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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
( ) For the fiscal year ended December 31, 2001
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 0-5519
ASSOCIATED BANC-CORP
(Exact name of registrant as specified in its charter)
Wisconsin 39-1098068
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1200 Hansen Road
Green Bay, Wisconsin 54304
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (920) 491-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
Common stock, par value - $0.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of March 1, 2002, 68,862,132 shares of Common Stock were outstanding and the
aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $2,428,653,000. Excludes approximately $102,031,000
of market value representing the outstanding shares of the Registrant owned by
all directors and officers who individually, in certain cases, or collectively,
may be deemed affiliates. Includes approximately $169,698,000 of market value
representing 6.71% of the outstanding shares of the Registrant held in a
fiduciary capacity by the trust company subsidiary of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Portions of Documents are Incorporated
Proxy Statement for Annual Meeting of Part III
Shareholders on April 24, 2002
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ASSOCIATED BANC-CORP
2001 FORM 10-K TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk 40
Item 8. Financial Statements and Supplementary Data 41
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 76
PART III
Item 10. Directors and Executive Officers of the Registrant 76
Item 11. Executive Compensation 76
Item 12. Security Ownership of Certain Beneficial Owners and
Management 76
Item 13. Certain Relationships and Related Transactions 76
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 77
Signatures 79
2
Special Note Regarding Forward-Looking Statements
Forward-looking statements have been made in this document, and in documents
that are incorporated by reference, that are subject to risks and uncertainties.
These forward-looking statements describe future plans or strategies and include
Associated Banc-Corp's expectations of future results of operations. The words
"believes," "expects," "anticipates," or similar expressions identify
forward-looking statements.
Shareholders should note that many factors, some of which are discussed
elsewhere in this document and in the documents that are incorporated by
reference, could affect the future financial results of Associated Banc-Corp and
could cause those results to differ materially from those expressed in
forward-looking statements contained or incorporated by reference in this
document. These factors include the following:
- - operating, legal, and regulatory risks;
- - economic, political, and competitive forces affecting Associated
Banc-Corp's banking, securities, asset management, and credit services
businesses; and
- - the risk that Associated Banc-Corp's analyses of these risks and forces
could be incorrect and/or that the strategies developed to address them
could be unsuccessful.
These factors should be considered in evaluating the forward-looking statements,
and undue reliance should not be placed on such statements. Associated Banc-Corp
undertakes no obligation to update or revise any forward looking statements,
whether as a result of new information, future events, or otherwise.
PART I
ITEM 1 BUSINESS
General
Associated Banc-Corp (the "Corporation") is a bank holding company registered
pursuant to the Bank Holding Company Act of 1956, as amended (the "Act"). It was
incorporated in Wisconsin in 1964 and was inactive until 1969 when permission
was received from the Board of Governors of the Federal Reserve System to
acquire three banks. At December 31, 2001, the Corporation owned four commercial
banks located in Illinois, Minnesota, and Wisconsin (the "affiliates") serving
their local communities and, measured by total assets held at December 31, 2001,
was the second largest commercial bank holding company headquartered in
Wisconsin. The Corporation also owned 18 limited purpose banking and nonbanking
subsidiaries (the "subsidiaries") located in Arizona, California, Illinois,
Nevada, and Wisconsin.
Services
The Corporation provides advice and specialized services to its affiliates in
banking policy and operations, including auditing, data processing,
marketing/advertising, investing, legal/compliance, personnel services, trust
services, risk management, facilities management, security, purchasing,
treasury, finance, accounting, and other financial services functionally related
to banking.
Responsibility for the management of the affiliates remains with their
respective Boards of Directors and officers. Services rendered to the affiliates
by the Corporation are intended to assist the local management of these
affiliates to expand the scope of services offered by them. Bank affiliates of
the Corporation at December 31, 2001, provided services through 208 locations in
145 communities.
The Corporation, through its affiliates, provides a complete range of banking
services to individuals and businesses. These services include checking,
savings, and money market deposit accounts, business, personal, educational,
residential, and commercial mortgage loans, other consumer-oriented financial
services, including IRA and Keogh accounts, lease financing for a variety of
capital equipment for commerce and industry, and safe deposit and night
depository facilities. Automated Teller Machines (ATMs), which provide 24-hour
banking services to customers of the affiliates, are installed in many locations
in the affiliates' service areas. The affiliates are members of an interstate
shared ATM network, which allows their customers to perform
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banking transactions from their checking, savings, or credit card accounts at
ATMs in a multi-state environment. Among the services designed specifically to
meet the needs of businesses are various types of specialized financing, cash
management services, and transfer/collection facilities.
The affiliates provide lending, depository, and related financial services to
individual, commercial, industrial, financial, and governmental customers. Term
loans, revolving credit arrangements, letters of credit, inventory and accounts
receivable financing, real estate construction lending, and international
banking services are available.
Lending involves credit risk. Credit risk is controlled and monitored through
active asset quality management and the use of lending standards, thorough
review of potential borrowers, and active asset quality administration. Active
asset quality administration, including early problem loan identification and
timely resolution of problems, further ensures appropriate management of credit
risk and minimization of loan losses. The allowance for loan losses represents
management's estimate of an amount adequate to provide for probable losses
inherent in the loan portfolio. Management's evaluation of the adequacy of the
allowance for loan losses is based on management's ongoing review and grading of
the loan portfolio, consideration of past loan loss experience, trends in past
due and nonperforming loans, risk characteristics of the various classifications
of loans, current economic conditions, the fair value of underlying collateral,
and other factors which could affect potential credit losses. Credit risk
management is discussed under sections "Loans," "Allowance for Loan Losses," and
"Nonperforming Loans, Potential Problem Loans, and Other Real Estate Owned," and
under Notes 1 and 5 in the notes to consolidated financial statements.
Additional emphasis is given to noncredit services for commercial customers,
such as advice and assistance in the placement of securities, corporate cash
management, and financial planning. The affiliates make available check
clearing, safekeeping, loan participations, lines of credit, portfolio analyses,
and other services to approximately 120 correspondent financial institutions.
A trust company subsidiary and an investment management subsidiary offer a wide
variety of fiduciary, investment management, advisory, and corporate agency
services to individuals, corporations, charitable trusts, foundations, and
institutional investors. They also administer (as trustee and in other fiduciary
and representative capacities) pension, profit sharing and other employee
benefit plans, and personal trusts and estates.
Investment subsidiaries provide discount and full-service brokerage services,
including the sale of fixed and variable annuities, mutual funds, and
securities, to the affiliates' customers and the general public. Insurance
subsidiaries provide commercial and individual insurance services and engage in
reinsurance. Various life, property, casualty, credit, and mortgage insurance
products are available to the affiliates' customers and the general public. Two
investment subsidiaries located in Nevada hold, manage, and trade cash, stocks,
and securities transferred from the affiliates and reinvest investment income.
Three additional investment subsidiaries formed in Nevada and headquartered and
domiciled in the Cayman Islands provide investment services for their parent
bank, as well as provide management of their respective Real Estate Investment
Trust ("REIT") subsidiaries. An appraisal subsidiary provides real estate
appraisals for customers, government agencies, and the general public.
The mortgage banking subsidiary is involved in the origination, servicing, and
warehousing of mortgage loans, and the sale of such loans to investors. The
primary focus is on one- to four-family residential and multi-family properties,
which are generally salable into the secondary mortgage market. The principal
mortgage lending areas of this subsidiary are Wisconsin, Minnesota, and
Illinois. Nearly all long-term, fixed-rate real estate mortgage loans generated
are sold in the secondary market and to other financial institutions, with the
subsidiary retaining the servicing of those loans.
In addition to real estate loans, the Corporation's affiliates and subsidiaries
originate and/or service consumer loans, business credit card loans, and student
loans. Consumer, home equity, and student lending activities are principally
conducted in Wisconsin and Illinois, while the credit card base and resulting
loans are principally centered in the Midwest. In April 2000, the Corporation
entered into an agreement with Citibank USA for the acquisition of the
Corporation's retail credit card portfolio. That agreement, along with a
five-year agency
4
agreement entered into contemporaneously with Citibank USA, provides for agent
fees and other income on new and existing card business.
The Corporation, its affiliates, and subsidiaries are not dependent upon a
single or a few customers, the loss of which would have a material adverse
effect on the Corporation. No material portion of the business of the
Corporation, its affiliates, or its subsidiaries is seasonal.
Foreign Operations
The Corporation, its affiliates, and subsidiaries do not engage in any
operations in foreign countries, other than three investment subsidiaries all
formed under the General Corporation Law of the State of Nevada. These
investment subsidiaries are headquartered and commercially domiciled in the
Cayman Islands. Each subsidiary has at least one employee who is a resident of
the Cayman Islands. In addition, Associated Bank, National Association, a
banking affiliate of the Corporation, has established a branch in the Cayman
Islands under a Class B Banking License issued by the Cayman Islands Monetary
Authority. It has at least one employee who is a resident of the Cayman Islands.
Employees
At December 31, 2001, the Corporation, its affiliates, and subsidiaries, as a
group, had 3,845 full-time equivalent employees.
Competition
The financial services industry is highly competitive. The Corporation competes
for loans, deposits, and financial services in all of its principal markets. The
Corporation competes directly with other bank and nonbank institutions located
within its markets, with out-of-market banks and bank holding companies that
advertise or otherwise serve the Corporation's markets, money market and other
mutual funds, brokerage houses, and various other financial institutions.
Additionally, the Corporation competes with insurance companies, leasing
companies, regulated small loan companies, credit unions, governmental agencies,
and commercial entities offering financial services products. Competition
involves efforts to obtain new deposits, the scope and type of services offered,
interest rates paid on deposits and charged on loans, as well as other aspects
of banking. All of the affiliates also face direct competition from members of
bank holding company systems that have greater assets and resources than those
of the Corporation.
Supervision and Regulation
Financial institutions are highly regulated both at the federal and state level.
Numerous statutes and regulations presently affect the business of the
Corporation, its affiliates, and its subsidiaries. Proposed comprehensive
statutory and regulatory changes could have an effect on the Corporation's
business.
As a registered bank holding company under the Act, the Corporation and its
nonbanking affiliates are regulated and supervised by the Board of Governors of
the Federal Reserve System (the "Board"). The affiliates of the Corporation with
a national charter are supervised and examined by the Comptroller of the
Currency. The affiliates with a state charter are supervised and examined by
their respective state banking agency, and by the Federal Deposit Insurance
Corporation (the "FDIC"). All affiliates of the Corporation that accept insured
deposits are subject to examination by the FDIC.
The activities of the Corporation, its affiliates, and subsidiaries, are limited
by the Act to those activities that are banking or those nonbanking activities
that are closely related or incidental to banking. The Corporation is required
to act as a source of financial strength to each of its affiliates pursuant to
which it may be required to commit financial resources to support such
affiliates in circumstances when, absent such requirements, it might not do so.
The Act also requires the prior approval of the Board for the Corporation to
acquire direct or indirect control of more than five percent of any class of
voting shares of any bank or bank holding company. Further restrictions imposed
by the Act include capital requirements, restrictions on transactions with
5
affiliates, on issuances of securities, on dividend payments, on inter-affiliate
liabilities, on extensions of credit, and on expansion through merger and
acquisition.
The federal regulatory authorities have broad authority to enforce the
regulatory requirements imposed on the Corporation, its affiliates, and
subsidiaries. In particular, the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), and their implementing regulations, carry
greater enforcement powers. Under FIRREA, all commonly controlled FDIC insured
depository institutions may be held liable for any loss incurred by the FDIC
resulting from a failure of, or any assistance given by the FDIC to, any
commonly controlled institutions. Pursuant to certain provisions under FDICIA,
the federal regulatory agencies have broad powers to take prompt corrective
action if a depository institution fails to maintain certain capital levels.
Prompt corrective action may include the inability of the Corporation to pay
dividends, restrictions in acquisitions or activities, limitations on asset
growth, and other restrictions.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 contains
provisions which amended the Act to allow an adequately-capitalized and
adequately-managed bank holding company to acquire a bank located in another
state as of
September 29, 1995. Effective June 1, 1997, interstate branching was
permitted. The Riegle-Neal Amendments Act of 1997 clarifies the applicability of
host state laws to any branch in such state of an out-of-state bank.
The FDIC maintains the Bank Insurance Fund (BIF) and the Savings Association
Insurance Fund (SAIF) by assessing depository institutions an insurance premium
twice a year. The amount each institution is assessed is based both on the
balance of insured deposits held during the preceding two quarters, as well as
on the degree of risk the institution poses to the insurance fund. FDIC assesses
higher rates on those institutions that pose greater risks to the insurance
funds. Effective April 1, 2000, the FDIC Board of Directors (FDIC Board) adopted
revisions to the FDIC's regulation governing deposit insurance assessments which
it believes enhance the present system by allowing institutions with improving
capital positions to benefit from the improvement more quickly while requiring
those whose capital is failing to pay a higher assessment sooner. The Federal
Deposit Insurance Act governs the authority of the FDIC Board to set BIF and
SAIF assessment rates and directs the FDIC Board to establish a risk-based
assessment system for insured depository institutions and set assessments to the
extent necessary to maintain the reserve ratio at 1.25%.
The Gramm-Leach-Bliley Act of 1999, P.L. 106-102, enacted on November 12, 1999,
has made major amendments to the Act. The amendments, among other things, allow
certain qualifying bank holding companies to engage in activities that are
financial in nature and that explicitly include the underwriting and sale of
insurance. The amendments also amend the Act provisions governing the scope and
manner of the Board's supervision of bank holding companies, the manner in which
activities may be found to be financial in nature, and the extent to which state
laws on insurance will apply to insurance activities of banks and bank
affiliates. The Board has issued regulations implementing these provisions. The
amendments allow for the expansion of activities by banking organizations and
permit consolidation among financial organizations generally.
The laws and regulations to which the Corporation, its affiliates, and
subsidiaries are subject are constantly under review by Congress, the federal
regulatory agencies, and the state authorities. These laws and regulations could
be changed drastically in the future, which could affect the profitability of
the Corporation, its ability to compete effectively, or the composition of the
financial services industry in which the Corporation competes.
Government Monetary Policies and Economic Controls
The earnings and growth of the banking industry and the affiliates of the
Corporation are affected by the credit policies of monetary authorities,
including the Federal Reserve System. An important function of the Federal
Reserve System is to regulate the national supply of bank credit in order to
combat recession and curb inflationary pressures. Among the instruments of
monetary policy used by the Federal Reserve to implement these objectives are
open market operations in U.S. government securities, changes in reserve
requirements against member bank deposits, and changes in the Federal Reserve
discount rate. These means are used in
6
varying combinations to influence overall growth of bank loans, investments, and
deposits, and may also affect interest rates charged on loans or paid for
deposits. The monetary policies of the Federal Reserve authorities have had a
significant effect on the operating results of commercial banks in the past and
are expected to continue to have such an effect in the future.
In view of changing conditions in the national economy and in the money markets,
as well as the effect of credit policies by monetary and fiscal authorities,
including the Federal Reserve System, no prediction can be made as to possible
future changes in interest rates, deposit levels, and loan demand, or their
effect on the business and earnings of the Corporation and its affiliates.
ITEM 2 PROPERTIES
The Corporation's headquarters are located in the Village of Ashwaubenon,
Wisconsin, in a leased facility with approximately 30,000 square feet of office
space. The space is subject to a five-year lease with two consecutive five-year
extensions.
At December 31, 2001, the affiliates occupied 208 offices in 145 different
communities within Illinois, Minnesota, and Wisconsin. The main office of
Associated Bank, National Association, is owned. The affiliate main offices in
downtown Chicago, Rockford, and Minneapolis are located in the lobbies of
multi-story office buildings. Most affiliate branch offices are free-standing
buildings that provide adequate customer parking, including drive-in facilities
of various numbers and types for customer convenience. Some affiliates also have
branch offices in various supermarket locations, as well as offices in
retirement communities. In addition, the Corporation owns other real property
that, when considered in the aggregate, is not material to its financial
position.
ITEM 3 LEGAL PROCEEDINGS
There are legal proceedings pending against certain affiliates and subsidiaries
of the Corporation which arose in the normal course of their business. Although
litigation is subject to many uncertainties and the ultimate exposure with
respect to these matters cannot be ascertained, management believes, based upon
discussions with counsel, that the Corporation has meritorious defenses, and any
ultimate liability would not have a material adverse effect on the consolidated
financial position or results of operations of the Corporation.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ending December 31, 2001.
Executive Officers of the Corporation
Pursuant to General Instruction G of Form 10-K, the following list is included
as an unnumbered item in Part I of this report in lieu of being included in the
Proxy Statement for the Annual Meeting of Stockholders to be held April 24,
2002.
The following is a list of names and ages of executive officers of the
Corporation and affiliates indicating all positions and offices held by each
such person and each such person's principal occupation(s) or employment during
the past five years. The Date of Election refers to the date the person was
first elected an officer of the Corporation or its affiliates. Officers are
appointed annually by the Board of Directors at the meeting of directors
immediately following the Annual Meeting of Shareholders. There are no family
relationships among these officers nor any arrangement or understanding between
any officer and any other person pursuant to
7
which the officer was selected. No person other than those listed below has been
chosen to become an Executive Officer of the Corporation.
Name Offices and Positions Held Date of Election
---- -------------------------- ----------------
Robert C. Gallagher President, Chief Executive Officer, and Director of April 28, 1982
Age: 63 Associated Banc-Corp; Chairman and President of
Associated Bank, National Association (affiliate)
Prior to April 2000, President, Chief Operating
Officer, and Director of Associated Banc-Corp
From April 1996 to October 1998, Vice Chairman of
Associated Banc-Corp; Chairman and Chief Executive
Officer of Associated Bank Green Bay (affiliate)
Brian R. Bodager Chief Administrative Officer, General Counsel, and July 22, 1992
Age: 46 Corporate Secretary of Associated Banc-Corp;
Director of Associated Bank, National Association
(affiliate)
Prior to July 1997, Senior Vice President, General
Counsel, and Corporate Secretary of Associated
Banc-Corp
Joseph B. Selner Chief Financial Officer of Associated Banc-Corp; January 25, 1978
Age: 55 Director of Associated Bank, National Association
(affiliate)
Arthur E. Olsen, III General Auditor of Associated Banc-Corp July 28, 1993
Age: 50
William M. Bohn Director, Legal, Compliance, and Risk Management, of April 23, 1997
Age: 35 Associated Banc-Corp
Prior to April 1997, Officer of a Wisconsin-based
trust company
Robert J. Johnson Director, Corporate Human Resources, of Associated January 22, 1997
Age: 56 Banc-Corp
Donald E. Peters Director, Systems and Operations, of Associated October 27, 1997
Age: 52 Banc-Corp; Director of Associated Bank, National
Association (affiliate)
From October 1997 to November 1998, Director of
Systems and Operations of Associated Banc-Corp;
Executive Vice President of First Financial Bank
(former affiliate)
Prior to October 1997, Executive Vice President of
First Financial Corporation (former affiliate);
Executive Vice President of First Financial Bank
(former affiliate)
Teresa A. Rosengarten Treasurer of Associated Banc-Corp October 25, 2000
Age: 41
From March 1994 to August 2000, Treasurer of a
Tennessee-based bank holding company
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Name Offices and Positions Held Date of Election
---- -------------------------- ----------------
Mark J. McMullen Director, Wealth Management, of Associated June 2, 1981
Age: 52 Banc-Corp; Director of Associated Bank, National
Association (affiliate); Chairman and Chief
Executive Officer of Associated Trust Company
(affiliate)
Prior to July 1999, Senior Executive Vice President
and Director of Associated Bank Green Bay (affiliate)
Prior to July 1996, Executive Vice President and
Director of Associated Bank Green Bay (affiliate)
Randall J. Peterson Director, Community Banking, of Associated August 2, 1982
Age: 56 Banc-Corp; Director of Associated Bank, National
Association (affiliate)
From July 1996 to October 1998, President and
Director of Associated Bank Green Bay (affiliate)
Gordon J. Weber Director, Corporate Banking, of Associated January 1, 1973
Age: 53 Banc-Corp; Director of Associated Bank, National
Association (affiliate)
Prior to April 2001, President, Chief Executive
Officer, and Director of Associated Bank Milwaukee
(affiliate); Director of Associated Bank South
Central (affiliate)
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information in response to this item is incorporated by reference to the table
"Market Information" on Page 76 and the discussion of dividend restrictions in
Note 11 "Stockholders' Equity" of the notes to consolidated financial statements
included under Item 8 of this document. The Corporation's common stock is
currently being traded on The Nasdaq Stock Market under the symbol ASBC.
The approximate number of equity security holders of record of common stock,
$.01 par value, as of March 1, 2002, was 9,651. Certain of the Corporation's
shares are held in "nominee" or "street" name and the number of beneficial
owners of such shares is approximately 20,700.
Payment of future dividends is within the discretion of the Corporation's Board
of Directors and will depend, among other factors, on earnings, capital
requirements, and the operating and financial condition of the Corporation. At
the present time, the Corporation expects that dividends will continue to be
paid in the future.
9
ITEM 6 SELECTED FINANCIAL DATA
TABLE 1: EARNINGS SUMMARY AND SELECTED FINANCIAL DATA
(In Thousands, except per share data)
% 5-Year
Change Compound
2000 to Growth
Years ended December 31, 2001 2001 2000 1999 1998 1997 Rate
- ------------------------------------------------------------------------------------------------------------------------
Interest income $ 880,622 (5.4)% $ 931,157 $ 814,520 $ 785,765 $ 787,919 3.8%
Interest expense 458,637 (16.2) 547,590 418,775 411,028 411,637 4.1
-----------------------------------------------------------------------------------------
Net interest income 421,985 10.0 383,567 395,745 374,737 376,282 3.5
Provision for loan losses 28,210 39.6 20,206 19,243 14,740 31,668 15.5
-----------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 393,775 8.4 363,361 376,502 359,997 344,614 2.9
Noninterest income 195,603 6.2 184,196 165,906 167,928 94,854 11.2
Noninterest expense 338,369 6.5 317,736 305,092 294,962 323,200 3.0
-----------------------------------------------------------------------------------------
Income before income taxes and
extraordinary item 251,009 9.2 229,821 237,316 232,963 116,268 8.7
Income tax expense 71,487 15.6 61,838 72,373 75,943 63,909 4.5
-----------------------------------------------------------------------------------------
NET INCOME $ 179,522 6.9% $ 167,983 $ 164,943 $ 157,020 $ 52,359 10.9%
=========================================================================================
Basic earnings per share (1):
Income before extraordinary
item $ 2.72 10.6% $ 2.46 $ 2.36 $ 2.26 $ 0.76 11.9%
Net income 2.72 10.6 2.46 2.36 2.26 0.76 12.1
Diluted earnings per share (1):
Income before extraordinary
item 2.70 9.8 2.46 2.34 2.24 0.74 12.2
Net income 2.70 9.8 2.46 2.34 2.24 0.74 12.3
Cash dividends per share (1) 1.22 10.2 1.11 1.05 0.95 0.81 12.1
Weighted average shares
outstanding:
Basic 65,988 (3.2) 68,186 69,858 69,438 69,172 (1.0)
Diluted 66,516 (2.8) 68,410 70,468 70,168 70,329 (1.2)
SELECTED FINANCIAL DATA
Year-End Balances:
Loans $ 9,019,864 1.2% $ 8,913,379 $ 8,343,100 $ 7,272,697 $ 7,072,550 6.3%
Allowance for loan losses 128,204 6.6 120,232 113,196 99,677 92,731 12.3
Investment securities 3,197,021 (1.9) 3,260,205 3,270,383 2,907,735 2,940,218 3.0
Assets 13,604,374 3.6 13,128,394 12,519,902 11,250,667 10,690,442 6.1
Deposits 8,612,611 (7.3) 9,291,646 8,691,829 8,557,819 8,395,277 1.6
Long-term debt 1,103,395 801.3 122,420 24,283 26,004 15,270 101.4
Stockholders' equity 1,070,416 10.5 968,696 909,789 878,721 813,692 5.9
Book value per share (1) 16.38 11.8 14.65 13.09 12.70 11.75 4.8
-----------------------------------------------------------------------------------------
Average Balances:
Loans $ 9,092,699 4.7% $ 8,688,086 $ 7,800,791 $ 7,255,850 $ 6,959,018 6.7%
Investment securities 3,143,786 (5.2) 3,317,499 3,119,923 2,737,556 2,905,921 4.5
Assets 13,103,754 2.3 12,810,235 11,698,104 10,628,695 10,391,718 6.3
Deposits 8,581,233 (5.7) 9,102,940 8,631,652 8,430,701 8,121,945 2.0
Stockholders' equity 1,037,158 12.7 920,169 914,082 856,425 839,859 6.0
-----------------------------------------------------------------------------------------
Financial Ratios: (3)
Return on average equity 17.31% (95) 18.26% 18.04% 18.33% 6.23%
Return on average assets 1.37 6 1.31 1.41 1.48 0.50
Net interest margin
(tax-equivalent) 3.62 26 3.36 3.74 3.79 3.86
Average equity to average
assets 7.91 73 7.18 7.81 8.06 8.08
Dividend payout ratio (2) 44.85 (16) 45.01 44.68 42.04 106.58
=========================================================================================
(1) Per share data adjusted retroactively for stock splits and stock dividends.
(2) Ratio is based upon basic earnings per share.
(3) Change in basis points
N/M = not meaningful
10
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is management's analysis to assist in the understanding
and evaluation of the consolidated financial condition and results of operations
of Associated Banc-Corp (the "parent company"), together with its affiliates and
subsidiaries (the "Corporation"). It should be read in conjunction with the
consolidated financial statements and footnotes and the selected financial data
presented elsewhere in this report.
During 2001, the Corporation merged all of the Wisconsin bank affiliates
(Associated Bank South Central, Associated Bank North, Associated Bank
Milwaukee, Associated Bank, National Association, Associated Bank Lakeshore,
National Association, and Associated Bank Green Bay, National Association) into
a single national banking charter, headquartered in Green Bay, Wisconsin, under
the name Associated Bank, National Association. Certain nonbank subsidiaries
(Associated Leasing, Inc., Associated Banc-Corp Services, Inc., and Associated
Commercial Mortgage, Inc.) also merged with and into the resultant bank,
becoming operating divisions of Associated Bank, National Association.
The financial discussion that follows may refer to the impact of the
Corporation's business combination activity, detailed under section "Business
Combinations" and Note 2 of the notes to consolidated financial statements. The
detailed financial discussion focuses on 2001 results compared to 2000.
Discussion of 2000 results to 1999 is predominantly in section "2000 Compared to
1999."
Performance Summary
The Corporation recorded net income of $179.5 million for the year ended
December 31, 2001, an increase of $11.5 million or 6.9% over the $168.0 million
earned in 2000. Basic earnings per share for 2001 were $2.72, a 10.6% increase
over 2000 basic earnings per share of $2.46. Earnings per diluted share were
$2.70, a 9.8% increase over 2000 diluted earnings per share of $2.46. Return on
average assets ("ROA") and return on average equity ("ROE") for 2001 were 1.37%
and 17.31%, respectively, compared to 1.31% and 18.26%, respectively, for 2000.
Cash dividends paid in 2001 increased by 10.2% to $1.22 per share over the $1.11
per share paid in 2000. Key factors behind these results were:
- - Taxable equivalent net interest income was $444.2 million for 2001, $38.9
million or 9.6% higher than 2000. Interest expense decreased by $88.9
million, while taxable equivalent interest income decreased $50.0 million.
The volume of average earning assets increased $225 million to $12.3
billion, which exceeded the $81.7 million increase in interest-bearing
liabilities. Increases in the volume of earning assets and interest-bearing
liabilities, as well as changes in product mix, added $18.3 million to
taxable equivalent net interest income, while changes in interest rates
resulted in a $20.6 million increase.
- - Net interest income and net interest margin were also impacted in 2001 by
the declining interest rate environment, competitive pricing pressures,
branch deposit sales, and funding of stock repurchases. The Federal Reserve
lowered interest rates an unprecedented eleven times during 2001, producing
an average Federal funds rate for 2001 that was 238 basis points ("bp")
lower than the average for 2000.
- - The net interest margin was 3.62% for 2001, a 26 bp increase from 3.36% for
2000, the net result of the 31 bp increase in interest rate spread, offset
by a 5 bp decline in the net free funds contribution. Rates on
interest-bearing liabilities in 2001 were 86 bp lower than last year, while
the yield on interest earning assets decreased 55 bp, bringing the interest
rate spread up by 31 bp.
- - Total loans were $9.0 billion at December 31, 2001, an increase of $106
million or 1.2% over December 31, 2000. The loan mix continued to shift,
with commercial loan balances increasing $603 million (13.0%) and
representing 58% of total loans at December 31, 2001, compared to 52% at
year-end 2000. Total deposits were $8.6 billion at December 31, 2001, $679
million lower than December 31, 2000, with brokered CDs decreasing by $626
million. To take advantage of the lower rate environment, the Corporation
increased long-term debt by $1.0 billion, including $200 million of
subordinated debt, $200 million of bank notes, and longer-term Federal Home
Loan Bank advances.
11
- - Asset quality remained relatively strong. The provision for loan losses
increased to $28.2 million compared to $20.2 million in 2000. Net charge
offs were $20.2 million, an increase of $11.3 million, primarily due to the
charge off of several large commercial credits. Net charge offs were 0.22%
of average loans compared to 0.10% in 2000. The ratio of allowance for loan
losses to loans was 1.42% and 1.35% at December 31, 2001 and 2000,
respectively. Nonperforming loans were $52.1 million, representing 0.58% of
total loans at year-end 2001, compared to $47.7 million or 0.54% of total
loans last year.
- - Noninterest income was $195.6 million for 2001, $11.4 million or 6.2%
higher than 2000. Net gains on the sales of assets and investment
securities totaled $2.7 million in 2001, compared to net gains of $16.8
million in 2000. Excluding these asset and security sales, noninterest
income was $192.9 million, or $25.5 million (15.2%) over 2000. Mortgage
banking revenue more than doubled, adding $33.8 million over the prior
year, and service charges on deposit accounts were up $4.5 million over
2000. Partially offsetting these increases were an $8.6 million reduction
in trust service fees and a $3.3 million decrease in retail commissions.
- - Noninterest expense was $338.4 million, up $20.6 million or 6.5% over 2000.
Personnel expenses rose $14.4 million, of which $6.7 million was
attributable to salary expense and $7.7 million was due to fringe benefit
expense. Mortgage servicing rights expense increased $10.6 million,
predominantly driven by an increase to the valuation reserve on mortgage
servicing rights. All other expense categories were down, in total, $4.4
million.
- - Income tax expense increased to $71.5 million, up $9.6 million from 2000.
The effective tax rate in 2001 was 28.5% compared to 26.9% for 2000. The
increase was primarily attributable to the increase in net income before
tax, an increase in state tax expense, and a decrease in tax valuation
allowance adjustments.
Business Combinations
There were no business combinations during 2001 or 2000. There was one
transaction pending at December 31, 2001, which was consummated in February
2002, as noted below. There were three business combination transactions
completed during 1999. The Corporation's business combination activity is
further summarized in Note 2 of the notes to consolidated financial statements.
On September 10, 2001, the Corporation announced the signing of a definitive
agreement to acquire Signal Financial Corporation ("Signal") of Mendota Heights,
Minnesota. Based upon the Corporation's closing stock price on September 10,
2001 (the date of public announcement of the acquisition) and other terms of the
Merger Agreement, the acquisition price is approximately $192.5 million, of
which, $58.4 million will be paid in cash and the remainder in the Corporation's
common stock. On February 28, 2002, the Corporation consummated its acquisition
of 100% of the outstanding common shares of Signal. As the transaction was
accounted for under the purchase method, the results of operations of Signal
will be included by the Corporation beginning on the consummation date, and
therefore, are not included in the accompanying consolidated financial
statements. At February 28, 2002, Signal reported $1.2 billion in total assets.
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income is the primary source of the Corporation's revenue. Net
interest income is the difference between interest income on interest earning
assets, such as loans and securities, and the interest expense on
interest-bearing deposits and other borrowings, used to fund those and other
assets or activities. The amount of net interest income is affected by changes
in interest rates and by the amount and composition of interest earning assets
and interest-bearing liabilities. Additionally, net interest income is impacted
by the sensitivity of the balance sheet to changes in interest rates which
factors in characteristics such as the fixed or variable nature of the financial
instruments, contractual maturities, and repricing frequencies.
12
Net interest income in the consolidated statements of income (which excludes the
taxable equivalent adjustment on tax exempt assets) was $422.0 million, compared
to $383.6 million last year. The taxable equivalent adjustments (the adjustments
to bring tax-exempt interest to a level that would yield the same after-tax
income had that income been subject to taxation, using a 35% tax rate) of $22.2
million for 2001 and $21.7 million for 2000, resulted in fully taxable
equivalent net interest income of $444.2 million and $405.3 million,
respectively. The taxable equivalent adjustment between years was relatively
unchanged (up $509,000) and was in line with the growth in average municipal
securities balances.
Tax equivalent net interest income was $444.2 million for 2001, an increase of
$38.9 million or 9.6% from 2000. The increase in tax equivalent net interest
income was primarily attributable to the benefit of lower interest rates,
particularly on the cost of interest-bearing liabilities, and a higher level of
earning assets. Interest rates fell steadily during 2001, but were generally
rising during 2000. Comparatively, the average Federal funds rate for 2001 was
238 bp lower than for 2000, while the rate at December 31, 2001, was 475 bp
lower than at December 31, 2000.
