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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, 2001
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 0-5519
ASSOCIATED BANC-CORP
(Exact name of registrant as specified in its charter)
Wisconsin 39-1098068
(State or other jurisdiction of (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, 2002, 68,862,132 shares of Common Stock were outstanding and the
aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $2,428,653,000. Excludes approximately $102,031,000
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 $169,698,000 of market value
representing 6.71% 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 24, 2002
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ASSOCIATED BANC-CORP
2001 FORM 10-K TABLE OF CONTENTS
Page
----
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 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk 40
Item 8. Financial Statements and Supplementary Data 41
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 76
PART III
Item 10. Directors and Executive Officers of the Registrant 76
Item 11. Executive Compensation 76
Item 12. Security Ownership of Certain Beneficial Owners and
Management 76
Item 13. Certain Relationships and Related Transactions 76
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 77
Signatures 79
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, 2001, the Corporation owned four commercial
banks located in Illinois, Minnesota, and Wisconsin (the "affiliates") serving
their local communities and, measured by total assets held at December 31, 2001,
was the second largest commercial bank holding company headquartered in
Wisconsin. The Corporation also owned 18 limited purpose banking and nonbanking
subsidiaries (the "subsidiaries") located in Arizona, California, Illinois,
Nevada, and Wisconsin.
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, 2001, provided services through 208 locations in
145 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, educational,
residential, and commercial mortgage loans, other consumer-oriented financial
services, including IRA and Keogh accounts, lease financing for a variety of
capital equipment for commerce and industry, 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
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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 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
allowance for loan losses 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. Two
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. An appraisal subsidiary provides real estate
appraisals for customers, government agencies, and the general public.
The mortgage banking subsidiary is involved in the origination, servicing, and
warehousing of mortgage loans, and the sale of such loans to investors. The
primary focus is on one- to four-family residential and multi-family properties,
which are generally salable into the secondary mortgage market. The principal
mortgage lending areas of this subsidiary are Wisconsin, Minnesota, 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
subsidiary retaining the servicing of those loans.
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 for the acquisition of the
Corporation's retail credit card portfolio. That agreement, along with a
five-year agency
4
agreement entered into contemporaneously with Citibank USA, 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, 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, 2001, the Corporation, its affiliates, and subsidiaries, as a
group, had 3,845 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 by the Federal Deposit Insurance
Corporation (the "FDIC"). All affiliates of the Corporation that accept insured
deposits are subject to examination by the FDIC.
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
5
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 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.
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
6
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 are located in the Village of Ashwaubenon,
Wisconsin, in a leased facility with approximately 30,000 square feet of office
space. The space is subject to a five-year lease with two consecutive five-year
extensions.
At December 31, 2001, the affiliates occupied 208 offices in 145 different
communities within Illinois, Minnesota, and Wisconsin. The main office of
Associated Bank, National Association, is owned. The affiliate main offices in
downtown 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, 2001.
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 24,
2002.
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 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
7
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
---- -------------------------- ----------------
Robert C. Gallagher President, Chief Executive Officer, and Director of April 28, 1982
Age: 63 Associated Banc-Corp; Chairman and President of
Associated Bank, National Association (affiliate)
Prior to April 2000, President, Chief Operating
Officer, and Director of Associated Banc-Corp
From April 1996 to October 1998, Vice Chairman of
Associated Banc-Corp; Chairman and Chief Executive
Officer of Associated Bank Green Bay (affiliate)
Brian R. Bodager Chief Administrative Officer, General Counsel, and July 22, 1992
Age: 46 Corporate Secretary of Associated Banc-Corp;
Director of Associated Bank, National Association
(affiliate)
Prior to July 1997, Senior Vice President, General
Counsel, and Corporate Secretary of Associated
Banc-Corp
Joseph B. Selner Chief Financial Officer of Associated Banc-Corp; January 25, 1978
Age: 55 Director of Associated Bank, National Association
(affiliate)
Arthur E. Olsen, III General Auditor of Associated Banc-Corp July 28, 1993
Age: 50
William M. Bohn Director, Legal, Compliance, and Risk Management, of April 23, 1997
Age: 35 Associated Banc-Corp
Prior to April 1997, Officer of a Wisconsin-based
trust company
Robert J. Johnson Director, Corporate Human Resources, of Associated January 22, 1997
Age: 56 Banc-Corp
Donald E. Peters Director, Systems and Operations, of Associated October 27, 1997
Age: 52 Banc-Corp; Director of Associated Bank, National
Association (affiliate)
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)
Teresa A. Rosengarten Treasurer of Associated Banc-Corp October 25, 2000
Age: 41
From March 1994 to August 2000, Treasurer of a
Tennessee-based bank holding company
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Name Offices and Positions Held Date of Election
---- -------------------------- ----------------
Mark J. McMullen Director, Wealth Management, of Associated June 2, 1981
Age: 52 Banc-Corp; Director of Associated Bank, National
Association (affiliate); Chairman and Chief
Executive Officer of 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 Director, Community Banking, of Associated August 2, 1982
Age: 56 Banc-Corp; Director of Associated Bank, National
Association (affiliate)
From July 1996 to October 1998, President and
Director of Associated Bank Green Bay (affiliate)
Gordon J. Weber Director, Corporate Banking, of Associated January 1, 1973
Age: 53 Banc-Corp; Director of Associated Bank, National
Association (affiliate)
Prior to April 2001, President, Chief Executive
Officer, and Director of Associated Bank Milwaukee
(affiliate); Director of Associated Bank South
Central (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 76 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, 2002, was 9,651. Certain of the Corporation's
shares are held in "nominee" or "street" name and the number of beneficial
owners of such shares is approximately 20,700.
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.
