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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, 1998
[_] 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 ((S)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, 1999, 63,361,693 shares of Common Stock were outstanding and
the aggregate market value of the voting stock held by nonaffiliates of the
Registrant was approximately $1,859,721,000. Excludes approximately
$96,572,000 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
$161,436,000 of market value representing 8.25% of the outstanding shares of
the Registrant held in a fiduciary capacity by the trust departments of three
wholly-owned subsidiaries 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 28, 1999
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ASSOCIATED BANC-CORP
1998 FORM 10-K TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 38
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 71
PART III
Item 10. Directors and Executive Officers of the Registrant 71
Item 11. Executive Compensation 71
Item 12. Security Ownership of Certain Beneficial Owners and Management 71
Item 13. Certain Relationships and Related Transactions 71
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 72
Signatures
2
Special Note Regarding Forward-Looking Statements
Forward-looking statements have been made in this document, and in documents
that are incorporated by reference, that are subject to risks and
uncertainties. These forward-looking statements, which are included in
Management's Discussion and Analysis and in the Chairman's letter, 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. Currently, the Corporation owns ten commercial
banks located in Illinois, Minnesota, and Wisconsin (the "affiliates") serving
their local communities and, measured by total assets held at December 31,
1998, was the third largest commercial bank holding company headquartered in
Wisconsin. The Corporation also owns 30 nonbanking subsidiaries located in
Arizona, California, Delaware, Illinois, Missouri, Nevada, and Wisconsin.
The Corporation acquired Citizens Bankshares, Inc., and its wholly owned
subsidiary, Citizens Bank, National Association, and its wholly owned
subsidiaries, CB Investments, Inc. and Wisconsin Finance Corporation, and its
wholly owned subsidiary, Citizens Financial Services, Inc., on December 19,
1998. Further, the Corporation consummated the acquisition of Windsor
Bancshares, Inc. and its wholly owned subsidiary, Bank Windsor, on February 3,
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, 1998, provided services through
225 locations in 155 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
3
accounts, safe deposit and night depository facilities. Automated Teller
Machines (ATMs), which provide 24-hour banking services to customers of the
affiliates, are installed in many locations in the affiliates' service areas.
The affiliates are members of an interstate shared ATM network, which allows
their customers to perform banking transactions from their checking, savings,
or credit card accounts at ATMs in a multi-state environment. Among the
services designed specifically to meet the needs of 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 possible loan
losses ("AFLL") represents management's estimate of an amount adequate to
provide for potential 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, such as Year 2000 issues. Credit risk management is discussed
under sections "Loans," "Allowance for Possible 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.
Three of the affiliates, 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. Several investment subsidiaries
located in Nevada hold, manage, and trade cash, stocks, and securities
transferred from the affiliates and reinvest investment income. 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 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. In addition to real estate loans, the Corporation's
affiliates and subsidiaries originate significant volumes of consumer loans,
credit card loans, and student loans. Consumer, home equity, and student
lending activities are principally conducted in Wisconsin and Illinois, while
the credit card base and resulting loans are principally centered in the
Midwest. Nearly all long-term, fixed-rate real estate mortgage loans generated
are sold in the secondary market and to other financial institutions, with the
subsidiaries retaining the servicing of those loans.
4
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.
Employees
At December 31, 1998, the Corporation, its affiliates, and subsidiaries, as a
group, had 3,965 full-time equivalent employees.
Competition
Competition exists in all of the Corporation's principal markets. 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. Substantial competition exists from other financial
institutions engaged in the business of making loans, accepting deposits, and
issuing credit cards. 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 are non-
member banks. The subsidiary thrift of the Corporation was supervised and
examined by the Office of Thrift Supervision until it was merged out of
existence in November 1998. 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.
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
5
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 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
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 currently subject to a five-year
lease with two consecutive five-year extensions.
The affiliates currently occupy 225 offices in 155 different communities
within Illinois, Minnesota, and Wisconsin. All affiliate main offices are
owned, except Associated Bank Milwaukee, Associated Bank Chicago, and
Associated Bank Illinois. The affiliate main offices in downtown Milwaukee,
Chicago, and Rockford 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.
6
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 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
28, 1999.
The following is a list of names and ages of executive officers of the
Corporation and affiliates indicating all positions and offices held by each
such person and each such person's principal occupation(s) or employment
during the past five years. The Date of Election refers to the date the person
was first elected an officer of the Corporation or its affiliates. Officers
are appointed annually by the Board of Directors at the meeting of directors
immediately following the Annual Meeting of Shareholders. There are no family
relationships among these officers nor any arrangement or understanding
between any officer and any other person pursuant to 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: 63 Associated Banc-Corp
Prior to October 1998, Chairman,
President, and Chief Executive Officer
of Associated Banc-Corp
Robert C. Gallagher President, Chief Operating Officer, and April 28, 1982
Age: 60 Director of Associated Banc-Corp
Prior to October 1998, Vice Chairman of
Associated Banc-Corp; Chairman and
Chief Executive Officer of Associated
Bank Green Bay (affiliate)
Prior to April 1996, Executive Vice
President and Director of Associated
Banc-Corp; Chairman, President and
Chief Executive Officer of Associated
Bank Green Bay (affiliate)
John C. Seramur Vice Chairman of Associated Banc-Corp October 27, 1997
Age: 56
From October 1997 to November 1998,
Vice Chairman of Associated Banc-Corp;
President, Chief Executive Officer, and
Director of First Financial Corporation
(former affiliate); President, Chief
Executive Officer, and Director of
First Financial Bank (former affiliate)
Prior to October 1997, President, Chief
Executive Officer, and Director of
First Financial Corporation (former
affiliate); President, Chief Executive
Officer, and Director of First
Financial Bank (former affiliate)
Brian R. Bodager Chief Administrative Officer, General July 22, 1992
Age: 43 Counsel and Corporate Secretary of
Associated Banc-Corp
Prior to July 1997, Senior Vice
President, General Counsel, and
Corporate Secretary of Associated Banc-
Corp
7
Name Offices and Positions Held Date of Election
Joseph B. Selner Chief Financial Officer of January 25, 1978
Age: 52 Associated Banc-Corp
Arthur E. Olsen, III General Auditor of Associated Banc- July 28, 1993
Age: 47 Corp
Mary Ann Bamber Director of Retail Banking of January 22, 1997
Age: 48 Associated 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 January 22, 1997
Age: 53 Associated Banc-Corp
Prior to January 1997, Officer of a
Wisconsin manufacturing company
Donald E. Peters Director of Systems and Operations October 27, 1997
Age: 49 of Associated
Banc-Corp
From October 1997 to November 1998,
Director of Systems and Operations
of Associated Banc-Corp; Executive
Vice President of First Financial
Bank (former affiliate)
Prior to October 1997, Executive
Vice President of First Financial
Corporation (former affiliate);
Executive Vice President of First
Financial Bank (former affiliate)
Cindy K. Moon-Mogush Director of Marketing of Associated April 20, 1998
Age: 37 Banc-Corp
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: 43
Prior to May 18, 1998, Senior Vice
President of a Michigan-based bank
holding company
John P. Evans Chief Executive Officer and Director August 16, 1993
Age: 49 of Associated Bank North (affiliate)
David J. Handy President, Chief Executive Officer, May 31, 1991
Age: 59 and Director of Associated Bank,
National Association (affiliate)
David G. Krill President, Chief Executive Officer, November 3, 1997
Age: 56 and Director of Associated
Commercial Mortgage, Inc.
Prior to November 1997, Senior Vice
President of First Financial Bank
(former affiliate)
Michael B. Mahlik Executive Vice President, Managing January 1, 1991
Age: 46 Trust Officer, and Director of
Associated Bank, National
Association (affiliate)
George J. McCarthy President, Chief Executive Officer, November 11, 1983
Age: 48 and Director of Associated Bank
Chicago (affiliate)
8
Name Offices and Positions Held Date of Election
Mark J. McMullen Senior Executive Vice President and June 2, 1981
Age: 50 Director of Associated Bank Green Bay
(affiliate)
Prior to July 1996, Executive Vice
President and Director of Associated
Bank Green Bay (affiliate)
Randall J. Peterson President, Chief Executive Officer, August 2, 1982
Age: 53 and Director of Associated Bank Green
Bay (affiliate)
From July 1996 to October 1998,
President and Director of Associated
Bank Green Bay (affiliate)
Prior to July 1996, Executive Vice
President and Director of Associated
Bank Green Bay (affiliate)
Gary L. Schaefer President and Director of Associated March 1, 1995
Age: 49 Bank South Central (affiliate)
Prior to March 1995, Senior Officer of
a Wisconsin bank
Thomas R. Walsh President, Chief Executive Officer, January 1, 1994
Age: 41 and Director of Associated Bank
Illinois (affiliate)
From January 1994 to November 12,
1998, President, Chief Executive
Officer, and Director of Associated
Bank Lakeshore (affiliate)
From September 1992 to January 1994,
Senior Officer of Associated Bank
Lakeshore (affiliate)
Gordon J. Weber President, Chief Executive Officer, December 15, 1993
Age: 51 and Director of Associated Bank
Milwaukee (affiliate);
Director of Associated Bank South
Central (affiliate)
Prior to December 15, 1993, President,
Chief Executive Officer and Director
of Associated Bank Lakeshore
(affiliate)
Scott A. Yeoman President, Chief Executive Officer, October 1, 1994
Age: 41 and Director of Associated Bank
Lakeshore (affiliate)
From October 1, 1994, to September 15,
1998, Senior Vice President of
Associated Bank Lakeshore (affiliate)
Prior to October 1, 1994, Vice
President of an Illinois-based bank
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 71 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,
$.01 par value, as of March 1, 1999, was 10,400. Certain of the Corporation's
shares are held in "nominee" or "street" name and, accordingly, the number of
beneficial owners of such shares is not known nor included in the foregoing
number.