Interest rate spread and net interest margin are utilized to measure and explain
changes in net interest income. Interest rate spread is the difference between
the yield on earning assets and the rate paid for interest-bearing liabilities
that fund those assets. The net interest margin is expressed as the percentage
of net interest income to average earning assets. The net interest margin
exceeds the interest rate spread because noninterest-bearing sources of funds
(net free funds), principally demand deposits and stockholders' equity, also
support earning assets. To compare tax-exempt asset yields to taxable yields,
the yield on tax-exempt loans and securities is computed on a tax equivalent
basis. Net interest income, interest rate spread, and net interest margin are
discussed further on a tax equivalent basis.
Table 2 provides average balances of earning assets and interest-bearing
liabilities, the associated interest income and expense, and the corresponding
interest rates earned and paid, as well as net interest income, interest rate
spread, and net interest margin on a tax-equivalent basis for the three years
ended December 31, 2001. Tables 3 through 5 present additional information to
facilitate the review and discussion of tax equivalent net interest income,
interest rate spread, and net interest margin.
As indicated in Tables 2 and 3, increases in volume and changes in the mix of
both earning assets and interest-bearing liabilities added $18.3 million to tax
equivalent net interest income, while changes in the rates resulted in a $20.6
million increase, for a net increase of $38.9 million.
The net interest margin for 2001 was 3.62%, compared to 3.36% in 2000. The 26 bp
increase in net interest margin is attributable to a 31 bp increase in interest
rate spread (i.e., an 86 bp decrease in the cost of interest-bearing
liabilities, net of a 55 bp decrease in the yield on earning assets), partially
offset by a 5 bp lower contribution from net free funds. In conjunction with the
stock buy-back programs (see further detail under section "Capital"), $34.4
million was used in 2001 for the repurchase of 1.0 million shares of common
stock, while $92.3 million was used in 2000 to repurchase 3.7 million shares.
Given the lower interest rate environment of 2001, the combination of buying
back fewer shares and lower funding costs favorably impacted the net interest
margin by approximately 2 bp in 2001.
For 2001, the cost of interest-bearing liabilities decreased 86 bp, impacted
favorably by the declining rate environment during 2001, reducing interest
expense by $90.7 million (with interest-bearing deposits accounting for $46.2
million of the decrease). The combined average cost of interest-bearing deposits
excluding brokered CDs was 3.94%, down 58 bp, primarily from carrying a higher
proportion of lower-costing transaction accounts during 2001 versus 2000.
Higher-costing brokered CDs fell to represent 3.8% of interest-bearing
liabilities (versus 7.9% for 2000) and cost 99 bp less than last year. The cost
of wholesale funds (comprised of all short-term borrowings and long-term debt)
decreased 154 bp to 4.78% for 2001 (primarily a function of the declining rate
environment and the predominantly short-term nature of the funds) which reduced
interest expense by $44.5 million. For 2001, the yield on earning assets fell 55
bp (driven primarily by a 75 bp decline in the loan yield), which decreased
interest earned by $70.1 million (with loans accounting for $65.4 million of the
decrease). The average loan yield was 7.63%, down 75 bp from last year. The
repricing of variable rate loans, as well as competitive factors on new and
refinanced loans, in the declining interest rate environment, put downward
pressure on loan yields for 2001, as did the sale of the higher-yielding credit
card receivables in
13
April 2000. The yield on securities and short-term investments combined was down
only 11 bp, supported by portfolio strategies that started during 2000 to
mitigate interest rate risk, decreasing tax equivalent interest income by an
aggregate $4.7 million.
In combination, the growth and composition change of earning assets contributed
an additional $20.1 million to tax equivalent net interest income, while the
growth and composition of interest-bearing liabilities cost an additional $1.8
million, netting a $18.3 million increase to tax equivalent net interest income.
Average earning assets were $12.3 billion in 2001, an increase of $225 million,
or 1.9%, from 2000. Loans accounted for the majority of the growth in earning
assets, increasing to 74.1% of average earning assets, compared to 72.1% for
2000. Average loans were $9.1 billion in 2001, up $405 million or 4.7% compared
to 2000, despite the sale of $128 million of credit card receivables in April
2000 and despite high-refinancing and sales of residential mortgages in 2001.
During 2001, the Corporation continued to focus on shifting the composition of
its loan portfolio, growing the proportion of commercial loans, which
represented 53.9% of average loans for 2001 compared to 49.6% for 2000. For
2001, tax equivalent interest income on loans increased $31.1 million from
growth, but decreased $65.4 million from the impact of the rate environment (as
noted above), for a net decrease of $34.3 million versus last year (see Table
3). In support of funding a portion of the loan growth, securities and
short-term investments combined decreased $180 million on average. Thus, for
2001, tax equivalent interest income on securities and short-term investments
decreased $11.0 million from the volume changes, and decreased $4.7 million from
the rate changes (as noted above), for a net $15.7 million decrease to tax
equivalent interest income.
Average interest-bearing liabilities were $10.8 billion in 2001, a slight
increase of $81.7 million, or 0.8%, from 2000. While relatively unchanged in
balance, the mix of interest-bearing liabilities changed significantly compared
to last year. Average interest-bearing deposits, a predominant source of funding
(down $602 million or 7.5%), represented 69.0% of average interest-bearing
liabilities for 2001, compared to 75.1% last year, driven by a reduction in
brokered CDs as cheaper funding sources were utilized. Without the brokered CDs,
interest-bearing deposits represented 65.2% of average interest-bearing
liabilities for 2001, versus 67.2% last year. Given this decline and coupled
with the growth in earning assets and other cash needs, the Corporation
increased its use of wholesale funding. To take advantage of the lower rate
environment, improve liquidity, and mitigate interest rate risk, the Corporation
increased its long-term debt to 5.3% of average interest-bearing liabilities,
compared to 1.1% for 2000. Therefore, for 2001, interest expense on
interest-bearing deposits decreased $80.9 million, the result of a $34.7 million
reduction from the declines in volume and a $46.2 million reduction from the
favorable impact of the rate environment. To reiterate, brokered CDs were the
predominant driver of this change (primarily from utilization of less expensive
funding sources), down $436 million and costing 99 bp less in 2001 than 2000,
while all other non-brokered interest-bearing deposits were down $166 million
and cost 58 bp less than last year. Total interest-bearing deposits cost 4.03%
on average for 2001 (71 bp less than last year). Total wholesale funds
(including all short-term and long-term funding sources other than
interest-bearing deposits) were $3.3 billion on average for 2001, up $683
million or 25.7%, with $460 million of the increase in average long-term debt.
Wholesale funding on a combined basis cost 4.78% (154 bp lower than last year),
of which long-term debt cost 5.07% on average for 2001 (128 bp lower than 2000).
Thus, for 2001, interest expense on wholesale funds decreased $8.0 million,
attributable to a $44.5 million decrease from the favorable impact of the rate
environment, offset partially by a $36.5 million increase from the growth in
volume.
14
TABLE2: Average Balances and Interest Rates (interest and rates on a
tax-equivalent basis)
Years Ended December 31,
---------------------------------------------------------------------------------------------------
2001 2000 1999
---------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------------------
($ in Thousands)
ASSETS
Earning assets:
Loans (1)(2)(3) $ 9,092,699 $693,780 7.63% $ 8,688,086 $728,128 8.38% $ 7,800,791 $626,407 8.03%
Investment securities:
Taxable 2,306,444 146,170 6.34 2,523,492 163,768 6.49 2,597,760 163,769 6.30
Tax exempt(1) 837,343 61,507 7.35 794,007 58,233 7.33 522,163 36,201 6.93
Short-term investments 35,380 1,421 4.02 41,309 2,775 6.72 34,110 1,806 5.29
---------------------------------------------------------------------------------------------------
Securities and short-term
investments 3,179,167 209,098 6.58 3,358,808 224,776 6.69 3,154,033 201,776 6.40
---------------------------------------------------------------------------------------------------
Total earning assets $12,271,866 $902,878 7.36% $12,046,894 $952,904 7.91% $10,954,824 $828,183 7.56%
---------------------------------------------------------------------------------------------------
Allowance for loan losses (125,790) (115,580) (105,488)
Cash and due from banks 279,363 268,267 263,288
Other assets 678,315 610,654 585,480
---------------------------------------------------------------------------------------------------
Total assets $13,103,754 $12,810,235 $11,698,104
===================================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings deposits $ 839,417 $ 11,812 1.41% $ 956,177 $ 19,704 2.06% $ 919,163 $14,998 1.63%
Interest-bearing demand
deposits 799,451 7,509 0.94 803,779 11,091 1.38 796,506 10,645 1.34
Money market deposits 1,722,242 55,999 3.25 1,407,502 65,702 4.67 1,373,010 52,478 3.82
Time deposits, excluding
Brokered CDs 3,648,942 201,035 5.51 4,008,382 228,191 5.69 4,297,977 222,811 5.18
--------------------------------------------------------------------------------------------------
Total interest-bearing
deposits, excluding
Brokered CDs 7,010,052 276,355 3.94 7,175,840 324,688 4.52 7,386,656 300,932 4.07
Brokered CDs 404,686 22,575 5.58 840,518 55,204 6.57 241,309 13,143 5.45
--------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 7,414,738 298,930 4.03 8,016,358 379,892 4.74 7,627,965 314,075 4.12
Federal funds purchased and
securities Sold under
agreements to repurchase 1,839,336 77,011 4.19 1,724,291 107,732 6.25 1,057,269 52,843 5.00
Other short-term borrowings 924,420 53,535 5.79 816,553 52,698 6.45 951,524 50,214 5.28
Long-term debt 574,753 29,161 5.07 114,374 7,268 6.35 24,644 1,643 6.67
--------------------------------------------------------------------------------------------------
Total wholesale funding 3,338,509 159,707 4.78 2,655,218 167,698 6.32 2,033,437 104,700 5.15
--------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $10,753,247 $458,637 4.27% $10,671,576 $547,590 5.13% $ 9,661,402 $418,775 4.33%
--------------------------------------------------------------------------------------------------
Demand deposits 1,166,495 1,086,582 1,003,687
Accrued expenses and other
liabilities 146,854 131,908 118,933
Stockholders' equity 1,037,158 920,169 914,082
--------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $13,103,754 $12,810,235 $11,698,104
==================================================================================================
Net interest income and rate
spread (1) $444,241 3.09% $405,314 2.78% $409,408 3.23%
==================================================================================================
Net interest margin (1) 3.62% 3.36% 3.74%
==================================================================================================
Taxable equivalent adjustment $ 22,256 $ 21,747 $13,663
==================================================================================================
(1) The yield on tax exempt loans and securities is computed on a
tax-equivalent basis using a tax rate of 35% for all periods presented and
is net of the effects of certain disallowed interest deductions.
(2) Nonaccrual loans and loans held for sale have been included in the average
balances.
(3) Interest income includes net loan fees.
15
TABLE 3: Rate/Volume Analysis (1)
2001 Compared to 2000 2000 Compared to 1999
Increase (Decrease) Due to Increase (Decrease) Due to
----------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
----------------------------------------------------------------------------
($ in Thousands)
Interest income:
Loans (2) $ 31,086 $ (65,434) $ (34,348) $ 73,540 $ 28,181 $ 101,721
Investment securities:
Taxable (13,844) (3,754) (17,598) (4,907) 4,906 (1)
Tax-exempt (2) 3,183 91 3,274 19,834 2,198 22,032
Short-term investments (354) (1,000) (1,354) 455 514 969
----------------------------------------------------------------------------
Securities and short-term investments (11,015) (4,663) (15,678) 15,382 7,618 23,000
----------------------------------------------------------------------------
Total earning assets (2) $ 20,071 $ (70,097) $ (50,026) $ 88,922 $ 35,799 $ 124,721
----------------------------------------------------------------------------
Interest expense:
Savings deposits $ (2,194) $ (5,698) $ (7,892) $ 662 $ 4,044 $ 4,706
Interest-bearing demand deposits (59) (3,523) (3,582) 124 322 446
Money market deposits 12,800 (22,503) (9,703) 1,425 11,799 13,224
Time deposits, excluding Brokered CDs (19,977) (7,179) (27,156) (14,323) 19,703 5,380
----------------------------------------------------------------------------
Total interest-bearing deposits, excluding
Brokered CDs (9,430) (38,903) (48,333) (12,112) 35,868 23,756
Brokered CDs (25,284) (7,345) (32,629) 31,642 10,419 42,061
----------------------------------------------------------------------------
Total interest-bearing deposits (34,714) (46,248) (80,962) 19,530 46,287 65,817
Federal funds purchased and securities sold under
agreements to repurchase 6,588 (37,309) (30,721) 39,307 15,582 54,889
Other short-term borrowings 6,421 (5,584) 837 (8,058) 10,542 2,484
Long-term debt 23,479 (1,586) 21,893 5,707 (82) 5,625
----------------------------------------------------------------------------
Total wholesale funding 36,488 (44,479) (7,991) 36,956 26,042 62,998
----------------------------------------------------------------------------
Total interest-bearing liabilities $ 1,774 $ (90,727) $ (88,953) $ 56,486 $ 72,329 $ 128,815
----------------------------------------------------------------------------
Net interest income (2) $ 18,297 $ 20,630 $ 38,927 $ 32,436 $ (36,530) $ (4,094)
============================================================================
(1) The change in interest due to both rate and volume has been allocated in
proportion to the relationship to the dollar amounts of the change in each.
(2) The yield on tax-exempt loans and securities is computed on an FTE basis
using a tax rate of 35% for all periods presented and is net of the effects
of certain disallowed interest deductions.
TABLE 4: Interest Rate Spread and Interest Margin (on a tax-equivalent basis)
2001 Average 2000 Average 1999 Average
---------------------------------------------------------------------------------------------------
%of %of %of
Balance Earning Yield/ Balance Earning Yield/ Earning Yield/
Assets Rate Assets Rate Balance Assets Rate
---------------------------------------------------------------------------------------------------
($inThousands)
Earning assets $12,271,866 100.0% 7.36% $12,046,894 100.0% 7.91% $10,954,824 100.0% 7.56%
---------------------------------------------------------------------------------------------------
Financed by:
Interest-bearing funds $10,753,247 87.6% 4.27% $10,671,576 88.6% 5.13% $9,661,402 88.2% 4.33%
Noninterest-bearing
funds 1,518,619 12.4% 1,375,318 11.4% 1,293,422 11.8%
---------------------------------------------------------------------------------------------------
Total funds sources $12,271,866 100.0% 3.74% $12,046,894 100.0% 4.55% $10,954,824 100.0% 3.82%
===================================================================================================
Interest rate spread 3.09% 2.78% 3.23%
Contribution from net
free funds .53% .58% .51%
----- ----- -----
Net interest margin 3.62% 3.36% 3.74%
===================================================================================================
Average prime rate* 6.91% 9.23% 8.00%
Average fed funds rate* 3.88% 6.26% 4.95%
Average spread 303bp 297bp 305bp
===================================================================================================
*Source: Bloomberg
16
TABLE 5: Selected Average Balances
Percent 2001 as % of 2000 as % of
2001 2000 Change Total Assets Total Assets
----------------------------------------------------------------
($ in Thousands)
ASSETS
Loans $ 9,092,699 $ 8,688,086 4.7% 69.4% 67.8%
Investment securities
Taxable 2,306,444 2,523,492 (8.6) 17.6 19.7
Tax-exempt 837,343 794,007 5.5 6.4 6.2
Short-term investments 35,380 41,309 (14.4) 0.3 0.3
----------------------------------------------------------------
Total earning assets 12,271,866 12,046,894 1.9 93.7 94.0
Other assets 831,888 763,341 9.0 6.3 6.0
----------------------------------------------------------------
Total assets $13,103,754 $12,810,235 2.3% 100.0% 100.0%
================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing deposits $ 7,414,738 $ 8,016,358 (7.5)% 56.6% 62.6%
Short-term borrowings 2,763,756 2,540,844 8.8 21.1 19.8
Long-term debt 574,753 114,374 402.5 4.4 0.9
----------------------------------------------------------------
Total interest-bearing liabilities 10,753,247 10,671,576 0.8 82.1 83.3
Noninterest-bearing deposits 1,166,495 1,086,582 7.4 8.9 8.5
Accrued expenses and other liabilities 146,854 131,908 11.3 1.1 1.0
Stockholders' equity 1,037,158 920,169 12.7 7.9 7.2
----------------------------------------------------------------
Total liabilities and stockholders' equity $13,103,754 $12,810,235 2.3% 100.0% 100.0%
================================================================
Provision for Loan Losses
The provision for loan losses in 2001 was $28.2 million. In comparison, the
provision for loan losses for 2000 was $20.2 million, and $19.2 million for
1999. The provision for loan losses is predominantly a function of the
methodology used to determine the adequacy of the allowance for loan losses
which focuses on changes in the size and character of the loan portfolio,
changes in levels of impaired and other nonperforming loans, historical losses
on each portfolio category, the risk inherent in specific loans, concentrations
of loans to specific borrowers or industries, existing economic conditions, the
fair value of underlying collateral, and other factors which could affect
potential credit losses. The ratio of the allowance for loan losses to total
loans was 1.42%, up from 1.35% at December 31, 2000, and up from 1.36% at
December 31, 1999. See additional discussion under section, "Allowance for Loan
Losses."
Noninterest Income
Noninterest income was $195.6 million for 2001, $11.4 million or 6.2% higher
than 2000. Primary categories that have impacted the change between comparable
periods were mortgage banking, net gains (losses) on both investment securities
and asset sales, and trust service fees. Fee income as a percentage of total
revenues (defined as total noninterest income less gains or losses on asset and
investment sales ("fee income") divided by taxable equivalent net interest
income plus fee income) was 30.3% for 2001 compared to 29.2% last year.
17
TABLE 6: Noninterest Income
% Change From
Years Ended December 31, Prior Year
--------------------------------------------------------
2001 2000 1999 2001 2000
--------------------------------------------------------
($ in Thousands)
Trust service fees $ 29,063 $ 37,617 $ 37,996 (22.7)% (1.0)%
Service charges on deposit accounts 37,817 33,296 29,584 13.6 12.5
Mortgage banking income 53,724 19,944 30,417 169.4 (34.4)
Credit card and other nondeposit fees 26,731 25,739 20,763 3.9 24.0
Retail commission income 16,872 20,187 18,372 (16.4) 9.9
Bank owned life insurance income 12,916 12,377 9,456 4.4 30.9
Asset sale gains, net 1,997 24,420 4,977 (91.8) N/M
Other 15,765 18,265 11,315 (13.7) 61.4
--------------------------------------------------------
Subtotal $ 194,885 $ 191,845 $ 162,880 1.6% 17.8%
Investment securities gains (losses), net 718 (7,649) 3,026 N/M N/M
--------------------------------------------------------
Total noninterest income $ 195,603 $ 184,196 $ 165,906 6.2% 11.0%
========================================================
Subtotal, net of asset sale gains
("fee income") $ 192,888 $ 167,425 $ 157,903 15.2% 6.0%
========================================================
N/M = not meaningful
Trust service fees for 2001 were $29.1 million, down $8.6 million (22.7%) from
last year. The change was predominantly due to a decrease in the market value of
assets under management, a function of the market and competitive market
conditions. Trust assets under management totaled $4.2 billion and $4.6 billion
at December 31, 2001 and 2000, respectively.
Service charges on deposits were $37.8 million, $4.5 million (13.6%) higher than
2000 primarily due to 2001 benefiting from the 2000 mid-year increases, changes
in non-sufficient fund/overdraft charges and other service charges, and lower
waive percentages.
Mortgage banking income was $53.7 million in 2001, an increase of $33.8 million,
more than double the 2000 level. Mortgage banking income consists of servicing
fees, the gain or loss on sales of mortgage loans to the secondary market, gains
on sales of servicing, and production-related revenue (origination,
underwriting, and escrow waiver fees). The increase was driven primarily by a
significant increase in secondary mortgage loan production and related sales
between comparable periods ($2.3 billion of production in 2001 versus $456
million in 2000). The higher production levels positively impacted gains on
sales of mortgages (up $29.5 million, of which, $4.1 million was related to
gains in the fair value of mortgage derivatives and $4.3 million was due to the
sale of mortgage servicing rights) and volume-related fees (up $6.2 million).
Servicing fees were down $1.9 million compared to 2000, in line with the decline
in the portfolio serviced for others. The portfolio serviced for others was down
5% to $5.2 billion from $5.5 billion at December 31, 2000, due to sales of
mortgage servicing rights on a portion of the portfolio, partially offset by
increases attributable to higher sales volume.
Credit card and other nondeposit fees were $26.7 million for 2001, an increase
of $0.9 million or 3.9% over 2000, with $1.6 million in increased merchant
income and a $0.6 million decline in other nondeposit charges. The other credit
card revenue was enhanced by the April 2000 acquisition agreement and five-year
agency agreement with Citibank USA which provide for agent fees and other income
on new and existing card business.
Retail commission income (which includes commissions from insurance and
brokerage product sales) was $16.9 million, down $3.3 million or 16.4% compared
to last year. The decrease was primarily attributable to declines in the stock
market, lower portfolio valuations, and general market uncertainty due to the
state of the economy. Brokerage commissions declined $2.1 million, while
insurance commissions declined $1.2 million.
18
Asset sale gains for 2001 were $2.0 million, including the $0.9 million net
premium on the sale of $12 million in deposits from one branch during 2001.
Asset sale gains for 2000 were $24.4 million, including the $12.9 million gain
recognized on the sale of $128 million credit card receivables to Citibank USA
and the $11.1 million net premium on the sales of $109 million in deposits from
six branches during 2000.
Bank owned life insurance income was $12.9 million, up $0.5 million or 4.4% over
last year. Other noninterest income was $15.8 million for 2001, down $2.5
million from 2000. The sale of stock in a regional ATM network resulted in a
gain of $2.6 million during 2001, while 2000 included $1.5 million recognized in
connection with an interim servicing agreement with Citibank USA related to the
credit card receivable sale, and $3.6 million in connection with the
Corporation's mid-2000 change in data processing and management information
system vendors, both of which compensated for certain additional costs incurred
by the Corporation.
Investment securities gains for 2001 were $0.7 million. The 2000 net losses of
$7.6 million were primarily from various securities sold and the proceeds either
reinvested to mitigate interest rate risk and enhance future yields or to pay
down higher cost borrowings.
Noninterest Expense
Total noninterest expense for 2001 was $338.4 million, a $20.6 million or 6.5%
increase over 2000 noninterest expense.
TABLE 7: Noninterest Expense
% Change
From Prior
Years Ended December 31, Year
---------------------------------------------------
2001 2000 1999 2001 2000
---------------------------------------------------
($ in Thousands)
Personnel expense $171,362 $157,007 $151,644 9.1% 3.5%
Occupancy 23,947 23,258 22,576 3.0 3.0
Equipment 14,426 15,272 15,987 (5.5) (4.5)
Data processing 19,596 22,375 21,695 (12.4) 3.1
Business development and advertising 13,071 13,359 11,919 (2.2) 12.1
Stationery and supplies 6,921 7,961 8,110 (13.1) (1.8)
FDIC expense 1,661 1,818 3,313 (8.6) (45.1)
Mortgage servicing rights expense 19,987 9,406 1,668 112.5 N/M
Intangible amortization 8,378 8,905 8,134 (5.9) 9.5
Legal and professional fees 4,394 7,595 8,051 (42.1) (5.7)
Other 54,626 50,780 51,995 7.6 (2.3)
---------------------------------------------------
Total noninterest expense $338,369 $317,736 $305,092 6.5% 4.1%
===================================================
N/M = not meaningful
Personnel expense (including salary-related expenses and fringe benefit
expenses) increased $14.4 million or 9.1% over 2000, and represented 50.6% of
total noninterest expense in 2001 compared to 49.4% in 2000. Salary expense
increased $6.7 million or 5.3% in 2001, despite a modest decrease in average
full-time equivalent employees, due primarily to increases in bonus and
incentive pay and temporary help. Average full-time equivalent employees of
3,849 during 2001 were down 60 or 1.5% from the 3,909 full-time equivalent
employees during 2000. Fringe benefits increased $7.7 million in 2001, primarily
the result of a $3.8 million increase in profit sharing expense (given a higher
profit share percentage in 2001), and a $2.0 million increase in premium based
benefits (directly related to the rising costs of health, dental, and life
insurance coverage).
Occupancy and equipment expense on a combined basis was $38.4 million for 2001,
essentially unchanged from last year. Data processing costs decreased to $19.6
million, down $2.8 million or 12.4% over last year, attributable to lower
overall vendor costs related to the change in service providers and the system
conversion
19
in mid-2000. Business development and advertising decreased to $13.1 million for
2001, down $0.3 million compared to 2000, primarily in television advertising
for a branding campaign in 2000.
Mortgage servicing rights expense includes the amortization of the mortgage
servicing rights asset and increases or decreases to the valuation allowance
associated with the mortgage servicing rights asset. Amortization of mortgage
servicing rights increased by $10.6 million between 2001 and 2000, predominantly
driven by an increase of $10.7 million to the valuation reserve during 2001,
reflecting the decline in interest rates in 2001 and the acceleration in
prepayment speeds in the portfolio of loans serviced for others. See Note 1 of
the notes to consolidated financial statements for the Corporation's accounting
policy for mortgage servicing rights, which is considered a critical accounting
policy given that estimating the fair value of the mortgage servicing rights
involves judgment, particularly of estimated prepayment speeds of the underlying
mortgages serviced. A valuation allowance is established to the extent the
carrying value of the mortgage servicing rights exceeds the estimated fair
value. Net income could be affected if management's estimate of the prepayment
speeds or other factors differ materially from actual prepayments. Mortgage
servicing rights, included in other assets on the consolidated balance sheet,
were $32.1 million, net of a $10.7 million valuation allowance at December 31,
2001 (see Note 6 of the notes to consolidated financial statements).
Intangible amortization decreased to $8.4 million, primarily as the result of
the reduction of intangibles associated with the six branches sold during 2000.
Intangible amortization includes amortization of goodwill and other identifiable
intangible assets. Under the provisions of a new accounting pronouncement,
goodwill and intangible assets with indefinite useful lives will no longer be
amortized beginning January 1, 2002. See further discussion under Note 1 of the
notes to consolidated financial statements.
Legal and professional fees were down $3.2 million compared to last year,
principally in consultant fees not recurring in 2001. Other expense was $54.6
million for 2001, up $3.8 million compared to 2000, most directly attributable
to increased mortgage loan expenses related to the higher secondary mortgage
loan production during 2001 versus 2000 (see also section "Noninterest Income").
Income Taxes
Income tax expense for 2001 was $71.5 million, up $9.6 million from 2000 income
tax expense of $61.8 million. The Corporation's effective tax rate (income tax
expense divided by income before taxes) was 28.5% in 2001 compared to 26.9% in
2000. The increase was primarily attributable to the increase in net income
before tax, an increase in state tax expense, and a decrease in tax valuation
allowance adjustments.
See Note 1 of the notes to consolidated financial statements for the
Corporation's income tax accounting policy. Income tax expense recorded in the
consolidated income statement involves interpretation and application of certain
accounting pronouncements and federal and state tax codes, and is, therefore,
considered a critical accounting policy. The Corporation undergoes examination
by various regulatory taxing authorities. Such agencies may require that changes
in the amount of tax expense or valuation allowance be recognized when their
interpretations differ from those of management, based on their judgments about
information available to them at the time of their examinations. See Note 13 of
the notes to consolidated financial statements for more information.
BALANCE SHEET ANALYSIS
Loans
Total loans were $9.0 billion at December 31, 2001, an increase of $106 million
or 1.2% over December 31, 2000, predominantly in commercial loans. Commercial
loans were $5.2 billion, up $603 million or 13.0%. Commercial loans grew to
represent 58% of total loans at the end of 2001, up from 52% at year-end 2000.
Changing the mix of loans to include more commercial loans continued to be a
strategic initiative during 2001. Also the decrease in residential real estate
was strongly influenced by refinance activity and sales of current year
production into the secondary market.
20
TABLE 8: Loan Composition
As of December 31,
--------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------------------------------------------------------------------------------------
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
--------------------------------------------------------------------------------------------
($ in Thousands)
Commercial, financial, and
agricultural $1,783,300 20% $1,657,322 19% $1,412,338 17% $ 962,208 13% $ 986,839 14%
Real estate - construction 797,734 9 660,732 7 560,450 7 461,157 7 335,978 5
Commercial real estate 2,630,964 29 2,287,946 26 1,903,633 23 1,384,524 19 1,273,174 18
Lease financing 11,629 -- 14,854 -- 23,229 -- 19,231 -- 14,072 --
--------------------------------------------------------------------------------------------
Commercial 5,223,627 58 4,620,854 52 3,899,650 47 2,827,120 39 2,610,063 37
Residential real estate 2,524,199 28 3,158,721 35 3,274,767 39 3,362,885 46 3,263,977 46
Home equity 609,254 7 508,979 6 408,577 5 331,861 5 405,086 6
--------------------------------------------------------------------------------------------
Residential mortgage 3,133,453 35 3,667,700 41 3,683,344 44 3,694,746 51 3,669,063 52
Consumer 662,784 7 624,825 7 760,106 9 750,831 10 793,424 11
--------------------------------------------------------------------------------------------
Total loans $9,019,864 100% $8,913,379 100% $8,343,100 100% $7,272,697 100% $7,072,550 100%
============================================================================================
Commercial, financial, and agricultural loans were $1.8 billion at the end of
2001, up $126 million or 7.6% since year-end 2000, and comprised 20% of total
loans outstanding, up from 19% at the end of 2000. The commercial, financial,
and agricultural loan classification primarily consists of commercial loans to
middle market companies and small businesses. Loans of this type are in a
diverse range of industries. The credit risk related to commercial loans is
largely influenced by general economic conditions and the resulting impact on a
borrower's operations. Within the commercial, financial, and agricultural
classification, loans to finance agricultural production totaled $16.6 million,
only 0.2% of total loans, at December 31, 2001.
Real estate construction loans grew $137 million or 20.7% to $798 million,
representing 9% of the total loan portfolio at the end of 2001, compared to $661
million or 7% at the end of 2000. Loans in this classification are primarily
short-term interim loans that provide financing for the acquisition or
development of commercial real estate, such as multifamily or other commercial
development projects. Real estate construction loans are made to developers and
project managers who are well known to the Corporation, have prior successful
project experience, and are well capitalized. Projects undertaken by these
developers are carefully reviewed by the Corporation to ensure that they are
economically viable. Loans of this type are primarily made to customers based in
the Corporation's tri-state market in which the Corporation has a thorough
knowledge of the local market economy. The credit risk associated with real
estate construction loans is generally confined to specific geographic areas,
but is also influenced by general economic conditions. The Corporation controls
the credit risk on these types of loans by making loans in familiar markets to
developers, underwriting the loans to meet the requirements of institutional
investors in the secondary market, reviewing the merits of individual projects,
controlling loan structure, and monitoring project progress and construction
advances.
Commercial real estate includes loans secured by farmland, multifamily
properties, and nonfarm/nonresidential real estate properties. Commercial real
estate totaled $2.6 billion at December 31, 2001, up $343 million or 15.0% over
last year and comprised 29% of total loans outstanding versus 26% at year-end
2000. Commercial real estate loans involve borrower characteristics similar to
those discussed above for commercial loans and real estate-construction
projects. Loans of this type are mainly for business and industrial properties,
multifamily properties, community purpose properties, and similar properties.
Loans are primarily made to customers based in Wisconsin, Illinois, and
Minnesota. Credit risk is managed in a similar manner to commercial loans and
real estate construction by employing sound underwriting guidelines, lending to
borrowers in known markets and businesses, and formally reviewing the borrower's
financial soundness and relationship on an ongoing basis. In many cases the
Corporation will take additional real estate collateral to further secure the
overall lending relationship.
Residential mortgage loans totaled $3.1 billion at the end of 2001, down $534
million or 14.6% from the prior year and comprised 35% of total loans
outstanding versus 41% at year-end 2000. Loans in this classification include
residential real estate (which consists of conventional home mortgages and
second mortgages) and
21
home equity lines. Residential real estate loans generally limit the maximum
loan to 80% of collateral value. Residential real estate loans were $2.5 billion
at December 31, 2001, down $635 million or 20.0% compared to last year,
principally due to high refinance activity (influenced strongly by the lower
rate environment in 2001 compared to 2000 and sales of the majority of current
year production into the secondary market). Home equity lines grew by $100
million, or 19.7%, to $609 million in 2001, in response to the lower rate
environment in 2001.
TABLE 9: Loan Maturity Distribution and Interest Rate Sensitivity (1)
Maturity (2)
----------------------------------------------------
December 31, 2001 Within 1 Year 1-5 Years After 5 Years Total
------------- --------- ------------- -----
($ in Thousands)
Commercial, financial, and agricultural $1,353,625 $367,462 $ 62,213 $1,783,300
Real estate-construction 559,201 170,596 67,937 797,734
----------------------------------------------------
Total $1,912,826 $538,058 $130,150 $2,581,034
====================================================
Fixed rate $ 395,888 $465,301 $130,150 $991,339
Floating or adjustable rate 1,516,938 72,757 --- 1,589,695
----------------------------------------------------
Total $1,912,826 $538,058 $130,150 $2,581,034
====================================================
Percent 74% 21% 5% 100%
(1) Based upon scheduled principal repayments.
(2) Demand loans, past due loans, and overdrafts are reported in the "Within 1
Year" category.
Consumer loans to individuals totaled $663 million at December 31, 2001, up $38
million or 6.1% compared to 2000, representing 7% of the year-end loan
portfolio. Installment loans include short-term installment loans, direct and
indirect automobile loans, recreational vehicle loans, credit card loans (which
are primarily business-oriented following the April 2000 sale to Citibank USA of
$128 million of retail credit card receivables), student loans, and other
personal loans. Individual borrowers may be required to provide related
collateral or a satisfactory endorsement or guaranty from another person,
depending on the specific type of loan and the creditworthiness of the borrower.
