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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period to
COMMISSION FILE NUMBER: 0-5519
ASSOCIATED BANC-CORP
(Exact name of registrant as specified in its charter)
WISCONSIN 39-1098068
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
1200 HANSEN ROAD 54304
GREEN BAY, WISCONSIN (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (920) 491-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
COMMON STOCK, PAR VALUE--$0.01 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of March 1, 2000, 63,164,218 shares of Common Stock were outstanding and the
aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $1,501,035,000. Excludes approximately $74,122,000
of market value representing the outstanding shares of the Registrant owned by
all directors and officers who individually, in certain cases, or collectively,
may be deemed affiliates. Includes approximately $132,423,000 of market value
representing 8.41% of the outstanding shares of the Registrant held in a
fiduciary capacity by the trust company subsidiary of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K Into Which
Document Portions of Documents are Incorporated
Proxy Statement for Annual Meeting of Part III
Shareholders on April 26, 2000
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ASSOCIATED BANC-CORP
1999 FORM 10-K TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 10
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 38
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 72
PART III
Item 10. Directors and Executive Officers of the Registrant 72
Item 11. Executive Compensation 72
Item 12. Security Ownership of Certain Beneficial Owners and
Management 72
Item 13. Certain Relationships and Related Transactions 72
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K 73
Signatures 75
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Forward-looking statements have been made in this document, and in documents
that are incorporated by reference, that are subject to risks and uncertainties.
These forward-looking statements describe future plans or strategies and include
Associated Banc-Corp's expectations of future results of operations. The words
"believes," "expects," "anticipates," or similar expressions identify
forward-looking statements.
Shareholders should note that many factors, some of which are discussed
elsewhere in this document and in the documents that are incorporated by
reference, could affect the future financial results of Associated Banc-Corp and
could cause those results to differ materially from those expressed in
forward-looking statements contained or incorporated by reference in this
document. These factors include the following:
- operating, legal, and regulatory risks;
- economic, political, and competitive forces affecting Associated
Banc-Corp's banking, securities, asset management, and credit services
businesses; and
- the risk that Associated Banc-Corp's analyses of these risks and forces
could be incorrect and/or that the strategies developed to address them
could be unsuccessful.
These factors should be considered in evaluating the forward-looking statements,
and undue reliance should not be placed on such statements.
PART I
ITEM 1 BUSINESS
GENERAL
Associated Banc-Corp (the "Corporation") is a bank holding company registered
pursuant to the Bank Holding Company Act of 1956, as amended (the "Act"). It was
incorporated in Wisconsin in 1964 and was inactive until 1969 when permission
was received from the Board of Governors of the Federal Reserve System to
acquire three banks. At December 31, 1999, the Corporation owned ten commercial
banks located in Illinois, Minnesota, and Wisconsin (the "affiliates") serving
their local communities and, measured by total assets held at December 31, 1999,
was the third largest commercial bank holding company headquartered in
Wisconsin. The Corporation also owned 32 nonbanking subsidiaries (the
"subsidiaries") located in Arizona, California, Delaware, Illinois, Missouri,
Nevada, and Wisconsin.
The Corporation entered the Minnesota banking market through three separate
transactions during 1999. It acquired Windsor Bancshares, Inc. and its wholly
owned subsidiary, Bank Windsor, on February 3, 1999. The Corporation also
consummated the acquisition of Riverside Acquisition Corp. and its wholly owned
subsidiary, Riverside Bancshares, Inc., and its wholly owned subsidiary,
Riverside Bank, on August 31, 1999. Further, the Corporation finalized its
acquisition of BNC Financial Corporation on December 31, 1999.
SERVICES
The Corporation provides advice and specialized services to its affiliates in
banking policy and operations, including auditing, data processing,
marketing/advertising, investing, legal/compliance, personnel services, trust
services, risk management, facilities management, security, corporate-wide
purchasing, treasury, finance, accounting, and other financial services
functionally related to banking.
Responsibility for the management of the affiliates remains with their
respective Boards of Directors and officers. Services rendered to the affiliates
by the Corporation are intended to assist the local management of these
affiliates to expand the scope of services offered by them. Bank affiliates of
the Corporation at December 31, 1999, provided services through 223 locations in
157 communities.
The Corporation, through its affiliates, provides a complete range of banking
services to individuals and small to medium-size businesses. These services
include checking, savings, NOW, Super NOW, and money market deposit accounts,
business, personal, educational, residential, and commercial mortgage loans,
MasterCard, VISA and other consumer-oriented financial services, including IRA
and Keogh accounts, safe deposit and
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night depository facilities. Automated Teller Machines (ATMs), which provide
24-hour banking services to customers of the affiliates, are installed in many
locations in the affiliates' service areas. The affiliates are members of an
interstate shared ATM network, which allows their customers to perform banking
transactions from their checking, savings, or credit card accounts at ATMs in a
multi-state environment. Among the services designed specifically to meet the
needs of small and medium-size businesses are various types of specialized
financing, cash management services, and transfer/collection facilities.
The affiliates provide lending, depository, and related financial services to
commercial, industrial, financial, and governmental customers. Term loans,
revolving credit arrangements, letters of credit, inventory and accounts
receivable financing, real estate construction lending, and international
banking services are available.
Lending involves credit risk. Credit risk is controlled and monitored through
active asset quality management and the use of lending standards, thorough
review of potential borrowers, and active asset quality administration. Active
asset quality administration, including early problem loan identification and
timely resolution of problems, further ensures appropriate management of credit
risk and minimization of loan losses. The allowance for loan losses ("AFLL")
represents management's estimate of an amount adequate to provide for losses
inherent in the loan portfolio. Management's evaluation of the adequacy of the
AFLL is based on management's ongoing review and grading of the loan portfolio,
consideration of past loan loss experience, trends in past due and nonperforming
loans, risk characteristics of the various classifications of loans, current
economic conditions, the fair value of underlying collateral, and other factors
which could affect potential credit losses. Credit risk management is discussed
under sections "Loans," "Allowance for Loan Losses," and "Nonperforming Loans,
Potential Problem Loans, and Other Real Estate Owned" and under Notes 1 and 6 in
the notes to consolidated financial statements.
Additional emphasis is given to noncredit services for commercial customers,
such as advice and assistance in the placement of securities, corporate cash
management, and financial planning. The affiliates make available check
clearing, safekeeping, loan participations, lines of credit, portfolio analyses,
and other services to approximately 120 correspondent financial institutions.
A trust company subsidiary and an investment management subsidiary offer a wide
variety of fiduciary, investment management, advisory, and corporate agency
services to individuals, corporations, charitable trusts, foundations, and
institutional investors. They also administer (as trustee and in other fiduciary
and representative capacities) pension, profit sharing and other employee
benefit plans, and personal trusts and estates.
Investment subsidiaries provide discount and full-service brokerage services,
including the sale of fixed and variable annuities, mutual funds, and
securities, to the affiliates' customers and the general public. Insurance
subsidiaries provide commercial and individual insurance services, including
various life, property, casualty, credit, and mortgage products to the
affiliates' customers and the general public. Seven investment subsidiaries
located in Nevada hold, manage, and trade cash, stocks, and securities
transferred from the affiliates and reinvest investment income. Three additional
investment subsidiaries formed in Nevada and headquartered and domiciled in the
Cayman Islands provide investment services for their parent bank, as well as
provide management of their respective Real Estate Investment Trust ("REIT")
subsidiaries. A leasing subsidiary provides lease financing for a variety of
capital equipment for commerce and industry. An appraisal subsidiary provides
real estate appraisals for customers, government agencies, and the general
public.
The mortgage banking subsidiaries are involved in the origination, servicing,
and warehousing of mortgage loans, and the sale of such loans to investors. The
primary focus is on commercial and one- to four-family residential and
multi-family properties, all of which are generally salable into the secondary
mortgage market. The principal mortgage lending areas of these subsidiaries are
Wisconsin and Illinois. Nearly all long-term, fixed-rate real estate mortgage
loans generated are sold in the secondary market and to other financial
institutions, with the subsidiaries retaining the servicing of those loans.
In addition to real estate loans, the Corporation's affiliates and subsidiaries
originate and/or service consumer loans, credit card loans, and student loans.
Consumer, home equity, and student lending activities are
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principally conducted in Wisconsin and Illinois, while the credit card base and
resulting loans are principally centered in the Midwest.
The Corporation, its affiliates, and subsidiaries are not dependent upon a
single or a few customers, the loss of which would have a material adverse
effect on the Corporation. No material portion of the business of the
Corporation, its affiliates, or its subsidiaries is seasonal.
FOREIGN OPERATIONS
The Corporation, its affiliates, and subsidiaries do not engage in any
operations in foreign countries, other than three investment subsidiaries all
formed under the General Corporation Law of the State of Nevada. These
investment subsidiaries are headquartered and commercially domiciled in the
Cayman Islands. Each subsidiary has at least one employee who is a resident of
the Cayman Islands.
EMPLOYEES
At December 31, 1999, the Corporation, its affiliates, and subsidiaries, as a
group, had 3,966 full-time equivalent employees.
COMPETITION
The financial services industry is highly competitive. The Corporation competes
for loans, deposits and financial services in all of its principal markets. The
Corporation competes directly with other bank and nonbank institutions located
within its markets, with out-of-market banks and bank holding companies that
advertise or otherwise serve the Corporation's markets, money market and other
mutual funds, brokerage houses, and various other financial institutions.
Additionally, the Corporation competes with insurance companies, leasing
companies, regulated small loan companies, credit unions, governmental agencies
and commercial entities offering financial services products. Competition
involves efforts to obtain new deposits, the scope and type of services offered,
interest rates paid on deposits and charged on loans, as well as other aspects
of banking. All of the affiliates also face direct competition from members of
bank holding company systems that have greater assets and resources than those
of the Corporation.
SUPERVISION AND REGULATION
Financial institutions are highly regulated both at the federal and state level.
Numerous statutes and regulations presently affect the business of the
Corporation, its affiliates, and its subsidiaries. Proposed comprehensive
statutory and regulatory changes could have an effect on the Corporation's
business.
As a registered bank holding company under the Act, the Corporation and its
nonbanking affiliates are regulated and supervised by the Board of Governors of
the Federal Reserve System (the "Board"). The affiliates of the Corporation with
a national charter are supervised and examined by the Comptroller of the
Currency. The affiliates with a state charter are supervised and examined by
their respective state banking agency, and either the Board, if such affiliate
is a member of the Federal Reserve System, or by the Federal Deposit Insurance
Corporation (the "FDIC"), if a nonmember. Currently, all affiliates with a state
charter are nonmember banks. All affiliates of the Corporation that accept
insured deposits are subject to examination by the FDIC.
The activities of the Corporation, and its affiliates and subsidiaries, are
limited by the Act to those activities that are banking, or those nonbanking
activities that are closely related or incidental to banking. The Corporation is
required to act as a source of financial strength to each of its affiliates
pursuant to which it may be required to commit financial resources to support
such affiliates in circumstances when, absent such requirements, it might not do
so. The Act also requires the prior approval of the Board for the Corporation to
acquire direct or indirect control of more than five percent of any class of
voting shares of any bank or bank holding company. Further restrictions imposed
by the Act include capital requirements, restrictions on transactions with
affiliates, on issuances of securities, on dividend payments, on inter-affiliate
liabilities, on extensions of credit, and on expansion through merger and
acquisition.
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The federal regulatory authorities have broad authority to enforce the
regulatory requirements imposed on the Corporation, its affiliates, and
subsidiaries. In particular, the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), and their implementing regulations, carry
greater enforcement powers. Under FIRREA, all commonly controlled FDIC insured
depository institutions may be held liable for any loss incurred by the FDIC
resulting from a failure of, or any assistance given by the FDIC to, any
commonly controlled institutions. Pursuant to certain provisions under FDICIA,
the federal regulatory agencies have broad powers to take prompt corrective
action if a depository institution fails to maintain certain capital levels.
Prompt corrective action may include the inability of the Corporation to pay
dividends, restrictions in acquisitions or activities, limitations on asset
growth, and other restrictions.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 contains
provisions which amended the Act to allow an adequately-capitalized and
adequately-managed bank holding company to acquire a bank located in another
state as of September 29, 1995. Effective June 1, 1997, interstate branching was
permitted. The Riegle-Neal Amendments Act of 1997 clarifies the applicability of
host state laws to any branch in such state of an out-of-state bank.
The FDIC Board of Directors (the "FDIC Board") voted December 11, 1996, to
finalize a rule lowering the rates on assessments paid to the Savings
Association Insurance Fund ("SAIF"), effective as of October 1, 1996. As a
result of the special assessment required by the Deposit Insurance Funds Act of
1996 ("Funds Act"), the SAIF was capitalized at the target Designated Reserve
Ratio ("DRR") of 1.25% of estimated insured deposits on October 1, 1996. The
Funds Act required the FDIC to set assessments in order to maintain the target
DRR. The FDIC Board has, therefore, lowered the rates on assessments paid to the
SAIF, while simultaneously widening the spread between the lowest and highest
rates to improve the effectiveness of the FDIC's risk-based premium system. The
FDIC Board has also established a process, similar to that which was applied to
the Bank Insurance Fund ("BIF"), for adjusting the rate schedules for both the
SAIF and the BIF within a limited range, without notice and comment, to maintain
each of the fund balances at the target DRR.
The Gramm-Leach-Bliley Act of 1999, P.L. 106-102, enacted on November 12, 1999,
has made major amendments to the Act. The amendments, among other things, will
allow certain qualifying bank holding companies to engage in activities that are
financial in nature and that explicitly include the underwriting and sale of
insurance. The amendments will also amend the Act provisions governing the scope
and manner of the Board's supervision of bank holding companies, the manner in
which activities may be found to be financial in nature, and the extent to which
state laws on insurance will apply to insurance activities of banks and bank
affiliates. The provisions amending the activity limitations and supervision of
bank holding companies are generally effective 120 days following enactment. The
Board is expected to issue regulations implementing these provisions. It can be
expected that the amendments will allow for the expansion of activities by
banking organizations and permit consolidation among financial organizations
generally.
The laws and regulations to which the Corporation, its affiliates, and
subsidiaries are subject are constantly under review by Congress, the federal
regulatory agencies, and the state authorities. These laws and regulations could
be changed drastically in the future, which could affect the profitability of
the Corporation, its ability to compete effectively, or the composition of the
financial services industry in which the Corporation competes.
GOVERNMENT MONETARY POLICIES AND ECONOMIC CONTROLS
The earnings and growth of the banking industry and the affiliates of the
Corporation are affected by the credit policies of monetary authorities,
including the Federal Reserve System. An important function of the Federal
Reserve System is to regulate the national supply of bank credit in order to
combat recession and curb inflationary pressures. Among the instruments of
monetary policy used by the Federal Reserve to implement these objectives are
open market operations in U.S. government securities, changes in reserve
requirements against member bank deposits, and changes in the Federal Reserve
discount rate. These means are used in varying combinations to influence overall
growth of bank loans, investments, and deposits, and may also affect
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interest rates charged on loans or paid for deposits. The monetary policies of
the Federal Reserve authorities have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to have
such an effect in the future.
In view of changing conditions in the national economy and in the money markets,
as well as the effect of credit policies by monetary and fiscal authorities,
including the Federal Reserve System, no prediction can be made as to possible
future changes in interest rates, deposit levels, and loan demand, or their
effect on the business and earnings of the Corporation and its affiliates.
ITEM 2 PROPERTIES
The Corporation's headquarters were relocated to the Village of Ashwaubenon,
Wisconsin, in a leased facility with approximately 30,000 square feet of office
space in September 1998. The space is subject to a five-year lease with two
consecutive five-year extensions.
At December 31, 1999, the affiliates occupied 223 offices in 157 different
communities within Illinois, Minnesota, and Wisconsin. All affiliate main
offices are owned, except Associated Bank Milwaukee, Associated Bank Chicago,
Associated Bank Illinois, Bank Windsor, and Riverside Bank. The affiliate main
offices in downtown Milwaukee, Chicago, Rockford, and Minneapolis, are located
in the lobbies of multi-story office buildings. Most affiliate branch offices
are free-standing buildings that provide adequate customer parking, including
drive-in facilities of various numbers and types for customer convenience. Some
affiliates also have branch offices in various supermarket locations, as well as
offices in retirement communities. In addition, the Corporation owns other real
property that, when considered in the aggregate, is not material to its
financial position.
ITEM 3 LEGAL PROCEEDINGS
There are legal proceedings pending against certain affiliates and subsidiaries
of the Corporation which arose in the normal course of their business. Although
litigation is subject to many uncertainties and the ultimate exposure with
respect to these matters cannot be ascertained, management believes, based upon
discussions with counsel, that the Corporation has meritorious defenses, and any
ultimate liability would not have a material adverse effect on the consolidated
financial position or results of operations of the Corporation.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
EXECUTIVE OFFICERS OF THE CORPORATION
Pursuant to General Instruction G of Form 10-K, the following list is included
as an unnumbered item in Part I of this report in lieu of being included in the
Proxy Statement for the Annual Meeting of Stockholders to be held April 26,
2000.
The following is a list of names and ages of executive officers of the
Corporation, its affiliates, and subsidiaries indicating all positions and
offices held by each such person and each such person's principal occupation(s)
or employment during the past five years. The Date of Election refers to the
date the person was first elected an officer of the Corporation or its
affiliates or subsidiaries. Officers are appointed annually by the Board of
Directors at the meeting of directors immediately following the Annual Meeting
of Shareholders. There are no family relationships among these officers nor any
arrangement or understanding between any officer and any other person pursuant
to which the officer was selected. No person other than those listed below has
been chosen to become an Executive Officer of the Corporation.
NAME OFFICES AND POSITIONS HELD DATE OF ELECTION
Harry B. Conlon Chairman and Chief Executive Officer of March 1, 1975
Age: 64 Associated Banc-Corp
Prior to October 1998, Chairman, President, and
Chief Executive Officer of Associated Banc-Corp
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NAME OFFICES AND POSITIONS HELD DATE OF ELECTION
Robert C. Gallagher President, Chief Operating Officer, and Director April 28, 1982
Age: 61 of Associated Banc-Corp
Prior to October 1998, Vice Chairman of
Associated Banc-Corp; Chairman and Chief
Executive Officer of Associated Bank Green Bay
(affiliate)
Prior to April 1996, Executive Vice President and
Director of Associated Banc-Corp; Chairman,
President and Chief Executive Officer of
Associated Bank Green Bay (affiliate)
Brian R. Bodager Chief Administrative Officer, General Counsel and July 22, 1992
Age: 44 Corporate Secretary of Associated Banc-Corp
Prior to July 1997, Senior Vice President,
General Counsel, and Corporate Secretary of
Associated Banc-Corp
Joseph B. Selner Chief Financial Officer of Associated Banc-Corp January 25, 1978
Age: 53
Arthur E. Olsen, III General Auditor of Associated Banc-Corp July 28, 1993
Age: 48
Mary Ann Bamber Director of Retail Banking of Associated January 22, 1997
Age: 49 Banc-Corp
From January 1996 to January 1997, independent
consultant
From January 1996 to January 1997, Senior Officer
of an Iowa-based bank
Prior to January 1996, Senior Officer of a
Minnesota-based holding company
Robert J. Johnson Director of Human Resources of Associated January 22, 1997
Age: 54 Banc-Corp
Prior to January 1997, Officer of a Wisconsin
manufacturing company
Donald E. Peters Director of Systems and Operations of Associated October 27, 1997
Age: 50 Banc-Corp
From October 1997 to November 1998, Director of
Systems and Operations of Associated Banc-Corp;
Executive Vice President of First Financial Bank
(former affiliate)
Prior to October 1997, Executive Vice President
of First Financial Corporation (former
affiliate); Executive Vice President of First
Financial Bank (former affiliate)
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NAME OFFICES AND POSITIONS HELD DATE OF ELECTION
Cindy K. Moon-Mogush Director of Marketing of Associated Banc-Corp April 20, 1998
Age: 38
From July 1997 to April 1998, Senior Vice
President of a Michigan-based bank holding
company
From March 1995 to July 1997, Officer of a
Michigan-based bank holding company
Prior to March 1995, Senior Officer of a
Michigan-based financial institution
David S. Fisher Treasurer of Associated Banc-Corp May 18, 1998
Age: 44
Prior to May 18, 1998, Senior Vice President of a
Michigan-based bank holding company
David E. Cleveland President of Riverside Bank (affiliate) August 31, 1999
Age: 66
John P. Evans Chief Executive Officer and Director of August 16, 1993
Age: 50 Associated Bank North (affiliate)
David J. Handy President, Chief Executive Officer, and Director May 31, 1991
Age: 60 of Associated Bank, National Association
(affiliate)
David G. Krill President, Chief Executive Officer, and Director November 3, 1997
Age: 57 of Associated Commercial Mortgage, Inc.
(subsidiary)
Prior to November 1997, Senior Vice President of
First Financial Bank (former affiliate)
Michael B. Mahlik Executive Vice President, Managing Trust Officer, January 1, 1991
Age: 47 and Director of Associated Bank, National
Association (affiliate)
George J. McCarthy President, Chief Executive Officer, and Director November 11, 1983
Age: 49 of Associated Bank Chicago (affiliate)
Mark J. McMullen Senior Executive Vice President and Director of June 2, 1981
Age: 51 Associated Bank Green Bay (affiliate)
Prior to July 1996, Executive Vice President and
Director of Associated Bank Green Bay (affiliate)
Randall J. Peterson President, Chief Executive Officer, and Director August 2, 1982
Age: 54 of Associated Bank Green Bay (affiliate)
From July 1996 to October 1998, President and
Director of Associated Bank Green Bay (affiliate)
Prior to July 1996, Executive Vice President and
Director of Associated Bank Green Bay (affiliate)
Gary L. Schaefer President and Director of Associated Bank South March 1, 1995
Age: 50 Central (affiliate)
Prior to March 1995, Senior Officer of a
Wisconsin bank
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NAME OFFICES AND POSITIONS HELD DATE OF ELECTION
Thomas R. Walsh President, Chief Executive Officer, and Director January 1, 1994
Age: 42 of Associated Bank Illinois (affiliate)
From January 1994 to November 12, 1998,
President, Chief Executive Officer, and Director
of Associated Bank Lakeshore (affiliate)
Gordon J. Weber President, Chief Executive Officer, and Director December 15, 1993
Age: 52 of Associated Bank Milwaukee (affiliate);
Director of Associated Bank South Central
(affiliate)
Scott A. Yeoman President, Chief Executive Officer, and Director October 1, 1994
Age: 42 of Associated Bank Lakeshore (affiliate)
From October 1, 1994, to September 15, 1998,
Senior Vice President of Associated Bank
Lakeshore (affiliate)
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information in response to this item is incorporated by reference to the table
"Market Information" on Page 74 and the discussion of dividend restrictions in
Note 12 "Stockholders' Equity" of the notes to consolidated financial statements
included under Item 8 of this document. The Corporation's common stock is
currently being traded on The Nasdaq Stock Market under the symbol ASBC.
The approximate number of equity security holders of record of common stock,
$.01 par value, as of March 1, 2000, was 10,400. Certain of the Corporation's
shares are held in "nominee" or "street" name and, accordingly, the number of
beneficial owners of such shares is not known nor included in the foregoing
number.
