3 through 5
present additional information to facilitate the review and discussion of FTE
net interest income, interest rate spread, and net interest margin.
As indicated in Tables 2 and 3, increases in volume and changes in the mix of
both EAs and IBLs added $32.4 million to FTE net interest income, whereas
changes in the rates resulted in a $36.5 million decline, for a net decrease of
$4.1 million.
The net interest margin for 2000 was 3.36%, compared to 3.74% in 1999. For 2000,
the yield on EAs rose 35 basis points, increasing interest earned by $35.8
million (with loans accounting for $28.1 million of the increase), while the
cost of IBLs increased 80 bp, raising interest expense by $72.3 million (with
interest-bearing deposits, principally brokered CDs, accounting for $46.3
million), for a net decline of $36.5 million in FTE net interest income. The
decline in net interest margin was unfavorably impacted by tighter credit
spreads in increasingly competitive markets and by increased reliance of funding
loan growth with market-rate sensitive liabilities in a rising rate environment,
particularly wholesale funding. In addition, the lower margin reflects the cost
of funding the Corporation's share repurchases during 2000 and funding more BOLI
(an asset whose earnings are recorded as fee income), as well as the sales of
branch deposits (replaced with higher-costing wholesale funds) and the sale of
higher-yielding credit card receivables. While these actions negatively impacted
the margin, they supported other corporate objectives, such as capital
management, revenue diversity, and streamlining strategies.
In combination, the growth and composition change of EAs contributed an
additional $88.9 million to FTE net interest income, while the growth and
composition of IBLs cost an additional $56.5 million, netting a $32.4 million
increase to FTE net interest income.
Average EAs were $12.0 billion in 2000, an increase of $1.1 billion, or 10.0%,
from 1999. On average, the acquisitions contributed approximately $275 million
to this increase, while the sale of the credit card receivables reduced average
EAs by approximately $96 million. Loans accounted for the majority of the growth
in EAs, increasing to 72.1% of average EAs, compared to 71.2% for 1999. Average
loans were $8.7 billion in 2000, up $887 million or 11.4% compared to 1999 (up
9.8% excluding the net impact from acquisitions and the sale of credit card
receivables). During 2000, the Corporation focused on shifting the composition
of its loan portfolio, growing the proportion of commercial loans, which
represented 36% of average EAs for 2000 compared to 31% for 1999. For 2000, FTE
interest income on loans increased $101.7 million over last year, with $73.5
million contributed from loan growth and $28.2 million added from the rate
environment impact on loans (See Table 3). The average loan yield for 2000 was
8.38%, up 35 bp over last year. The loan yield lagged the change in the market
rate in part due to repricing frequencies in the portfolio, competitive pricing
pressures on new production, the sale of the higher yielding credit card
receivables, and other loan mix changes. The increase seen in investment yields
was primarily a result of the rising rate environment.
Average IBLs were $10.7 billion in 2000, an increase of $1.0 billion or 10.5%
from 1999. Although the Corporation has been successful in attracting
transactional demand deposit accounts, loan growth outpaced
14
deposit growth, increasing the Corporation's reliance on brokered CDs and other
wholesale funding sources. The mix of IBLs shifted from lower-rate deposits
(which represented 75.1% of average IBLs for 2000 compared to 79.0% for 1999) to
higher-cost wholesale funding. Average interest-bearing deposits were $8.0
billion in 2000, up $388 million or 5.1% compared to 1999 (up 5.0% excluding the
net impact from acquisitions and branch deposit sales). For 2000, interest
expense on interest-bearing deposits increased $65.8 million, with $19.5 million
contributed from the growth in volume and $46.3 million added from the impact of
the rate environment. Brokered CDs were the predominant driver of the change in
interest-bearing deposits, up $599 million on average over last year, and
costing 112 bp more in 2000 than 1999. Total wholesale funds (including all
funding sources other than interest-bearing deposits) were $2.7 billion on
average for 2000, up $622 million or 30.6%. Total interest-bearing deposits cost
4.74% on average for 2000 (62 bp more than last year), while wholesale funding
on a combined basis cost 6.32% (117 bp higher than last year).