Payment of future dividends is within the discretion of the Corporation's
Board of Directors and will depend, among other factors, on earnings, capital
requirements, and the operating and financial condition of the Corporation. At
the present time, the Corporation expects that dividends will continue to be
paid in the future.
9
ITEM 6 SELECTED FINANCIAL DATA
TABLE 1: EARNINGS SUMMARY AND SELECTED FINANCIAL DATA(1)
($ in thousands, except per share data)
%
Change 5-Year
1997 Compound
to Growth
Years ended December 31, 1998 1998 1997 1996 1995 1994 1993 Rate
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Interest income $ 785,765 (0.3)% $ 787,919 $ 731,763 $ 696,858 $ 613,725 $ 586,567 6.0%
Interest expense 411,028 (0.1) 411,637 375,922 360,499 292,735 287,587 7.4
------------------------------------------------------------------------------------------
Net interest income 374,737 (0.4) 376,282 355,841 336,359 320,990 298,980 4.6
Provision for possible
loan losses 14,740 (53.5) 31,668 13,695 14,029 9,035 16,441 (2.2)
------------------------------------------------------------------------------------------
Net interest income
after provision for
possible loan losses 359,997 4.5 344,614 342,146 322,330 311,955 282,539 5.0
------------------------------------------------------------------------------------------
Noninterest income 167,951 76.2 95,302 116,274 104,989 84,155 95,713 11.9
Noninterest expense 294,985 (8.9) 323,648 293,231 252,927 245,310 240,318 4.2
------------------------------------------------------------------------------------------
Net noninterest expense 127,034 (44.4) 228,346 176,957 147,938 161,155 144,605 (2.6)
------------------------------------------------------------------------------------------
Income before income
taxes and extraordinary
item/cumulative effect
of an accounting change 232,963 100.4 116,268 165,189 174,392 150,800 137,934 11.1
Income tax expense 75,943 18.8 63,909 57,487 62,381 54,203 49,311 9.0
Extraordinary item -- -- N/M (686) -- -- -- N/M
------------------------------------------------------------------------------------------
NET INCOME $ 157,020 199.9% $ 52,359 $ 107,016 $ 112,011 $ 96,597 $ 88,623 12.1%
==========================================================================================
Basic earnings per
share(2)
Income before
extraordinary item $ 2.49 198.7% $ 0.83 $ 1.70 $ 1.82 $ 1.59 $ 1.50 10.6%
Net income 2.49 198.7 0.83 1.69 1.82 1.59 1.50 10.6
Diluted earnings per
share(2)
Income before
extraordinary item 2.46 200.6 0.82 1.67 1.79 1.55 1.44 11.3
Net income 2.46 200.6 0.82 1.66 1.79 1.55 1.44 11.3
Cash dividends per
share(2) 1.04 17.4 0.89 0.76 0.65 0.57 0.50 15.8
Weighted average shares
outstanding
Basic 63,125 0.4 62,884 63,205 61,386 60,747 59,005 1.4
Diluted 63,789 (0.2) 63,935 64,380 62,473 62,144 61,518 0.7
SELECTED FINANCIAL DATA
Year-End Balances:
Loans (including loans
held for sale) $ 7,437,867 3.5% $ 7,186,551 $ 6,697,404 $6,418,683 $5,995,964 $5,380,082 6.7%
Allowance for possible
loan losses 99,677 7.5 92,731 71,767 68,560 65,774 63,415 9.5
Investment securities 2,907,735 (1.1) 2,940,218 2,753,938 2,266,895 2,499,380 2,433,963 3.6
Assets 11,250,667 5.2 10,690,442 10,120,413 9,393,609 9,130,522 8,448,468 5.9
Deposits 8,557,819 1.9 8,395,277 7,959,240 7,570,201 7,334,240 7,063,481 3.9
Long-term borrowings 26,004 70.3 15,270 33,329 36,907 94,537 250,402 (36.4)
Stockholders' equity 878,721 8.0 813,692 803,562 725,211 626,591 560,722 9.4
Stockholders' equity per
share(2) 13.97 8.1 12.92 12.81 11.75 10.27 9.43 8.2
------------------------------------------------------------------------------------------
Average Balances:
Loans (including loans
held for sale) $ 7,255,850 4.3% $ 6,959,018 $ 6,583,572 $6,157,655 $5,636,601 $5,136,319 7.2%
Investment securities 2,737,556 (5.8) 2,905,921 2,523,757 2,421,379 2,536,133 2,444,255 2.3
Assets 10,628,695 2.3 10,391,718 9,640,471 9,123,981 8,737,231 8,228,145 5.3
Deposits 8,430,701 3.8 8,121,945 7,778,177 7,409,409 7,191,053 6,927,867 4.0
Stockholders' equity 856,425 2.0 839,859 775,180 674,368 596,365 511,737 10.8
------------------------------------------------------------------------------------------
Financial Ratios:
Return on average
equity(3) 18.33% 140 bp 16.93% 16.64% 17.21% 16.20% 17.32%
Return on average
assets(3) 1.48 11 1.37 1.35 1.27 1.11 1.08
Net interest margin,
tax-equivalent 3.79 (7) 3.86 3.95 3.95 3.93 3.91
Average equity to
average assets 8.06 (2) 8.08 8.04 7.39 6.83 6.22
Dividend payout
ratio(3)(4) 41.93 255 39.38 37.07 35.71 35.85 33.33
==========================================================================================
(1) All financial data adjusted retroactively for certain acquisitions
accounted for using the pooling-of-interests method.
(2) Per share data adjusted retroactively for stock splits and stock dividends.
(3) Ratio is based upon income prior to merger integration and other one-time
charges or extraordinary items.
(4) Ratio is based upon basic earnings per share.
N/M = not meaningful
10
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is management's analysis to assist in the
understanding and evaluation of the consolidated financial condition and
results of operations of 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 the 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 focuses on "operating earnings." To
arrive at operating earnings, reported results of 1997 and 1996 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.
. 1996 operating earnings exclude a one-time pre-tax charge of $28.8
million associated with the recapitalization of the Savings Association
Insurance Fund ("SAIF"), a one-time pre-tax charge of $4.2 million
related to a change in accounting for the amortization of goodwill and
other intangible assets, and an extraordinary after-tax charge of
$686,000 related to early redemption costs on subordinated notes (all
recorded at FFC). These charges, $22.7 million after-tax, reduced basic
earnings per share by $0.35 and diluted earnings per share by $0.34. See
also Note 3 of the notes to consolidated financial statements.
Performance ratios for these periods are also calculated excluding these
items.
All per share information has been restated to reflect 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.
Performance Summary
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 decreased by $519,000 between the
annual periods. The interest rate environment, affected by a flattening
yield curve, negatively impacted net interest income. Growth in earning
asset volume, and changes in mix toward higher yielding loans and toward
lower rate funding, countered the negative impact from the flattening
yield curve.
. 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 possible loan losses to loans increased to 1.37% from 1.31% at
December 31, 1998 and 1997, respectively.
11
. 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.
Cash dividends paid in 1998 increased by 17.4% to $1.04 per share over the
$0.89 per share paid in 1997.
Business Combinations
The Corporation's business combination activity is summarized in Note 2 of the
notes to consolidated financial statements.
On December 19, 1998, the Corporation completed its acquisition of Citizens
Bankshares, Inc. ("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 through the issuance of 448,571 shares of common
stock and $16.2 million in cash. The purchase price exceeded the fair value of
net assets acquired, resulting in the recording of $11.9 million of goodwill.
At December 31, 1998, Citizens Bank and the consumer finance companies
continue operations as wholly-owned subsidiaries of the Corporation. In the
second quarter of 1999, the Corporation anticipates merging Citizens Bank into
its existing banks.
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
Financial, Inc., 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.
During 1996, the Corporation acquired $457 million in assets through four
acquisition transactions. Three were accounted for using the pooling-of
interests method. Goodwill of $1.9 million was recorded on the fourth
transaction, accounted for under the purchase method.
Subsequent Combination
On February 3, 1999, the Corporation consummated the acquisition of Windsor
Bancshares, Inc. ("Windsor"), a Minnesota bank holding company. Windsor's
principal subsidiary is Bank Windsor, which operates offices in the Minnesota
communities of Minneapolis, Nerstrand, Sleepy Eye and Chisholm. At December
31, 1998, Windsor had total consolidated assets of approximately $178 million.