Payment of future dividends is within the discretion of the Corporation's Board
of Directors and will depend, among other factors, on earnings, capital
requirements, and the operating and financial condition of the Corporation. At
the present time, the Corporation expects that dividends will continue to be
paid in the future.
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ITEM 6 SELECTED FINANCIAL DATA
TABLE 1: EARNINGS SUMMARY AND SELECTED FINANCIAL DATA
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
%
CHANGE
1998 TO
YEARS ENDED DECEMBER 31, 1999 1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Interest income $ 814,520 3.7% $ 785,765 $ 787,919 $ 731,763 $ 696,858 $ 613,725
Interest expense 418,775 1.9 411,028 411,637 375,922 360,499 292,735
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Net interest income 395,745 5.6 374,737 376,282 355,841 336,359 320,990
Provision for loan losses 19,243 30.5 14,740 31,668 13,695 14,029 9,035
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Net interest income after
provision for loan
losses 376,502 4.6 359,997 344,614 342,146 322,330 311,955
Noninterest income 165,906 (1.2) 167,928 94,854 115,265 104,989 84,155
Noninterest expense 305,092 3.4 294,962 323,200 292,222 252,927 245,310
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Income before income taxes
and extraordinary item 237,316 1.9 232,963 116,268 165,189 174,392 150,800
Income tax expense 72,373 (4.7) 75,943 63,909 57,487 62,381 54,203
Extraordinary item -- -- -- -- (686) -- --
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NET INCOME $ 164,943 5.0% $ 157,020 $ 52,359 $ 107,016 $ 112,011 $ 96,597
==============================================================================================
Basic earnings per
share(1):
Income before
extraordinary item $ 2.60 4.4% $ 2.49 $ 0.83 $ 1.70 $ 1.82 $ 1.59
Net income 2.60 4.4 2.49 0.83 1.69 1.82 1.59
Diluted earnings per
share(1):
Income before
extraordinary item 2.57 4.5 2.46 0.82 1.67 1.79 1.55
Net income 2.57 4.5 2.46 0.82 1.66 1.79 1.55
Cash dividends per share(1) 1.16 11.1 1.04 0.89 0.76 0.65 0.57
Weighted average shares
outstanding:
Basic 63,507 0.6 63,125 62,884 63,205 61,386 60,747
Diluted 64,061 0.4 63,789 63,935 64,380 62,473 62,144
SELECTED FINANCIAL DATA
Year-End Balances:
Loans (including loans held
for sale) $ 8,369,903 12.5% $ 7,437,867 $ 7,186,551 $6,697,404 $6,418,683 $5,995,964
Allowance for loan losses 113,196 13.6 99,677 92,731 71,767 68,560 65,774
Investment securities 3,255,535 12.0 2,907,735 2,940,218 2,753,938 2,266,895 2,499,380
Assets 12,519,902 11.3 11,250,667 10,690,442 10,120,413 9,393,609 9,130,522
Deposits 8,691,829 1.6 8,557,819 8,395,277 7,959,240 7,570,201 7,334,240
Long-term borrowings 24,283 (6.6) 26,004 15,270 33,329 36,907 94,537
Stockholders' equity 909,789 3.5 878,721 813,692 803,562 725,211 626,591
Book value per share(1) 14.40 3.1 13.97 12.92 12.81 11.75 10.27
----------------------------------------------------------------------------------------------
Average Balances:
Loans (including loans held
for sale) $ 7,801,435 7.5% $ 7,255,850 $ 6,959,018 $6,583,572 $6,157,655 $5,636,601
Investment securities 3,119,279 13.9 2,737,556 2,905,921 2,523,757 2,421,379 2,536,133
Assets 11,698,104 10.1 10,628,695 10,391,718 9,640,471 9,123,981 8,737,231
Deposits 8,631,652 2.4 8,430,701 8,121,945 7,778,177 7,409,409 7,191,053
Stockholders' equity 914,082 6.7 856,425 839,859 775,180 674,368 596,365
----------------------------------------------------------------------------------------------
Financial Ratios:
Return on average equity(2) 18.04% (29)bp 18.33% 16.93% 16.64% 17.21% 16.20%
Return on average assets(2) 1.41 (7) 1.48 1.37 1.35 1.27 1.11
Net interest margin
(tax-equivalent) 3.74 (5) 3.79 3.86 3.95 3.95 3.93
Average equity to average
assets 7.81 (25) 8.06 8.08 8.04 7.39 6.83
Dividend payout ratio(2)(3) 44.62 269 41.93 39.38 37.07 35.71 35.85
==============================================================================================
5-YEAR
COMPOUND
GROWTH
YEARS ENDED DECEMBER 31, RATE
- --------------------------- --------
Interest income 5.8%
Interest expense 7.4
--------
Net interest income 4.3
Provision for loan losses 16.3
--------
Net interest income after
provision for loan
losses 3.8
Noninterest income 14.5
Noninterest expense 4.5
--------
Income before income taxes
and extraordinary item 9.5
Income tax expense 6.0
Extraordinary item N/M
--------
NET INCOME 11.3%
========
Basic earnings per
share(1):
Income before
extraordinary item 10.3%
Net income 10.3
Diluted earnings per
share(1):
Income before
extraordinary item 10.6
Net income 10.6
Cash dividends per share(1) 15.3
Weighted average shares
outstanding:
Basic 0.9
Diluted 0.6
SELECTED FINANCIAL DATA
Year-End Balances:
Loans (including loans held
for sale) 6.9%
Allowance for loan losses 11.5
Investment securities 5.4
Assets 6.5
Deposits 3.5
Long-term borrowings (23.8)
Stockholders' equity 7.7
Book value per share(1) 7.0
--------
Average Balances:
Loans (including loans held
for sale) 6.7%
Investment securities 4.2
Assets 6.0
Deposits 3.7
Stockholders' equity 8.9
--------
Financial Ratios:
Return on average equity(2)
Return on average assets(2)
Net interest margin
(tax-equivalent)
Average equity to average
assets
Dividend payout ratio(2)(3)
========
(1) Per share data adjusted retroactively for stock splits and stock dividends.
(2) Ratio is based upon income prior to merger integration and other one-time
charges or extraordinary items for 1997, 1996, and 1995.
(3) Ratio is based upon basic earnings per share.
N/M = not meaningful
11
12
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is management's analysis to assist in the understanding
and evaluation of the consolidated financial condition and results of operations
of Associated Banc-Corp (the "Corporation"). It should be read in conjunction
with the consolidated financial statements and footnotes and the selected
financial data presented elsewhere in this report.
The financial discussion that follows refers to the impact of the Corporation's
business combination activity, detailed under section, "Business Combinations,"
and Note 2 of the notes to consolidated financial statements. In particular, in
October 1997 the Corporation merged with First Financial Corporation ("FFC"),
the parent company of a $6.0 billion federally chartered thrift (First Financial
Bank or "FFB"). The transaction was accounted for as a pooling of interests, and
thus, all consolidated financial data was restated as though the entities had
been combined for the periods presented.
In addition, the following discussion will refer to "operating earnings,"
particularly for 1997 results. To arrive at operating earnings, reported results
of 1997 were adjusted by the following (no adjustments were necessary for 1999
or 1998). Performance ratios for 1997 are also calculated excluding these items.
- 1997 operating earnings exclude the merger, integration, and other
one-time charges ("merger-related charges") recorded by the Corporation
in conjunction with the merger of FFC of $103.7 million, or $89.8 million
after tax. This pre-tax charge includes a $35.3 million adjustment to
securities for other than temporary impairment, $16.8 million of
conforming provision for loan losses, and $51.6 million of merger,
integration, and other one-time charges. These charges reduced basic
earnings per share by $1.43 and diluted earnings per share by $1.41. See
Note 3 of the notes to consolidated financial statements for additional
detail.
PERFORMANCE SUMMARY
The Corporation recorded net income of $164.9 million for the year ended
December 31, 1999, an increase of $7.9 million or 5.0% over the $157.0 million
earned in 1998. Basic earnings per share were $2.60, a 4.4% increase over 1998
basic earnings per share of $2.49. Earnings per diluted share were $2.57, a 4.5%
increase over 1998 diluted earnings per share of $2.46. Return on average assets
and return on average equity were 1.41% and 18.04% for 1999, compared to 1.48%
and 18.33%, respectively, for 1998. Cash dividends paid in 1999 increased by
11.1% to $1.16 per share over the $1.04 per share paid in 1998. Key factors
behind these results were:
- Taxable equivalent net interest income was $409.4 million for 1999, up
$28.0 million or 7.3% over last year. Taxable equivalent interest income
increased by $35.7 million while interest expense increased $7.7 million.
The volume of average earning assets increased $892.6 million to $11.0
billion, which exceeded the $871.0 million increase in interest-bearing
liabilities. Increases in volume and changes in product mix added $35.0
million to taxable equivalent net interest income, whereas changes in the
rate environment resulted in a $7.0 million decline.
- Total loans and deposits were $8.4 billion and $8.7 billion,
respectively, at December 31, 1999, compared to $7.3 billion and $8.6
billion, respectively, at December 31, 1998. These increases were from
internal growth and acquisitions.
- Provision for loan losses increased to $19.2 million compared to $14.7
million in 1998. Net charge-offs increased $2.3 million, primarily due to
lower recoveries in 1999 than in 1998, and were 0.18% of average loans
compared to 0.16% in 1998. The ratio of allowance for loan losses to
loans was 1.35% and 1.37% at December 31, 1999 and 1998, respectively.
Nonperforming assets were $40.7 million, representing 0.32% of total
assets at year-end 1999, compared to $59.9 million, or 0.53% of total
assets last year.
- Noninterest income was $165.9 million for 1999, $2.0 million or 1.2%
lower than 1998. A primary component impacting this decline was mortgage
banking income, down $15.7 million in 1999 versus
12
13
1998, driven primarily by a 46% drop in secondary mortgage loan
production (particularly refinancing activity) in response to the rising
interest rate environment in 1999 compared to 1998. Gains on the sale of
assets and investment securities were $6.0 million lower than the $14.0
million recorded in 1998. Excluding mortgage banking income and gains on
asset and investment securities sales, noninterest income increased by
$19.7 million or 18.2% in 1999, with increases in most other categories.
- Noninterest expense increased $10.1 million or 3.4% over 1998. Most
categories of noninterest expense increased due to the acquisitions,
which added $16.7 million. Partially offsetting the increases were
decreases in MSR amortization and professional fees.
- Income tax expense decreased to $72.3 million, down $3.6 million from
1998. The 1999 effective tax rate was 30.50% or 210 bp lower than the
32.6% rate for 1998, due primarily to the tax benefit of increased
municipal securities and BOLI revenue, and the use of tax loss
carryforwards.
BUSINESS COMBINATIONS
During 1999, the Corporation acquired $591 million in assets through three
acquisition transactions. All were accounted for under the purchase method, and
therefore the financial position and results of operations of each entity were
included in the consolidated financial statements as of the consummation date of
each transaction. Due to the timing of the December 31, 1998, purchase
acquisition of Citizens Bankshares, Inc. ("Citizens"), 1998 results included
Citizens' financial position in the consolidated balance sheet, but did not
include any operational results in the consolidated income statement for 1998.
The Corporation's business combination activity is further summarized in Note 2
of the notes to consolidated financial statements. Share repurchase activity is
described under section "Capital."
INCOME STATEMENT ANALYSIS
NET INTEREST INCOME
Net interest income is the primary source of the Corporation's revenue. Net
interest income is the difference between interest income on earning assets
("EAs"), such as loans and securities, and the interest expense on
interest-bearing deposits and other borrowings, used to fund those assets. The
amount of net interest income is affected by changes in interest rates and by
the amount and composition of EAs and interest-bearing liabilities ("IBLs").
Interest rate spread and net interest margin are utilized to measure and explain
changes in net interest income. Interest rate spread is the difference between
the yield on EAs and the rate paid for IBLs that fund those assets. The net
interest margin is expressed as the percentage of net interest income to average
EAs. The net interest margin exceeds the interest rate spread because
noninterest-bearing sources of funds (net free funds), principally demand
deposits and stockholders' equity, also support EAs. To compare tax-exempt asset
yields to taxable yields, the yield on tax-exempt loans and securities is
computed on a fully taxable equivalent ("FTE") basis using a tax rate of 35%.
Net interest income, interest rate spread, and net interest margin are presented
and discussed below on an FTE basis.
Table 2 provides average balances of EAs and IBLs, the associated interest
income and expense, and the corresponding interest rates earned and paid, as
well as net interest income, interest rate spread, and net interest margin on an
FTE basis for the three years ended December 31, 1999. Tables 3 through 5
present additional information to facilitate the review and discussion of net
interest income, interest rate spread, and net interest margin.
FTE net interest income was $409.4 million for 1999, an increase of $28.0
million or 7.3% over 1998. A higher level of EAs, partially offset by a lower
net interest margin, led to the increase in 1999. Citizens and the 1999
acquisitions, net of the cost to fund them, accounted for $20.0 million of the
increase in FTE net interest income.
FTE interest income increased by $35.7 million while interest expense increased
$7.7 million. The volume of average EAs increased $893 million which exceeded
the $871 million increase in interest-bearing liabilities. Increases in volume
and changes in mix added $35.0 million to FTE net interest income, whereas
changes in the rate environment resulted in a $7.0 million decline. See Table 3
for rate/volume analysis.
13
14
For 1999, the yield on EAs declined 32 basis points, lowering interest earned by
$33.0 million (with loans accounting for $21.3 million of the decrease), and the
cost of interest-bearing liabilities fell 35 bp, improving FTE net interest
income by $26.0 million (with interest-bearing deposits accounting for $22.7
million), for a net decline of $7.0 million in FTE net interest income.
In combination, the growth and composition change of EAs contributed an
additional $68.7 million to FTE net interest income, while the growth and
composition of IBLs cost an additional $33.7 million, netting a $35.0 million
increase to FTE net interest income.
The net interest margin was 3.74% in 1999, compared to 3.79% in 1998. The
decline in net interest margin was due to the combination of a lower yield on
EAs, the reliance on higher-cost borrowed funds to support loan growth, and a
lower contribution from net free funds. In addition, the lower margin reflects
the cost of funding the Corporation's share repurchases during 1999 and the
purchase of an additional $100 million in bank owned life insurance ("BOLI") (a
non-interest earning asset).
Consistent with industry trends, the Corporation's net interest margin has been
narrowing. That trend is a reflection of heightened price competition for
traditional loan and deposit products. Recent increases in short-term interest
rates by the Federal Reserve also pressured the Corporation's net interest
margin.
Average EAs were $11.0 billion in 1999, an increase of $893 million, or 8.9%,
from 1998. On average, the acquisitions contributed approximately $432 million
to this increase. Loan production accounted for the majority of the growth in
EAs. Average loans in 1999 were $7.8 billion in 1999, up $546 million or 7.5%
compared to 1998 (up 3.4% excluding acquisitions). During 1999, the Corporation
focused on shifting the composition of its loan portfolio, especially in growing
the proportion of commercial loans, which represented 30.9% of average EAs for
1999 compared to 26.5% for 1998.
Average IBLs were $9.7 billion in 1999, an increase of $870 million, or 9.9%,
from 1998. Although the Corporation has been successful in attracting new
noninterest-bearing demand deposits, loan growth outpaced deposits, increasing
the Corporation's reliance on wholesale funding sources. The mix of IBLs shifted
from lower-rate deposits (average interest-bearing deposits decreased to
represent 79.0% of average IBLs for 1999 compared to 86.3% for 1998, costing
4.12% or 43 bp less than last year) to higher cost wholesale funding, costing
5.15% (30 bp lower than last year).
14
15
TABLE 2: AVERAGE BALANCES AND INTEREST RATES (INTEREST AND RATES ON A
TAX-EQUIVALENT BASIS)
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------------------------------------
($ IN THOUSANDS)
ASSETS
Earning assets:
Loans (1)(2)(3) $ 7,801,435 $626,444 8.03% $ 7,255,850 $603,423 8.32%
Investment securities:
Taxable 2,597,116 163,732 6.30 2,500,470 168,536 6.74
Tax exempt(1) 522,163 36,201 6.93 237,086 17,028 7.18
Interest-bearing deposits in
other financial institutions 9,083 454 4.99 31,283 1,679 5.37
Federal funds sold and securities
purchased under agreements to
resell 25,027 1,352 5.40 37,493 1,800 4.81
-------------------------------------------------------------------
Total earning assets $10,954,824 $828,183 7.56% $10,062,182 $792,466 7.88%
-------------------------------------------------------------------
Allowance for loan losses (105,488) (92,175)
Cash and due from banks 263,288 246,596
Other assets 585,480 412,092
-------------------------------------------------------------------
Total assets $11,698,104 $10,628,695
===================================================================
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
Savings deposits $ 919,163 $ 14,998 1.63% $ 981,630 $ 20,812 2.12%
NOW deposits 796,506 10,645 1.34 473,123 8,212 1.74
Money market deposits 1,373,010 52,478 3.82 1,377,503 45,430 3.30
Time deposits 4,539,286 235,954 5.20 4,753,959 270,938 5.70
-------------------------------------------------------------------
Total interest-bearing
deposits 7,627,965 314,075 4.12 7,586,215 345,392 4.55
Federal funds purchased and
securities sold under
agreements to repurchase 1,057,269 52,843 5.00 517,344 26,174 5.06
Other short-term borrowings 951,524 50,214 5.28 660,761 37,600 5.69
Long-term debt 24,644 1,643 6.67 27,055 1,862 6.88
-------------------------------------------------------------------
Total interest-bearing
liabilities $ 9,661,402 $418,775 4.33% $ 8,791,375 $411,028 4.68%
-------------------------------------------------------------------
Demand deposits 1,003,687 844,486
Accrued expenses and other
liabilities 118,933 136,409
Stockholders' equity 914,082 856,425
-------------------------------------------------------------------
Total liabilities and
stockholders' equity $11,698,104 $10,628,695
===================================================================
Net interest income and rate
spread (1) $409,408 3.23% $381,438 3.20%
===================================================================
Net interest margin (1) 3.74% 3.79%
===================================================================
Taxable equivalent adjustment $ 13,663 $ 6,701
===================================================================
YEARS ENDED DECEMBER 31,
--------------------------------
1997
--------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
--------------------------------
($ IN THOUSANDS)
ASSETS
Earning assets:
Loans (1)(2)(3) $ 6,959,018 $593,660 8.53%
Investment securities:
Taxable 2,725,539 184,230 6.76
Tax exempt(1) 180,382 13,926 7.72
Interest-bearing deposits in
other financial institutions 15,347 779 5.08
Federal funds sold and securities
purchased under agreements to
resell 16,238 999 6.16
--------------------------------
Total earning assets $ 9,896,524 $793,594 8.02%
--------------------------------
Allowance for loan losses (73,748)
Cash and due from banks 229,006
Other assets 339,936
--------------------------------
Total assets $10,391,718
================================
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
Savings deposits $ 1,047,098 $ 24,100 2.30%
NOW deposits 402,717 7,726 1.92
Money market deposits 1,238,073 38,529 3.11
Time deposits 4,692,333 267,088 5.69
--------------------------------
Total interest-bearing
deposits 7,380,221 337,443 4.57
Federal funds purchased and
securities sold under
agreements to repurchase 538,097 29,046 5.40
Other short-term borrowings 749,803 43,463 5.80
Long-term debt 26,929 1,685 6.26
--------------------------------
Total interest-bearing
liabilities $ 8,695,050 $411,637 4.73%
--------------------------------
Demand deposits 741,724
Accrued expenses and other
liabilities 115,085
Stockholders' equity 839,859
--------------------------------
Total liabilities and
stockholders' equity $10,391,718
================================
Net interest income and rate
spread (1) $381,957 3.29%
================================
Net interest margin (1) 3.86%
================================
Taxable equivalent adjustment $ 5,675
================================
(1) The yield on tax exempt loans and securities is computed on a tax-equivalent
basis using a tax rate of 35% for all periods presented and is net of the
effects of certain disallowed interest deductions.
(2) Nonaccrual loans and loans held for sale have been included in the average
balances.
(3) Interest income includes net loan fees.
15
16
TABLE 3: RATE/VOLUME ANALYSIS(1)
1999 COMPARED TO 1998 1998 COMPARED TO 1997
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------------------------------------------------------
VOLUME RATE NET VOLUME RATE NET
------------------------------------------------------------------------------
(IN THOUSANDS)
Interest income:
Loans(2) $ 44,304 $(21,283) $ 23,021 $ 24,921 $(15,158) $ 9,763
Investment securities:
Taxable 6,356 (11,160) (4,804) (15,170) (524) (15,694)
Tax-exempt(2) 19,783 (610) 19,173 4,127 (1,025) 3,102
Interest-bearing deposits in other financial
institutions (1,116) (109) (1,225) 853 47 900
Federal funds sold and securities purchased
under agreements to resell (652) 204 (448) 1,062 (261) 801
------------------------------------------------------------------------------
Total earning assets(2) $ 68,675 $(32,958) $ 35,717 $ 15,793 $(16,921) $ (1,128)
------------------------------------------------------------------------------
Interest expense:
Savings deposits $ (1,258) $ (4,556) $ (5,814) $ (1,454) $ (1,834) $ (3,288)
NOW deposits 4,648 (2,215) 2,433 1,267 (781) 486
Money market deposits (149) 7,197 7,048 4,508 2,393 6,901
Time deposits (11,870) (23,114) (34,984) 3,511 339 3,850
Total interest-bearing deposits (8,629) (22,688) (31,317) 7,832 117 7,949
Federal funds purchased and securities sold
under agreements to repurchase 26,989 (320) 26,669 (1,094) (1,778) (2,872)
Other short-term borrowings 15,515 (2,901) 12,614 (5,079) (784) (5,863)
Long-term debt (162) (57) (219) 8 169 177
------------------------------------------------------------------------------
Total interest-bearing liabilities $ 33,713 $(25,966) $ 7,747 $ 1,667 $ (2,276) $ (609)
------------------------------------------------------------------------------
Net interest income(2) $ 34,962 $ (6,992) $ 27,970 $ 14,126 $(14,645) $ (519)
==============================================================================
(1) The change in interest due to both rate and volume has been allocated in
proportion to the relationship to the dollar amounts of the change in each.
(2) The yield on tax-exempt loans and securities is computed on an FTE basis
using a tax rate of 35% for all periods presented and is net of the effects
of certain disallowed interest deductions.