15
TABLE 2: AVERAGE BALANCES AND INTEREST RATES (INTEREST AND RATES ON A
TAX-EQUIVALENT BASIS)
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
---------------------------------------------------------------------------------------------------
($ IN THOUSANDS)
ASSETS
Earning assets:
Loans (1)(2)(3) $ 8,688,086 $ 728,128 8.38% $ 7,800,791 $ 626,407 8.03% $ 7,255,850 $ 603,423 8.32%
Investment securities:
Taxable 2,523,492 163,768 6.49 2,597,760 163,769 6.30 2,500,470 168,536 6.74
Tax exempt(1) 794,007 58,233 7.33 522,163 36,201 6.93 237,086 17,028 7.18
Short-term investments 41,309 2,775 6.72 34,110 1,806 5.29 68,776 3,479 5.06
---------------------------------------------------------------------------------------------------
Total earning assets $12,046,894 $ 952,904 7.91% $10,954,824 $ 828,183 7.56% $10,062,182 $ 792,466 7.88%
---------------------------------------------------------------------------------------------------
Allowance for loan losses (115,580) (105,488) (92,175)
Cash and due from banks 268,267 263,288 246,596
Other assets 610,654 585,480 412,092
---------------------------------------------------------------------------------------------------
Total assets $12,810,235 $11,698,104 $10,628,695
===================================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits $ 956,177 $ 19,704 2.06% $ 919,163 $ 14,998 1.63% $ 981,630 $ 20,812 2.12%
Interest-bearing demand
deposits 803,779 11,091 1.38 796,506 10,645 1.34 473,123 8,212 1.74
Money market deposits 1,407,502 65,702 4.67 1,373,010 52,478 3.82 1,377,503 45,430 3.30
Time deposits 4,848,900 283,395 5.84 4,539,286 235,954 5.20 4,753,959 270,938 5.70
---------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 8,016,358 379,892 4.74 7,627,965 314,075 4.12 7,586,215 345,392 4.55
Federal funds purchased and
securities sold under
agreements to repurchase 1,724,291 107,732 6.25 1,057,269 52,843 5.00 517,344 26,174 5.06
Other short-term borrowings 816,553 52,698 6.45 951,524 50,214 5.28 660,761 37,600 5.69
Long-term debt 114,374 7,268 6.35 24,644 1,643 6.67 27,055 1,862 6.88
---------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $10,671,576 $ 547,590 5.13% $ 9,661,402 $ 418,775 4.33% $ 8,791,375 $ 411,028 4.68%
---------------------------------------------------------------------------------------------------
Demand deposits 1,086,582 1,003,687 844,486
Accrued expenses and other
liabilities 131,908 118,933 136,409
Stockholders' equity 920,169 914,082 856,425
---------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $12,810,235 $11,698,104 $10,628,695
===================================================================================================
Net interest income and rate
spread (1) $ 405,314 2.78% $ 409,408 3.23% $ 381,438 3.20%
===================================================================================================
Net interest margin (1) 3.36% 3.74% 3.79%
===================================================================================================
Taxable equivalent adjustment $ 21,747 $ 13,663 $ 6,701
===================================================================================================
(1) The yield on tax exempt loans and securities is computed on a
tax-equivalent basis using a tax rate of 35% for all periods presented and
is net of the effects of certain disallowed interest deductions.
(2) Nonaccrual loans and loans held for sale have been included in the average
balances.
(3) Interest income includes net loan fees.
16
TABLE 3: RATE/VOLUME ANALYSIS (1)
2000 COMPARED TO 1999 1999 COMPARED TO 1998
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------------------------------------------------
VOLUME RATE NET VOLUME RATE NET
----------------------------------------------------------------------
($ IN THOUSANDS)
Interest income:
Loans (2) $ 73,540 $ 28,181 $101,721 $ 44,213 $(21,229) $ 22,984
Investment securities:
Taxable (4,907) 4,906 (1) 6,398 (11,165) (4,767)
Tax-exempt (2) 19,834 2,198 22,032 19,783 (610) 19,173
Short-term investments 455 514 969 (1,768) 95 (1,673)
-----------------------------------------------------------------------
Total earning assets (2) $ 88,922 $ 35,799 $124,721 $ 68,626 $(32,909) $ 35,717
-----------------------------------------------------------------------
Interest expense:
Savings deposits $ 662 $ 4,044 $ 4,706 $ (1,258) $ (4,556) $ (5,814)
Interest-bearing demand deposits 124 322 446 4,648 (2,215) 2,433
Money market deposits 1,425 11,799 13,224 (149) 7,197 7,048
Time deposits 17,319 30,122 47,441 (11,870) (23,114) (34,984)
-----------------------------------------------------------------------
Total interest-bearing deposits 19,530 46,287 65,817 (8,629) (22,688) (31,317)
Federal funds purchased and securities sold
under agreements to repurchase 39,307 15,582 54,889 26,989 (320) 26,669
Other short-term borrowings (8,058) 10,542 2,484 15,515 (2,901) 12,614
Long-term debt 5,707 (82) 5,625 (162) (57) (219)
-----------------------------------------------------------------------
Total interest-bearing liabilities $ 56,486 $ 72,329 $128,815 $ 33,713 $(25,966) $ 7,747
-----------------------------------------------------------------------
Net interest income (2) $ 32,436 $ (36,530) $ (4,094) $ 34,913 $ (6,943) $ 27,970
=======================================================================
(1) The change in interest due to both rate and volume has been allocated in
proportion to the relationship to the dollar amounts of the change in each.
(2) The yield on tax-exempt loans and securities is computed on an FTE basis
using a tax rate of 35% for all periods presented and is net of the effects
of certain disallowed interest deductions.