Credit risk for these types of loans is generally greatly influenced by general
economic conditions, the characteristics of individual borrowers, and the nature
of the loan collateral. Credit risk is primarily controlled by reviewing the
creditworthiness of the borrowers as well as taking appropriate collateral and
guaranty positions on such loans. Factors that are critical to managing overall
credit quality are sound loan underwriting and administration, systematic
monitoring of existing loans and commitments, effective loan review on an
ongoing basis, early identification of potential problems, an adequate allowance
for loan losses, and sound nonaccrual and charge-off policies.
An active credit risk management process is used for commercial loans to further
ensure that sound and consistent credit decisions are made. Credit risk is
controlled by detailed underwriting procedures, comprehensive loan
administration, and periodic review of borrowers' outstanding loans and
commitments. Borrower relationships are formally reviewed on an ongoing basis
for early identification of potential problems. Further analyses by customer,
industry, and geographic location are performed to monitor trends, financial
performance, and concentrations.
The loan portfolio is widely diversified by types of borrowers, industry groups,
and market areas. Significant loan concentrations are considered to exist for a
financial institution when there are amounts loaned to numerous borrowers
engaged in similar activities that would cause them to be similarly impacted by
economic or other conditions. At December 31, 2001, no concentrations of any
type existed in the Corporation's portfolio in excess of 10% of total loans.
22
Allowance for Loan Losses
The investment and loan portfolios are the Corporation's primary interest
earning assets. While the investment portfolio is structured with minimum credit
exposure to the Corporation, the loan portfolio is the primary asset subject to
credit risk. Credit risk is controlled and monitored through the use of lending
standards, thorough review of potential borrowers, and on-going review of loan
payment performance. Active asset quality administration, including early
problem loan identification and timely resolution of problems, further ensures
appropriate management of credit risk and minimization of loan losses. Credit
risk management for each loan type is discussed briefly in the section entitled
"Loans."
At December 31, 2001, the allowance for loan losses was $128.2 million, compared
to $120.2 million at December 31, 2000. The $8.0 million increase was the net
result of $28.2 million provision for loan losses, offset by $20.2 million of
net charge offs. As of December 31, 2001, the allowance for loan losses to total
loans was 1.42% and covered 246% of nonperforming loans, compared to 1.35% and
252%, respectively, at December 31, 2000. Tables 10 and 11 provide additional
information regarding activity in the allowance for loan losses and Table 12
provides additional information regarding nonperforming loans.
The provision for loan losses in 2001 was $28.2 million. In comparison, the
provision for loan losses for 2000 was $20.2 million and $19.2 million in 1999.
The provision for loan losses is predominantly a function of the result of the
methodology used to determine the allowance for loan losses.
23
TABLE 10: Loan Loss Experience
Years Ended December 31,
----------------------------------------------------------
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
($ in Thousands)
Allowance for loan losses, at beginning of year $ 120,232 $ 113,196 $ 99,677 $ 92,731 $ 71,767
Balance related to acquisitions -- -- 8,016 3,636 728
Decrease from sale of credit card receivables -- (4,216) -- -- --
Provision for loan losses 28,210 20,206 19,243 14,740 31,668
Loans charged off:
Commercial, financial, and agricultural 11,268 1,679 2,222 3,533 1,327
Real estate - construction 1,631 38 -- 202 600
Commercial real estate 3,578 795 927 *** ***
Residential real estate 1,262 2,923 2,545 *** ***
--------- --------- --------- --------- ---------
Real estate - mortgage 4,840 3,718 3,472 3,256 3,222
Consumer 4,822 5,717 10,925 9,839 9,900
Lease financing 78 3 2 209 --
--------------------------------------------------------
Total loans charged off 22,639 11,155 16,621 17,039 15,049
Recoveries of loans previously charged off:
Commercial, financial, and agricultural 1,013 772 726 2,384 513
Real estate - construction -- -- 1 -- --
Commercial real estate 242 153 364 *** ***
Residential real estate 192 297 291 *** ***
--------------------------------------------------------
Real estate - mortgage 434 450 655 1,582 1,312
Consumer 954 979 1,464 1,641 1,792
Lease financing -- -- 35 2 --
--------------------------------------------------------
Total recoveries 2,401 2,201 2,881 5,609 3,617
--------------------------------------------------------
Net loans charged off 20,238 8,954 13,740 11,430 11,432
--------------------------------------------------------
Allowance for loan losses, at end of year $ 128,204 $ 120,232 $ 113,196 $ 99,677 $ 92,731
========================================================
*** Data for this period is unavailable.
Ratio of allowance for loan losses to net
charge offs 6.3 13.4 8.2 8.7 8.1
Ratio of net charge offs to average loans 0.22% 0.10% 0.18% 0.16% 0.16%
Ratio of allowance for loan losses to total
loans at end of period 1.42% 1.35% 1.36% 1.37% 1.31%
========================================================
The allowance for loan losses represents management's estimate of an amount
adequate to provide for probable incurred credit losses in the loan portfolio at
the balance sheet date. See management's allowance for loan losses accounting
policy in Note 1 of the notes to consolidated financial statements. Management's
evaluation of the adequacy of the allowance for loan losses is based on
management's ongoing review and grading of the loan portfolio, consideration of
past loan loss experience, trends in past due and nonperforming loans, risk
characteristics of the various classifications of loans, existing economic
conditions, the fair value of underlying collateral, and other factors which
could affect potential credit losses. Assessing these numerous factors involves
significant judgment, and therefore, management considers the allowance for loan
losses a critical accounting policy.
In general, the change in the allowance for loan losses is a function of a
number of factors, including but not limited to changes in the loan portfolio
(see Table 8), net charge offs (see Table 10), and nonperforming loans (see
Table 12). First, total loan growth from year-end 2000 to 2001 was up slightly
to 1.2%. The growth was strongest in the commercial portfolio (particularly
commercial real estate; commercial, financial, and agricultural loans; and
construction loans), which grew $603 million or 13.0% to represent 58% of total
loans at
24
year-end 2001 compared to 52% last year-end. This segment of the loan portfolio
carries greater inherent credit risk (described under section "Loans"). Net
charge offs for 2001 have increased to $20.2 million. The rise in net charge
offs is largely due to the charge off of several large commercial credits
(accountable for approximately $10.7 million of charge-offs). Finally,
nonperforming loans to total loans grew to 0.58% for 2001 compared to 0.54% last
year.
The allocation of the Corporation's allowance for loan losses for the last five
years is shown in Table 11. The allocation methodology applied by the
Corporation, designed to assess the adequacy of the allowance for loan losses,
focuses on changes in the size and character of the loan portfolio, changes in
levels of impaired and other nonperforming loans, the risk inherent in specific
loans, concentrations of loans to specific borrowers or industries, existing
economic conditions, and historical losses on each portfolio category. Because
each of the criteria used is subject to change, the allocation of the allowance
for loan losses is made for analytical purposes and is not necessarily
indicative of the trend of future loan losses in any particular loan category.
The total allowance is available to absorb losses from any segment of the
portfolio. Management continues to target and maintain the allowance for loan
losses equal to the allocation methodology plus an unallocated portion, as
determined by economic conditions on the Corporation's borrowers. For both 1999
and 1998, estimation methods and assumptions included consideration of Year 2000
issues on significant customers. Management allocates the allowance for loan
losses for credit losses by pools of risk. The business loan (commercial real
estate; commercial, financial, and agricultural; leases; and real estate
construction) allocation is based on a quarterly review of individual loans,
loan types, and industries. The retail loan (residential real estate, home
equity, and consumer) allocation is based on analysis of historical delinquency
and charge-off statistics and trends. Minimum loss factors used by the
Corporation for criticized loan categories are consistent with regulatory agency
factors. Loss factors for non-criticized loan categories are based primarily on
historical loan loss experience and peer group statistics. The mechanism used to
address differences between estimated and actual loan loss experience includes
review of recent nonperforming loan trends, underwriting trends, external
factors, and management's judgment relating to current assumptions.
The allocation methods used for December 31, 2001 and 2000 were generally
comparable. However, the uncertainty of current economic conditions on the
business results of numerous individual borrowers and certain industries is
being monitored carefully, as is the increased pace at which the financial
results of a borrower's company can take a downturn from difficult and varied
economic conditions. Therefore, the allocations for criticized loans in
substandard and watch categories were increased. The amount allocated to
commercial, financial and agricultural loans in 2001 represented 34% of the
allowance for loan losses, compared to 38% last year. In 2000 for this category,
a greater amount of these loans were in criticized loan categories and for which
specific allocations were made. Thus, as anticipated, Table 10 evidences that
this category incurred the largest amount of 2001 charge-offs. Finally,
commercial, financial and agricultural loans represent 24% of nonperforming
loans compared to 29% last year. The real estate mortgage category accommodates
allowance allocated for commercial real estate and residential real estate. For
2001, the amount allocated for commercial real estate increased to $48.7
million, representing 38.0% of the allowance for loan losses compared to 21.6%
last year. The increase was a function of changes in the commercial real estate
loan category, including increased loan balances, growing 15.0% to represent 29%
of total loans versus 26% at year-end 2000, and increased net charge-off
activity of $3.3 million for 2001, versus last year of $641,000.
For 2000 compared to 1999, the amount allocated to consumer loans decreased to
represent 5% of the allowance for loan losses versus 13% for 1999, predominantly
as a function of the sale of $128 million of credit card receivables in
mid-2000. Additionally, the amount allocated to commercial, financial and
agricultural loans increased to 38% versus 28% last year, in part for the
increase in the amount to criticized categories, as noted above, and since more
of these loans were in nonperforming loan categories at year-end 2000 versus
1999 (29% and 17%, respectively).
Management carefully considers numerous detailed and general factors, its
assumptions, and the likelihood of materially different conditions that could
alter its assumptions. Consolidated net income could be affected if management's
estimate of the population of loans with possible loss or its estimate of the
amount of loss that might be incurred are materially different, requiring
additional provision for loan losses to be recorded.
25
Management believes the allowance for loan losses to be adequate at December 31,
2001. While management uses available information to recognize losses on loans,
future adjustments to the allowance for loan losses may be necessary based on
changes in economic conditions and the impact of such change on the
Corporation's borrowers. As an integral part of their examination process,
various regulatory agencies also review the allowance for loan losses. Such
agencies may require that certain loan balance be charged off when their credit
evaluations differ from those of management, based on their judgments about
information available to them at the time of their examination.
TABLE 11: Allocation of the Allowance for Loan Losses
As of December 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
--------- ------------ ------------ ---------- ---------
($ in Thousands)
Commercial, financial, and agricultural $ 44,071 $ 45,571 $ 31,648 $25,385 $33,682
Real estate - construction 7,977 6,531 5,605 3,369 2,016
Real estate - mortgage 61,894 51,161 50,267 40,216 30,360
Consumer 5,683 6,194 14,904 16,924 16,870
Lease financing 327 149 184 426 493
Unallocated 8,252 10,626 10,588 13,357 9,310
--------------------------------------------------------
Total allowance for loan losses $128,204 $120,232 $113,196 $99,677 $92,731
========================================================
Net charge offs were $20.2 million or 0.22% of average loans for 2001, compared
to $9.0 million or 0.10% of average loans for 2000, and were $13.7 million or
0.18% of average loans for 1999. The $11.3 million increase in net charge offs
was primarily driven by higher charge-offs of commercial, financial and
agricultural loans in 2001 versus 2000 (at $11.3 million, up $9.6 million as
shown in Table 10). This rise in charge offs is predominantly due to the charge
off of several large commercial credits (accountable for approximately $10.7
million of the charge-offs) during 2001. Loans charged off are subject to
continuous review, and specific efforts are taken to achieve maximum recovery of
principal, accrued interest, and related expenses.
Nonperforming Loans, Potential Problem Loans, and Other Real Estate Owned
Management is committed to an aggressive nonaccrual and problem loan
identification philosophy. This philosophy is embodied through the ongoing
monitoring and reviewing of all pools of risk in the loan portfolio to ensure
that all problem loans are identified quickly and the risk of loss is minimized.
Nonperforming loans are defined as nonaccrual loans, loans 90 days or more past
due but still accruing, and restructured loans. The Corporation specifically
excludes from its definition of nonperforming loans student loan balances that
are 90 days or more past due and still accruing and that have contractual
government guarantees as to collection of principal and interest. Such past due
student loans were approximately $21.0 million and $19.5 million at December 31,
2001 and 2000, respectively.
Loans are generally placed on nonaccrual status when contractually past due 90
days or more as to interest or principal payments. Additionally, whenever
management becomes aware of facts or circumstances that may adversely impact the
collectibility of principal or interest on loans, it is management's practice to
place such loans on nonaccrual status immediately, rather than delaying such
action until the loans become 90 days past due. Previously accrued and
uncollected interest on such loans is reversed, amortization of related loan
fees is suspended, and income is recorded only to the extent that interest
payments are subsequently received in cash and a determination has been made
that the principal balance of the loan is collectible. If collectibility of the
principal is in doubt, payments received are applied to loan principal.
Loans past due 90 days or more but still accruing interest are also included in
nonperforming loans. Loans past due 90 days or more but still accruing are
classified as such where the underlying loans are both well secured (the
collateral value is sufficient to cover principal and accrued interest) and in
the process of collection. Also included in nonperforming loans are
"restructured" loans. Restructured loans involve the granting of some
26
concession to the borrower involving the modification of terms of the loan, such
as changes in payment schedule or interest rate.
TABLE 12: Nonperforming Loans and Other Real Estate Owned
December 31,
------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ------------ ----------- -----------
($ in Thousands)
Nonaccrual loans $48,238 $41,045 $32,076 $48,150 $32,415
Accruing loans past due 90 days or more 3,649 6,492 4,690 5,252 1,324
Restructured loans 238 159 148 485 558
------------------------------------------------------------
Total nonperforming loans $52,125 $47,696 $36,914 $53,887 $34,297
Other real estate owned 2,717 4,032 3,740 6,025 2,067
------------------------------------------------------------
Total nonperforming assets $54,842 $51,728 $40,654 $59,912 $36,364
============================================================
Ratios at period end:
Nonperforming loans to total loans 0.58% 0.54% 0.44% 0.74% 0.48%
Nonperforming assets to total assets 0.40% 0.39% 0.32% 0.53% 0.34%
Allowance for loan losses to nonperforming loans 246% 252% 307% 185% 270%
============================================================
Nonperforming loans at December 31, 2001, were $52.1 million, an increase of
$4.4 million from December 31, 2000. The ratio of nonperforming loans to total
loans at the end of 2001 was 0.58%, as compared to 0.54% and 0.44% at December
31, 2000 and 1999, respectively. Nonaccrual loans accounted for $7.2 million of
the increase in nonperforming loans, partially offset by a $2.8 million decline
in accruing loans past due 90 days or more. Commercial nonaccrual loans
(representing approximately 65% of nonaccrual loans at year-end 2001 versus 67%
at year-end 2000) increased $4.0 million, predominantly due to the addition of
one large commercial credit (totaling approximately $3.1 million). Accruing
loans past due 90 days or more declined as the result of one large commercial
credit that went on nonaccrual during 2001, and was subsequently repaid and
partially charged off. The Corporation's allowance for loan losses to
nonperforming loans was 246% at year-end 2001, down from 252% at year-end 2000
and 307% at year-end 1999.
Other real estate owned decreased to $2.7 million at December 31, 2001, compared
to $4.0 million and $3.7 million at year-end 2000 and 1999, respectively. Net
gains on sales of other real estate owned were $643,000, $116,000 and $403,000
for 2001, 2000, and 1999, respectively. Management actively seeks to ensure
properties held are monitored to minimize the Corporation's risk of loss.
The following table shows, for those loans accounted for on a nonaccrual basis
and restructured loans for the years ended as indicated, the gross interest that
would have been recorded if the loans had been current in accordance with their
original terms and the amount of interest income that was included in interest
income for the period.
TABLE 13: Foregone Loan Interest
Years Ended December 31,
---------------------------------
2001 2000 1999
---------- ----------- ----------
($ in Thousands)
Interest income in accordance
with original terms $4,840 $3,951 $3,074
Interest income recognized (2,694) (2,609) (1,637)
---------------------------------
Reduction in interest income $2,146 $1,342 $1,437
=================================
Potential problem loans are loans where there are doubts as to the ability of
the borrower to comply with present repayment terms. The decision of management
to place loans in this category does not necessarily indicate that the
Corporation expects losses to occur, but that management recognizes that a
higher degree of risk is associated with these performing loans. At December 31,
2001, potential problem loans totaled
27
$177.8 million. The loans that have been reported as potential problem loans are
not concentrated in a particular industry, but rather cover a diverse range of
businesses. Management does not presently expect significant losses from credits
in the potential problem loan category.
Investment Securities Portfolio
The investment securities portfolio is intended to provide the Corporation with
adequate liquidity, flexibility in asset/liability management, and a source of
stable income. Investment securities classified as held to maturity are carried
in the consolidated balance sheet at amortized cost while investment securities
classified as available for sale are carried at fair market value. At December
31, 2001, the total carrying value of investment securities represented 23% of
total assets, compared to 25% at year-end 2000. On average, the investment
portfolio represented 26% and 28% of average earning assets for 2001 and 2000,
respectively.
The classification of securities as held to maturity or available for sale is
determined at the time of purchase. Beginning in 1998, the Corporation began to
classify most investment purchases as available for sale. This is consistent
with the Corporation's investment philosophy of maintaining flexibility to
manage the investment portfolio, particularly in light of asset/liability
management strategies, including possible securities sales in response to
changes in interest rates or prepayment risk, the need to manage regulatory
capital, and other factors. Statement of Financial Accounting Standards No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities,"
which was adopted by the Corporation as required on January 1, 2001, provided
for the option, upon adoption, to change the classification of investments held.
Thus, on January 1, 2001, the Corporation reclassified all its held to maturity
securities to available for sale securities. The amortized cost and fair value
of the securities transferred were $369 million and $373 million, respectively.
SFAS 133 is more fully described under Notes 1 and 15 of the notes to
consolidated financial statements.
TABLE 14: Investment Securities Portfolio
At December 31,
--------------------------------------
2001 2000 1999
------------- ----------- ------------
($ in Thousands)
Investment Securities Held to Maturity:
Federal agency securities $ -- $ 25,055 $ 26,012
Obligations of states and political
subdivisions -- 110,182 128,833
Mortgage-related securities -- 182,299 204,725
Other securities (debt) -- 51,022 54,467
-------------------------------------
Total amortized cost and carrying value $ -- $ 368,558 $ 414,037
=====================================
Total fair value $ -- $ 372,873 $ 413,107
=====================================
Investment Securities Available for Sale:
U.S. Treasury securities $ 15,071 $ 23,847 $ 47,092
Federal agency securities 196,175 341,929 406,275
Obligations of state and political 847,887 756,914 550,975
subdivisions
Mortgage-related securities 1,642,851 1,425,290 1,578,089
Other securities (debt and equity) 414,399 319,129 334,024
-------------------------------------
Total amortized cost $3,116,383 $2,867,109 $2,916,455
=====================================
Total fair value and carrying value $3,197,021 $2,891,647 $2,856,346
=====================================
Total Investment Securities:
Total amortized cost $3,116,383 $3,235,667 $3,330,492
Total fair value 3,197,021 3,264,520 3,269,453
Total carrying value 3,197,021 3,260,205 3,270,383
=====================================
28
At December 31, 2001 and 2000, mortgage-related securities represented 52.7% and
49.7%, respectively, of total investment securities based on amortized cost. The
fair value of mortgage-related securities are subject to inherent risks based
upon the future performance of the underlying collateral (i.e. mortgage loans)
for these securities, such as prepayment risk and interest rate changes.
At December 31, 2001, the Corporation's securities portfolio did not contain
securities, other than U.S. Treasury and federal agencies, of any single issuer
that were payable from and secured by the same source of revenue or taxing
authority where the aggregate carrying value of such securities exceeded 10% of
stockholders' equity or $1.1 billion.
TABLE 15: Investment Securities Portfolio Maturity Distribution (1)
- At December 31, 2001
Investment Securities Available for Sale - Maturity Distribution and Weighted Average Yield
-------------------------------------------------------------------------------------------------------------------
After one but After five Mortgage-related
Within within five but within After and
one year years ten years ten years equity securities Total Total
------------------------------------------------------------------------------------------------ Fair
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Value
-------------------------------------------------------------------------------------------------------------------
($ in Thousands)
U. S. Treasury
securities $ 3,955 6.40% $ 11,116 2.84% $ -- -- $ -- -- $ -- -- $ 15,071 3.78% $ 15,115
Federal agency
securities 35,969 6.22% 160,001 5.92% 111 6.83% 94 5.82% -- -- 196,175 5.98% 204,644
Obligations of
states and
political
subdivisions
(2) 29,555 7.30% 175,523 7.00% 314,421 6.73% 328,388 7.99% -- -- 847,887 7.29% 861,603
Other debt
securities 96,058 4.88% 182,601 6.18% 20,860 6.20% -- -- -- -- 299,519 5.76% 306,554
Mortgage-related
securities -- -- -- -- -- -- -- -- 1,642,851 6.23% 1,642,851 6.23% 1,674,323
Equity
securities -- -- -- -- -- -- -- -- 114,880 5.07% 114,880 5.07% 134,782
-------------------------------------------------------------------------------------------------------------------
Total amortized
cost $165,537 5.60% $529,241 6.10% $335,392 6.70% $328,482 7.99% $1,757,731 6.16% $3,116,383 6.40% $3,197,021
===================================================================================================================
Total fair
value $167,534 $547,865 $337,188 $335,329 $1,809,105 $3,197,021
===================================================================================================================
(1) Expected maturities will differ from contractual maturities, as borrowers
may have the right to call or repay obligations with or without call or
prepayment penalties.
(2) Yields on tax-exempt securities are computed on a tax-equivalent basis
using a tax rate of 35% and have not been adjusted for certain disallowed
interest deductions.
Deposits
Deposits are the Corporation's largest source of funds. At December 31, 2001,
deposits were $8.6 billion, down $679 million or 7.3% over last year, primarily
in brokered certificates of deposit ("CDs") (down $626 million). Total deposits
excluding brokered CDs ("nonbrokered deposits") were relatively flat between
year-end periods. The sale of deposits of one branch during 2001 decreased
deposits by $12 million. The sale of six branches during 2000 decreased deposits
at year-end 2000 by approximately $109 million.
The primary factors influencing the Corporation's nonbrokered deposit growth has
been competitive pressure from other financial institutions, as well as other
investment opportunities available to customers. During 2001 the Corporation
particularly marketed its business demand deposits and money market accounts,
which offer competitive, market-indexed rates, and greater customer flexibility.
On average, deposits were $8.6 billion for 2001, down $522 million or 5.7% over
the average for 2000. However, excluding the $436 million decrease in average
brokered CDs, deposits were down 1.0%. As previously mentioned under section
"Net Interest Income," the decline in average deposits increased the
Corporation's reliance on wholesale funding, as discussed under section "Other
Funding Sources."
Table 16 summarizes the distribution of average deposits. A maturity
distribution of certificates of deposits and other time deposits of $100,000 or
more at December 31, 2001, is shown in Table 17.
29
TABLE 16: Average Deposits Distribution
2001 2000 1999
--------------------- --------------------- --------------------
% of % of % of
Amount Total Amount Total Amount Total
----------- ----- ---------- ----- ---------- -----
($ in Thousands)
Noninterest-bearing demand
deposits $1,166,495 14% $1,086,582 12% $1,003,687 12%
Interest-bearing demand deposits 799,451 9 803,779 9 796,506 9
Savings deposits 839,417 10 956,177 11 919,163 11
Money market deposits 1,722,242 20 1,407,502 15 1,373,010 16
Brokered certificates of deposit 404,686 5 840,518 9 241,309 3
Other time deposits 3,648,942 42 4,008,382 44 4,297,977 49
----------------------------------------------------------------
Total deposits $8,581,233 100% $9,102,940 100% $8,631,652 100%
================================================================
TABLE 17: Maturity Distribution-Certificates of Deposit and
Other Time Deposits of $100,000 or More
December 31, 2001
----------------------------
Certificates Other Time
of Deposit Deposits
----------------------------
($ in Thousands)
Three months or less $511,504 $ 66,427
Over three months through six months 152,180 36,809
Over six months through twelve months 117,493 38,791
Over twelve months 70,233 612
----------------------------
Total $851,410 $142,639
============================
Other Funding Sources
Other funding sources, including both long-term debt and short-term borrowings
("wholesale funds"), were $3.7 billion at December 31, 2001, up $1.0 billion
from $2.7 billion at December 31, 2000. Long-term debt at December 31, 2001, was
$1.1 billion, up from $122.4 million at the end of last year, due to the
issuance of $200 million of subordinated debt, $200 million of bank notes, and
the use of long-term Federal Home Loan Bank advances. See Note 10 of the notes
to consolidated financial statements for additional information on long-term
debt. Short-term borrowings are primarily comprised of Federal funds purchased;
securities sold under agreements to repurchase; short-term Federal Home Loan
Bank advances; notes payable to banks; treasury, tax, and loan notes; and
commercial paper. The Federal Home Loan Bank advances included in short-term
borrowings are those with original maturities of less than one year. The
treasury, tax, and loan notes are demand notes representing secured borrowings
from the U.S. Treasury, collateralized by qualifying securities and loans. The
funds are placed with the subsidiary banks at the discretion of the U.S.
Treasury and may be called at any time. See Note 9 of the notes to consolidated
financial statements for additional information on short-term borrowings, and
Table 18 for specific disclosure required for major short-term borrowing
categories.
Wholesale funds on average were $3.3 billion for 2001, up $683 million or 25.7%
over 2000. The reliance on wholesale funds increased during 2001 as mentioned
under both sections "Net Interest Income" and "Deposits". The mix of wholesale
funding shifted toward longer-term instruments, with average long-term debt
representing 17.2% of wholesale funds compared to 4.3% last year, in response to
certain asset/liability objectives and favorable interest rates. Within the
short-term borrowing categories, average Federal funds purchased and securities
sold under agreements to repurchase were up $115 million and short-term Federal
Home Loan Bank advances were up $181 million.
30
TABLE 18: Short-Term Borrowings
December 31,
-----------------------------------------
2001 2000 1999
------------ ------------ ------------
($ in Thousands)
Federal funds purchased and securities sold under
agreements to repurchase:
Balance end of year $1,691,152 $1,691,796 $1,344,396
Average amounts outstanding during year 1,839,336 1,724,291 1,057,269
Maximum month-end amounts outstanding 2,298,320 2,012,529 1,640,043
Average interest rates on amounts outstanding at end of 2.22% 6.59% 5.30%
year
Average interest rates on amounts outstanding during year 4.19% 6.25% 5.00%
Federal Home Loan Bank advances:
Balance end of year $ 300,000 $ 750,000 $ 531,652
Average amounts outstanding during year 722,466 541,909 778,245
Maximum month-end amounts outstanding 850,000 1,375,653 1,173,021
Average interest rates on amounts outstanding at end of 3.15% 6.42% 6.37%
year
Average interest rates on amounts outstanding during year 6.25% 6.39% 5.22%
Liquidity
The objective of liquidity management is to ensure that the Corporation has the
ability to generate sufficient cash or cash equivalents in a timely and
cost-effective manner to meet its commitments as they fall due. Funds are
available from a number of sources, primarily from the core deposit base and
from loans and securities repayments and maturities. Additionally, liquidity is
provided from sales of the securities portfolio, lines of credit with major
banks, the ability to acquire large and brokered deposits, and the ability to
securitize or package loans for sale.
The Corporation's liquidity management framework includes measurement of several
key elements, such as wholesale funding as a percent of total assets and liquid
assets to short-term wholesale funding. The Corporation's liquidity framework
also incorporates contingency planning to assess the nature and volatility of
funding sources and to determine alternatives to these sources. The contingency
plan would be activated to ensure the Corporation's funding commitments could be
met in the event of general market disruption or adverse economic conditions.
Strong capital ratios, credit quality and core earnings are essential to
retaining high credit ratings and, consequently, cost-effective access to the
wholesale funding markets. A downgrade or loss in credit ratings could have an
impact on the Corporation's ability to access wholesale funding at favorable
interest rates. As a result, capital ratios, asset quality measurements and
profitability ratios are monitored on an ongoing basis as part of the liquidity
management process.
TABLE 19: Credit Ratings at December 31, 2001
Fitch
Moody's S&P Ratings
------- --- -------
Bank short-term P1 A2 F1
Bank long-term A2 A- A-
Corporation short-term P2 A2 F1
Corporation long-term A3 BBB+ A-
Subordinated debt long-term Baa1 BBB BBB+
While core deposits and loan and investment repayment are principal sources of
liquidity, funding diversification is another key element of liquidity
management. Diversity is achieved by strategically varying depositor type, term,
funding market, and instrument.
The parent company manages its liquidity position to provide the funds necessary
to pay dividends to stockholders, service debt, invest in subsidiaries,
repurchase common stock, and satisfy other operating
31
requirements. The parent company's primary funding sources to meet its liquidity
requirements are dividends and service fees from subsidiaries, borrowings with
major banks, commercial paper issuance, and proceeds from the issuance of
equity. Dividends received in cash from subsidiaries totaled $90.0 million in
2001 and represent a primary funding source. At December 31, 2001, $148.0
million in dividends could be paid to the parent by its subsidiaries and
affiliates without obtaining prior regulatory approval, subject to the capital
needs of the banks. As discussed in Item 1, the subsidiary banks are subject to
regulation and, among other things, may be limited in their ability to pay
dividends or transfer funds to the parent company. Accordingly, consolidated
cash flows as presented in the consolidated statements of cash flows may not
represent cash immediately available for the payment of cash dividends to the
Corporation's stockholders or for other cash needs.
In addition to affiliate dividends, the parent company has multiple funding
sources that could be used to increase liquidity and provide additional
financial flexibility. These sources include a revolving credit facility,
commercial paper and a shelf registration. The parent company has available a
$100 million revolving credit facility with established lines of credit from
nonaffiliated banks, of which $100 million was available at December 31, 2001.
During 2000, a $200 million commercial paper program was initiated, of which
$200 million was available at December 31, 2001. Additionally, effective in May
2001, the parent company filed a registration statement utilizing a "shelf"
registration process. Under this shelf process, the parent company may offer up
to $500 million of any combination of the following securities, either
separately or in units: debt securities, preferred stock, depositary shares,
common stock, and warrants. In August 2001, the parent company obtained $200
million in a subordinated notes offering, bearing a 6.75% fixed coupon rate and
a 10-year maturity. At December 31, 2001, $300 million was available under the
shelf registration.
Investment securities are an important tool to the Corporation's liquidity
objective. As of December 31, 2001, all securities are classified as available
for sale. Of the $3.2 billion investment portfolio, $1.0 billion were pledged as
collateral for repurchase agreements, representing a lower-cost source of funds.
The remaining securities could be pledged or sold to enhance liquidity if
necessary.
The bank affiliates have a variety of funding sources (in addition to key
liquidity sources, such as core deposits, loan sales, loan repayments, and
investment portfolio sales) available to increase financial flexibility. During
2000, the four largest subsidiary banks (Associated Bank Illinois, National
Association, Associated Bank Milwaukee, Associated Bank Green Bay, National
Association, and Associated Bank North) established a $2.0 billion bank note
program. As noted in the opening section of Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, during the second
quarter of 2001 the Corporation merged its Wisconsin banks into a single
national charter named Associated Bank, National Association; thus, subsequently
the program is available for use by Associated Bank Illinois, National
Association and Associated Bank, National Association. Under this program,
short-term and long-term debt may be issued. In April 2001, Associated Bank,
National Association obtained $200 million of variable rate notes that reprice
quarterly at LIBOR plus 22 bp and bear a two-year maturity. As of December 31,
2001, $1.8 billion was available. The banks have also established federal funds
lines with major banks totaling approximately $2.3 billion and the ability to
borrow approximately $1.3 billion from the Federal Home Loan Bank ($1.1 billion
was outstanding at December 31, 2001). In addition, the bank affiliates also
accept Eurodollar deposits, issue institutional CDs, and from time to time offer
brokered CDs.
Through the normal course of operations, the Corporation has entered into
certain contractual obligations and other commitments. Such obligations
generally relate to funding of operations through deposits or debt issuances, as
well as leases for premises and equipment. As a financial service provider the
Corporation routinely enters into commitments to extend credit. While
contractual obligations represent future cash requirements of the Corporation, a
significant portion of commitments to extend credit may expire without being
drawn upon. Such commitments are subject to the same credit policies and
approval process accorded to loans made by the Corporation.
32
The following table summarizes significant contractual obligations and other
commitments at December 31, 2001.
Table 20: Contractual Obligations and Other Commitments
Operating
Time deposits Long-term debt leases Total
-------------------------------------------------------
($ in Thousands)
2002 $3,046,869 $ 200,140 $ 5,590 $3,252,599
2003 421,112 502,411 5,223 928,746
2004 111,873 200,150 3,980 316,003
2005 50,687 --- 3,650 54,337
2006 16,389 --- 2,966 19,355
Thereafter 2,662 200,694 15,480 218,836
-------------------------------------------------------
Total $3,649,592 $1,103,395 $36,889 $4,789,876
=======================================================
Commitments to extend credit $3,189,013
==========
For the year ended December 31, 2001, net cash provided from financing
activities was $238.1 million, while operating and investing activities used net
cash of $409,000 and $28.8 million, respectively, for a net increase in cash and
cash equivalents of $208.9 million since year-end 2000. Generally, during 2001,
time deposits matured that were not renewed (primarily in brokered CDs), while
total asset growth since year-end 2000 was moderate. Thus, other financing
sources increased, particularly long-term debt and other short-term borrowings,
to help replenish the net decrease in deposits and to provide for common stock
repurchases and payment of cash dividends to the Corporation's stockholders.