TABLE 4: INTEREST RATE SPREAD AND INTEREST MARGIN (ON A TAX-EQUIVALENT BASIS)
1999 AVERAGE 1998 AVERAGE 1997 AVERAGE
--------------------------------------------------------------------------------------
% OF % OF
EARNING YIELD/ EARNING YIELD/
BALANCE ASSETS RATE BALANCE ASSETS RATE BALANCE
--------------------------------------------------------------------------------------
($ IN THOUSANDS)
Earning assets $10,954,824 100.0% 7.56% $10,062,182 100.0% 7.88% $9,896,524
--------------------------------------------------------------------------------------
Financed by:
Interest-bearing funds 9,661,402 88.2% 4.33% 8,791,375 87.4% 4.68% 8,695,050
Noninterest-bearing funds 1,293,422 11.8% 1,270,807 12.6% 1,201,474
--------------------------------------------------------------------------------------
Total funds sources $10,954,824 100.0% 3.82% $10,062,182 100.0% 4.09% $9,896,524
======================================================================================
Interest rate spread 3.23% 3.20%
Contribution from net free funds .51% .59%
----- -----
Net interest margin 3.74% 3.79%
======================================================================================
Average prime rate* 8.00% 8.35%
Average fed funds rate* 4.95% 5.36%
Average spread 305BP 299BP
======================================================================================
1997 AVERAGE
---------------------
% OF
EARNING YIELD/
ASSETS RATE
---------------------
($ IN THOUSANDS)
Earning assets 100.0% 8.02%
---------------------
Financed by:
Interest-bearing funds 87.9% 4.73%
Noninterest-bearing funds 12.1%
---------------------
Total funds sources 100.0% 4.16%
=====================
Interest rate spread 3.29%
Contribution from net free funds .57%
-----
Net interest margin 3.86%
=====================
Average prime rate* 8.44%
Average fed funds rate* 5.46%
Average spread 298BP
=====================
* Source: Bloomberg
16
17
TABLE 5: SELECTED AVERAGE BALANCES
PERCENT 1999 AS % OF 1998 AS % OF
1999 1998 CHANGE TOTAL ASSETS TOTAL ASSETS
---------------------------------------------------------------------
($ IN THOUSANDS)
ASSETS
Loans $ 7,801,435 $ 7,255,850 7.5% 66.7% 68.3%
Investment securities
Taxable 2,597,116 2,500,470 3.9 22.2 23.5
Tax-exempt 522,163 237,086 120.2 4.4 2.2
Interest-bearing deposits in other
financial institutions 9,083 31,283 (71.0) 0.1 0.3
Federal funds sold and securities
purchased under agreements to
resell 25,027 37,493 (33.2) 0.2 0.4
---------------------------------------------------------------------
Total earning assets 10,954,824 10,062,182 8.9 93.6 94.7
Other assets 743,280 566,513 31.2 6.4 5.3
---------------------------------------------------------------------
Total assets $11,698,104 $10,628,695 10.1% 100.0% 100.0%
=====================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing deposits $ 7,627,965 $ 7,586,215 0.6% 65.2% 71.4%
Short-term borrowings 2,008,793 1,178,105 70.5 17.2 11.1
Long-term debt 24,644 27,055 (8.9) 0.2 0.2
---------------------------------------------------------------------
Total interest-bearing liabilities 9,661,402 8,791,375 9.9 82.6 82.7
Demand deposits 1,003,687 844,486 18.9 8.6 7.9
Accrued expenses and other
liabilities 118,933 136,409 (12.8) 1.0 1.3
Stockholders' equity 914,082 856,425 6.7 7.8 8.1
---------------------------------------------------------------------
Total liabilities and stockholders'
equity $11,698,104 $10,628,695 10.1% 100.0% 100.0%
=====================================================================
PROVISION FOR LOAN LOSSES
The provision for loan losses ("PFLL") in 1999 was $19.2 million. In comparison,
the PFLL for 1998 was $14.7 million, and $14.9 million for 1997, excluding the
$16.8 million additional provision to conform FFC with the policies, practices,
and procedures of the Corporation. The PFLL is a function of the methodology
used to determine the adequacy of the allowance for loan losses. The ratio of
the allowance for loan losses to total loans was 1.35%, down slightly from 1.37%
at December 31, 1998, and up from 1.31% at December 31, 1997. See additional
discussion under section, "Allowance for Loan Losses."
NONINTEREST INCOME
Noninterest income ("NII") was $165.9 million for 1999, $2.0 million or 1.2%
lower than 1998. As a percent of total revenue (net interest income plus
noninterest income), NII declined to 29.5% in 1999, compared to 30.9% in 1998.
The primary component impacting this decline was mortgage banking income, which
decreased $15.7 million in 1999, as discussed below. Gains on the sale of assets
and investment securities were $6.0 million lower than the $14.0 million
recorded in 1998. Excluding mortgage banking income and gains on asset and
investment securities sales, NII increased by $19.7 million or 18.2% in 1999, of
which the acquisitions contributed approximately $3.4 million.
17
18
TABLE 6: NONINTEREST INCOME
% CHANGE
FROM PRIOR
YEARS ENDED DECEMBER 31, YEAR
----------------------------------------------------
1999 1998 1997 1999 1998
-------- -------- -------- ----- -----
($ IN THOUSANDS)
Trust service fees $ 37,996 $ 33,328 $ 28,764 14.0% 15.9%
Service charges on deposit accounts 29,584 27,464 27,909 7.7 (1.6)
Mortgage banking income 30,417 46,105 25,685 (34.0) 79.5
Credit card and other nondeposit fees 20,763 17,514 15,728 18.6 11.4
Retail commission income 18,372 14,823 15,444 23.9 (4.0)
Asset sale gains, net 4,977 7,166 852 (30.5) 741.1
Other 20,771 14,697 13,248 41.3 10.9
----------------------------------------------------
Subtotal 162,880 161,097 127,630 1.1% 26.2%
Investment securities gains, net * 3,026 6,831 2,514 (55.7) 171.7
Merger, integration, and other one-time
charges -- -- (35,290) -- N/M
Total noninterest income $165,906 $167,928 $ 94,854 (1.2)% 77.0%
====================================================
Subtotal, excluding asset sale gains $157,903 $153,931 $126,778 2.6% 21.4%
Subtotal, excluding asset sale gains and
mortgage banking income 127,486 107,826 101,093 18.2 6.7
====================================================
* Excludes the $35.3 million shown on the merger, integration, and other
one-time charges line.
N/M = not meaningful
Trust service fees for 1999 were $38.0 million, a $4.7 million or 14.0% increase
over last year. The increase was a function of continued improvement in trust
business volume and growth in assets under management. Trust assets under
management totaled $5.2 billion and $4.9 billion at December 31, 1999 and 1998,
respectively.
Service charges on deposits were $29.6 million, $2.1 million higher than 1998
due to mid-year increases and changes in NSF and other service charges, and
initiatives to reduce the volume of service charges waived.
Mortgage banking income consists of servicing fees, the gain or loss on sale of
mortgage loans to the secondary market, and production-related revenue
(origination, underwriting, and escrow waiver fees). Mortgage banking income was
$30.4 million in 1999, a decrease of $15.7 million or 34.0% from 1998. The
decrease was driven primarily by a 46% drop in secondary mortgage loan
production (particularly refinancing activity) in response to the rising
interest rate environment in 1999 compared to 1998. The lower production levels
adversely impacted gains on sales of mortgages (down $13.1 million or 54%) and
volume related fees (down $2.3 million or 36%). Despite an increase in the
portfolio of loans serviced for others ($5.6 billion at December 31, 1999, up
6.8% from $5.2 billion at year-end 1998), servicing fees decreased $0.3 million
between the years, as the mix of the servicing portfolio has changed and higher
servicing spread business has paid off during 1999.
Credit card and other nondeposit fees were $20.8 million for 1999, an increase
of $3.2 million or 18.6% over 1998. Credit cards and home equity line fees
accounted for $2.7 million of the increase, attributable in part to higher
merchant processing revenue.
Retail commission income (which includes commissions from insurance and
brokerage product sales) was up $3.5 million or 23.9% due to a stronger stock
market environment in 1999 compared to 1998 and growth in annuity sales. The
majority of the increase ($2.2 million) was attributable to brokerage product
sales.
Asset sale gains for 1999 were $5.0 million, of which $4.6 million was
attributable to the net premium on deposits on three branches sold. Asset sale
gains in 1998 of $7.2 million included a $2.8 million gain on the sale of a
branch building in Illinois and a $3.0 million gain on the sale of an affinity
credit card portfolio.
18
19
Other NII was $20.8 million for 1999, up $6.1 million from 1998, primarily
attributable to BOLI income, which increased $8.3 million to $9.5 million in
1999. The Corporation made a $100 million investment in BOLI in October 1998 and
an additional $100 million investment in May 1999.
Investment securities gains for 1999 were $3.0 million, primarily due to a $3.6
million gain on the sale of a certain agency security further described in Note
5 of the notes to consolidated financial statements. Investment securities gains
for 1998 were $6.8 million, of which $5.1 million was related to certain zero-
coupon bond related transactions, further described under section "Interest Rate
Risk" and Note 15 of the notes to consolidated financial statements.
NONINTEREST EXPENSE
Total noninterest expense ("NIE") for 1999 was $305.1 million, a $10.1 million
or 3.4% increase over 1998 NIE. Citizens and the 1999 acquisitions added
approximately $16.7 million to NIE. The amortization of mortgage servicing
rights ("MSRs"), decreased $12.2 million, principally due to lower valuation
reserves during 1999. Excluding the acquisitions and the amortization of MSRs,
NIE increased $5.6 million or 2.0% over 1998.
TABLE 7: NONINTEREST EXPENSE
% CHANGE
FROM PRIOR
YEARS ENDED DECEMBER 31, YEAR
-------------------------------------------------
1999 1998 1997 1999 1998
-------- -------- -------- ----- -----
($ IN THOUSANDS)
Salaries and employee benefits $151,644 $148,490 $134,319 2.1% 10.6%
Occupancy 22,576 20,205 19,873 11.7 1.7
Equipment 15,987 13,250 12,600 20.7 5.2
Data processing 21,695 18,714 16,928 15.9 10.6
Business development and advertising 11,919 13,177 15,936 (9.5) (17.3)
Stationery and supplies 8,110 6,858 5,532 18.3 24.0
FDIC expense 3,313 3,267 3,284 1.4 (0.5)
Professional fees 7,117 9,709 6,294 (26.7) 54.3
Other 62,731 61,292 56,812 2.3 7.9
-------------------------------------------------
Total noninterest expense (operating) 305,092 294,962 271,578 3.4 8.6
Merger, integration, and other one-time
charges -- -- 51,622 -- N/M
-------------------------------------------------
Total noninterest expense $305,092 $294,962 $323,200 3.4% (8.7)%
=================================================
N/M = not meaningful
Salaries and employee benefits increased $3.2 million or 2.1% over 1998, and
represented 49.7% of total NIE in 1999 compared to 50.3% in 1998. Salary expense
increased $5.5 million or 4.6% in 1999, principally due to the acquisitions and
base merit increases between the years. Fringe benefits decreased $2.3 million
in 1999, the net result of a $7.7 million reduction in profit sharing expense
offset in part by rising costs of health, dental, life, and other fringe
benefits (up $5.4 million or 25.6%). Full-time equivalent employees ("FTEs")
from year-end 1998 to 1999 included the addition of 294 FTEs from acquisitions.
Despite this, total FTEs of 3,966 at year-end 1999 were essentially the same as
the 3,965 FTEs at December 31, 1998. FTEs were reduced throughout the year
primarily in operational areas as centralization of processes and other
operational-related synergies were achieved.
The 1999 acquisitions added a total of $8.1 million to non-personnel related NIE
categories. In addition, occupancy expense was impacted by higher costs of
contract help and rent, equipment expenses rose due to computer upgrades, and
data processing costs increased due to higher processing volumes and expenses
associated with Year 2000 and internet software. Stationery and supplies also
experienced increases largely due to acquisition-related stationery and office
supplies costs.
19
20
Business development and advertising declined $1.3 million in 1999 compared to
1998 as a result of a corporate objective to closely manage these costs.
Professional fees were also lower, down $2.6 million over 1998, due principally
to the completion of Year 2000 consultant work.
MSR amortization (which includes the amortization of the MSR asset and increases
or decreases to the valuation allowance associated with the MSR asset) is
included in other noninterest expense. MSR amortization decreased by $12.2
million between 1999 and 1998, predominantly driven by the valuation adjustment
(see Note 7 of the notes to consolidated financial statements). This decrease
was offset by increases in loan expenses (especially in credit cards and home
equity lines as volume in these lines has grown), office expense, intangible
amortization, and losses other than loans. The 1999 acquisitions accounted for
$4.3 million of the increase in other expense.
INCOME TAXES
Income tax expense for 1999 was $72.4 million, down $3.6 million from 1998
income tax expense of $75.9 million. The Corporation's effective tax rate
(income tax expense divided by income before taxes) was 30.5% in 1999 compared
to 32.6% in 1998. This decrease is primarily the result of the tax benefit of
increased municipal securities and BOLI revenue, and the utilization of tax loss
carryforwards.
BALANCE SHEET ANALYSIS
LOANS
Total loans, including loans held for sale, increased by $932 million, or 12.5%,
to $8.4 billion at the end of 1999, with the acquisitions accounting for $412
million of the loan growth. Commercial, financial, and agricultural lending grew
by $450 million and commercial real estate (a component of real estate mortgage
loans) grew by $519 million. Combined, these commercial loan categories
increased $969 million, or 41.3%, to $3.3 billion and represented 40% of total
loans at the end of 1999, up from 32% at year-end 1998. Increasing the mix of
commercial lending was a strategic initiative of 1999.
TABLE 8: LOAN COMPOSITION
AS OF DECEMBER 31,
----------------------------------------------------------------------------
1999 1998 1997 1996
----------------------------------------------------------------------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT
----------------------------------------------------------------------------
($ IN THOUSANDS)
Commercial, financial, and
agricultural $1,412,338 17% $ 962,208 13% $ 986,839 14% $ 841,145
Real estate--construction 560,450 7 461,157 6 335,978 5 235,478
Real estate--mortgage 5,613,780 67 5,244,440 71 5,056,238 70 4,796,457
Installment loans to
individuals 760,106 9 750,831 10 793,424 11 813,875
Lease financing 23,229 -- 19,231 -- 14,072 -- 10,449
----------------------------------------------------------------------------
Total loans (including
loans held for sale) $8,369,903 100% $7,437,867 100% $7,186,551 100% $6,697,404
============================================================================
AS OF DECEMBER 31,
---------------------------
1996 1995
---------------------------
% OF % OF
TOTAL AMOUNT TOTAL
---------------------------
($ IN THOUSANDS)
Commercial, financial, and
agricultural 13% $ 801,004 13%
Real estate--construction 3 217,223 3
Real estate--mortgage 72 4,569,362 71
Installment loans to
individuals 12 821,351 13
Lease financing -- 9,743 --
---------------------------
Total loans (including
loans held for sale) 100% $6,418,683 100%
===========================
Real estate-mortgage loans totaled $5.6 billion at the end of 1999 and $5.2
billion at the end of 1998. Loans in this classification in 1999 include two
broad loan types: (1) commercial real estate (discussed below) and (2)
residential real estate, which consists of conventional home mortgages, home
equity lines, second mortgages, and mortgage loans held for sale. Residential
real estate loans generally limit the maximum loan to 75%-80% of collateral
value. Residential real estate loans were $3.7 billion at December 31, 1999,
down $150 million or 3.9% compared to last year. Mortgage loans held for sale
decreased by $153 million, to $12 million at year-end 1999, a function of a 46%
drop in secondary mortgage loan production (particularly refinancing activity)
in response to the rising rate environment in 1999 compared to 1998. The home
equity line grew by $77 million,
20
21
or 23.1%, to $409 million in 1999, in response to promotional efforts in 1999.
Other residential real estate loans were down by $74 million.
Commercial real estate (included in the real estate-mortgage classification in
Table 8) includes loans secured by farmland, multifamily properties, and
nonfarm/nonresidential real estate properties. Commercial real estate totaled
$1.9 billion at December 31, 1999, up $519 million or 37.5% over last year and
comprised 23% of total loans outstanding versus 19% at year-end 1998. Commercial
real estate loans involve borrower characteristics similar to those discussed
below for commercial loans and real estate-construction projects. Loans of this
type are mainly for business and industrial properties, multi-family properties,
community purpose properties, and similar properties. Loans are primarily made
to borrowers in Wisconsin, Illinois, and Minnesota. Credit risk is managed in a
similar manner to commercial loans and real estate construction by employing
sound underwriting guidelines, lending to borrowers in known markets and
businesses, and formally reviewing the borrower's financial soundness and
relationship on an ongoing basis.
Commercial, financial, and agricultural loans were $1.4 billion at the end of
1999, up $450 million or 46.8% since year-end 1998, and comprised 17% of total
loans outstanding, up from 13% at the end of 1998. Acquisitions accounted for
approximately $315 million of the increase since year-end 1998. The commercial,
financial, and agricultural loan classification primarily consists of commercial
loans to middle market companies and small businesses. Loans of this type are in
a broad range of industries. The credit risk related to commercial loans is
largely influenced by general economic conditions and the resulting impact on a
borrower's operations. Within commercial, financial, and agricultural
classification at December 31, 1999, loans to finance agricultural production
total $23.1 million or 0.3% of total loans.
Real estate construction loans grew $99 million or 21.5% to $560 million,
representing 7% of the total loan portfolio at the end of 1999, compared to $461
million or 6% at the end of 1998. Loans in this classification are primarily
short-term interim loans that provide financing for the acquisition or
development of commercial real estate, such as multi-family or other commercial
development projects. Real estate construction loans are made to developers and
project managers who are well known to the Corporation, have prior successful
project experience, and are well capitalized. Projects undertaken by these
developers are carefully reviewed by the Corporation to ensure that they are
economically viable. Loans of this type are primarily made in the Corporation's
tri-state market in which the Corporation has a thorough knowledge of the local
market economy. The credit risk associated with real estate construction loans
is generally confined to specific geographic areas. The Corporation controls the
credit risk on these types of loans by making loans in familiar markets to
developers, underwriting the loans to meet the requirements of institutional
investors in the secondary market, reviewing the merits of individual projects,
controlling loan structure, and monitoring project progress and construction
advances.
TABLE 9: LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY (1)
MATURITY (2)
-------------------------------------------------------------
DECEMBER 31, 1999 WITHIN 1 YEAR 1-5 YEARS AFTER 5 YEARS TOTAL
----------------- ------------- --------- ------------- --------------
($ IN THOUSANDS)
Commercial, financial, and agricultural $ 994,007 $358,168 $60,163 $1,412,338
Real estate-construction 316,410 204,735 39,305 560,450
-------------------------------------------------------------
Total $1,310,417 $562,903 $99,468 $1,972,788
=============================================================
Fixed rate $ 411,521 $490,883 $81,559 $ 983,963
Floating or adjustable rate 898,896 72,020 17,909 988,825
-------------------------------------------------------------
Total $1,310,417 $562,903 $99,468 $1,972,788
=============================================================
Percent 66% 29% 5% 100%
(1) Based upon scheduled principal repayments.
(2) Demand loans, past due loans, and overdrafts are reported in the "Within 1
Year" category.
21
22
Installment loans to individuals totaled $760 million, up $9 million or 1%
compared to 1998. Installment loans include short-term installment loans, direct
and indirect automobile loans, recreational vehicle loans, credit card loans,
student loans, and other personal loans. Individual borrowers may be required to
provide related collateral or a satisfactory endorsement or guaranty from
another person, depending on the specific type of loan and the creditworthiness
of the borrower. Credit risk for these types of loans is generally greatly
influenced by general economic conditions, the characteristics of individual
borrowers, and the nature of the loan collateral. Credit risk is primarily
controlled by reviewing the creditworthiness of the borrowers as well as taking
appropriate collateral and guaranty positions on such loans.
An active credit risk management process is used for commercial loans to ensure
that sound and consistent credit decisions are made. Credit risk is controlled
by detailed underwriting procedures, comprehensive loan administration, and
periodic review of borrowers' outstanding loans and commitments. Borrower
relationships are formally reviewed on an ongoing basis for early identification
of potential problems. Further analyses by customer, industry, and geographic
location are performed to monitor trends, financial performance, and
concentrations.
Factors that are critical to managing overall credit quality are sound loan
underwriting and administration, systematic monitoring of existing loans and
commitments, effective loan review on an ongoing basis, early identification of
potential problems, an adequate allowance for loan losses, and sound nonaccrual
and charge-off policies.
The loan portfolio is widely diversified by types of borrowers, industry groups,
and market areas. Significant loan concentrations are considered to exist for a
financial institution when there are amounts loaned to numerous borrowers
engaged in similar activities that would cause them to be similarly impacted by
economic or other conditions. At December 31, 1999, no concentrations existed in
the Corporation's portfolio in excess of 10% of total loans (excluding loans
held for sale) or $836 million.
ALLOWANCE FOR LOAN LOSSES
The investment and loan portfolios are the Corporation's primary interest
earning assets. While the investment portfolio is structured with minimum credit
exposure to the Corporation, the loan portfolio is the primary asset subject to
credit risk. Credit risk is controlled and monitored through the use of lending
standards, thorough review of potential borrowers, and ongoing review of loan
payment performance. Active asset quality administration, including early
problem loan identification and timely resolution of problems, further ensures
appropriate management of credit risk and minimization of loan losses. Credit
risk management for each loan type is discussed briefly in the section entitled
"Loans."
At December 31, 1999, the allowance for loan losses ("AFLL") was $113.2 million,
compared to $99.7 million last year. Of this $13.5 million increase, $8.0
million of AFLL was acquired in the 1999 purchase acquisitions. The loan
portfolios of the acquired entities were predominantly comprised of commercial
loans. As of year-end 1999, the AFLL to total loans was 1.35% and covered 307%
of nonperforming loans, compared to 1.37% and 185%, respectively, at December
31, 1998. Tables 10 and 11 provide additional information regarding activity in
the AFLL.
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23
TABLE 10: LOAN LOSS EXPERIENCE
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
($ IN THOUSANDS)
AFLL at beginning of year $ 99,677 $92,731 $71,767 $68,560 $65,774
Balance related to acquisitions 8,016 3,636 728 3,511 --
Provision for loan losses (PFLL) 19,243 14,740 31,668 13,695 14,029
Loans charged off:
Commercial, financial, and agricultural 2,222 3,533 1,327 2,916 3,356
Real estate - construction -- 202 600 193 191
Real estate - mortgage 3,472 3,256 3,222 2,813 3,099
Installment loans to individuals 10,925 9,839 9,900 11,693 9,221
Lease financing 2 209 -- 1 5
------------------------------------------------------------
Total loans charged off 16,621 17,039 15,049 17,616 15,872
Recoveries of loans previously charged off:
Commercial, financial, and agricultural 726 2,384 513 1,255 1,856
Real estate - construction 1 -- -- 3 70
Real estate - mortgage 655 1,582 1,312 837 931
Installment loans to individuals 1,464 1,641 1,792 1,514 1,764
Lease financing 35 2 -- 8 8
------------------------------------------------------------
Total recoveries 2,881 5,609 3,617 3,617 4,629
------------------------------------------------------------
Net loans charged off (NCOs) 13,740 11,430 11,432 13,999 11,243
------------------------------------------------------------
AFLL, at end of year $113,196 $99,677 $92,731 $71,767 $68,560
============================================================
Ratio of AFLL to NCOs 8.2 8.7 8.1 5.1 6.1
Ratio of NCOs to average loans outstanding .18% .16% .16% .21% .18%
Ratio of AFLL to total loans at end of
period 1.35% 1.37% 1.31% 1.08% 1.12%
============================================================
The AFLL represents management's estimate of an amount adequate to provide for
losses inherent in the loan portfolio. Management's evaluation of the adequacy
of the AFLL is based on management's ongoing review and grading of the loan
portfolio, consideration of past loan loss experience, trends in past due and
nonperforming loans, risk characteristics of the various classifications of
loans, current economic conditions, the fair value of underlying collateral, and
other factors which could affect credit losses, such as Year 2000 issues related
to significant borrowers.
