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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period 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 54304
GREEN BAY, WISCONSIN (Zip code)
(Address of principal executive offices)
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 (sec.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, 2000, 63,164,218 shares of Common Stock were outstanding and the
aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $1,501,035,000. Excludes approximately $74,122,000
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 $132,423,000 of market value
representing 8.41% 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 26, 2000
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ASSOCIATED BANC-CORP
1999 FORM 10-K TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 38
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 72
PART III
Item 10. Directors and Executive Officers of the Registrant 72
Item 11. Executive Compensation 72
Item 12. Security Ownership of Certain Beneficial Owners and
Management 72
Item 13. Certain Relationships and Related Transactions 72
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K 73
Signatures 75
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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.
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, 1999, the Corporation owned ten commercial
banks located in Illinois, Minnesota, and Wisconsin (the "affiliates") serving
their local communities and, measured by total assets held at December 31, 1999,
was the third largest commercial bank holding company headquartered in
Wisconsin. The Corporation also owned 32 nonbanking subsidiaries (the
"subsidiaries") located in Arizona, California, Delaware, Illinois, Missouri,
Nevada, and Wisconsin.
The Corporation entered the Minnesota banking market through three separate
transactions during 1999. It acquired Windsor Bancshares, Inc. and its wholly
owned subsidiary, Bank Windsor, on February 3, 1999. The Corporation also
consummated the acquisition of Riverside Acquisition Corp. and its wholly owned
subsidiary, Riverside Bancshares, Inc., and its wholly owned subsidiary,
Riverside Bank, on August 31, 1999. Further, the Corporation finalized its
acquisition of BNC Financial Corporation on December 31, 1999.
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, corporate-wide
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, 1999, provided services through 223 locations in
157 communities.
The Corporation, through its affiliates, provides a complete range of banking
services to individuals and small to medium-size businesses. These services
include checking, savings, NOW, Super NOW, and money market deposit accounts,
business, personal, educational, residential, and commercial mortgage loans,
MasterCard, VISA and other consumer-oriented financial services, including IRA
and Keogh accounts, safe deposit and
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night depository facilities. Automated Teller Machines (ATMs), which provide
24-hour banking services to customers of the affiliates, are installed in many
locations in the affiliates' service areas. The affiliates are members of an
interstate shared ATM network, which allows their customers to perform banking
transactions from their checking, savings, or credit card accounts at ATMs in a
multi-state environment. Among the services designed specifically to meet the
needs of small and medium-size businesses are various types of specialized
financing, cash management services, and transfer/collection facilities.
The affiliates provide lending, depository, and related financial services to
commercial, industrial, financial, and governmental customers. Term loans,
revolving credit arrangements, letters of credit, inventory and accounts
receivable financing, real estate construction lending, and international
banking services are available.
Lending involves credit risk. Credit risk is controlled and monitored through
active asset quality management and the use of lending standards, thorough
review of potential borrowers, and active asset quality administration. Active
asset quality administration, including early problem loan identification and
timely resolution of problems, further ensures appropriate management of credit
risk and minimization of loan losses. The allowance for loan losses ("AFLL")
represents management's estimate of an amount adequate to provide for losses
inherent in the loan portfolio. Management's evaluation of the adequacy of the
AFLL is based on management's ongoing review and grading of the loan portfolio,
consideration of past loan loss experience, trends in past due and nonperforming
loans, risk characteristics of the various classifications of loans, current
economic conditions, the fair value of underlying collateral, and other factors
which could affect potential credit losses. Credit risk management is discussed
under sections "Loans," "Allowance for Loan Losses," and "Nonperforming Loans,
Potential Problem Loans, and Other Real Estate Owned" and under Notes 1 and 6 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, including
various life, property, casualty, credit, and mortgage products to the
affiliates' customers and the general public. Seven investment subsidiaries
located in Nevada hold, manage, and trade cash, stocks, and securities
transferred from the affiliates and reinvest investment income. Three additional
investment subsidiaries formed in Nevada and headquartered and domiciled in the
Cayman Islands provide investment services for their parent bank, as well as
provide management of their respective Real Estate Investment Trust ("REIT")
subsidiaries. A leasing subsidiary provides lease financing for a variety of
capital equipment for commerce and industry. An appraisal subsidiary provides
real estate appraisals for customers, government agencies, and the general
public.
The mortgage banking subsidiaries are involved in the origination, servicing,
and warehousing of mortgage loans, and the sale of such loans to investors. The
primary focus is on commercial and one- to four-family residential and
multi-family properties, all of which are generally salable into the secondary
mortgage market. The principal mortgage lending areas of these subsidiaries are
Wisconsin and Illinois. Nearly all long-term, fixed-rate real estate mortgage
loans generated are sold in the secondary market and to other financial
institutions, with the subsidiaries retaining the servicing of those loans.
In addition to real estate loans, the Corporation's affiliates and subsidiaries
originate and/or service consumer loans, credit card loans, and student loans.
Consumer, home equity, and student lending activities are
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principally conducted in Wisconsin and Illinois, while the credit card base and
resulting loans are principally centered in the Midwest.
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.
EMPLOYEES
At December 31, 1999, the Corporation, its affiliates, and subsidiaries, as a
group, had 3,966 full-time equivalent employees.
COMPETITION
The financial services industry is highly competitive. The Corporation competes
for loans, deposits and financial services in all of its principal markets. The
Corporation competes directly with other bank and nonbank institutions located
within its markets, with out-of-market banks and bank holding companies that
advertise or otherwise serve the Corporation's markets, money market and other
mutual funds, brokerage houses, and various other financial institutions.
Additionally, the Corporation competes with insurance companies, leasing
companies, regulated small loan companies, credit unions, governmental agencies
and commercial entities offering financial services products. Competition
involves efforts to obtain new deposits, the scope and type of services offered,
interest rates paid on deposits and charged on loans, as well as other aspects
of banking. All of the affiliates also face direct competition from members of
bank holding company systems that have greater assets and resources than those
of the Corporation.
SUPERVISION AND REGULATION
Financial institutions are highly regulated both at the federal and state level.
Numerous statutes and regulations presently affect the business of the
Corporation, its affiliates, and its subsidiaries. Proposed comprehensive
statutory and regulatory changes could have an effect on the Corporation's
business.
As a registered bank holding company under the Act, the Corporation and its
nonbanking affiliates are regulated and supervised by the Board of Governors of
the Federal Reserve System (the "Board"). The affiliates of the Corporation with
a national charter are supervised and examined by the Comptroller of the
Currency. The affiliates with a state charter are supervised and examined by
their respective state banking agency, and either the Board, if such affiliate
is a member of the Federal Reserve System, or by the Federal Deposit Insurance
Corporation (the "FDIC"), if a nonmember. Currently, all affiliates with a state
charter are nonmember banks. All affiliates of the Corporation that accept
insured deposits are subject to examination by the FDIC.
The activities of the Corporation, and its affiliates and subsidiaries, are
limited by the Act to those activities that are banking, or those nonbanking
activities that are closely related or incidental to banking. The Corporation is
required to act as a source of financial strength to each of its affiliates
pursuant to which it may be required to commit financial resources to support
such affiliates in circumstances when, absent such requirements, it might not do
so. The Act also requires the prior approval of the Board for the Corporation to
acquire direct or indirect control of more than five percent of any class of
voting shares of any bank or bank holding company. Further restrictions imposed
by the Act include capital requirements, restrictions on transactions with
affiliates, on issuances of securities, on dividend payments, on inter-affiliate
liabilities, on extensions of credit, and on expansion through merger and
acquisition.
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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 Board of Directors (the "FDIC Board") voted December 11, 1996, to
finalize a rule lowering the rates on assessments paid to the Savings
Association Insurance Fund ("SAIF"), effective as of October 1, 1996. As a
result of the special assessment required by the Deposit Insurance Funds Act of
1996 ("Funds Act"), the SAIF was capitalized at the target Designated Reserve
Ratio ("DRR") of 1.25% of estimated insured deposits on October 1, 1996. The
Funds Act required the FDIC to set assessments in order to maintain the target
DRR. The FDIC Board has, therefore, lowered the rates on assessments paid to the
SAIF, while simultaneously widening the spread between the lowest and highest
rates to improve the effectiveness of the FDIC's risk-based premium system. The
FDIC Board has also established a process, similar to that which was applied to
the Bank Insurance Fund ("BIF"), for adjusting the rate schedules for both the
SAIF and the BIF within a limited range, without notice and comment, to maintain
each of the fund balances at the target DRR.
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, will
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 will 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 provisions amending the activity limitations and supervision of
bank holding companies are generally effective 120 days following enactment. The
Board is expected to issue regulations implementing these provisions. It can be
expected that the amendments will 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 varying combinations to influence overall
growth of bank loans, investments, and deposits, and may also affect
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interest rates charged on loans or paid for deposits. The monetary policies of
the Federal Reserve authorities have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to have
such an effect in the future.