For the year ended December 31, 2000, net cash was provided from both operating
and financing activities ($189.2 million and $367.7 million, respectively),
while investing activities used net cash of $474.5 million, for a net increase
in cash and cash equivalents of $82.4 million since year-end 1999. Generally,
total assets grew modestly during 2000, primarily in loans, and cash was also
needed for payment of cash dividends and for common stock repurchases. These
needs were funded by increased deposits (primarily brokered CDs), net of
deposits sold, and by proceeds from the sale of the credit card receivables.
During 2000, proceeds from the sales and maturities of investment securities
were predominantly reinvested by the Corporation to mitigate interest rate risk
and enhance future investment yields.
Quantitative and Qualitative Disclosures about Market Risk
Market risk arises from exposure to changes in interest rates, exchange rates,
commodity prices, and other relevant market rate or price risk. The Corporation
faces market risk in the form of interest rate risk through other than trading
activities. Market risk from other than trading activities in the form of
interest rate risk is measured and managed through a number of methods. The
Corporation uses financial modeling techniques that measure the sensitivity of
future earnings due to changing rate environments to measure interest rate risk.
Policies established by the Corporation's Asset/Liability Committee and approved
by the Corporation's Board of Directors limit exposure of earnings at risk.
General interest rate movements are used to develop sensitivity as the
Corporation feels it has no primary exposure to a specific point on the yield
curve. These limits are based on the Corporation's exposure to a 100 bp and 200
bp immediate and sustained parallel rate move, either upward or downward.
Interest Rate Risk
In order to measure earnings sensitivity to changing rates, the Corporation uses
three different measurement tools: static gap analysis, simulation of earnings,
and economic value of equity. The static gap analysis starts with contractual
repricing information for assets, liabilities, and off-balance sheet
instruments. These items are then combined with repricing estimations for
administered rate (interest-bearing demand deposits, savings, and money market
accounts) and non-rate related products (demand deposit accounts, other assets,
and other liabilities) to create a baseline repricing balance sheet. In addition
to the contractual information, residential mortgage whole loan products and
mortgage-backed securities are adjusted based on industry estimates of
33
prepayment speeds that capture the expected prepayment of principal above the
contractual amount based on how far away the contractual coupon is from market
coupon rates.
The following table represents the Corporation's consolidated static gap
position as of December 31, 2001.
TABLE 21: Interest Rate Sensitivity Analysis
December 31, 2001
---------------------------------------------------------------------------------------
Interest Sensitivity Period
Total Within
0-90 Days 91-180 Days 181-365 Days 1 Year Over 1 Year Total
---------------------------------------------------------------------------------------
($ in Thousands)
Earning assets:
Loans, held for sale $ 301,707 $ -- $ -- $ 301,707 $ -- $ 301,707
Investment securities, at
amortized cost 450,378 144,107 257,005 851,490 2,264,893 3,116,383
Loans 4,169,830 449,088 1,080,056 5,698,974 3,320,890 9,019,864
Other earning assets 17,442 -- -- 17,442 -- 17,442
---------------------------------------------------------------------------------------
Total earning assets $ 4,939,357 $ 593,195 $ 1,337,061 $ 6,869,613 $ 5,585,783 $12,455,396
=======================================================================================
Interest-bearing liabilities:
Interest-bearing deposits(1) (2) $ 1,473,802 $ 1,425,082 $ 1,737,432 $ 4,636,316 $ 3,686,295 $ 8,322,611
Other interest-bearing 3,115,134 100 200,640 3,315,874 721,372 4,037,246
liabilities (2)
Interest rate swaps (400,000) -- 400,000 -- -- --
---------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 4,188,936 $ 1,425,182 $ 2,338,072 $ 7,952,190 $ 4,407,667 $12,359,857
=======================================================================================
Interest sensitivity gap $ 750,421 $ (831,987) $(1,001,011) $$ 1,178,116 $ 95,539
Cumulative interest sensitivity gap $ 750,421 $ (81,566) $(1,082,577)
12 Month cumulative gap as a
percentage of earning assets
at December 31, 2001 6.0% (0.7)% (8.7)%
=======================================================================================
(1) The interest rate sensitivity assumptions for demand deposits, savings
accounts, money market accounts, and interest-bearing demand deposit
accounts are based on current and historical experiences regarding
portfolio retention and interest rate repricing behavior. Based on these
experiences, a portion of these balances are considered to be long-term and
fairly stable and are therefore included in the "Over 1 Year" category.
(2) For analysis purposes, Brokered CDs of $290,000 have been included with
other interest-bearing liabilities and excluded from interest-bearing
deposits.
The static gap analysis in Table 21 provides a representation of the
Corporation's earnings sensitivity to changes in interest rates. It is a static
indicator that does not reflect various repricing characteristics and may not
necessarily indicate the sensitivity of net interest income in a changing
interest rate environment.
Interest rate risk of embedded positions including prepayment and early
withdrawal options, lagged interest rate changes, administered interest rate
products, and cap and floor options within products require a more dynamic
measuring tool to capture earnings risk. Earnings simulation and economic value
of equity are used to more completely assess interest rate risk.
Along with the static gap analysis, determining the sensitivity of short term
future earnings to a hypothetical plus or minus 100 and 200 basis point parallel
rate shock can be accomplished through the use of simulation modeling. In
addition to the assumptions used to create the static gap, simulation of
earnings includes the modeling of the balance sheet as an ongoing entity. Future
business assumptions involving administered rate products, prepayments for
future rate-sensitive balances, and the reinvestment of maturing assets and
liabilities are included. These items are then modeled to project net interest
income based on a hypothetical change in interest rates. The resulting net
interest income for the next 12-month period is compared to the net interest
income amount calculated using flat rates. This difference represents the
Corporation's earnings sensitivity to a plus or minus 100 basis point parallel
rate shock.
The resulting simulations for December 31, 2001, projected that net interest
income would decrease by approximately 1.6% of budgeted net interest income if
rates rose by a 100 basis point shock, and projected that
34
net interest income would decrease by approximately 0.1% of budgeted net
interest income if rates fell by a 100 basis point shock. At December 31, 2000,
the 100 basis point shock up was projected to decrease net interest income by
3.4%, and the 100 basis point shock down projected that net interest income
would increase by 2.6%.
Economic value of equity is another tool used to measure the impact of interest
rates on the present value of assets, liabilities and off-balance sheet
financial instruments. This measurement is a longer-term analysis of interest
rate risk as it evaluates every cash flow produced by the current balance sheet.
The projected changes for earnings simulation and economic value of equity for
both 2001 and 2000 were within the Corporation's interest rate risk policy.
According to the interest rate risk tests discussed above, the Corporation's
sensitivity to interest rate changes decreased during 2001. This reduction in
interest sensitivity came from changes in the mix of the balance sheet and the
use of long-term debt.
These results are based solely on immediate and sustained parallel changes in
market rates and do not reflect the earnings sensitivity that may arise from
other factors. These factors may include changes in the shape of the yield
curve, the change in spread between key market rates, or accounting recognition
of the impairment of certain intangibles. The above results are also considered
to be conservative estimates due to the fact that no management action to
mitigate potential income variances are included within the simulation process.
This action could include, but would not be limited to, delaying an increase in
deposit rates, extending liabilities, using financial derivative products to
hedge interest rate risk, changing the pricing characteristics of loans, or
changing the growth rate of certain assets and liabilities.
The Corporation uses interest rate derivative financial instruments as an
asset/liability management tool to hedge mismatches in interest rate exposure
indicated by the net interest income simulation described above. They are used
to reduce the Corporation's exposure to interest rate fluctuations and provide
more stable spreads between loan yields and the rate on their funding sources.
In 2001, the Corporation executed $523 million of new interest rate swaps to
reduce interest rate risk. Interest rate swaps involve the exchange of fixed-
and variable-rate payments without the exchange of the underlying notional
amount on which the interest payments are calculated.
Table 22: Interest Rate Swap Hedging Portfolio Notional
Balances and Yield by Maturity Date
Maturity Notional Weighted Average Weighted Average
Date Amount Rate Received Rate Paid
- -------------------------------------------------------------------------------
($ in Thousands)
2002 $ 200,000 6.44% 2.44%
2004 15,106 6.71 4.13
2005 23,651 6.54 4.46
2006 36,194 7.31 4.36
2007 20,887 6.99 4.15
2008 12,521 7.23 4.22
2010 1,503 7.85 4.47
2011 413,524 4.65 4.63
---------
$ 723,386
=========
To hedge against rising interest rates, the Corporation may use interest rate
caps. Counterparties to these interest cap agreements pay the Corporation based
on the notional amount and the difference between current rates and strike
rates. At December 31, 2001, there were $200 million of interest rate caps
outstanding, which have a six month LIBOR strike of 4.72%. To hedge against
falling interest rates, the Corporation may use interest rate floors. Like caps,
counterparties to interest rate floor agreements pay the Corporation based on
the notional amount and the difference between current rates and strike rates.
There were no floors outstanding at December 31, 2001. Derivative financial
instruments are also discussed in Note 15 of the notes to consolidated financial
statements.
35
Capital
Stockholders' equity at December 31, 2001, increased to $1.1 billion or $16.38
per share, compared with $968.7 million or $14.65 per share at the end of 2000.
Stockholders' equity is also described in Note 11 of the notes to consolidated
financial statements.
The increase in stockholders' equity in 2001 was primarily composed of retention
of earnings and the exercise of stock options, with offsetting decreases to
stockholders' equity from the payment of cash dividends and the repurchase of
common stock. Additionally, stockholders' equity at year-end 2001 included $47.2
million of accumulated other comprehensive income, predominantly related to
unrealized gains on securities available for sale, net of the tax effect. At
December 31, 2000, stockholders' equity included $15.6 million of accumulated
other comprehensive income related to unrealized gains on securities available
for sale, net of the tax effect. Stockholders' equity to assets at December 31,
2001 was 7.87%, compared to 7.38% at the end of 2000.
TABLE 23: Capital
At December 31,
----------------------------------------
2001 2000 1999
------------- ------------- ------------
(In Thousands, except per share data)
Total stockholders' equity $1,070,416 $ 968,696 $ 909,789
Tier 1 capital 924,871 846,371 831,907
Total capital 1,253,036 966,994 941,005
Market capitalization 2,305,672 2,008,274 2,164,623
---------------------------------------
Book value per common share $ 16.38 $ 14.65 $ 13.09
Cash dividend per common share 1.22 1.11 1.05
Stock price at end of period 35.29 30.38 31.14
Low closing price for the period 29.75 20.29 27.56
High closing price for the period 36.91 30.63 39.15
---------------------------------------
Total equity / assets 7.87% 7.38% 7.27%
Tangible common equity / assets 7.20 6.62 6.39
Tier 1 leverage ratio 7.03 6.52 6.80
Tier 1 risk-based capital ratio 9.71 9.37 9.72
Total risk-based capital ratio 13.15 10.70 10.99
---------------------------------------
Shares outstanding (period end) 65,335 66,116 69,520
Basic shares outstanding (average) 65,988 68,186 69,858
Diluted shares outstanding (average) 66,516 68,410 70,468
=======================================
Cash dividends paid in 2001 were $1.22 per share, compared with $1.11 per share
in 2000, an increase of 10.2%. Cash dividends per share have increased at a
12.1% compounded rate during the past five years.
The adequacy of the Corporation's capital is regularly reviewed to ensure that
sufficient capital is available for current and future needs and is in
compliance with regulatory guidelines. The assessment of overall capital
adequacy depends on a variety of factors, including asset quality, liquidity,
stability of earnings, changing competitive forces, economic condition in
markets served, and strength of management.
As of December 31, 2001 and 2000, the Corporation's Tier 1 risk-based capital
ratios, total risk-based capital (Tier 1 and Tier 2) ratios, and Tier 1 leverage
ratios were in excess of regulatory minimum and well capitalized requirements.
It is management's intent to exceed the minimum requisite capital levels. The
increase in the total risk-based capital ratio for 2001 compared to 2000 is
primarily attributable to the subordinated debt issued in 2001 which qualifies
as Tier 2 supplementary capital for regulatory purposes. Capital ratios are
included in Note 18 of the notes to consolidated financial statements.
The Board of Directors has authorized management to repurchase shares of the
Corporation's common stock each quarter in the market, to be made available for
issuance in connection with the Corporation's employee
36
incentive plans and for other corporate purposes. The Board of Directors
authorized the repurchase of up to 1.2 million shares (300,000 shares per
quarter) in 2001 and 2000. Of these authorizations, approximately 800,000 shares
were repurchased for $26.7 million during 2001 (with 247,000 shares reissued in
connection with stock options exercised), and 418,000 shares were repurchased
for $10.6 million in 2000 (with 322,000 shares reissued for options exercised).
Additionally, under two separate actions in 2000, the Board of Directors
authorized the repurchase and cancellation of the Corporation's outstanding
shares, not to exceed approximately 6.7 million shares on a combined basis.
Under these authorizations 228,000 shares were repurchased for $7.7 million
during 2001, at an average cost of $33.88 per share, while approximately 3.1
million shares remain authorized to repurchase at December 31, 2001. The
repurchase of shares will be based on market opportunities, capital levels,
growth prospects, and other investment opportunities.
Shares repurchased and not retired are held as treasury stock and, accordingly,
are accounted for as a reduction of stockholders' equity.
Management believes that a strong capital position is necessary to take
advantage of opportunities for profitable geographic and product expansion, and
to provide depositor and investor confidence. Management actively reviews
capital strategies for the Corporation and each of its subsidiaries in light of
perceived business risks, future growth opportunities, industry standards, and
regulatory requirements. It is management's intent to maintain an optimal
capital and leverage mix for growth and for shareholder return.
Fourth Quarter 2001 Results
Net income for fourth quarter 2001 ("4Q01") was $46.3 million, $6.6 million
higher than the $39.7 million earned in the fourth quarter of 2000 ("4Q00"). ROE
was 17.03%, 8 bp higher than 4Q00, while ROA increased 18 basis points to 1.39%.
Taxable equivalent net interest income for 4Q01 was $119.6 million, $19.4
million higher than 4Q00. The predominant factor impacting net interest income
and net interest margin was the differing interest rate environment between the
comparable quarters. The average Fed funds rate for 4Q01 was 436 bp lower than
the comparable quarter last year, with rates steadily declining during 4Q01
versus level during 4Q00. The $19.4 million increase in net interest income was
principally attributable to rate, with a 63 bp rise in net interest margin
increasing net interest income by approximately $17.6 million and changes in
balance sheet growth and mix adding approximately $1.8 million of additional net
interest income. For 4Q01, net interest margin was 3.83% compared to 3.20% in
4Q00. The rate on interest-bearing liabilities decreased 207 bp to 3.32% due
principally to repricing of deposit products and wholesale funds in the lower
interest rate environment. The yield on earning assets, which are slower to
reprice, dropped 126 bp to 6.70% in 4Q01. The net result was an 81 bp increase
in interest rate spread. The increase in spread was offset in part by an 18 bp
reduction in net free funds contribution. Average earning asset growth (up $82
million to $12.4 billion) and decreases in interest-bearing deposits (down $1.0
billion) were funded primarily with other wholesale funds (up $855 million). To
take advantage of the lower interest rate environment, the Corporation increased
the levels of long-term debt by replacing short-term funding balances throughout
2001 with $200 million of subordinated debt, $200 million of bank notes, and
longer term Federal Home Loan Bank advances.
The provision for loan losses of $9.3 million in 4Q01 was up $4.1 million from
4Q00, as more was provided in 2001 due to declines in asset quality related to
the weakening economy and its impact on borrowers, and increased risk in the
portfolio.
Noninterest income in 4Q01 was $8.7 million higher than the comparable quarter
in 2000. Mortgage banking revenue was up $12.2 million, more than triple, to
$17.5 million. Record high secondary mortgage production ($806 million in 4Q01
versus $174 million in 4Q00) and favorable pricing led to increased gains on
sales (up $10.8 million) and higher production-related fees. Service charges on
deposit accounts were up $1.1 million, principally from higher service charges
on business accounts. Gains on the sale of assets was up $1.0 million, due
predominantly to the net premium on deposits from a branch sale in 4Q01. Revenue
decreases occurred in trust service fees, down $1.3 million due to the
deterioration in market conditions and, correspondingly, to lower portfolio
valuations, while other income was down $3.8 million, attributable to the $3.6
million
37
settlement recorded in 4Q00 for the Corporation's mid-year change in data
processing vendors. The remaining noninterest income categories collectively
decreased $0.7 million or 4% from the same period last year.
Noninterest expense between the comparable quarters was up $15.6 million.
Personnel expense was $7.5 million higher, with salaries and related expenses up
$3.0 million and fringe benefits up $4.5 million. The increase in salaries was
due primarily to higher base salaries in 2001 and higher bonuses and incentives.
The increase in fringe benefits was primarily attributable to higher profit
sharing expenses and higher health insurance coverage costs. Mortgage servicing
rights expense increased by $5.4 million, primarily the result of $5.1 million
additional valuation reserve recorded on the servicing portfolio given the lower
fair value of mortgage servicing rights due to the rate environment and the
acceleration of prepayments between the periods. Other expenses were up $2.4
million, with loan expenses higher by $1.1 million, predominantly in
volume-driven credit card and mortgage loan fees. The remaining noninterest
expense categories were level on a comparable quarter basis. Income tax expense
was up $2.1 million between the fourth quarters due to higher income before tax,
partially offset by a decrease in the effective tax rate, at 26.8% for 4Q01
compared to 27.3% for 4Q00.
TABLE 24: Selected Quarterly Financial Data:
The following is selected financial data summarizing the results of operations
for each quarter in the years ended December 31, 2001 and 2000:
2001 Quarter Ended
-------------------------------------------------------
December 31 September 30 June 30 March 31
-------------------------------------------------------
(In Thousands, except per share data)
Interest income $203,861 $217,434 $225,648 $233,679
Interest expense 89,842 110,423 121,696 136,676
Provision for loan losses 9,297 6,966 6,365 5,582
Investment securities gains (losses), net -- 476 (4) 246
Income before income tax expense 63,275 64,106 66,338 57,290
Net income 46,312 45,105 46,019 42,086
======================================================
Basic net income per share $ 0.71 $ 0.68 $ 0.70 $ 0.64
Diluted net income per share 0.70 0.68 0.69 0.63
Basic weighted average shares 65,579 66,083 66,146 66,150
Diluted weighted average shares 66,133 66,633 66,691 66,688
2000 Quarter Ended
------------------------------------------------------
December 31 September 30 June 30 March 31
------------------------------------------------------
(In Thousands, except per share data)
Interest income $242,194 $237,892 $228,298 $222,773
Interest expense 147,876 143,354 131,936 124,424
Provision for loan losses 5,203 4,122 5,166 5,715
Investment securities losses, net (455) (2) (5,490) (1,702)
Income before income tax expense 54,581 54,620 60,653 59,967
Net income 39,701 41,504 43,697 43,081
======================================================
Basic net income per share $ 0.60 $ 0.61 $ 0.63 $ 0.62
Diluted net income per share 0.60 0.61 0.63 0.62
Basic weighted average shares 66,314 68,031 68,918 69,504
Diluted weighted average shares 66,542 68,293 69,206 69,812
2000 Compared to 1999
The Corporation recorded net income of $168.0 million for the year ended
December 31, 2000, an increase of $3.0 million or 1.8% over the $164.9 million
earned in 1999. Basic earnings per share for 2000 were $2.46, a
38
4.2% increase over 1999 basic earnings per share of $2.36. Earnings per diluted
share were $2.46, a 5.1% increase over 1999 diluted earnings per share of $2.34.
Return on average assets and return on average equity for 2000 were 1.31% and
18.26%, respectively, compared to 1.41% and 18.04%, respectively, for 1999. Cash
dividends paid in 2000 increased by 5.0% to $1.11 per share over the $1.05 per
share paid in 1999. Key factors behind these results were:
Taxable equivalent net interest income was $405.3 million for 2000, $4.1 million
or 1.0% lower than 1999. Taxable equivalent interest income increased by $124.7
million, while interest expense increased $128.8 million. The volume of average
earning assets increased $1.1 billion (with $887 million attributable to loan
growth) to $12.0 billion, which exceeded the $1.0 billion (with $599 million due
to increased reliance on brokered CDs) increase in interest-bearing liabilities.
Although increases in the volume of earning assets and interest-bearing
liabilities, as well as changes in product mix, added $32.4 million to taxable
equivalent net interest income, changes in interest rates resulted in a $36.5
million decrease.
Net interest income and net interest margin were also impacted in 2000 by the
rising interest rate environment, competitive pricing pressures, branch deposit
and credit card receivable sales, and funding of stock repurchases. The Federal
Reserve raised interest rates six times between July 1999 and December 2000,
producing an average Federal funds rate for 2000 that was 131 bp higher than the
average for 1999.
The net interest margin was 3.36% for 2000, a 38 bp decline from 3.74% for 1999,
the net result of the 45 bp decrease in interest rate spread, offset by a 7 bp
improvement in the net free funds contribution. Rates on interest-bearing
liabilities in 2000 were 80 bp higher than in 1999, while the yield on earning
assets increased 35 bp, bringing the interest rate spread down by 45 bp.
Total loans were $8.9 billion at December 31, 2000, an increase of $570 million
or 6.8% over December 31, 1999, predominantly in commercial loans. Excluding the
sale of $128 million of credit card receivables in 2000, total loans were 8.4%
higher at year-end 2000 than a year earlier. Total deposits were $9.3 billion at
December 31, 2000, $600 million higher than December 31, 1999, despite the sale
of six Illinois branch offices in 2000 with deposits totaling $109 million. The
growth was predominantly in brokered CDs.
Asset quality remained relatively strong. The provision for loans losses
increased to $20.2 million compared to $19.2 million in 1999. Net charge-offs
decreased $4.8 million, primarily due to fewer net charge-offs on credit cards
between the years, given the sale of credit card receivables in April 2000. Net
charge-offs were 0.10% of average loans compared to 0.18% in 1999. The ratio of
allowance for loan losses to loans was 1.35% and 1.36% at December 31, 2000 and
1999, respectively. Nonperforming loans were $47.7 million, representing 0.54%
of total loans at year-end 2000, compared to $36.9 million or 0.44% of total
loans in 1999.
Noninterest income was $184.2 million for 2000, $18.3 million or 11.0% higher
than 1999. Net gains on the sales of assets and investment securities totaled
$16.8 million in 2000 compared to net gains of $8.0 million in 1999. Key sales
in 2000 included a $12.9 million gain on the sale of the credit card
receivables, the $11.1 million net premium on the sales of deposits of six
branches, and $7.6 million net losses on the sale of investment securities.
Excluding these asset and security sales, noninterest income was $167.4 million,
or $9.5 million (6.0%) higher than 1999. With the exception of mortgage banking,
which was impacted by a year-over-year slowdown in secondary mortgage
production, all other noninterest income categories collectively increased $20.0
million or 15.7% in 2000 compared to 1999.
Noninterest expense was $317.7 million, up $12.6 million or 4.1% over 1999.
However, 1999 expenses were reduced by two large items totaling $12.0 million,
namely the $8.0 million reversal of mortgage servicing rights valuation
allowance and a $4.0 million reduction in profit sharing expense. Not including
these items, noninterest expense was relatively unchanged (up $6.0 million or
0.2%), despite adding $10.9 million of incremental expenses in 2000 from the
1999 purchase acquisitions. Excluding the acquisitions, as well as the two 1999
items noted above, noninterest expense was $10.3 million (3.4%) lower than 1999.
Income tax expense decreased to $61.8 million, down $10.5 million from 1999. The
effective tax rate in 2000 was 26.9% compared to 30.5% for 1999, due to the tax
benefits of additional municipal securities, increased income in real estate
investment trusts and bank owned life insurance, and tax valuation allowance
adjustments.
39
Subsequent Events
On January 23, 2002, the Board of Directors declared a $0.31 per share dividend
payable on February 15, 2002, to shareholders of record as of February 1, 2002.
On February 28, 2002, the Corporation consummated its acquisition of 100% of the
outstanding common shares of Signal, a financial holding company with $1.1
billion in assets at December 31, 2001. As the transaction was accounted for
under the purchase method, the results of operations of Signal will be included
by the Corporation beginning on the consummation date, and therefore, are not
included in the accompanying consolidated financial statements. See Note 2 of
the notes to consolidated financial consolidated statements for additional
details of the Signal transaction.
These subsequent events have not been reflected in the accompanying consolidated
financial statements.
Future Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," ("SFAS 144") which supersedes both SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," ("SFAS 121") and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions," for the disposal of a segment
of a business. SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This Statement requires that
long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized for the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
SFAS 144 requires companies to separately report discontinued operations and
extends that reporting to a component of an entity that either has been disposed
of (by sale, abandonment, or in a distribution to owners) or is classified as
held for sale. Assets to be disposed of are reported at the lower of the
carrying amount or fair value, less costs to sell. The Corporation is required
to adopt SFAS 144 on January 1, 2002. Management does not expect the adoption of
SFAS 144 to have a material impact on the Corporation's financial statements.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," ("SFAS
141") and SFAS No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142").
For a detailed discussion of these statements, see "Recent Accounting
Pronouncements" under Note 1 of the notes to consolidated financial statements.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item is set forth in Item 7 under the captions
"Quantitative and Qualitative Disclosures About Market Risk" and "Interest Rate
Risk."
40
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ASSOCIATED BANC-CORP
CONSOLIDATED BALANCE SHEETS
December 31,
--------------------------------
2001 2000
--------------------------------
(In Thousands,
except share data)
ASSETS
Cash and due from banks $ 587,994 $ 368,186
Interest-bearing deposits in other financial institutions 5,427 5,024
Federal funds sold and securities purchased under
agreements to resell 12,015 23,310
Investment securities:
Held to maturity - at amortized cost (fair value of approximately
$372,873 in 2000) -- 368,558
Available for sale - at fair value
(amortized cost of $3,116,383 in 2001 and $2,867,109 in 2000) 3,197,021 2,891,647
Loans held for sale 301,707 24,593
Loans 9,019,864 8,913,379
Allowance for loan losses (128,204) (120,232)
- --------------------------------------------------------------------------------------------------------
Loans, net 8,891,660 8,793,147
Premises and equipment 119,528 127,600
Other assets 489,022 526,329
- --------------------------------------------------------------------------------------------------------
Total assets $ 13,604,374 $ 13,128,394
========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 1,425,109 $ 1,243,949
Interest-bearing deposits, excluding Brokered CDs 6,897,502 7,131,637
Brokered CDs 290,000 916,060
- --------------------------------------------------------------------------------------------------------
Total deposits 8,612,611 9,291,646
Short-term borrowings 2,643,851 2,598,203
Long-term debt 1,103,395 122,420
Accrued expenses and other liabilities 174,101 147,429
- --------------------------------------------------------------------------------------------------------
Total liabilities 12,533,958 12,159,698
- --------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock (Par value $1.00 per share, authorized 750,000
shares, no shares issued) -- --
Common stock (Par value $0.01 per share, authorized 100,000,000
shares, issued 66,174,357 and 66,402,157 shares at
December 31, 2001 and 2000, respectively) 662 664
Surplus 289,751 296,479
Retained earnings 760,031 663,566
Accumulated other comprehensive income, net of tax 47,176 15,581
Treasury stock at cost (839,002 shares in 2001 and
285,948 shares in 2000) (27,204) (7,594)
- --------------------------------------------------------------------------------------------------------
Total stockholders' equity 1,070,416 968,696
- --------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 13,604,374 $ 13,128,394
========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
41
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31,
--------------------------------------
2001 2000 1999
-------- -------- --------
(In Thousands, except per share data)
INTEREST INCOME
Interest and fees on loans $ 692,646 $ 726,849 $ 625,529
Interest and dividends on investment securities:
Taxable 146,170 163,768 163,768
Tax-exempt 40,385 37,765 23,417
Interest on deposits in other financial
institutions 378 432 454
Interest on federal funds sold and securities
purchased under agreements to resell 1,043 2,343 1,352
- ------------------------------------------------------------------------------------------
Total interest income 880,622 931,157 814,520
- ------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 298,930 379,892 314,075
Interest on short-term borrowings 130,546 160,430 103,057
Interest on long-term debt 29,161 7,268 1,643
- ------------------------------------------------------------------------------------------
Total interest expense 458,637 547,590 418,775
- ------------------------------------------------------------------------------------------
NET INTEREST INCOME 421,985 383,567 395,745
Provision for loan losses 28,210 20,206 19,243
- ------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 393,775 363,361 376,502
- ------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust service fees 29,063 37,617 37,996
Service charges on deposit accounts 37,817 33,296 29,584
Mortgage banking 53,724 19,944 30,417
Credit card and other nondeposit fees 26,731 25,739 20,763
Retail commissions 16,872 20,187 18,372
Bank owned life insurance income 12,916 12,377 9,456
Asset sale gains, net 1,997 24,420 4,977
Investment securities gains (losses), net 718 (7,649) 3,026
Other 15,765 18,265 11,315
- ------------------------------------------------------------------------------------------
Total noninterest income 195,603 184,196 165,906
- ------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Personnel expense 171,362 157,007 151,644
Occupancy 23,947 23,258 22,576
Equipment 14,426 15,272 15,987
Data processing 19,596 22,375 21,695
Business development and advertising 13,071 13,359 11,919
Stationery and supplies 6,921 7,961 8,110
FDIC expense 1,661 1,818 3,313
Mortgage servicing rights expense 19,987 9,406 1,668
Legal and professional fees 4,394 7,595 8,051
Other 63,004 59,685 60,129
- ------------------------------------------------------------------------------------------
Total noninterest expense 338,369 317,736 305,092
- ------------------------------------------------------------------------------------------
Income before income taxes 251,009 229,821 237,316
Income tax expense 71,487 61,838 72,373
- ------------------------------------------------------------------------------------------
Net income $ 179,522 $ 167,983 $ 164,943
==========================================================================================
Earnings per share:
Basic $ 2.72 $ 2.46 $ 2.36
Diluted $ 2.70 $ 2.46 $ 2.34
Average shares outstanding:
Basic 65,988 68,186 69,858
Diluted 66,516 68,410 70,468
==========================================================================================
See accompanying Notes to Consolidated Financial Statements.
42
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Other
Common Stock Comprehensive
-------------- Retained Income Treasury
Shares Amount Surplus Earnings (Loss) Stock Total
----------------------------------------------------------------------------
(In Thousands, except per share data)
Balance, December 31, 1998 63,390 $634 $225,757 $646,071 $ 23,369 $(17,110) $ 878,721
Comprehensive income:
Net income -- -- -- 164,943 -- -- 164,943
Net unrealized holding losses on available for
sale securities arising during year, net of taxes
of $33.6 million -- -- -- -- (60,181) -- (60,181)
Less: reclassification adjustment for net gains
on available for sale securities realized in
net income, net of taxes of $1.2 million -- -- -- -- (1,816) -- (1,816)
-------
Comprehensive income 102,946
-------
Cash dividends, $1.05 per share -- -- -- (73,743) -- -- (73,743)
Common stock issued:
Business combinations 2,513 25 90,063 (2,211) (154) 25,976 113,699
Incentive stock options -- -- -- (5,109) -- 8,530 3,421
Purchase and retirement of treasury stock in
connection with business combinations (2,513) (25) (90,540) (1,197) -- -- (91,762)
Purchase of treasury stock -- -- -- -- -- (24,255) (24,255)
Tax benefits of stock options -- -- 762 -- -- --- 762
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 63,390 $634 $226,042 $728,754 $(38,782) $ (6,859) $ 909,789
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- -- 167,983 -- -- 167,983
Net unrealized holding gains on available for
sale securities arising during year, net of
taxes of $27.2 million -- -- -- -- 49,774 -- 49,774
Less: reclassification adjustment for net
losses on available for
sale securities realized in net income, net
of taxes of $3.1 million -- -- -- -- 4,589 -- 4,589
-------
Comprehensive income 222,346
-------
Cash dividends, $1.11 per share -- -- -- (75,719) -- -- (75,719)
Common stock issued:
Incentive stock options -- -- -- (6,219) -- 10,112 3,893
10% stock dividend 6,269 63 151,170 (151,233) -- -- --
Purchase and retirement of treasury stock in
connection with repurchase program (3,257) (33) (81,847) -- -- 7,782 (74,098)
Purchase of treasury stock -- -- -- -- -- (18,629) (18,629)
Tax benefits of stock options -- -- 1,114 -- -- -- 1,114
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 66,402 $664 $296,479 $663,566 $ 15,581 $ (7,594) $ 968,696
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- -- 179,522 -- -- 179,522
Cumulative effect of accounting change, net of
taxes of $843,000 -- -- -- -- (1,265) -- (1,265)
Net loss on derivative instruments arising
during the year, net of taxes of $563,000 -- -- -- -- (844) -- (844)
Additional pension obligation, net of taxes of
$1.5 million -- -- -- -- (2,228) -- (2,228)
Net unrealized holding gains on available for
sale securities arising during the year, net
of taxes of $20.3 million -- -- -- -- 36,363 -- 36,363
Less: reclassification adjustment for net gains
on available for sale securities realized in
net income, net of taxes of $287,000 -- -- -- -- (431) -- (431)
-------
Comprehensive income 211,117
-------
Cash dividends, $1.22 per share -- -- -- (80,553) -- -- (80,553)
Common stock issued:
Incentive stock options -- -- -- (2,504) -- 7,242 4,738
Purchase and retirement of treasury stock in
connection with repurchase program (228) (2) (7,715) -- -- -- (7,717)
Purchase of treasury stock -- -- -- -- -- (26,852) (26,852)
Tax benefits of stock options -- -- 987 -- -- -- 987
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 66,174 $662 $289,751 $760,031 $ 47,176 $(27,204) $1,070,416
=================================================================================================================================
See accompanying Notes to Consolidated Financial Statements.