The transaction was consummated through the issuance of 799,961 shares of
common stock and was accounted for under the purchase method. It is not
reflected in the accompanying consolidated financial statements.
INCOME STATEMENT ANALYSIS
Net Interest Income
Net interest income continues to be the largest component of the Corporation's
operating income (net interest income plus noninterest income), accounting for
69.1% of 1998 total operating income, compared
12
to 74.2% in 1997. The decline in this relationship was a combination of the
lower net interest income as further discussed below, and the increase in
noninterest income (discussed under "Noninterest Income").
Net interest income represents the difference between interest earned on
loans, securities and other interest-earning assets, and the interest expense
associated with the deposits and borrowings that fund them. Interest rate
fluctuations together with changes in volume and types of earning assets and
interest-bearing liabilities combine to affect total net interest income. The
remainder of this analysis discusses net interest income on a fully taxable
equivalent ("FTE") basis in order to provide comparability among the types of
interest earned. See also Tables 2 through 5 for additional information
related to net interest income and the net interest margin.
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. 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 yield curve change and the low interest rate environment of residential
mortgage lending were factors causing prepayments of mortgage loans to
accelerate significantly during 1998. This accumulation of funds was invested
at lower yields than the assets that were prepaid. Thus, rates decreased
interest earned from earning assets by $16.9 million (mostly in loans, with a
$15.2 million decrease), while moderately decreasing interest paid on
interest-bearing liabilities ("IBLs") by $4.3 million, for a net $12.6 million
decrease to net interest income.
Volumes and changes in mix offset most of the impact from the interest rate
environment and competitive pricing changes. Earning asset volume increased
$166 million, the mix of earning assets shifted towards higher yielding loans
(average loans growing to represent 72.11% of average earning assets for 1998
versus 70.32% for 1997), IBLs volume increased $96 million, and the mix of
IBLs shifted towards lower rate deposits (average interest-bearing deposits
growing to represent 86.29% of average IBLs for 1998 compared to 84.88% for
1997). Thus, the growth and composition of earning assets contributed an
increase of $15.8 million to FTE net interest income, while the growth of IBLs
cost an additional $3.7 million, for a net $12.1 million increase to 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 re-pricing 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.
Loans are the largest component of earning assets. On average, loans grew $297
million, or 4.3%, to $7.3 billion for 1998, and represented 72.11% of earning
assets, compared to 70.32% for 1997. A change in the total yield on the loan
portfolio generally will have the largest impact on net interest income. The
yield on total loans decreased by 21 basis points to 8.32%, after decreasing 5
basis points in 1997 versus 1996. This was strongly impacted by the high
prepayment activity seen in mortgages during 1998, competitive pricing
pressure on new loans, and the impact of the flattening yield curve on the
yields of new loan production.
Deposits are the largest component of IBLs. On average, total deposits grew
$309 million, or 3.8%, to $8.4 billion. Interest-bearing deposits on average
grew $206 million to $7.6 billion for 1998, and represented 86.29% of IBLs,
compared to 84.88% for 1997. The deposit growth allowed a lower dependence on
costlier wholesale funding. The cost of interest-bearing deposits was down 2
basis points to 4.55% for 1998, compared to 4.57% for 1997. The cost of
wholesale funding was down 19 basis points to 5.45% for 1998. Thus, the total
cost of funds decreased 5 basis points to 4.68% for 1998. The growth of net
free funds (the difference between earning assets and interest-bearing
liabilities, or the amount of funding that does not have a specific interest
cost associated with them), and the subsequent contribution from these funds,
also increased in 1998. Combined, these factors helped to offset the decline
in the interest rate spread.
13
TABLE 2: Average Balances and Interest Rates (Income and rates on a tax-
equivalent basis)
Years Ended December 31,
-------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------------
($ in Thousands)
ASSETS
Earning assets:
Loans, net of unearned
income(1)(2)(3) $ 7,255,850 $603,423 8.32% $ 6,959,018 $593,660 8.53% $6,583,572 $565,141 8.58%
Investment securities:
Taxable 2,500,470 168,623 6.74 2,725,539 184,330 6.76 2,345,489 157,070 6.70
Tax exempt(1) 237,086 16,941 7.15 180,382 13,826 7.66 178,268 13,219 7.42
Interest-bearing
deposits in other
financial institutions 31,283 1,679 5.37 15,347 779 5.08 5,630 437 7.77
Federal funds sold and
securities purchased
under agreements to
resell 37,493 1,800 4.80 16,238 999 6.16 21,750 1,267 5.82
-------------------------------------------------------------------------------------
Total earning assets $10,062,182 $792,466 7.88% $ 9,896,524 $793,594 8.02% $9,134,709 $737,134 8.07%
-------------------------------------------------------------------------------------
Allowance for possible
loan losses (92,175) (73,748) (72,168)
Cash and due from banks 246,596 229,006 245,948
Other assets 412,092 339,936 331,982
-------------------------------------------------------------------------------------
Total Assets $10,628,695 $10,391,718 $9,640,471
=====================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
Savings deposits $ 1,011,947 $ 21,640 2.14% $ 1,073,244 $ 24,396 2.27% $1,121,531 $ 27,501 2.45%
NOW deposits 724,570 10,463 1.44 712,458 11,905 1.67 673,106 11,397 1.69
Money market deposits 1,095,739 42,351 3.87 902,186 34,054 3.77 799,795 28,229 3.53
Time deposits 4,753,959 270,938 5.70 4,692,333 267,088 5.69 4,486,355 253,788 5.66
Total interest-bearing
deposits 7,586,215 345,392 4.55 7,380,221 337,443 4.57 7,080,787 320,915 4.53
Federal funds purchased
and securities sold
under agreements to
repurchase 517,344 26,174 5.06 538,097 29,046 5.40 444,676 22,976 5.17
Other short-term
borrowings 660,761 37,600 5.69 749,803 43,463 5.80 484,266 29,207 6.03
Long-term borrowings 27,055 1,862 6.88 26,929 1,685 6.26 44,799 2,824 6.30
-------------------------------------------------------------------------------------
Total interest-bearing
liabilities $ 8,791,375 $411,028 4.68% $ 8,695,050 $411,637 4.73% $8,054,528 $375,922 4.67%
-------------------------------------------------------------------------------------
Demand deposits 844,486 741,724 697,390
Accrued expenses and
other liabilities 136,409 115,085 113,373
Stockholders' equity 856,425 839,859 775,180
-------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $10,628,695 $10,391,718 $9,640,471
=====================================================================================
Net interest income and
rate spread(1) $381,438 3.20% $381,957 3.29% $361,212 3.40%
=====================================================================================
Net yield on earning
assets(1) 3.79% 3.86% 3.95%
=====================================================================================
(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 have been included in the average balances.
(3) Interest income includes net loan fees.