9
ITEM 6 SELECTED FINANCIAL DATA
TABLE 1: EARNINGS SUMMARY AND SELECTED FINANCIAL DATA
(In Thousands, except per share data)
% 5-Year
Change Compound
2000 to Growth
Years ended December 31, 2001 2001 2000 1999 1998 1997 Rate
- ------------------------------------------------------------------------------------------------------------------------
Interest income $ 880,622 (5.4)% $ 931,157 $ 814,520 $ 785,765 $ 787,919 3.8%
Interest expense 458,637 (16.2) 547,590 418,775 411,028 411,637 4.1
-----------------------------------------------------------------------------------------
Net interest income 421,985 10.0 383,567 395,745 374,737 376,282 3.5
Provision for loan losses 28,210 39.6 20,206 19,243 14,740 31,668 15.5
-----------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 393,775 8.4 363,361 376,502 359,997 344,614 2.9
Noninterest income 195,603 6.2 184,196 165,906 167,928 94,854 11.2
Noninterest expense 338,369 6.5 317,736 305,092 294,962 323,200 3.0
-----------------------------------------------------------------------------------------
Income before income taxes and
extraordinary item 251,009 9.2 229,821 237,316 232,963 116,268 8.7
Income tax expense 71,487 15.6 61,838 72,373 75,943 63,909 4.5
-----------------------------------------------------------------------------------------
NET INCOME $ 179,522 6.9% $ 167,983 $ 164,943 $ 157,020 $ 52,359 10.9%
=========================================================================================
Basic earnings per share (1):
Income before extraordinary
item $ 2.72 10.6% $ 2.46 $ 2.36 $ 2.26 $ 0.76 11.9%
Net income 2.72 10.6 2.46 2.36 2.26 0.76 12.1
Diluted earnings per share (1):
Income before extraordinary
item 2.70 9.8 2.46 2.34 2.24 0.74 12.2
Net income 2.70 9.8 2.46 2.34 2.24 0.74 12.3
Cash dividends per share (1) 1.22 10.2 1.11 1.05 0.95 0.81 12.1
Weighted average shares
outstanding:
Basic 65,988 (3.2) 68,186 69,858 69,438 69,172 (1.0)
Diluted 66,516 (2.8) 68,410 70,468 70,168 70,329 (1.2)
SELECTED FINANCIAL DATA
Year-End Balances:
Loans $ 9,019,864 1.2% $ 8,913,379 $ 8,343,100 $ 7,272,697 $ 7,072,550 6.3%
Allowance for loan losses 128,204 6.6 120,232 113,196 99,677 92,731 12.3
Investment securities 3,197,021 (1.9) 3,260,205 3,270,383 2,907,735 2,940,218 3.0
Assets 13,604,374 3.6 13,128,394 12,519,902 11,250,667 10,690,442 6.1
Deposits 8,612,611 (7.3) 9,291,646 8,691,829 8,557,819 8,395,277 1.6
Long-term debt 1,103,395 801.3 122,420 24,283 26,004 15,270 101.4
Stockholders' equity 1,070,416 10.5 968,696 909,789 878,721 813,692 5.9
Book value per share (1) 16.38 11.8 14.65 13.09 12.70 11.75 4.8
-----------------------------------------------------------------------------------------
Average Balances:
Loans $ 9,092,699 4.7% $ 8,688,086 $ 7,800,791 $ 7,255,850 $ 6,959,018 6.7%
Investment securities 3,143,786 (5.2) 3,317,499 3,119,923 2,737,556 2,905,921 4.5
Assets 13,103,754 2.3 12,810,235 11,698,104 10,628,695 10,391,718 6.3
Deposits 8,581,233 (5.7) 9,102,940 8,631,652 8,430,701 8,121,945 2.0
Stockholders' equity 1,037,158 12.7 920,169 914,082 856,425 839,859 6.0
-----------------------------------------------------------------------------------------
Financial Ratios: (3)
Return on average equity 17.31% (95) 18.26% 18.04% 18.33% 6.23%
Return on average assets 1.37 6 1.31 1.41 1.48 0.50
Net interest margin
(tax-equivalent) 3.62 26 3.36 3.74 3.79 3.86
Average equity to average
assets 7.91 73 7.18 7.81 8.06 8.08
Dividend payout ratio (2) 44.85 (16) 45.01 44.68 42.04 106.58
=========================================================================================
(1) Per share data adjusted retroactively for stock splits and stock dividends.
(2) Ratio is based upon basic earnings per share.
(3) Change in basis points
N/M = not meaningful
10
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.
During 2001, the Corporation merged all of the Wisconsin bank affiliates
(Associated Bank South Central, Associated Bank North, Associated Bank
Milwaukee, Associated Bank, National Association, Associated Bank Lakeshore,
National Association, and Associated Bank Green Bay, National Association) into
a single national banking charter, headquartered in Green Bay, Wisconsin, under
the name Associated Bank, National Association. Certain nonbank subsidiaries
(Associated Leasing, Inc., Associated Banc-Corp Services, Inc., and Associated
Commercial Mortgage, Inc.) also merged with and into the resultant bank,
becoming operating divisions of Associated Bank, National Association.
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 2001 results compared to 2000.
Discussion of 2000 results to 1999 is predominantly in section "2000 Compared to
1999."
Performance Summary
The Corporation recorded net income of $179.5 million for the year ended
December 31, 2001, an increase of $11.5 million or 6.9% over the $168.0 million
earned in 2000. Basic earnings per share for 2001 were $2.72, a 10.6% increase
over 2000 basic earnings per share of $2.46. Earnings per diluted share were
$2.70, a 9.8% increase over 2000 diluted earnings per share of $2.46. Return on
average assets ("ROA") and return on average equity ("ROE") for 2001 were 1.37%
and 17.31%, respectively, compared to 1.31% and 18.26%, respectively, for 2000.
Cash dividends paid in 2001 increased by 10.2% to $1.22 per share over the $1.11
per share paid in 2000. Key factors behind these results were:
- - Taxable equivalent net interest income was $444.2 million for 2001, $38.9
million or 9.6% higher than 2000. Interest expense decreased by $88.9
million, while taxable equivalent interest income decreased $50.0 million.
The volume of average earning assets increased $225 million to $12.3
billion, which exceeded the $81.7 million increase in interest-bearing
liabilities. Increases in the volume of earning assets and interest-bearing
liabilities, as well as changes in product mix, added $18.3 million to
taxable equivalent net interest income, while changes in interest rates
resulted in a $20.6 million increase.
- - Net interest income and net interest margin were also impacted in 2001 by
the declining interest rate environment, competitive pricing pressures,
branch deposit sales, and funding of stock repurchases. The Federal Reserve
lowered interest rates an unprecedented eleven times during 2001, producing
an average Federal funds rate for 2001 that was 238 basis points ("bp")
lower than the average for 2000.
- - The net interest margin was 3.62% for 2001, a 26 bp increase from 3.36% for
2000, the net result of the 31 bp increase in interest rate spread, offset
by a 5 bp decline in the net free funds contribution. Rates on
interest-bearing liabilities in 2001 were 86 bp lower than last year, while
the yield on interest earning assets decreased 55 bp, bringing the interest
rate spread up by 31 bp.
- - Total loans were $9.0 billion at December 31, 2001, an increase of $106
million or 1.2% over December 31, 2000. The loan mix continued to shift,
with commercial loan balances increasing $603 million (13.0%) and
representing 58% of total loans at December 31, 2001, compared to 52% at
year-end 2000. Total deposits were $8.6 billion at December 31, 2001, $679
million lower than December 31, 2000, with brokered CDs decreasing by $626
million. To take advantage of the lower rate environment, the Corporation
increased long-term debt by $1.0 billion, including $200 million of
subordinated debt, $200 million of bank notes, and longer-term Federal Home
Loan Bank advances.
11
- - Asset quality remained relatively strong. The provision for loan losses
increased to $28.2 million compared to $20.2 million in 2000. Net charge
offs were $20.2 million, an increase of $11.3 million, primarily due to the
charge off of several large commercial credits. Net charge offs were 0.22%
of average loans compared to 0.10% in 2000. The ratio of allowance for loan
losses to loans was 1.42% and 1.35% at December 31, 2001 and 2000,
respectively. Nonperforming loans were $52.1 million, representing 0.58% of
total loans at year-end 2001, compared to $47.7 million or 0.54% of total
loans last year.