43
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
------------------------------------------
2001 2000 1999
------------ ------------- ------------
($ in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 179,522 $ 167,983 $ 164,943
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 28,210 20,206 19,243
Depreciation and amortization 18,616 19,396 19,266
Amortization (accretion) of:
Mortgage servicing rights 19,987 9,406 1,668
Intangibles 8,378 8,905 8,134
Investment premiums and discounts 1,078 (572) 1,959
Deferred loan fees and costs 2,225 2,514 1,772
Deferred income taxes 16,648 (13,936) 4,543
(Gain) loss on sales of investment securities, net (718) 7,649 (3,026)
Gain on sales of other assets, net (1,997) (24,420) (4,977)
Gain on sales of loans held for sale, net (24,372) (3,113) (11,172)
Mortgage loans originated and acquired for sale (2,305,059) (456,312) (1,169,843)
Proceeds from sales of mortgage loans held for sale 2,052,317 446,787 1,237,075
(Increase) decrease in interest receivable and other
assets (22,903) (3,859) 2,939
Increase (decrease) in interest payable and other
liabilities 27,659 8,518 (2,444)
- ---------------------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (409) 189,152 270,080
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (132,845) (715,452) (682,837)
Capitalization of mortgage servicing rights (20,919) (4,739) (12,389)
Purchases of:
Securities available for sale (664,329) (933,197) (1,210,498)
Premises and equipment, net of disposals (7,702) (11,828) (20,457)
Bank owned life insurance -- -- (100,000)
Proceeds from:
Sales of securities available for sale 135,627 648,359 78,751
Maturities of securities available for sale 647,626 327,385 744,403
Maturities of securities held to maturity -- 45,201 136,292
Sales of other assets 13,762 169,793 16,832
Net cash received in acquisitions of subsidiaries -- -- 53,597
- ---------------------------------------------------------------------------------------------------------
Net cash used by investing activities (28,780) (474,478) (996,306)
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (667,235) 709,017 (299,739)
Net increase (decrease) in short-term borrowings 45,648 (176,887) 1,046,214
Repayment of long-term debt (907) (1,863) (619)
Proceeds from issuance of long-term debt 981,882 100,000 53
Cash dividends (80,553) (75,719) (73,743)
Proceeds from exercise of incentive stock options 4,738 3,893 3,421
Sales of branch deposits (10,899) (98,034) (55,663)
Purchase and retirement of treasury stock (7,717) (74,098) (91,762)
Purchase of treasury stock (26,852) (18,629) (24,255)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 238,105 367,680 503,907
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 208,916 82,354 (222,319)
Cash and due from banks at beginning of year 396,520 314,166 536,485
- ---------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 605,436 $ 396,520 $ 314,166
- ---------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 478,128 $ 529,017 $ 417,047
Income taxes 58,129 49,814 53,512
Supplemental schedule of noncash investing activities:
Securities held to maturity transferred to securities
available for sale 27,659 8,518 (2,444)
Loans transferred to other real estate 3,897 7,255 9,177
Loans made in connection with the disposition of other
real estate -- -- 1,125
Mortgage loans securitized and transferred to
securities available for sale -- -- 97,155
Acquisitions:
Fair value of assets acquired, including cash and
cash equivalents -- -- 590,845
Value ascribed to intangibles -- -- 85,090
Liabilities assumed -- -- 551,126
=========================================================================================================
See accompanying Notes to Consolidated Financial Statements.
44
ASSOCIATED BANC-CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000, and 1999
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of Associated Banc-Corp and its
subsidiaries (the "Corporation") conform to accounting principles generally
accepted in the United States of America and to general practice within the
financial services industry. The following is a description of the more
significant of those policies.
Business
The Corporation provides a full range of banking and related financial services
to individual and corporate customers through its network of bank and nonbank
affiliates. The Corporation is subject to competition from other financial and
non-financial institutions that offer similar or competing products and
services. The Corporation is regulated by federal and state banking agencies and
undergoes periodic examinations by those agencies.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of the Corporation
and subsidiaries, all of which are wholly-owned. All significant intercompany
balances and transactions have been eliminated in consolidation. Results of
operations of companies purchased are included from the date of acquisition.
Certain amounts in the 2000 and 1999 consolidated financial statements have been
reclassified to conform with the 2001 presentation.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Estimates that are particularly susceptible to significant change include the
determination of the allowance for loan losses, income taxes and mortgage
servicing rights.
Investment Securities
Securities are classified as held to maturity, available for sale, or trading at
the time of purchase. In 2001 and 2000, all securities purchased were classified
as available for sale. Investment securities classified as held to maturity,
which management has the positive intent and ability to hold to maturity, are
reported at amortized cost, adjusted for amortization of premiums and accretion
of discounts, using a method that approximates level yield. The amortized cost
of debt securities classified as held to maturity or available for sale is
adjusted for amortization of premiums and accretion of discounts to the earlier
of call date or maturity, or in the case of mortgage-related securities, over
the estimated life of the security. Such amortization and accretion is included
in interest income from the related security. Available for sale and trading
securities are reported at fair value with unrealized gains and losses, net of
related deferred income taxes, included in stockholders' equity as a separate
component of other comprehensive income. Realized securities gains or losses and
declines in value judged to be other than temporary are included in investment
securities gains (losses), net in the consolidated statements of income. The
cost of securities sold is based on the specific identification method. Any
security for which there has been other than temporary impairment of value is
written down to its estimated fair value through a charge to earnings.
Loans
Loans and leases are carried at the principal amount outstanding, net of any
unearned income. Unearned income from direct leases is recognized on a basis
that generally approximates a level yield on the outstanding balances
receivable. Loan origination fees and certain direct loan origination costs are
deferred and the net amount is amortized over the contractual life of the
related loans or over the commitment period as an adjustment of yield.
45
Loans are generally placed on nonaccrual status when contractually past due 90
days or more as to interest or principal payments. Additionally, whenever
management becomes aware of facts or circumstances that may adversely impact the
collectibility of principal or interest on loans, it is management's practice to
place such loans on nonaccrual status immediately, rather than delaying such
action until the loans become 90 days past due. Previously accrued and
uncollected interest on such loans is reversed, amortization of related loan
fees is suspended, and income is recorded only to the extent that interest
payments are subsequently received in cash and a determination has been made
that the principal balance of the loan is collectible. If collectibility of the
principal is in doubt, payments received are applied to loan principal. A
nonaccrual loan is returned to accrual status when the obligation has been
brought current and the ultimate collectibility of the total contractual
principal and interest is no longer in doubt.
Loans Held for Sale
Loans held for sale are recorded at the lower of cost or market as determined on
an aggregate basis and generally consist of current production of certain
fixed-rate first mortgage loans. Holding costs are treated as period costs.
Allowance for Loan Losses
The allowance for loan losses is a reserve for estimated credit losses. Actual
credit losses, net of recoveries, are deducted from the allowance for loan
losses. A provision for loan losses, which is a charge against earnings, is
added to bring the allowance for loan losses to a level that, in management's
judgment, is adequate to absorb probable losses in the loan portfolio.
The allocation methodology applied by the Corporation, designed to assess the
adequacy of the allowance for loan losses, focuses on changes in the size and
character of the loan portfolio, changes in levels of impaired and other
nonperforming loans, historical losses on each portfolio category, the risk
inherent in specific loans, concentrations of loans to specific borrowers or
industries, existing economic conditions, the fair value of underlying
collateral, and other factors which could affect potential credit losses.
Management continues to target and maintain the allowance for loan losses equal
to the allocation methodology plus an unallocated portion, as determined by
economic conditions and other factors, on the Corporation's borrowers.
Management allocates the allowance for loan losses by pools of risk. The
commercial loan (commercial real estate; commercial, financial, and
agricultural; leases; and real estate construction) allocation is based on a
quarterly review of individual loans, loan types, and industries. The retail
loan (residential real estate, home equity, and consumer) allocation is based on
analysis of historical delinquency and charge-off statistics and trends. Minimum
loss factors used by the Corporation for criticized loan categories are
consistent with regulatory agency factors. Loss factors for non-criticized loan
categories are based primarily on historical loan loss experience.
Management, considering current information and events regarding the borrowers'
ability to repay their obligations, considers a loan to be impaired when it is
probable that the Corporation will be unable to collect all amounts due
according to the contractual terms of the note agreement, including principal
and interest. Management has determined that commercial, financial, and
agricultural loans and commercial real estate loans that have a nonaccrual
status or have had their terms restructured meet this definition. Large groups
of homogeneous loans, such as mortgage and consumer loans and leases, are
collectively evaluated for impairment. The amount of impairment is measured
based upon the loan's observable market price, the estimated fair value of the
collateral for collateral-dependent loans, or alternatively, the present value
of expected future cash flows discounted at the loan's effective interest rate.
Interest income on impaired loans is recorded when cash is received and only if
principal is considered to be fully collectible.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance for loan losses may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Corporation's
allowance for loan losses. Such agencies may
46
require the Corporation to recognize additions to the allowance for loan losses
based on their judgments about information available to them at the time of
their examinations.
Other Real Estate Owned
Other real estate owned is included in other assets in the consolidated balance
sheets and is comprised of property acquired through a foreclosure proceeding or
acceptance of a deed-in-lieu of foreclosure, and loans classified as
in-substance foreclosure. Other real estate owned is recorded at the lower of
recorded investment in the loans at the time of acquisition or the fair value of
the properties, less estimated selling costs. Any write-down in the carrying
value of a property at the time of acquisition is charged to the allowance for
loan losses. Any subsequent write-downs to reflect current fair market value, as
well as gains and losses on disposition and revenues and expenses incurred in
maintaining such properties, are recorded directly to the income statement.
Other real estate owned totaled $2.7 million and $4.0 million at December 31,
2001 and 2000, respectively.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on the straight-line
method over the estimated useful lives of the related assets or the lease term.
Maintenance and repairs are charged to expense as incurred, while additions or
major improvements are capitalized and depreciated over their estimated useful
lives. Estimated useful lives of the assets are 3 to 20 years for land
improvements, 5 to 40 years for buildings, 3 to 5 years for computers, and 3 to
20 years for furniture, fixtures and other equipment. Leasehold improvements are
amortized on a straight line basis over the lesser of the lease terms or the
estimated useful lives of the improvements.
Intangibles
The excess of the purchase price over the fair value of net assets of
subsidiaries acquired consists primarily of goodwill and core deposit
intangibles that are being amortized on straight-line and accelerated methods.
These intangibles are included in other assets in the consolidated balance
sheets. Goodwill is amortized to operating expense over periods up to 40 years
for acquisitions made before 1983 and for periods up to 25 years for
acquisitions made after 1982. Core deposit intangibles are amortized on an
accelerated basis to expense over periods of 7 to 10 years. The Corporation
reviews long-lived assets and certain identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable, in which case an impairment charge would be
recorded. Goodwill and deposit base intangibles outstanding, net of accumulated
amortization, at December 31, 2001 and 2000 were $98.3 million and $106.7
million, respectively.
Mortgage Servicing Rights
Mortgage servicing rights capitalized are amortized in proportion to and over
the period of estimated servicing income. Capitalized mortgage servicing rights
are included in other assets. The total cost of loans originated or purchased is
allocated between loans and servicing rights based on the relative fair values
of each. The value of mortgage servicing rights is adversely affected when
mortgage interest rates decline and mortgage loan prepayments increase.
Impairment is assessed using stratifications based on the risk characteristics
of the underlying loans, such as bulk acquisitions versus loan-by-loan, loan
type, and interest rate. To the extent the carrying value of the mortgage
servicing rights exceed their fair value, a valuation reserve is established.
Income Taxes
Amounts provided for income tax expense are based on income reported for
financial statement purposes and do not necessarily represent amounts currently
payable under tax laws. Deferred income taxes, which arise principally from
temporary differences between the period in which certain income and expenses
are recognized for financial accounting purposes and the period in which they
affect taxable income, are included in the amounts provided for income taxes. In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be
47
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the level of historical taxable
income and projections for future taxable income over the period which the
deferred tax assets are deductible, management believes it is more likely than
not the Corporation will realize the benefits of these deductible differences,
net of the existing valuation allowances at December 31, 2001.
The Corporation files a consolidated federal income tax return and individual
subsidiary state income tax returns. Accordingly, amounts equal to tax benefits
of those subsidiaries having taxable federal losses or credits are offset by
other subsidiaries that incur federal tax liabilities.
Derivative Financial Instruments and Hedging Activities
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
(collectively referred to as "SFAS 133") requires derivative instruments,
including derivative instruments embedded in other contracts, to be carried at
fair value on the balance sheet with changes in the fair value recorded directly
in earnings. As required, the Corporation adopted SFAS 133 on January 1, 2001.
In accordance with the transition provisions of SFAS 133, upon adoption the
Corporation recorded a cumulative effect of $1.3 million, net of taxes of
$843,000, in accumulated other comprehensive income to recognize at fair value
all derivatives that are designated as cash flow hedge instruments. Due to
immateriality, net gains on derivatives designated as fair value hedges were
recorded in earnings at adoption.
All derivatives are recognized on the consolidated balance sheet at their fair
value. On the date the derivative contract is entered into, the Corporation
designates the derivative, except for mortgage banking derivatives for which
changes in fair value of the derivative is recorded in earnings, as either a
fair value hedge (i.e. a hedge of the fair value of a recognized asset or
liability) or a cash flow hedge (i.e. a hedge of the variability of cash flows
to be received or paid related to a recognized asset or liability). The
Corporation formally documents all relationships between hedging instruments and
hedging items, as well as its risk management objective and strategy for
undertaking various hedge transactions. This process includes linking all
derivatives that are designated as fair value hedges or cash flow hedges to
specific assets or liabilities on the balance sheet. The Corporation also
formally assesses, both at the hedge's inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of hedged items. If
it is determined that a derivative is not highly effective as a hedge or that it
has ceased to be a highly effective hedge, the Corporation discontinues hedge
accounting prospectively.
For a derivative designated as a fair value hedge, the changes in the fair value
of the derivative and of the hedged item attributable to the hedged risk are
recognized in earnings. If the derivative is designated as a cash flow hedge,
the effective portions of changes in the fair value of the derivative are
recorded in other comprehensive income and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of changes
in the fair value of cash flow hedges are recognized in earnings.
The Corporation discontinues hedge accounting prospectively when it is
determined that the derivative is no longer effective in offsetting changes in
the fair value or cash flows of the hedged item, the derivative expires or is
sold, terminated, or exercised, the derivative is dedesignated as a hedging
instrument, or management determines that designation of the derivative as a
hedging instrument is no longer appropriate. When hedge accounting is
discontinued because it is determined that the derivative no longer qualifies as
an effective fair value hedge, the Corporation continues to carry the derivative
on the balance sheet at its fair value, and no longer adjusts the hedged asset
or liability for changes in fair value. The adjustment of the carrying amount of
the hedged asset or liability is accounted for in the same manner as other
components of the carrying amount of that asset or liability.
For the year ended December 31, 2000, prior to the adoption of SFAS 133, the
Corporation entered into interest rate swap agreements to hedge market values
and to alter the cash flow characteristics of certain on-balance sheet
instruments. The interest rate swaps are linked with a specific asset or
liability or a group of
48
related assets or liabilities at the inception of the derivative contract and
have a high degree of correlation with the related balance sheet item during the
hedge period. Net interest income or expense on the interest rate swap was
recorded in the consolidated statements of income as a component of interest
income or interest expense depending on the financial instrument to which the
swap is designated. Realized gains or losses on contracts, either settled or
terminated, are deferred and are recorded as either an adjustment to the
carrying value of the related on-balance sheet asset or liability or in other
assets or other liabilities. Deferred amounts are amortized into interest income
or expense over either the remaining original life of the derivative instrument
or the expected life of the related asset or liability. Unrealized gains or
losses on these contracts were not recognized on the balance sheet.
Stock-Based Compensation
As allowed under SFAS 123, "Accounting for Stock-Based Compensation," the
Corporation measures stock-based compensation cost in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
Opinion No. 25). The Corporation has included in Note 11 the impact of the fair
value of employee stock-based compensation plans on net income and earnings per
share on a pro forma basis.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents are considered to include cash and due from banks, interest-bearing
deposits in other financial institutions, and federal funds sold and securities
purchased under agreements to resell. Cash and cash equivalents were $605.4
million and $396.5 million at December 31, 2001, and December 31, 2000,
respectively.
Per Share Computations
Basic earnings per share is calculated by dividing net income available to
common stockholders by the weighted average number of common shares outstanding.
Diluted earnings per share is calculated by dividing net income by the weighted
average number of shares adjusted for the dilutive effect of outstanding stock
options. Also see Notes 11 and 19.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," ("SFAS
141") and SFAS No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142").
SFAS 141 requires that the purchase method of accounting be used for all
business combinations. SFAS 141 also specifies criteria that intangible assets
acquired in a business combination must meet to be recognized and reported
separately from goodwill. SFAS 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of SFAS 142.
SFAS 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and subsequently, SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," after its adoption.
The Corporation adopted the provisions of SFAS 141 as of July 1, 2001, and SFAS
142 as of January 1, 2002. Goodwill and intangible assets determined to have an
indefinite useful life acquired in a purchase business combination completed
after June 30, 2001, but before SFAS 142 is adopted in full, are not amortized.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001, continued to be amortized and tested for impairment prior
to the full adoption of SFAS 142.
Upon adoption of SFAS 142, the Corporation is required to evaluate its existing
intangible assets and goodwill that were acquired in purchase business
combinations, and to make any necessary reclassifications in order to conform
with the new classification criteria in SFAS 141 for recognition separate from
goodwill. The Corporation will also be required to reassess the useful lives and
residual values of all intangible assets
49
acquired, and make any necessary amortization period adjustments by the end of
the first interim period after adoption. If an intangible asset is identified as
having an indefinite useful life, the Corporation will be required to test the
intangible asset for impairment in accordance with the provisions of SFAS 142
within the first interim period. Impairment is measured as the excess of the
carrying value over the fair value of an intangible asset with an indefinite
life. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in the
first interim period.
In connection with the SFAS 142 transitional goodwill impairment evaluation, the
Statement requires the Corporation to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Corporation must identify its reporting units and determine
the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of January 1, 2002. The Corporation will then have up to six
months from January 1, 2002, to determine the fair value of each reporting unit
and compare it to the carrying amount of the reporting unit. To the extent the
carrying amount of a reporting unit exceeds the fair value of the reporting
unit, an indication exists that the reporting unit goodwill may be impaired and
the Corporation must perform the second step of the transitional impairment
test. The second step is required to be completed as soon as possible, but no
later than the end of the year of adoption. In the second step, the Corporation
must compare the implied fair value of the reporting unit goodwill with the
carrying amount of the reporting unit goodwill, both of which would be measured
as of the date of adoption. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit to all of the assets (recognized
and unrecognized) and liabilities of the reporting unit in a manner similar to a
purchase price allocation, in accordance with SFAS 141. The residual fair value
after this allocation is the implied fair value of the reporting unit goodwill.
Any transitional impairment loss will be recognized as the cumulative effect of
a change in accounting principle in the Corporation's statement of income.
As of January 1, 2002, the date of adoption of SFAS 142, the Corporation had
unamortized goodwill in the amount of $92.4 million, of which $85.7 million will
be subject to the transition provisions of SFAS 142 and $6.7 million will
continue to be amortized as an identifiable intangible asset subject to
amortization. Also, at January 1, 2002, the Corporation had core deposit
intangibles, of $5.9 million which will continue to be amortized. Annual
amortization expense related to the core deposit intangibles was $1.9 million
and $2.3 million for 2001 and 2000, respectively. Amortization expense related
to goodwill was $6.5 million and $6.6 million for the years ended December 31,
2001, and 2000, respectively. Because of the effort needed to comply with
adopting SFAS 142, it is not practicable to reasonably estimate the impact of
adopting the Statements on the Corporation's financial statements at the date of
this report, including whether it will be required to recognize any transitional
impairment losses as the cumulative effect of a change in accounting principle.
50
NOTE 2 BUSINESS COMBINATIONS:
There were no business combinations during 2000 or 2001. The following table
summarizes completed transactions during 1999. Each acquisition was accounted
for under the purchase method, thus, the results of their operations prior to
their respective consummation dates are not included in the accompanying
consolidated financial statements. Goodwill, core deposit intangibles, and other
purchase accounting adjustments are recorded upon consummation of a purchase
acquisition where the purchase price exceeds the fair value of net assets
acquired.
Consideration Paid
------------------
Shares of
Date Common Total
Name of Acquired Company Acquired Stock Cash Assets Loans Deposits
- -----------------------------------------------------------------------------------------------------------------------
( $ in Millions, except shares)
BNC Financial Corporation ("BNC") 12/31/99 -- $5.3 $35 $33 $ --
St. Cloud, Minnesota
Riverside Acquisition Corp. ("Riverside") 8/31/99 2,677,405 -- 374 266 337
Minneapolis, Minnesota (a)
Windsor Bancshares, Inc. ("Windsor") 2/3/99 879,957 -- 182 113 152
Minneapolis, Minnesota (a)
(a) During the first quarter of 2000, Riverside and Windsor merged and became
Associated Bank Minnesota.
On December 31, 1999, the Corporation completed its acquisition of BNC, an
asset-based commercial lender headquartered in St. Cloud, Minnesota. BNC had
assets of approximately $35 million at December 31, 1999. The purchase price was
$5.3 million in cash and goodwill of $1.2 million was recorded. BNC operates as
a wholly-owned subsidiary of the Corporation. Effective March 31, 2000, BNC
operated as Associated Commercial Finance, Inc.
On August 31, 1999, the Corporation completed its acquisition of Riverside, a
Minnesota bank holding company for Riverside Bank. Riverside had total assets of
approximately $374 million upon consummation. The transaction was completed
through the issuance of 2,677,405 shares of common stock, which were repurchased
and retired during 1999 under authorization by the Board of Directors. Goodwill
of $60.6 million and a core deposit intangible of $5.9 million were recorded.
On February 3, 1999, the Corporation consummated the acquisition of Windsor, a
Minnesota bank holding company for Bank Windsor. At consummation Windsor had
total assets of approximately $182 million. The transaction was consummated
through the issuance of 879,957 shares of common stock, which were repurchased
and retired under authorization by the Board of Directors. Goodwill of $17.4
million was recorded.
On September 10, 2001, the Corporation announced the signing of a definitive
agreement to acquire Signal. Signal operates banking branches in nine locations
in the Twin Cities and Eastern Minnesota. As a result of the acquisition, the
Corporation expects to expand its Minnesota presence, particularly in the Twin
Cities area, under the community banking philosophy utilized by both the
Corporation and Signal. It also expects to reduce costs through efficiencies,
particularly following the merger planned in the second quarter of 2002 of
Signal's banking subsidiaries with and into Associated Bank Minnesota, to
operate under a single national banking charter named Associated Bank Minnesota,
National Association. In 2002 the Corporation consummated its acquisition of
100% of the outstanding common shares of Signal Financial Corporation, a
financial holding company headquartered in Mendota Heights, Minnesota
("Signal").
The Signal transaction was accounted for under the purchase accounting method
and was consummated through the issuance of 3.69 million shares of common stock
and $58.4 million in cash for a purchase price of $192.5 million. The value of
the shares was determined using the closing stock price of the Corporation's
stock on September 10, 2001, the initiation date of the transaction.
51
The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the date of the acquisition. The Corporation is in
the process of finalizing a third-party valuation of the core deposit intangible
asset; thus, the allocation of the purchase price is subject to refinement.
$ in Millions
--------------
Investment securities available for sale $ 163.8
Loans 760.0
Allowance for loan losses (12.0)
Other assets 118.1
Intangible asset 5.6
Goodwill 123.4
-------------
Total assets acquired $ 1,158.9
-------------
Deposits $ 784.8
Borrowings 165.5
Other liabilities 16.1
-------------
Total liabilities acquired $ 966.4
-------------
Net assets acquired $ 192.5
=============
The intangible asset represents $5.6 million estimated as the core deposit
intangible asset. The $123.4 million of goodwill will be assigned to the banking
segment during first quarter 2002, as part of the adoption of SFAS 142.
NOTE 3 RESTRICTIONS ON CASH AND DUE FROM BANKS:
The Corporation's bank subsidiaries are required to maintain certain vault cash
and reserve balances with the Federal Reserve Bank to meet specific reserve
requirements. These requirements approximated $109.4 million at December 31,
2001.
52
NOTE 4 INVESTMENT SECURITIES:
The amortized cost and fair values of securities available for sale at December
31, 2001 and 2000 were as follows:
2001
-----------------------------------------------------------------
Gross Unrealized Gross Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
-----------------------------------------------------------------
($ in Thousands)
U. S. Treasury securities $ 15,071 $ 91 $ (47) $ 15,115
Federal agency securities 196,175 8,469 -- 204,644
Obligations of state and political subdivisions 847,887 13,755 (39) 861,603
Mortgage-related securities 1,642,851 31,496 (24) 1,674,323
Other securities (debt and equity) 414,399 26,937 -- 441,336
-----------------------------------------------------------------
Total securities available for sale $3,116,383 $ 80,748 $ (110) $3,197,021
=================================================================
2000
-----------------------------------------------------------------
Gross Unrealized Gross Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
-----------------------------------------------------------------
($ in Thousands)
U. S. Treasury securities $ 23,847 $ 51 $ (38) $ 23,860
Federal agency securities 341,929 868 (49) 342,748
Obligations of state and political subdivisions 756,914 9,408 (1,381) 764,941
Mortgage-related securities 1,425,290 7,574 (5,247) 1,427,617
Other securities (debt and equity) 319,129 16,943 (3,591) 332,481
-----------------------------------------------------------------
Total securities available for sale $2,867,109 $ 34,844 $(10,306) $2,891,647
=================================================================
The amortized cost and fair values of securities held to maturity at December
31, 2000 are shown below. Under SFAS No. 133, the Corporation was allowed a
one-time opportunity to reclassify investment securities from held to maturity
to available for sale. Thus, on January 1, 2001, the Corporation reclassified
all its held to maturity securities to available for sale. The amortized cost
and fair value of the securities transferred were $369 million and $373 million,
respectively.
2000
-----------------------------------------------------------------
Gross Unrealized Gross Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
-----------------------------------------------------------------
($ in Thousands)
Federal agency securities $ 25,055 $ 86 $ -- $ 25,141
Obligations of state and political subdivisions 110,182 1,041 -- 111,223
Mortgage-related securities 182,299 2,868 (4) 185,163
Other securities (debt) 51,022 324 -- 51,346
-----------------------------------------------------------------
Total securities held to maturity $ 368,558 $ 4,319 $ (4) $ 372,873
=================================================================
53
The amortized cost and fair values of investment securities available for sale
at December 31, 2001, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
2001
--------------------------
Amortized Fair
Cost Value
--------------------------
($ in Thousands)
Due in one year or less $ 165,537 $ 167,534
Due after one year through five years 529,241 547,865
Due after five years through ten years 335,392 337,188
Due after ten years 328,482 335,329
--------------------------
Total debt securities 1,358,652 1,387,916
Mortgage-related securities 1,642,851 1,674,323
Equity securities 114,880 134,782
--------------------------
Total $ 3,116,383 $ 3,197,021
==========================
Total proceeds and gross realized gains and losses from sale of securities
available for sale for each of the three years ended December 31 were:
2001 2000 1999
------------- ------------- --------------
($ in Thousands)
Proceeds $135,627 $648,359 $78,751
Gross gains 1,322 2,889 4,615
Gross losses (604) (10,538) (1,589)
Pledged securities with a carrying value of approximately $1.6 billion and $1.7
billion at December 31, 2001, and December 31, 2000, respectively, were pledged
to secure certain deposits, Federal Home Loan Bank advances, or for other
purposes as required or permitted by law.
NOTE 5 LOANS:
Loans at December 31 are summarized below.
2001 2000
---------- ----------
($ in Thousands)
Commercial, financial, and agricultural $1,783,300 $1,657,322
Real estate - construction 797,734 660,732
Commercial real estate 2,630,964 2,287,946
Lease financing 11,629 14,854
--------------------------
Total Commercial 5,223,627 4,620,854
Residential real estate 2,524,199 3,158,721
Home equity 609,254 508,979
--------------------------
Total Residential mortgage 3,133,453 3,667,700
Consumer 662,784 624,825
--------------------------
Total loans $9,019,864 $8,913,379
==========================
54
A summary of the changes in the allowance for loan losses for the years
indicated is as follows:
2001 2000 1999
---------- -------- --------
($ in Thousands)
Balance at beginning of year $ 120,232 $ 113,196 $ 99,677
Balance related to acquisitions -- -- 8,016
Decrease from sale of credit card
receivables -- (4,216) --
Provision for loan losses 28,210 20,206 19,243
Charge-offs (22,639) (11,155) (16,621)
Recoveries 2,401 2,201 2,881
------------------------------------
Net charge-offs (20,238) (8,954) (13,740)
------------------------------------
Balance at end of year $ 128,204 $ 120,232 $ 113,196
====================================
Nonaccrual loans totaled $48.2 million and $41.0 million at December 31, 2001
and 2000, respectively.
Management has determined that commercial, financial, and agricultural loans and
commercial real estate loans that have nonaccrual status or have had their terms
restructured are impaired loans. The following table presents data on impaired
loans at December 31:
2001 2000
-------- --------
($ in Thousands)
Impaired loans for which an allowance has been provided $ 10,140 $ 4,733
Impaired loans for which no allowance has been provided 17,720 14,690
--------------------
Total loans determined to be impaired $ 27,860 $ 19,423
====================
Allowance for loan losses related to impaired loans $ 6,445 $ 2,315
====================
2001 2000 1999
--------- -------- --------
For the years ended December 31: ($ in Thousands)
Average recorded investment
in impaired loans $ 28,319 $ 18,650 $ 16,640
=================================
Cash basis interest income recognized
from impaired loans $ 1,795 $ 1,623 $ 1,081
=================================
The Corporation's subsidiaries have granted loans to their directors, executive
officers, or their related affiliates. These loans were made on substantially
the same terms, including rates and collateral, as those prevailing at the time
for comparable transactions with other unrelated customers, and do not involve
more than a normal risk of collection. These loans to related parties are
summarized as follows:
2001
----------------
($ in Thousands)
Balance at beginning of year $ 154,368
New loans 84,454
Repayments (101,671)
Changes due to status of executive
officers and directors (1) (90,306)
---------
Balance at end of year $ 46,845
=========
(1) During 2001, the Corporation merged all of the Wisconsin bank affiliates
(Associated Bank South Central, Associated Bank North, Associated Bank
Milwaukee, Associated Bank, National Association, Associated Bank
Lakeshore, National Association, and Associated Bank Green Bay, National
Association) into a single national banking charter, headquartered in Green
Bay, Wisconsin, under the name Associated Bank, National Association.
Certain nonbank subsidiaries (Associated Leasing, Inc., Associated Banc
Corp Services, Inc. and Associated Commercial Mortgage, Inc.) also merged
with and into the
56
resultant bank, becoming operating divisions of Associated Bank, National
Association. This resulted in a reduction of individuals defined to be
related parties.
The Corporation serves the credit needs of its customers by offering a wide
variety of loan programs to customers, primarily in Wisconsin, Illinois, and
Minnesota. 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
a multiple number of borrowers engaged in similar activities that would cause
them to be similarly impacted by economic or other conditions. At December 31,
2001, no concentrations of any type existed in the Corporation's loan portfolio
in excess of 10% of total loans.
NOTE 6 MORTGAGE SERVICING RIGHTS:
A summary of changes in the balance of mortgage servicing rights is as follows:
2001 2000
-------- --------
($ in Thousands)
Balance at beginning of year $ 36,269 $ 40,936
Additions 20,919 4,739
Sales of servicing (5,136) --
Amortization (9,267) (9,406)
Change in valuation allowance (10,720) --
--------------------------
Balance at end of year $ 32,065 $ 36,269
==========================
A summary of changes in the valuation allowance during 2001, 2000 and 1999 is as
follows.
2001 2000 1999
-------- -------- --------
($ in Thousands)
Balance at beginning of year $ -- $ -- $ 8,023
Additions 10,720 -- --
Reversals -- -- (8,023)
--------------------------------
Balance at end of year $ 10,720 $ -- $ --
================================
At December 31, 2001, the Corporation was servicing 1- to 4- family residential
mortgage loans owned by other investors with balances totaling $5.23 billion
compared to $5.50 billion and $5.57 billion at December 31, 2000 and 1999,
respectively. The fair value of servicing was approximately $32.1 million at
December 31, 2001 compared to $43.8 million at year-end 2000. During 2001, the
Corporation sold $812 million of loans serviced with an unamortized cost of $5.1
million, for a net gain of $4.3 million.