14
TABLE 3: Rate/Volume Analysis(1)
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Due to Increase (Decrease) Due to
-----------------------------------------------------------
Volume Rate Net Volume Rate Net
-----------------------------------------------------------
(In Thousands)
Interest income:
Loans, net of unearned
income(2) $ 24,921 $ (15,158) $ 9,763 $ 32,049 $ (3,530) $ 28,519
Investment securities:
Taxable (15,178) (529) (15,707) 25,689 1,571 27,260
Tax-exempt(2) 4,104 (989) 3,115 158 449 607
Interest-bearing
deposits in other
financial institutions 853 47 900 537 (195) 342
Federal funds sold and
securities purchased
under agreements to
resell 1,062 (261) 801 (336) 68 (268)
------------------------------------------------
Total earning assets(2) $ 15,762 $ (16,890) $ (1,128) $ 58,097 $ (1,637) $ 56,460
------------------------------------------------
Interest expense:
Savings deposits $ (1,353) $ (1,403) $ (2,756) $ (1,152) $ (1,953) $ (3,105)
NOW deposits 199 (1,641) (1,442) 659 (151) 508
Money market deposits 7,464 833 8,297 3,777 2,048 5,825
Time deposits 3,511 339 3,850 11,716 1,584 13,300
Total interest-bearing
deposits 9,821 (1,872) 7,949 15,000 1,528 16,528
Federal funds purchased
and securities sold
under agreements to
repurchase (1,094) (1,778) (2,872) 5,005 1,065 6,070
Other short-term
borrowings (5,079) (784) (5,863) 15,434 (1,178) 14,256
Long-term borrowings 8 169 177 (1,118) (21) (1,139)
------------------------------------------------
Total interest-bearing
liabilities $ 3,656 $ (4,265) $ (609) $ 34,321 $ 1,394 $ 35,715
------------------------------------------------
Net interest income(2) $ 12,106 $ (12,625) $ (519) $ 23,776 $ (3,031) $ 20,745
------------------------------------------
------------------------------------------
(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)
1998 Average 1997 Average 1996 Average
----------------------------------------------------------------------------
% of % of % of
Earning Earning Earning
Balance Assets Rate Balance Assets Rate Balance Assets Rate
----------------------------------------------------------------------------
($ in Thousands)
Earning assets $10,062,182 100.0% 7.88% $9,896,524 100.0% 8.02% $9,134,709 100.0% 8.07%
-----------------------------------------------------------
Financed by:
Interest-bearing funds $ 8,791,375 87.4% 4.68% $8,695,050 87.9% 4.73% $8,054,528 88.2% 4.67%
Noninterest-bearing funds $ 1,270,807 12.6% $1,201,474 12.1% $1,080,181 11.8%
-----------------------------------------------------------
Total funds sources $10,062,182 100.0% 4.09% $9,896,524 100.0% 4.16% $9,134,709 100% 4.12%
-----------------------------------------------------------
-----------------------------------------------------------
Interest rate spread 3.20% 3.29% 3.40%
Contribution from net free funds .59% .57% .55%
Net interest margin 3.79% 3.86% 3.95%
-----------------------------------------------------------
-----------------------------------------------------------
Average prime rate* 8.35% 8.44% 8.27%
Average fed funds rate* 5.36% 5.46% 5.30%
Average spread 299BP 298BP 297BP
-----------------------------------------------------------
-----------------------------------------------------------
*Source: Bloomberg
15
TABLE 5: Selected Average Balances
Percent 1998 as % of 1997 as % of
1998 1997 Change Total Assets Total Assets
--------------------------------------------------
($ in Thousands)
ASSETS
Loans, net of unearned income $ 7,255,850 $ 6,959,018 4.3% 68.3% 67.0%
Investment securities
Taxable 2,500,470 2,725,539 (8.3) 23.5 26.2
Tax-exempt 237,086 180,382 31.4 2.2 1.7
Interest-bearing deposits in other financial institutions 31,283 15,347 103.8 0.3 0.1
Federal funds sold and securities purchased under
agreements to resell 37,493 16,238 130.9 0.4 0.2
--------------------------------------------------
Total earning assets 10,062,182 9,896,524 1.7 94.7 95.2
Other assets 566,513 495,194 14.4 5.3 4.8
--------------------------------------------------
Total assets $10,628,695 $10,391,718 2.3% 100.0% 100.0%
--------------------------------------------------
--------------------------------------------------
LIABILITIES & STOCKHOLDERS' EQUITY
Interest-bearing deposits $ 7,586,215 $ 7,380,221 2.8% 71.4% 71.0%
Short-term borrowings 1,178,105 1,287,900 (8.5) 11.1 12.4
Long-term borrowings 27,055 26,929 0.5 0.2 0.3
--------------------------------------------------
Total interest-bearing liabilities 8,791,375 8,695,050 1.1 82.7 83.7
Demand deposits 844,486 741,724 13.9 7.9 7.1
Accrued expenses and other liabilities 136,409 115,085 18.5 1.3 1.1
Stockholders' equity 856,425 839,859 2.0 8.1 8.1
--------------------------------------------------
Total liabilities and stockholders' equity $10,628,695 $10,391,718 2.3% 100.0% 100.0%
--------------------------------------------------
--------------------------------------------------
As the largest component of operating income, improvements in the growth of
net interest income are important to the Corporation's earnings performance.
Growth in the Corporation's net interest income has historically been the
result of growth in the volume of earning assets. Given the 1997 merger with
FFC, the Corporation's balance sheet has higher reliance on mortgage-related
products (loans and mortgage-related securities), which has increased the
importance of managing interest rate risk, particularly in the rate
environment experienced during 1998. The Corporation uses certain modeling and
analysis techniques to manage net interest income and the related interest
rate risk position (See sections "Interest Rate Risk" and "Quantitative and
Qualitative Disclosures about Market Risk"). The Corporation seeks to meet the
needs of its customers, yet provide for stability in net interest income in
the event of significant interest rate changes.
Provision for Possible Loan Losses
The provision for possible loan losses ("PFLL") in 1998 was $14.7 million. In
comparison, the PFLL for 1997 was $14.9 million, excluding the $16.8 million
additional provision to conform FFC with the policies, practices, and
procedures of the Corporation, and $13.7 million in 1996. The PFLL is a
function of the methodology used to determine the adequacy of the allowance
for loan losses. The ratio of allowance for possible loan losses to total
loans was 1.37%, up from 1.31% and 1.08% at December 31, 1997 and 1996,
respectively. See additional discussion under section, "Allowance for Possible
Loan Losses."
Noninterest Income
Noninterest income ("NII") was a strong contributor to earnings, at $168.0
million for 1998, increasing $37.4 million or 28.6% over operating NII of
$130.6 million for 1997. NII as a percent of operating income grew to 30.9%
for 1998, compared to 25.8% for 1997. The growth in this relationship was
affected particularly by the increase in mortgage banking revenues and gains
on asset sales, and the decline in net interest income, as previously
discussed under "Net Interest Income." Excluding securities gains, operating
noninterest income increased $33.0 million or 25.8%. Trust fees, mortgage
banking revenues, credit card and related fees, and gains on asset sales
accounted for the majority of the increase.
16
TABLE 6: Noninterest Income
% Change
From Prior
Years Ended December 31, Year
----------------------------------------
1998 1997 1996 1998 1997
-------- ------- -------- ----- -----
($ in Thousands)
Trust service fees $ 33,328 $28,764 $ 25,185 15.9% 14.2%
Service charges on deposit
accounts 27,464 27,909 26,004 (1.6) 7.3
Mortgage banking income 46,128 25,709 23,873 79.4 7.7
Credit card and other nondeposit
fees 17,514 15,728 13,931 11.4 12.9
Retail commission income 14,823 15,444 12,734 (4.0) 21.3
Asset sale gains, net 7,166 852 12,520 741.1 N/M
Other 14,697 13,672 12,705 7.5 7.6
----------------------------------------
Total, excluding securities gains 161,120 128,078 126,952 25.8 0.9
Investment securities gains
(losses), net (operating) 6,831 2,514 (10,678) 171.7 N/M
Merger, integration, and other
one-time charges -- (35,290) -- N/M N/M
----------------------------------------
Total noninterest income $167,951 $95,302 $116,274 76.2% (18.0)%
========================================
N/M=not meaningful
Trust service fees for 1998 were $33.3 million, a $4.6 million or 15.9%
increase over last year. The increase is a function of continued improvement
in trust business volume and growth in assets under management. Trust assets
under management totaled $4.9 billion and $4.0 billion at December 31, 1998
and 1997, respectively.
While the prepayment of mortgages and the rate environment had negative
impacts on net interest income as previously described, the volume of mortgage
activity positively impacted other income from mortgage activity. Mortgage
banking income is comprised of mainly fees related to servicing mortgage
loans, residential loan origination fees, underwriting fees, escrow waiver
fees, and the gain or loss on sale of mortgage loans to the secondary market.
Mortgage banking income was $46.1 million for 1998, an increase of $20.4
million or 79.4% over 1997, resulting from high production levels. Mortgage
loan production for resale was $2.2 billion in 1998, compared to $1.1 billion
in 1997. Servicing revenue increased by $1.7 million to $15.8 million for
1998. The increase in servicing revenue reflects the Corporation's growing
servicing portfolio, as 1-4 family residential loans serviced for others
increased to $5.2 billion, up from $5.0 billion at year-end 1997. Other
volume-related fees were also up, with underwriting fees increasing $1.9
million, origination fees increasing $978,000, and escrow waiver fees
increasing $442,000. Net gains on sales of mortgage loans accounted for the
majority of the increase, growing $15.4 million over 1997. See also Note 7 of
the notes to consolidated financial statements.
Credit card and other nondeposit fees were $17.5 million for 1998, an increase
of $1.8 million or 11.4% over 1997. Credit cards accounted for $1.2 million of
the increase. Asset sale gains increased $6.3 million over last year, with 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.
Investment securities gains for 1998 were $6.8 million, up from $2.5 million
in operating investment gains for 1997. In the fourth quarter of 1997, the
Corporation hedged certain agency issued zero-coupon bonds held by FFB by
executing various interest rate futures contracts. In the first quarter of
1998, these contracts were closed and the zero coupon bonds were sold. As a
result, a net gain of $5.1 million was recognized. See also the discussion
under "Interest Rate Risk" and Note 5 of the notes to consolidated financial
statements.
The Corporation made a $100 million investment in bank-owned life insurance in
October 1998 which contributed $1.2 million to 1998 NII, and is included in
other NII. Despite increases in deposit balances, service charges on deposits
decreased $445,000 and retail commission income (which includes commissions
from insurance product sales, equity brokerage product sales, and the sale of
annuities ) was down $621,000.
17
The merger, integration, and other one-time charges consist of writedowns
taken to record other than temporary impairment of value of securities.
Concurrent with the 1997 consummation of the FFC merger, 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, 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 the fourth quarter of 1997. This security is highly 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. The estimated fair value of this security
at the time of the other than temporary impairment charge was based on quoted
prices of instruments with similar characteristics and cash flow valuation
techniques.