- - Noninterest income was $195.6 million for 2001, $11.4 million or 6.2%
higher than 2000. Net gains on the sales of assets and investment
securities totaled $2.7 million in 2001, compared to net gains of $16.8
million in 2000. Excluding these asset and security sales, noninterest
income was $192.9 million, or $25.5 million (15.2%) over 2000. Mortgage
banking revenue more than doubled, adding $33.8 million over the prior
year, and service charges on deposit accounts were up $4.5 million over
2000. Partially offsetting these increases were an $8.6 million reduction
in trust service fees and a $3.3 million decrease in retail commissions.
- - Noninterest expense was $338.4 million, up $20.6 million or 6.5% over 2000.
Personnel expenses rose $14.4 million, of which $6.7 million was
attributable to salary expense and $7.7 million was due to fringe benefit
expense. Mortgage servicing rights expense increased $10.6 million,
predominantly driven by an increase to the valuation reserve on mortgage
servicing rights. All other expense categories were down, in total, $4.4
million.
- - Income tax expense increased to $71.5 million, up $9.6 million from 2000.
The effective tax rate in 2001 was 28.5% compared to 26.9% for 2000. The
increase was primarily attributable to the increase in net income before
tax, an increase in state tax expense, and a decrease in tax valuation
allowance adjustments.
Business Combinations
There were no business combinations during 2001 or 2000. There was one
transaction pending at December 31, 2001, which was consummated in February
2002, as noted below. There were three business combination transactions
completed during 1999. The Corporation's business combination activity is
further summarized in Note 2 of the notes to consolidated financial statements.
On September 10, 2001, the Corporation announced the signing of a definitive
agreement to acquire Signal Financial Corporation ("Signal") of Mendota Heights,
Minnesota. Based upon the Corporation's closing stock price on September 10,
2001 (the date of public announcement of the acquisition) and other terms of the
Merger Agreement, the acquisition price is approximately $192.5 million, of
which, $58.4 million will be paid in cash and the remainder in the Corporation's
common stock. On February 28, 2002, the Corporation consummated its acquisition
of 100% of the outstanding common shares of Signal. As the transaction was
accounted for under the purchase method, the results of operations of Signal
will be included by the Corporation beginning on the consummation date, and
therefore, are not included in the accompanying consolidated financial
statements. At February 28, 2002, Signal reported $1.2 billion in total assets.
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 interest earning
assets, 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 interest earning assets
and interest-bearing liabilities. 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.
12
Net interest income in the consolidated statements of income (which excludes the
taxable equivalent adjustment on tax exempt assets) was $422.0 million, compared
to $383.6 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 $22.2
million for 2001 and $21.7 million for 2000, resulted in fully taxable
equivalent net interest income of $444.2 million and $405.3 million,
respectively. The taxable equivalent adjustment between years was relatively
unchanged (up $509,000) and was in line with the growth in average municipal
securities balances.
Tax equivalent net interest income was $444.2 million for 2001, an increase of
$38.9 million or 9.6% from 2000. The increase in tax equivalent net interest
income was primarily attributable to the benefit of lower interest rates,
particularly on the cost of interest-bearing liabilities, and a higher level of
earning assets. Interest rates fell steadily during 2001, but were generally
rising during 2000. Comparatively, the average Federal funds rate for 2001 was
238 bp lower than for 2000, while the rate at December 31, 2001, was 475 bp
lower than at December 31, 2000.
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 earning assets and the rate paid for interest-bearing liabilities
that fund those assets. The net interest margin is expressed as the percentage
of net interest income to average earning assets. 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 earning assets. To compare tax-exempt asset yields to taxable yields,
the yield on tax-exempt loans and securities is computed on a tax equivalent
basis. Net interest income, interest rate spread, and net interest margin are
discussed further on a tax equivalent basis.
Table 2 provides average balances of earning assets and interest-bearing
liabilities, 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 a tax-equivalent basis for the three years
ended December 31, 2001. Tables 3 through 5 present additional information to
facilitate the review and discussion of tax equivalent 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 earning assets and interest-bearing liabilities added $18.3 million to tax
equivalent net interest income, while changes in the rates resulted in a $20.6
million increase, for a net increase of $38.9 million.
The net interest margin for 2001 was 3.62%, compared to 3.36% in 2000. The 26 bp
increase in net interest margin is attributable to a 31 bp increase in interest
rate spread (i.e., an 86 bp decrease in the cost of interest-bearing
liabilities, net of a 55 bp decrease in the yield on earning assets), partially
offset by a 5 bp lower contribution from net free funds. In conjunction with the
stock buy-back programs (see further detail under section "Capital"), $34.4
million was used in 2001 for the repurchase of 1.0 million shares of common
stock, while $92.3 million was used in 2000 to repurchase 3.7 million shares.
Given the lower interest rate environment of 2001, the combination of buying
back fewer shares and lower funding costs favorably impacted the net interest
margin by approximately 2 bp in 2001.
For 2001, the cost of interest-bearing liabilities decreased 86 bp, impacted
favorably by the declining rate environment during 2001, reducing interest
expense by $90.7 million (with interest-bearing deposits accounting for $46.2
million of the decrease). The combined average cost of interest-bearing deposits
excluding brokered CDs was 3.94%, down 58 bp, primarily from carrying a higher
proportion of lower-costing transaction accounts during 2001 versus 2000.
Higher-costing brokered CDs fell to represent 3.8% of interest-bearing
liabilities (versus 7.9% for 2000) and cost 99 bp less than last year. The cost
of wholesale funds (comprised of all short-term borrowings and long-term debt)
decreased 154 bp to 4.78% for 2001 (primarily a function of the declining rate
environment and the predominantly short-term nature of the funds) which reduced
interest expense by $44.5 million. For 2001, the yield on earning assets fell 55
bp (driven primarily by a 75 bp decline in the loan yield), which decreased
interest earned by $70.1 million (with loans accounting for $65.4 million of the
decrease). The average loan yield was 7.63%, down 75 bp from last year. The
repricing of variable rate loans, as well as competitive factors on new and
refinanced loans, in the declining interest rate environment, put downward
pressure on loan yields for 2001, as did the sale of the higher-yielding credit
card receivables in
13
April 2000. The yield on securities and short-term investments combined was down
only 11 bp, supported by portfolio strategies that started during 2000 to
mitigate interest rate risk, decreasing tax equivalent interest income by an
aggregate $4.7 million.
In combination, the growth and composition change of earning assets contributed
an additional $20.1 million to tax equivalent net interest income, while the
growth and composition of interest-bearing liabilities cost an additional $1.8
million, netting a $18.3 million increase to tax equivalent net interest income.
Average earning assets were $12.3 billion in 2001, an increase of $225 million,
or 1.9%, from 2000. Loans accounted for the majority of the growth in earning
assets, increasing to 74.1% of average earning assets, compared to 72.1% for
2000. Average loans were $9.1 billion in 2001, up $405 million or 4.7% compared
to 2000, despite the sale of $128 million of credit card receivables in April
2000 and despite high-refinancing and sales of residential mortgages in 2001.