In general, the change in the AFLL is a function of a number of factors. First,
total loan growth from year-end 1998 to 1999 was up 9.3%, excluding the 1999
purchase acquisitions. The growth was strongest in the commercial portfolio
(particularly commercial real estate; commercial, financial, and agricultural
loans; and construction loans), up 24.5% net of the 1999 purchase acquisitions.
This segment of the loan portfolio carries greater inherent credit risk
(described under section "Loans"). Net charge-offs have increased, up $2.3
million to $13.7 million for 1999 versus $11.4 million for 1998, primarily from
1999 recoveries being $2.7 million lower than 1998.
The allocation of the Corporation's AFLL for the last five years is shown in
Table 11. The allocation methodology applied by the Corporation, designed to
assess the adequacy of the AFLL, focuses on changes in the size and character of
the loan portfolio, changes in levels of impaired and other nonperforming loans,
the risk inherent in specific loans, concentrations of loans to specific
borrowers or industries, existing economic conditions, and historical losses on
each portfolio category. The indirect risk in the form of off-balance sheet
unfunded commitments is also taken into consideration. Management continues to
target and maintain the AFLL equal to the allocation methodology plus an
unallocated portion, as determined by economic conditions and emerging systemic
factors on the Corporation's borrowers. For both 1999 and 1998, estimation
methods and assumptions included consideration of Year 2000 issues on
significant customers. Management allocates AFLL for credit losses by pools of
risk. The business loan (commercial real estate; commercial, financial, and
23
24
agricultural; leases; and real estate construction) allocation is based on a
quarterly review of individual loans, loan types, and industries. The retail
loan (residential mortgage, home equity, and installment) allocation is based on
analysis of historical delinquency and charge-off statistics and trends. Minimum
loss factors used by the Corporation for criticized loan categories are
consistent with regulatory agencies. Loss factors for non-criticized loan
categories are based primarily on historical loan loss experience and peer group
statistics. The mechanism used to address differences between estimated and
actual loan loss experience includes review of recent nonperforming loan trends,
underwriting trends, and external factors.
The allocation methods used for December 31, 1999 and 1998 were generally
comparable. For 1999 compared to 1998, the allocation for credit card loans was
reduced based on delinquencies and charge-offs trending below national averages
and the maturation of the portfolio, which indicated lower risk of loss, and the
allocation factor for commercial real estate loans (included in real
estate-mortgage) was increased given the increased risk associated with a rising
interest rate environment on this loan category. For 1998 compared to 1997,
increases were made to the AFLL allocation for credit card and mobile homes
based upon a higher risk profile than other consumer loan categories, and
increases in commercial categories were made given the growth in these loan
segments and consideration of Year 2000 issues on significant customers.
Management believes the AFLL to be adequate at December 31, 1999. While
management uses available information to recognize losses on loans, future
adjustments to the AFLL may be necessary based on changes in economic conditions
and the impact of such change on the Corporation's borrowers. As an integral
part of their examination process, various regulatory agencies also review the
AFLL. Such agencies may require that changes in the AFLL be recognized when
their credit evaluations differ from those of management, based on their
judgments about information available to them at the time of their examination.
TABLE 11: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
AS OF DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
(IN THOUSANDS)
Commercial, financial, and agricultural $ 31,648 $25,385 $33,682 $27,943 $22,753
Real estate - construction 5,605 3,369 2,016 1,047 929
Real estate - mortgage 50,267 40,216 30,360 19,116 22,331
Installment loans to individuals 14,904 16,924 16,870 16,239 14,848
Lease financing 184 426 493 530 460
Unallocated 10,588 13,357 9,310 6,892 7,239
----------------------------------------------------
Total AFLL $113,196 $99,677 $92,731 $71,767 $68,560
====================================================
The PFLL in 1999 was $19.2 million. In comparison, the PFLL for 1998 was $14.7
million and $14.9 million in 1997, excluding the $16.8 million additional
provision ("additional provision") to conform FFC with the policies, practices,
and procedures of the Corporation.
Net charge-offs were $13.7 million or 0.18% of average loans for 1999, and were
$11.4 million or 0.16% of average loans for both 1998 and 1997. The $2.3 million
increase in net charge-offs was primarily driven by 1999 recoveries being lower
than 1998 recoveries. Gross charge-offs were down $0.4 million between 1999 and
1998, and gross recoveries were down by $2.7 million, primarily due to a large
recovery on a commercial customer in 1998. Loans charged off are subject to
continuous review and specific efforts are taken to achieve maximum recovery of
principal, accrued interest, and related expenses.
NONPERFORMING LOANS, POTENTIAL PROBLEM LOANS, AND OTHER REAL ESTATE OWNED
Management is committed to an aggressive nonaccrual and problem loan
identification philosophy. This philosophy is embodied through the ongoing
monitoring and reviewing of all pools of risk in the loan portfolio to ensure
that all problem loans are identified quickly and the risk of loss is minimized.
24
25
Nonperforming loans are defined as nonaccrual loans, loans 90 days or more past
due but still accruing, and restructured loans. The Corporation specifically
excludes from its definition of nonperforming loans student loan balances that
are 90 days or more past due and still accruing and that have contractual
government guarantees as to collection of principal and interest. Such past due
student loans were approximately $17 million and $13 million at December 31,
1999 and 1998, respectively.
Loans are generally placed on nonaccrual status when contractually past due 90
days or more as to interest or principal payments. Additionally, whenever
management becomes aware of facts or circumstances that may adversely impact on
the collectibility of principal or interest on loans, it is management's
practice to place such loans on nonaccrual status immediately, rather than
delaying such action until the loans become 90 days past due. Previously accrued
and uncollected interest on such loans is reversed, amortization of related loan
fees is suspended, and income is recorded only to the extent that interest
payments are subsequently received in cash and a determination has been made
that the principal balance of the loan is collectible. If collectibility of the
principal is in doubt, payments received are applied to loan principal.
Loans past due 90 days or more but still accruing interest are also included in
nonperforming loans. Loans past due 90 days or more but still accruing are
classified as such where the underlying loans are both well secured (the
collateral value is sufficient to cover principal and accrued interest) and in
the process of collection. Also included in nonperforming loans are
"restructured" loans. Restructured loans involve the granting of some concession
to the borrower involving the modification of terms of the loan, such as changes
in payment schedule or interest rate.
TABLE 12: NONPERFORMING LOANS AND OTHER REAL ESTATE OWNED
DECEMBER 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
($ IN THOUSANDS)
Nonaccrual loans $32,076 $48,150 $32,415 $32,287 $28,787
Accruing loans past due 90 days or more 4,690 5,252 1,324 1,801 1,320
Restructured loans 148 485 558 534 1,704
Total nonperforming loans $36,914 $53,887 $34,297 $34,622 $31,811
===========================================================
Other real estate owned $ 3,740 $ 6,025 $ 2,067 $ 1,939 $ 4,852
===========================================================
Ratio of nonperforming loans to total loans
at period end .44% .74% .48% .52% .50%
Ratio of the AFLL to nonperforming loans at
period end 306.6% 185.0% 270.4% 207.3% 215.5%
===========================================================
Nonperforming loans at December 31, 1999, were $36.9 million, a decrease of
$17.0 million from December 31, 1998. The ratio of nonperforming loans to total
loans at the end of 1999 was .44%, as compared to .74% and .48% at December 31,
1998 and 1997, respectively. Nonaccrual loans account for $16.1 million of the
decrease in nonperforming loans. Commercial nonaccrual loans (representing
approximately 52% of nonaccrual loans at year-end 1999) declined $5.3 million,
predominantly due to a $4.0 million commercial property that was in nonaccrual
loans at year end 1998 but was moved to other real estate owned in early 1999
and subsequently sold before year-end 1999. The remaining reduction in
nonaccrual loans was due to residential mortgage nonaccruals which decreased
$10.3 million compared to 1998. The Corporation's AFLL to nonperforming loans
was 306% at year-end 1999, up from 185% and 270% at year-ends 1998 and 1997,
respectively.
The following table shows, for those loans accounted for on a nonaccrual basis
and restructured loans for the years ended as indicated, the gross interest that
would have been recorded if the loans had been current in accordance with their
original terms and the amount of interest income that was included in interest
income for the period.
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26
TABLE 13: FOREGONE LOAN INTEREST
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Interest income in accordance with original terms $ 3,074 $ 5,046 $ 2,332
Interest income recognized (1,637) (2,884) (1,215)
---------------------------------
Reduction in interest income $ 1,437 $ 2,162 $ 1,117
---------------------------------
---------------------------------
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, 1999, potential problem loans totaled $74.7 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.
Other real estate owned ("OREO") decreased to $3.7 million at December 31, 1999,
compared to $6.0 million and $2.1 million at year-ends 1998 and 1997,
respectively, predominantly due to the sale of two large commercial OREO
properties totaling approximately $5.0 million. Net gains on sales of OREO were
$403,000, $426,000 and $509,000 for 1999, 1998, and 1997, respectively.
Management actively seeks to ensure properties held are monitored to minimize
the Corporation's risk of loss.
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, at amortized cost, including those held to
maturity ("HTM") and available for sale ("AFS"), totaled $3.3 billion at
December 31, 1999, compared to $2.9 billion at the end of 1998.
TABLE 14: INVESTMENT SECURITIES PORTFOLIO
YEARS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
Investment Securities Held to Maturity (HTM):
U.S. Treasury securities $ -- $ -- $ 498
Federal agency securities 26,012 66,204 146,259
Obligations of states and political subdivisions 128,833 153,663 183,286
Mortgage-related securities 204,725 262,111 361,298
Other securities (debt) 54,467 68,797 81,183
--------------------------------------
Total amortized cost $ 414,037 $ 550,775 $ 772,524
======================================
Total fair market value $ 413,107 $ 562,940 $ 782,240
======================================
Investment Securities Available for Sale (AFS):
U.S. Treasury securities $ 47,092 $ 68,488 $ 109,200
Federal agency securities 406,275 248,697 324,708
Obligations of state and political subdivisions 550,975 217,153 14,312
Mortgage-related securities 1,578,089 1,625,403 1,536,134
Other securities (debt and equity) 319,176 160,499 142,081
--------------------------------------
Total amortized cost $2,901,607 $2,320,240 $2,126,435
======================================
Total fair market value $2,841,498 $2,356,960 $2,167,694
======================================
26
27
At December 31, 1999 and 1998, mortgage-related securities represented 53.8% and
65.7%, respectively, of total investment securities, based on amortized cost.
Mortgage-related securities are subject to inherent risks based upon the future
performance of the underlying collateral (i.e. mortgage loans) for these
securities. Among these risks are prepayment risk and interest rate risk. Should
general interest rate levels decline, the mortgage-related securities portfolio
would be subject to 1) prepayments as borrowers typically would seek to obtain
financing at lower rates, 2) a decline in interest income received on
adjustable-rate issuances, and 3) an increase in the fair value of fixed rate
issuances. Conversely, should general interest rate levels increase (such as
seen in the 1999 environment compared to 1998), the mortgage-related securities
portfolio would be subject to 1) a longer term to maturity as borrowers would be
less likely to prepay their loans, 2) an increase in interest income received on
adjustable rate issuances, 3) a decline in the fair value of fixed rate
issuances, and 4) a decline in fair value of adjustable rate issuances to an
extent dependent upon the level of interest rate increases, the time period to
the next interest rate repricing date for the individual security, and the
applicable periodic (annual and/or lifetime) cap which could limit the degree to
which the individual security could reprice within a given time period.
The mortgage-related security portfolio includes both U.S. Government agency
issuances and nonagency issuances. Unlike U.S. Government agency issued
mortgage-related securities, which include a guarantee of principal and interest
payments on the underlying collateral, nonagency securities are generally
structured with a senior ownership position and subordinate ownership
position(s) providing credit support for the senior position. The structure of
nonagency mortgage-related securities may expose the Corporation to credit risk
in addition to interest rate risk and prepayment risk as discussed above.
Nonagency mortgage-related securities AFS were $70.0 million and $102.7 million
at December 31, 1999 and 1998, respectively. Management monitors the major
factors affecting the performance of nonagency mortgage-related securities
including, 1) delinquencies, foreclosures, repossessions, and recoveries
relative to the underlying mortgage loans collateralizing each security, 2) the
level of available subordination or other credit enhancements, 3) the competence
of the servicer of the underlying mortgage portfolio, and 4) the rating assigned
to each security by independent national rating agencies.
Concurrent with the consummation of the FFC merger in 1997, the Corporation
transferred all nonagency mortgage-related securities and an agency security,
with a combined amortized cost of $251.9 million, from securities HTM to
securities AFS. These mortgage-related securities were transferred to maintain
the existing interest rate risk position and credit risk policy of the
Corporation.
Concurrent with the transfer in 1997, the Corporation recorded a $32.5 million
pre-tax charge to earnings relative to one agency security with an amortized
cost of $130.6 million. Management recorded this other than temporary impairment
of value in 1997. During 1999, the Corporation sold approximately one-third of
the agency security for a $3.6 million gain. This security is complex, comprised
of multiple cash flows predominated by an inverse floater tied to LIBOR, for
which stress tests indicate that the cash flows are volatile in higher interest
rate environments. Management continues to monitor and manage the risk exposure
of this security.
Additionally, in 1997 the Corporation recorded a $2.8 million pre-tax charge on
other mortgage-related securities that were transferred to available for sale,
with an amortized cost of $18.9 million, to reflect an other than temporary
impairment of value. These securities were subsequently sold with no additional
loss in January 1998.
In November 1997, the Corporation hedged certain agency issued zero-coupon bonds
held by FFC, with a carrying value of $37.2 million and a market value of $41.6
million, by executing various interest rate futures contracts. These contracts
had a notional value of $70.5 million and would mature in March 1998.
Subsequently, in January 1998, the futures contracts were closed and the
zero-coupon bonds were sold. A net gain of $5.1 million was recognized in
investment securities gains in the first quarter of 1998 from these
transactions.
Tax exempt securities grew to represent 20.5% of total securities based on
amortized cost, compared to 12.9% at year-end 1998. The steepness of the
municipal bond yield curve in 1999, combined with tax advantages, made the
tax-exempt investments more attractive relative to other similar duration
securities.
27
28
The aggregate market value of total securities was approximately $3.25 billion
(100.0% of carrying value) and $2.92 billion (100.4% of carrying value) at
December 31, 1999 and 1998, respectively.
At December 31, 1999, 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 book value of such securities exceeded 10% of
stockholders' equity or $91.0 million.
TABLE 15: INVESTMENT SECURITIES PORTFOLIO MATURITY DISTRIBUTION (1)
DECEMBER 31, 1999
INVESTMENT SECURITIES HELD TO MATURITY - MATURITY DISTRIBUTION AND WEIGHTED AVERAGE YIELD
----------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE MORTGAGE-
WITHIN BUT WITHIN BUT WITHIN AFTER RELATED
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS SECURITIES
----------------------------------------------------------------------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
----------------------------------------------------------------------------------------
($ IN THOUSANDS)
Federal agency
securities $ 1,002 5.24% $ 25,010 6.64% $ -- -- $ -- -- $ -- --
Obligations of states
and
political
subdivisions 15,243 7.86% 89,092 7.26% 24,398 7.14% 100 11.36% -- --
Other securities (debt) 3,403 6.62% 49,504 6.83% 1,560 6.45% -- -- -- --
Mortgage-related
securities -- -- -- -- -- -- -- -- 204,725 7.04%
----------------------------------------------------------------------------------------
Total amortized cost $19,648 7.51% $163,606 7.03% $25,958 7.10% $100 11.36% $204,725 7.04%
========================================================================================
Total fair value $19,733 $163,327 $25,704 $115 $204,228
========================================================================================
INVESTMENT SECURITIES HELD TO MATURITY - MATURITY DISTRIBUTION AND WEIGHTED AVERAGE YIELD
---------------------------
TOTAL TOTAL
---------------- FAIR
AMOUNT YIELD VALUE
---------------------------
($ IN THOUSANDS)
Federal agency
securities $ 26,012 6.59% $ 25,724
Obligations of states
and
political
subdivisions 128,833 7.31% 129,041
Other securities (debt) 54,467 6.80% 54,114
Mortgage-related
securities 204,725 7.04% 204,228
---------------------------
Total amortized cost $414,037 7.07% $413,107
===========================
Total fair value $413,107
===========================
INVESTMENT SECURITIES AVAILABLE FOR SALE - MATURITY DISTRIBUTION AND WEIGHTED AVERAGE YIELD
------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS
------------------------------------------------------------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------------------------------------------------------------------------
($ IN THOUSANDS)
U. S. Treasury
securities $18,667 6.14% $ 22,450 5.64% $ 5,975 5.85% $ -- --
Federal agency
securities 6,071 5.48% 320,052 5.89% 79,474 5.86% 678 7.37%
Obligations of states
and political
subdivisions 6,907 7.02% 36,005 6.82% 271,872 6.53% 236,191 7.21%
Other securities
(debt) 41,589 5.15% 20,276 6.55% 163,665 6.15% -- --
Mortgage-related
securities -- -- -- -- -- -- -- --
Equity securities -- -- -- -- -- -- -- --
------------------------------------------------------------------------
Total amortized cost $73,234 5.47% $398,783 6.07% $520,986 6.30% $236,869 7.20%
========================================================================
Total fair value $72,945 $390,021 $494,310 $222,266
========================================================================
INVESTMENT SECURITIES AVAILABLE FOR SALE - MATURITY DISTRIBUTION AND WEIGHTED AVERAGE YIELD
----------------------------------------------------
MORTGAGE-
RELATED
AND EQUITY
SECURITIES TOTAL TOTAL
--------------------------------------- FAIR
AMOUNT YIELD AMOUNT YIELD VALUE
----------------------------------------------------
($ IN THOUSANDS)
U. S. Treasury
securities $ -- -- $ 47,092 5.87% $ 46,670
Federal agency
securities -- -- 406,275 5.88% 396,316
Obligations of states
and political
subdivisions -- -- 550,975 6.85% 522,299
Other securities
(debt) -- -- 225,530 6.00% 214,257
Mortgage-related
securities 1,578,089 6.54% 1,578,089 6.54% 1,552,441
Equity securities 93,646 6.20% 93,646 6.20% 109,515
----------------------------------------------------
Total amortized cost $1,671,735 6.52% $2,901,607 6.44% $2,841,498
====================================================
Total fair value $1,661,956 $2,841,498
====================================================
(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, 1999,
deposits were $8.7 billion, up $134 million or 1.6% over last year. The 1999
acquisitions increased deposits by $489 million, while the sale of three
branches in fourth quarter 1999 decreased deposits by $56 million. Thus, without
these acquisitions and branch sales, deposits were down 3.5% from year-end 1998.
The decline in deposits, net of acquisitions and branch sales, was a result of
shifting customer preferences, primarily out of certificate of deposit accounts
(CDs), and heightened competition for deposit dollars within the financial
services industry. To curb part of the decline, the Corporation increased
brokered CDs by $265 million to $337 million at December 31, 1999.
28
29
On average, deposits were $8.6 billion for 1999, up $201 million or 2.4% over
the average for 1998. However, excluding the impact of deposits acquired, total
average deposits declined 2.0%; further excluding the increase in brokered CDs,
deposits were down 3.5%. 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."
The distribution of average deposits for 1999, 1998, and 1997 is summarized in
Table 16. A maturity distribution of certificates of deposits and other time
deposits of $100,000 or more at December 31, 1999, is shown in Table 17.
TABLE 16: AVERAGE DEPOSITS DISTRIBUTION
1999 1998 1997
------------------- ------------------- ---------------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------- ----- ---------- ----- ---------- -------
($ IN THOUSANDS)
Noninterest-bearing demand deposits $1,003,687 12% $ 844,486 10% $ 741,724 9%
Interest-bearing demand deposits 796,506 9 473,123 6 402,717 5
Savings deposits 919,163 11 981,630 12 1,047,098 13
Money market deposits 1,373,010 16 1,377,503 16 1,238,073 15
Brokered certificates of deposit 241,309 3 117,011 1 139,712 2
Other time deposits 4,297,977 49 4,636,948 55 4,552,621 56
-------------------------------------------------------------------
Total deposits $8,631,652 100% $8,430,701 100% $8,121,945 100%
-------------------------------------------------------------------
-------------------------------------------------------------------
TABLE 17: MATURITY DISTRIBUTION-CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS
OF $100,000 OR MORE
DECEMBER 31, 1999
--------------------------------
CERTIFICATES OTHER
OF DEPOSIT TIME DEPOSITS
--------------------------------
(IN THOUSANDS)
Three months or less $315,544 $66,029
Over three months through six months 112,856 13,750
Over six months through twelve months 180,936 18,000
Over twelve months 97,823 --
--------------------------------
Total $707,159 $97,779
================================
OTHER FUNDING SOURCES
Other funding sources include long-term debt and short-term borrowings.
Long-term debt at December 31, 1999, was $24.3 million, down slightly from $26.0
million at the end of last year. See Note 11 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, Federal Home Loan Bank ("FHLB") advances, notes
payable to banks, and treasury, tax, and loan notes. Of note, the FHLB advances
included in short-term borrowings are those with original maturities of less
than one year and callable notes that have one-year call premiums which the
Corporation expects may be called, even if the notes have maturities exceeding
one year. See Note 10 of the notes to consolidated financial statements for
additional information on short-term borrowings.
Short-term borrowings increased $1.1 billion to $2.8 billion at December 31,
1999, compared to last year end, with $737 million of the increase in treasury,
tax, and loan notes. These demand notes represent 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.
29
30
During 1999, the Corporation increased its reliance on average short-term
borrowings to fund loan growth and its share repurchases. Average short-term
borrowings were $2.0 billion for 1999 compared to $1.2 billion for 1998. Table
18 provides specific information required for major borrowing categories.
TABLE 18: SHORT-TERM BORROWINGS
DECEMBER 31,
----------------------------------
1999 1998 1997
---------- -------- --------
(IN THOUSANDS)
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE:
Balance end of year $1,344,396 $502,586 $712,250
Average amounts outstanding during year 1,057,269 517,344 538,097
Maximum month-end amounts outstanding 1,640,043 704,113 741,808
Average interest rates on amounts outstanding at end of
year 5.30% 4.72% 5.66%
Average interest rates on amounts outstanding during year 5.00% 5.06% 5.40%
FEDERAL HOME LOAN BANK ADVANCES:
Balance end of year $ 531,652 $937,021 $525,317
Average amounts outstanding during year 778,245 564,166 670,754
Maximum month-end amounts outstanding 1,173,021 937,021 777,828
Average interest rates on amounts outstanding at end of
year 6.37% 4.78% 5.66%
Average interest rates on amounts outstanding during year 5.22% 5.52% 5.65%
TREASURY, TAX AND LOAN NOTES:
Balance end of year $ 742,142 $ 5,192 $ 8,195
Average amounts outstanding during year 50,360 6,143 6,281
Maximum month-end amounts outstanding 742,142 10,011 10,845
Average interest rates on amounts outstanding at end of
year 3.74% 4.51% 5.04%
Average interest rates on amounts outstanding during year 4.95% 5.75% 6.18%
LIQUIDITY
Effective liquidity management ensures the cash flow requirements of depositors
and borrowers, as well as the operating cash needs of the Corporation, are met.