Additionally, the Corporation recorded a $2.8 million pre-tax charge on other
nonagency mortgage-related securities that were transferred to securities AFS,
with an amortized cost of $18.9 million, to reflect an other than temporary
impairment of value in the fourth quarter of 1997. These securities were
subsequently sold with no additional loss in January 1998.
Noninterest Expense
Total noninterest expense ("NIE") for 1998 was $295.0 million, a $23.0 million
or 8.4% increase over 1997 operating NIE (excluding merger, integration, and
other one-time charges). Personnel expense accounts for 62% of this increase,
up $14.2 million over 1997. Mortgage servicing rights ("MSRs") amortization
and professional fees are accountable for $9.7 million of the increase, offset
partially by decreases in various other categories, particularly business
development and advertising.
TABLE 7: Noninterest Expense
% Change
From Prior
Years Ended December 31, Year
----------------------------------------
1998 1997 1996 1998 1997
-------- -------- -------- ----- -----
($ in Thousands)
Salaries and employee benefits $148,490 $134,319 $126,696 10.6% 6.0%
Occupancy 20,205 20,296 19,563 (0.4) 3.8
Equipment 13,250 12,600 12,033 5.2 4.7
Data processing 18,714 16,928 15,907 10.6 6.4
Business development and advertising 13,177 15,936 14,754 (17.3) 8.0
Stationery and supplies 6,858 5,532 5,030 24.0 10.0
FDIC expense 3,267 3,284 9,675 (0.5) (66.1)
Professional fees 9,709 6,294 5,246 54.3 20.0
Other 61,315 56,837 51,322 7.9 10.7
----------------------------------------
Total noninterest expense
(operating) 294,985 272,026 260,226 8.4 4.5
Merger, integration, and other one-
time charges -- 51,622 33,005 N/M N/M
----------------------------------------
Total noninterest expense $294,985 $323,648 $293,231 (8.9)% 10.4%
========================================
N/M=not meaningful
Salaries and employee benefits increased $14.2 million or 10.6% compared to
1997. This category continues to be the largest component of NIE, representing
50.3%, 49.4%, and 48.7% of operating expenses in 1998, 1997, and 1996,
respectively. The increase in 1998 was comprised of higher salary expenses of
$11.8 million and higher fringe benefit costs of $2.4 million. The increase in
salary expense reflects base merit pay increases, variable pay increases
(commissions/incentives), transitional overlapping positions as support
functions were being centralized, and new positions added. The fringe benefit
increase is attributable to FICA taxes, pension and profit sharing expenses.
These fringe benefit increases were a result of higher levels of base
compensation. Full-time equivalent employees at December 31, 1998 were 3,965
18
compared to 3,679 at December 31, 1997, of which 130 were from the acquisition
of Citizens. As the Corporation continues to expand to take advantage of
business opportunities and the related revenues, management will continue to
review its significant investment in salaries and employee benefit expenses.
Professional fees were up $3.4 million primarily in due to Year 2000 efforts
and consulting assistance with the FFB conversion. MSRs amortization, included
in other expense, increased $6.3 million over 1997, a function of MSR
valuation in a high prepayment environment, and of the volume of mortgage
production and secondary market activity. See also Note 7 of the notes to
consolidated financial statements.
Increases in data processing expense and stationery and supplies were
principally the result of the fourth quarter 1998 conversion of FFB systems
and FFB branches into the Corporation's affiliates.
Income Taxes
Income tax expense was $75.9 million, down $1.9 million from 1997 income tax
expense, excluding tax effects of merger, integration and other one-time
charges. The Corporation's effective tax rate (operating income tax expense
divided by operating income before taxes) was 32.6% in 1998 compared to 39.4%
in 1997.
BALANCE SHEET ANALYSIS
Loans
Total loans, including loans held for sale, increased by $251 million, or
3.5%, to $7.4 billion at the end of 1998. The December 1998 acquisition of
Citizens accounted for $105 million of the loan growth. Increases were
experienced primarily in real estate lending, with a $125 million increase in
real estate construction, $51 million increase in mortgage loans held for
sale, $111 million increase in commercial real estate and a net increase of
$26 million in residential mortgages (conventional home loans, home equity
lines and second mortgages).
TABLE 8: Loan Composition
As of December 31,
------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ----------------
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
($ in Thousands)
Commercial, financial,
and agricultural $ 962,208 13% $ 986,839 14% $ 841,145 13% $ 801,004 13% $ 710,285 12%
Real estate--
construction 461,157 6 335,978 5 235,478 3 217,223 3 199,376 3
Real estate--mortgage 5,244,440 71 5,056,238 70 4,796,457 72 4,569,362 71 4,278,825 71
Installment loans to
individuals 750,831 10 793,424 11 813,875 12 821,351 13 801,302 14
Lease financing 19,231 -- 14,072 -- 10,449 -- 9,743 -- 6,176 --
----------------------------------------------------------------------------------------
Total loans (including
loans held for sale) $7,437,867 100% $7,186,551 100% $6,697,404 100% $6,418,683 100% $5,995,964 100%
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Real estate-mortgage loans totaled $5.2 billion at the end of 1998 and $5.1
billion at the end of 1997. Loans in this classification in 1998 include $3.7
billion of loans secured by 1- to 4-family residential properties. Residential
real estate loans consist of conventional home mortgages, home equity lines,
and second mortgages. Loans of this type are primarily made to borrowers in
Wisconsin and Illinois. Residential real estate loans generally limit the
maximum loan to 75%-80% of collateral value.
The real estate-mortgage classification also includes commercial real estate,
i.e., loans secured by multifamily, nonfarm, and nonresidential real estate
properties. Loans in this group totaled $1.4 billion at December 31, 1998, up
$111.4 million or 8.7% over last year. 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 and Illinois. Credit risk is managed in a similar manner to
commercial loans and real estate
19
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 $962.2 million at the end
of 1998, down $24.6 million since year-end 1997, and comprising 13% of total
loans outstanding, down from 14% at the end of 1997. 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. Borrowers are primarily concentrated in Wisconsin
and Illinois. The credit risk related to commercial loans is largely
influenced by general economic conditions and the resulting impact on a
borrower's operations. Within the commercial, financial, and agricultural
classification at December 31, 1998, loans to finance agricultural production
total $32.4 million or 0.4% of total 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.
The loan portfolio is widely diversified by types of borrowers, industry
groups, and market areas. Significant loan concentrations are considered to
exist for a financial institution when there are amounts loaned to a multiple
number of borrowers engaged in similar activities that would cause them to be
similarly impacted by economic or other conditions. At December 31, 1998, no
concentrations existed in the Corporation's portfolio in excess of 10% of
total loans, or $744 million.
Real estate-construction loans grew $125 million or 37% to $461 million,
representing 6% of the total loan portfolio at the end of 1998 compared to
$336 million, or 5% at the end of 1997. Loans in this classification are
primarily short-term interim loans that provide financing for the acquisition
or development of commercial real estate, such as multi-family or other
commercial development projects. Real estate construction loans are made to
developers and project managers who are well known to the Corporation, have
prior successful project experience, and are well capitalized. Projects
undertaken by these developers are carefully reviewed by the Corporation to
ensure that they are economically viable. Loans of this type are primarily
made in markets in Wisconsin and Illinois in which the Corporation has a
thorough knowledge of the local market economy. The credit risk associated
with real estate construction loans is generally confined to specific
geographic areas. The Corporation controls the credit risk on these types of
loans by making loans in familiar markets to developers, underwriting the
loans to meet the requirements of institutional investors in the secondary
market, reviewing the merits of individual projects, controlling loan
structure, and monitoring project progress and construction advances.
TABLE 9: Loan Maturity Distribution and Interest Rate Sensitivity(1)
Maturity(2)
---------------------------------------
Within 1-5 After
December 31, 1998 1 Year Years 5 Years Total
- ----------------- -------- -------- ------- ----------
($ in Thousands)
Commercial, financial, and
agricultural $692,271 $242,158 $27,779 $ 962,208
Real estate-construction 251,120 154,388 55,649 461,157
--------------------------
Total $943,391 $396,546 $83,428 $1,423,365
--------------------------
--------------------------
Fixed rate $299,364 $377,283 $79,382 $ 756,029
Floating or adjustable rate 644,027 19,263 4,046 667,336
--------------------------
Total $943,391 $396,546 $83,428 $1,423,365
--------------------------
--------------------------
Percent 66% 28% 6% 100%
(1) Based upon scheduled principal repayments.
(2) Demand loans, past due loans, and overdrafts are reported in the "Within 1
Year" category.
20
Installment loans to individuals totaled $751 million, down $42 million, or 5%
compared to 1997. The decline was principally in credit cards, impacted in
part by a 1998 sale of approximately $24 million of an affinity credit card
portfolio. 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. Loans are made to individual borrowers
located primarily in Wisconsin and Illinois. Credit risk for these types of
loans is generally greatly influenced by general economic conditions, the
characteristics of individual borrowers and the nature of the loan collateral.
Credit risk is primarily controlled by reviewing the creditworthiness of the
borrowers as well as taking appropriate collateral and guaranty positions on
such loans.