During 2001, the Corporation continued to focus on shifting the composition of
its loan portfolio, growing the proportion of commercial loans, which
represented 53.9% of average loans for 2001 compared to 49.6% for 2000. For
2001, tax equivalent interest income on loans increased $31.1 million from
growth, but decreased $65.4 million from the impact of the rate environment (as
noted above), for a net decrease of $34.3 million versus last year (see Table
3). In support of funding a portion of the loan growth, securities and
short-term investments combined decreased $180 million on average. Thus, for
2001, tax equivalent interest income on securities and short-term investments
decreased $11.0 million from the volume changes, and decreased $4.7 million from
the rate changes (as noted above), for a net $15.7 million decrease to tax
equivalent interest income.
Average interest-bearing liabilities were $10.8 billion in 2001, a slight
increase of $81.7 million, or 0.8%, from 2000. While relatively unchanged in
balance, the mix of interest-bearing liabilities changed significantly compared
to last year. Average interest-bearing deposits, a predominant source of funding
(down $602 million or 7.5%), represented 69.0% of average interest-bearing
liabilities for 2001, compared to 75.1% last year, driven by a reduction in
brokered CDs as cheaper funding sources were utilized. Without the brokered CDs,
interest-bearing deposits represented 65.2% of average interest-bearing
liabilities for 2001, versus 67.2% last year. Given this decline and coupled
with the growth in earning assets and other cash needs, the Corporation
increased its use of wholesale funding. To take advantage of the lower rate
environment, improve liquidity, and mitigate interest rate risk, the Corporation
increased its long-term debt to 5.3% of average interest-bearing liabilities,
compared to 1.1% for 2000. Therefore, for 2001, interest expense on
interest-bearing deposits decreased $80.9 million, the result of a $34.7 million
reduction from the declines in volume and a $46.2 million reduction from the
favorable impact of the rate environment. To reiterate, brokered CDs were the
predominant driver of this change (primarily from utilization of less expensive
funding sources), down $436 million and costing 99 bp less in 2001 than 2000,
while all other non-brokered interest-bearing deposits were down $166 million
and cost 58 bp less than last year. Total interest-bearing deposits cost 4.03%
on average for 2001 (71 bp less than last year). Total wholesale funds
(including all short-term and long-term funding sources other than
interest-bearing deposits) were $3.3 billion on average for 2001, up $683
million or 25.7%, with $460 million of the increase in average long-term debt.
Wholesale funding on a combined basis cost 4.78% (154 bp lower than last year),
of which long-term debt cost 5.07% on average for 2001 (128 bp lower than 2000).
Thus, for 2001, interest expense on wholesale funds decreased $8.0 million,
attributable to a $44.5 million decrease from the favorable impact of the rate
environment, offset partially by a $36.5 million increase from the growth in
volume.
14
TABLE2: Average Balances and Interest Rates (interest and rates on a
tax-equivalent basis)
Years Ended December 31,
---------------------------------------------------------------------------------------------------
2001 2000 1999
---------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------------------
($ in Thousands)
ASSETS
Earning assets:
Loans (1)(2)(3) $ 9,092,699 $693,780 7.63% $ 8,688,086 $728,128 8.38% $ 7,800,791 $626,407 8.03%
Investment securities:
Taxable 2,306,444 146,170 6.34 2,523,492 163,768 6.49 2,597,760 163,769 6.30
Tax exempt(1) 837,343 61,507 7.35 794,007 58,233 7.33 522,163 36,201 6.93
Short-term investments 35,380 1,421 4.02 41,309 2,775 6.72 34,110 1,806 5.29
---------------------------------------------------------------------------------------------------
Securities and short-term
investments 3,179,167 209,098 6.58 3,358,808 224,776 6.69 3,154,033 201,776 6.40
---------------------------------------------------------------------------------------------------
Total earning assets $12,271,866 $902,878 7.36% $12,046,894 $952,904 7.91% $10,954,824 $828,183 7.56%
---------------------------------------------------------------------------------------------------
Allowance for loan losses (125,790) (115,580) (105,488)
Cash and due from banks 279,363 268,267 263,288
Other assets 678,315 610,654 585,480
---------------------------------------------------------------------------------------------------
Total assets $13,103,754 $12,810,235 $11,698,104
===================================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits $ 839,417 $ 11,812 1.41% $ 956,177 $ 19,704 2.06% $ 919,163 $14,998 1.63%
Interest-bearing demand
deposits 799,451 7,509 0.94 803,779 11,091 1.38 796,506 10,645 1.34
Money market deposits 1,722,242 55,999 3.25 1,407,502 65,702 4.67 1,373,010 52,478 3.82
Time deposits, excluding
Brokered CDs 3,648,942 201,035 5.51 4,008,382 228,191 5.69 4,297,977 222,811 5.18
--------------------------------------------------------------------------------------------------
Total interest-bearing
deposits, excluding
Brokered CDs 7,010,052 276,355 3.94 7,175,840 324,688 4.52 7,386,656 300,932 4.07
Brokered CDs 404,686 22,575 5.58 840,518 55,204 6.57 241,309 13,143 5.45
--------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 7,414,738 298,930 4.03 8,016,358 379,892 4.74 7,627,965 314,075 4.12
Federal funds purchased and
securities Sold under
agreements to repurchase 1,839,336 77,011 4.19 1,724,291 107,732 6.25 1,057,269 52,843 5.00
Other short-term borrowings 924,420 53,535 5.79 816,553 52,698 6.45 951,524 50,214 5.28
Long-term debt 574,753 29,161 5.07 114,374 7,268 6.35 24,644 1,643 6.67
--------------------------------------------------------------------------------------------------
Total wholesale funding 3,338,509 159,707 4.78 2,655,218 167,698 6.32 2,033,437 104,700 5.15
--------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $10,753,247 $458,637 4.27% $10,671,576 $547,590 5.13% $ 9,661,402 $418,775 4.33%
--------------------------------------------------------------------------------------------------
Demand deposits 1,166,495 1,086,582 1,003,687
Accrued expenses and other
liabilities 146,854 131,908 118,933
Stockholders' equity 1,037,158 920,169 914,082
--------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $13,103,754 $12,810,235 $11,698,104
==================================================================================================
Net interest income and rate
spread (1) $444,241 3.09% $405,314 2.78% $409,408 3.23%
==================================================================================================
Net interest margin (1) 3.62% 3.36% 3.74%
==================================================================================================
Taxable equivalent adjustment $ 22,256 $ 21,747 $13,663
==================================================================================================
(1) The yield on tax exempt loans and securities is computed on a
tax-equivalent basis using a tax rate of 35% for all periods presented and
is net of the effects of certain disallowed interest deductions.
(2) Nonaccrual loans and loans held for sale have been included in the average
balances.
(3) Interest income includes net loan fees.