Funds are available from a number of sources, including the securities
portfolio, the core deposit base, lines of credit with major banks, the ability
to acquire large deposits, and the ability to securitize or package loans for
sale. Additionally, liquidity is provided from loans and securities repayments
and maturities.
The parent company's primary funding sources to meet its liquidity requirements
are dividends and service fees from subsidiaries, borrowings with major banks,
and proceeds from the issuance of equity. 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 requirements. Dividends received in cash from
subsidiaries totaled $76.3 million in 1999 and represent a primary funding
source. At December 31, 1999, $158.3 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. Additionally, the parent
company had $200 million of established lines of credit with nonaffiliated
banks, of which $157 million was outstanding at December 31, 1999.
As discussed in Item 1 of Form 10-K, 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.
During 1999, the parent company and its four largest subsidiary banks were rated
by Moody's and Standard and Poor's (S&P). These ratings, along with the
Corporation's existing Thomson BankWatch rating, provide opportunity for greater
funding capacity and funding alternatives. The parent company's ratings at
December 31, 1999, were Prime-2 for Moody's short term, A-2 for S&P's short
term, and BBB+ for S&P's issuer rating. The subsidiary banks' ratings were
Prime-1 and A2 for Moody's short- and long-term ratings, respectively, and A-2
and A- for S&P's short- and long-term ratings, respectively.
30
31
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 which measure the sensitivity of
future earnings due to changing rate environments to measure interest rate risk.
Policies established by the Corporate Asset/Liability Committee and approved by
the Corporate 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 basis point immediate and
sustained parallel rate move, either upward or downward. The Corporation manages
interest rate risk through the change in the repricing of investments, interest
rate swaps, and purchased funds portfolios.
INTEREST RATE RISK
In order to measure earnings sensitivity to changing rates, the Corporation uses
two different measurement tools: static gap analysis and simulation of earnings.
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 (NOW, 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 product and mortgage-backed securities are adjusted based on industry
estimates of 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 resulting static gap is the base for the earnings
sensitivity calculation.
The following table represents the Corporation's consolidated static gap
position as of December 31, 1999.
TABLE 19: INTEREST RATE SENSITIVITY ANALYSIS
DECEMBER 31, 1999
-----------------------------------------------------------------------------------
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 $ 11,955 $ -- $ -- $ 11,955 $ -- $ 11,955
Investment securities, at
amortized cost 520,659 196,598 348,572 1,065,829 2,189,706 3,255,535
Loans 2,933,069 547,174 996,202 4,476,445 3,881,503 8,357,948
Other earning assets 29,514 -- -- 29,514 -- 29,514
-----------------------------------------------------------------------------------
Total $ 3,495,197 $ 743,772 $ 1,344,774 $ 5,583,743 $6,071,209 $11,654,952
===================================================================================
Interest-bearing liabilities:
Interest-bearing deposits(1) $ 2,760,716 $ 906,062 $ 1,274,309 $ 4,941,087 $2,646,811 $ 7,587,898
Other interest-bearing
liabilities 2,652,514 1,377 744 2,654,635 144,738 2,799,373
-----------------------------------------------------------------------------------
Total interest-bearing
liabilities 5,413,230 907,439 1,275,053 7,595,722 2,791,549 10,387,271
Rate swaps (300,000) -- -- (300,000) 300,000 --
-----------------------------------------------------------------------------------
Total interest-bearing
liabilities with rate swaps $ 5,113,230 $ 907,439 $ 1,275,053 $ 7,295,722 $3,091,549 $10,387,271
===================================================================================
Interest sensitivity gap $(1,618,033) $ (163,667) $ 69,721 $(1,711,979) $2,979,660 $ 1,267,681
Cumulative interest
sensitivity gap $(1,618,033) $(1,781,700) $(1,711,979)
Cumulative ratio of rate
sensitive assets to rate
sensitive liabilities at
December 31, 1999 68.4% 70.4% 76.5%
===================================================================================
(1) The interest rate sensitivity assumptions for demand deposits, savings
accounts, money market accounts, and NOW 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
is considered to be long-term and fairly stable and is therefore included in
the "Over 1 Year" category.
31
32
The static gap analysis in Table 19 provides a representation of the
Corporation's earnings sensitivity to changes in interest rates. It is a static
indicator which 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 is used to create a
more complete assessment of interest rate risk.
Along with the static gap analysis, determining the sensitivity of future
earnings to a hypothetical plus or minus 100 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 income based on a hypothetical change in
interest rates. The resulting net income for the next 12-month period is
compared to the net 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 projected that net income would decrease by
approximately 6.6% of stable-rate net income if rates rose by a 100 basis point
shock, and projected that net income would increase by approximately 5.9% if
rates fell by a 100 basis point shock. At December 31, 1998, the 100 basis point
shock up was projected to decrease net income by 4.2%, and the 100 basis point
shock down projected that net income would increase by 1.8%. The projected
changes for both 1999 and 1998 were within the Corporation's interest rate risk
policy. According to the earnings simulation model, the Corporation's
sensitivity to interest rate changes increased during 1999. In response to
higher rates in the second half of 1999, the Corporation's sensitivity was
increased through the greater reliance on short-term borrowings, mitigated in
part by the use of interest rate swaps (see Notes 1 and 15 of notes to
consolidated financial statements).
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, such as 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 would include,
but would not be limited to, delaying an increase in deposit rates, changing the
pricing characteristics of loans, and changing the growth rate of certain assets
and liabilities. The primary change in market risk exposure is due to the
increase in short-term borrowings. The proceeds from these borrowings were
primarily used to fund the increase in loans.
CAPITAL
Stockholders' equity at December 31, 1999, increased to $909.8 million or $14.40
per share, compared with $878.7 million or $13.97 per share at the end of 1998.
The increase in stockholders' equity in 1999 was primarily composed of retention
of earnings and the exercise of stock options. Offsetting increases to
stockholders' equity were the payment of cash dividends and the purchase of
treasury stock. Issuance of common stock in connection with the 1999 purchase
acquisitions had minimal impact on shareholders' equity at December 31, 1999,
due to repurchase activity authorized by the Corporation's Board of Directors
("BOD"). Additionally, stockholders' equity at year-end 1999 included a $38.8
million equity component (included in accumulated other comprehensive income
(loss)) related to unrealized losses on securities AFS, net of the tax effect,
predominately due to the impact of the 1999 rising rate impact on that
portfolio. At December 31, 1998, stockholders' equity included $23.4 million
related to unrealized gains on securities AFS, net of the tax effect.
Stockholders' equity to assets at December 31, 1999, was 7.27%, compared to
7.81% at the end of 1998.
Cash dividends paid in 1999 were $1.16 per share, compared with $1.04 per share
in 1998, an increase of 11.5%. Cash dividends per share have increased at a
15.3% compounded rate during the past five years.
32
33
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, 1999 and 1998, 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 requirements. It is management's intent to
exceed the minimum requisite capital levels. Capital ratios are included in Note
18, Regulatory Matters, of the notes to consolidated financial statements.
The BOD 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 BOD authorized the repurchase of up to 300,000 shares
per quarter in both 1999 and 1998. Under these authorizations, in 1999,
approximately 390,000 shares were repurchased, with 252,000 shares reissued in
connection with stock options exercised. In 1998, 372,000 were repurchased and
339,000 reissued for 1998 options exercised.
In connection with purchase acquisition transactions, the BOD authorized the
repurchase and retirement of shares issued. During 1999, approximately 2,783,000
shares were repurchased and 2,513,000 shares were retired in connection with the
Windsor and Riverside purchase acquisitions, with the difference being reissued
in connection with the consummation of Riverside. In 1998, approximately 900,000
shares were repurchased and 449,000 shares were retired in connection with the
Citizens and Windsor acquisitions, with the difference being reissued in
connection with the February 1999 consummation of Windsor. Shares repurchased
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 1999 RESULTS
Net income for fourth quarter 1999 ("4Q99") was $44.3 million, up $6.5 million
from the $37.8 million net income earned in the fourth quarter of 1998 ("4Q98").
Return on average equity was 19.05%, up 197 basis points from 4Q98, while return
on average assets increased 4 basis points to 1.42%. Acquisition activity
(further described in Note 2 of the notes to consolidated financial statements)
impacted the comparable quarter analysis. Financial results of 4Q98 do not
include results of the Citizens, Windsor, and Riverside purchase acquisitions,
while 4Q99 included financial results of all three acquisitions. These
acquisitions account for approximately $1.4 million, net of funding costs, of
the increase in net income between comparable quarters. The purchase acquisition
of BNC on December 31, 1999, impacted only the year-end balance sheet.
FTE net interest income for 4Q99 was $106.0 million, $11.3 million higher than
4Q98. The increase was due to growth in average earning assets and higher
contribution from net free funds, partially offset by a 3 bp decline in the
interest rate spread. Average earning asset growth (up $1.4 billion to $11.5
billion) and a decrease in interest-bearing deposits, excluding brokered CDs
(down $75 million), was funded primarily by higher-costing brokered CDs (up $378
million) and other wholesale funds (up $1.0 billion). The net interest margin
fell 7 bp to 3.65% for 4Q99. The acquisitions, net of funding costs, accounted
for $7.9 million of the increase in FTE net interest income between comparable
quarters.
The provision for loan losses was up $1.5 million over the provision for 4Q98,
in part due to the strong loan growth especially in commercial real estate and
other commercial loans. Noninterest income between comparable quarters was
impacted by three main components: a) investment gains were down $2.4 million,
b) assets sale gains were up $4.1 million, primarily due to the gains on sale of
three branch locations in 4Q99, and c) mortgage banking income was down $8.4
million, the result of an 85% drop in secondary mortgage loan
33
34
production and refinancing activity between fourth quarter periods caused
predominantly by higher interest rates, adversely impacting gains on the sale of
mortgages and volume related fees. Without these three components, noninterest
income was up $5.8 million, seen in BOLI income (up $1.8 million to $3.0 million
in 4Q99, given the investment in BOLI doubled between comparable quarters to
$200 million), credit card and other nondeposit fees (up $1.8 million or 47%),
and the remainder realized primarily in trust income, retail commission income,
and service charges on deposit accounts.
Noninterest expense for 4Q99 was down $2.8 million over 4Q98, led by a $4.7
million decrease in the valuation of mortgage servicing rights between
comparable quarters and a $3.8 million reduction in legal and professional fees,
due to the completion of Year 2000 consulting and FFC conversion efforts.
Partially offsetting these expense reductions were increases in equipment
expense (up $1.6 million, primarily in depreciation as computer upgrades were in
place and functioning in 4Q99 versus 4Q98), intangible amortization (up $1.1
million, associated with the timing of purchase acquisitions), total personnel
expense net of profit sharing expense (up $2.1 million, predominantly in higher
fringe benefit costs), and increases to various other line items. Taxes were up
$2.9 million between the fourth quarters, due to the increase in income before
tax and the increase in the effective tax rate, at 28.3% for 4Q99 compared to
28.0% for 4Q98.
TABLE 20: SELECTED QUARTERLY FINANCIAL DATA:
The following is selected financial data summarizing the results of operations
for each quarter in the years ended December 31, 1999 and 1998:
1999 QUARTER ENDED
---------------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
---------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Interest income $216,258 $205,185 $197,377 $195,700
Interest expense 114,432 105,615 99,826 98,902
Provision for loan losses 5,704 4,541 4,547 4,451
Investment securities gains (losses), net (1,536) (50) 1,023 3,589
Income before income tax expense 61,874 60,101 57,371 57,970
---------------------------------------------------
Net income $ 44,334 $ 41,782 $ 9,876 $ 38,951
===================================================
Basic net income per share $ 0.70 $ 0.65 $ 0.63 $ 0.62
Diluted net income per share $ 0.69 $ 0.65 $ 0.62 $ 0.61
Basic weighted average shares 63,667 63,803 63,337 63,214
Diluted weighted average shares 64,239 64,394 63,922 63,752
1998 QUARTER ENDED
---------------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
---------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Interest income $194,322 $196,406 $196,413 $198,624
Interest expense 101,598 102,724 102,598 104,108
Provision for loan losses 4,229 3,378 3,375 3,758
Investment securities gains, net 842 35 643 5,311
Income before income tax expense 52,411 57,274 62,519 60,759
---------------------------------------------------
Net income $ 37,756 $ 38,400 $ 41,004 $ 39,860
===================================================
Basic net income per share $ 0.60 $ 0.61 $ 0.65 $ 0.63
Diluted net income per share $ 0.60 $ 0.60 $ 0.64 $ 0.62
Basic weighted average shares 62,658 63,306 63,261 63,281
Diluted weighted average shares 63,209 63,941 64,029 64,244
34
35
1998 COMPARED TO 1997
The following financial discussion focuses on the comparison of 1998 results
compared to 1997 "operating earnings." In particular, in October 1997 the
Corporation merged with First Financial Corporation ("FFC"), the parent company
of a $6.0 billion federally chartered thrift (First Financial Bank or "FFB"). To
arrive at operating earnings, reported results of 1997 were adjusted by the
following (no adjustments were made for 1998): 1997 operating earnings exclude
the merger, integration, and other one-time charges ("merger-related charges")
recorded by the Corporation in conjunction with the merger of FFC of $103.7
million, or $89.8 million after tax. This pre-tax charge includes a $35.3
million adjustment to securities for other than temporary impairment, $16.8
million of conforming provision for loan losses, and $51.6 million of merger,
integration, and other one-time charges. These charges reduced basic earnings
per share by $1.43 and diluted earnings per share by $1.41. See Note 3 of the
notes to consolidated financial statements for additional detail.
The Corporation recorded net income of $157.0 million for the year ended
December 31, 1998, an increase of $14.8 million or 10.4% over the operating net
income of $142.2 million earned in 1997. Basic earnings per share were $2.49, a
10.2% increase over 1997 basic operating earnings per share of $2.26. Earnings
per diluted share were $2.46, a 10.8% increase over 1997 diluted operating
earnings per share of $2.22. Return on average assets and return on average
equity were 1.48% and 18.33% for 1998, compared to 1.37% and 16.93%,
respectively, for 1997. Key factors behind these results were:
Taxable equivalent net interest income ("FTE net interest income") was $381.4
million in 1998, down $519,000 from the $382.0 million level in 1997. The
interest rate environment, affected by a flattening yield curve and competitive
pricing pressure, negatively impacted net interest income by $12.6 million,
while growth in earning asset volume and changes in mix toward higher yielding
loans and toward lower rate funding countered the negative impact from the yield
curve shift with a $12.1 million increase to FTE net interest income.
The net interest margin, net taxable equivalent interest income divided by
average interest-earning assets, was 3.79% for 1998, a 7 basis point decline
from 3.86% in 1997. The interest spread, or difference between the yield on
earning assets and the rate on IBLs, decreased 9 basis points to 3.20% for 1998,
offset by a 2 basis point larger contribution from net free funds. The yield on
earning assets decreased 14 basis points to 7.88%, while the rate on IBLs
decreased 5 basis points to 4.68% for 1998. The sensitivity of the asset mix to
the flattening of the yield curve described above was larger than the benefit
received from the repricing of liabilities. The larger contribution from net
free funds resulted primarily from a $69 million increase in average balance.
Combined, these factors decreased the net interest margin by 7 basis points in
1998.
The provision for loan losses was essentially unchanged at $14.7 million for
1998, decreasing $128,000 from the $14.9 million (excluding the merger-related
charge) in 1997. Net charge-offs were also unchanged at $11.4 million, or .16%
of average loans, for both 1998 and 1997. The allowance for loan losses to loans
increased to 1.37% from 1.31% at December 31, 1998 and 1997, respectively.
Noninterest income was a strong contributor to earnings, increasing $37.4
million or 28.6% over 1997. Excluding securities gains, noninterest income
increased $33.0 million or 25.8%. Mortgage banking revenues, trust fees, credit
card and related fees, and gains on asset sales accounted for the majority of
the increase.
Noninterest expense increased $23.0 million or 8.4% over 1997. Personnel expense
accounts for 62% of this increase, up $14.2 million over 1997. Mortgage
servicing rights amortization and professional fees are accountable for $11.5
million of increase, offset partially by decreases in various other categories,
particularly business development and advertising.
SUBSEQUENT EVENTS
The Corporation continually reviews its branch distribution network for
efficiencies and utilization of resources. In addition to the three branches
sold during 1999, the Corporation at December 31, 1999, had signed agreements
for the sale of deposits of five additional branch locations, totaling
approximately $83 million in deposits, with estimated net deposit premiums to be
received of approximately $8 million. The deposit sales are expected to be
completed through April 2000.
35
36
The Corporation entered into an agreement with Citibank USA ("Citi") in February
2000 under which Citi will acquire the Corporation's approximately $130 million
in credit card receivables. The Corporation expects to recognize a gain of
approximately $12 million in the second quarter of 2000 as a result of the sale
of the credit card receivables. In addition, the Corporation signed a five-year
agency agreement with Citi which includes a revenue sharing arrangement.
These subsequent events have not been reflected in the accompanying consolidated
financial statements.
ACCOUNTING DEVELOPMENTS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133," requires
derivative instruments be carried at fair value on the balance sheet. The
statement continues to allow derivative instruments to be used to hedge various
risks and sets forth specific criteria to be used to determine when hedge
accounting can be used. The statement also provides for offsetting changes in
fair value or cash flows of both the derivative and the hedged asset or
liability to be recognized in earnings in the same period; however, any changes
in fair value or cash flow that represent the ineffective portion of a hedge are
required to be recognized in earnings and cannot be deferred. For derivative
instruments not accounted for as hedges, changes in fair value are required to
be recognized in earnings.
The Corporation plans to adopt the provisions of this statement, as amended, for
its quarterly and annual reporting beginning January 1, 2001, the statement's
effective date. The impact of adopting the provisions of this statement on
Associated's financial position, results of operations, and cash flow subsequent
to the effective date is not currently estimable and will depend on the
financial position of the Corporation and the nature and purpose of the
derivative instruments in use at that time.
YEAR 2000
The Corporation's Year 2000 Project has been completed. As of February 28, 2000,
the Corporation has not experienced any significant disruptions of normal
business operations. Additionally, no customer disruptions, which could have
resulted in significant financial difficulties, have been brought to the
attention of management through February 28, 2000.
The Year 2000 Project relates to systems designed to use two digits rather than
four to define the applicable year. The Corporation adopted a centralized
approach to addressing the Year 2000 problem. The Corporation's Director of
Systems and Operations has overall responsibility for the Year 2000 compliance
efforts and is assisted by a project management office that is staffed with both
internal and external resources. Overseeing the project is a steering committee
composed of senior management officials. Monthly status reports have been
provided to each of the Corporation's affiliates and the Corporation's Board of
Directors monitors progress on a quarterly basis. The Corporation dedicated
significant internal and external resources to assess, plan, and execute a
strategy for achieving Year 2000 readiness.
Using the Federal Financial Institution's Examination Council (FFIEC) Year 2000
directives that have been published since 1996, the Corporation established
policy guidelines and time frames that have been used to manage the work effort
and guide Year 2000 compliance decision making. All project management
activities and plans have incorporated the FFIEC guidelines published to date.
The Corporation's Year 2000 compliance efforts have included completing an
inventory of all products and services that may be affected by Year 2000 date
related issues. Each product or service inventoried has been categorized as
mission critical, significant, ancillary, or other, depending on its
significance to the successful continuance of a business activity. Concurrent
with and immediately following the completion of the inventory of products and
services, the Corporation undertook and completed an awareness project involving
all employees, management, boards of directors, and customers of the
Corporation.
The Corporation has adhered to FFIEC guidelines for substantially completing
Year 2000 remediation, testing, and implementation for all Mission Critical
products and services by June 30, 1999, and for Significant
36
37
products and services by December 31, 1999. The Corporation had completed
remediation, testing, and implementation for all Mission Critical and
Significant products and services by October 31, 1999.
The Corporation uses national third party service providers and software vendors
almost exclusively. The products and services provided by these organizations
have been integrated to provide an overall technology infrastructure for the
Corporation. As a result, a large part of the Corporation's Mission Critical
product Year 2000 testing effort was for products processed by service bureaus.
The Corporation conducted Year 2000 testing with these service bureaus and/or
verified that the service bureau's systems that the Corporation utilizes have
successfully completed Year 2000 tests. The Corporation determined not only that
the service bureau's systems would function properly in the Year 2000 and
beyond, but also tested that the specific functions utilized by the Corporation
would properly perform.
The Corporation has no custom developed system code. Therefore, the remediation
phase of the Corporation's Year 2000 compliance effort did not include code
renovation. Product and service upgrades provided by the Corporation's service
bureaus and other vendors were the primary remediation strategy. This also
impacts the testing phase of the overall project plan and required that it would
be proportionally larger than a plan which has significant code renovation as
its focus.
The Corporation has been careful to consider non-information technology as well
as information technology systems in its approach to Year 2000 compliance.
Non-information technology systems include equipment in use in the business
areas, which is not defined as computer hardware or peripheral devices.
Equipment includes: calculators, time clocks,
heating/ventilating/air-conditioning, elevators, telephones, facsimiles,
satellite dishes, and security devices. The Corporation contacted vendors of
non-information technology systems to determine Year 2000 compliance of these
systems and products and tested these systems and products during 1999. The
Corporation also identified third parties with which it has a material
relationship, such as telecommunications, power, and other utility vendors. The
impact and status of these services were reviewed and appropriate steps were
taken, as considered appropriate in the circumstances, to provide for continued
operation for all areas.
The Corporation's customers who were not preparing for the Year 2000 might have
experienced a disruption in business that could have potentially resulted in
significant financial difficulties. Through the use of personal contacts and
questionnaires, the Corporation had taken an active role in heightening customer
awareness of the Year 2000 issues, assessing and monitoring material customers'
Year 2000 compliance efforts, and taking steps to minimize the Corporation's
exposure. Material customers include fund takers, fund providers, and capital
market and asset management counterparties. The Year 2000 readiness of material
customers has been monitored by the Corporation on a quarterly basis, and
prospective material credit customers were also assessed for Year 2000
compliance as part of the underwriting process. Additionally, consideration of
Year 2000 credit risk had been incorporated into the Corporation's loan reserve
methodology. Major fund providers were identified and their Year 2000 readiness
had been assessed and monitored.
The costs for Year 2000 compliance did not have a significant impact on the
Corporation's results of operations, liquidity, or capital resources. The
Corporation's total costs of addressing Year 2000 issues were approximately
$10.5 million, of which all had been expended as of December 31, 1999. Year 2000
compliance costs have been influenced by a heavy reliance on external resources
that have been contracted to assist the Corporation in the project management,
vendor management, and testing phases of its Year 2000 compliance effort.
Scheduled systems upgrades and enhancements which would have taken place,
notwithstanding the Year 2000 compliance process, have not been included in the
Year 2000 costs, even though certain of these expenses may have resulted in Year
2000 solutions.
Management of the Corporation believes that the potential effects on the
Corporation's internal operations of the Year 2000 compliance effort have been
addressed prior to the Year 2000. However, if required product or service
upgrades had not been made or were not completed on a timely basis prior to the
Year 2000, the Year 2000 issue could have disrupted normal business operations.