Factors that are critical to managing overall credit quality are sound loan
underwriting and administration, systematic monitoring of existing loans and
commitments, effective loan review on an ongoing basis, early identification
of potential problems, an adequate allowance for possible loan losses, and
sound nonaccrual and charge-off policies.
Allowance for Possible Loan Losses
The investment and loan portfolios are the Corporation's primary interest
earning assets. While the investment portfolio is structured with minimum
credit exposure to the Corporation, the loan portfolio is the primary asset
subject to credit risk. Credit risk is controlled and monitored through the
use of lending standards, thorough review of potential borrowers, and on-going
review of loan payment performance. Active asset quality administration,
including early problem loan identification and timely resolution of problems,
further ensures appropriate management of credit risk and minimization of loan
losses. Credit risk management for each loan type is discussed briefly in the
section entitled "Loans."
As of December 31, 1998, the allowance for possible loan losses ("AFLL") grew
by 7.5% to $99.7 million, compared to $92.7 million last year. As of year-end
1998, the AFLL to total loans was 1.37% and covered 185% of nonperforming
loans, compared to 1.31% and 270%, respectively, at December 31, 1997. The
AFLL at year end 1997 was increased by a $16.8 million one-time charge related
to the merger with FFC to conform the level of the allowance to the policies,
practices and procedures of the Corporation. Tables 10 and 11 provide
additional information regarding activity in the AFLL.
21
TABLE 10: Loan Loss Experience
Years Ended December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
($ in Thousands)
AFLL at beginning of
year $ 92,731 $ 71,767 $ 68,560 $ 65,774 $ 63,415
Balance related to
acquisitions 3,636 728 3,511 -- 3,366
Provision for possible
loan losses 14,740 31,668 13,695 14,029 9,035
Loans charged off:
Commercial, financial,
and agricultural 3,533 1,327 2,916 3,356 2,593
Real estate--
construction 202 600 193 191 89
Real estate--mortgage 3,256 3,222 2,813 3,099 4,224
Installment loans to
individuals 9,839 9,900 11,693 9,221 9,038
Lease financing 209 -- 1 5 18
---------------------------------------------------
Total loans charged off 17,039 15,049 17,616 15,872 15,962
Recoveries of loans
previously charged off:
Commercial, financial,
and agricultural 2,384 513 1,255 1,856 3,086
Real estate--
construction -- -- 3 70 --
Real estate--mortgage 1,582 1,312 837 931 1,151
Installment loans to
individuals 1,641 1,792 1,514 1,764 1,676
Lease financing 2 -- 8 8 7
---------------------------------------------------
Total recoveries 5,609 3,617 3,617 4,629 5,920
---------------------------------------------------
Net loans charged off
(NCOs) 11,430 11,432 13,999 11,243 10,042
---------------------------------------------------
AFLL at end of year $ 99,677 $ 92,731 $ 71,767 $ 68,560 $ 65,774
==========================================================
Average loans
outstanding $7,255,850 $6,959,018 $6,583,572 $6,157,655 $5,636,601
Ratio of AFLL to NCOs 8.7 8.1 5.1 6.1 6.5
Ratio of NCOs to average
loans outstanding .16% .16% .21% .18% .18%
Ratio of AFLL to total
loans at end of period 1.37% 1.31% 1.08% 1.12% 1.16%
==========================================================
The AFLL represents management's estimate of an amount adequate to provide for
potential 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, such as Year 2000 issues relating to borrowers.
In general, the increase in the AFLL is a function of a number of factors.
First, while total loan growth was moderate (2.8% increase from year-end 1997
to 1998), there was stronger growth in commercial real estate and real estate
construction loans which carry greater inherent credit risk (described under
section "Loans"). Also, nonperforming loans have increased (further discussed
under section "Nonperforming Loans, Potential Problem Loans, and Other Real
Estate Owned"). Nonperforming loans are considered a key indicator of future
loan losses. Loans classified as potential problem loans have increased
slightly over last year. Loans under watch have increased over last year, in
part given consideration of possible Year 2000 issues of significant
customers. Net charge-offs have remained unchanged ($11.4 million for 1998 and
1997). Finally, $3.6 million of AFLL was acquired in the December 1998
Citizens acquisition.
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. For 1998,
22
estimation methods and assumptions included consideration of Year 2000 issues
on significant customers. 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. For 1998, increases were made
to the AFLL allocation for credit card and mobile homes based upon a
significantly higher risk profile than other consumer loan categories, and
increases in commercial categories were made given the growth in these loan
segments and Year 2000 issues. 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.
Management believes the AFLL to be adequate at December 31, 1998. 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 Possible Loan Losses
As of December 31,
---------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(In Thousands)
Commercial, financial and agricultural $25,385 $33,682 $27,943 $22,753 $21,279
Real estate--construction 3,369 2,016 1,047 929 1,133
Real estate--mortgage 40,216 30,360 19,116 22,331 23,254
Installment loans to individuals 16,924 16,870 16,239 14,848 14,896
Lease financing 426 493 530 460 331
Unallocated 13,357 9,310 6,892 7,239 4,881
--------------------------------------------
Total $99,677 $92,731 $71,767 $68,560 $65,774
--------------------------------------------
--------------------------------------------
The provision for possible loan losses ("PFLL") in 1998 was $14.7 million. In
comparison, the PFLL for 1997 was $14.9 million, excluding the $16.8 million
additional provision ("additional provision") to conform FFC with the
policies, practices and procedures of the Corporation, and $13.7 million in
1996. The PFLL exceeded net charge-offs by $3.3 million in 1998 and $3.4
million in 1997 (excluding the additional provision).
Net charge-offs were $11.4 million, or 0.16% of average loans, for both 1998
and 1997, and $14.0 million or 0.21% of average loans for 1996. Gross charge-
offs and gross recoveries for 1998 were both up by $2.0 million, principally
the result of a large commercial credit that was charged off and subsequently
recovered during 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.
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 student loans were approximately $13 million at December 31, 1998.
23
Loans are generally placed on nonaccrual status when contractually past due 90
days or more as to interest or principal payments. Additionally, whenever
management becomes aware of facts or circumstances that may adversely impact
on the collectibility of principal or interest on loans, it is management's
practice to place such loans on nonaccrual status immediately, rather than
delaying such action until the loans become 90 days past due. Previously
accrued and uncollected interest on such loans is reversed, amortization of
related loan fees is suspended, and income is recorded only to the extent that
interest payments are subsequently received in cash and a determination has
been made that the principal balance of the loan is collectible. If
collectibility of the principal is in doubt, payments received are applied to
loan principal.
Loans past due 90 days or more but still accruing interest are also included
in nonperforming loans. Loans past due 90 days or more but still accruing are
classified as such where the underlying loans are both well secured (the
collateral value is sufficient to cover principal and accrued interest) and in
the process of collection. Also included in nonperforming loans are
"restructured" loans. Restructured loans involve the granting of some
concession to the borrower involving the modification of terms of the loan,
such as changes in payment schedule or interest rate.
TABLE 12: Nonperforming Loans and Other Real Estate Owned
December 31,
-------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
($ in Thousands)
Nonaccrual loans $48,150 $32,415 $32,287 $28,787 $28,025
Accruing loans past due 90 days
or more 5,252 1,324 1,801 1,320 1,484
Restructured loans 485 558 534 1,704 1,888
-------------------------------------------
Total nonperforming loans $53,887 $34,297 $34,622 $31,811 $31,397
===========================================
Other real estate owned $ 6,025 $ 2,067 $ 1,939 $ 4,852 $ 6,172
===========================================
Ratio of nonperforming loans to
total loans at period end .74% .48% .52% .50% .53%
Ratio of the allowance for
possible loan losses to
nonperforming loans at period end 185% 270% 207% 216% 209%
===========================================
Nonperforming loans at December 31, 1998, were $53.9 million, an increase of
$19.6 million from December 31, 1997. The ratio of nonperforming loans to
total loans at the end of 1997 was .74%, as compared to .48% and .52% at
December 31, 1997 and 1996, respectively. Nonaccrual loans account for $15.7
million of the increase in nonperforming loans, of which $3.3 million was
acquired with the December 1998 acquisition of Citizens. Real estate
nonaccrual loans accounted for $10.3 million of the increase (of which $7.0
million was residential real estate), while commercial and industrial loan
nonaccruals increased by $4.0 million. The Corporation's AFLL to nonperforming
loans was 185% at year-end 1998, down from 270% and 207% at year ends 1997 and
1996, 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.
24
TABLE 13: Foregone Loan Interest
Years Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
Interest income in
accordance with
original terms $ 5,046 $ 2,332 $ 2,764
Interest income
recognized (2,884) (1,215) (1,086)
----------------------------
Reduction in interest
income $ 2,162 $ 1,117 $ 1,678
============================
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, 1998, potential problem loans totaled $50.2 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 increased to $6.0 million at December 31, 1998,
compared to $2.1 million and $1.9 million at year ends 1997 and 1996,
respectively, in part due to the fourth quarter 1998 classification of certain
bank properties carried as real estate owned. Management actively seeks to
ensure properties held are administered 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 HTM and AFS, totaled $2.9 billion at December 31, 1998 and 1997.