In view of changing conditions in the national economy and in the money markets,
as well as the effect of credit policies by monetary and fiscal authorities,
including the Federal Reserve System, no prediction can be made as to possible
future changes in interest rates, deposit levels, and loan demand, or their
effect on the business and earnings of the Corporation and its affiliates.
ITEM 2 PROPERTIES
The Corporation's headquarters were relocated to the Village of Ashwaubenon,
Wisconsin, in a leased facility with approximately 30,000 square feet of office
space in September 1998. The space is subject to a five-year lease with two
consecutive five-year extensions.
At December 31, 1999, the affiliates occupied 223 offices in 157 different
communities within Illinois, Minnesota, and Wisconsin. All affiliate main
offices are owned, except Associated Bank Milwaukee, Associated Bank Chicago,
Associated Bank Illinois, Bank Windsor, and Riverside Bank. The affiliate main
offices in downtown Milwaukee, Chicago, Rockford, and Minneapolis, are located
in the lobbies of multi-story office buildings. Most affiliate branch offices
are free-standing buildings that provide adequate customer parking, including
drive-in facilities of various numbers and types for customer convenience. Some
affiliates also have branch offices in various supermarket locations, as well as
offices in retirement communities. In addition, the Corporation owns other real
property that, when considered in the aggregate, is not material to its
financial position.
ITEM 3 LEGAL PROCEEDINGS
There are legal proceedings pending against certain affiliates and subsidiaries
of the Corporation which arose in the normal course of their business. Although
litigation is subject to many uncertainties and the ultimate exposure with
respect to these matters cannot be ascertained, management believes, based upon
discussions with counsel, that the Corporation has meritorious defenses, and any
ultimate liability would not have a material adverse effect on the consolidated
financial position or results of operations of the Corporation.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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 26,
2000.
The following is a list of names and ages of executive officers of the
Corporation, its affiliates, and subsidiaries 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 or subsidiaries. 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 which the officer was selected. No person other than those listed below has
been chosen to become an Executive Officer of the Corporation.
NAME OFFICES AND POSITIONS HELD DATE OF ELECTION
Harry B. Conlon Chairman and Chief Executive Officer of March 1, 1975
Age: 64 Associated Banc-Corp
Prior to October 1998, Chairman, President, and
Chief Executive Officer of Associated Banc-Corp
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NAME OFFICES AND POSITIONS HELD DATE OF ELECTION
Robert C. Gallagher President, Chief Operating Officer, and Director April 28, 1982
Age: 61 of Associated Banc-Corp
Prior to October 1998, Vice Chairman of
Associated Banc-Corp; Chairman and Chief
Executive Officer of Associated Bank Green Bay
(affiliate)
Prior to April 1996, Executive Vice President and
Director of Associated Banc-Corp; Chairman,
President and Chief Executive Officer of
Associated Bank Green Bay (affiliate)
Brian R. Bodager Chief Administrative Officer, General Counsel and July 22, 1992
Age: 44 Corporate Secretary of Associated Banc-Corp
Prior to July 1997, Senior Vice President,
General Counsel, and Corporate Secretary of
Associated Banc-Corp
Joseph B. Selner Chief Financial Officer of Associated Banc-Corp January 25, 1978
Age: 53
Arthur E. Olsen, III General Auditor of Associated Banc-Corp July 28, 1993
Age: 48
Mary Ann Bamber Director of Retail Banking of Associated January 22, 1997
Age: 49 Banc-Corp
From January 1996 to January 1997, independent
consultant
From January 1996 to January 1997, Senior Officer
of an Iowa-based bank
Prior to January 1996, Senior Officer of a
Minnesota-based holding company
Robert J. Johnson Director of Human Resources of Associated January 22, 1997
Age: 54 Banc-Corp
Prior to January 1997, Officer of a Wisconsin
manufacturing company
Donald E. Peters Director of Systems and Operations of Associated October 27, 1997
Age: 50 Banc-Corp
From October 1997 to November 1998, Director of
Systems and Operations of Associated Banc-Corp;
Executive Vice President of First Financial Bank
(former affiliate)
Prior to October 1997, Executive Vice President
of First Financial Corporation (former
affiliate); Executive Vice President of First
Financial Bank (former affiliate)
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NAME OFFICES AND POSITIONS HELD DATE OF ELECTION
Cindy K. Moon-Mogush Director of Marketing of Associated Banc-Corp April 20, 1998
Age: 38
From July 1997 to April 1998, Senior Vice
President of a Michigan-based bank holding
company
From March 1995 to July 1997, Officer of a
Michigan-based bank holding company
Prior to March 1995, Senior Officer of a
Michigan-based financial institution
David S. Fisher Treasurer of Associated Banc-Corp May 18, 1998
Age: 44
Prior to May 18, 1998, Senior Vice President of a
Michigan-based bank holding company
David E. Cleveland President of Riverside Bank (affiliate) August 31, 1999
Age: 66
John P. Evans Chief Executive Officer and Director of August 16, 1993
Age: 50 Associated Bank North (affiliate)
David J. Handy President, Chief Executive Officer, and Director May 31, 1991
Age: 60 of Associated Bank, National Association
(affiliate)
David G. Krill President, Chief Executive Officer, and Director November 3, 1997
Age: 57 of Associated Commercial Mortgage, Inc.
(subsidiary)
Prior to November 1997, Senior Vice President of
First Financial Bank (former affiliate)
Michael B. Mahlik Executive Vice President, Managing Trust Officer, January 1, 1991
Age: 47 and Director of Associated Bank, National
Association (affiliate)
George J. McCarthy President, Chief Executive Officer, and Director November 11, 1983
Age: 49 of Associated Bank Chicago (affiliate)
Mark J. McMullen Senior Executive Vice President and Director of June 2, 1981
Age: 51 Associated Bank Green Bay (affiliate)
Prior to July 1996, Executive Vice President and
Director of Associated Bank Green Bay (affiliate)
Randall J. Peterson President, Chief Executive Officer, and Director August 2, 1982
Age: 54 of Associated Bank Green Bay (affiliate)
From July 1996 to October 1998, President and
Director of Associated Bank Green Bay (affiliate)
Prior to July 1996, Executive Vice President and
Director of Associated Bank Green Bay (affiliate)
Gary L. Schaefer President and Director of Associated Bank South March 1, 1995
Age: 50 Central (affiliate)
Prior to March 1995, Senior Officer of a
Wisconsin bank
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NAME OFFICES AND POSITIONS HELD DATE OF ELECTION
Thomas R. Walsh President, Chief Executive Officer, and Director January 1, 1994
Age: 42 of Associated Bank Illinois (affiliate)
From January 1994 to November 12, 1998,
President, Chief Executive Officer, and Director
of Associated Bank Lakeshore (affiliate)
Gordon J. Weber President, Chief Executive Officer, and Director December 15, 1993
Age: 52 of Associated Bank Milwaukee (affiliate);
Director of Associated Bank South Central
(affiliate)
Scott A. Yeoman President, Chief Executive Officer, and Director October 1, 1994
Age: 42 of Associated Bank Lakeshore (affiliate)
From October 1, 1994, to September 15, 1998,
Senior Vice President of Associated Bank
Lakeshore (affiliate)
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information in response to this item is incorporated by reference to the table
"Market Information" on Page 74 and the discussion of dividend restrictions in
Note 12 "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,
$.01 par value, as of March 1, 2000, was 10,400. Certain of the Corporation's
shares are held in "nominee" or "street" name and, accordingly, the number of
beneficial owners of such shares is not known nor included in the foregoing
number.
Payment of future dividends is within the discretion of the Corporation's Board
of Directors and will depend, among other factors, on earnings, capital
requirements, and the operating and financial condition of the Corporation. At
the present time, the Corporation expects that dividends will continue to be
paid in the future.