Additionally, subsequent uncontrolled changes to Mission Critical and
Significant products could have impacted their Year 2000 compliance. Normal
business operations could also have been disrupted if third party servicers,
upon which the Corporation depends for services, including service bureaus,
payment systems, utilities, etc., had encountered difficulties relating to the
37
38
Year 2000 issue. The most reasonable likely worst case Year 2000 scenarios
foreseeable at the time included the Corporation temporarily not being able to
process, in some combination, various types of customer transactions. This could
have affected the ability of the Corporation to, among other things, originate
new loans, post loan payments, accept deposits or allow immediate withdrawals,
and, depending on the amount of time such scenario lasted, could have had a
material adverse effect on the Corporation.
Because of the serious implications of the scenarios mentioned above, a number
of actions had been taken to address and/or mitigate these risks. Contingency
plans had been established and were monitored for all Mission Critical products
to mitigate the risks associated with any failure to successfully complete Year
2000 compliance renovation, validation, or implementation efforts. Management
had also instituted procedures to ensure that those Mission Critical and
Significant products tested to be Year 2000 ready remained so through the turn
of the century. This clean management procedure provided for controlling changes
to products deemed Year 2000 ready and a process for revalidating those products
as changes occur prior to the turn of the century. Additionally, a business
resumption contingency plan had been developed to mitigate risks associated with
the failure at critical dates of systems that support core business processes.
This Year 2000 business resumption contingency plan had been designed to ensure
that Mission Critical core business processes would continue if one or more
supporting systems failed and would allow for limited transactions, including
the ability to make certain deposit withdrawals, until the Year 2000 problems
are fixed. A liquidity contingency plan had also been written, which included
working with the Federal Reserve to ensure that adequate currency would be
available to meet anticipated customer needs, as well as ensuring adequate
access to funding as needed by the Corporation
The costs of the Year 2000 project and the date on which the Corporation planned
to complete Year 2000 compliance were based on management's best estimates,
which were derived using numerous assumptions of future events such as service
bureaus' and other vendors' plans, the availability of certain resources
(including internal and external resources), and other factors. However, there
could be no guarantee that these estimates would have been achieved at the cost
disclosed or within the timeframe indicated, and actual results could have
differed materially from these plans. Factors that might have affected the
timely and efficient completion of the Corporation's Year 2000 project included,
but was not limited to, vendors' and service bureaus' abilities to adequately
correct or convert software and the effect on the Corporation's ability to test
these systems, the availability and cost of personnel trained in the Year 2000
area, the ability to identify and correct all relevant computer programs, and
similar uncertainties.
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."
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ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ASSOCIATED BANC-CORP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
(IN THOUSANDS
EXCEPT SHARE DATA)
ASSETS
Cash and due from banks $ 284,652 $ 331,532
Interest-bearing deposits in other financial institutions 4,394 200,467
Federal funds sold and securities purchased under agreements
to resell 25,120 4,485
Investment securities:
Held to maturity--at amortized cost (fair value of
approximately $413,107 and $562,940, respectively) 414,037 550,775
Available for sale--at fair value (amortized cost of
$2,901,607 and $2,320,240 respectively) 2,841,498 2,356,960
Loans held for sale 11,955 165,170
Loans 8,357,948 7,272,697
Allowance for loan losses (113,196) (99,677)
- ------------------------------------------------------------------------------------------
Loans, net 8,244,752 7,173,020
Premises and equipment 140,100 140,142
Other assets 553,394 328,116
- ------------------------------------------------------------------------------------------
Total assets $12,519,902 $11,250,667
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 1,103,931 $ 998,379
Interest-bearing deposits 7,587,898 7,559,440
- ------------------------------------------------------------------------------------------
Total deposits 8,691,829 8,557,819
Short-term borrowings 2,775,090 1,671,093
Long-term debt 24,283 26,004
Accrued expenses and other liabilities 118,911 117,030
- ------------------------------------------------------------------------------------------
Total liabilities 11,610,113 10,371,946
- ------------------------------------------------------------------------------------------
Commitments and contingent liabilities -- --
- ------------------------------------------------------------------------------------------
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 63,389,734 shares at
December 31, 1999 and 1998) 634 634
Surplus 226,042 225,757
Retained earnings 728,754 646,071
Accumulated other comprehensive income (loss) (38,782) 23,369
Treasury stock at cost (189,610 shares in 1999 and 503,158
shares in 1998) (6,859) (17,110)
- ------------------------------------------------------------------------------------------
Total stockholders' equity 909,789 878,721
- ------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $12,519,902 $11,250,667
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
INTEREST INCOME
Interest and fees on loans $625,565 $602,470 $592,747
Interest and dividends on investment securities:
Taxable 163,732 168,536 184,230
Tax-exempt 23,417 11,280 9,164
Interest on deposits in other financial institutions 454 1,679 779
Interest on federal funds sold and securities purchased
under agreements to resell 1,352 1,800 999
- ------------------------------------------------------------------------------------------------------
Total interest income 814,520 785,765 787,919
- ------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 314,075 345,392 337,443
Interest on short-term borrowings 103,057 63,774 72,509
Interest on long-term borrowings 1,643 1,862 1,685
- ------------------------------------------------------------------------------------------------------
Total interest expense 418,775 411,028 411,637
- ------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 395,745 374,737 376,282
Provision for loan losses 19,243 14,740 31,668
- ------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 376,502 359,997 344,614
- ------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust service fees 37,996 33,328 28,764
Service charges on deposit accounts 29,584 27,464 27,909
Mortgage banking 30,417 46,105 25,685
Credit card and other nondeposit fees 20,763 17,514 15,728
Retail commissions 18,372 14,823 15,444
Asset sale gains, net 4,977 7,166 852
Investment securities gains (losses), net 3,026 6,831 (32,776)
Other 20,771 14,697 13,248
- ------------------------------------------------------------------------------------------------------
Total noninterest income 165,906 167,928 94,854
- ------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 151,644 148,490 134,319
Occupancy 22,576 20,205 19,873
Equipment 15,987 13,250 12,600
Data processing 21,695 18,714 16,928
Business development and advertising 11,919 13,177 15,936
Stationery and supplies 8,110 6,858 5,532
FDIC expense 3,313 3,267 3,284
Professional fees 7,117 9,709 6,294
Merger, integration, and other one-time charges -- -- 51,622
Other 62,731 61,292 56,812
- ------------------------------------------------------------------------------------------------------
Total noninterest expense 305,092 294,962 323,200
- ------------------------------------------------------------------------------------------------------
Income before income taxes 237,316 232,963 116,268
Income tax expense 72,373 75,943 63,909
- ------------------------------------------------------------------------------------------------------
Net income $164,943 $157,020 $ 52,359
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 2.60 $ 2.49 $ 0.83
Diluted $ 2.57 $ 2.46 $ 0.82
Average shares outstanding:
Basic 63,507 63,125 62,884
Diluted 64,061 63,789 63,935
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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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)
Balance, December 31, 1996 46,535 $465 $230,810 $564,923 $ 8,281 $ (918) $803,561
Comprehensive income:
Net income -- -- -- 52,359 -- -- 52,359
Net unrealized holding losses arising
during year -- -- -- -- (4,564) -- (4,564)
Add back: reclassification adjustment
for net losses realized in net income -- -- -- -- 32,776 -- 32,776
Income tax effect -- -- -- -- (10,413) -- (10,413)
--------
Comprehensive income 70,158
--------
Cash dividends, $0.89 per share -- -- -- (16,983) -- -- (16,983)
Cash dividends of pooled affiliates -- -- -- (32,345) -- -- (32,345)
Common stock issued:
Business combinations 345 4 3,778 4,218 64 -- 8,064
Incentive stock options 382 4 3,847 (2,177) -- 3,494 5,168
6-for-5 stock split effected in the
form of a stock dividend 3,746 37 (37) -- -- -- --
Tax benefits of stock options -- -- 716 -- -- -- 716
Purchase of treasury stock -- -- -- -- -- (3,599) (3,599)
Pre-merger transactions of pooled company (613) (6) (21,042) -- -- -- (21,048)
---------------------------------------------------------------------------
Balance, December 31, 1997 50,395 504 218,072 569,995 26,144 (1,023) 813,692
---------------------------------------------------------------------------
Comprehensive income:
Net income -- -- -- 157,020 -- -- 157,020
Net unrealized holding gains arising
during year -- -- -- -- 2,292 -- 2,292
Less: reclassification adjustment for
net gains realized in net income -- -- -- -- (6,831) -- (6,831)
Income tax effect -- -- -- -- 1,593 -- 1,593
--------
Comprehensive income 154,074
--------
Cash dividends, $1.04 per share -- -- -- (65,841) -- -- (65,841)
Common stock issued:
Business combinations -- -- -- (3,425) 171 15,253 11,999
Incentive stock options 317 3 3,778 (11,678) -- 15,823 7,926
5-for-4 stock split effected in the
form of a stock dividend 12,678 127 (127) -- -- -- --
Tax benefits of stock options -- -- 4,034 -- -- -- 4,034
Purchase of treasury stock -- -- -- -- -- (47,163) (47,163)
---------------------------------------------------------------------------
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 arising
during year -- -- -- -- (93,803) -- (93,803)
Less: reclassification adjustment for
net gains realized in net income -- -- -- -- (3,026) -- (3,026)
Income tax effect -- -- -- -- 34,832 -- 34,832
--------
Comprehensive income 102,946
--------
Cash dividends, $1.16 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)
Tax benefits of stock options -- -- 762 -- -- -- 762
Purchase of treasury stock -- -- -- -- -- (24,255) (24,255)
---------------------------------------------------------------------------
Balance, December 31, 1999 63,390 $634 $226,042 $728,754 $(38,782) $ (6,859) $909,789
===========================================================================
See accompanying notes to consolidated financial statements.
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42
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
----------- --------- ---------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 164,943 $ 157,020 $ 52,359
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 19,243 14,740 31,668
Depreciation and amortization 19,266 15,027 14,418
Amortization (accretion) of:
Mortgage servicing rights 9,690 6,833 6,472
Intangibles 8,134 5,844 6,217
Investment premiums and discounts 1,959 (4,985) (1,499)
Deferred loan fees and costs 1,772 13 (522)
Deferred income taxes 4,543 9,891 (20,953)
(Gain) loss on sales of securities, net (3,026) (6,831) 32,776
Gain on other asset sales, net (4,526) (7,166) (852)
Gain on sales of loans held for sale, net (11,172) (24,341) (8,981)
(Increase) decrease in loans held for sale, net 67,232 (26,669) 5,810
(Increase) decrease in interest receivable and other
assets (5,534) 14,085 (1,663)
Increase (decrease) in interest payable and other
liabilities (2,444) (14,892) 35,585
- -----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 270,080 138,569 150,835
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in federal funds sold and securities purchased
under agreements to resell 3,365 29,476 20,891
Net (increase) decrease in interest-bearing deposits in
other financial institutions 196,185 (193,661) (1,455)
Net increase in loans (697,685) (231,285) (465,510)
Mortgage servicing rights additions (12,389) (21,502) (9,801)
Purchases of:
Securities held to maturity -- (1,717) (203,759)
Securities available for sale (1,195,650) (800,724) (316,112)
Premises and equipment, net of disposals (20,457) (30,268) (11,805)
Bank owned life insurance (100,000) (100,000) --
Proceeds from:
Sales of securities available for sale 78,751 62,168 71,178
Maturities of securities available for sale 744,403 663,227 29,260
Maturities of securities held to maturity 136,292 222,869 258,034
Sales of other real estate owned 10,129 9,530 7,177
Sale of other assets 6,703 32,301 343
Net cash received (paid) in acquisitions of subsidiaries 29,486 (11,713) 5,051
- -----------------------------------------------------------------------------------------------------
Net cash used by investing activities (820,867) (371,299) (616,508)
- -----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (299,739) 45,475 337,175
Net increase in short-term borrowings 1,046,214 321,607 117,555
Repayment of long-term borrowings (619) (1,464) --
Proceeds from issuance of long-term borrowings 53 13,538 --
Cash dividends (73,743) (65,841) (49,328)
Proceeds from exercise of stock options 3,421 7,926 5,168
Proceeds from sales of branch deposits (55,663) -- --
Purchase and retirement of treasury stock (91,762) -- --
Purchase of treasury stock (24,255) (47,163) (3,599)
Stock purchases by pooled company -- -- (21,048)
- -----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 503,907 274,078 385,923
- -----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (46,880) 41,348 (79,750)
Cash and due from banks at beginning of year 331,532 290,184 369,934
- -----------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 284,652 $ 331,532 $ 290,184
- -----------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 417,047 $ 405,841 $ 409,797
Income taxes 53,512 70,109 79,440
Supplemental schedule of noncash investing activities:
Loans transferred to other real estate 9,177 7,910 5,263
Loans made in connection with the disposition of other
real estate 1,125 780 240
Mortgage loans securitized and transferred to securities
available for sale 97,155 78,557 --
Securities transferred from held to maturity to available
for sale -- -- 251,946
Mortgage loans transferred to loans held for sale -- -- 68,340
Acquisitions:
Fair value of assets acquired, including cash and cash
equivalents 590,845 161,033 --
Value ascribed to intangibles 85,090 11,903 --
Liabilities assumed 551,126 144,405 --
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
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ASSOCIATED BANC-CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of Associated Banc-Corp and its
subsidiaries (the "Corporation") conform to generally accepted accounting
principles 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
institutions and 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. The
consolidated financial statements have been restated to include companies
acquired under pooling of interests when material. Certain amounts in the 1998
and 1997 consolidated financial statements have been reclassified to conform
with the 1999 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 and the valuation of investments
and mortgage servicing rights.
INVESTMENT SECURITIES
Securities are classified as held to maturity ("HTM"), available for sale
("AFS"), or trading at the time of purchase. In 1999, all securities purchased
were classified as AFS. Investment securities classified as HTM, which
management has the 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 HTM or AFS 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. AFS and trading securities are reported at fair value with
unrealized gains and losses, net of related deferred income taxes, included in
stockholders' equity or income, respectively. 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 market value through a charge to
earnings.
In determining if declines in value are other than temporary, management
estimates future cash flows to be generated by pools of loans underlying the
mortgage-related securities. Included in this evaluation are such factors as (i)
estimated loan prepayment rates, (ii) a review of delinquencies, foreclosures,
repossessions, and recovery rates relative to the underlying mortgage loans
collateralizing each security, (iii) the level of available subordination or
other credit enhancements, (iv) an assessment of the servicer of the underlying
mortgage portfolio, and (v) the rating assigned to each security by independent
national rating agencies.
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LOANS
Loans and leases are carried at the principal amount outstanding, net of any
unearned income. Unearned income, primarily from direct leases, is recognized on
a basis that generally approximates a level yield on the outstanding balances
receivable. Interest on all other loans is based upon the principal amount
outstanding.
Loans are normally placed on nonaccrual status when contractually past due 90
days or more as to interest or principal payments. Additionally, whenever
management becomes aware of facts or circumstances that may adversely impact on
the collectibility of principal or interest on loans, it is management's
practice to place such loans on nonaccrual status immediately, rather than
delaying such action until the loans become 90 days past due. Previously accrued
and uncollected interest on such loans is reversed, amortization of related loan
fees is suspended, and income is recorded only to the extent that interest
payments are subsequently received in cash and a determination has been made
that the principal balance of the loan is collectible. If collectibility of the
principal is in doubt, payments received are applied to loan principal. 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.
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.
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 ("AFLL") is a reserve for estimated credit losses.
Credit losses arise primarily from the loan portfolio. Actual credit losses, net
of recoveries, are deducted from the AFLL. A provision for loan losses, which is
a charge against earnings, is added to bring the AFLL to a level that, in
management's judgment, is adequate to absorb losses inherent in the loan
portfolio.
The allocation methodology applied by the Corporation, designed to assess the
adequacy of the AFLL, focuses on changes in the size and character of the loan
portfolio, changes in levels of impaired and other nonperforming loans, the risk
inherent in specific loans, concentrations of loans to specific borrowers or
industries, existing economic conditions, and historical losses on each
portfolio category. The indirect risk in the form of off-balance sheet unfunded
commitments is also taken into consideration. Management continues to target and
maintain the AFLL equal to the allocation methodology plus an unallocated
portion, as determined by economic conditions and emerging systemic factors,
such as Year 2000 issues, on the Corporation's borrowers. Management allocates
AFLL for credit losses by pools of risk. The business loan (commercial mortgage;
commercial, industrial, and agricultural; leases; and real estate construction)
allocation is based on a quarterly review of individual loans, loan types, and
industries. The retail loan (residential mortgage, home equity, and installment)
allocation is based on analysis of historical delinquency and charge-off
statistics and trends. Minimum loss factors used by the Corporation for
criticized loan categories are consistent with regulatory agencies. Loss factors
for non-criticized loan categories are based primarily on historical loan loss
experience and peer group statistics.
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 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 installment 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
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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 collectable.
Management believes that the AFLL is adequate. While management uses available
information to recognize losses on loans, future additions to the AFLL 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 AFLL. Such agencies may require the
Corporation to recognize additions to the AFLL based on their judgments about
information available to them at the time of their examinations.
OTHER REAL ESTATE OWNED
Other real estate owned ("OREO") 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. OREO 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 AFLL. 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. OREO totaled $3.7 million and
$6.0 million at December 31, 1999 and 1998, 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 for premises include periods up to 50 years and
for equipment include periods up to 10 years.
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 of 10 to 40
years. Core deposit intangibles are amortized 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.
As a result of acquisitions during 1999 and 1998, the Corporation recorded
additional goodwill of $79.2 million and $11.9 million, respectively.
Additionally, in 1999, the Corporation recorded additional core deposit
intangible of $5.9 million. Goodwill and deposit base intangibles outstanding,
net of accumulated amortization, at December 31, 1999 and 1998 was $116.6
million and $40.5 million, respectively.
MORTGAGE SERVICING RIGHTS
The total cost of loans originated or purchased is allocated between loans and
servicing rights based on the relative fair values of each. The servicing rights
capitalized are amortized in proportion to and over the period of estimated
servicing income. Capitalized mortgage servicing rights ("MSRs") are included in
other assets. The value of MSRs is adversely affected when mortgage interest
rates decline and mortgage loan prepayments increase. The carrying value and
fair value related to these off-balance sheet financial instruments is
considered when evaluating the servicing assets for impairment. 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 MSRs exceed their fair
value, a valuation reserve is established.
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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.
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 reimbursed by
other subsidiaries that incur federal tax liabilities.
DERIVATIVE FINANCIAL INSTRUMENTS
As part of managing the Corporation's interest rate risk, a variety of
derivative financial instruments could be used to hedge market values and to
alter the cash flow characteristics of certain on-balance sheet instruments. The
Corporation has principally used interest rate swaps. The derivative instruments
used to manage interest rate risk are linked with a specific asset or liability
or a group of 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 derivative
contracts used for interest rate risk management is 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 and 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 are
not recognized on the balance sheet.
STOCK-BASED COMPENSATION
As allowed under SFAS No. 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 12 the impact of the fair
value of employee stock-based compensation plans on net income and earnings per
share on a pro forma basis for awards granted since January 1, 1997, pursuant to
SFAS No. 123.
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.
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. See also Notes 12 and 19.
COMPREHENSIVE INCOME
Comprehensive income is the change in the Corporation's equity during the period
from transactions and other events and circumstances from non-owner sources.
Total comprehensive income is divided into net income and other comprehensive
income. The Corporation's "other comprehensive income" and "accumulated other
comprehensive income (loss)" are comprised solely of unrealized gains and losses
on securities available for sale.
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NOTE 2 BUSINESS COMBINATIONS:
The following table summarizes completed transactions during the three years
ended December 31, 1999:
CONSIDERATION PAID
------------------
SHARES OF
DATE COMMON TOTAL METHOD OF
NAME OF ACQUIRED COMPANY ACQUIRED STOCK CASH ASSETS LOANS DEPOSITS ACCOUNTING
- --------------------------------------------------------------------------------------------------------------
( IN MILLIONS, EXCEPT SHARES)
BNC Financial Corporation ("BNC") 12/31/99 -- $ 5.3 $ 35 $ 33 $ -- Purchase
St. Cloud, Minnesota
Riverside Acquisition Corp. 8/31/99 2,434,005 -- 374 266 337 Purchase
("Riverside")
Minneapolis, Minnesota
Windsor Bancshares, Inc. ("Windsor") 2/3/99 799,961 -- 182 113 152 Purchase
Minneapolis, Minnesota
Citizens Bankshares, Inc. 12/19/98 448,571 16.2 161 105 117 Purchase
("Citizens")
Shawano, Wisconsin
First Financial Corporation ("FFC") 10/29/97 34,794,911 0.1 6,005 3,469 4,572 Pooling of
(A) interests
Stevens Point, Wisconsin
Centra Financial, Inc. ("Centra") (B) 2/21/97 517,956 -- 76 36 70 Pooling of
West Allis, Wisconsin interests
==============================================================================================================
(A) All consolidated financial information was restated as if the transaction
had been effected as of the beginning of the earliest period presented.
(B) The transaction was not material to prior years' reported operating results
and, accordingly, previously reported results were not restated.
For the acquisitions accounted for under the purchase method, 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.
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. BNC operates as a
wholly-owned subsidiary of the Corporation, and will conduct business as
Associated Commercial Finance, Inc. upon completion of regulatory applications.
The $5.3 million cash acquisition was accounted for under the purchase method,
and goodwill of $1.2 million was recorded.
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 2,434,005 shares of common stock, which were repurchased
and retired during 1999 under authorization by the board of directors. The
transaction was accounted for under the purchase method. 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 799,961 shares of common stock, which were repurchased
and retired under authorization by the board of directors. The transaction was
accounted for under the purchase method, and goodwill of $17.4 million was
recorded.
In the first quarter of 2000, the Corporation anticipates combining Riverside
Bank and Bank Windsor to conduct business as Associated Bank Minnesota.
On December 19, 1998, the Corporation completed its acquisition of Citizens,
which had $161 million in assets and operated Citizens Bank and two consumer
finance companies. The merger, accounted for as a purchase, was consummated with
$16.2 million in cash and through the issuance of 448,571 shares of common
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stock, which were repurchased under authorization by the board of directors.
Goodwill of $11.9 million was recorded. In the second quarter of 1999, the
Corporation merged Citizens Bank into its existing banks. The consumer finance
companies continue to operate as wholly-owned subsidiaries of the Corporation.
On October 29, 1997, the Corporation merged with the $6.0 billion FFC, which had
over 125 bank branches throughout Wisconsin and Illinois. FFC's retail product
mix had a concentration of real-estate mortgage products (both traditional
mortgage products and home equity loans), credit card and student loans funded
primarily with retail interest-bearing deposits. The 1997 merger was consummated
through the issuance of 34.8 million shares of common stock and was accounted
for as a pooling of interests. Thus, all consolidated financial information was
restated as if the transaction had been effected as of the beginning of the
earliest reporting period. FFB operated as a thrift subsidiary of the
Corporation until fourth quarter 1998. On November 12, 1998, the Corporation
completed the conversion of FFB systems and the distribution of FFB assets into
its various affiliates.
On February 21, 1997, the Corporation completed its merger with Centra, which
had assets of approximately $76 million. The transaction was consummated through
the issuance of 517,956 shares of common stock and was accounted for as a
pooling of interests. However, the transaction was not material to prior years'
reported results, and accordingly, previously reported results were not
restated.