TABLE 14: Investment Securities Portfolio
Years Ended December 31,
--------------------------------
1998 1997 1996
---------- ---------- ----------
(In Thousands)
Investment Securities Held to Maturity (HTM):
U.S. Treasury securities $ -- $ 498 $ 4,204
Federal agency securities 66,204 146,259 143,927
Obligations of states and political
subdivisions 153,663 183,286 195,860
Mortgage-related securities 262,111 361,298 673,990
Other securities (debt) 68,797 81,183 61,768
--------------------------------
Total amortized cost $ 550,775 $ 772,524 $1,079,749
================================
Total fair market value $ 562,940 $ 782,240 $1,074,412
================================
Investment Securities Available for Sale
(AFS):
U.S. Treasury securities $ 68,488 $ 109,200 $ 149,314
Federal agency securities 248,697 324,708 326,049
Obligations of state and political
subdivisions 217,153 14,312 --
Mortgage-related securities 1,625,403 1,536,134 1,057,992
Other securities (debt and equity) 160,499 142,081 127,787
--------------------------------
Total amortized cost $2,320,240 $2,126,435 $1,661,142
================================
Total fair market value $2,356,960 $2,167,694 $1,674,189
================================
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
25
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, 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 $102.7 million
and $179.8 million at December 31, 1998 and 1997, 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 1997 consummation of the FFC merger, 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, 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 the fourth quarter of 1997. This security is highly 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. The estimated fair value of this security
at the time of the other than temporary impairment charge was based on quoted
prices of instruments with similar characteristics and cash flow valuation
techniques.
Additionally, 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.
Taxable securities were 91.3% of total securities at the end of 1998, compared
to 93.8% of total securities at the end of 1997. The aggregate market value of
the securities portfolio was approximately $2.92 billion (100.4% of carrying
value) and $2.95 billion (100.3% of carrying value) at December 31, 1998 and
1997, respectively.
At December 31, 1998, 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 $87.9 million.
26
TABLE 15: Investment Securities Portfolio Maturity Distribution(1)
December 31, 1998
Investment Securities Held to Maturity--Maturity Distribution and Weighted Average Yield
-------------------------------------------------------------------------------------------------------------
After One After Five Mortage-
Within But Within But Within After Related
One Year Five Years Ten Years Ten Years Securities Total Total
---------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Fair Value
-------------------------------------------------------------------------------------------------------------
($ in Thousands)
U. S. Treasury
securities $ -- -- $ -- -- $ -- -- $ -- -- $ -- -- $ -- -- $ --
Federal agency
securities 36,242 5.85% 23,462 6.68% 6,500 6.54% -- -- -- -- 66,204 6.21% 67,070
Obligations of
states and
political
subdivisions 19,663 7.58% 86,985 7.41% 46,810 7.23% 205 8.70% -- -- 153,663 7.38% 157,996
Mortgage-related
securities -- -- -- -- -- -- -- -- 262,111 7.06% 262,111 7.06% 266,408
Other securities
(debt) 14,284 7.02% 46,375 6.84% 8,138 6.66% -- -- -- -- 68,797 6.85% 71,466
-------------------------------------------------------------------------------------------------------------
Total amortized
cost $70,189 6.57% $156,822 7.13% $ 61,448 7.08% $ 205 8.70% $ 262,111 7.06% $ 550,775 7.02% $ 562,940
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Total fair value $70,664 $162,095 $ 63,541 $ 232 $ 266,408 $ 562,940
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Investment Securities Available for Sale--Maturity Distribution and Weighted Average Yield
-------------------------------------------------------------------------------------------------------------
After One After Five Mortage-
Within But Within But Within After Related
One Year Five Years Ten Years Ten Years Securities Total Total
---------------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Fair Value
-------------------------------------------------------------------------------------------------------------
($ in Thousands)
U. S. Treasury
securities $ 43,428 6.10% $ 25,060 6.19% $ -- -- $ -- -- $ -- -- $ 68,488 6.13% $ 69,602
Federal agency
securities 26,659 5.63% 176,539 6.09% 44,615 6.22% 884 7.35% -- -- 248,697 6.07% 250,901
Obligations of
states and
political
subdivisions 17,905 6.31% 14,737 6.85% 98,226 6.47% 86,285 6.38% -- -- 217,153 6.45% 217,570
Mortgage-related
securities -- -- -- -- -- -- -- -- 1,625,403 6.62% 1,625,403 6.62% 1,642,531
Other securities
(debt and
equity) 145,711 5.62% 4,116 6.73% 10,672 6.27% -- -- -- -- 160,499 5.69% 176,356
-------------------------------------------------------------------------------------------------------------
Total amortized
cost $233,703 5.76% $220,452 6.16% $153,513 6.38% $87,169 6.39% $1,625,403 6.62% $2,320,240 6.47% $2,356,960
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Total fair value $250,038 $223,384 $154,945 $86,062 $1,642,531 $2,356,960
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
U. S. Treasury
securities
Federal agency
securities
Obligations of
states and
political
subdivisions
Mortgage-related
securities
Other securities
(debt)
-------------------------------------------------------------------------------------------------------------
Total amortized
cost
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Total fair value
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
U. S. Treasury
securities
Federal agency
securities
Obligations of
states and
political
subdivisions
Mortgage-related
securities
Other securities
(debt and
equity)
-------------------------------------------------------------------------------------------------------------
Total amortized
cost
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
Total fair value
-------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------
1998 1997 1996
% of % of % of
Amount Total Amount Total Amount Total
($ in Thousands)
Noninterest-bearing demand
deposits $ 844,486 10% $ 741,724 9% $ 697,390 9%
Interest-bearing demand
deposits 724,570 9 712,458 9 673,106 9
Savings deposits 1,011,947 12 1,073,244 13 1,121,531 14
Money market deposits 1,095,739 13 902,186 11 799,795 10
Time deposits 4,753,959 56 4,692,333 58 4,486,355 58
-------------------------------------
Total deposits $8,430,701 100% $8,121,945 100% $7,778,177 100%
-------------------------------------
-------------------------------------
---------------- ---------------- ----------------
---------- ----- ---------- ----- ---------- -----
(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
Average total deposits in 1998 were $8.4 billion, an increase of 3.8% or $309
million over 1997. The average balance of brokered CDs in total deposits was
$117.0 million, a decrease of $22.7 million from 1997. Brokered CDs are
included in time deposits in the table shown below. Adjusted for brokered CDs,
average internal deposit growth in 1998 was 4.2%.
TABLE 16: Average Deposits Distribution
27
Average noninterest-bearing demand deposits as a percentage of total average
deposits increased to 10.0% in 1998 compared to 9.1% in 1997 and 9.0% in 1996.
Year-end 1998 non-interest-bearing deposits were $998 million compared to $936
million at the end of 1997. These amounts are substantially above the
respective yearly average balance amounts. Demand deposits normally show a
sizable increase as businesses, public entities, and correspondent banks
adjust their cash positions at year-end.
The total average interest-bearing demand, savings, and money market deposits
increased to $2.83 billion for 1998 from $2.69 billion in 1997. These deposits
as a percentage of total average deposits have remained relatively stable over
the past three years at 33.6% in 1998, 33.1% in 1997, and 33.4% in 1996.
TABLE 17: Maturity Distribution-Certificates of Deposit and Other Time
Deposits of $100,000 or More
December 31, 1998
--------------------------
Certificates Other
of Deposit Time Deposits
------------ -------------
(In Thousands)
Three months or less $400,557 $80,820
Over three months through six months 129,530 18,000
Over six months through twelve months 144,121 --
Over twelve months 80,553 --
-------- -------
Total $754,761 $98,820
======== =======
The Corporation continues to experience strong competition for deposits in its
markets. This is true for both the business and retail segments of the market.
Each year, the Corporation's banks offered a number of different products with
specific features and competitive pricing. The deposit products are designed
to retain core deposit accounts, attract new customers, and create
opportunities for providing other bank services or relationships.
Short-term borrowings
Short-term borrowings consist of federal funds purchased, securities sold
under repurchase agreements, Federal Home Loan Bank ("FHLB") notes, notes
payable to banks, commercial paper, treasury tax and loan notes,
collateralized mortgage obligations and industrial revenue bonds. Average
total short-term borrowings for 1998 were $1.18 billion compared with $1.29
billion in 1997.