NOTE 7 PREMISES AND EQUIPMENT:
A summary of premises and equipment at December 31 is as follows:
2001 2000
---------------------------------------- --------
Estimated Accumulated Net Book Net Book
Useful Lives Cost Depreciation Value Value
------------- ---------- ------------ -------- --------
($ in Thousands)
Land -- $ 25,066 $ -- $ 25,066 $ 23,183
Land improvements 3 - 20 years 2,784 2,050 734 725
Buildings 5 - 40 years 125,682 63,298 62,384 64,777
Computers 3 - 5 years 34,831 27,949 6,882 11,328
Furniture, fixtures and other equipment 3 - 20 years 89,028 70,785 18,243 20,492
Leasehold improvements 5 - 30 years 14,548 8,329 6,219 7,095
---------------------------------------------------------
Total premises and equipment $ 291,939 $ 172,411 $ 119,528 $ 127,600
=========================================================
Depreciation and amortization of premises and equipment totaled $16.2 million in
2001, $17.1 million in 2000, and $17.4 million in 1999.
The Corporation and certain subsidiaries are obligated under a number of
noncancelable operating leases for other facilities and equipment, certain of
which provide for increased rentals based upon increases in cost of living
adjustments and other operating costs. The approximate minimum annual rentals
and commitments under these noncancelable agreements and leases with remaining
terms in excess of one year are as follows:
($ in Thousands)
2002 $ 5,590
2003 5,223
2004 3,980
2005 3,650
2006 2,966
Thereafter 15,480
-------
Total $ 36,889
========
Total rental expense under leases, net of sublease income, totaled $7.3 million
in 2001, $7.1 million in 2000, and $6.3 million in 1999.
NOTE 8 DEPOSITS:
The distribution of deposits at December 31 is as follows.
2001 2000
---------- ----------
($ in Thousands)
Noninterest-bearing demand deposits $ 1,425,109 $ 1,243,949
Savings deposits 801,648 857,247
Interest-bearing demand deposits 922,164 850,280
Money market deposits 1,814,098 1,492,628
Brokered time deposits 290,000 916,060
Other time deposits 3,359,592 3,931,482
---------------------------
Total deposits $ 8,612,611 $ 9,291,646
===========================
Time deposits of $100,000 or more were $994 million and $1.2 billion at December
31, 2001 and 2000, respectively. Aggregate annual maturities of all time
deposits at December 31, 2001 are as follows:
Maturities During Year End
December 31, ($ in Thousands)
- --------------------------- ----------------
2002 $ 3,046,869
2003 421,112
2004 111,873
2005 50,687
2006 16,389
Thereafter 2,662
-----------
Total $ 3,649,592
===========
57
NOTE 9 SHORT-TERM BORROWINGS:
Short-term borrowings at December 31 are as follows:
2001 2000
-------- --------
($ in Thousands)
Federal funds purchased and securities sold
under agreements to repurchase $ 1,691,152 $ 1,691,796
Federal Home Loan Bank advances 300,000 750,000
Notes payable to banks -- 83,740
Treasury, tax, and loan notes 645,047 38,363
Commercial paper -- 34,304
Other borrowed funds 7,652 --
--------------------------
Total $ 2,643,851 $ 2,598,203
==========================
The short-term Federal Home Loan Bank advances are secured by blanket collateral
agreements on the subsidiary banks' mortgage loan portfolios whereby qualifying
mortgages (as defined) with unpaid principal balances aggregating no less than
167% of the Federal Home Loan Bank advances are maintained.
Included in short-term borrowings are Federal Home Loan Bank advances with
original maturities of less than one year. The treasury, tax, and loan notes are
demand notes representing secured borrowings from the U.S. Treasury,
collateralized by qualifying securities and loans.
Notes payable to banks are unsecured borrowings under existing lines of credit.
At December 31, 2001, the parent company had $100 million of established lines
of credit with various nonaffiliated banks, which was not drawn on at December
31, 2001. Borrowings under these lines accrue interest at short-term market
rates. Under the terms of the credit agreement, a variety of advances and
interest periods may be selected by the parent company. During 2000, a $200
million commercial paper program was initiated, no amounts were outstanding at
December 31, 2001.
NOTE 10 LONG-TERM DEBT:
Long-term debt at December 31 is as follows:
2001 2000
-------- --------
($ in Thousands)
Federal Home Loan Bank advances
(3.46% to 6.81%, fixed rate,
maturing in 2002 through 2014
for 2001, and 4.95% to 7.63%,
fixed rate, maturing in 2001
through 2014 for 2000) $ 715,993 $ 116,765
Bank note (1) 200,000 --
Subordinated debt, net (2) 181,882 --
Other borrowed funds 5,520 5,655
----------------------
Total long-term debt $ 1,103,395 $ 122,420
======================
(1) On April 4, 2001, the Corporation issued $200 million of variable rate bank
notes that matures on April 10, 2003. The note reprices quarterly at LIBOR
plus 22 basis points and was 2.66% at December 31, 2001.
(2) On August 6, 2001, the Corporation issued $200 million of subordinated
debt. This debt has a fixed interest rate of 6.75% and matures on August
15, 2011. During October, the Corporation entered into a fair value hedge
to hedge the interest rate risk on the subordinated debt. As of December
31, 2001, the fair value of the hedge was a $16.7 million loss. The
subordinated debt qualifies under the risk-based capital guidelines as Tier
2 supplementary capital for regulatory purposes.
58
The table below summarizes the maturities of the Corporation's long-term debt at
December 31, 2001:
Year ($ in Thousands)
- ---- ----------------
2002 $ 200,140
2003 502,411
2004 200,150
2005 --
2006 --
Thereafter 200,694
----------
Total long-term debt $1,103,395
==========
Note 11 Stockholders' Equity:
On June 15, 2000, the Corporation distributed 6.3 million shares of common stock
in connection with a 10% stock dividend. During 1999, the Corporation issued
shares in conjunction with merger and acquisition activity (see Note 2 of the
notes to consolidated financial statements). Share and price information has
been adjusted to reflect all stock splits and dividends.
The Corporation's Articles of Incorporation authorize the issuance of 750,000
shares of preferred stock at a par value of $1.00 per share. No shares have been
issued.
At December 31, 2001, subsidiary net assets equaled $1.1 billion, of which
approximately $148.0 million could be transferred to the Corporation in the form
of cash dividends without prior regulatory approval, subject to the capital
needs of each subsidiary.
The Board of Directors has authorized management to repurchase shares of the
Corporation's common stock each quarter in the market, to be made available for
issuance in connection with the Corporation's employee incentive plans and for
other corporate purposes. The Board of Directors authorized the repurchase of up
to 1.2 million shares (300,000 shares per quarter) in 2001 and 2000. Of these
authorizations, approximately 800,000 shares were repurchased for $26.7 million
during 2001 (with 247,000 shares reissued in connection with stock options
exercised), and 418,000 shares were repurchased for $10.6 million in 2000 (with
322,000 shares reissued for options exercised). Additionally, under two separate
actions in 2000, the Board of Directors authorized the repurchase and
cancellation of the Corporation's outstanding shares, not to exceed
approximately 6.7 million shares on a combined basis. Under these authorizations
228,000 shares were repurchased for $7.7 million during 2001, at an average cost
of $33.88 per share, while approximately 3.1 million shares remain authorized to
repurchase at December 31, 2001. The repurchase of shares will be based on
market opportunities, capital levels, growth prospects, and other investment
opportunities.
The Board of Directors approved the implementation of a broad-based stock option
grant, effective July 28, 1999. This stock option grant provided all qualifying
employees with an opportunity and an incentive to buy shares of the Corporation
and align their financial interest with the growth in value of the Corporation's
shares. These options have 10-year terms, fully vest in two years, and have
exercise prices equal to 100% of market value on the date of grant. As of
December 31, 2001, 1,620,000 shares remain available for granting.
The Amended and Restated Long-Term Incentive Stock Plan ("Stock Plan") was
adopted by the Board of Directors and originally approved by shareholders in
1987 and amended in 1994, 1997 and 1998. Options are generally exercisable up to
10 years from the date of grant and vest over two to three years. As of December
31, 2001, approximately 1,052,000 shares remain available for grants.
The stock incentive plans of acquired companies were terminated at each
respective merger date. Option holders under such plans received the
Corporation's common stock, or options to buy the Corporation's common stock,
based on the conversion terms of the various merger agreements. The historical
option information presented below has been restated to reflect the options
originally granted under the acquired companies' plans.
59
----------------------------------------------------------------------------------
2001 2000 1999
----------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
Outstanding Price Outstanding Price Outstanding Price
----------------------------------------------------------------------------------
Outstanding, January 1 3,308,447 $ 27.33 3,206,489 $ 25.95 2,156,822 $ 20.28
Granted 701,900 $ 32.30 688,030 $ 27.57 1,428,508 $ 32.26
Exercised (250,330) $ 18.91 (351,990) $ 11.05 (276,524) $ 12.35
Forfeited (105,456) $ 32.52 (234,082) $ 34.36 (102,317) $ 31.26
----------------------------------------------------------------------------------
Outstanding, December 31 3,654,561 $ 28.71 3,308,447 $ 27.33 3,206,489 $ 25.95
==================================================================================
Options exercisable at year-end 2,408,228 1,539,303 1,493,667
==================================================================================
The following table summarizes information about the Corporation's stock options
outstanding at December 31, 2001:
Options Weighted Average Remaining Grants Weighted Average
Outstanding Exercise Price Life (Years) Exercisable Exercise Price
-----------------------------------------------------------------------------
Range of Exercise Prices:
$ 7.18 55,040 $ 7.18 0.90 55,040 $ 7.18
$11.22 - $12.74 23,199 11.75 2.32 23,199 11.75
$15.54 - $17.58 383,584 16.39 2.22 383,584 16.39
$22.35 - $25.61 475,709 24.21 4.52 466,799 24.21
$27.56 - $29.61 1,080,263 27.68 7.59 529,590 27.64
$32.13 - $36.64 1,636,766 34.56 7.87 950,016 36.19
---------------------------------------------------------------------------
TOTAL 3,654,561 $ 28.71 6.62 2,408,228 $ 27.94
===========================================================================
For purposes of providing the pro forma disclosures required under SFAS No. 123,
the fair value of stock options granted in 2001, 2000, and 1999 was estimated at
the date of grant using a Black-Scholes option pricing model which was
originally developed for use in estimating the fair value of traded options
which have different characteristics from the Corporation's employee stock
options. The model is also sensitive to changes in the subjective assumptions
which can materially affect the fair value estimate. As a result, management
believes the Black-Scholes model may not necessarily provide a reliable single
measure of the fair value of employee stock options.
The following assumptions were used in estimating the fair value for options
granted in 2001, 2000 and 1999:
2001 2000 1999
-----------------------------------------
Dividend yield 3.51% 3.82% 3.39%
Risk-free interest rate 5.09% 6.63% 4.97%
Weighted average expected life 7 yrs. yrs. 50 yrs.
Expected volatility 26.07% 25.73% 24.51%
The weighted average per share fair values of options granted in 2001, 2000, and
1999 were $7.76, $6.97, and $6.90, respectively. The annual expense allocation
methodology prescribed by SFAS No. 123 attributes a higher percentage of the
reported expense to earlier years than to later years, resulting in an
accelerated expense recognition for proforma disclosure purposes.
60
Had the Corporation determined the compensation cost based on the fair value at
grant date for its stock options under SFAS No. 123, the Corporation's net
income and net income per share would have been as summarized below:
For the Years Ended December 31,
------------------------------------------
2001 2000 1999
-------------- -------------- ------------
($ in Thousands, except per share amounts)
Net Income As Reported $ 179,522 $ 167,983 $ 164,943
Pro Forma $ 176,038 $ 164,394 $ 162,226
Basic Earnings Per Share As Reported $ 2.72 $ 2.46 $ 2.36
Pro Forma $ 2.67 $ 2.41 $ 2.32
Diluted Earnings Per Share As Reported $ 2.70 $ 2.46 $ 2.34
Pro Forma $ 2.65 $ 2.40 $ 2.30
NOTE 12 RETIREMENT PLAN:
The Corporation has a noncontributory defined benefit retirement plan (the
"Plan") covering substantially all full-time employees. The benefits are based
primarily on years of service and the employee's compensation paid while a
participant in the plan. The Corporation's funding policy is consistent with the
funding requirements of federal law and regulations.
The following tables set forth the Plan's funded status and net periodic benefit
cost:
2001 2000
--------- --------
($ in Thousands)
Change in Benefit Obligation
Net benefit obligation at beginning of year $ 40,908 $ 37,052
Service cost 3,950 3,576
Interest cost 2,889 2,858
Actuarial loss 1,596 2,223
Gross benefits paid (3,576) (4,801)
-------------------------
Net benefit obligation at end of year $ 45,767 $ 40,908
=========================
Change in Fair Value of Plan Assets
Fair value of plan assets at beginning of year $ 34,681 $ 37,018
Actual loss on plan assets (1,907) (639)
Employer contributions 3,138 3,103
Gross benefits paid (3,576) (4,801)
-------------------------
Fair value of plan assets at end of year $ 32,336 $ 34,681
=========================
Funded Status
Funded status at end of year $(13,431) $(6,227)
Unrecognized net actuarial loss 7,034 58
Unrecognized prior service cost 532 594
Unrecognized net transition asset (1,383) (1,707)
-------------------------
Net amount recognized at end of year in the
balance sheet $ (7,248) $ (7,282)
=========================
Weighted average assumptions as of December 31:
Discount rate 7.25% 7.50%
Rate of increase in compensation levels 5.00 5.00
=========================
61
2001 2000 1999
-------- -------- --------
($ in Thousands)
Components of Net Periodic Benefit Cost
Service cost $ 3,950 $ 3,576 $ 3,858
Interest cost 2,889 2,858 2,549
Expected return on plan assets (3,474) (3,134) (2,789)
Amortization of:
Transition asset (324) (324) (324)
Prior service cost 63 62 63
Actuarial gain -- (36) --
---------------------------------
Total net periodic benefit cost $3,104 $3,002 $3,357
=================================
Weighted average assumptions used in cost calculations:
Discount rate 7.25% 7.75% 6.75%
Rate of increase in compensation levels 5.00 5.00 5.00
Expected long-term rate of return on plan assets 9.00 9.00 9.00
=================================
The Corporation and its subsidiaries also have a Profit Sharing/Retirement
Savings Plan (the "plan"). The Corporation's contribution is determined annually
by the Administrative Committee of the Board of Directors, based in part on
performance-based formulas provided in the plan. Total expense related to
contributions to the plan was $10.5 million, $6.1 million, and $2.3 million in
2001, 2000, and 1999, respectively.
At December 31, 2001, the Corporation recorded an additional pension obligation
of $4.2 million, of which, $2.2 million was included as a reduction in
accumulated other comprehensive income, net of taxes of $1.5 million, and
$500,000 was included as an intangible asset. An additional pension obligation
is required when the accumulated benefit obligation exceeds the sum of the fair
value of plan assets and the accrued pension expense.
NOTE 13 INCOME TAX EXPENSE:
The current and deferred amounts of income tax expense (benefit) are as follows:
Years ended December 31,
2001 2000 1999
--------------- -------------- --------------
($ in Thousands)
Current:
Federal $ 54,726 $ 73,885 $ 66,735
State 113 1,889 1,095
-------- -------- --------
Total current 54,839 75,774 67,830
Deferred:
Federal 14,947 (11,640) 3,894
State 1,701 (2,296) 649
-------- -------- --------
Total deferred 16,648 (13,936) 4,543
-------- -------- --------
Total income tax expense $ 71,487 $ 61,838 $ 72,373
======== ======== ========
62
Temporary differences between the amounts reported in the financial statements
and the tax bases of assets and liabilities resulted in deferred taxes. Deferred
tax assets and liabilities at December 31 are as follows:
2001 2000
----------- -----------
($ in Thousands)
Gross deferred tax assets:
Allowance for loan losses $ 52,038 $ 48,521
Accrued liabilities 4,861 4,367
Deferred compensation 6,799 7,427
Securities valuation adjustment 8,780 7,205
Deposit base intangible 4,764 4,659
Benefit of tax loss carryforwards 14,254 11,826
Other 9,136 9,974
----------------------
Total gross deferred tax assets 100,632 93,979
Valuation adjustment for deferred tax assets (12,163) (13,095)
----------------------
88,469 80,884
Gross deferred tax liabilities:
Real estate investment trust income 45,811 25,543
Mortgage banking activity 3,414 4,319
Deferred loan fee income and other loan yield adjustment 4,966 3,515
State income taxes 10,521 7,816
Other 6,904 7,122
----------------------
Total gross deferred tax liabilities 71,616 48,315
----------------------
Net deferred tax assets 16,853 32,569
Tax effect of unrealized gain related to available for sale (29,245) (8,983)
securities
Tax effect of unrealized loss related to derivative instruments 1,411 --
Tax effect of additional pension obligation 1,485 --
----------------------
(26,349) (8,983)
----------------------
Net deferred tax assets (liabilities) including tax effected $ (9,496) $ 23,586
items
======================
Components of the 2000 deferred tax assets have been adjusted to reflect the
filing of corporate income tax returns.
For financial reporting purposes, a valuation allowance has been recognized to
offset deferred tax assets related to state net operating loss carryforwards of
certain subsidiaries and other temporary differences due to the uncertainty that
the assets will be realized. If it is subsequently determined that all or a
portion of these deferred tax assets will be realized, the tax benefit for these
items will be used to reduce current tax expense for that period.
At December 31, 2001, the Corporation had state net operating losses of $170
million and federal net operating losses of $2 million that will expire in the
years 2002 through 2016.
63
The effective income tax rate differs from the statutory federal tax rate. The
major reasons for this difference are as follows:
2001 2000 1999
---- ---- ----
Federal income tax rate at statutory rate 35.0% 35.0% 35.0%
Increases (decreases) resulting from:
Tax-exempt interest and dividends (5.1) (5.0) (3.2)
State income taxes (net of federal income taxes) 0.5 (0.1) 1.2
Change in valuation allowance for deferred tax assets (1.1) (0.8) (1.7)
Increase in cash surrender value of life insurance (1.8) (1.9) (1.4)
Other 1.0 (0.3) 0.6
----------------------
Effective income tax rate 28.5% 26.9% 30.5%
======================
A savings bank acquired by the Corporation in 1997 qualified under provisions of
the Internal Revenue Code that permitted it to deduct from taxable income an
allowance for bad debts that differed from the provision for such losses charged
to income for financial reporting purposes. Accordingly, no provision for income
taxes has been made for $79.2 million of retained income at December 31, 2001.
If income taxes had been provided, the deferred tax liability would have been
approximately $31.8 million.
NOTE 14 COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENT LIABILITIES:
Commitments and Off-Balance Sheet Risk
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to manage its own exposure to interest rate risk. These financial
instruments include lending-related commitments.
Lending-related Commitments
Off-balance sheet lending-related commitments include commitments to extend
credit, commercial letters of credit, and standby letters of credit. These
financial instruments are exercisable at the market rate prevailing at the date
the underlying transaction will be completed, and thus are deemed to have no
current fair value, or the fair value is based on fees currently charged to
enter into similar agreements and is not material at December 31, 2001 and 2000.
Commitments to extend credit are agreements to lend to customers at
predetermined interest rates as long as there is no violation of any condition
established in the contracts. Standby and commercial letters of credit are
conditional commitments issued by the Corporation to guarantee the performance
and/or payment of a customer to a third party in connection with specified
transactions. The following is a summary of lending-related off-balance sheet
financial instruments at December 31:
2001 2000
---------- ----------
($ in Thousands)
Commitments to extend credit $3,189,013 $2,596,438
Commercial letters of credit 79,980 45,248
Standby letters of credit 189,996 145,321
Loans sold with recourse 1,941 4,575
Forward commitments to sell loans 650,500 52,350
For commitments to extend credit, commercial letters of credit, and standby
letters of credit the Corporation's associated credit risk is essentially the
same as that involved in extending loans to customers and is subject to normal
credit policies. The Corporation's exposure to credit loss in the event of
nonperformance by the other party to these financial instruments is represented
by the contractual amount of those instruments. The commitments generally have
fixed expiration dates or other termination clauses and may require payment of a
fee. The Corporation uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. The
Corporation evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Corporation upon
extension of
64
credit, is based on management's credit evaluation of the customer. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
All loans currently sold to others are sold on a nonrecourse basis with the
servicing rights of these loans retained by the Corporation. At December 31,
2001 and 2000, $1.9 million and $4.6 million, respectively, of the serviced
loans were previously sold with recourse, the majority of which is either
federally-insured or federally-guaranteed.
As a result of the adoption of SFAS 133, commitments to originate residential
mortgage loans held for sale and commitments to sell residential mortgage loans
are defined as derivatives, and are therefore required to be recorded on the
consolidated balance sheet at fair value. The Corporation's derivative and
hedging activity, as defined by SFAS 133, is further summarized in Note 15 of
the notes to consolidated financial statements. Included in commitments to
extend credit in the table above are commitments to originate residential
mortgage loans held for sale ("pipeline loans") of approximately $590.8 million
and $55.2 million, at December 31, 2001 and 2000, respectively, with terms
generally not exceeding 90 days. Adverse market interest rate changes between
the time a customer receives a rate-lock commitment and the time the loan is
sold to an investor can erode the value of that mortgage. Therefore, the
Corporation uses forward commitments to sell residential mortgage loans to
reduce its exposure to market risk resulting from changes in interest rates
which could alter the underlying fair value of mortgage loans held for sale and
pipeline loans. The fair value of the pipeline loans and the forward commitments
at December 31, 2001 and 2000, was a net gain of $4.1 million and $12,000,
respectively. Also, the Corporation had $301.7 million and $24.6 million of
mortgage loans held for sale in the consolidated balance sheets at December 31,
2001 and 2000, respectively. The mortgage loans held for sale are carried in the
consolidated balance sheet at the lower of cost or fair value, with fair value
determined based on the fixed prices of the forward commitments, or quoted
market prices on uncommitted mortgage loans held for sale.
Contingent Liabilities
There are legal proceedings pending against certain subsidiaries of the
Corporation in the ordinary 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
legal counsel, that the Corporation has meritorious defenses, and any ultimate
liability would not have a material adverse affect on the consolidated financial
position or results of operations of the Corporation.
NOTE 15 DERIVATIVE AND HEDGING ACTIVITIES:
Effective January 1, 2001, the Corporation adopted SFAS 133, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
All derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value. If the derivative is
designated as a fair value hedge, the changes in the fair value of the
derivative and of the hedged item attributable to the hedged risk are recognized
in earnings. If the derivative is designated as a cash flow hedge, the effective
portions of changes in the fair value of the derivative are recorded in other
comprehensive income and are recognized in the income statement when the hedged
item affects earnings. Ineffective portions of changes in the fair value of cash
flow hedges are recognized in earnings.
The Corporation uses derivative instruments primarily to hedge the variability
in interest payments or protect the value of certain assets and liabilities
recorded in its consolidated balance sheet from changes in interest rates. The
contract or notional amount of a derivative is used to determine, along with the
other terms of the derivative, the amounts to be exchanged between the
counterparties. Because the contract or notional amount does not represent
amounts exchanged by the parties, it is not a measure of loss exposure related
to the use of derivatives nor of exposure to liquidity risk. The Corporation is
exposed to credit risk in the event of nonperformance by counterparties to
financial instruments. As the Corporation generally enters into transactions
only with high quality counterparties, no losses with counterparty
nonperformance on derivative financial
65
instruments has occurred. Further, the Corporation obtains collateral and uses
master netting arrangements when available. To mitigate counterparty risk,
interest rate swap agreements generally contain language outlining collateral
pledging requirements for each counterparty. Collateral must be posted when the
market value exceeds a certain threshold. The threshold limits are determined
from the credit ratings of each counterparty. Upgrades or downgrades to the
credit ratings of either counterparty would lower or raise the threshold limits.
Market risk is the adverse effect on the value of a financial instrument that
results from a change in interest rates, currency exchange rates, or commodity
prices. The market risk associated with interest rate contracts is managed by
establishing and monitoring parameters that limit the types and degree of market
risk that may be undertaken.
Interest rate swap contracts are entered into primarily as an asset/liability
management strategy to reduce interest rate risk. Interest rate swap contracts
are exchanges of interest payments, such as fixed rate payments for floating
rate payments, based on a notional principal amount. Payments related to the
Corporation's swap contracts are made either monthly, quarterly or semi-annually
by one of the parties depending on the specific terms of the related contract.
The primary risk associated with all swaps is the exposure to movements in
interest rates and the ability of the counterparties to meet the terms of the
contract. At December 31, 2001, the Corporation had $723 million of interest
rate swaps outstanding. Included in this amount, $123 million in interest rate
swaps were used to convert fixed rate loans into floating rate assets. The
remaining swap contracts used for interest rate risk management of $600 million
at December 31, 2001, were used to hedge interest rate risk of various other
specific liabilities.
Estimated Weighted Average
Notional Fair Market ----------------------------------------
Amout Value Receive Rate Pay Rate Maturity
-------- --------- ------------ -------- ----------
December 31, 2001 ($ in Thousands)
- ------------------
Swaps-receive fixed / pay variable (1), (4) $200,000 $(16,678) 6.85% 4.60% 117 months
Swaps-receive variable / pay fixed (1), (3) 400,000 (12,970) 2.42% 5.47% 61 months
Swaps-receive fixed / pay variable (2), (4) 123,386 (828) 4.30% 7.06% 61 months
Caps-written (1), (3) 200,000 9,456 Strike 4.72% 2.47% 56 months
(1) Asset / Liability management hedge
(2) Customer / Loan-related hedge
(3) Cash flow hedges
(4) Fair value hedges
Interest rate floors and caps are interest rate protection instruments that
involve the payment from the seller to the buyer of an interest differential.
This differential represents the difference between a short-term rate (e.g. six
month LIBOR) and an agreed upon rate (the strike rate) applied to a notional
principal amount. By buying a cap the Corporation will be paid the differential
by a counterparty, should the short-term rate rise above the strike level of the
agreement. The primary risk associated with purchased floors and caps is the
ability of the counterparties to meet the terms of the agreement. As of December
31, 2001, the Corporation had purchased caps for asset/liability management of
$200 million.
The predominant activities affected by the statement include the Corporation's
use of interest rate swaps and certain mortgage banking activities. The adoption
of the statement included the following:
- - Under SFAS 133, the Corporation was allowed a one-time opportunity to
reclassify investment securities from held to maturity to available for
sale. Thus, upon adoption, the Corporation reclassified all its held to
maturity securities to available for sale securities. The amortized cost
and fair value of the securities transferred were $369 million and $373
million, respectively.
- - The Corporation designated its interest rate swaps existing at December 31,
2000, to qualify for hedge accounting. These swaps hedge the exposure to
variability in interest payments of variable rate liabilities. These hedges
represent cash flow hedges and were highly effective at adoption. On
adoption, the cumulative effect, net of taxes of $843,000, was recorded as
a decrease to accumulated other comprehensive income of $1.3 million.
66
- - The Corporation's commitments to sell groups of residential mortgage loans
that it originates or purchases as part of its mortgage banking operations,
as well as its commitments to originate residential mortgage loans are
considered derivatives under SFAS 133. The fair value of these derivatives
at adoption, a $12,000 net gain, was recorded in mortgage banking income.
In accordance with the statement, the Corporation measures the effectiveness of
its hedges on a periodic basis. Any difference between the fair value change of
the hedge versus the fair value change of the hedged item is considered to be
the "ineffective" portion of the hedge. The ineffective portion of the hedge is
recorded as an increase or decrease in the related income statement
classification of the item being hedged. For the mortgage derivatives, which are
not accounted for as hedges, changes in the fair value are recorded as an
adjustment to mortgage banking income.
At December 31, 2001, the estimated fair value of the interest rate swaps and
the cap designated as cash flow hedges was a $3.5 million unrealized loss, or
$2.1 million, net of taxes of $1.4 million, carried as a component of
accumulated other comprehensive income. The ineffective portion of the hedges
recorded through the statements of income was immaterial. Currently, none of the
existing amounts within accumulated other comprehensive income are expected to
be reclassified into earnings within the next 12 months. These instruments are
used to hedge the exposure to the variability in interest payments of variable
rate liabilities.
At December 31, 2001, the estimated fair value of the interest rate swaps
designated as fair value hedges was an unrealized loss of $17.5 million, carried
as a component of other liabilities. These swaps hedge against changes in the
fair value of certain loans and long term debt.
The change in fair value of the mortgage derivatives since adoption of SFAS 133
was a net gain of $4.1 million and is recorded in mortgage banking income for
the year ended December 31, 2001. The $4.1 million net fair value of mortgage
derivatives is composed of the net gain on commitments to sell approximately
$650.5 million of loans to various investors and commitments to fund
approximately $590.8 million of loans to individual borrowers.
At December 31, 2000, the Corporation had the following interest rate swaps to
hedge interest rate risk. The effect on net interest income for 2000 was an
increase of $311,000. The pay fixed swaps hedged money market deposits and the
receive rate was based on 3 month LIBOR, while the pay variable swaps hedged
certificates of deposit and the rate was based on 3 month LIBOR.
Estimated Weighted Average
Notional Fair Market ----------------------------------------
Amout Value Receive Rate Pay Rate Maturity
-------- --------- ------------ -------- ----------
December 31, 2001 ($ in Thousands)
- ------------------
Swaps - receive variable / pay fixed $300,000 $(2,107) 6.79% 6.36% 18 months
Swaps - receive fixed / pay variable 10,000 7 6.35% 6.43% 3 months
67
NOTE 16 PARENT COMPANY ONLY FINANCIAL INFORMATION:
Presented below are condensed financial statements for the parent company:
BALANCE SHEETS
2001 2000
------------ -----------
($ in Thousands)
ASSETS
Cash and due from banks $ 614 $ 516
Notes receivable from subsidiaries 201,759 81,044
Investment in subsidiaries 1,089,647 1,005,256
Other assets 59,005 53,177
-----------------------
Total assets $1,351,025 $1,139,993
=======================
LIABILITY AND STOCKHOLDERS' EQUITY
Short-term borrowings $ -- $ 118,044
Long-term debt 181,882 --
Accrued expenses and other liabilities 98,727 53,253
-----------------------
Total liabilities 280,609 171,297
Stockholders' equity 1,070,416 968,696
-----------------------
Total liabilities and stockholders' equity $1,351,025 $1,139,993
=======================
STATEMENTS OF INCOME
For the Years Ended December 31,
------------------------------------
2001 2000 1999
------------------------------------
($ in Thousands)
INCOME
Dividends from subsidiaries $ 90,000 $ 168,150 $ 73,675
Management and service fees
from subsidiaries 26,482 20,617 19,355
Interest income on notes receivable 4,590 8,442 8,007
Other income 3,428 3,234 1,919
-----------------------------------
Total income 124,500 200,443 102,956
-----------------------------------
EXPENSE
Interest expense on borrowed funds 8,107 9,284 7,886
Provision for loan losses (800) 2,000 --
Personnel expense 19,766 10,991 13,470
Other expense 11,379 11,565 8,948
-----------------------------------
Total expense 38,452 33,840 30,304
-----------------------------------
Income before income tax benefit
and equity in undistributed income 86,048 166,603 72,652
Income tax benefit (48) (4,670) (1,041)
----------------------------------
Income before equity in undistributed
net income of subsidiaries 86,096 171,273 73,693
Equity in undistributed net income
(loss) of subsidiaries 93,426 (3,290) 91,250
-----------------------------------
Net income $ 179,522 $ 167,983 $ 164,943
===================================
68
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
--------------------------------------
2001 2000 1999
--------------------------------------
($ in Thousands)
OPERATING INCOME
Net income $ 179,522 $ 167,983 $ 164,943
Adjustments to reconcile net income to net cash provided
by operating activities:
(Increase) decrease in equity in undistributed net
income of subsidiaries (93,426) 3,290 (91,250)
Depreciation and other amortization 439 476 388
Amortization of intangibles 397 420 404
Gain on sales of assets, net (8) (1,016) (783)
(Increase) decrease in interest receivable and other
assets (6,763) 4,243 (12,911)
Increase in interest payable and other liabilities 45,474 16,819 4,732
Capital (contributed to) received from subsidiaries 41,617 (24,832) 52,464
-----------------------------------
Net cash provided by operating activities 167,252 167,383 117,987
-----------------------------------
INVESTING ACTIVITIES
Proceeds from sales of investment securities -- 1,013 604
Net cash paid in acquisition of subsidiary -- -- (10,584)
Net decrease (increase) in notes receivable (120,474) 36,195 138,274
Purchase of premises and equipment, net of disposals (134) (115) (503)
-----------------------------------
Net cash provided (used) by investing activities (120,608) 37,093 127,791
-----------------------------------
FINANCING ACTIVITIES
Net decrease in short-term borrowings (118,044) (38,856) (60,635)
Net increase (decrease) in long-term debt 181,882 (1,405) 1,405
Cash dividends paid (80,553) (75,719) (73,743)
Proceeds from exercise of stock options 4,738 3,893 3,421
Purchase and retirement of treasury stock (7,717) (74,098) (91,762)
Purchase of treasury stock (26,852) (18,629) (24,255)
-----------------------------------
Net cash used by financing activities (46,546) (204,814) (245,569)
-----------------------------------
Net increase (decrease) in cash and cash equivalents 98 (338) 209
Cash and due from banks at beginning of year 516 854 645
-----------------------------------
Cash and due from banks at end of year $ 614 $ 516 $ 854
===================================
NOTE 17 FAIR VALUE OF FINANCIAL INSTRUMENTS:
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
that the Corporation disclose estimated fair values for its financial
instruments. Fair value estimates, methods, and assumptions are set forth below
for the Corporation's financial instruments.