NOTE 3 MERGER, INTEGRATION, AND OTHER ONE-TIME CHARGES:
The Corporation has not recorded any merger, integration, and other one-time
charges ("merger related charges") in 1999 or 1998. Merger related charges in
1997 recorded by the Corporation in conjunction with the merger of FFC were
$103.7 million, or $89.8 million after tax. These charges reduced basic earnings
per share by $1.43 and diluted earnings per share by $1.41.
Of the 1997 merger related charges, $51.6 million consisted of $22.5 million in
cash expenditures made in 1997, $4.5 million in noncash asset write-downs, and
$24.6 million that was anticipated to be substantially paid in 1998. The
components of the $51.6 million in charges for 1997 were: $12.6 million for
employee/director severance and contract costs, $20.2 million for costs
associated with duplicative facilities and systems and integration, $11.1
million for investment banking, legal, and accounting fees, and $7.7 million for
other related charges. As of December 31, 1999, $3.2 million remained to be
paid, primarily for contractual personnel payouts.
The Corporation recorded an additional provision for loan losses of $16.8
million in 1997, as a result of the merger with FFC, in order to conform the
policies, practices, and procedures of FFC with those of the Corporation. Also,
and as further discussed in Note 5, the Corporation recorded a $35.3 million
pre-tax charge for other than temporary impairment of value of certain
investment securities.
NOTE 4 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 $80.4 million at December 31,
1999.
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NOTE 5 INVESTMENT SECURITIES:
The amortized cost and fair values of securities HTM at December 31, 1999 and
1998 were as follows:
1999
-------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
-------------------------------------------------
(IN THOUSANDS)
Federal agency securities $ 26,012 $ 33 $ (321) $ 25,724
Obligations of state and political subdivisions 128,833 584 (376) 129,041
Mortgage-related securities 204,725 1,267 (1,764) 204,228
Other securities (debt) 54,467 35 (388) 54,114
-------------------------------------------------
Total securities HTM $414,037 $1,919 $(2,849) $413,107
=================================================
1998
-------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
-------------------------------------------------
(IN THOUSANDS)
Federal agency securities $ 66,204 $ 886 $(20) $ 67,070
Obligations of state and political subdivisions 153,663 4,333 -- 157,996
Mortgage-related securities 262,111 4,345 (48) 266,408
Other securities (debt) 68,797 2,669 -- 71,466
-------------------------------------------------
Total securities HTM $550,775 $12,233 $(68) $562,940
=================================================
The amortized cost and fair values of securities AFS at December 31, 1999 and
1998 were as follows:
1999
----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------
(IN THOUSANDS)
U. S. Treasury securities $ 47,092 $ 53 $ (475) $ 46,670
Federal agency securities 406,275 -- (9,959) 396,316
Obligations of state and political subdivisions 550,975 257 (28,933) 522,299
Mortgage-related securities 1,578,089 28,915 (54,563) 1,552,441
Other securities (debt and equity) 319,176 15,870 (11,274) 323,772
----------------------------------------------------
Total securities AFS $2,901,607 $45,095 $(105,204) $2,841,498
====================================================
1998
----------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------
(IN THOUSANDS)
U. S. Treasury securities $ 68,488 $ 1,114 $ -- $ 69,602
Federal agency securities 248,697 2,204 -- 250,901
Obligations of state and political subdivisions 217,153 1,605 (1,188) 217,570
Mortgage-related securities 1,625,403 17,908 (780) 1,642,531
Other securities (debt and equity) 160,499 15,857 -- 176,356
----------------------------------------------------
Total securities AFS $2,320,240 $38,688 $(1,968) $2,356,960
====================================================
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50
The amortized cost and fair values of investment securities HTM and AFS at
December 31, 1999, 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.
1999
-------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
-------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
-------------------------------------------------
(IN THOUSANDS)
Due in one year or less $ 19,648 $ 19,733 $ 73,234 $ 72,945
Due after one year through five years 163,606 163,327 398,783 390,021
Due after five years through ten years 25,958 25,704 520,986 494,310
Due after ten years 100 115 236,869 222,266
-------------------------------------------------
Total debt securities 209,312 208,879 1,229,872 1,179,542
Mortgage-related securities 204,725 204,228 1,578,089 1,552,441
Equity securities -- -- 93,646 109,515
-------------------------------------------------
Total $414,037 $413,107 $2,901,607 $2,841,498
=================================================
Total proceeds and gross realized gains and losses from sale of securities AFS
for each of the three years ended December 31 were:
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Proceeds $78,751 $62,168 $71,178
Gross gains 4,615 9,357 2,462
Gross losses 1,589 2,526 --
Concurrent with the consummation of the merger with FFC in 1997, the Corporation
transferred all nonagency mortgage-related securities and an agency security,
with a combined amortized cost of $251.9 million from securities HTM to
securities AFS. These mortgage-related securities were transferred to maintain
the existing interest rate risk position and credit risk policy of the
Corporation.
Concurrent with the transfer in 1997, the Corporation recorded a $32.5 million
pre-tax charge to earnings relative to one agency security with an amortized
cost of $130.6 million. Management recorded this other than temporary impairment
of value in 1997. During 1999, the Corporation sold approximately one-third of
the agency security for a $3.6 million gain.
Additionally, in 1997 the Corporation recorded a $2.8 million pre-tax charge, on
other mortgage-related securities that were transferred to available for sale,
with an amortized cost of $18.9 million to reflect an other than temporary
impairment of value. These securities were subsequently sold with no additional
loss in January 1998.
The net unrealized gain on the nonagency mortgage-related securities transferred
to available for sale from held to maturity in 1997 that were not deemed to have
an other than temporary impairment of value was $588,000, which was credited to
stockholders' equity, net of income tax of $206,000.
Pledged securities HTM with an amortized cost and securities AFS at fair value
totaled approximately $1.7 billion at December 31, 1999, and $653 million at
December 31, 1998, to secure certain deposits, Federal Home Loan Bank advances,
or for other purposes as required or permitted by law.
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NOTE 6 LOANS:
Loans at December 31 are summarized below:
1999 1998
---------- ----------
(IN THOUSANDS)
Commercial and financial $1,389,282 $ 929,844
Agricultural 23,056 32,364
Real estate -- construction 560,450 461,157
Real estate -- mortgage 5,601,825 5,079,270
Installment loans to individuals 760,106 750,831
Lease financing 23,229 19,231
---------------------------
Total $8,357,948 $7,272,697
===========================
A summary of the changes in the allowance for loan losses for the years
indicated is as follows:
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Balance at beginning of year $ 99,677 $ 92,731 $ 71,767
Balance related to acquisitions 8,016 3,636 728
Provision for loan losses 19,243 14,740 31,668
Charge-offs (16,621) (17,039) (15,049)
Recoveries 2,881 5,609 3,617
--------------------------------------
Net charge-offs (13,740) (11,430) (11,432)
--------------------------------------
Balance at end of year $113,196 $ 99,677 $ 92,731
--------------------------------------
--------------------------------------
Nonaccrual loans totaled $32.1 million and $48.2 million at December 31, 1999
and 1998, respectively.
Management has determined that commercial loans and commercial real estate loans
that have nonaccrual status or have had their terms restructured are defined as
impaired loans. The following table presents data on impaired loans at December
31:
1999 1998
------- -------
(IN THOUSANDS)
Impaired loans for which an allowance has been provided $ 3,174 $ 1,887
Impaired loans for which no allowance has been provided 11,576 13,540
---------------------
Total loans determined to be impaired $14,750 $15,427
=====================
AFLL related to impaired loans $ 1,731 $ 805
=====================
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
For the years ended December 31:
Average recorded investment in impaired loans $16,640 $15,652 $13,103
===================================
Cash basis interest income recognized from impaired loans $ 1,081 $ 1,062 $ 650
===================================
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
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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:
1999
--------------
(IN THOUSANDS)
Balance at beginning of year $ 85,555
New loans 90,374
Repayments (49,208)
Changes due to status of executive officers and directors (2,100)
--------
Balance at end of year $124,621
========
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
numerous borrowers engaged in similar activities that would cause them to be
similarly impacted by economic or other conditions. At December 31, 1999, no
concentrations existed in the Corporation's loan portfolio in excess of 10% of
total loans, or $836 million.
NOTE 7 MORTGAGE SERVICING RIGHTS:
A summary of changes in the balance of mortgage servicing rights is as follows:
1999 1998
------- -------
(IN THOUSANDS)
Balance at beginning of year $30,214 $22,535
Additions 12,389 21,502
Amortization (9,690) (6,833)
Change in valuation allowance 8,023 (6,990)
------------------
Balance at end of year $40,936 $30,214
==================
A summary of changes in the valuation allowance during 1999, 1998, and 1997 is
as follows:
1999 1998 1997
------- ------- ------
(IN THOUSANDS)
Balance at beginning of year $ 8,023 $ 1,033 $ 27
Additions -- 7,748 1,006
Reversals (8,023) (758) --
----------------------------
Balance at end of year $ -- $ 8,023 $1,033
============================
At December 31, 1999, the Corporation was servicing 1- to 4-family residential
mortgage loans owned by other investors with balances totaling $5.57 billion
compared to $5.21 billion and $4.97 billion at December 31, 1998 and 1997,
respectively.
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NOTE 8 PREMISES AND EQUIPMENT:
A summary of premises and equipment at December 31 is as follows:
1999 1998
-------- --------
(IN THOUSANDS)
Premises $124,947 $120,013
Land and land improvements 26,638 26,150
Furniture and equipment 128,324 119,758
Leasehold improvements 14,575 11,500
Less: Accumulated depreciation and amortization (154,384) (137,279)
--------------------
Total $140,100 $140,142
--------------------
--------------------
Depreciation and amortization of premises and equipment totaled $17.4 million in
1999, $14.4 million in 1998, and $14.2 million in 1997.
Data processing and management information system services are provided by a
third party to the Corporation pursuant to an agreement for information
technology services. The existing agreement at December 31, 1999, will be
replaced by an agreement with a different third party in mid-2000. The new
agreement, which will be in effect from June 30, 2000 through June 2005, calls
for monthly fixed and variable fees covering the cost of systems operations and
the migration to new systems. Operational costs are subject to annual
adjustment, indexed to changes in the Consumer Price Index (CPI). The costs
associated with the agreement are included in the minimum annual rental and
commitment table below.
The Corporation and certain subsidiaries are obligated under a number of
noncancelable operating leases for other facilities, equipment, and services,
certain of which provide for increased rentals based upon increases in volume,
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)
2000 $ 9,030
2001 12,738
2002 12,343
2003 11,689
2004 10,564
Thereafter 22,678
-------
Total $79,042
=======
Total rental and service expense under leases and other agreements, net of
sublease income, totaled $28.0 million in 1999, $23.7 million in 1998, and $21.6
million in 1997.
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NOTE 9 DEPOSITS:
The distribution of deposits at December 31 is as follows:
1999 1998
---------- ----------
(IN THOUSANDS)
Noninterest-bearing demand deposits $1,103,931 $ 998,379
Interest-bearing demand deposits 838,201 835,296
Savings deposits 868,514 936,677
Money market deposits 1,483,779 1,164,433
Brokered time deposits 337,243 72,496
Other time deposits 4,060,161 4,550,538
------------------------
Total deposits $8,691,829 $8,557,819
========================
Time deposits of $100,000 or more were $804.9 million and $853.6 million at
December 31, 1999 and 1998, respectively. Aggregate annual maturities of
certificate accounts at December 31, 1999 are as follows:
MATURITIES DURING YEAR END
DECEMBER 31, (IN THOUSANDS)
- -------------------------- --------------
2000 $3,492,269
2001 653,962
2002 163,806
2003 47,832
2004 24,770
Thereafter 14,765
----------
Total $4,397,404
==========
NOTE 10 SHORT-TERM BORROWINGS:
Short-term borrowings at December 31 are as follows:
1999 1998
---------- ----------
(IN THOUSANDS)
Federal funds purchased and securities sold under agreements
to repurchase $1,344,396 $ 502,586
Federal Home Loan Bank (FHLB) advances 531,652 937,021
Notes payable to banks 156,900 217,535
Treasury, tax, and loan notes 742,142 5,192
Other borrowed funds -- 8,759
------------------------
Total $2,775,090 $1,671,093
========================
Notes payable to banks are unsecured borrowings under existing lines of credit.
At December 31, 1999, the Corporation's parent company had $200 million of
established lines of credit with various nonaffiliated banks, of which $156.9
million was outstanding. Borrowings under these lines accrue interest at
short-term market rates and are payable upon demand or in maturities up to 90
days.
The short-term FHLB 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
FHLB advances are maintained. In addition, at December 31, 1999 and 1998,
certain subsidiary banks delivered collateral of $4 million and $42 million,
respectively, of mortgage-related securities.
Included in short-term borrowings are FHLB advances with original maturities of
less than one year and callable notes that have one-year call premiums, which
the Corporation expects may be called, even if the notes have maturities
exceeding one year.
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NOTE 11 LONG-TERM DEBT:
Long-term debt at December 31 is as follows:
1999 1998
------- -------
(IN THOUSANDS)
Federal Home Loan Bank advances (4.95% to 7.63% maturing in $17,098 $18,200
2000 through 2014 in 1999, and 4.95% to 7.63% maturing in
2000 through 2013 in 1998)
Industrial development revenue bonds (6.60% to 7.25% in 1999 5,780 5,780
and 1998)
Other borrowed funds 1,405 2,024
------------------
Total long-term debt $24,283 $26,004
==================
The table below summarizes the maturities of the Corporation's long-term debt at
December 31, 1999:
YEAR (IN THOUSANDS)
- ---- --------------
2000 $ 287
2001 9,735
2002 140
2003 7,247
2004 150
Thereafter 6,724
-------
Total long-term debt $24,283
=======
The industrial revenue bonds are payable in annual installments ranging from
$125,000 to $150,000 with additional payments of $1,910,000 and $3,320,000 due
October 1, 2012 and 2021, respectively. Interest is payable semi-annually. The
bonds were used to refinance an apartment project which was previously sold. The
bonds are collateralized by mortgage-backed securities with a carrying value and
fair value of $9,128,000 and $9,202,000, respectively, at December 31, 1999.
NOTE 12 STOCKHOLDERS' EQUITY:
The Corporation issued shares in conjunction with merger and acquisition
activity (see Note 2 of the notes to consolidated financial statements). These
shares had minimal impact on shareholders' equity at December 31, 1999, due to
repurchase activity authorized by the Corporation's Board of Directors ("BOD").
Additionally, on June 12, 1998, the Corporation distributed 12.7 million shares
of common stock in connection with a 5-for-4 stock split effected in the form of
a 25% stock dividend. On March 17, 1997, the Corporation distributed 3.7 million
shares of common stock in connection with a 6-for-5 stock split effected in the
form of a 20% stock dividend. 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, 1999, subsidiary net assets equaled $928.2 million, of which
approximately $158.3 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 BOD approved the implementation of a broad-based stock option grant,
effective July 28, 1999. This stock option grant provides 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, 1999, 1,322,025 shares remain available for granting.
The Corporation has an Incentive Stock Option Plan that provides for the
granting of options to key employees to purchase common stock at a price at
least equal to the fair market value of the stock on the date of grant. The
options granted are for a ten-year term and may be exercised at any time during
this period. As
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of December 31, 1999, 7,634 shares remain available for granting. No options
have been granted from this plan since 1985.
In January 1998, the BOD, with subsequent approval of the Corporation's
shareholders, approved an amendment, increasing the number of shares available
to be issued by an additional 1,875,000 shares, to the Amended and Restated
Long-Term Incentive Stock Plan ("Stock Plan"). The Stock Plan was adopted by the
BOD and originally approved by shareholders in 1987 and amended in 1994 and
1997. Options are generally exercisable up to 10 years from the date of grant
and vest over two to three years. As of December 31, 1999, approximately
2,057,015 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.
1999 1998 1997
--------------------------------------------------------------------------------------------
RANGE OF RANGE OF RANGE OF
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
OUTSTANDING PRICES OUTSTANDING PRICES OUTSTANDING PRICES
--------------------------------------------------------------------------------------------
Outstanding, January 1 1,960,748 $ 2.59-$42.80 2,396,119 $ 2.59-$32.58 2,695,339 $ 2.59-$24.58
Granted 1,298,730 30.91- 39.50 386,375 40.30- 42.80 317,213 28.17- 32.58
Exercised (251,386) 3.50- 28.17 (786,060) 2.59- 28.17 (608,378) 2.71- 24.58
Forfeited (93,016) 7.90- 40.30 (35,686) 7.49- 40.30 (8,055) 12.34- 28.17
--------------------------------------------------------------------------------------------
Outstanding, December 31 2,915,076 $ 2.59-$42.80 1,960,748 $ 2.59-$42.80 2,396,119 $ 2.59-$32.58
============================================================================================
Options exercisable at
year-end 1,337,387 1,297,179 1,821,573
============================================================================================
The following table summarizes information about the Corporation's stock options
outstanding at December 31, 1999:
OPTIONS WEIGHTED AVERAGE REMAINING GRANTS WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE LIFE (YEARS) EXERCISABLE EXERCISE PRICE
----------------------------------------------------------------------------------
Range of Exercise Prices:
$ 2.59 -- $ 5.33 41,514 $ 3.43 1.46 41,514 $ 3.43
$ 7.90 -- $ 8.36 217,543 8.13 1.91 217,543 8.13
$12.34 -- $17.88 404,234 16.83 3.76 397,064 16.82
$19.20 -- $24.58 379,132 22.23 5.62 377,937 22.23
$28.17 -- $32.58 829,387 29.62 8.41 181,323 28.24
Greater than $39.50 1,043,266 39.79 9.05 122,006 40.32
----------------------------------------------------------------------------------
TOTAL 2,915,076 $28.55 7.05 1,337,387 $20.21
==================================================================================
For purposes of providing the pro forma disclosures required under SFAS No. 123,
the fair value of stock options granted in 1997, 1998, 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.
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The following assumptions were used in estimating the fair value for options
granted in 1999, 1998 and 1997:
1999 1998 1997
--------- ------ ------
Dividend yield 3.39% 3.39% 2.10%
Risk free interest rate 4.97% 5.61% 6.47%
Weighted average expected life 5.50 yrs. 7 yrs. 7 yrs.
Expected volatility 24.51% 21.95% 19.64%
The weighted average per share fair values of options granted in 1999, 1998, and
1997 were $7.59, $9.11, and $8.00, 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.
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,
-------------------------------------
1999 1998 1997
-------- -------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Net Income As Reported $164,943 $157,020 $52,359
Pro Forma $162,226 $155,356 $51,179
Basic Earnings Per Share As Reported $ 2.60 $ 2.49 $ 0.83
Pro Forma $ 2.55 $ 2.46 $ 0.81
Diluted Earnings Per Share As Reported $ 2.57 $ 2.46 $ 0.82
Pro Forma $ 2.53 $ 2.44 $ 0.80
Pro forma net income reflects only options granted in 1999, 1998, and 1997.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' graded
vesting period and compensation cost for options granted prior to January 1,
1997, is not considered.
NOTE 13 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.
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The following tables set forth the Plan's funded status and net periodic benefit
cost:
1999 1998
------- -------
($ IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION
Net benefit obligation at beginning of year $37,301 $31,144
Service cost 3,858 3,369
Interest cost 2,549 2,329
Plan amendments -- 92
Actuarial (gain) loss (4,136) 2,282
Gross benefits paid (2,520) (1,915)
------------------
Net benefit obligation at end of year $37,052 $37,301
------------------
------------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $37,035 $34,230
Actual return on plan assets 511 3,856
Employer contributions 1,992 864
Gross benefits paid (2,520) (1,915)
------------------
Fair value of plan assets at end of year $37,018 $37,035
------------------
------------------
FUNDED STATUS
Funded status at end of year $ (34) $ (266)
Unrecognized net actuarial gain (5,974) (4,117)
Unrecognized prior service cost 657 719
Unrecognized net transition asset (2,031) (2,354)
------------------
Net amount recognized at end of year in the balance sheet $(7,382) $(6,018)
------------------
------------------
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate 7.75% 6.75%
Rate of increase in compensation levels 5.00 5.00
==================
1999 1998 1997
------- ------- -------
($ IN THOUSANDS)
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 3,858 $ 3,369 $ 1,957
Interest cost 2,549 2,329 2,015
Expected return on plan assets (2,789) (2,511) (2,151)
Amortization of:
Transition asset (324) (324) (324)
Prior service cost 63 35 31
Actuarial loss -- -- 3
-----------------------------
Total net periodic benefit cost $ 3,357 $ 2,898 $ 1,531
-----------------------------
Weighted average assumptions used in cost calculations:
Discount rate 6.75% 7.00% 7.50%
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
-----------------------------
-----------------------------
FFC had a noncontributory defined benefit retirement plan covering substantially
all Illinois-based employees. This plan was merged into the Corporation's plan
on January 1, 1998. Plan disclosures for periods prior to January 1, 1998, are
included in the Corporation disclosure above.
The Corporation and its subsidiaries also have a Profit Sharing/Retirement
Savings Plan. The Corporation's contribution is determined annually by the
Administrative Committee of the BOD, based in part on performance-based formulas
provided in the plan. Total expense related to contributions to the plan was
$2.3 million, $9.1 million, and $4.5 million in 1999, 1998, and 1997,
respectively. Prior to 1998, FFC had a defined-contribution profit sharing plan,
under which corporate contributions were discretionary. This plan was
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merged with the Corporation's plan in January 1998. Total expense related to
contributions to the FFC plan was $3.5 million in 1997.
FFC sponsored a supplemental executive retirement plan for certain executive
officers, which was partially funded through life insurance and provided
additional benefit at retirement, and an unfunded defined benefit retirement
plan for all outside directors. FFC also entered into employment agreements with
certain executive officers. As a result of the 1997 merger with the Corporation,
FFC recorded a charge of $11.7 million for the year ended December 31, 1997, to
terminate the plans and employment agreements. This charge is included in the
Corporation's merger, integration, and other one-time charges as described in
Note 3.
NOTE 14 INCOME TAX EXPENSE:
The current and deferred amounts of income tax expense (benefit) are as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
------- -------------- --------
(IN THOUSANDS)
Current:
Federal $66,735 $65,938 $ 75,238
State 1,095 114 9,624
-------------------------------------
Total current 67,830 66,052 84,862
Deferred:
Federal 3,894 8,087 (17,860)
State 649 1,804 (3,093)
-------------------------------------
Total deferred 4,543 9,891 (20,953)
-------------------------------------
Total income tax expense $72,373 $75,943 $ 63,909
-------------------------------------
-------------------------------------
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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:
1999 1998
------- -------
(IN THOUSANDS)
Gross deferred tax assets:
Allowance for loan losses $44,332 $38,792
Accrued liabilities 5,333 7,306
Accrued pension expense 1,186 1,168
Deferred compensation 8,179 7,565
Securities valuation adjustment 14,797 18,993
Deposit base intangible 6,595 6,885
Benefit of tax loss carryforwards 14,505 13,357
Other 227 406
------------------
Total gross deferred tax assets 95,154 94,472
Valuation adjustment for deferred tax assets (14,928) (18,866)
------------------
80,226 75,606
Gross deferred tax liabilities:
Premises and equipment 1,343 2,146
Deferred loan fee income and other loan yield adjustment 1,538 --
FHLB bank stock dividend 1,028 1,028
State income taxes 8,045 5,654
Other 13,551 15,157
------------------
Total gross deferred tax liabilities 25,505 23,985
------------------
Net deferred tax assets 54,721 51,621
------------------
Tax effect of unrealized gain (loss) related to available
for sale securities 21,327 (13,351)
------------------
Net deferred tax assets including unrealized gain related to
available for sale securities $76,048 $38,270
------------------
------------------
Components of the 1998 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
a subsidiary and other temporary differences. When realized, the tax benefit for
these items will be used to reduce current tax expense for that period.