15
TABLE 3: Rate/Volume Analysis (1)
2001 Compared to 2000 2000 Compared to 1999
Increase (Decrease) Due to Increase (Decrease) Due to
----------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
----------------------------------------------------------------------------
($ in Thousands)
Interest income:
Loans (2) $ 31,086 $ (65,434) $ (34,348) $ 73,540 $ 28,181 $ 101,721
Investment securities:
Taxable (13,844) (3,754) (17,598) (4,907) 4,906 (1)
Tax-exempt (2) 3,183 91 3,274 19,834 2,198 22,032
Short-term investments (354) (1,000) (1,354) 455 514 969
----------------------------------------------------------------------------
Securities and short-term investments (11,015) (4,663) (15,678) 15,382 7,618 23,000
----------------------------------------------------------------------------
Total earning assets (2) $ 20,071 $ (70,097) $ (50,026) $ 88,922 $ 35,799 $ 124,721
----------------------------------------------------------------------------
Interest expense:
Savings deposits $ (2,194) $ (5,698) $ (7,892) $ 662 $ 4,044 $ 4,706
Interest-bearing demand deposits (59) (3,523) (3,582) 124 322 446
Money market deposits 12,800 (22,503) (9,703) 1,425 11,799 13,224
Time deposits, excluding Brokered CDs (19,977) (7,179) (27,156) (14,323) 19,703 5,380
----------------------------------------------------------------------------
Total interest-bearing deposits, excluding
Brokered CDs (9,430) (38,903) (48,333) (12,112) 35,868 23,756
Brokered CDs (25,284) (7,345) (32,629) 31,642 10,419 42,061
----------------------------------------------------------------------------
Total interest-bearing deposits (34,714) (46,248) (80,962) 19,530 46,287 65,817
Federal funds purchased and securities sold under
agreements to repurchase 6,588 (37,309) (30,721) 39,307 15,582 54,889
Other short-term borrowings 6,421 (5,584) 837 (8,058) 10,542 2,484
Long-term debt 23,479 (1,586) 21,893 5,707 (82) 5,625
----------------------------------------------------------------------------
Total wholesale funding 36,488 (44,479) (7,991) 36,956 26,042 62,998
----------------------------------------------------------------------------
Total interest-bearing liabilities $ 1,774 $ (90,727) $ (88,953) $ 56,486 $ 72,329 $ 128,815
----------------------------------------------------------------------------
Net interest income (2) $ 18,297 $ 20,630 $ 38,927 $ 32,436 $ (36,530) $ (4,094)
============================================================================
(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)
2001 Average 2000 Average 1999 Average
---------------------------------------------------------------------------------------------------
%of %of %of
Balance Earning Yield/ Balance Earning Yield/ Earning Yield/
Assets Rate Assets Rate Balance Assets Rate
---------------------------------------------------------------------------------------------------
($inThousands)
Earning assets $12,271,866 100.0% 7.36% $12,046,894 100.0% 7.91% $10,954,824 100.0% 7.56%
---------------------------------------------------------------------------------------------------
Financed by:
Interest-bearing funds $10,753,247 87.6% 4.27% $10,671,576 88.6% 5.13% $9,661,402 88.2% 4.33%
Noninterest-bearing
funds 1,518,619 12.4% 1,375,318 11.4% 1,293,422 11.8%
---------------------------------------------------------------------------------------------------
Total funds sources $12,271,866 100.0% 3.74% $12,046,894 100.0% 4.55% $10,954,824 100.0% 3.82%
===================================================================================================
Interest rate spread 3.09% 2.78% 3.23%
Contribution from net
free funds .53% .58% .51%
----- ----- -----
Net interest margin 3.62% 3.36% 3.74%
===================================================================================================
Average prime rate* 6.91% 9.23% 8.00%
Average fed funds rate* 3.88% 6.26% 4.95%
Average spread 303bp 297bp 305bp
===================================================================================================
*Source: Bloomberg
16
TABLE 5: Selected Average Balances
Percent 2001 as % of 2000 as % of
2001 2000 Change Total Assets Total Assets
----------------------------------------------------------------
($ in Thousands)
ASSETS
Loans $ 9,092,699 $ 8,688,086 4.7% 69.4% 67.8%
Investment securities
Taxable 2,306,444 2,523,492 (8.6) 17.6 19.7
Tax-exempt 837,343 794,007 5.5 6.4 6.2
Short-term investments 35,380 41,309 (14.4) 0.3 0.3
----------------------------------------------------------------
Total earning assets 12,271,866 12,046,894 1.9 93.7 94.0
Other assets 831,888 763,341 9.0 6.3 6.0
----------------------------------------------------------------
Total assets $13,103,754 $12,810,235 2.3% 100.0% 100.0%
================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing deposits $ 7,414,738 $ 8,016,358 (7.5)% 56.6% 62.6%
Short-term borrowings 2,763,756 2,540,844 8.8 21.1 19.8
Long-term debt 574,753 114,374 402.5 4.4 0.9
----------------------------------------------------------------
Total interest-bearing liabilities 10,753,247 10,671,576 0.8 82.1 83.3
Noninterest-bearing deposits 1,166,495 1,086,582 7.4 8.9 8.5
Accrued expenses and other liabilities 146,854 131,908 11.3 1.1 1.0
Stockholders' equity 1,037,158 920,169 12.7 7.9 7.2
----------------------------------------------------------------
Total liabilities and stockholders' equity $13,103,754 $12,810,235 2.3% 100.0% 100.0%
================================================================
Provision for Loan Losses
The provision for loan losses in 2001 was $28.2 million. In comparison, the
provision for loan losses for 2000 was $20.2 million, and $19.2 million for
1999. The provision for loan losses 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 1.42%, up from 1.35% at December 31, 2000, and up from 1.36% at
December 31, 1999. See additional discussion under section, "Allowance for Loan
Losses."
Noninterest Income
Noninterest income was $195.6 million for 2001, $11.4 million or 6.2% higher
than 2000. Primary categories that have impacted the change between comparable
periods were mortgage banking, net gains (losses) on both investment securities
and asset sales, and trust service fees. Fee income as a percentage of total
revenues (defined as total noninterest income less gains or losses on asset and
investment sales ("fee income") divided by taxable equivalent net interest
income plus fee income) was 30.3% for 2001 compared to 29.2% last year.