69
The estimated fair values of the Corporation's financial instruments at December
31, 2001 and 2000 are as follows:
2001 2000
-------------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------------------------------------------------------
($ in Thousands)
Financial assets:
Cash and due from banks $ 587,994 $ 587,994 $ 368,186 $ 368,186
Interest-bearing deposits in other
financial institutions 5,427 5,427 5,024 5,024
Federal funds sold and securities
purchased under agreements to resell 12,015 12,015 23,310 23,310
Accrued interest receivable 77,289 77,289 96,163 96,163
Investment securities:
Held to maturity -- -- 368,558 372,873
Available for sale 3,197,021 3,197,021 2,891,647 2,891,647
Loans held for sale 301,707 301,707 24,593 24,693
Loans 9,019,864 9,277,269 8,913,379 8,949,770
Financial liabilities:
Deposits 8,612,611 8,667,356 9,291,646 9,318,802
Accrued interest payable 36,003 36,003 60,744 60,744
Short-term borrowings 2,643,851 2,643,851 2,598,203 2,598,203
Long-term debt 1,103,395 1,124,036 122,420 123,821
Interest rate swap and cap agreements (1) (21,020) (21,020) -- (2,100)
=======================================================
(1) At December 31, 2001 and 2000, the notional amount of interest rate swap
and cap agreements was $923 million and $310 million, respectively. For
2001, the interest rate swap agreements are carried in the balance sheet at
fair value; for 2000, the swaps are off-balance sheet. See Notes 14 and 15
for information on the fair value of lending-related off-balance sheet and
derivative financial instruments.
Cash and due from banks, interest-bearing deposits in other financial
institutions, federal funds sold and securities purchased under agreements to
resell, and accrued interest receivable - For these short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Investment securities held to maturity, investment securities available for
sale, and trading account securities - The fair value of investment securities
held to maturity, investment securities available for sale, and trading account
securities, except certain state and municipal securities, is estimated based on
bid prices published in financial newspapers or bid quotations received from
securities dealers. The fair value of certain state and municipal securities is
not readily available through market sources other than dealer quotations, so
fair value estimates are based on quoted market prices of similar instruments,
adjusted for differences between the quoted instruments and the instruments
being valued. There were no trading account securities at December 31, 2001 or
2000.
Loans Held for Sale - Fair value is estimated using the prices of the
Corporation's existing commitments to sell such loans and/or the quoted market
prices for commitments to sell similar loans.
Loans - Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
real estate, residential mortgage, credit card, and other consumer. The fair
value of other types of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with
similar credit ratings and for similar maturities. Future cash flows are also
adjusted for estimated reductions or delays due to delinquencies, nonaccruals,
or potential charge-offs.
Deposits - The fair value of deposits with no stated maturity such as
noninterest-bearing demand deposits, savings, interest-bearing demand deposits,
and money market accounts, is equal to the amount payable on
70
demand as of December 31. The fair value of certificates of deposit is based on
the discounted value of contractual cash flows. The discount rate is estimated
using the rates currently offered for deposits of similar remaining maturities.
Accrued interest payable and short-term borrowings - For these short-term
instruments, the carrying amount is a reasonable estimate of fair value.
Long-term debt - Rates currently available to the Corporation for debt with
similar terms and remaining maturities are used to estimate fair value of
existing borrowings.
Interest rate swap and cap agreements - The fair value of interest rate swap and
cap agreements is obtained from dealer quotes. These values represent the
estimated amount the Corporation would receive or pay to terminate the
agreements, taking into account current interest rates and, when appropriate,
the current creditworthiness of the counter-parties.
Limitations - Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Corporation's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
NOTE 18 REGULATORY MATTERS:
The Corporation and the subsidiary banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on the Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation must meet specific capital guidelines that involve
quantitative measures of the Corporation's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Corporation's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2001, that the
Corporation and the subsidiary banks meet all capital adequacy requirements to
which they are subject.
As of December 31, 2001 and 2000, the most recent notifications from the Office
of the Comptroller of the Currency and the Federal Deposit Insurance Corporation
categorized the subsidiary banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the subsidiary banks must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institutions' category.
The actual capital amounts and ratios of the Corporation and its significant
subsidiaries are presented below. No deductions from capital were made for
interest rate risk in 2001 or 2000. The increase in the total risk-based capital
ratio for 2001 compared to 2000 is primarily attributable to the subordinated
debt issued in 2001 which qualifies as Tier 2 supplementary capital.
71
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions: (2)
----------------------- ----------------------- ---------------------------
Amount Ratio (1) Amount Ratio (1) Amount Ratio (1)
----------- ----------- ---------- ----------- ---------- -------------
As of December 31, 2001: ($ In Thousands)
- -----------------------
Associated Banc-Corp
- --------------------
Total Capital $1,253,036 13.15% $762,217 =>8.00%
Tier I Capital 924,871 9.71 381,109 =>4.00%
Leverage 924,871 7.03 526,084 =>4.00%
Associated Bank, N.A. (3)
- -------------------------
Total Capital 737,978 10.49 562,730 =>8.00% $703,412 =>10.00%
Tier I Capital 645,700 9.18 281,365 =>4.00% 422,047 =>6.00%
Leverage 645,700 6.88 375,540 =>4.00% 469,425 =>5.00%
Associated Bank Illinois, N.A.
- ------------------------------
Total Capital 177,293 13.02 108,963 =>8.00% 136,204 =>10.00%
Tier I Capital 163,925 12.04 54,482 =>4.00% 81,722 =>6.00%
Leverage 163,925 6.46 101,544 =>4.00% 126,931 =>5.00%
As of December 31, 2000:
- -----------------------
Associated Banc-Corp
- --------------------
Total Capital $966,994 10.70% $722,655 =>8.00%
Tier I Capital 846,371 9.37 361,327 =>4.00%
Leverage 846,371 6.52 519,200 =>4.00%
Associated Bank Illinois, N.A.
- ------------------------------
Total Capital 172,611 10.28 134,346 =>8.00% $167,932 =>10.00%
Tier I Capital 152,894 9.10 67,173 =>4.00% 100,759 =>6.00%
Leverage 152,894 5.42 112,864 =>4.00% 141,080 =>5.00%
Associated Bank Milwaukee (3)
- -----------------------------
Total Capital 194,400 10.36 150,087 =>8.00% 187,609 =>10.00%
Tier I Capital 171,179 9.12 75,043 =>4.00% 112,565 =>6.00%
Leverage 171,179 5.86 116,782 =>4.00% 145,977 =>5.00%
Associated Bank Green Bay, N.A. (3)
- -----------------------------------
Total Capital 183,848 10.75 136,771 =>8.00% 170,964 =>10.00%
Tier I Capital 159,577 9.33 68,386 =>4.00% 102,578 =>6.00%
Leverage 159,577 6.46 98,883 =>4.00% 123,603 =>5.00%
Associated Bank North (3)
- -------------------------
Total Capital 112,506 11.90 75,636 =>8.00% 94,545 =>10.00%
Tier I Capital 100,491 10.63 37,818 =>4.00% 56,727 =>6.00%
Leverage 100,491 6.77 59,358 =>4.00% 74,197 =>5.00%
(1) Total Capital ratio is defined as Tier 1 Capital plus Tier 2 Capital
divided by total risk-weighted assets. The Tier 1 Capital ratio is defined
as Tier 1 capital divided by total risk-weighted assets. The leverage ratio
is defined as Tier 1 capital divided by the most recent quarter's average
total assets.
(2) Prompt corrective action provisions are not applicable at the bank holding
company level.
(3) During 2001, the Corporation merged all of the Wisconsin bank affiliates
(Associated Bank South Central, Associated Bank North, Associated Bank
Milwaukee, Associated Bank, National Association, Associated Bank
Lakeshore, National Association, and Associated Bank Green Bay, National
Association) into a single national banking charter, headquartered in Green
Bay, Wisconsin, under
72
the name Associated Bank, National Association. Certain nonbank
subsidiaries (Associated Leasing, Inc., Associated Banc-Corp Services, Inc.
and Associated Commercial Mortgage, Inc.) also merged with and into the
resultant bank, becoming operating divisions of Associated Bank, National
Association.
NOTE 19 EARNINGS PER SHARE:
Presented below are the calculations for basic and diluted earnings per share:
For the Years Ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
(In thousands, except per share data)
Basic:
Net income $179,522 $167,983 $164,943
Weighted average shares outstanding 65,988 68,186 69,858
Basic earnings per common share $ 2.72 $ 2.46 $ 2.36
==============================
Diluted:
Net income $179,522 $167,983 $164,943
Weighted average shares outstanding 65,988 68,186 69,858
Effect of dilutive stock options outstanding 528 224 610
------------------------------
Diluted weighted average shares outstanding 66,516 68,410 70,468
Diluted earnings per common share $ 2.70 $ 2.46 $ 2.34
==============================
NOTE 20 SEGMENT REPORTING
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," requires selected financial and descriptive information about
reportable operating segments. The statement replaces the "industry segment"
concept of SFAS No. 14 with a "management approach" concept as the basis for
identifying reportable segments. The management approach is based on the way
that management organizes the segments within the enterprise for making
operating decisions, allocating resources, and assessing performance.
Consequently, the segments are evident from the structure of the enterprise's
internal organization, focusing on financial information that an enterprise's
chief operating decision-makers use to make decisions about the enterprise's
operating matters.
While the Corporation continues developing a process toward evaluating business
lines and products across its subsidiaries through 2001, management decision
making has been and is still based on financial information by legal entity.
Each banking entity is empowered to make decisions that are appropriate for its
customers and for the business environment of its communities.
The Corporation's reportable segment is banking. The Corporation conducts its
banking segment through its bank and mortgage subsidiaries. For purposes of
segment disclosure under this statement, these entities have been combined as
one, given these segments have similar economic characteristics and the nature
of their products, services, processes, customers, delivery channels, and
regulatory environment are similar. Banking includes: a) business banking -
small business and other business lending, investment management, leasing,
business deposits, and a complement of services such as cash management and
international banking; and b) retail banking - consumer, mortgage, and other
real estate lending, credit cards, and deposits.
The "other" segment is comprised of smaller nonreportable segments, including
insurance, brokerage services, asset management, consumer finance, treasury,
holding company investments, as well as inter-segment eliminations and residual
revenues and expenses, representing the difference between actual amounts
incurred and the amounts allocated to operating segments.
73
The accounting policies of the segments are the same as those described in Note
1. Selected segment information is presented below.
Consolidated
Banking Other Eliminations Total
----------- ----------- ------------- -----------
($ in Thousands)
2001
Interest income $ 920,894 $ 18,863 $ (59,135) $ 880,622
Interest expense 506,069 11,703 (59,135) 458,637
-------------------------------------------------------
Net interest income 414,825 7,160 -- 421,985
Provision for loan losses 27,361 849 -- 28,210
Noninterest income 226,539 86,396 (117,332) 195,603
Depreciation and amortization 46,016 965 -- 46,981
Other noninterest expense 311,424 97,296 (117,332) 291,388
Income taxes 71,428 59 -- 71,487
-------------------------------------------------------
Net income $ 185,135 $ (5,613) $ -- $ 179,522
=======================================================
Total assets $13,884,532 $ 1,458,958 $(1,739,116) $13,604,374
=======================================================
2000
Interest income $ 982,509 $ 21,277 $ (72,629) $ 931,157
Interest expense 607,175 13,044 (72,629) 547,590
-------------------------------------------------------
Net interest income 375,334 8,233 -- 383,567
Provision for loan losses 17,216 2,990 -- 20,206
Noninterest income 215,317 96,615 (127,736) 184,196
Depreciation and amortization 36,508 1,199 -- 37,707
Other noninterest expense 317,142 90,623 (127,736) 280,029
Income taxes 61,751 87 -- 61,838
-------------------------------------------------------
Net income $ 158,034 $ 9,949 $ -- $ 167,983
=======================================================
Total assets $13,935,545 $ 1,220,196 $(2,027,347) $13,128,394
=======================================================
1999
Interest income $ 844,357 $ 15,627 $ (45,464) $ 814,520
Interest expense 454,624 9,615 (45,464) 418,775
-------------------------------------------------------
Net interest income 389,733 6,012 -- 395,745
Provision for loan losses 18,616 627 -- 19,243
Noninterest income 197,526 85,371 (116,991) 165,906
Depreciation and amortization 27,687 1,380 -- 29,067
Other noninterest expense 323,569 69,447 (116,991) 276,025
Income taxes 64,900 7,473 -- 72,373
-------------------------------------------------------
Net income $ 152,487 $ 12,456 $ -- $ 164,943
=======================================================
Total assets $13,497,011 $ 1,181,919 $(2,159,028) $12,519,902
=======================================================
74
INDEPENDENT AUDITORS' REPORT
ASSOCIATED BANC-CORP
The Board of Directors
Associated Banc-Corp:
We have audited the accompanying consolidated balance sheets of Associated
Banc-Corp and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2001.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Associated Banc-Corp
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
KPMG LLP
Chicago, Illinois
January 17, 2002
75
Market Information
Market Price Range
Sales Prices
--------------------------------
Dividends Book
Paid Value High Low Close
----------- -------- ------ ----- -------
2001
4th Quarter $.3100 $16.38 $35.98 $31.78 $35.29
3rd Quarter .3100 16.39 36.91 29.83 33.89
2nd Quarter .3100 15.89 35.99 31.63 35.99
1st Quarter .2900 15.48 36.19 29.75 33.25
- -------------------------------------------------------------------------------
2000
4th Quarter $.2900 $14.65 $30.63 $21.84 $30.38
3rd Quarter .2900 13.94 26.63 22.13 26.25
2nd Quarter .2636 13.57 27.27 21.81 21.81
1st Quarter .2636 13.30 30.06 20.29 27.16
- -------------------------------------------------------------------------------
Annual dividend rate: $1.24
Market information has been restated for the 10% stock dividend declared April
26, 2000, paid on June 15, 2000, to shareholders of record at the close of
business on June 1, 2000.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in the Corporation's definitive Proxy Statement, prepared for
the 2002 Annual Meeting of Shareholders, which contains information concerning
directors of the Corporation under the caption "Election of Directors," is
incorporated herein by reference. The information in the Corporation's
definitive Proxy Statement, prepared for the 2002 Annual Meeting of
Shareholders, which contains information concerning directors and executive
officers of the Corporation under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance," is incorporated herein by reference. The
information concerning "Executive Officers of the Registrant," as a separate
item, appears in Part I of this document.
ITEM 11 EXECUTIVE COMPENSATION
The information in the Corporation's definitive Proxy Statement, prepared for
the 2002 Annual Meeting of Shareholders, which contains information concerning
this item, under the caption "Executive Compensation," is incorporated herein by
reference.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the Corporation's definitive Proxy Statement, prepared for
the 2002 Annual Meeting of Shareholders, which contains information concerning
this item, under the caption "Stock Ownership," is incorporated herein by
reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the Corporation's definitive Proxy Statement, prepared for
the 2002 Annual Meeting of Shareholders, which contains information concerning
this item under the caption "Interest of Management in Certain Transactions," is
incorporated herein by reference.
76
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 and 2 Financial Statements and Financial Statement Schedules
The following financial statements and financial statement schedules are
included under a separate caption "Financial Statements and Supplementary
Data" in Part II, Item 8 hereof and are incorporated herein by reference.
Consolidated Balance Sheets - December 31, 2001 and 2000
Consolidated Statements of Income - For the Years Ended December 31, 2001,
2000, and 1999
Consolidated Statements of Changes in Stockholders' Equity - For the Years
Ended December 31, 2001, 2000, and 1999
Consolidated Statements of Cash Flows - For the Years Ended December 31,
2001, 2000, and 1999
Notes to Consolidated Financial Statements
Independent Auditors' Reports
77
(a) 3 Exhibits Required by Item 601 of Regulation S-K
Sequential Page Number or
Exhibit Number Description Incorporate by Reference to
- ----------------------- --------------------------------------- ----------------------------------------
(3)(a) Articles of Incorporation Exhibit (3)(a) to Report on Form 10-K
for fiscal year ended December 31, 1999
(3)(b) Bylaws Exhibit (3)(b) to Report on Form 10-K
for fiscal year ended December 31, 1999
(4) Instruments Defining the Rights
of Security Holders, Including
Indentures
The Registrant, by signing this
report, agrees to furnish the
Securities and Exchange
Commission, upon its
request, a copy of any instrument
that defines the rights of holders
of long-term debt of the Registrant
and all of its subsidiaries for
which consolidated or unconsolidated
Financial statements are required to
be filed and that authorizes a total
amount of securities not in excess
of 10% of the total assets of the
Registrant and its subsidiaries on
a consolidated basis
*(10)(a) The 1982 Incentive Stock Option Exhibit (10) to Report on Form 10-K
Plan of the Registrant for fiscal year ended December 31, 1987
*(10)(b) The Restated Long-Term Incentive Exhibits filed with Associated's
Stock Plan of the Registrant registration statement (333-46467) on
Form S-8 filed under the Securities
Act of 1933
*(10)(c) Change of Control Plan of the Exhibit (10)(d) to Report on Form 10-K
Registrant effective April 25, for fiscal year ended December 31, 1994
1994
*(10)(d) Deferred Compensation Plan and Exhibit (10)(e) to Report on Form 10-K
Deferred Compensation Trust for fiscal year ended December 31, 1994
effective as of December 16,
1993, and Deferred Compensation
Agreement of the Registrant
dated December 31, 1994
*(10)(e) Incentive Compensation Agreement Filed herewith
(form) and schedules dated as of
October 1, 2001
*(10)(f) Retirement Agreement between Filed herewith
Associated Banc-Corp and Harry
B. Conlon effective April 26,
2000
78
Sequential Page Number or
Exhibit Number Description Incorporate by Reference to
- ----------------------- --------------------------------------- ----------------------------------------
(11) Statement Re Computation of Per See Note 19 in Part II Item 8
Share Earnings
(21) Subsidiaries of the Corporation Filed herewith
(23) Consent of Independent Auditor Filed herewith
(24) Power of Attorney Filed herewith
- -------------------------------
* Management contracts and arrangements.
Schedules and exhibits other than those listed are omitted for the reasons
that they are not required, are not applicable or that equivalent
information has been included in the financial statements, and notes
thereto, or elsewhere herein.
(b) Reports on Form 8-K
None.
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ASSOCIATED BANC-CORP
Date: March 21, 2002 By:/s/ ROBERT C. GALLAGHER
-------------- --------------------------------
Robert C. Gallagher
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ H.B. Conlon * /s/ William R. Hutchinson *
----------------------------------- ----------------------------------
H. B. Conlon William R. Hutchinson
Chairman of the Board Director
/s/ JOSEPH B. SELNER /s/ Robert P. Konopacky *
----------------------------------- ----------------------------------
Joseph B. Selner Robert P. Konopacky
Chief Financial Officer Director
Principal Financial Officer and
Principal Accounting Officer
/s/ ROBERT C. GALLAGHER /s/ Dr. George R. Leach *
----------------------------------- ----------------------------------
Robert C. Gallagher Dr. George R. Leach
President, Chief Executive Officer, Director
and a Director
/s/ John C. Seramur * /s/ John C. Meng *
----------------------------------- ----------------------------------
John C. Seramur John C. Meng
Vice Chairman Director
/s/ Robert S. Gaiswinkler * /s/ J. Douglas Quick *
----------------------------------- ----------------------------------
Robert S. Gaiswinkler J. Douglas Quick
Director Director
/s/ Ronald R. Harder * /s/ John H. Sproule *
----------------------------------- ----------------------------------
Ronald R. Harder John H. Sproule
Director Director
*/s/ BRIAN R. BODAGER
--------------------
Brian R. Bodager
Attorney-in-Fact
Date: March 21, 2002
80
EXHIBIT 10(E)
INCENTIVE COMPENSATION AGREEMENT
This Incentive Compensation Agreement ("Agreement") is made and entered
into as of this 1st day of October, 2001, by and between Associated Banc-Corp on
behalf of its affiliates and subsidiaries, (collectively referred to as the
"Company"), and *Participant* ("Employee").
WHEREAS, the Board of Directors of the Company (the "Board"), desiring (i)
to associate more closely the interests of certain key employees with those of
the company's financial, performance, and service goals, (ii) to provide
long-term incentives and rewards to those key employees of the Company and its
affiliated units who are in a position to contribute to the long-term success
and growth of the Company, and (iii) to assist the Company in retaining and
attracting key employees with requisite experience and ability.
NOW THEREFORE, in consideration of the mutual premises and covenants
contained herein, the receipt and sufficiency of which are hereby acknowledged,
it is agreed as follows:
I. Incentive Compensation
A. Incentive Compensation Governed by Terms of Agreement. This
Incentive Compensation shall be payable only in accordance with
the terms of this Agreement. Terms defined in this Agreement,
where used herein, shall have the meanings as so defined.
B. Payment of Incentive Compensation. Incentive Compensation shall
be paid, in accordance with and only upon Employee's completion
of the achievement of goals as set forth in Schedule A.
Compensation amount will be determined based on target award set
forth in Schedule B.
No payment shall be made until the terms and conditions of this
Agreement are satisfied. Notwithstanding the foregoing, payment
shall be made immediately upon a Change in Control in the
Company, as defined in Section II.A.4. as subject to the
following:
1. Except as described below, in the event of the involuntary
termination of Employee's employment with the Company or its
affiliated units for cause (including reasons described in
I.B.4. below) or the Employee voluntarily terminates for any
reason (other than that as described in II.B. below),
Employee's right to any earned or unearned portion of
Incentive Compensation under this Agreement payable to
Employee shall terminate immediately.
2. In the event of Employee's termination of employment with
the Company or its affiliated units due to Employee's death,
Permanent Disability or Retirement, any Incentive
Compensation, pro-rated for the length of employment during
the Performance Period and earned, payable, and outstanding
under Section B of this Agreement, shall remain payable, but
only to the extent such Incentive Compensation was payable
on the date of such Employee's termination of employment. If
on the date of such termination of employment, any such
Incentive Compensation is not payable, the Committee shall
have the discretion to cause such compensation to become
payable on the date or dates specified therein as if such
termination of employment had not occurred. The Committee
may exercise the discretion granted to it by the preceding
sentence at the time this Agreement is executed or at any
time thereafter while such Agreement remains in force.
3. In the event of Employee's termination of employment with
the Company at the request of the Company without cause,
Employee's right to any unearned portion of Incentive
Compensation under this Agreement payable to Employee shall
terminate immediately.
Any Incentive Compensation earned, payable, and outstanding
under Section B of this Agreement shall remain payable,
pro-rated for the length of employment during the
Performance Period, but only to the extent such Incentive
Compensation was payable on the date of Employee's
termination.
1
4. Notwithstanding any other provisions of this Agreement, if
Employee's employment or service is terminated by reason of
a breach of Employee's employment agreement with the Company
or any of its affiliated units, as determined by the
Committee, or by reason of Employee's commission of a felony
or a misdemeanor against the Company or any of its
affiliated units (whether or not prosecuted), this Agreement
shall be deemed terminated and not payable to Employee.
C. Term of Agreement. This Agreement shall remain in effect for the
duration of the Performance Period, unless terminated due to
reasons discussed in Sections I.B or II.B herein.
D. Deferral of Compensation. Incentive Compensation under this
Agreement will be paid in accordance with this Agreement and
shall be eligible for deferral in accordance with the terms of
the Associated Banc-Corp Deferred Compensation Plan.
E. Manner of Payment. Incentive Compensation under this Agreement
will be paid in conjunction with Employee's regular paycheck
first following the payout of the award, as an additional
compensation item.
F. Withholding of Taxes. Pursuant to applicable federal, state,
local or foreign laws, the Company will withhold income or other
taxes upon the payment of any compensation under this Agreement.
G. No Employment or Retention Agreement Intended. This Agreement
does not confer upon Employee any right to continuation of
employment or retention in service in any capacity by the Company
or an affiliated unit and does not constitute an employment or
retention agreement of any kind.
H. Nonsolicitation: For a period of one year following termination
of Employee's employment with the Company, Employee will not,
within the area defined by a 60 mile radius of Employee's primary
office of the Company, directly or indirectly, whether as an
agent, investor, employer, employee, consultant, representative,
trustee, partner, proprietor or otherwise, do any of the
following:
(a) solicit or accept business from any person or entity who is,
directly or indirectly, an Active Customer (as defined
herein) of Associated Banc-Corp, or its subsidiaries or
affiliates, and with whom Employee has had contact during
the twelve month period prior to termination of Employee's
employment with the Company (the "Reference Period");
(b) request or advise any of the Active Customers, suppliers or
other business contacts of the Company who have business
relationships with the Company and with whom Employee had
contact during his/her employment with the Company to
withdraw, curtail or cancel any of their business relations
with the Company;
(c) induce or attempt to induce any employee or other personnel
of the Company to terminate his or her relationship or
breach his/her employment relationship or other contractual
relationship, whether oral or written, with the Company.
II. Miscellaneous
A. Definitions.
1. Incentive Compensation. Incentive Compensation shall mean
monies earned and payable under this Agreement and in
accordance with calculation and target award formulas and
payment terms as contained and described within this
Agreement and attached Schedules.
2. Committee. Committee herein refers to the Administrative
Committee of the Board of Directors of Associated.
2
3. Permanent Disability. Permanent Disability shall mean a
finding by the Committee that a participant is fully and
permanently unable to be gainfully employed because of a
physical or mental disability. Determination shall be made
based on whether Employee has been approved for coverage and
benefits under Company's Long-Term Disability Insurance.
4. Retirement. Retirement shall mean any date on which an
employee retires under the terms and conditions of the
Company's Profit Sharing and Retirement Savings Plan
provided, however, that the employee has attained age 55 as
of such date.
5. Change in Control. "Change In Control" shall mean a change
in control of the Company which shall be deemed to have
occurred only if:
(i) 25% or more of the outstanding voting securities of the
Company changes beneficial ownership as a result of a
tender offer;
(ii) The Company is merged or consolidated with another
corporation, and as a result of such merger or
consolidation, less than 75% of the outstanding voting
securities of the surviving or resulting corporation is
owned in the aggregate by the shareholders of the
Company who owned such securities immediately prior to
such merger or consolidation, other than affiliates,
within the meaning of the Securities and Exchange Act
of 1934, as amended (the "Exchange Act"), of any party
to such merger or consolidation;
(iii) The Company sells at least 85% of its assets to any
entity which is not a member of the control group of
corporations, within the meaning of Code section 1563,
of which the Company is a member, or
(iv) A person, within the meaning of sections 3(a)(9) or
13(d)(3) of the Exchange Act, acquires 25% or more of
the outstanding voting securities of the Company
(whether directly, indirectly, beneficially or of
record).
For purposes hereof, ownership of voting securities shall
take into account and shall include ownership as determined
by applying the provisions of Rule 13d-3(d)(1)(I) (relating
to options) as of the Exchange Act.
6. Active Customer. "Active Customer" shall mean any account or
prospective account which, within the Reference Period,
either received any products or services supplied by or on
behalf of the Company or was under "Active Solicitation" by
the Company and with which Employee had contact during the
Reference Period.
7. Active Solicitation. "Active Solicitation" shall mean at
least two contacts, in person, by letter or facsimile or
telephone, by any personnel of the Company, including
Employee, during the Reference Period.
8. Performance Period. "Performance Period" shall mean January
1, 2001 through December 31, 2003; or any subsequent
three-year period beginning any January 1 thereafter.
B. Transfers/Change in Position. A change in employment or service
from the Company to an affiliated unit of the Company, or vice
versa, or to a different position within the Company, will
constitute termination of this Agreement. The Committee may
determine that a new Agreement be executed for the new position
in accordance with approved Participation Guidelines. Any such
new Agreement shall be deemed a continuation of the Employee's
participation and of the three-year Performance Period satisfied
as of the date of the transfer or change in position.
If an Employee's new position does not meet the approved
Participation Guidelines and a new Agreement, therefore, is not
entered into, the Employee shall be eligible to receive a portion
of any payment due under this Agreement on a pro-rated basis
according to the length of service the Employee satisfied during
the Performance Period. Any such payment due will be made
according to the timing and payment terms and conditions of this
Agreement.
3
C. Leaves. The Committee (or board of directors in case of a member
of the Committee) may determine that, for purposes of the Plan,
an Employee who is on leave of absence will still be considered
as in the continuous employment or service of the Company.
D. Notices. Any notice to be given to the Committee under the terms
of this Agreement shall be addressed to the Company, in care of
its secretary, at 1200 Hansen Road, P.O. Box 13307, Green Bay,
Wisconsin 54307-3307. Any notice to be given to Employee may be
addressed to him or her at his or her address as it appears in
the Company's records or at such other address as either party
may hereafter designate in writing to the other. Any such notice
shall be deemed to have been duly given if personally delivered
or if enclosed in a properly sealed envelope or wrapper addressed
as aforesaid, certified and deposited, postage prepaid, in a post
office or branch post office regularly maintained by the United
States government.
E. Successors. This Agreement shall be binding upon and inure to the
benefit of any successor or successors of the Company.
F. Wisconsin Contract. This Agreement has been negotiated and
effected in Wisconsin and shall be construed under the laws of
that state.
G. Employment Contract. This Agreement is not an employment contract
of any kind between Associated or any of its affiliates and the
Employee. Employment with Associated is at the will of Associated
and its employees. Associated may terminate employment without
any notice at any time and for any reason not prohibited by law.
Any representation to the contrary is not binding upon Associated
unless signed in writing by Associated's President and the
employee.
IN WITNESS WHEREOF, the Company has caused these presents to be executed in
its behalf by its chairman and chief executive officer and attested by its
secretary and the Employee has executed the same as of the day and year first
written, which is the date of the granting of the option evidenced hereby.
ASSOCIATED BANC-CORP
/s/ Robert C. Gallagher
R. C. Gallagher, Chief Executive
Officer and President
ATTEST:
/s/ Brian R. Bodager
Brian R. Bodager, Chief Administrative OFficer,
General Counsel, and Corporate Secretary
I have read and agree to the terms and conditions of this Incentive Compensation
Agreement as provided herein.
- -----------------------------------
*Participant*
4
Schedule A
Calculation of Awards
1. Calculation of Awards
Performance Unit cash awards are determined based upon results against the
targeted cumulative basic Earnings Per Share for the three-year performance
period beginning January 1, 2001. The performance target and the basis for
calculating awards for the specified performance period are defined below.
Awards are calculated as a percentage of base salary that is in effect as
of the inception of the plan. For new participants, salary will be that as
of the first day of participation in the plan.
A. Company Performance Measure
Performance against the target Earnings Per Share growth rate will
based upon the cumulative basic EPS for each of the three years as
approved by the Administrative Committee of the Board. Annual results
will be reviewed by the Committee at the same time the Committee
reviews the results of the annual Performance Incentive Plan. Under
certain circumstances, the Committee may adjust the fully diluted EPS
results of the annual Performance Incentive Plan for part or all of
extraordinary gains or losses for the year. An example of such
adjustments would be restructuring charges relative to mergers and
acquisitions. In those instances, the same adjustments would be
applied to the basic EPS results of the long-term Performance Unit
Plan for that year. As in the case of the annual performance plan, the
CEO will make recommendations relative to any adjustments for the
Committee to consider.
EPS Growth Objectives
---------------------
Annual EPS Actual 2000 2001 2002 2003 Cumulative
Growth
(2001-2003)
- --------------------------------------------------------------------------------
12% Growth $2.46 $2.76 $3.09 $3.46 $9.31
10% Goal $2.46 $2.70 $2.97 $3.27 $8.94
8% Growth $2.46 $2.66 $2.87 $3.10 $8.63
B. Peer Group Modifier
Awards for company performance may be increased or reduced based upon
performance relative to the peer group. The peer group is defined as the
top 50 banks reported by Keefe, Bruyette & Woods (KBW) as of the end of the
performance period, excluding the top 10 largest banks in this group and
excluding any companies with a mix of business which is not principally
commercial banking (currently identified as State Street Corporation, MBNA
Corporation and Northern Trust Corp).
The peer ranking will be measured on the basis of the reported diluted EPS
growth during the performance period between January 1, 2001 through
December 31, 2003.
Peer Group Modifier
- - Relative peer group performance is used to modify the initial incentive
award (e.g., +/-25%)
- - Initial Incentive Award Percentile Multiple Relative Performance
>75th 1.25 - EPS Growth
Based on EPS 55th - 75th 1.10
Growth
45th - 55th 1.00
25th - 45th 0.90
Less than 25th 0.75
Maximum Award: 150% target (at 12% EPS growth) X 1.25 = 188%
5
Target Award: 100% target (at 10% EPS growth ) X 1.00 = 100%
Threshold Award: 50% target (at 8% EPS growth) X 0.75 = 38%
2. New Participants
The Chief Executive Officer may approve new participants as eligible for
Performance Units. Participants who become eligible during a three-year
period will have awards pro-rated based upon the number of months they
participated during the current Performance Period.
3. Payment of Awards
Performance Unit cash awards shall be calculated and paid during the Second
Quarter of the year following the end of the Performance Period, following
evaluation of peer comparison results and approval of the Administrative
Committee of the Board. Applicable state, local and federal taxes will be
withheld from payments as required by law.
6
Schedule B
Approved Participants
I. Performance Period
January 1, 2001 through December 31, 2003
Target Award as a
Target Award as a Percent of Salary
Percent of Salary (at end of
Participant (Per Year) Performance Period) Base Salary
- -------------------------------------------------------------------------------
Robert Gallagher 33.33% 99.99% $560,000
Gordon Weber 33.33% 99.99% $300,000
Mark McMullen 33.33% 99.99% $260,000
Donald Peters 33.33% 99.99% $270,000
7
EXHIBIT 10(F)
RETIREMENT AGREEMENT
THIS RETIREMENT AGREEMENT is entered into this 26th day of April, 2000, by
and between HARRY B. CONLON ("Conlon") and ASSOCIATED BANC-CORP, a Wisconsin
corporation ("Associated").