The effective income tax rate differs from the statutory federal tax rate. The
major reasons for this difference are as follows:
1999 1998 1997
---- ---- -----
Federal income tax rate at statutory rate 35.0% 35.0% 35.0%
Increases (decreases) resulting from:
Tax-exempt interest and dividends (3.2) (1.7) (2.9)
State income taxes (net of federal income taxes) 1.2 1.7 3.3
Merger, integration, and other one-time charges -- -- 3.4
Change in valuation allowance for deferred tax assets (1.7) (2.4) 15.7
Other (.8) -- 0.5
---------------------
Effective income tax rate 30.5% 32.6% 55.0%
---------------------
---------------------
FFB 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 $79,243,000 of
retained
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income at December 31, 1999. If income taxes had been provided, the deferred tax
liability would have been approximately $31,804,000.
NOTE 15 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 and interest rate swaps.
LENDING-RELATED COMMITMENTS
For off-balance sheet lending-related commitments (such as commitments to extend
credit, commercial letters of credit, and standby letters of credit), the
associated credit risk is essentially the same as that involved in extending
loans to customers and is subject to normal credit policies. The fair value for
off-balance sheet lending commitments is based on fees currently charged to
enter into similar agreements and is not material at December 31, 1999 and 1998.
The following is a summary of lending-related financial instruments with off-
balance sheet risk at December 31:
1999 1998
---------- ----------
(IN THOUSANDS)
Commitments to extend credit $3,165,411 $2,929,012
Commercial letters of credit 26,666 9,795
Standby letters of credit and financial guarantees written 147,864 113,155
Loans sold with recourse 7,851 11,904
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit,
commercial letters of credit, and standby letters of credit and financial
guarantees written is represented by the contractual amount of those
instruments. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. 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
credit, is based on management's credit evaluation of the customer.
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,
1999 and 1998, $8 million and $12 million, respectively, of the serviced loans
were previously sold with recourse, the majority of which is either
federally-insured or federally-guaranteed.
INTEREST RATE SWAPS
As part of managing the Corporation's interest rate risk, a variety of
derivative financial instruments could be used to hedge market values and to
alter the cash flow characteristics of certain on-balance sheet instruments. The
Corporation has principally used interest rate swaps. In these swap agreements,
the Corporation agrees to exchange, at specified intervals, the difference
between fixed- and floating-interest amounts calculated on an agreed-upon
notional principal amount. Pay fixed interest rate swaps are used to convert
fixed rate assets into synthetic variable rate instruments and to convert
variable rate funding sources into synthetic fixed rate funding instruments.
Receive fixed interest rate swaps are used to convert variable rate assets into
synthetic fixed rate instruments and to convert fixed rate funding sources into
synthetic variable rate funding instruments.
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Associated's interest rate swaps at December 31, 1999, are summarized below.
There were no interest rate swaps at December 31, 1998. The effect on net
interest income for 1999 was a decrease of $148,000. The 1999 swaps hedge money
market deposits and the receive rate is based on 3 month LIBOR.
ESTIMATED WEIGHTED AVERAGE
NOTIONAL FAIR MARKET ----------------------------------------------
AMOUNT VALUE PAY RATE RECEIVE RATE REMAINING MATURITY
-------- ----------- -------- ------------ ------------------
($ IN THOUSANDS)
Pay fixed swaps $300,000 $ 1,812 6.36% 6.12% 29 months
The Corporation may enter into various interest rate futures contracts to hedge
specific investment securities. These contracts are commitments to either
purchase or sell a financial instrument at a specified date on an agreed-upon
future date. There were no interest rate futures contracts used in 1999 or 1998.
In November 1997, the Corporation hedged certain agency issued zero-coupon bonds
held by FFC, with a carrying value of $37.2 million and a market value of $41.6
million, by executing various interest rate futures contracts. At December 31,
1997, these contracts had a notional value of $70.5 million and a maturity date
of March 1998. In January 1998, the futures contracts were closed and the
zero-coupon bonds were sold, with a net gain of $5.1 million recognized in
investment securities gains in the first quarter of 1998.
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
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 16 PARENT COMPANY FINANCIAL INFORMATION:
Presented below are condensed financial statements for the Parent Company:
BALANCE SHEETS
1999 1998
---------- ----------
(IN THOUSANDS)
ASSETS
Cash and due from banks $ 854 $ 645
Notes receivable from subsidiaries 117,239 255,513
Investment in subsidiaries 928,237 826,403
Other assets 58,198 45,397
------------------------
Total assets $1,104,528 $1,127,958
========================
LIABILITY AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 156,900 $ 217,535
Long-term debt 1,405 --
Accrued expenses and other liabilities 36,434 31,702
------------------------
Total liabilities 194,739 249,237
Stockholders' equity 909,789 878,721
------------------------
Total liabilities and stockholders' equity $1,104,528 $1,127,958
========================
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STATEMENTS OF INCOME
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1999 1998 1997
-------- -------- -------
(IN THOUSANDS)
INCOME
Dividends from subsidiaries $ 73,675 $161,675 $63,355
Management and service fees from subsidiaries 19,355 10,092 4,685
Interest income on notes receivable 8,007 9,432 7,615
Other income 1,919 1,543 514
-------------------------------
Total income 102,956 182,742 76,169
-------------------------------
EXPENSE
Interest expense on borrowed funds 7,886 5,571 4,634
Salaries and employee benefits 13,470 7,367 3,871
Merger, integration, and other one-time charges -- -- 20,837
Other expense 8,948 6,352 5,203
-------------------------------
Total expense 30,304 19,290 34,545
-------------------------------
Income before income tax expense (benefit) and equity in
undistributed income 72,652 163,452 41,624
Income tax expense (benefit) (1,041) 751 (6,155)
-------------------------------
Income before equity in undistributed net income of
subsidiaries 73,693 162,701 47,779
Equity in undistributed net income of subsidiaries 91,250 (5,681) 4,580
-------------------------------
Net income $164,943 $157,020 $52,359
-------------------------------
-------------------------------
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STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------------
1999 1998 1997
--------- --------- --------
(IN THOUSANDS)
OPERATING INCOME
Net income $ 164,943 $ 157,020 $ 52,359
Adjustments to reconcile net income to net cash provided
by operating activities:
(Increase) decrease in equity in undistributed net
income of subsidiaries (91,250) 5,681 (4,580)
Depreciation and other amortization 388 298 161
Amortization of intangibles 404 443 446
Gain on sales of assets, net (783) (1,321) (356)
(Increase) decrease in interest receivable and other
assets (12,911) 2,949 (10,714)
Increase in interest payable and other liabilities 4,732 6,226 12,080
--------------------------------------
Net cash provided by operating activities 65,523 171,296 49,396
--------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of investment securities 604 1,602 357
Net cash paid in acquisition of subsidiary (10,584) (16,021) --
Net decrease (increase) in notes receivable 138,274 (116,616) (16,335)
Purchase of premises and equipment, net of disposals (503) (1,527) (176)
Capital (contributed to) received from subsidiaries 52,464 (62,162) --
--------------------------------------
Net cash provided (used) by investing activities 180,255 (194,724) (16,154)
--------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in short-term borrowings (60,635) 129,146 14,213
Net increase in long-term debt 1,405 -- --
Cash dividends paid (73,743) (65,841) (49,328)
Proceeds from exercise of stock options 3,421 7,926 5,168
Purchase and retirement of treasury stock (91,762) -- --
Purchase of treasury stock (24,255) (47,163) (3,599)
--------------------------------------
Net cash provided (used) by financing activities (245,569) 24,068 (33,546)
--------------------------------------
Net increase (decrease) in cash and cash equivalents 209 640 (304)
Cash and due from banks at beginning of year 645 5 309
--------------------------------------
Cash and due from banks at end of year $ 854 $ 645 $ 5
--------------------------------------
--------------------------------------
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.
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The estimated fair values of the Corporation's financial instruments at December
31, 1999 and 1998 are as follows:
1999 1998
----------------------------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------------------------------------------------
(IN THOUSANDS)
Financial assets:
Cash and due from banks $ 284,652 $ 284,652 $ 331,532 $ 331,532
Interest-bearing deposits in other financial
institutions 4,394 4,394 200,467 200,467
Federal funds sold and securities purchase
under purchased under agreements to
resell 25,120 25,120 4,485 4,485
Investment securities:
Held to maturity 414,037 413,107 550,775 562,940
Available for sale 2,841,498 2,841,498 2,356,960 2,356,960
Loans held for sale 11,955 12,001 165,170 166,011
Loans 8,357,948 8,295,682 7,272,697 7,339,376
Financial liabilities:
Deposits 8,691,829 8,677,444 8,557,819 8,569,915
Short-term borrowings 2,775,090 2,775,090 1,671,093 1,671,093
Long-term debt 24,283 25,283 26,004 27,814
Off-balance sheet:
Interest rate swap agreements -- 1,812 -- --
----------------------------------------------------
At December 31, 1999, the notional amount of off-balance sheet instruments was
$300 million of interest rate swap agreements. There were no interest rate swaps
at December 31, 1998. See Note 15 for information on the fair value of
lending-related off-balance sheet financial instruments.
CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS IN OTHER FINANCIAL
INSTITUTIONS, AND FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS
TO RESELL--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, 1999 or
1998.
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, NOW accounts, and money market
accounts, is equal to the amount payable on demand as of December 31. The fair
value of certificates of deposit is based on the discounted value of contractual
cash
65
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flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities.
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 AGREEMENTS--The fair value of interest rate swap 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, 1999, that the
Corporation and the subsidiary banks meet all capital adequacy requirements to
which they are subject.
As of December 31, 1999 and 1998, the most recent notifications from the Office
of the Comptroller of the Currency and the Federal Deposit Insurance Corporation
categorized the Corporation and its subsidiary banks as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized the Corporation 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 1999 or 1998.
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TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS:
------------------ ------------------ -----------------------
AMOUNT RATIO* AMOUNT RATIO* AMOUNT RATIO*
-------- ------ -------- ------ ---------- ---------
($ IN THOUSANDS)
AS OF DECEMBER 31, 1999:
- -----------------------------
ASSOCIATED BANC-CORP
- -----------------------------
Total Capital $941,005 10.99% $684,739 +8.00% $855,923 +10.00%
Tier I Capital $831,907 9.72% $342,369 +4.00% $513,554 +6.00%
Leverage $831,907 6.80% $489,083 +4.00% $611,353 +5.00%
ASSOCIATED BANK ILLINOIS, N.A
- -----------------------------
Total Capital $187,183 11.12% $134,660 +8.00% $168,325 +10.00%
Tier I Capital $166,084 9.87% $ 67,330 +4.00% $100,995 +6.00%
Leverage $166,084 6.03% $110,108 +4.00% $137,635 +5.00%
ASSOCIATED BANK MILWAUKEE
- -----------------------------
Total Capital $189,302 10.87% $139,329 +8.00% $174,161 +10.00%
Tier I Capital $166,283 9.55% $ 69,664 +4.00% $104,497 +6.00%
Leverage $166,283 6.05% $109,988 +4.00% $137,485 +5.00%
ASSOCIATED BANK GREEN BAY
- -----------------------------
Total Capital $176,525 10.75% $131,339 +8.00% $164,174 +10.00%
Tier I Capital $142,972 8.71% $ 65,670 +4.00% $ 98,505 +6.00%
Leverage $142,972 6.60% $ 86,632 +4.00% $108,290 +5.00%
ASSOCIATED BANK NORTH
- -----------------------------
Total Capital $114,485 12.43% $ 73,705 +8.00% $ 92,132 +10.00%
Tier I Capital $101,650 11.03% $ 36,853 +4.00% $ 55,279 +6.00%
Leverage $101,650 7.14% $ 56,983 +4.00% $ 71,229 +5.00%
AS OF DECEMBER 31, 1998:
- -----------------------------
ASSOCIATED BANC-CORP
- -----------------------------
Total Capital $906,326 12.28% $590,291 +8.00% $737,863 +10.00%
Tier I Capital $815,069 11.05% $295,145 +4.00% $442,718 +6.00%
Leverage $815,069 7.56% $431,304 +4.00% $539,130 +5.00%
ASSOCIATED BANK ILLINOIS, N.A
- -----------------------------
Total Capital $199,346 14.04% $113,605 +8.00% $142,006 +10.00%
Tier I Capital $181,509 12.78% $ 56,803 +4.00% $ 85,204 +6.00%
Leverage $181,509 12.82% $ 56,641 +4.00% $ 70,801 +5.00%
ASSOCIATED BANK MILWAUKEE
- -----------------------------
Total Capital $158,680 10.08% $125,887 +8.00% $157,359 +10.00%
Tier I Capital $137,508 8.74% $ 62,944 +4.00% $ 94,415 +6.00%
Leverage $137,508 7.47% $ 73,672 +4.00% $ 92,091 +5.00%
ASSOCIATED BANK GREEN BAY
- -----------------------------
Total Capital $138,636 10.26% $108,137 +8.00% $135,172 +10.00%
Tier I Capital $108,023 7.99% $ 54,069 +4.00% $ 81,103 +6.00%
Leverage $108,023 6.92% $ 62,397 +4.00% $ 77,997 +5.00%
ASSOCIATED BANK NORTH
- -----------------------------
Total Capital $108,959 12.92% $ 67,457 +8.00% $ 84,321 +10.00%
Tier I Capital $ 97,094 11.51% $ 33,729 +4.00% $ 50,593 +6.00%
Leverage $ 97,094 10.09% $ 38,501 +4.00% $ 48,127 +5.00%
+ Represents the 'greater than or equal to' sign.
*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.
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NOTE 19 EARNINGS PER SHARE:
Presented below are the calculations for basic and diluted earnings per share:
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997
---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Basic:
Net income $164,943 $157,020 $52,359
Weighted average shares outstanding 63,507 63,125 62,884
Basic earnings per common share $ 2.60 $ 2.49 $ 0.83
=====================================
Diluted:
Net income $164,943 $157,020 $52,359
Weighted average shares outstanding 63,507 63,125 62,884
Effect of dilutive stock options outstanding 554 664 1,051
-------------------------------------
Diluted weighted average shares outstanding 64,061 63,789 63,935
Diluted earnings per common share $ 2.57 $ 2.46 $ 0.82
=====================================
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 began a process toward evaluating business lines and
products across its subsidiaries in 1999, management decision making has been
and is still strongly based on financial information by legal entity. The
Corporation, prior to and since the 1997 merger with FFC, has managed itself as
a multibank holding company with a super community banking philosophy. 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, leasing, mortgage, insurance, and brokerage
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, insurance, and international banking; and b) retail
banking - installment, mortgage, and other real estate lending, credit cards,
insurance, brokerage, and deposits.
The "other" segment is comprised of smaller nonreportable segments, including
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.
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The accounting policies of the segments are the same as those described in Note
1. Selected segment information is presented below.
BANKING OTHER ELIMINATIONS CONSOLIDATED TOTAL
------- ----- ------------ ------------------
(IN THOUSANDS)
1999
Interest income $ 844,607 $ 15,378 $ (45,465) $ 814,520
Interest expense 452,362 11,878 (45,465) 418,775
----------- ---------- ----------- -----------
Net interest income 392,245 3,500 -- 395,745
Provision for loan losses 18,616 627 -- 19,243
Noninterest income 161,179 121,721 (116,994) 165,906
Depreciation and amortization 19,996 9,024 (3) 29,017
Other noninterest expense 295,726 97,337 (116,988) 276,075
Income taxes 65,613 6,584 176 72,373
----------- ---------- ----------- -----------
Net income $ 153,473 $ 11,649 $ (179) $ 164,943
=========== ========== =========== ===========
Total assets $13,463,684 $1,215,247 $(2,159,029) $12,519,902
=========== ========== =========== ===========
1998
Interest income $ 813,561 $ 10,374 $ (38,170) $ 785,765
Interest expense 441,771 7,427 (38,170) 411,028
----------- ---------- ----------- -----------
Net interest income 371,790 2,947 -- 374,737
Provision for loan losses 14,740 -- -- 14,740
Noninterest income 137,182 86,489 (55,720) 167,951
Depreciation and amortization 32,855 3,785 (1,354) 35,286
Other noninterest expense 246,442 58,431 (45,174) 259,699
Income taxes 69,197 6,571 175 75,943
----------- ---------- ----------- -----------
Net income $ 145,738 $ 20,649 $ (9,367) $ 157,020
=========== ========== =========== ===========
Total assets $11,479,306 $1,235,362 $(1,464,001) $11,250,667
=========== ========== =========== ===========
1997
Interest income $ 806,408 $ 9,757 $ (28,246) $ 787,919
Interest expense 433,641 6,331 (28,335) 411,637
----------- ---------- ----------- -----------
Net interest income 372,767 3,426 89 376,282
Provision for loan losses 14,868 -- -- 14,868
Noninterest income 107,622 56,397 (33,427) 130,592
Depreciation and amortization 26,216 2,698 -- 28,914
Other noninterest expense 282,202 47,765 (86,855) 243,112
Income taxes 75,727 2,425 (350) 77,802
----------- ---------- ----------- -----------
Subtotal $ 81,376 $ 6,935 $ 53,867 142,178
=========== ========== ===========
Merger, integration, and other one-time
charges, net of tax (see Note 3) (89,819)
-----------
Net income $ 52,359
===========
Total assets $12,469,413 $1,400,046 $(3,179,017) $10,690,442
=========== ========== =========== ===========
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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, 1999 and 1998, 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, 1999.
These consolidated financial statements are the responsibility of Associated
Banc-Corp's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the
consolidated financial statements of First Financial Corporation and
subsidiaries, a wholly-owned subsidiary of Associated Banc-Corp as of December
31, 1997, which consolidated statement of income reflected total revenues
constituting 52.6% for the year ended December 31, 1997, of the related
consolidated total. Those financial statements were audited by Ernst & Young LLP
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for First Financial Corporation and subsidiaries, is based
solely on the report of Ernst & Young LLP.
We conducted our audits in accordance with generally accepted auditing
standards. 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 and the report of Ernst & Young LLP provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of Ernst & Young LLP, 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
KPMG LLP
Chicago, Illinois
January 19, 2000
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INDEPENDENT AUDITORS' REPORT
FIRST FINANCIAL CORPORATION
The Board of Directors
First Financial Corporation
We have audited the consolidated statements of income, changes in stockholders'
equity, and cash flows of First Financial Corporation and subsidiaries (the
"Corporation") for the year ended December 31, 1997 (not presented separately
herein). These consolidated statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated 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 statement of income
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
First Financial Corporation and subsidiaries for the year ended December 31,
1997 in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Milwaukee, Wisconsin
January 22, 1998
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MARKET INFORMATION
MARKET PRICE RANGE
SALES PRICES
-------------------
DIVIDENDS PAID BOOK VALUE HIGH LOW
-------------- ---------- ------ ------
1999
4th Quarter $.290 $14.40 $40.38 $33.75
3rd Quarter .290 14.54 41.19 35.09
2nd Quarter .290 14.18 43.06 30.81
1st Quarter .290 14.27 35.25 30.31
- -------------------------------------------------------------------------------------------------------
1998
4th Quarter $.290 $13.97 $37.00 $26.75
3rd Quarter .290 13.96 42.38 31.44
2nd Quarter .232 13.70 43.70 36.25
1st Quarter .232 13.24 43.80 38.09
- -------------------------------------------------------------------------------------------------------
Annual dividend rate: $1.16
Market information has been restated for the 5-for-4 stock split declared April
22, 1998, effected as a 25% stock dividend paid on June 12, 1998, to
shareholders of record at the close of business on June 1, 1998.
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 2000 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 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 2000 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 2000 Annual Meeting of Shareholders, which contains information concerning
this item, under the captions "Principal Holders of Common Stock" and "Security
Ownership of Management," is incorporated herein by reference.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the Corporation's definitive Proxy Statement, prepared for
the 2000 Annual Meeting of Shareholders, which contains information concerning
this item under the caption "Certain Transactions," is incorporated herein by
reference.
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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, 1999 and 1998
Consolidated Statements of Income -- For the Years Ended December 31, 1999,
1998, and 1997
Consolidated Statements of Changes in Stockholders' Equity -- For the Years
Ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows -- For the Years Ended December 31,
1999, 1998, and 1997
Notes to Consolidated Financial Statements
Independent Auditors' Reports
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(A)3 EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
EXHIBIT SEQUENTIAL PAGE NUMBER OR
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 Plan Form 10-K
for fiscal year ended December 31, 1987
*(10)(b) The Restated Long-Term Stock Plan of the Exhibits filed with Incentive
Registrant Associated's registration statement
(333-46467) on Form S-8 filed under the
Securities Act of 1933
*(10)(c) Change of Control Plan of the Registrant Exhibit (10)(d) to Report on Form 10-K
effective April 25, 1994 for fiscal year ended December 31, 1994
*(10)(d) Deferred Compensation Plan and Deferred Exhibit (10)(e) to Report on Form 10-K
Compensation Trust effective as of for fiscal year ended December 31, 1994
December 16, 1993, and Deferred
Compensation Agreement of the Registrant
dated December 31, 1994
(11) Statement Re Computation of Per Share See Note 19 in Part II Item 8
Earnings
(21) Subsidiaries of the Corporation Filed herewith
(23) Consents of Independent Auditors Filed herewith
(24) Power of Attorney Filed herewith
(27) Financial Data Schedule 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
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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 23, 2000 By: /s/ H. B. CONLON
-------------------------------------
H. B. Conlon
Chairman 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.
By: /s/ H. B. CONLON By: *
------------------------------------ -------------------------------------
H. B. Conlon William R. Hutchinson
Chairman and Chief Executive Officer Director
By: /s/ JOSEPH B. SELNER By: *
------------------------------------ -------------------------------------
Joseph B. Selner Robert P. Konopacky
Chief Financial Officer Director
Principal Financial Officer and
Principal Accounting Officer
By: /s/ ROBERT C. GALLAGHER By: *
------------------------------------ -------------------------------------
Robert C. Gallagher Dr. George R. Leach
President, Chief Operating Officer, Director
and a Director
By: * By: *
------------------------------------ -------------------------------------
John C. Seramur John C. Meng
Vice Chairman Director
By: * By: *
------------------------------------ -------------------------------------
Robert S. Gaiswinkler J. Douglas Quick
Director Director
By: * By: *
------------------------------------ -------------------------------------
Ronald R. Harder John H. Sproule
Director Director
By: * By: *
------------------------------------ -------------------------------------
John S. Holbrook, Jr. Ralph R. Staven
Director Director
*By: /s/ BRIAN R. BODAGER By: *
------------------------------------ -------------------------------------
Brian R. Bodager Norman L. Wanta
Attorney-in-Fact Director
Date: March 23, 2000
75