TABLE 4: INTEREST RATE SPREAD AND INTEREST MARGIN (ON A TAX-EQUIVALENT BASIS)
2000 AVERAGE 1999 AVERAGE 1998 AVERAGE
---------------------------------------------------------------------------------------------
% OF % OF % OF
EARNING YIELD EARNING YIELD EARNING YIELD
BALANCE ASSETS / RATE BALANCE ASSETS / RATE BALANCE ASSETS / RATE
---------------------------------------------------------------------------------------------
($ IN THOUSANDS)
Earning assets $12,046,894 100.0% 7.91% $10,954,824 100.0% 7.56% $10,062,182 100.0% 7.88%
---------------------------------------------------------------------------------------------
Financed by:
Interest-bearing funds 10,671,576 88.6% 5.13% 9,661,402 88.2% 4.33% 8,791,375 87.4% 4.68%
Noninterest-bearing
funds 1,375,318 11.4% 1,293,422 11.8% 1,270,807 12.6%
---------------------------------------------------------------------------------------------
Total funds sources $12,046,894 100.0% 4.55% $10,954,824 100.0% 3.82% $10,062,182 100.0% 4.09%
=============================================================================================
Interest rate spread 2.78% 3.23% 3.20%
Contribution from net
free funds .58% .51% .59%
----- ----- -----
Net interest margin 3.36% 3.74% 3.79%
=============================================================================================
Average prime rate* 9.23% 8.00% 8.35%
Average fed funds rate* 6.26% 4.95% 5.36%
Average spread 297bp 305bp 299bp
=============================================================================================
*Source: Bloomberg
17
TABLE 5: SELECTED AVERAGE BALANCES
2000 AS 1999 AS
PERCENT % OF % OF
2000 1999 CHANGE TOTAL ASSETS TOTAL ASSETS
-----------------------------------------------------------------------
($ IN THOUSANDS)
ASSETS
Loans $ 8,688,086 $ 7,800,791 11.4% 67.8% 66.7%
Investment securities
Taxable 2,523,492 2,597,760 (2.9) 19.7 22.2
Tax-exempt 794,007 522,163 52.1 6.2 4.4
Short-term investments 41,309 34,110 21.1 0.3 0.3
-----------------------------------------------------------------------
Total earning assets 12,046,894 10,954,824 10.0 94.0 93.6
Other assets 763,341 743,280 2.7 6.0 6.4
-----------------------------------------------------------------------
Total assets $12,810,235 $11,698,104 9.5% 100.0% 100.0%
=======================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing deposits $8,016,358 $7,627,965 5.1% 62.6% 65.2%
Short-term borrowings 2,540,844 2,008,793 26.5 19.8 17.2
Long-term debt 114,374 24,644 364.1 0.9 0.2
-----------------------------------------------------------------------
Total interest-bearing liabilities 10,671,576 9,661,402 10.5 83.3 82.6
Demand deposits 1,086,582 1,003,687 8.3 8.5 8.6
Accrued expenses and other liabilities 131,908 118,933 10.9 1.0 1.0
Stockholders' equity 920,169 914,082 0.7 7.2 7.8
-----------------------------------------------------------------------
Total liabilities and stockholders' equity $12,810,235 $11,698,104 9.5% 100.0% 100.0%
=======================================================================
PROVISION FOR LOAN LOSSES
The PFLL in 2000 was $20.2 million. In comparison, the PFLL for 1999 was $19.2
million, and $14.7 million for 1998. The PFLL is predominantly a function of the
methodology used to determine the adequacy of the allowance for loan losses
which focuses on changes in the size and character of the loan portfolio,
changes in levels of impaired and other nonperforming loans, historical losses
on each portfolio category, the risk inherent in specific loans, concentrations
of loans to specific borrowers or industries, existing economic conditions, the
fair value of underlying collateral, and other factors which could affect
potential credit losses. The ratio of the allowance for loan losses to total
loans was 1.35%, down slightly from 1.36% at December 31, 1999, and down from
1.37% at December 31, 1998. See additional discussion under section, "Allowance
for Loan Losses."
NONINTEREST INCOME
Noninterest income was $184.2 million for 2000, $18.3 million or 11.0% higher
than 1999. Of the $18.3 million increase, $8.8 million was from increased net
gains on asset and investment sales. Thus, excluding asset and investment sales,
noninterest income was 6.0% higher than last year, despite a dramatic decrease
in mortgage banking income as discussed below. Excluding mortgage banking income
and the net gains on asset and investment sales, noninterest income increased by
$20.0 million or 15.7% in 2000, of which the 1999 acquisitions contributed
approximately $2.8 million. Fee income as a percentage of total revenues
(defined as total noninterest income less gains or losses on asset and
investment sales ("fee income") divided by taxable equivalent net interest
income plus fee income) was 29.2% for 2000 compared to 27.8% last year.
18
TABLE 6: NONINTEREST INCOME
% CHANGE
FROM PRIOR
YEARS ENDED DECEMBER 31, YEAR
-----------------------------------------------------------------
2000 1999 1998 2000 1999
-----------------------------------------------------------------
($ IN THOUSANDS)
Trust service fees $ 37,617 $ 37,996 $ 33,328 (1.0)% 14.0%
Service charges on deposit accounts 33,296 29,584 27,464 12.5 7.7
Mortgage banking income 19,944 30,417 46,105 (34.4) (34.0)
Credit card and other nondeposit fees 25,739 20,763 17,514 24.0 18.6
Retail commission income 20,187 18,372 14,823 9.9 23.9
BOLI income 12,377 9,456 1,174 30.9 N/M
Asset sale gains, net 24,420 4,977 7,166 N/M (30.5)
Other 18,265 11,315 13,523 61.4 (16.3)
-----------------------------------------------------------------
Subtotal 191,845 162,880 161,097 17.8% 1.1%
Investment securities gains (losses), net (7,649) 3,026 6,831 N/M (55.7)
------------------------------------------------------------------
Total noninterest income $184,196 $165,906 $167,928 11.0% (1.2)%
==================================================================
Subtotal, excluding asset sale gains ("fee
income") $167,425 $157,903 $153,931 6.0% 2.6%
==================================================================
Subtotal, excluding asset sale gains and mortgage
banking income $147,481 $127,486 $107,826 15.7% 18.2
==================================================================
N/M = not meaningful
Trust service fees for 2000 were $37.6 million, down 1% from last year. The
change was predominantly due to a decrease in the market value of assets under
management, a function of the declines in the stock and bond markets during 2000
compared to 1999, and competitive market conditions. Trust assets under
management totaled $4.6 billion and $5.2 billion at December 31, 2000 and 1999,
respectively.