17
TABLE 6: Noninterest Income
% Change From
Years Ended December 31, Prior Year
--------------------------------------------------------
2001 2000 1999 2001 2000
--------------------------------------------------------
($ in Thousands)
Trust service fees $ 29,063 $ 37,617 $ 37,996 (22.7)% (1.0)%
Service charges on deposit accounts 37,817 33,296 29,584 13.6 12.5
Mortgage banking income 53,724 19,944 30,417 169.4 (34.4)
Credit card and other nondeposit fees 26,731 25,739 20,763 3.9 24.0
Retail commission income 16,872 20,187 18,372 (16.4) 9.9
Bank owned life insurance income 12,916 12,377 9,456 4.4 30.9
Asset sale gains, net 1,997 24,420 4,977 (91.8) N/M
Other 15,765 18,265 11,315 (13.7) 61.4
--------------------------------------------------------
Subtotal $ 194,885 $ 191,845 $ 162,880 1.6% 17.8%
Investment securities gains (losses), net 718 (7,649) 3,026 N/M N/M
--------------------------------------------------------
Total noninterest income $ 195,603 $ 184,196 $ 165,906 6.2% 11.0%
========================================================
Subtotal, net of asset sale gains
("fee income") $ 192,888 $ 167,425 $ 157,903 15.2% 6.0%
========================================================
N/M = not meaningful
Trust service fees for 2001 were $29.1 million, down $8.6 million (22.7%) from
last year. The change was predominantly due to a decrease in the market value of
assets under management, a function of the market and competitive market
conditions. Trust assets under management totaled $4.2 billion and $4.6 billion
at December 31, 2001 and 2000, respectively.
Service charges on deposits were $37.8 million, $4.5 million (13.6%) higher than
2000 primarily due to 2001 benefiting from the 2000 mid-year increases, changes
in non-sufficient fund/overdraft charges and other service charges, and lower
waive percentages.
Mortgage banking income was $53.7 million in 2001, an increase of $33.8 million,
more than double the 2000 level. Mortgage banking income consists of servicing
fees, the gain or loss on sales of mortgage loans to the secondary market, gains
on sales of servicing, and production-related revenue (origination,
underwriting, and escrow waiver fees). The increase was driven primarily by a
significant increase in secondary mortgage loan production and related sales
between comparable periods ($2.3 billion of production in 2001 versus $456
million in 2000). The higher production levels positively impacted gains on
sales of mortgages (up $29.5 million, of which, $4.1 million was related to
gains in the fair value of mortgage derivatives and $4.3 million was due to the
sale of mortgage servicing rights) and volume-related fees (up $6.2 million).
Servicing fees were down $1.9 million compared to 2000, in line with the decline
in the portfolio serviced for others. The portfolio serviced for others was down
5% to $5.2 billion from $5.5 billion at December 31, 2000, due to sales of
mortgage servicing rights on a portion of the portfolio, partially offset by
increases attributable to higher sales volume.
Credit card and other nondeposit fees were $26.7 million for 2001, an increase
of $0.9 million or 3.9% over 2000, with $1.6 million in increased merchant
income and a $0.6 million decline 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 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 $16.9 million, down $3.3 million or 16.4% compared
to last year. The decrease was primarily attributable to declines in the stock
market, lower portfolio valuations, and general market uncertainty due to the
state of the economy. Brokerage commissions declined $2.1 million, while
insurance commissions declined $1.2 million.
18
Asset sale gains for 2001 were $2.0 million, including the $0.9 million net
premium on the sale of $12 million in deposits from one branch during 2001.
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 Citibank USA
and the $11.1 million net premium on the sales of $109 million in deposits from
six branches during 2000.
Bank owned life insurance income was $12.9 million, up $0.5 million or 4.4% over
last year. Other noninterest income was $15.8 million for 2001, down $2.5
million from 2000. The sale of stock in a regional ATM network resulted in a
gain of $2.6 million during 2001, while 2000 included $1.5 million recognized in
connection with an interim servicing agreement with Citibank USA 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 gains for 2001 were $0.7 million. The 2000 net losses of
$7.6 million 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.
Noninterest Expense
Total noninterest expense for 2001 was $338.4 million, a $20.6 million or 6.5%
increase over 2000 noninterest expense.
TABLE 7: Noninterest Expense
% Change
From Prior
Years Ended December 31, Year
---------------------------------------------------
2001 2000 1999 2001 2000
---------------------------------------------------
($ in Thousands)
Personnel expense $171,362 $157,007 $151,644 9.1% 3.5%
Occupancy 23,947 23,258 22,576 3.0 3.0
Equipment 14,426 15,272 15,987 (5.5) (4.5)
Data processing 19,596 22,375 21,695 (12.4) 3.1
Business development and advertising 13,071 13,359 11,919 (2.2) 12.1
Stationery and supplies 6,921 7,961 8,110 (13.1) (1.8)
FDIC expense 1,661 1,818 3,313 (8.6) (45.1)
Mortgage servicing rights expense 19,987 9,406 1,668 112.5 N/M
Intangible amortization 8,378 8,905 8,134 (5.9) 9.5
Legal and professional fees 4,394 7,595 8,051 (42.1) (5.7)
Other 54,626 50,780 51,995 7.6 (2.3)
---------------------------------------------------
Total noninterest expense $338,369 $317,736 $305,092 6.5% 4.1%
===================================================
N/M = not meaningful
Personnel expense (including salary-related expenses and fringe benefit
expenses) increased $14.4 million or 9.1% over 2000, and represented 50.6% of
total noninterest expense in 2001 compared to 49.4% in 2000. Salary expense
increased $6.7 million or 5.3% in 2001, despite a modest decrease in average
full-time equivalent employees, due primarily to increases in bonus and
incentive pay and temporary help. Average full-time equivalent employees of
3,849 during 2001 were down 60 or 1.5% from the 3,909 full-time equivalent
employees during 2000. Fringe benefits increased $7.7 million in 2001, primarily
the result of a $3.8 million increase in profit sharing expense (given a higher
profit share percentage in 2001), and a $2.0 million increase in premium based
benefits (directly related to the rising costs of health, dental, and life
insurance coverage).
Occupancy and equipment expense on a combined basis was $38.4 million for 2001,
essentially unchanged from last year. Data processing costs decreased to $19.6
million, down $2.8 million or 12.4% over last year, attributable to lower
overall vendor costs related to the change in service providers and the system
conversion
19
in mid-2000. Business development and advertising decreased to $13.1 million for
2001, down $0.3 million compared to 2000, primarily in television advertising
for a branding campaign in 2000.
Mortgage servicing rights expense includes the amortization of the mortgage
servicing rights asset and increases or decreases to the valuation allowance
associated with the mortgage servicing rights asset. Amortization of mortgage
servicing rights increased by $10.6 million between 2001 and 2000, predominantly
driven by an increase of $10.7 million to the valuation reserve during 2001,
reflecting the decline in interest rates in 2001 and the acceleration in
prepayment speeds in the portfolio of loans serviced for others. See Note 1 of
the notes to consolidated financial statements for the Corporation's accounting
policy for mortgage servicing rights, which is considered a critical accounting
policy given that estimating the fair value of the mortgage servicing rights
involves judgment, particularly of estimated prepayment speeds of the underlying
mortgages serviced. A valuation allowance is established to the extent the
carrying value of the mortgage servicing rights exceeds the estimated fair
value. Net income could be affected if management's estimate of the prepayment
speeds or other factors differ materially from actual prepayments. Mortgage
servicing rights, included in other assets on the consolidated balance sheet,
were $32.1 million, net of a $10.7 million valuation allowance at December 31,
2001 (see Note 6 of the notes to consolidated financial statements).
Intangible amortization decreased to $8.4 million, primarily as the result of
the reduction of intangibles associated with the six branches sold during 2000.