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ITEM 6 SELECTED FINANCIAL DATA
TABLE 1: EARNINGS SUMMARY AND SELECTED FINANCIAL DATA
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
%
CHANGE
1998 TO
YEARS ENDED DECEMBER 31, 1999 1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Interest income $ 814,520 3.7% $ 785,765 $ 787,919 $ 731,763 $ 696,858 $ 613,725
Interest expense 418,775 1.9 411,028 411,637 375,922 360,499 292,735
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Net interest income 395,745 5.6 374,737 376,282 355,841 336,359 320,990
Provision for loan losses 19,243 30.5 14,740 31,668 13,695 14,029 9,035
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Net interest income after
provision for loan
losses 376,502 4.6 359,997 344,614 342,146 322,330 311,955
Noninterest income 165,906 (1.2) 167,928 94,854 115,265 104,989 84,155
Noninterest expense 305,092 3.4 294,962 323,200 292,222 252,927 245,310
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Income before income taxes
and extraordinary item 237,316 1.9 232,963 116,268 165,189 174,392 150,800
Income tax expense 72,373 (4.7) 75,943 63,909 57,487 62,381 54,203
Extraordinary item -- -- -- -- (686) -- --
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NET INCOME $ 164,943 5.0% $ 157,020 $ 52,359 $ 107,016 $ 112,011 $ 96,597
==============================================================================================
Basic earnings per
share(1):
Income before
extraordinary item $ 2.60 4.4% $ 2.49 $ 0.83 $ 1.70 $ 1.82 $ 1.59
Net income 2.60 4.4 2.49 0.83 1.69 1.82 1.59
Diluted earnings per
share(1):
Income before
extraordinary item 2.57 4.5 2.46 0.82 1.67 1.79 1.55
Net income 2.57 4.5 2.46 0.82 1.66 1.79 1.55
Cash dividends per share(1) 1.16 11.1 1.04 0.89 0.76 0.65 0.57
Weighted average shares
outstanding:
Basic 63,507 0.6 63,125 62,884 63,205 61,386 60,747
Diluted 64,061 0.4 63,789 63,935 64,380 62,473 62,144
SELECTED FINANCIAL DATA
Year-End Balances:
Loans (including loans held
for sale) $ 8,369,903 12.5% $ 7,437,867 $ 7,186,551 $6,697,404 $6,418,683 $5,995,964
Allowance for loan losses 113,196 13.6 99,677 92,731 71,767 68,560 65,774
Investment securities 3,255,535 12.0 2,907,735 2,940,218 2,753,938 2,266,895 2,499,380
Assets 12,519,902 11.3 11,250,667 10,690,442 10,120,413 9,393,609 9,130,522
Deposits 8,691,829 1.6 8,557,819 8,395,277 7,959,240 7,570,201 7,334,240
Long-term borrowings 24,283 (6.6) 26,004 15,270 33,329 36,907 94,537
Stockholders' equity 909,789 3.5 878,721 813,692 803,562 725,211 626,591
Book value per share(1) 14.40 3.1 13.97 12.92 12.81 11.75 10.27
----------------------------------------------------------------------------------------------
Average Balances:
Loans (including loans held
for sale) $ 7,801,435 7.5% $ 7,255,850 $ 6,959,018 $6,583,572 $6,157,655 $5,636,601
Investment securities 3,119,279 13.9 2,737,556 2,905,921 2,523,757 2,421,379 2,536,133
Assets 11,698,104 10.1 10,628,695 10,391,718 9,640,471 9,123,981 8,737,231
Deposits 8,631,652 2.4 8,430,701 8,121,945 7,778,177 7,409,409 7,191,053
Stockholders' equity 914,082 6.7 856,425 839,859 775,180 674,368 596,365
----------------------------------------------------------------------------------------------
Financial Ratios:
Return on average equity(2) 18.04% (29)bp 18.33% 16.93% 16.64% 17.21% 16.20%
Return on average assets(2) 1.41 (7) 1.48 1.37 1.35 1.27 1.11
Net interest margin
(tax-equivalent) 3.74 (5) 3.79 3.86 3.95 3.95 3.93
Average equity to average
assets 7.81 (25) 8.06 8.08 8.04 7.39 6.83
Dividend payout ratio(2)(3) 44.62 269 41.93 39.38 37.07 35.71 35.85
==============================================================================================
5-YEAR
COMPOUND
GROWTH
YEARS ENDED DECEMBER 31, RATE
- --------------------------- --------
Interest income 5.8%
Interest expense 7.4
--------
Net interest income 4.3
Provision for loan losses 16.3
--------
Net interest income after
provision for loan
losses 3.8
Noninterest income 14.5
Noninterest expense 4.5
--------
Income before income taxes
and extraordinary item 9.5
Income tax expense 6.0
Extraordinary item N/M
--------
NET INCOME 11.3%
========
Basic earnings per
share(1):
Income before
extraordinary item 10.3%
Net income 10.3
Diluted earnings per
share(1):
Income before
extraordinary item 10.6
Net income 10.6
Cash dividends per share(1) 15.3
Weighted average shares
outstanding:
Basic 0.9
Diluted 0.6
SELECTED FINANCIAL DATA
Year-End Balances:
Loans (including loans held
for sale) 6.9%
Allowance for loan losses 11.5
Investment securities 5.4
Assets 6.5
Deposits 3.5
Long-term borrowings (23.8)
Stockholders' equity 7.7
Book value per share(1) 7.0
--------
Average Balances:
Loans (including loans held
for sale) 6.7%
Investment securities 4.2
Assets 6.0
Deposits 3.7
Stockholders' equity 8.9
--------
Financial Ratios:
Return on average equity(2)
Return on average assets(2)
Net interest margin
(tax-equivalent)
Average equity to average
assets
Dividend payout ratio(2)(3)
========
(1) Per share data adjusted retroactively for stock splits and stock dividends.
(2) Ratio is based upon income prior to merger integration and other one-time
charges or extraordinary items for 1997, 1996, and 1995.
(3) Ratio is based upon basic earnings per share.
N/M = not meaningful
11
12
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 "Corporation"). It should be read in conjunction
with the consolidated financial statements and footnotes and the selected
financial data presented elsewhere in this report.
The financial discussion that follows refers 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. In particular, in
October 1997 the Corporation merged with First Financial Corporation ("FFC"),
the parent company of a $6.0 billion federally chartered thrift (First Financial
Bank or "FFB"). The transaction was accounted for as a pooling of interests, and
thus, all consolidated financial data was restated as though the entities had
been combined for the periods presented.
In addition, the following discussion will refer to "operating earnings,"
particularly for 1997 results. To arrive at operating earnings, reported results
of 1997 were adjusted by the following (no adjustments were necessary for 1999
or 1998). Performance ratios for 1997 are also calculated excluding these items.
- 1997 operating earnings exclude the merger, integration, and other
one-time charges ("merger-related charges") recorded by the Corporation
in conjunction with the merger of FFC of $103.7 million, or $89.8 million
after tax. This pre-tax charge includes a $35.3 million adjustment to
securities for other than temporary impairment, $16.8 million of
conforming provision for loan losses, and $51.6 million of merger,
integration, and other one-time charges. These charges reduced basic
earnings per share by $1.43 and diluted earnings per share by $1.41. See
Note 3 of the notes to consolidated financial statements for additional
detail.
PERFORMANCE SUMMARY
The Corporation recorded net income of $164.9 million for the year ended
December 31, 1999, an increase of $7.9 million or 5.0% over the $157.0 million
earned in 1998. Basic earnings per share were $2.60, a 4.4% increase over 1998
basic earnings per share of $2.49. Earnings per diluted share were $2.57, a 4.5%
increase over 1998 diluted earnings per share of $2.46. Return on average assets
and return on average equity were 1.41% and 18.04% for 1999, compared to 1.48%
and 18.33%, respectively, for 1998. Cash dividends paid in 1999 increased by
11.1% to $1.16 per share over the $1.04 per share paid in 1998. Key factors
behind these results were:
- Taxable equivalent net interest income was $409.4 million for 1999, up
$28.0 million or 7.3% over last year. Taxable equivalent interest income
increased by $35.7 million while interest expense increased $7.7 million.
The volume of average earning assets increased $892.6 million to $11.0
billion, which exceeded the $871.0 million increase in interest-bearing
liabilities. Increases in volume and changes in product mix added $35.0
million to taxable equivalent net interest income, whereas changes in the
rate environment resulted in a $7.0 million decline.
- Total loans and deposits were $8.4 billion and $8.7 billion,
respectively, at December 31, 1999, compared to $7.3 billion and $8.6
billion, respectively, at December 31, 1998. These increases were from
internal growth and acquisitions.
- Provision for loan losses increased to $19.2 million compared to $14.7
million in 1998. Net charge-offs increased $2.3 million, primarily due to
lower recoveries in 1999 than in 1998, and were 0.18% of average loans
compared to 0.16% in 1998. The ratio of allowance for loan losses to
loans was 1.35% and 1.37% at December 31, 1999 and 1998, respectively.
Nonperforming assets were $40.7 million, representing 0.32% of total
assets at year-end 1999, compared to $59.9 million, or 0.53% of total
assets last year.
- Noninterest income was $165.9 million for 1999, $2.0 million or 1.2%
lower than 1998. A primary component impacting this decline was mortgage
banking income, down $15.7 million in 1999 versus
12
13
1998, driven primarily by a 46% drop in secondary mortgage loan
production (particularly refinancing activity) in response to the rising
interest rate environment in 1999 compared to 1998. Gains on the sale of
assets and investment securities were $6.0 million lower than the $14.0
million recorded in 1998. Excluding mortgage banking income and gains on
asset and investment securities sales, noninterest income increased by
$19.7 million or 18.2% in 1999, with increases in most other categories.