Service charges on deposits were $33.3 million, $3.7 million (12.5%) higher than
1999 due to mid-year rate increases and initiatives to reduce the volume of
service charges waived.
Mortgage banking income consists of servicing fees, the gain or loss on sale of
mortgage loans to the secondary market, and production-related revenue
(origination, underwriting, and escrow waiver fees). Mortgage banking income was
$19.9 million in 2000, a decrease of $10.5 million or 34.4% from 1999. The
decrease was driven primarily by a 61% drop in secondary mortgage loan
production in response to the rising interest rate environment in 2000 compared
to 1999. The lower production levels adversely impacted gains on sales of
mortgages (down $8.1 million or 72%) and volume related fees (down $2.2 million
or 56%). The portfolio of loans serviced for others was relatively unchanged
($5.5 billion at December 31, 2000, down 1% from $5.6 billion at year-end 1999),
directly affecting servicing fees which were $14.9 million, down $0.2 million or
1% between the years.
Credit card and other nondeposit fees were $25.7 million for 2000, an increase
of $5.0 million or 24.0% over 1999, with $1.6 million in increased merchant
income, $2.8 million in all other credit card revenue, and $0.6 million in other
nondeposit charges. The other credit card revenue was enhanced by the April 2000
acquisition agreement and five-year agency agreement with Citibank USA ("Citi")
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 $20.2 million, up $1.8 million or 9.9% compared to
last year. The increase was led by higher insurance revenue, particularly from
fixed annuities and credit life production.
Asset sale gains for 2000 were $24.4 million, including the $12.9 million gain
recognized on the sale of $128 million credit card receivables to Citi and the
$11.1 million net premium on the sales of $109 million in
19
deposits from six branches during 2000. Asset sale gains in 1999 of $5.0 million
were primarily attributable to the net premium on deposits of three branches
sold in the fourth quarter of 1999.
BOLI income was $12.4 million, up $2.9 million or 30.9% over last year, in line
with the 20% increase in the average base investment and rate increases
effective in the first quarter of 2000. Other noninterest income was $18.3
million for 2000, up $7.0 million from 1999. The increase included $1.5 million
recognized in connection with an interim servicing agreement with Citi related
to the credit card receivable sale, and $3.6 million in connection with the
Corporation's mid-2000 change in data processing and management information
system vendors, both of which compensated for certain additional costs incurred
by the Corporation.
Investment securities losses for 2000 were $7.6 million. The net losses were
primarily from various securities sold and the proceeds either reinvested to
mitigate interest rate risk and enhance future yields or to pay down higher cost
borrowings. Investment securities gains for 1999 were $3.0 million, primarily
due to a $3.6 million gain on the partial sale of an agency security that
carried an other than temporary impairment amount reported in 1997. The
remaining portion of this security was sold during 2000 for a $1.5 million loss.
NONINTEREST EXPENSE
Total noninterest expense ("NIE") for 2000 was $317.7 million, a $12.6 million
or 4.1% increase over 1999 NIE. However, 1999 expenses were reduced by two large
items totaling $12.0 million (the $8.0 million reversal of MSR valuation
allowance and a $4.0 million reduction in profit sharing expense). Not including
these items, NIE was relatively unchanged between the years (up $0.6 million or
0.2%), despite adding approximately $10.9 million of incremental expenses in
2000 from the 1999 purchase acquisitions. Excluding the acquisitions, and the
two noted items from 1999, NIE decreased $10.3 million or 3.4% over 1999.
Primary categories impacting the change between 2000 and 1999 are noted below.
TABLE 7: NONINTEREST EXPENSE
% CHANGE
FROM PRIOR
YEARS ENDED DECEMBER 31, YEAR
------------------------------------------------------
2000 1999 1998 2000 1999
------------------------------------------------------
($ IN THOUSANDS)
Personnel expense $157,007 $151,644 $148,490 3.5% 2.1%
Occupancy 23,258 22,576 20,205 3.0 11.7
Equipment 15,272 15,987 13,250 (4.5) 20.7
Data processing 22,375 21,695 18,714 3.1 15.9
Business development and advertising 13,359 11,919 13,177 12.1 (9.5)
Stationery and supplies 7,961 8,110 6,858 (1.8) 18.3
FDIC expense 1,818 3,313 3,267 (45.1) 1.4
Amortization of mortgage servicing rights, net 9,406 1,668 13,823 N/M (87.9)
Intangible amortization 8,905 8,134 5,844 9.5 39.2
Legal and professional fees 7,595 8,051 11,889 (5.7) (32.3)
Other 50,780 51,995 39,445 (2.3) 31.8
------------------------------------------------------
Total noninterest expense $317,736 $305,092 $294,962 4.1% 3.4%
======================================================
N/M = not meaningful
Personnel expense increased $5.4 million or 3.5% over 1999, and represented
49.4% of total NIE in 2000 compared to 49.7% in 1999. Salary expenses remained
level, increasing only $0.8 million or 0.6% in 2000, principally due to
operational efficiencies. Merit increases between the years were offset by fewer
full-time equivalent employees ("FTEs") and lower temporary contract labor.