Intangible amortization includes amortization of goodwill and other identifiable
intangible assets. Under the provisions of a new accounting pronouncement,
goodwill and intangible assets with indefinite useful lives will no longer be
amortized beginning January 1, 2002. See further discussion under Note 1 of the
notes to consolidated financial statements.
Legal and professional fees were down $3.2 million compared to last year,
principally in consultant fees not recurring in 2001. Other expense was $54.6
million for 2001, up $3.8 million compared to 2000, most directly attributable
to increased mortgage loan expenses related to the higher secondary mortgage
loan production during 2001 versus 2000 (see also section "Noninterest Income").
Income Taxes
Income tax expense for 2001 was $71.5 million, up $9.6 million from 2000 income
tax expense of $61.8 million. The Corporation's effective tax rate (income tax
expense divided by income before taxes) was 28.5% in 2001 compared to 26.9% in
2000. The increase was primarily attributable to the increase in net income
before tax, an increase in state tax expense, and a decrease in tax valuation
allowance adjustments.
See Note 1 of the notes to consolidated financial statements for the
Corporation's income tax accounting policy. Income tax expense recorded in the
consolidated income statement involves interpretation and application of certain
accounting pronouncements and federal and state tax codes, and is, therefore,
considered a critical accounting policy. The Corporation undergoes examination
by various regulatory taxing authorities. Such agencies may require that changes
in the amount of tax expense or valuation allowance be recognized when their
interpretations differ from those of management, based on their judgments about
information available to them at the time of their examinations. See Note 13 of
the notes to consolidated financial statements for more information.
BALANCE SHEET ANALYSIS
Loans
Total loans were $9.0 billion at December 31, 2001, an increase of $106 million
or 1.2% over December 31, 2000, predominantly in commercial loans. Commercial
loans were $5.2 billion, up $603 million or 13.0%. Commercial loans grew to
represent 58% of total loans at the end of 2001, up from 52% at year-end 2000.
Changing the mix of loans to include more commercial loans continued to be a
strategic initiative during 2001. Also the decrease in residential real estate
was strongly influenced by refinance activity and sales of current year
production into the secondary market.
20
TABLE 8: Loan Composition
As of December 31,
--------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------------------------------------------------------------------------------------
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
--------------------------------------------------------------------------------------------
($ in Thousands)
Commercial, financial, and
agricultural $1,783,300 20% $1,657,322 19% $1,412,338 17% $ 962,208 13% $ 986,839 14%
Real estate - construction 797,734 9 660,732 7 560,450 7 461,157 7 335,978 5
Commercial real estate 2,630,964 29 2,287,946 26 1,903,633 23 1,384,524 19 1,273,174 18
Lease financing 11,629 -- 14,854 -- 23,229 -- 19,231 -- 14,072 --
--------------------------------------------------------------------------------------------
Commercial 5,223,627 58 4,620,854 52 3,899,650 47 2,827,120 39 2,610,063 37
Residential real estate 2,524,199 28 3,158,721 35 3,274,767 39 3,362,885 46 3,263,977 46
Home equity 609,254 7 508,979 6 408,577 5 331,861 5 405,086 6
--------------------------------------------------------------------------------------------
Residential mortgage 3,133,453 35 3,667,700 41 3,683,344 44 3,694,746 51 3,669,063 52
Consumer 662,784 7 624,825 7 760,106 9 750,831 10 793,424 11
--------------------------------------------------------------------------------------------
Total loans $9,019,864 100% $8,913,379 100% $8,343,100 100% $7,272,697 100% $7,072,550 100%
============================================================================================
Commercial, financial, and agricultural loans were $1.8 billion at the end of
2001, up $126 million or 7.6% since year-end 2000, and comprised 20% of total
loans outstanding, up from 19% at the end of 2000. 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
diverse 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, loans to finance agricultural production totaled $16.6 million,
only 0.2% of total loans, at December 31, 2001.
Real estate construction loans grew $137 million or 20.7% to $798 million,
representing 9% of the total loan portfolio at the end of 2001, compared to $661
million or 7% at the end of 2000. Loans in this classification are primarily
short-term interim loans that provide financing for the acquisition or
development of commercial real estate, such as multifamily 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 to customers based 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,
but is also influenced by general economic conditions. 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 $2.6 billion at December 31, 2001, up $343 million or 15.0% over
last year and comprised 29% of total loans outstanding versus 26% at year-end
2000. 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,
multifamily properties, community purpose properties, and similar properties.
Loans are primarily made to customers based 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. In many cases the
Corporation will take additional real estate collateral to further secure the
overall lending relationship.
Residential mortgage loans totaled $3.1 billion at the end of 2001, down $534
million or 14.6% from the prior year and comprised 35% of total loans
outstanding versus 41% at year-end 2000. Loans in this classification include
residential real estate (which consists of conventional home mortgages and
second mortgages) and
21
home equity lines. Residential real estate loans generally limit the maximum
loan to 80% of collateral value. Residential real estate loans were $2.5 billion
at December 31, 2001, down $635 million or 20.0% compared to last year,
principally due to high refinance activity (influenced strongly by the lower
rate environment in 2001 compared to 2000 and sales of the majority of current
year production into the secondary market). Home equity lines grew by $100
million, or 19.7%, to $609 million in 2001, in response to the lower rate
environment in 2001.
TABLE 9: Loan Maturity Distribution and Interest Rate Sensitivity (1)
Maturity (2)
----------------------------------------------------
December 31, 2001 Within 1 Year 1-5 Years After 5 Years Total
------------- --------- ------------- -----
($ in Thousands)
Commercial, financial, and agricultural $1,353,625 $367,462 $ 62,213 $1,783,300
Real estate-construction 559,201 170,596 67,937 797,734
----------------------------------------------------
Total $1,912,826 $538,058 $130,150 $2,581,034
====================================================
Fixed rate $ 395,888 $465,301 $130,150 $991,339
Floating or adjustable rate 1,516,938 72,757 --- 1,589,695
----------------------------------------------------
Total $1,912,826 $538,058 $130,150 $2,581,034
====================================================
Percent 74% 21% 5% 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 $663 million at December 31, 2001, up $38
million or 6.1% compared to 2000, representing 7% of the year-end loan
portfolio. Installment loans include short-term installment loans, direct and
indirect automobile loans, recreational vehicle loans, credit card loans (which
are primarily business-oriented following the April 2000 sale to Citibank USA of
$128 million of retail credit card receivables), 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. 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.
An active credit risk management process is used for commercial loans to further
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.
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, 2001, no concentrations of any
type existed in the Corporation's portfolio in excess of 10% of total loans.
22
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 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, 2001, the allowance for loan losses was $128.2 million, compared
to $120.2 million at December 31, 2000. The $8.0 million increase was the net
result of $28.2 million provision for loan losses, offset by $20.2 million of
net charge offs. As of December 31, 2001, the allowance for loan losses to total
loans was 1.42% and covered 246% of nonperforming loans, compared to 1.35% and
252%, respectively, at December 31, 2000. Tables 10 and 11 provide additional
information regarding activity in the allowance for loan losses and Table 12
provides additional information regarding nonperforming loans.