- Noninterest expense increased $10.1 million or 3.4% over 1998. Most
categories of noninterest expense increased due to the acquisitions,
which added $16.7 million. Partially offsetting the increases were
decreases in MSR amortization and professional fees.
- Income tax expense decreased to $72.3 million, down $3.6 million from
1998. The 1999 effective tax rate was 30.50% or 210 bp lower than the
32.6% rate for 1998, due primarily to the tax benefit of increased
municipal securities and BOLI revenue, and the use of tax loss
carryforwards.
BUSINESS COMBINATIONS
During 1999, the Corporation acquired $591 million in assets through three
acquisition transactions. All were accounted for under the purchase method, and
therefore the financial position and results of operations of each entity were
included in the consolidated financial statements as of the consummation date of
each transaction. Due to the timing of the December 31, 1998, purchase
acquisition of Citizens Bankshares, Inc. ("Citizens"), 1998 results included
Citizens' financial position in the consolidated balance sheet, but did not
include any operational results in the consolidated income statement for 1998.
The Corporation's business combination activity is further summarized in Note 2
of the notes to consolidated financial statements. Share repurchase activity is
described under section "Capital."
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
Net interest income is the primary source of the Corporation's revenue. Net
interest income is the difference between interest income on earning assets
("EAs"), such as loans and securities, and the interest expense on
interest-bearing deposits and other borrowings, used to fund those assets. The
amount of net interest income is affected by changes in interest rates and by
the amount and composition of EAs and interest-bearing liabilities ("IBLs").
Interest rate spread and net interest margin are utilized to measure and explain
changes in net interest income. Interest rate spread is the difference between
the yield on EAs and the rate paid for IBLs that fund those assets. The net
interest margin is expressed as the percentage of net interest income to average
EAs. The net interest margin exceeds the interest rate spread because
noninterest-bearing sources of funds (net free funds), principally demand
deposits and stockholders' equity, also support EAs. To compare tax-exempt asset
yields to taxable yields, the yield on tax-exempt loans and securities is
computed on a fully taxable equivalent ("FTE") basis using a tax rate of 35%.
Net interest income, interest rate spread, and net interest margin are presented
and discussed below on an FTE basis.
Table 2 provides average balances of EAs and IBLs, the associated interest
income and expense, and the corresponding interest rates earned and paid, as
well as net interest income, interest rate spread, and net interest margin on an
FTE basis for the three years ended December 31, 1999. Tables 3 through 5
present additional information to facilitate the review and discussion of net
interest income, interest rate spread, and net interest margin.
FTE net interest income was $409.4 million for 1999, an increase of $28.0
million or 7.3% over 1998. A higher level of EAs, partially offset by a lower
net interest margin, led to the increase in 1999. Citizens and the 1999
acquisitions, net of the cost to fund them, accounted for $20.0 million of the
increase in FTE net interest income.
FTE interest income increased by $35.7 million while interest expense increased
$7.7 million. The volume of average EAs increased $893 million which exceeded
the $871 million increase in interest-bearing liabilities. Increases in volume
and changes in mix added $35.0 million to FTE net interest income, whereas
changes in the rate environment resulted in a $7.0 million decline. See Table 3
for rate/volume analysis.
13
14
For 1999, the yield on EAs declined 32 basis points, lowering interest earned by
$33.0 million (with loans accounting for $21.3 million of the decrease), and the
cost of interest-bearing liabilities fell 35 bp, improving FTE net interest
income by $26.0 million (with interest-bearing deposits accounting for $22.7
million), for a net decline of $7.0 million in FTE net interest income.
In combination, the growth and composition change of EAs contributed an
additional $68.7 million to FTE net interest income, while the growth and
composition of IBLs cost an additional $33.7 million, netting a $35.0 million
increase to FTE net interest income.
The net interest margin was 3.74% in 1999, compared to 3.79% in 1998. The
decline in net interest margin was due to the combination of a lower yield on
EAs, the reliance on higher-cost borrowed funds to support loan growth, and a
lower contribution from net free funds. In addition, the lower margin reflects
the cost of funding the Corporation's share repurchases during 1999 and the
purchase of an additional $100 million in bank owned life insurance ("BOLI") (a
non-interest earning asset).
Consistent with industry trends, the Corporation's net interest margin has been
narrowing. That trend is a reflection of heightened price competition for
traditional loan and deposit products. Recent increases in short-term interest
rates by the Federal Reserve also pressured the Corporation's net interest
margin.
Average EAs were $11.0 billion in 1999, an increase of $893 million, or 8.9%,
from 1998. On average, the acquisitions contributed approximately $432 million
to this increase. Loan production accounted for the majority of the growth in
EAs. Average loans in 1999 were $7.8 billion in 1999, up $546 million or 7.5%
compared to 1998 (up 3.4% excluding acquisitions). During 1999, the Corporation
focused on shifting the composition of its loan portfolio, especially in growing
the proportion of commercial loans, which represented 30.9% of average EAs for
1999 compared to 26.5% for 1998.
Average IBLs were $9.7 billion in 1999, an increase of $870 million, or 9.9%,
from 1998. Although the Corporation has been successful in attracting new
noninterest-bearing demand deposits, loan growth outpaced deposits, increasing
the Corporation's reliance on wholesale funding sources. The mix of IBLs shifted
from lower-rate deposits (average interest-bearing deposits decreased to
represent 79.0% of average IBLs for 1999 compared to 86.3% for 1998, costing
4.12% or 43 bp less than last year) to higher cost wholesale funding, costing
5.15% (30 bp lower than last year).
14
15
TABLE 2: AVERAGE BALANCES AND INTEREST RATES (INTEREST AND RATES ON A
TAX-EQUIVALENT BASIS)
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------------------------------------
($ IN THOUSANDS)
ASSETS
Earning assets:
Loans (1)(2)(3) $ 7,801,435 $626,444 8.03% $ 7,255,850 $603,423 8.32%
Investment securities:
Taxable 2,597,116 163,732 6.30 2,500,470 168,536 6.74
Tax exempt(1) 522,163 36,201 6.93 237,086 17,028 7.18
Interest-bearing deposits in
other financial institutions 9,083 454 4.99 31,283 1,679 5.37
Federal funds sold and securities
purchased under agreements to
resell 25,027 1,352 5.40 37,493 1,800 4.81
-------------------------------------------------------------------
Total earning assets $10,954,824 $828,183 7.56% $10,062,182 $792,466 7.88%
-------------------------------------------------------------------
Allowance for loan losses (105,488) (92,175)
Cash and due from banks 263,288 246,596
Other assets 585,480 412,092
-------------------------------------------------------------------
Total assets $11,698,104 $10,628,695
===================================================================
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
Savings deposits $ 919,163 $ 14,998 1.63% $ 981,630 $ 20,812 2.12%
NOW deposits 796,506 10,645 1.34 473,123 8,212 1.74
Money market deposits 1,373,010 52,478 3.82 1,377,503 45,430 3.30
Time deposits 4,539,286 235,954 5.20 4,753,959 270,938 5.70
-------------------------------------------------------------------
Total interest-bearing
deposits 7,627,965 314,075 4.12 7,586,215 345,392 4.55
Federal funds purchased and
securities sold under
agreements to repurchase 1,057,269 52,843 5.00 517,344 26,174 5.06
Other short-term borrowings 951,524 50,214 5.28 660,761 37,600 5.69
Long-term debt 24,644 1,643 6.67 27,055 1,862 6.88
-------------------------------------------------------------------
Total interest-bearing
liabilities $ 9,661,402 $418,775 4.33% $ 8,791,375 $411,028 4.68%
-------------------------------------------------------------------
Demand deposits 1,003,687 844,486
Accrued expenses and other
liabilities 118,933 136,409
Stockholders' equity 914,082 856,425
-------------------------------------------------------------------
Total liabilities and
stockholders' equity $11,698,104 $10,628,695
===================================================================
Net interest income and rate
spread (1) $409,408 3.23% $381,438 3.20%
===================================================================
Net interest margin (1) 3.74% 3.79%
===================================================================
Taxable equivalent adjustment $ 13,663 $ 6,701
===================================================================
YEARS ENDED DECEMBER 31,
--------------------------------
1997
--------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
--------------------------------
($ IN THOUSANDS)
ASSETS
Earning assets:
Loans (1)(2)(3) $ 6,959,018 $593,660 8.53%
Investment securities:
Taxable 2,725,539 184,230 6.76
Tax exempt(1) 180,382 13,926 7.72