WHEREAS, Conlon wishes to retire from his position as Chief Executive
Officer of Associated and from his employment by Associated; and
WHEREAS, in connection with such retirement, Associated and Conlon mutually
agree that the position of Chief Executive Officer be transferred from Conlon to
a successor effective as of April 1, 2000, and that Conlon's employment by
Associated shall be terminated effective as of June 30, 2000 (the "Termination
Date"); and
WHEREAS, in order to achieve a more orderly and efficient transition to a
new CEO with a new management team, Associated wishes to retain Conlon after the
Termination Date to render consulting and advisory services to Associated, and
Conlon wishes to make himself available to provide such services, all on the
terms and conditions set forth in this Agreement; and
WHEREAS, Associated and Conlon wish to set forth certain mutual
understandings with respect to the details of Conlon's retirement from
Associated, his service on the Board of Directors, and his consulting
relationship with Associated.
NOW, THEREFORE, in consideration of the provisions of this Agreement,
Conlon and Associated do mutually agree as follows:
1. Transfer of CEO Position, Termination of Employment.
Effective as of April 1, 2000, Conlon ceased to be Associated's Chief
Executive Officer and such position was transferred to a successor. Thereafter,
Conlon shall remain an employee of Associated through the Termination Date, as
of which such date Conlon's employment relationship with Associated shall end.
2. Consulting Services.
(a) Conlon shall provide limited consulting and advisory services
exclusively to Associated from the Termination Date through December 31, 2001.
During the term of this Agreement, Conlon shall devote substantial efforts to
his
8
position as an independent consultant and advisor and shall perform corporate
development services and such other tasks as may be reasonably assigned to
Conlon by the Board or Associated's Chief Executive Officer, subject to the
mutual agreement of the parties. Conlon agrees that Associated is willing to
engage Conlon on the basis that he will provide these limited consulting and
advisory services exclusively to Associated through December 31, 2001. Conlon
agrees that he will not provide such consulting or advisory services to any
other banking organization during this exclusive consulting period with
Associated.
(b) As compensation for the foregoing consulting and advisory services,
Conlon shall be entitled to the compensation described in Paragraph 3 below, and
shall be entitled to no other compensation.
(c) In addition, Associated shall reimburse Conlon for all reasonable
expenses incurred by Conlon in the performance of his obligations under this
Paragraph 2; provided, however, that sufficient documentation has been provided
to Associated.
(d) In performing the services specified in this Paragraph 2, Conlon shall
be acting as an independent contractor and shall not be an employee of
Associated. Nothing contained in this Agreement shall be construed to create a
partnership or joint venture between Associated and Conlon, nor to authorize
either Associated or Conlon to act as a general or special agent of the other
party in any respect except as specifically set forth in this Agreement.
3. Payments and Benefits.
(a) Except as otherwise expressly provided herein, Conlon shall receive his
regular salary and benefits through the Termination Date.
(b) Conlon has served as Associated's Chief Executive Officer for 25 years
and has served as the chairman of the Board for 12 years. During that time,
Associated has grown from approximately $300 million in assets to $12.3 billion
as of September 30, 1999; Associated also has had one of the lowest loan
charge-offs percentages in the industry. During the period from 1989 to 1998,
Associated's shareholders received a total return of approximately 600%.
Associated is now the third largest bank holding company in Wisconsin and has a
significant presence in Illinois and the Twin Cities.
Associated recognizes the substantial growth of Associated during Conlon's
tenure. Accordingly, in consideration of the substantial expertise and
experience that Conlon would bring to a competitor if he were free to do so,
Conlon shall be entitled to additional compensation in the following amounts:
9
- In consideration of the covenant not to compete (pursuant to
Paragraph 6 below), the benefits described in Paragraphs 3(c) through (i)
below and the sum of $250,000 for the period from the Termination Date
through December 31, 2000, $350,000 for calendar year 2001, and $200,000
for calendar year 2002; and
- Associated has determined that it is in its best interests to have
an orderly and efficient transition to a new CEO with a new management team
and that Conlon, with his substantial expertise and experience, can be
instrumental in helping Associated achieve such a smooth transition.
Accordingly, in consideration of the director and consulting services
described herein, Conlon shall be entitled to additional compensation in
the following amounts:
- In consideration of the consulting services (pursuant to Paragraph 2
above), the sum of $50,000 for the period from the Termination Date through
December 31, 2000, and $50,000 for calendar year 2001.
(c) With respect to each of the employee benefit plans listed below, Conlon
shall be entitled to the following benefits.
(i) The normal contribution for the Plan Year 2000 under the
Associated Banc-Corp Profit Sharing and Retirement Savings Plan (the
"Profit Sharing Plan"), effective January 1, 1989, as amended, calculated
on the basis of Conlon's annual compensation through the Termination Date;
provided, that if Conlon constitutes an "Inactive Participant" as defined
in Article 1 of the Profit Sharing Plan, he shall receive this benefit in
cash.
(ii) The normal contribution for the Plan Year 2000 under the
Associated Banc-Corp Retirement Account Plan (the "Retirement Plan"),
restated effective January 1, 1989, as amended, calculated on the basis of
Conlon's annual compensation through the Termination Date.
(d) With respect to Associated's annual bonus plan, Associated shall
calculate the bonus to which Conlon would have been entitled if he had been
employed by Associated through December 31, 2000 at his normal salary.
Associated shall pay to Conlon in cash one-half (1/2) of such amount at the time
the bonus is paid to other similarly-situated employees whose employment
continues through December 31, 2000.
(e) In addition to the foregoing, Associated shall pay the premiums for
Conlon's Northwestern Mutual Life Insurance Policy (Policy No. 10670456) for
calendar year 2000.
(f) At all times during the term of this Agreement after the Termination
Date, so long as other similarly-situated retirees receive health and dental
benefits, Conlon shall be entitled to participate in Associated's medical and
dental
10
insurance plan on the same basis as other retirees. If, at any time, such plan
is discontinued for any reason, Associated shall continue to provide Conlon with
comparable benefits for his remaining lifetime. Conlon will pay all necessary
premiums for the benefits under this Paragraph 3(f).
(g) Associated shall pay the foregoing amounts and shall provide the
foregoing benefits in accordance with Associated's normal payroll and employee
benefits policies, except that each of the amounts payable under Paragraphs 3(c)
and 3(d), above, shall be paid to Conlon as soon as reasonably practicable after
such amounts have been determined. Notwithstanding the foregoing, however:
(i) Associated shall pay to Conlon in a lump sum on the first business
day of January 2001 the $400,000 payment owing hereunder for calendar year
2001; and
(ii) Associated shall pay to Conlon in a lump sum on the first
business day of January 2002 the $200,000 payment owing hereunder for
calendar year 2002.
All amounts paid to Conlon hereunder shall be made by check or wire transfer to
Conlon's account or accounts, which he shall designate in writing to Associated.
(h) In recognition of the services that Conlon has provided and will
continue to provide to Associated, if Conlon dies prior to receiving any or all
of the amounts listed under this Paragraph 3, Associated shall pay to Conlon's
estate any amounts that are or become payable to Conlon pursuant to this
Paragraph 3, at the time such amounts would otherwise have been paid to Conlon.
(i) Nothing in this Agreement shall forfeit or otherwise affect Conlon's
right to vested benefits in the Profit Sharing Plan and the Retirement Plan,
which such benefits shall be paid to Conlon (or his legal representatives or
heirs) according to such plans or policies.
4. Director Compensation. For the period from the Termination Date through
December 31, 2002, Conlon shall receive no additional compensation for serving
as chairman or member of the Board other than the compensation described in
Paragraph 3 above. For any period after December 31, 2002 during which Conlon
serves as chairman or a member of the Board, Associated shall pay to Conlon the
director fees normally received by one of Associated's directors serving in a
similar capacity. At all times after the date of this Agreement, Conlon shall be
entitled to expense reimbursement to the same extent as Associated's other
directors serving in a similar capacity.
5. Stock Options.
11
(a) Effective as of the date of this Agreement, the Administrative
Committee of Associated's Board of Directors has agreed and hereby acknowledges
that (i) to the extent not already vested, all stock options issued under the
Associated Banc-Corp Restated Long-Term Incentive Stock Plan and the Associated
Banc-Corp 1999 Nonqualified Stock Option Plan shall continue to vest as if
Conlon's retirement had not occurred and (ii) all such options shall remain
exercisable after the Termination Date as if Conlon had not retired. If not
exercised timely, incentive stock options will become nonqualified options,
pursuant to federal tax law.
(b) Effective as of the date Conlon exercises his final options granted in
1993, the Administrative Committee of Associated's Board of Directors agrees to
grant to Conlon during 2000, under the Associated Banc-Corp Long-Term Incentive
Stock Plan, additional nonqualified stock options to purchase 31,250 shares of
Associated stock. These options will vest one year after their grant date, and
shall remain exercisable for a three-year term. The strike price will equal the
stock price on the date Conlon exercises the last of the stock options granted
to him in 1993.
6. Covenant Not to Compete.
(a) Associated shall be irreparably harmed and may suffer severe financial
loss if Conlon is employed by or provides services to a competitor of
Associated. Conlon, by signing this Agreement, acknowledges that he understands
that the restrictive covenant described in this Paragraph 6 will limit his
future business and employment activities; that, in light of the consideration
to be received by him under this Agreement, such limitations are reasonable and
are not now, nor does he expect them to be in the future, unreasonably harsh or
onerous; that such limitations are reasonably necessary to protect the interests
of Associated; and that the prohibited territory described below encompasses the
primary territory in which his activities would have an adverse effect on
Associated.
(b) At all times prior to the earlier of (i) January 1, 2003, or (ii) one
year after Conlon leaves the Associated Board of Directors, Conlon shall not, in
the following counties, engage in competitive activities on behalf of a
competitive business, without first obtaining written permission from the Board
or Associated's Chief Executive Officer:
(i) The Wisconsin counties of Ashland, Bayfield, Brown, Buffalo,
Clark, Columbia, Dane, Dodge, Door, Eau Claire, Fond du Lac, Forest, Iron,
Jackson, Jefferson, Kenosha, La Crosse, Langlade, Lincoln, Manitowoc,
Marathon, Marinette, Milwaukee, Oconto, Oneida, Outagamie, Ozaukee, Pepin,
Portage, Price, Racine, Rock, Sauk, Sawyer, Shawano, Sheboygan, Taylor,
Trempealeau, Vilas, Walworth, Washington, Waukesha, Waupaca, Winnebago, and
Wood;
(ii) The Illinois counties of Adams, Bond, Cook, Dekalb, Fulton,
Hancock, Kane, Kendall, Knox, Macon, Madison, Marshall, Mason, Mercer,
12
Monroe, Ogle, Peoria, Pike, Schuyler, St. Clair, Tazewell, Warren,
Winnebago and Woodford; and
(iii) The Minnesota counties of Hennepin, Rice and St. Louis.
"Engage in competitive activities" shall mean rendering services as a
director, a chief executive officer (or in a similar executive capacity) or as a
consultant (other than to businesses owned by immediate family members) with any
commercial banking organization, where such services would be similar to the
services provided by Conlon during his employment by Associated. A "competitive
business" shall mean any person or entity engaged in banking, which such person
or entity competes with the services or products provided by Associated.
(c) If Conlon violates any of his material obligations under this Paragraph
6, Associated shall be entitled to injunctive relief in addition to any other
monetary remedies available to it.
7. Taxes. All payments and benefits provided for under this Agreement shall
be subject to all applicable legal requirements with respect to the withholding
and payment of taxes.
8. Indemnification. Associated shall indemnify and save Conlon harmless as
provided in the By-Laws of Associated and as provided by the Wisconsin Business
Corporation Law. Conlon shall cooperate as reasonably requested by Associated's
counsel in the defense of any legal actions brought against Associated with
respect to matters occurring during Conlon's employment with Associated.
9. Confidentiality of Agreement. The circumstances leading to and the
contents and terms of this Agreement are confidential. Conlon and his attorneys
and Associated and its attorneys agree and promise that none of the contents of
this Agreement shall be published, displayed, discussed, disclosed, revealed, or
characterized (directly or indirectly, including by innuendo or other means) in
any way to anyone under any circumstances, other than those required by law;
provided, however, that it is understood that Associated may communicate various
provisions of this Agreement within its organization as needed for the
implementation of the Agreement and to its attorneys, financial advisors and
accountants, and that Conlon may divulge the contents of this Agreement to his
spouse, attorneys, financial advisors, and income tax preparers. Notwithstanding
the foregoing, Associated shall be entitled to disclose the contents and the
terms of this Agreement in, and attach the Agreement as an exhibit to, any
filing or disclosure document required to be made or filed by Associated
pursuant to all applicable securities and banking laws and regulations or the
disclosure obligations of any exchange or trading market.
10. Notices. All notices, demands, or other communciations which may or are
required to be given hereunder by either party to the other shall be made by
13
personal delivery in writing or by mail, registered or certified, postage
prepaid with return receipt requested, addressed to:
If to Associated:
Chief Executive Officer
Associated Banc-Corp
1200 Hansen Road
Green Bay, Wisconsin 54304
If to Conlon:
Mr. Harry B. Conlon
1116 Fox River Drive
De Pere, Wisconsin 54115
Or to such other address as Conlon may designate by written notice to
Associated. All notices, demands and other communications hereunder shall be
deemed to have been given when personally delivered or two days after deposit in
the United States mail.
11. Waiver. The waiver of either party of a breach of a provision of this
Agreement by the other shall not operate to be construed as a waiver of any
subsequent breach by such other party.
12. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
13. Applicable Law. This Agreement is drawn to be effective in and shall be
construed in accordance with the laws of the State of Wisconsin.
14. Corporate Authority. The officer executing this Retirement Agreement on
behalf of Associated represents that he has full authority to do so and to bind
Associated, its parents, subsidiaries, predecessors, successors, and assigns.
15. Successors; Assignments.
(a) This Agreement shall inure to the benefit of and be binding upon
Conlon, his legal representatives, heirs, and distributees. No rights of Conlon
hereunder shall be assignable by Conlon, except that Conlon's rights hereunder
may be assigned by will or through the laws of intestacy.
(b) This Agreement shall inure to the benefit of and shall be binding upon
Associated, its successors and assigns. Associated may assign this Agreement to
an Affiliate in connection with a sale, merger, consolidation, reorganization,
or other
14
similar transaction if, as a condition of such sale, merger, consolidation,
reorganization, or other similar transaction, Associated requires such Affiliate
to expressly assume the duties and obligations hereunder and to expressly agree
to perform this Agreement to the same extent as Associated would be required if
no assignment had taken place. An "Affiliate" shall mean any entity (a) which
owns a controlling interest in Associated, (b) in which Associated owns a
controlling interest, or (c) which is under common control with Associated.
Otherwise, this Agreement may not be assigned by Associated without the express
written consent of Conlon (or his legal representatives).
16. Entire Agreement. This Agreement supersedes any other agreements, oral
or written, between the parties with respect to the subject matter hereof, and
contains all of the agreements and understandings between the parties with
respect to such subject matter. Any amendment, waiver, or modification of any
term of this Agreement shall be effective only if it is signed in writing by
both parties.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
CONLON:
/s/ Harry B. Conlon
Harry B. Conlon
ASSOCIATED:
Associated Banc-Corp
BY: /s/Robert C. Gallagher
------------------------------
Chief Executive Officer
15
Attachment to the Retirement Agreement
between Associated Banc-Corp ("Associated")
and Harry B. Conlon ("Conlon")
This attachment addresses the exercise period for all stock options issued
to Conlon after January 1, 1994.
1. Conlon has nonqualified stock options to purchase 1,577 shares of
Associated stock, granted on April 25, 1994. These options will expire on April
25, 2004.
2. Conlon has incentive stock options to purchase 2,500 shares of
Associated stock, granted on January 25, 1995. These options will expire on
January 25, 2005.
3. Conlon has nonqualified stock options to purchase 13,578.75 shares of
Associated stock, granted on January 25, 1995. These options will expire on
January 25, 2005.
4. Conlon has incentive stock options to purchase 4,066.5 shares of
Associated stock, granted on January 24, 1996. These options will expire on
January 24, 2006.
5. Conlon has nonqualified stock options to purchase 14,683.5 shares of
Associated stock, granted on January 24, 1996. These options will expire on
January 24, 2006.
6. Conlon has incentive stock options to purchase 3,549 shares of
Associated stock, granted on January 29, 1997. These options will expire on
January 29, 2007.
7. Conlon has nonqualified stock options to purchase 15,201 shares of
Associated stock, granted on January 29, 1997. These options will expire on
January 29, 2007.
8. Conlon has incentive stock options to purchase 2,481.25 shares of
Associated stock, granted on January 28, 1998. These options will expire on
January 28, 2008.
9. Conlon has nonqualified stock options to purchase 47,518.75 shares of
Associated stock, granted on January 28, 1998. These options will expire on
January 28, 2008.
10. Conlon has incentive stock options to purchase 3,299 shares of
Associated stock, granted on January 27, 1999. These options will expire on
January 27, 2009.
11. Conlon has nonqualified stock options to purchase 61,701 shares of
Associated stock, granted on January 27, 1999. These options will expire on
January 27, 2009.
12. Conlon has nonqualified stock options to purchase 3,767 shares of
Associated stock, granted on July 28, 1999. These options will expire on July
28, 2009.
13. Conlon will be granted nonqualified stock options to purchase 31,250
shares of Associated stock on the date he exercises the last of his remaining
1993 nonqualified stock options.
16
EXHIBIT 21
Subsidiaries of the Corporation
The following bank subsidiaries are national banks and are organized under the
laws of the United States:
Associated Bank, National Association
Associated Bank Illinois, National Association
Associated Card Services Bank, National Association
Associated Trust Company, National Association
The following bank subsidiaries are state banks and are organized under the laws
of the State of Illinois:
Associated Bank Chicago
The following bank subsidiaries are state banks and are organized under the laws
of the State of Minnesota:
Associated Bank Minnesota
The following non-bank subsidiaries are organized under the laws of the State of
Wisconsin:
Associated Commercial Finance, Inc. Associated Mortgage, Inc.
Associated Investment Management Group, Inc. Appraisal Services, Inc.
Associated Investment Services, Inc. Associated Investment Management, LLC
Associated Green Bay Real Estate Corp. Wisconsin Finance Corporation
Associated Illinois Real Estate Corp. Associated Neenah Real Estate Corp.
The following non-bank subsidiary is organized under the laws of the State of
Illinois:
Citizens Financial Services, Inc.
The following non-bank subsidiary is organized under the laws of the State of
Arizona:
Banc Life Insurance Corporation
The following non-bank subsidiary is organized under the laws of the State of
California:
Mortgage Finance Corporation
The following non-bank subsidiaries are organized under the laws of the State of
Nevada:
ASBC Investment Corp. ASBC Investment Corp-Illinois
Associated Green Bay Investment Corp.
Associated Illinois Investment Corp. Associated Neenah Investment Corp.
17
EXHIBIT 23
Consent of Independent Public Accountants
-----------------------------------------
The Board of Directors
Associated Banc-Corp:
Re: Registration Statement on Form S-8
- #2-77435 - #33-63545
- #2-99096 - #33-67436
- #33-16952 - #33-86790
- #33-24822 - #333-46467
- #33-35560 - #333-74307
- #33-54658
Re: Registration Statement on Form S-3
- #2-98922 - #33-63557
- #33-28081 - #33-67434
- #333-59482
We consent to incorporation by reference in the Registration Statements on Form
S-8 and S-3 of Associated Banc-Corp of our report dated January 17, 2002,
relating to the consolidated balance sheets of Associated Banc-Corp and
subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 2001, which report appears
in the December 31, 2001 annual report on Form 10-K of Associated Banc-Corp.
/s/ KPMG LLP
Chicago, Illinois
March 21, 2002
18
EXHIBIT 24
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Associated
Banc-Corp, a Wisconsin corporation (the "Corporation"), which is planning to
file with the Securities and Exchange Commission (the "SEC"), Washington, D.C.,
under the provisions of the Securities Act of 1934 (the "Act"), a Form 10-K, the
form which must be used for annual reports pursuant to Section 13 or 15(d) of
the Act, and Proxy Statement in accordance with Regulation 14A and Schedule 14A
under the Act and Regulation S-K and Rule 14a-3(b) under the Act, for the
reporting period ending December 31, 2001, hereby constitutes and appoints Brian
R. Bodager his true and lawful attorney-in-fact and agent.
Said attorney-in-fact and agent shall have full power to act for him and in
his name, place, and stead in any and all capacities, to sign such Form 10-K and
Proxy Statement and any and all amendments thereto (including post-effective
amendments), with power where appropriate to affix the corporate seal of the
Corporation thereto and to attest such seal, and to file such Form 10-K and
Proxy Statement and each amendment (including post-effective amendments) so
signed, with all exhibits thereto, and any and all documents in connection
therewith, with the SEC, and to appear before the SEC in connection with any
matter relating to such Form 10-K and Proxy Statement and to any and all
amendments thereto (including post-effective amendments).
The undersigned hereby grants such attorney-in-fact and agent full power
and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the 23rd day of January, 2002.
/s/ Harry B. Conlon
-------------------------------------
Harry B. Conlon
Director
19
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Associated
Banc-Corp, a Wisconsin corporation (the "Corporation"), which is planning to
file with the Securities and Exchange Commission (the "SEC"), Washington, D.C.,
under the provisions of the Securities Act of 1934 (the "Act"), a Form 10-K, the
form which must be used for annual reports pursuant to Section 13 or 15(d) of
the Act, and Proxy Statement in accordance with Regulation 14A and Schedule 14A
under the Act and Regulation S-K and Rule 14a-3(b) under the Act, for the
reporting period ending December 31, 2001, hereby constitutes and appoints Brian
R. Bodager his true and lawful attorney-in-fact and agent.
Said attorney-in-fact and agent shall have full power to act for him and in
his name, place, and stead in any and all capacities, to sign such Form 10-K and
Proxy Statement and any and all amendments thereto (including post-effective
amendments), with power where appropriate to affix the corporate seal of the
Corporation thereto and to attest such seal, and to file such Form 10-K and
Proxy Statement and each amendment (including post-effective amendments) so
signed, with all exhibits thereto, and any and all documents in connection
therewith, with the SEC, and to appear before the SEC in connection with any
matter relating to such Form 10-K and Proxy Statement and to any and all
amendments thereto (including post-effective amendments).
The undersigned hereby grants such attorney-in-fact and agent full power
and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the 23rd day of January, 2002.
/s/ Robert S. Gaiswinkler
-------------------------------------
Robert S. Gaiswinkler
Director
20
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Associated
Banc-Corp, a Wisconsin corporation (the "Corporation"), which is planning to
file with the Securities and Exchange Commission (the "SEC"), Washington, D.C.,
under the provisions of the Securities Act of 1934 (the "Act"), a Form 10-K, the
form which must be used for annual reports pursuant to Section 13 or 15(d) of
the Act, and Proxy Statement in accordance with Regulation 14A and Schedule 14A
under the Act and Regulation S-K and Rule 14a-3(b) under the Act, for the
reporting period ending December 31, 2001, hereby constitutes and appoints Brian
R. Bodager his true and lawful attorney-in-fact and agent.
Said attorney-in-fact and agent shall have full power to act for him and in
his name, place, and stead in any and all capacities, to sign such Form 10-K and
Proxy Statement and any and all amendments thereto (including post-effective
amendments), with power where appropriate to affix the corporate seal of the
Corporation thereto and to attest such seal, and to file such Form 10-K and
Proxy Statement and each amendment (including post-effective amendments) so
signed, with all exhibits thereto, and any and all documents in connection
therewith, with the SEC, and to appear before the SEC in connection with any
matter relating to such Form 10-K and Proxy Statement and to any and all
amendments thereto (including post-effective amendments).
The undersigned hereby grants such attorney-in-fact and agent full power
and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the 23rd day of January, 2002.
/s/ Ronald R. Harder
--------------------------------------
Ronald R. Harder
Director
21
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Associated
Banc-Corp, a Wisconsin corporation (the "Corporation"), which is planning to
file with the Securities and Exchange Commission (the "SEC"), Washington, D.C.,
under the provisions of the Securities Act of 1934 (the "Act"), a Form 10-K, the
form which must be used for annual reports pursuant to Section 13 or 15(d) of
the Act, and Proxy Statement in accordance with Regulation 14A and Schedule 14A
under the Act and Regulation S-K and Rule 14a-3(b) under the Act, for the
reporting period ending December 31, 2001, hereby constitutes and appoints Brian
R. Bodager his true and lawful attorney-in-fact and agent.
Said attorney-in-fact and agent shall have full power to act for him and in
his name, place, and stead in any and all capacities, to sign such Form 10-K and
Proxy Statement and any and all amendments thereto (including post-effective
amendments), with power where appropriate to affix the corporate seal of the
Corporation thereto and to attest such seal, and to file such Form 10-K and
Proxy Statement and each amendment (including post-effective amendments) so
signed, with all exhibits thereto, and any and all documents in connection
therewith, with the SEC, and to appear before the SEC in connection with any
matter relating to such Form 10-K and Proxy Statement and to any and all
amendments thereto (including post-effective amendments).
The undersigned hereby grants such attorney-in-fact and agent full power
and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the 23rd day of January, 2002.
/s/ William R. Hutchinson
--------------------------------------
William R. Hutchinson
Director
22
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Associated
Banc-Corp, a Wisconsin corporation (the "Corporation"), which is planning to
file with the Securities and Exchange Commission (the "SEC"), Washington, D.C.,
under the provisions of the Securities Act of 1934 (the "Act"), a Form 10-K, the
form which must be used for annual reports pursuant to Section 13 or 15(d) of
the Act, and Proxy Statement in accordance with Regulation 14A and Schedule 14A
under the Act and Regulation S-K and Rule 14a-3(b) under the Act, for the
reporting period ending December 31, 2001, hereby constitutes and appoints Brian
R. Bodager his true and lawful attorney-in-fact and agent.
Said attorney-in-fact and agent shall have full power to act for him and in
his name, place, and stead in any and all capacities, to sign such Form 10-K and
Proxy Statement and any and all amendments thereto (including post-effective
amendments), with power where appropriate to affix the corporate seal of the
Corporation thereto and to attest such seal, and to file such Form 10-K and
Proxy Statement and each amendment (including post-effective amendments) so
signed, with all exhibits thereto, and any and all documents in connection
therewith, with the SEC, and to appear before the SEC in connection with any
matter relating to such Form 10-K and Proxy Statement and to any and all
amendments thereto (including post-effective amendments).
The undersigned hereby grants such attorney-in-fact and agent full power
and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the 23rd day of January, 2002.
/s/ Robert P. Konopacky
--------------------------------------
Robert P. Konopacky
Director
23
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Associated
Banc-Corp, a Wisconsin corporation (the "Corporation"), which is planning to
file with the Securities and Exchange Commission (the "SEC"), Washington, D.C.,
under the provisions of the Securities Act of 1934 (the "Act"), a Form 10-K, the
form which must be used for annual reports pursuant to Section 13 or 15(d) of
the Act, and Proxy Statement in accordance with Regulation 14A and Schedule 14A
under the Act and Regulation S-K and Rule 14a-3(b) under the Act, for the
reporting period ending December 31, 2001, hereby constitutes and appoints Brian
R. Bodager his true and lawful attorney-in-fact and agent.
Said attorney-in-fact and agent shall have full power to act for him and in
his name, place, and stead in any and all capacities, to sign such Form 10-K and
Proxy Statement and any and all amendments thereto (including post-effective
amendments), with power where appropriate to affix the corporate seal of the
Corporation thereto and to attest such seal, and to file such Form 10-K and
Proxy Statement and each amendment (including post-effective amendments) so
signed, with all exhibits thereto, and any and all documents in connection
therewith, with the SEC, and to appear before the SEC in connection with any
matter relating to such Form 10-K and Proxy Statement and to any and all
amendments thereto (including post-effective amendments).
The undersigned hereby grants such attorney-in-fact and agent full power
and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the 23rd day of January, 2002.
/s/ George R. Leach
--------------------------------------
George R. Leach
Director
24
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Associated
Banc-Corp, a Wisconsin corporation (the "Corporation"), which is planning to
file with the Securities and Exchange Commission (the "SEC"), Washington, D.C.,
under the provisions of the Securities Act of 1934 (the "Act"), a Form 10-K, the
form which must be used for annual reports pursuant to Section 13 or 15(d) of
the Act, and Proxy Statement in accordance with Regulation 14A and Schedule 14A
under the Act and Regulation S-K and Rule 14a-3(b) under the Act, for the
reporting period ending December 31, 2001, hereby constitutes and appoints Brian
R. Bodager his true and lawful attorney-in-fact and agent.
Said attorney-in-fact and agent shall have full power to act for him and in
his name, place, and stead in any and all capacities, to sign such Form 10-K and
Proxy Statement and any and all amendments thereto (including post-effective
amendments), with power where appropriate to affix the corporate seal of the
Corporation thereto and to attest such seal, and to file such Form 10-K and
Proxy Statement and each amendment (including post-effective amendments) so
signed, with all exhibits thereto, and any and all documents in connection
therewith, with the SEC, and to appear before the SEC in connection with any
matter relating to such Form 10-K and Proxy Statement and to any and all
amendments thereto (including post-effective amendments).
The undersigned hereby grants such attorney-in-fact and agent full power
and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the 23rd day of January, 2002.
/s/ John C. Meng
--------------------------------------
John C. Meng
Director
25
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Associated
Banc-Corp, a Wisconsin corporation (the "Corporation"), which is planning to
file with the Securities and Exchange Commission (the "SEC"), Washington, D.C.,
under the provisions of the Securities Act of 1934 (the "Act"), a Form 10-K, the
form which must be used for annual reports pursuant to Section 13 or 15(d) of
the Act, and Proxy Statement in accordance with Regulation 14A and Schedule 14A
under the Act and Regulation S-K and Rule 14a-3(b) under the Act, for the
reporting period ending December 31, 2001, hereby constitutes and appoints Brian
R. Bodager his true and lawful attorney-in-fact and agent.
Said attorney-in-fact and agent shall have full power to act for him and in
his name, place, and stead in any and all capacities, to sign such Form 10-K and
Proxy Statement and any and all amendments thereto (including post-effective
amendments), with power where appropriate to affix the corporate seal of the
Corporation thereto and to attest such seal, and to file such Form 10-K and
Proxy Statement and each amendment (including post-effective amendments) so
signed, with all exhibits thereto, and any and all documents in connection
therewith, with the SEC, and to appear before the SEC in connection with any
matter relating to such Form 10-K and Proxy Statement and to any and all
amendments thereto (including post-effective amendments).
The undersigned hereby grants such attorney-in-fact and agent full power
and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the 23rd day of January, 2002.
/s/ J. Douglas Quick
--------------------------------------
J. Douglas Quick
Director
26
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Associated
Banc-Corp, a Wisconsin corporation (the "Corporation"), which is planning to
file with the Securities and Exchange Commission (the "SEC"), Washington, D.C.,
under the provisions of the Securities Act of 1934 (the "Act"), a Form 10-K, the
form which must be used for annual reports pursuant to Section 13 or 15(d) of
the Act, and Proxy Statement in accordance with Regulation 14A and Schedule 14A
under the Act and Regulation S-K and Rule 14a-3(b) under the Act, for the
reporting period ending December 31, 2001, hereby constitutes and appoints Brian
R. Bodager his true and lawful attorney-in-fact and agent.
Said attorney-in-fact and agent shall have full power to act for him and in
his name, place, and stead in any and all capacities, to sign such Form 10-K and
Proxy Statement and any and all amendments thereto (including post-effective
amendments), with power where appropriate to affix the corporate seal of the
Corporation thereto and to attest such seal, and to file such Form 10-K and
Proxy Statement and each amendment (including post-effective amendments) so
signed, with all exhibits thereto, and any and all documents in connection
therewith, with the SEC, and to appear before the SEC in connection with any
matter relating to such Form 10-K and Proxy Statement and to any and all
amendments thereto (including post-effective amendments).
The undersigned hereby grants such attorney-in-fact and agent full power
and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the 23rd day of January, 2002.
/s/ John C. Seramur
--------------------------------------
John C. Seramur
Director
27
DIRECTOR'S POWER OF ATTORNEY
----------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Associated
Banc-Corp, a Wisconsin corporation (the "Corporation"), which is planning to
file with the Securities and Exchange Commission (the "SEC"), Washington, D.C.,
under the provisions of the Securities Act of 1934 (the "Act"), a Form 10-K, the
form which must be used for annual reports pursuant to Section 13 or 15(d) of
the Act, and Proxy Statement in accordance with Regulation 14A and Schedule 14A
under the Act and Regulation S-K and Rule 14a-3(b) under the Act, for the
reporting period ending December 31, 2001, hereby constitutes and appoints Brian
R. Bodager his true and lawful attorney-in-fact and agent.
Said attorney-in-fact and agent shall have full power to act for him and in
his name, place, and stead in any and all capacities, to sign such Form 10-K and
Proxy Statement and any and all amendments thereto (including post-effective
amendments), with power where appropriate to affix the corporate seal of the
Corporation thereto and to attest such seal, and to file such Form 10-K and
Proxy Statement and each amendment (including post-effective amendments) so
signed, with all exhibits thereto, and any and all documents in connection
therewith, with the SEC, and to appear before the SEC in connection with any
matter relating to such Form 10-K and Proxy Statement and to any and all
amendments thereto (including post-effective amendments).
The undersigned hereby grants such attorney-in-fact and agent full power
and authority to do and perform any and all acts and things requisite and
necessary to be done as he might or could do in person, and hereby ratifies and
confirms all that such attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of the 23rd day of January, 2002.
/s/ John H. Sproule
--------------------------------------
John H. Sproule
Director
28