Average FTEs of 3,909 during 2000 were down 128 or 3.2% from the 4,037 FTEs
during 1999. FTEs were reduced throughout the year primarily in operational
areas as centralization of processes and other operational-related synergies
were achieved. Fringe benefits increased $4.6 million in 2000, primarily the
result of a $4.0 million increase in profit sharing expense.
20
Rising costs of health, dental, and life insurance coverages were nearly offset
by reductions in other fringe benefits (up $0.6 million or 2.1% on a combined
basis).
Occupancy and equipment expense on a combined basis was $38.5 million for 2000,
essentially unchanged from last year. Data processing costs increased to $22.4
million, up $680,000 or 3.1% over last year, attributable to increased costs for
software and system enhancements during 2000, partially offset by lower credit
card processing costs given the credit card receivables sale in 2000. Business
development and advertising increased to $13.4 million for 2000, up $1.4 million
compared to 1999, primarily in television advertising for a branding campaign in
2000.
FDIC expense decreased to $1.8 million, down $1.5 million, reflecting the net
rate reduction in the combined BIF and SAIF effective for 2000 on a minimally
changed deposit base. Amortization of MSRs includes the amortization of the MSR
asset and increases or decreases to the valuation allowance associated with the
MSR asset. Amortization of MSRs increased by $7.7 million between 2000 and 1999,
predominantly driven by the recovery of an $8.0 million valuation adjustment
during 1999 (see Note 6 of the notes to consolidated financial statements).
Intangible amortization was $8.9 million, up due to a full year of amortization
during 2000 on the intangibles added from the 1999 purchase acquisitions. Legal
and professional fees were down $456,000 compared to last year, primarily due to
Y2K consulting costs not recurring in 2000.
Other expense was $50.8 million for 2000, down $1.2 million compared to 1999,
most directly attributable to lower loan expenses (down $1.2 million and in line
with lower mortgage loan production in 2000 and lower credit card expenses
following the sale of the credit card receivables in April 2000).
INCOME TAXES
Income tax expense for 2000 was $61.8 million, down $10.5 million from 1999
income tax expense of $72.4 million. The Corporation's effective tax rate
(income tax expense divided by income before taxes) was 26.9% in 2000 compared
to 30.5% in 1999. This decrease was attributable to the tax benefits of
increased municipal securities (average balances of municipal securities were
52% higher than 1999), increased BOLI income, real estate investment trusts, and
tax valuation allowance adjustments.
BALANCE SHEET ANALYSIS
LOANS
Total loans were $8.9 billion at December 31, 2000, an increase of $570 million
or 6.8% over December 31, 1999, predominantly in commercial loans. Excluding the
sale of $128 million of credit card receivables in the second quarter of 2000,
total loans were 8.4% higher at year-end 2000 than a year ago. Commercial loans
were $4.6 billion, up $721 million or 18.5%. Commercial loans grew to represent
52% of total loans at the end of 2000, up from 47% at year-end 1999. Changing
the mix of loans to include more commercial loans continued to be a strategic
initiative during 2000.
21
TABLE 8: LOAN COMPOSITION
AS OF DECEMBER 31,
-------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------
% OF % OF % OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------------------------------------------------------------------------------------------
($ IN THOUSANDS)
Commercial, financial,
and agricultural $1,657,322 19% $1,412,338 17% $ 962,208 13% $ 986,839 14% $ 841,145 13%
Real estate -
construction 660,732 7 560,450 7 461,157 7 335,978 5 235,478 3
Commercial real estate 2,287,946 26 1,903,633 23 1,384,524 19 1,273,174 18 1,175,992 18
Lease financing 14,854 -- 23,229 -- 19,231 -- 14,072 -- 10,449 --
-------------------------------------------------------------------------------------------
Commercial 4,620,854 52 3,899,650 47 2,827,120 39 2,610,063 37 2,263,064 34
Residential real estate 3,158,721 35 3,274,767 39 3,362,885 46 3,263,977 46 3,215,433 48
Home equity 508,979 6 408,577 5 331,861 5 405,086 6 362,542 6
-------------------------------------------------------------------------------------------
Residential mortgage 3,667,700 41 3,683,344 44 3,694,746 51 3,669,063 52 3,577,975 54
Consumer 624,825 7 760,106 9 750,831 10 793,424 11 813,875 12
-------------------------------------------------------------------------------------------
Total loans $8,913,379 100% $8,343,100 100% $7,272,697 100% $7,072,550 100% $6,654,914 100%
===========================================================================================
Commercial, financial, and agricultural loans were $1.7 billion at the end of
2000, up $245 million or 17.3% since year-end 1999, and comprised 19% of total
loans outstanding, up from 17% at the end of 1999. The commercial, financial,
and agricultural loan classification primarily consists of commercial loans to
middle market companies and small businesses. Loans of this type are in a broad
range of industries. The credit risk related to commercial loans is largely
influenced by general economic conditions and the resulting impact on a
borrower's operations. Within the commercial, financial, and agricultural
classification at December 31, 2000, loans to finance agricultural production
totaled $19.6 million or 0.2% of total loans.