Interest-bearing deposits in
other financial institutions 15,347 779 5.08
Federal funds sold and securities
purchased under agreements to
resell 16,238 999 6.16
--------------------------------
Total earning assets $ 9,896,524 $793,594 8.02%
--------------------------------
Allowance for loan losses (73,748)
Cash and due from banks 229,006
Other assets 339,936
--------------------------------
Total assets $10,391,718
================================
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
Savings deposits $ 1,047,098 $ 24,100 2.30%
NOW deposits 402,717 7,726 1.92
Money market deposits 1,238,073 38,529 3.11
Time deposits 4,692,333 267,088 5.69
--------------------------------
Total interest-bearing
deposits 7,380,221 337,443 4.57
Federal funds purchased and
securities sold under
agreements to repurchase 538,097 29,046 5.40
Other short-term borrowings 749,803 43,463 5.80
Long-term debt 26,929 1,685 6.26
--------------------------------
Total interest-bearing
liabilities $ 8,695,050 $411,637 4.73%
--------------------------------
Demand deposits 741,724
Accrued expenses and other
liabilities 115,085
Stockholders' equity 839,859
--------------------------------
Total liabilities and
stockholders' equity $10,391,718
================================
Net interest income and rate
spread (1) $381,957 3.29%
================================
Net interest margin (1) 3.86%
================================
Taxable equivalent adjustment $ 5,675
================================
(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
16
TABLE 3: RATE/VOLUME ANALYSIS(1)
1999 COMPARED TO 1998 1998 COMPARED TO 1997
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------------------------------------------------------
VOLUME RATE NET VOLUME RATE NET
------------------------------------------------------------------------------
(IN THOUSANDS)
Interest income:
Loans(2) $ 44,304 $(21,283) $ 23,021 $ 24,921 $(15,158) $ 9,763
Investment securities:
Taxable 6,356 (11,160) (4,804) (15,170) (524) (15,694)
Tax-exempt(2) 19,783 (610) 19,173 4,127 (1,025) 3,102
Interest-bearing deposits in other financial
institutions (1,116) (109) (1,225) 853 47 900
Federal funds sold and securities purchased
under agreements to resell (652) 204 (448) 1,062 (261) 801
------------------------------------------------------------------------------
Total earning assets(2) $ 68,675 $(32,958) $ 35,717 $ 15,793 $(16,921) $ (1,128)
------------------------------------------------------------------------------
Interest expense:
Savings deposits $ (1,258) $ (4,556) $ (5,814) $ (1,454) $ (1,834) $ (3,288)
NOW deposits 4,648 (2,215) 2,433 1,267 (781) 486
Money market deposits (149) 7,197 7,048 4,508 2,393 6,901
Time deposits (11,870) (23,114) (34,984) 3,511 339 3,850
Total interest-bearing deposits (8,629) (22,688) (31,317) 7,832 117 7,949
Federal funds purchased and securities sold
under agreements to repurchase 26,989 (320) 26,669 (1,094) (1,778) (2,872)
Other short-term borrowings 15,515 (2,901) 12,614 (5,079) (784) (5,863)
Long-term debt (162) (57) (219) 8 169 177
------------------------------------------------------------------------------
Total interest-bearing liabilities $ 33,713 $(25,966) $ 7,747 $ 1,667 $ (2,276) $ (609)
------------------------------------------------------------------------------
Net interest income(2) $ 34,962 $ (6,992) $ 27,970 $ 14,126 $(14,645) $ (519)
==============================================================================
(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)
1999 AVERAGE 1998 AVERAGE 1997 AVERAGE
--------------------------------------------------------------------------------------
% OF % OF
EARNING YIELD/ EARNING YIELD/
BALANCE ASSETS RATE BALANCE ASSETS RATE BALANCE
--------------------------------------------------------------------------------------
($ IN THOUSANDS)
Earning assets $10,954,824 100.0% 7.56% $10,062,182 100.0% 7.88% $9,896,524
--------------------------------------------------------------------------------------
Financed by:
Interest-bearing funds 9,661,402 88.2% 4.33% 8,791,375 87.4% 4.68% 8,695,050
Noninterest-bearing funds 1,293,422 11.8% 1,270,807 12.6% 1,201,474
--------------------------------------------------------------------------------------
Total funds sources $10,954,824 100.0% 3.82% $10,062,182 100.0% 4.09% $9,896,524
======================================================================================
Interest rate spread 3.23% 3.20%
Contribution from net free funds .51% .59%
----- -----
Net interest margin 3.74% 3.79%
======================================================================================
Average prime rate* 8.00% 8.35%
Average fed funds rate* 4.95% 5.36%
Average spread 305BP 299BP
======================================================================================
1997 AVERAGE
---------------------
% OF
EARNING YIELD/
ASSETS RATE
---------------------
($ IN THOUSANDS)
Earning assets 100.0% 8.02%
---------------------
Financed by:
Interest-bearing funds 87.9% 4.73%
Noninterest-bearing funds 12.1%
---------------------
Total funds sources 100.0% 4.16%
=====================
Interest rate spread 3.29%
Contribution from net free funds .57%
-----
Net interest margin 3.86%
=====================
Average prime rate* 8.44%
Average fed funds rate* 5.46%
Average spread 298BP
=====================
* Source: Bloomberg
16
17
TABLE 5: SELECTED AVERAGE BALANCES
PERCENT 1999 AS % OF 1998 AS % OF
1999 1998 CHANGE TOTAL ASSETS TOTAL ASSETS
---------------------------------------------------------------------
($ IN THOUSANDS)
ASSETS
Loans $ 7,801,435 $ 7,255,850 7.5% 66.7% 68.3%
Investment securities
Taxable 2,597,116 2,500,470 3.9 22.2 23.5
Tax-exempt 522,163 237,086 120.2 4.4 2.2
Interest-bearing deposits in other
financial institutions 9,083 31,283 (71.0) 0.1 0.3
Federal funds sold and securities
purchased under agreements to
resell 25,027 37,493 (33.2) 0.2 0.4
---------------------------------------------------------------------
Total earning assets 10,954,824 10,062,182 8.9 93.6 94.7
Other assets 743,280 566,513 31.2 6.4 5.3
---------------------------------------------------------------------
Total assets $11,698,104 $10,628,695 10.1% 100.0% 100.0%
=====================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing deposits $ 7,627,965 $ 7,586,215 0.6% 65.2% 71.4%
Short-term borrowings 2,008,793 1,178,105 70.5 17.2 11.1
Long-term debt 24,644 27,055 (8.9) 0.2 0.2
---------------------------------------------------------------------
Total interest-bearing liabilities 9,661,402 8,791,375 9.9 82.6 82.7
Demand deposits 1,003,687 844,486 18.9 8.6 7.9
Accrued expenses and other
liabilities 118,933 136,409 (12.8) 1.0 1.3
Stockholders' equity 914,082 856,425 6.7 7.8 8.1
---------------------------------------------------------------------
Total liabilities and stockholders'
equity $11,698,104 $10,628,695 10.1% 100.0% 100.0%
=====================================================================
PROVISION FOR LOAN LOSSES
The provision for loan losses ("PFLL") in 1999 was $19.2 million. In comparison,
the PFLL for 1998 was $14.7 million, and $14.9 million for 1997, excluding the
$16.8 million additional provision to conform FFC with the policies, practices,
and procedures of the Corporation. The PFLL is a function of the methodology
used to determine the adequacy of the allowance for loan losses. The ratio of
the allowance for loan losses to total loans was 1.35%, down slightly from 1.37%
at December 31, 1998, and up from 1.31% at December 31, 1997. See additional
discussion under section, "Allowance for Loan Losses."
NONINTEREST INCOME
Noninterest income ("NII") was $165.9 million for 1999, $2.0 million or 1.2%
lower than 1998. As a percent of total revenue (net interest income plus
noninterest income), NII declined to 29.5% in 1999, compared to 30.9% in 1998.
The primary component impacting this decline was mortgage banking income, which
decreased $15.7 million in 1999, as discussed below. Gains on the sale of assets
and investment securities were $6.0 million lower than the $14.0 million
recorded in 1998. Excluding mortgage banking income and gains on asset and
investment securities sales, NII increased by $19.7 million or 18.2% in 1999, of
which the acquisitions contributed approximately $3.4 million.
17
18
TABLE 6: NONINTEREST INCOME
% CHANGE
FROM PRIOR
YEARS ENDED DECEMBER 31, YEAR
----------------------------------------------------
1999 1998 1997 1999 1998
-------- -------- -------- ----- -----
($ IN THOUSANDS)
Trust service fees $ 37,996 $ 33,328 $ 28,764 14.0% 15.9%
Service charges on deposit accounts 29,584 27,464 27,909 7.7 (1.6)
Mortgage banking income 30,417 46,105 25,685 (34.0) 79.5
Credit card and other nondeposit fees 20,763 17,514 15,728 18.6 11.4
Retail commission income 18,372 14,823 15,444 23.9 (4.0)
Asset sale gains, net 4,977 7,166 852 (30.5) 741.1
Other 20,771 14,697 13,248 41.3 10.9
----------------------------------------------------
Subtotal 162,880 161,097 127,630 1.1% 26.2%
Investment securities gains, net * 3,026 6,831 2,514 (55.7) 171.7
Merger, integration, and other one-time
charges -- -- (35,290) -- N/M
Total noninterest income $165,906 $167,928 $ 94,854 (1.2)% 77.0%
====================================================
Subtotal, excluding asset sale gains $157,903 $153,931 $126,778 2.6% 21.4%
Subtotal, excluding asset sale gains and
mortgage banking income 127,486 107,826 101,093 18.2 6.7
====================================================
* Excludes the $35.3 million shown on the merger, integration, and other
one-time charges line.