The provision for loan losses in 2001 was $28.2 million. In comparison, the
provision for loan losses for 2000 was $20.2 million and $19.2 million in 1999.
The provision for loan losses is predominantly a function of the result of the
methodology used to determine the allowance for loan losses.
23
TABLE 10: Loan Loss Experience
Years Ended December 31,
----------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
($ in Thousands)
Allowance for loan losses, at beginning of year $ 120,232 $ 113,196 $ 99,677 $ 92,731 $ 71,767
Balance related to acquisitions -- -- 8,016 3,636 728
Decrease from sale of credit card receivables -- (4,216) -- -- --
Provision for loan losses 28,210 20,206 19,243 14,740 31,668
Loans charged off:
Commercial, financial, and agricultural 11,268 1,679 2,222 3,533 1,327
Real estate - construction 1,631 38 -- 202 600
Commercial real estate 3,578 795 927 *** ***
Residential real estate 1,262 2,923 2,545 *** ***
--------- --------- --------- --------- ---------
Real estate - mortgage 4,840 3,718 3,472 3,256 3,222
Consumer 4,822 5,717 10,925 9,839 9,900
Lease financing 78 3 2 209 --
--------------------------------------------------------
Total loans charged off 22,639 11,155 16,621 17,039 15,049
Recoveries of loans previously charged off:
Commercial, financial, and agricultural 1,013 772 726 2,384 513
Real estate - construction -- -- 1 -- --
Commercial real estate 242 153 364 *** ***
Residential real estate 192 297 291 *** ***
--------------------------------------------------------
Real estate - mortgage 434 450 655 1,582 1,312
Consumer 954 979 1,464 1,641 1,792
Lease financing -- -- 35 2 --
--------------------------------------------------------
Total recoveries 2,401 2,201 2,881 5,609 3,617
--------------------------------------------------------
Net loans charged off 20,238 8,954 13,740 11,430 11,432
--------------------------------------------------------
Allowance for loan losses, at end of year $ 128,204 $ 120,232 $ 113,196 $ 99,677 $ 92,731
========================================================
*** Data for this period is unavailable.
Ratio of allowance for loan losses to net
charge offs 6.3 13.4 8.2 8.7 8.1
Ratio of net charge offs to average loans 0.22% 0.10% 0.18% 0.16% 0.16%
Ratio of allowance for loan losses to total
loans at end of period 1.42% 1.35% 1.36% 1.37% 1.31%
========================================================
The allowance for loan losses represents management's estimate of an amount
adequate to provide for probable incurred credit losses in the loan portfolio at
the balance sheet date. See management's allowance for loan losses accounting
policy in Note 1 of the notes to consolidated financial statements. Management's
evaluation of the adequacy of the allowance for loan losses 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. Assessing these numerous factors involves
significant judgment, and therefore, management considers the allowance for loan
losses a critical accounting policy.
In general, the change in the allowance for loan losses is a function of a
number of factors, including but not limited to changes in the loan portfolio
(see Table 8), net charge offs (see Table 10), and nonperforming loans (see
Table 12). First, total loan growth from year-end 2000 to 2001 was up slightly
to 1.2%. The growth was strongest in the commercial portfolio (particularly
commercial real estate; commercial, financial, and agricultural loans; and
construction loans), which grew $603 million or 13.0% to represent 58% of total
loans at
24
year-end 2001 compared to 52% last year-end. This segment of the loan portfolio
carries greater inherent credit risk (described under section "Loans"). Net
charge offs for 2001 have increased to $20.2 million. The rise in net charge
offs is largely due to the charge off of several large commercial credits
(accountable for approximately $10.7 million of charge-offs). Finally,
nonperforming loans to total loans grew to 0.58% for 2001 compared to 0.54% last
year.
The allocation of the Corporation's allowance for loan losses for the last five
years is shown in Table 11. The allocation methodology applied by the
Corporation, designed to assess the adequacy of the allowance for loan losses,
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 allowance for loan
losses 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 allowance for loan
losses 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 real estate, 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, external
factors, and management's judgment relating to current assumptions.
The allocation methods used for December 31, 2001 and 2000 were generally
comparable. However, the uncertainty of current economic conditions on the
business results of numerous individual borrowers and certain industries is
being monitored carefully, as is the increased pace at which the financial
results of a borrower's company can take a downturn from difficult and varied
economic conditions. Therefore, the allocations for criticized loans in
substandard and watch categories were increased. The amount allocated to
commercial, financial and agricultural loans in 2001 represented 34% of the
allowance for loan losses, compared to 38% last year. In 2000 for this category,
a greater amount of these loans were in criticized loan categories and for which
specific allocations were made. Thus, as anticipated, Table 10 evidences that
this category incurred the largest amount of 2001 charge-offs. Finally,
commercial, financial and agricultural loans represent 24% of nonperforming
loans compared to 29% last year. The real estate mortgage category accommodates
allowance allocated for commercial real estate and residential real estate. For
2001, the amount allocated for commercial real estate increased to $48.7
million, representing 38.0% of the allowance for loan losses compared to 21.6%
last year. The increase was a function of changes in the commercial real estate
loan category, including increased loan balances, growing 15.0% to represent 29%
of total loans versus 26% at year-end 2000, and increased net charge-off
activity of $3.3 million for 2001, versus last year of $641,000.
For 2000 compared to 1999, the amount allocated to consumer loans decreased to
represent 5% of the allowance for loan losses versus 13% for 1999, predominantly
as a function of the sale of $128 million of credit card receivables in
mid-2000. Additionally, the amount allocated to commercial, financial and
agricultural loans increased to 38% versus 28% last year, in part for the
increase in the amount to criticized categories, as noted above, and since more
of these loans were in nonperforming loan categories at year-end 2000 versus
1999 (29% and 17%, respectively).
Management carefully considers numerous detailed and general factors, its
assumptions, and the likelihood of materially different conditions that could
alter its assumptions. Consolidated net income could be affected if management's
estimate of the population of loans with possible loss or its estimate of the
amount of loss that might be incurred are materially different, requiring
additional provision for loan losses to be recorded.
25
Management believes the allowance for loan losses to be adequate at December 31,
2001. While management uses available information to recognize losses on loans,
future adjustments to the allowance for loan losses may be necessary based on
changes in economic conditions and the impact of such change on the
Corporation's borrowers. As an integral part of their examination process,
various regulatory agencies also review the allowance for loan losses. Such
agencies may require that certain loan balance be charged off when their credit
evaluations differ from those of management, based on their judgments about
information available to them at the time of their examination.
TABLE 11: Allocation of the Allowance for Loan Losses
As of December 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
--------- ------------ ------------ ---------- ---------
($ in Thousands)
Commercial, financial, and agricultural $ 44,071 $ 45,571 $ 31,648 $25,385 $33,682
Real estate - construction 7,977 6,531 5,605 3