Real estate construction loans grew $100 million or 17.9% to $661 million,
representing 7% of the total loan portfolio at the end of 2000, compared to $560
million or 7% at the end of 1999. Loans in this classification are primarily
short-term interim loans that provide financing for the acquisition or
development of commercial real estate, such as multi-family or other commercial
development projects. Real estate construction loans are made to developers and
project managers who are well known to the Corporation, have prior successful
project experience, and are well capitalized. Projects undertaken by these
developers are carefully reviewed by the Corporation to ensure that they are
economically viable. Loans of this type are primarily made in the Corporation's
tri-state market in which the Corporation has a thorough knowledge of the local
market economy. The credit risk associated with real estate construction loans
is generally confined to specific geographic areas. The Corporation controls the
credit risk on these types of loans by making loans in familiar markets to
developers, underwriting the loans to meet the requirements of institutional
investors in the secondary market, reviewing the merits of individual projects,
controlling loan structure, and monitoring project progress and construction
advances.
Commercial real estate includes loans secured by farmland, multifamily
properties, and nonfarm/nonresidential real estate properties. Commercial real
estate totaled $2.3 billion at December 31, 2000, up $384 million or 20.2% over
last year and comprised 26% of total loans outstanding versus 23% at year-end
1999. Commercial real estate loans involve borrower characteristics similar to
those discussed above for commercial loans and real estate-construction
projects. Loans of this type are mainly for business and industrial properties,
multi-family properties, community purpose properties, and similar properties.
Loans are primarily made to borrowers in Wisconsin, Illinois, and Minnesota.
Credit risk is managed in a similar manner to commercial loans and real estate
construction by employing sound underwriting guidelines, lending to borrowers in
known markets and businesses, and formally reviewing the borrower's financial
soundness and relationship on an ongoing basis.
Residential mortgage loans totaled $3.7 billion at the end of 2000 and 1999.
Loans in this classification include residential real estate, which consists of
conventional home mortgages, home equity lines, and second mortgages.
Residential real estate loans generally limit the maximum loan to 75%-80% of
collateral value. Residential real estate loans were $3.2 billion at December
31, 2000, down $116 million or 3.5% compared to
22
last year, principally due to lower production as a result of a higher rate
environment in 2000 compared to 1999 and strong price competition. Home equity
lines grew by $100 million, or 24.6%, to $509 million in 2000, in response to
promotional efforts in 2000.
TABLE 9: LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY (1)
MATURITY (2)
--------------------------------------------------------------
DECEMBER 31, 2000 WITHIN 1 YEAR 1-5 YEARS AFTER 5 YEARS TOTAL
- ------------------------ --------------------------------------------------------------
($ IN THOUSANDS)
Commercial, financial, and agricultural $1,125,657 $ 436,365 $ 95,300 $1,657,322
Real estate-construction 413,954 183,569 63,209 660,732
--------------------------------------------------------------
Total $1,539,611 $ 619,934 $158,509 $2,318,054
==============================================================
Fixed rate $ 348,679 $ 532,468 $134,420 $1,015,567
Floating or adjustable rate 1,190,932 87,466 24,089 1,302,487
--------------------------------------------------------------
Total $1,539,611 $ 619,934 $158,509 $2,318,054
==============================================================
Percent 66% 27% 7% 100%
- --------------------------------------
(1) Based upon scheduled principal repayments.
(2) Demand loans, past due loans, and overdrafts are reported in the "Within 1
Year" category.
Consumer loans to individuals totaled $625 million at December 31, 2000, down
$135 million or 17.8% compared to 1999, with $128 million of retail credit card
receivables sold in April 2000. Installment loans include short-term installment
loans, direct and indirect automobile loans, recreational vehicle loans, credit
card loans (which are primarily business-oriented since the April 2000 sale),
student loans, and other personal loans. Individual borrowers may be required to
provide related collateral or a satisfactory endorsement or guaranty from
another person, depending on the specific type of loan and the creditworthiness
of the borrower. Credit risk for these types of loans is generally greatly
influenced by general economic conditions, the characteristics of individual
borrowers, and the nature of the loan collateral. Credit risk is primarily
controlled by reviewing the creditworthiness of the borrowers as well as taking
appropriate collateral and guaranty positions on such loans.
An active credit risk management process is used for commercial loans to ensure
that sound and consistent credit decisions are made. Credit risk is controlled
by detailed underwriting procedures, comprehensive loan administration, and
periodic review of borrowers' outstanding loans and commitments. Borrower
relationships are formally reviewed on an ongoing basis for early identification
of potential problems. Further analyses by customer, industry, and geographic
location are performed to monitor trends, financial performance, and
concentrations.
Factors that are critical to managing overall credit quality are sound loan
underwriting and administration, systematic monitoring of existing loans and
commitments, effective loan review on an ongoing basis, early identification of
potential problems, an adequate allowance for loan losses, and sound nonaccrual
and charge-off policies.