N/M = not meaningful
Trust service fees for 1999 were $38.0 million, a $4.7 million or 14.0% increase
over last year. The increase was a function of continued improvement in trust
business volume and growth in assets under management. Trust assets under
management totaled $5.2 billion and $4.9 billion at December 31, 1999 and 1998,
respectively.
Service charges on deposits were $29.6 million, $2.1 million higher than 1998
due to mid-year increases and changes in NSF and other service charges, and
initiatives to reduce the volume of service charges waived.
Mortgage banking income consists of servicing fees, the gain or loss on sale of
mortgage loans to the secondary market, and production-related revenue
(origination, underwriting, and escrow waiver fees). Mortgage banking income was
$30.4 million in 1999, a decrease of $15.7 million or 34.0% from 1998. The
decrease was driven primarily by a 46% drop in secondary mortgage loan
production (particularly refinancing activity) in response to the rising
interest rate environment in 1999 compared to 1998. The lower production levels
adversely impacted gains on sales of mortgages (down $13.1 million or 54%) and
volume related fees (down $2.3 million or 36%). Despite an increase in the
portfolio of loans serviced for others ($5.6 billion at December 31, 1999, up
6.8% from $5.2 billion at year-end 1998), servicing fees decreased $0.3 million
between the years, as the mix of the servicing portfolio has changed and higher
servicing spread business has paid off during 1999.
Credit card and other nondeposit fees were $20.8 million for 1999, an increase
of $3.2 million or 18.6% over 1998. Credit cards and home equity line fees
accounted for $2.7 million of the increase, attributable in part to higher
merchant processing revenue.
Retail commission income (which includes commissions from insurance and
brokerage product sales) was up $3.5 million or 23.9% due to a stronger stock
market environment in 1999 compared to 1998 and growth in annuity sales. The
majority of the increase ($2.2 million) was attributable to brokerage product
sales.
Asset sale gains for 1999 were $5.0 million, of which $4.6 million was
attributable to the net premium on deposits on three branches sold. Asset sale
gains in 1998 of $7.2 million included a $2.8 million gain on the sale of a
branch building in Illinois and a $3.0 million gain on the sale of an affinity
credit card portfolio.
18
19
Other NII was $20.8 million for 1999, up $6.1 million from 1998, primarily
attributable to BOLI income, which increased $8.3 million to $9.5 million in
1999. The Corporation made a $100 million investment in BOLI in October 1998 and
an additional $100 million investment in May 1999.
Investment securities gains for 1999 were $3.0 million, primarily due to a $3.6
million gain on the sale of a certain agency security further described in Note
5 of the notes to consolidated financial statements. Investment securities gains
for 1998 were $6.8 million, of which $5.1 million was related to certain zero-
coupon bond related transactions, further described under section "Interest Rate
Risk" and Note 15 of the notes to consolidated financial statements.
NONINTEREST EXPENSE
Total noninterest expense ("NIE") for 1999 was $305.1 million, a $10.1 million
or 3.4% increase over 1998 NIE. Citizens and the 1999 acquisitions added
approximately $16.7 million to NIE. The amortization of mortgage servicing
rights ("MSRs"), decreased $12.2 million, principally due to lower valuation
reserves during 1999. Excluding the acquisitions and the amortization of MSRs,
NIE increased $5.6 million or 2.0% over 1998.
TABLE 7: NONINTEREST EXPENSE
% CHANGE
FROM PRIOR
YEARS ENDED DECEMBER 31, YEAR
-------------------------------------------------
1999 1998 1997 1999 1998
-------- -------- -------- ----- -----
($ IN THOUSANDS)
Salaries and employee benefits $151,644 $148,490 $134,319 2.1% 10.6%
Occupancy 22,576 20,205 19,873 11.7 1.7
Equipment 15,987 13,250 12,600 20.7 5.2
Data processing 21,695 18,714 16,928 15.9 10.6
Business development and advertising 11,919 13,177 15,936 (9.5) (17.3)
Stationery and supplies 8,110 6,858 5,532 18.3 24.0
FDIC expense 3,313 3,267 3,284 1.4 (0.5)
Professional fees 7,117 9,709 6,294 (26.7) 54.3
Other 62,731 61,292 56,812 2.3 7.9
-------------------------------------------------
Total noninterest expense (operating) 305,092 294,962 271,578 3.4 8.6
Merger, integration, and other one-time
charges -- -- 51,622 -- N/M
-------------------------------------------------
Total noninterest expense $305,092 $294,962 $323,200 3.4% (8.7)%
=================================================
N/M = not meaningful
Salaries and employee benefits increased $3.2 million or 2.1% over 1998, and
represented 49.7% of total NIE in 1999 compared to 50.3% in 1998. Salary expense
increased $5.5 million or 4.6% in 1999, principally due to the acquisitions and
base merit increases between the years. Fringe benefits decreased $2.3 million
in 1999, the net result of a $7.7 million reduction in profit sharing expense
offset in part by rising costs of health, dental, life, and other fringe
benefits (up $5.4 million or 25.6%). Full-time equivalent employees ("FTEs")
from year-end 1998 to 1999 included the addition of 294 FTEs from acquisitions.
Despite this, total FTEs of 3,966 at year-end 1999 were essentially the same as
the 3,965 FTEs at December 31, 1998. FTEs were reduced throughout the year
primarily in operational areas as centralization of processes and other
operational-related synergies were achieved.
The 1999 acquisitions added a total of $8.1 million to non-personnel related NIE
categories. In addition, occupancy expense was impacted by higher costs of
contract help and rent, equipment expenses rose due to computer upgrades, and
data processing costs increased due to higher processing volumes and expenses
associated with Year 2000 and internet software. Stationery and supplies also
experienced increases largely due to acquisition-related stationery and office
supplies costs.
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20
Business development and advertising declined $1.3 million in 1999 compared to
1998 as a result of a corporate objective to closely manage these costs.
Professional fees were also lower, down $2.6 million over 1998, due principally
to the completion of Year 2000 consultant work.
MSR amortization (which includes the amortization of the MSR asset and increases
or decreases to the valuation allowance associated with the MSR asset) is
included in other noninterest expense. MSR amortization decreased by $12.2
million between 1999 and 1998, predominantly driven by the valuation adjustment
(see Note 7 of the notes to consolidated financial statements). This decrease
was offset by increases in loan expenses (especially in credit cards and home
equity lines as volume in these lines has grown), office expense, intangible
amortization, and losses other than loans. The 1999 acquisitions accounted for
$4.3 million of the increase in other expense.
INCOME TAXES
Income tax expense for 1999 was $72.4 million, down $3.6 million from 1998
income tax expense of $75.9 million. The Corporation's effective tax rate
(income tax expense divided by income before taxes) was 30.5% in 1999 compared
to 32.6% in 1998. This decrease is primarily the result of the tax benefit of
increased municipal securities and BOLI revenue, and the utilization of tax loss
carryforwards.
BALANCE SHEET ANALYSIS
LOANS
Total loans, including loans held for sale, increased by $932 million, or 12.5%,
to $8.4 billion at the end of 1999, with the acquisitions accounting for $412
million of the loan growth. Commercial, financial, and agricultural lending grew
by $450 million and commercial real estate (a component of real estate mortgage
loans) grew by $519 million. Combined, these commercial loan categories
increased $969 million, or 41.3%, to $3.3 billion and represented 40% of total
loans at the end of 1999, up from 32% at year-end 1998. Increasing the mix of
commercial lending was a strategic initiative of 1999.
TABLE 8: LOAN COMPOSITION
AS OF DECEMBER 31,
----------------------------------------------------------------------------
1999 1998 1997 1996
----------------------------------------------------------------------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT
----------------------------------------------------------------------------
($ IN THOUSANDS)
Commercial, financial, and
agricultural $1,412,338 17% $ 962,208 13% $ 986,839 14% $ 841,145
Real estate--construction 560,450 7 461,157 6 335,978 5 235,478
Real estate--mortgage 5,613,780 67 5,244,440 71 5,056,238 70 4,796,457
Installment loans to
individuals 760,106 9 750,831 10 793,424 11 813,875
Lease financing 23,229 -- 19,231 -- 14,072 -- 10,449
----------------------------------------------------------------------------
Total loans (including
loans held for sale) $8,369,903 100% $7,437,867 100% $7,186,551 100% $6,697,404
============================================================================
AS OF DECEMBER 31,
---------------------------
1996 1995
---------------------------
% OF % OF
TOTAL AMOUNT TOTAL
---------------------------
($ IN THOUSANDS)
Commercial, financial, and
agricultural 13% $ 801,004 13%
Real estate--construction 3 217,223 3
Real estate--mortgage 72 4,569,362 71
Installment loans to
individuals 12 821,351 13
Lease financing -- 9,743 --
---------------------------
Total loans (including
loans held for sale) 100% $6,418,683 100%
===========================
Real estate-mortgage loans totaled $5.6 billion at the end of 1999 and $5.2
billion at the end of 1998. Loans in this classification in 1999 include two
broad loan types: (1) commercial real estate (discussed below) and (2)
residential real estate, which consists of conventional home mortgages, home
equity lines, second mortgages, and mortgage loans held for sale. Residential
real estate loans generally limit the maximum loan to 75%-80% of collateral
value. Residential real estate loans were $3.7 billion at December 31, 1999,
down $150 million or 3.9% compared to last year. Mortgage loans held for sale
decreased by $153 million, to $12 million at year-end 1999, a function of a 46%
drop in secondary mortgage loan production (particularly refinancing activity)
in response to the rising rate environment in 1999 compared to 1998. The home
equity line grew by $77 million,
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21
or 23.1%, to $409 million in 1999, in response to promotional efforts in 1999.
Other residential real estate loans were down by $74 million.
Commercial real estate (included in the real estate-mortgage classification in
Table 8) includes loans secured by farmland, multifamily properties, and
nonfarm/nonresidential real estate properties. Commercial real estate totaled
$1.9 billion at December 31, 1999, up $519 million or 37.5% over last year and
comprised 23% of total loans outstanding versus 19% at year-end 1998. Commercial
real estate loans involve borrower characteristics similar to those discussed
below for commercial loans and real estate-construction projects. Loans of this
type are mainly for business and industrial properties, multi-family properties,
community purpose properties, and similar properties. Loans are primarily made
to borrowers in Wisconsin, Illinois, and Minnesota. Credit risk is managed in a
similar manner to commercial loans and real estate construction by employing
sound underwriting guidelines, lending to borrowers in known markets and
businesses, and formally reviewing the borrower's financial soundness and
relationship on an ongoing basis.
Commercial, financial, and agricultural loans were $1.4 billion at the end of
1999, up $450 million or 46.8% since year-end 1998, and comprised 17% of total
loans outstanding, up from 13% at the end of 1998. Acquisitions accounted for
approximately $315 million of the increase since year-end 1998. The commercial,
financial, and agricultural loan classification primarily consists of commercial
loans to middle market companies and small businesses. Loans of this type are in
a broad range of industries. The credit risk related to commercial loans is
largely influenced by general economic conditions and the resulting impact on a
borrower's operations. Within commercial, financial, and agricultural
classification at December 31, 1999, loans to finance agricultural production
total $23.1 million or 0.3% of total loans.
Real estate construction loans grew $99 million or 21.5% to $560 million,
representing 7% of the total loan portfolio at the end of 1999, compared to $461
million or 6% at the end of 1998. Loans in this classification are primarily
short-term interim loans that provide financing for the acquisition or
development of commercial real estate, such as multi-family or other commercial
development projects. Real estate construction loans are made to developers and
project managers who are well known to the Corporation, have prior successful
project experience, and are well capitalized. Projects undertaken by these
developers are carefully reviewed by the Corporation to ensure that they are
economically viable. Loans of this type are primarily made in the Corporation's
tri-state market in which the Corporation has a thorough knowledge of the local
market economy. The credit risk associated with real estate construction loans
is generally confined to specific geographic areas. The Corporation controls the
credit risk on these types of loans by making loans in familiar markets to
developers, underwriting the loans to meet the requirements of institutional
investors in the secondary market, reviewing the merits of individual projects,
controlling loan structure, and monitoring project progress and construction
advances.
TABLE 9: LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY (1)
MATURITY (2)
-------------------------------------------------------------
DECEMBER 31, 1999 WITHIN 1 YEAR 1-5 YEARS AFTER 5 YEARS TOTAL
----------------- ------------- --------- ------------- --------------
($ IN THOUSANDS)
Commercial, financial, and agricultural $ 994,007 $358,168 $60,163 $1,412,338
Real estate-construction 316,410 204,735 39,305 560,450
-------------------------------------------------------------
Total $1,310,417 $562,903 $99,468 $1,972,788
=============================================================
Fixed rate $ 411,521 $490,883 $81,559 $ 983,963
Floating or adjustable rate 898,896 72,020 17,909 988,825
-------------------------------------------------------------
Total $1,310,417 $562,903 $99,468 $1,972,788
=============================================================
Percent 66% 29% 5% 100%
(1) Based upon scheduled principal repayments.
(2) Demand loans, past due loans, and overdrafts are reported in the "Within 1
Year" category.
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22
Installment loans to individuals totaled $760 million, up $9 million or 1%
compared to 1998. Installment loans include short-term installment loans, direct
and indirect automobile loans, recreational vehicle loans, credit card loans,
student loans, and other personal loans. Individual borrowers may be required to
provide related collateral or a satisfactory endorsement or guaranty from
another person, depending on the specific type of loan and the creditworthiness
of the borrower. Credit risk for these types of loans is generally greatly
influenced by general economic conditions, the characteristics of individual
borrowers, and the nature of the loan collateral. Credit risk is primarily
controlled by reviewing the creditworthiness of the borrowers as well as taking
appropriate collateral and guaranty positions on such loans.
An active credit risk management process is used for commercial loans to ensure
that sound and consistent credit decisions are made. Credit risk is controlled
by detailed underwriting procedures, comprehensive loan administration, and
periodic review of borrowers' outstanding loans and commitments. Borrower
relationships are formally reviewed on an ongoing basis for early identification
of potential problems. Further analyses by customer, industry, and geographic
location are performed to monitor trends, financial performance, and
concentrations.
Factors that are critical to managing overall credit quality are sound loan
underwriting and administration, systematic monitoring of existing loans and
commitments, effective loan review on an ongoing basis, early identification of
potential problems, an adequate allowance for loan losses, and sound nonaccrual
and charge-off policies.
The loan portfolio is widely diversified by types of borrowers, industry groups,
and market areas. Significant loan concentrations are considered to exist for a
financial institution when there are amounts loaned to numerous borrowers
engaged in similar activities that would cause them to be similarly impacted by
economic or other conditions. At December 31, 1999, no concentrations existed in
the Corporation's portfolio in excess of 10% of total loans (excluding loans
held for sale) or $836 million.
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 ongoing 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, 1999, the allowance for loan losses ("AFLL") was $113.2 million,
compared to $99.7 million last year. Of this $13.5 million increase, $8.0
million of AFLL was acquired in the 1999 purchase acquisitions. The loan
portfolios of the acquired entities were predominantly comprised of commercial
loans. As of year-end 1999, the AFLL to total loans was 1.35% and covered 307%
of nonperforming loans, compared to 1.37% and 185%, respectively, at December
31, 1998. Tables 10 and 11 provide additional information regarding activity in
the AFLL.
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TABLE 10: LOAN LOSS EXPERIENCE
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
($ IN THOUSANDS)
AFLL at beginning of year $ 99,677 $92,731 $71,767 $68,560 $65,774
Balance related to acquisitions 8,016 3,636 728 3,511 --
Provision for loan losses (PFLL) 19,243 14,740 31,668 13,695 14,029
Loans charged off:
Commercial, financial, and agricultural 2,222 3,533 1,327 2,916 3,356
Real estate - construction -- 202 600 193 191
Real estate - mortgage 3,472 3,256 3,222 2,813 3,099
Installment loans to individuals 10,925 9,839 9,900 11,693 9,221
Lease financing 2 209 -- 1 5
------------------------------------------------------------
Total loans charged off 16,621 17,039 15,049 17,616 15,872
Recoveries of loans previously charged off:
Commercial, financial, and agricultural 726 2,384 513 1,255 1,856
Real estate - construction 1 -- -- 3 70
Real estate - mortgage 655 1,582 1,312 837 931
Installment loans to individuals 1,464 1,641 1,792 1,514 1,764
Lease financing 35 2 -- 8 8
------------------------------------------------------------
Total recoveries 2,881 5,609 3,617 3,617 4,629
------------------------------------------------------------
Net loans charged off (NCOs) 13,740 11,430 11,432 13,999 11,243
------------------------------------------------------------
AFLL, at end of year $113,196 $99,677 $92,731 $71,767 $68,560
============================================================
Ratio of AFLL to NCOs 8.2 8.7 8.1 5.1 6.1
Ratio of NCOs to average loans outstanding .18% .16% .16% .21% .18%
Ratio of AFLL to total loans at end of
period 1.35% 1.37% 1.31% 1.08% 1.12%
============================================================
The AFLL represents management's estimate of an amount adequate to provide for
losses inherent in the loan portfolio. Management's evaluation of the adequacy
of the AFLL is based on management's ongoing review and grading of the loan
portfolio, consideration of past loan loss experience, trends in past due and
nonperforming loans, risk characteristics of the various classifications of
loans, current economic conditions, the fair value of underlying collateral, and
other factors which could affect credit losses, such as Year 2000 issues related
to significant borrowers.