The loan portfolio is widely diversified by types of borrowers, industry groups,
and market areas. Significant loan concentrations are considered to exist for a
financial institution when there are amounts loaned to numerous borrowers
engaged in similar activities that would cause them to be similarly impacted by
economic or other conditions. At December 31, 2000, no concentrations existed in
the Corporation's portfolio in excess of 10% of total loans.
ALLOWANCE FOR LOAN LOSSES
The investment and loan portfolios are the Corporation's primary interest
earning assets. While the investment portfolio is structured with minimum credit
exposure to the Corporation, the loan portfolio is the primary asset subject to
credit risk. Credit risk is controlled and monitored through the use of lending
standards, thorough review of potential borrowers, and on-going review of loan
payment performance. Active asset quality
23
administration, including early problem loan identification and timely
resolution of problems, further ensures appropriate management of credit risk
and minimization of loan losses. Credit risk management for each loan type is
discussed briefly in the section entitled "Loans."
At December 31, 2000, the allowance for loan losses ("AFLL") was $120.2 million,
compared to $113.2 million at December 31, 1999. The $7.0 million increase was
the net result of $20.2 million provision for loan losses, offset by $9.0
million of NCOs and a $4.2 million decrease related to the sale of credit card
receivables in the second quarter of 2000. As of December 31, 2000, the AFLL to
total loans was 1.35% and covered 252% of nonperforming loans, compared to 1.36%
and 307%, respectively, at December 31, 1999. Tables 10 and 11 provide
additional information regarding activity in the AFLL and Table 12 provides
additional information regarding nonperforming loans.
TABLE 10: LOAN LOSS EXPERIENCE
YEARS ENDED DECEMBER 31,
------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------
($ IN THOUSANDS)
AFLL, at beginning of year $113,196 $ 99,677 $ 92,731 $ 71,767 $ 68,560
Balance related to acquisitions --- 8,016 3,636 728 3,511
Decrease from sale of credit card receivables (4,216) --- --- --- ---
Provision for loan losses (PFLL) 20,206 19,243 14,740 31,668 13,695
Loans charged off:
Commercial, financial, and agricultural 1,679 2,222 3,533 1,327 2,916
Real estate - construction 38 --- 202 600 193
Real estate - mortgage 3,718 3,472 3,256 3,222 2,813
Consumer 5,717 10,925 9,839 9,900 11,693
Lease financing 3 2 209 --- 1
------------------------------------------------------
Total loans charged off 11,155 16,621 17,039 15,049 17,616
Recoveries of loans previously charged off:
Commercial, financial, and agricultural 772 726 2,384 513 1,255
Real estate - construction --- 1 --- --- 3
Real estate - mortgage 450 655 1,582 1,312 837
Consumer 979 1,464 1,641 1,792 1,514
Lease financing --- 35 2 --- 8
------------------------------------------------------
Total recoveries 2,201 2,881 5,609 3,617 3,617
------------------------------------------------------
Net loans charged off (NCOs) 8,954 13,740 11,430 11,432 13,999
------------------------------------------------------
AFLL, at end of year $120,232 $113,196 $ 99,677 $ 92,731 $ 71,767
======================================================
Ratio of AFLL to NCOs 13.4 8.2 8.7 8.1 5.1
Ratio of NCOs to average loans outstanding .10% .18% .16% .16% .21%
Ratio of AFLL to total loans at end of period 1.35% 1.36% 1.37% 1.31% 1.08%
========== ========== =========== =========== =========
The AFLL represents management's estimate of an amount adequate to provide for
probable incurred 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 potential credit losses.
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 8), NCOs
(see Table 10), and nonperforming loans (see Table 12). First, total loan growth
from year-end 1999 to 2000 was up 6.8% (or 8.4% when factoring in the $128
million of credit card receivables sold during 2000). The growth was strongest
in the commercial portfolio (particularly commercial real estate; commercial,
financial, and agricultural loans; and construction loans), which grew
24
$721 million or 18.5% to represent 52% of total loans at year-end 2000 compared
to 47% last year-end. This segment of the loan portfolio carries greater
inherent credit risk (described under section "Loans"). While NCOs for 2000 have
decreased $4.8 million to $9.0 million, the decline is due to having sold the
credit card receivables and thus, no longer incurring related charge-offs.
Excluding NCOs on credit cards, NCOs would be relatively unchanged between 1999
and 2000. Finally, nonperforming loans to total loans grew to 0.54% for 2000
compared to 0.44% last year.