In general, the change in the AFLL is a function of a number of factors. First,
total loan growth from year-end 1998 to 1999 was up 9.3%, excluding the 1999
purchase acquisitions. The growth was strongest in the commercial portfolio
(particularly commercial real estate; commercial, financial, and agricultural
loans; and construction loans), up 24.5% net of the 1999 purchase acquisitions.
This segment of the loan portfolio carries greater inherent credit risk
(described under section "Loans"). Net charge-offs have increased, up $2.3
million to $13.7 million for 1999 versus $11.4 million for 1998, primarily from
1999 recoveries being $2.7 million lower than 1998.
The allocation of the Corporation's AFLL for the last five years is shown in
Table 11. The allocation methodology applied by the Corporation, designed to
assess the adequacy of the AFLL, focuses on changes in the size and character of
the loan portfolio, changes in levels of impaired and other nonperforming loans,
the risk inherent in specific loans, concentrations of loans to specific
borrowers or industries, existing economic conditions, and historical losses on
each portfolio category. The indirect risk in the form of off-balance sheet
unfunded commitments is also taken into consideration. Management continues to
target and maintain the AFLL equal to the allocation methodology plus an
unallocated portion, as determined by economic conditions and emerging systemic
factors 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 AFLL for credit losses by pools of
risk. The business loan (commercial real estate; commercial, financial, and
23
24
agricultural; leases; and real estate construction) allocation is based on a
quarterly review of individual loans, loan types, and industries. The retail
loan (residential mortgage, home equity, and installment) 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 agencies. Loss factors for non-criticized loan
categories are based primarily on historical loan loss experience and peer group
statistics. The mechanism used to address differences between estimated and
actual loan loss experience includes review of recent nonperforming loan trends,
underwriting trends, and external factors.
The allocation methods used for December 31, 1999 and 1998 were generally
comparable. For 1999 compared to 1998, the allocation for credit card loans was
reduced based on delinquencies and charge-offs trending below national averages
and the maturation of the portfolio, which indicated lower risk of loss, and the
allocation factor for commercial real estate loans (included in real
estate-mortgage) was increased given the increased risk associated with a rising
interest rate environment on this loan category. For 1998 compared to 1997,
increases were made to the AFLL allocation for credit card and mobile homes
based upon a higher risk profile than other consumer loan categories, and
increases in commercial categories were made given the growth in these loan
segments and consideration of Year 2000 issues on significant customers.
Management believes the AFLL to be adequate at December 31, 1999. While
management uses available information to recognize losses on loans, future
adjustments to the AFLL may be necessary based on changes in economic conditions
and the impact of such change on the Corporation's borrowers. As an integral
part of their examination process, various regulatory agencies also review the
AFLL. Such agencies may require that changes in the AFLL be recognized when
their credit evaluations differ from those of management, based on their
judgments about information available to them at the time of their examination.
TABLE 11: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
AS OF DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
(IN THOUSANDS)
Commercial, financial, and agricultural $ 31,648 $25,385 $33,682 $27,943 $22,753
Real estate - construction 5,605 3,369 2,016 1,047 929
Real estate - mortgage 50,267 40,216 30,360 19,116 22,331
Installment loans to individuals 14,904 16,924 16,870 16,239 14,848
Lease financing 184 426 493 530 460
Unallocated 10,588 13,357 9,310 6,892 7,239
----------------------------------------------------
Total AFLL $113,196 $99,677 $92,731 $71,767 $68,560
====================================================
The PFLL in 1999 was $19.2 million. In comparison, the PFLL for 1998 was $14.7
million and $14.9 million in 1997, excluding the $16.8 million additional
provision ("additional provision") to conform FFC with the policies, practices,
and procedures of the Corporation.
Net charge-offs were $13.7 million or 0.18% of average loans for 1999, and were
$11.4 million or 0.16% of average loans for both 1998 and 1997. The $2.3 million
increase in net charge-offs was primarily driven by 1999 recoveries being lower
than 1998 recoveries. Gross charge-offs were down $0.4 million between 1999 and
1998, and gross recoveries were down by $2.7 million, primarily due to a large
recovery on a commercial customer in 1998. Loans charged off are subject to
continuous review and specific efforts are taken to achieve maximum recovery of
principal, accrued interest, and related expenses.
NONPERFORMING LOANS, POTENTIAL PROBLEM LOANS, AND OTHER REAL ESTATE OWNED
Management is committed to an aggressive nonaccrual and problem loan
identification philosophy. This philosophy is embodied through the ongoing
monitoring and reviewing of all pools of risk in the loan portfolio to ensure
that all problem loans are identified quickly and the risk of loss is minimized.
24
25
Nonperforming loans are defined as nonaccrual loans, loans 90 days or more past
due but still accruing, and restructured loans. The Corporation specifically
excludes from its definition of nonperforming loans student loan balances that
are 90 days or more past due and still accruing and that have contractual
government guarantees as to collection of principal and interest. Such past due
student loans were approximately $17 million and $13 million at December 31,
1999 and 1998, respectively.
Loans are generally placed on nonaccrual status when contractually past due 90
days or more as to interest or principal payments. Additionally, whenever
management becomes aware of facts or circumstances that may adversely impact on
the collectibility of principal or interest on loans, it is management's
practice to place such loans on nonaccrual status immediately, rather than
delaying such action until the loans become 90 days past due. Previously accrued
and uncollected interest on such loans is reversed, amortization of related loan
fees is suspended, and income is recorded only to the extent that interest
payments are subsequently received in cash and a determination has been made
that the principal balance of the loan is collectible. If collectibility of the
principal is in doubt, payments received are applied to loan principal.
Loans past due 90 days or more but still accruing interest are also included in
nonperforming loans. Loans past due 90 days or more but still accruing are
classified as such where the underlying loans are both well secured (the
collateral value is sufficient to cover principal and accrued interest) and in
the process of collection. Also included in nonperforming loans are
"restructured" loans. Restructured loans involve the granting of some concession
to the borrower involving the modification of terms of the loan, such as changes
in payment schedule or interest rate.
TABLE 12: NONPERFORMING LOANS AND OTHER REAL ESTATE OWNED
DECEMBER 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
($ IN THOUSANDS)
Nonaccrual loans $32,076 $48,150 $32,415 $32,287 $28,787
Accruing loans past due 90 days or more 4,690 5,252 1,324 1,801 1,320
Restructured loans 148 485 558 534 1,704
Total nonperforming loans $36,914 $53,887 $34,297 $34,622 $31,811
===========================================================
Other real estate owned $ 3,740 $ 6,025 $ 2,067 $ 1,939 $ 4,852
===========================================================
Ratio of nonperforming loans to total loans
at period end .44% .74% .48% .52% .50%
Ratio of the AFLL to nonperforming loans at
period end 306.6% 185.0% 270.4% 207.3% 215.5%
===========================================================
Nonperforming loans at December 31, 1999, were $36.9 million, a decrease of
$17.0 million from December 31, 1998. The ratio of nonperforming loans to total
loans at the end of 1999 was .44%, as compared to .74% and .48% at December 31,
1998 and 1997, respectively. Nonaccrual loans account for $16.1 million of the
decrease in nonperforming loans. Commercial nonaccrual loans (representing
approximately 52% of nonaccrual loans at year-end 1999) declined $5.3 million,
predominantly due to a $4.0 million commercial property that was in nonaccrual
loans at year end 1998 but was moved to other real estate owned in early 1999
and subsequently sold before year-end 1999. The remaining reduction in
nonaccrual loans was due to residential mortgage nonaccruals which decreased
$10.3 million compared to 1998. The Corporation's AFLL to nonperforming loans
was 306% at year-end 1999, up from 185% and 270% at year-ends 1998 and 1997,
respectively.
The following table shows, for those loans accounted for on a nonaccrual basis
and restructured loans for the years ended as indicated, the gross interest that
would have been recorded if the loans had been current in accordance with their
original terms and the amount of interest income that was included in interest
income for the period.
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TABLE 13: FOREGONE LOAN INTEREST
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Interest income in accordance with original terms $ 3,074 $ 5,046 $ 2,332
Interest income recognized (1,637) (2,884) (1,215)
---------------------------------
Reduction in interest income $ 1,437 $ 2,162 $ 1,117
---------------------------------
---------------------------------
Pot