The allocation of the Corporation's AFLL for the last five years is shown in
Table 11. The allocation methodology applied by the Corporation, designed to
assess the adequacy of the AFLL, focuses on changes in the size and character of
the loan portfolio, changes in levels of impaired and other nonperforming loans,
the risk inherent in specific loans, concentrations of loans to specific
borrowers or industries, existing economic conditions, and historical losses on
each portfolio category. Because each of the criteria used is subject to change,
the allocation of the allowance for loan losses is made for analytical purposes
and is not necessarily indicative of the trend of future loan losses in any
particular loan category. The total allowance is available to absorb losses from
any segment of the portfolio. Management continues to target and maintain the
AFLL equal to the allocation methodology plus an unallocated portion, as
determined by economic conditions on the Corporation's borrowers. For both 1999
and 1998, estimation methods and assumptions included consideration of Year 2000
issues on significant customers. Management allocates the AFLL for credit losses
by pools of risk. The business loan (commercial real estate; commercial,
financial, and agricultural; leases; and real estate construction) allocation is
based on a quarterly review of individual loans, loan types, and industries. The
retail loan (residential mortgage, home equity, and consumer) allocation is
based on analysis of historical delinquency and charge-off statistics and
trends. Minimum loss factors used by the Corporation for criticized loan
categories are consistent with regulatory agency factors. Loss factors for
non-criticized loan categories are based primarily on historical loan loss
experience and peer group statistics. The mechanism used to address differences
between estimated and actual loan loss experience includes review of recent
nonperforming loan trends, underwriting trends, and external factors.
The allocation methods used for December 31, 2000 and 1999 were generally
comparable. For 2000, the amount allocated to commercial, financial, and
agricultural loans increased, representing 38% of the AFLL, compared to 28% last
year. The increase was a function of changes in the commercial, financial, and
agricultural loans category, including: a greater amount of these loans in
criticized loan categories and for which specific allocations were made for 2000
compared to 1999; increased loan balances, growing to represent 19% of total
loans at year-end 2000 versus 17% last year; and more of these loans in
nonperforming loan categories at year-end 2000 versus last year (28% versus 16%,
respectively). For 2000, the amount allocated to consumer loans decreased to
represent 5% of the AFLL versus 13% for 1999. This decrease was predominantly a
function of the sale of $128 million of credit card receivables in mid-2000. For
1999 compared to 1998, the allocation for credit card loans was reduced based on
delinquencies and charge-offs trending below national averages and the
maturation of the portfolio, which indicated lower risk of loss, and the
allocation factor for commercial real estate loans (included in real
estate-mortgage) was increased given the increased risk associated with a rising
interest rate environment on this loan category.
Management believes the AFLL to be adequate at December 31, 2000. While
management uses available information to recognize losses on loans, future
adjustments to the AFLL may be necessary based on changes in economic conditions
and the impact of such change on the Corporation's borrowers. As an integral
part of their examination process, various regulatory agencies also review the
AFLL. Such agencies may require that changes in the AFLL be recognized when
their credit evaluations differ from those of management, based on their
judgments about information available to them at the time of their examination.
25
TABLE 11: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
AS OF DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------
($ IN THOUSANDS)
Commercial, financial, and agricultural $ 45,571 $ 31,648 $ 25,385 $ 33,682 $ 27,943
Real estate - construction 6,531 5,605 3,369 2,016 1,047
Real estate - mortgage 51,161 50,267 40,216 30,360 19,116
Consumer 6,194 14,904 16,924 16,870 16,239
Lease financing 149 184 426 493 530
Unallocated 10,626 10,588 13,357 9,310 6,892
----------------------------------------------------
Total AFLL $120,232 $113,196 $ 99,677 $ 92,731 $ 71,767
====================================================
The PFLL in 2000 was $20.2 million. In comparison, the PFLL for 1999 was $19.2
million and $14.7 million in 1998.
NCOs were $9.0 million or 0.10% of average loans for 2000, compared to $13.7
million or 0.18% of average loans for 1999, and were $11.4 million or 0.16% of
average loans for 1998. The $4.8 million decrease in NCOs was primarily driven
by lower charge-offs of consumer loans in 2000 versus 1999 (down $5.2 million as
shown in Table 10). This decline is predominantly due to having sold the retail
credit card receivables in 2000 and, thus, no longer incurring related
charge-offs. Excluding NCOs on credit cards, NCOs would have been relatively
unchanged between 1999 and 2000. Loans charged off are subject to continuous
review, and specific efforts are taken to achieve maximum recovery of principal,
accrued interest, and related expenses.
NONPERFORMING LOANS, POTENTIAL PROBLEM 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 all problem loans are identified quickly and the risk of loss is minimized.
Nonperforming loans are defined as nonaccrual loans, loans 90 days or more past
due but still accruing, and restructured loans. The Corporation specifically
excludes from its definition of nonperforming loans 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. Such past due
student loans were approximately $19.5 million and $16.9 million at December 31,
2000 and 1999, respectively.
Loans are generally placed on nonaccrual status when contractually past due 90
days or more as to interest or principal payments. Additionally, whenever
management becomes aware of facts or circumstances that may adversely impact the
collectibility of principal or interest on loans, it is management's practice to
place such loans on nonaccrual status immediately, rather than delaying such
action until the loans become 90 days past due. Previously accrued and
uncollected interest on such loans is reversed, amortization of related loan
fees is suspended, and income is recorded only to the extent that interest
payments are subsequently received in cash and a determination has been made
that the principal balance of the loan is collectible. If collectibility of the
principal is in doubt, payments received are applied to loan principal.
Loans past due 90 days or more but still accruing interest are also included in
nonperforming loans. Loans past due 90 days or more but still accruing are
classified as such where the underlying loans are both well secured (the
collateral value is sufficient to cover principal and accrued interest) and in
the process of collection. Also included in nonperforming loans are
"restructured" loans. Restructured loans involve the granting of some con