TABLE 18: Short-Term Borrowings
December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
($ in Thousands)
Federal funds purchased and securities
sold under
agreements to repurchase $ 502,586 $ 712,250 $ 666,030
Federal Home Loan Bank 937,021 525,317 451,380
Notes payable to banks 217,535 87,139 68,937
Other borrowed funds 13,951 12,302 15,046
---------------------------
Total $1,671,093 $1,337,008 $1,201,393
---------------------------
---------------------------
Average amounts outstanding during year $1,178,105 $1,287,900 $ 928,942
Average interest rates on amounts
outstanding during year 5.41% 5.63% 5.62%
Maximum month-end amounts outstanding $1,671,093 $1,405,233 $1,201,393
Average interest rates on amounts
outstanding at end of year 4.95% 5.75% 5.82%
---------------------------
---------------------------
The change in short-term borrowings outstanding is principally attributable to
larger amounts of FHLB notes with a remaining maturity less than 1 year as the
Corporation continues to supplement the funding of asset growth with wholesale
funds. Included in short-term FHLB advances are callable notes that have
original maturities exceeding one year. However, these notes have one-year
call premiums, which the
28
Corporation expects may be called. The notes payable to banks and other
borrowed funds are primarily used to fund residential, commercial, and leasing
lending activities at the Corporation's residential mortgage, commercial
mortgage, and leasing subsidiaries.
Liquidity
Liquidity refers to the ability of the Corporation to generate adequate
amounts of cash to meet the Corporation's needs. The Corporation must meet
maturing debt obligations, provide a reliable source of funding to borrowers,
and fund operations on a cost effective basis. Special consideration is also
being given to Year 2000 liquidity issues (see "Year 2000"). The affiliates
and the parent company of the Corporation have different liquidity
considerations.
Banking subsidiaries meet their cash flow requirements by having funds
available to satisfy customer credit needs as well as having available funds
to satisfy deposit withdrawal requests. Liquidity at banking subsidiaries is
derived from deposit growth, money market investments, loan repayments and
maturing loans, the maturity of investment securities HTM, the maturity or
sale of investment securities AFS, access to other funding sources and
markets, and a strong capital position.
Deposit growth is and will continue to be the primary source of liquidity at
the banking subsidiaries. Total period-end deposits increased $163 million
from 1997 to 1998. The Corporation's overall deposit base grew an average of
$309 million, or 3.8% during 1998. Deposit growth, especially in the core
deposit base, is the most stable source of liquidity of a bank.
Another substantial source of liquidity is the investment securities
portfolio, particularly securities maturing within one year, and principal and
interest on mortgage-backed securities. At December 31, 1998, excluding
mortgage-related securities, the amortized cost of total securities maturing
within one year were $320 million. At the end of 1998, the securities AFS
portfolio contained $317 million at amortized cost of U.S. Treasury and
federal agency securities. These government securities are highly marketable
and had a market value of $320 million or 101.0% of amortized cost at year-
end.
The loan portfolio is also a source of additional liquidity. The Corporation
has $943 million of commercial loans and real estate-construction loans
maturing within one year and has a steady flow of repayments particularly in
the mortgage and installment loan portfolios. Additionally, at year-end 1998,
the Corporation had $3.9 billion of loans secured by 1- to 4-family
residential property that could possibly be securitized.
Within the classification of short-term borrowings at year-end 1998, federal
funds purchased and securities sold under agreements to repurchase totaled
$503 million compared to $712 million at the end of 1997. Federal funds are
purchased from a sizable network of correspondent banks while securities sold
under agreements to repurchase are obtained from a base of individual,
business and public entity customers.
The aggregate subsidiary liquidity resources were sufficient in 1998 to fund
the growth in loans and the investment securities portfolio, and to meet other
needs for cash when necessary. As of December 31, 1998, there were no material
commitments for capital expenditures, i.e. to purchase fixed assets.
Liquidity is also necessary at the parent company level. The parent company's
primary sources of funds are dividends and service fees from subsidiaries,
borrowings, 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 and satisfy other
operating requirements. Dividends received in cash from subsidiaries totaled
$165.9 million in 1998 and will continue to be the parent's main source of
liquidity. The dividends from subsidiaries, along with a $129.1 million change
in 1998 in net short-term borrowed funds, were sufficient to pay cash
dividends to the Corporation's common stockholders of $65.8 million in 1998
and fund lending activities of nonbanking subsidiaries.
At December 31, 1998, $46.3 million in dividends could be paid to the parent
by subsidiary banks without obtaining prior regulatory approval, subject to
the capital needs of the banks. Additionally, the parent company had $225
million of established lines of credit with nonaffiliated banks, of which
$217.5 million was in use. Of the amount in use, the parent company
downstreamed the majority to the Corporation's various subsidiaries for their
use in funding loans and leases.
29
The Corporation's long-term debt-to-equity ratio at December 31, 1998 was 3.0%
compared to 1.9% at December 31, 1997, attributable to the moderate increase
in use of long-term debt from the FHLB.
Management believes that, in the current economic environment, the
Corporation's subsidiary and parent company liquidity positions are adequate.
There are no known trends nor any known demands, commitments, events or
uncertainties that will result or are reasonably likely to result in a
material increase or decrease in the Corporation's liquidity.
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 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, 1998.
TABLE 19: Interest Rate Sensitivity Analysis
December 31, 1998
-----------------------------------------------------------------------
Interest Sensitivity Period
-----------------------------------------------------------------------
Total
181-365 Within Over 1
0-90 Days 91-180 Days Days 1 Year Year Total
---------- ----------- ---------- ---------- ---------- -----------
($ in Thousands)
Earning assets:
Loans, held for sale $ 165,170 $ -- $ -- $ 165,170 $ -- $ 165,170
Investment securities,
at amortized cost 452,515 241,761 430,127 1,124,403 1,746,612 2,871,015
Loans, net of unearned
income 2,521,101 505,908 1,077,634 4,104,643 3,168,054 7,272,697
Other earning assets 204,952 -- -- 204,952 -- 204,952
-----------------------------------------------------------------
Total earning assets $3,343,738 $ 747,669 $1,507,761 $5,599,168 $4,914,666 $10,513,834
-----------------------------------------------------------------
-----------------------------------------------------------------
Interest-bearing
liabilities:
Interest-bearing
deposits(1) $2,561,317 $ 998,522 $1,299,288 $4,859,127 $2,700,313 $ 7,559,440
Other interest-bearing
liabilities 1,593,531 160 1,441 1,595,132 101,965 1,697,097
-----------------------------------------------------------------
Total interest-bearing
liabilities $4,154,848 $ 998,682 $1,300,729 $6,454,259 $2,802,278 $ 9,256,537
-----------------------------------------------------------------
-----------------------------------------------------------------
Interest sensitivity gap $ (811,110) $ (251,013) $ 207,032 $ (855,091) $2,112,388 $ 1,257,297
Cumulative interest
sensitivity gap $ (811,110) $(1,062,123) $ (855,091)
Cumulative ratio of rate
sensitive assets to
rate sensitive
liabilities at December
31, 1998 80.5% 79.4% 86.8%
(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.
30
The static gap analysis in Table 19 provides a representation of the
Corporation's earnings sensitivity to changes in interest rates. The
Corporation believes the sensitivity analysis in Table 19 and the related
discussion shows more directly the impacts on earnings from market risk than
the presentation used last year, shown comparatively in Table 20 for 1998 and
1997.
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 after tax income for the
next 12-month period is compared to the after tax 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 show that the Corporation would have a negative variance
of $6.7 million compared to the base case over the next 12 months in the shock
up 100 basis points, while the shock down 100 basis points would result in a
positive variance of $2.9 million.
These results are based solely on immediate and sustained parallel changes in
market rates and do not reflect the earnings sensitivity that may arise from
other factors, such as changes in the shape of the yield curve, the change in
spread between key market rates, or accounting recognition of the impairment
of certain intangibles. The above results are also considered to be
conservative estimates due to the fact that no management action to mitigate
potential income variances are included within the simulation process. This
action would include, but would not be limited to, adjustments to the
repricing characteristics of any on or off-balance sheet item with regard to
short-term rate projections and current market value assessments.
31
Table 20 reflects the Corporation's expected cash flows and applicable yields
on earning assets and interest-bearing liabilities and the resulting current
fair market value after discounting expected cash flows at existing market
rates at December 31, 1998 and 1997, respectively.
TABLE 20: Market Risk Analysis Interest Rate Risk
Expected Period of Maturity
-----------------------------------------------------------------------------------
Within 1-2 2-3 3-4 4-5 Greater Than
1 Year Years Years Years Years 5 Years Total
---------------------------------------------------------------------------------------------------------
Fair
Yield/ Yield/ Yield/ Yield/ Yield/ Yield/ Market
December 31, 1997 Bal. Rate Bal. Rate Bal. Rate Bal. Rate Bal. Rate Bal. Rate Bal. Rate Value
- ----------------------------------------------------------------------------------------------------------------------------
($ In Millions)
Short-term
investments (V) $ 205 5.17% $ -- -- $ -- -- $ -- -- $ -- -- $ -- -- $ 205 5.17% $ 205
Loans held for
sale (V) 165 7.00% -- -- -- -- -- -- -- -- -- -- 165 7.00% 165
Treasury,
Agency, Other
Securities (F) 196 6.24% 27 6.02% 47 6.54% 122 6.29% 79 6.22% 71 6.33% 542 6.27% 567
Treasury,
Agency, Other
Securities (V) 70 5.02% -- -- -- -- -- -- -- -- -- -- 70 5.02% 69
Mortgage-related
securities (F) 302 6.58% 214 6.79% 205 6.61% 148 6.35% 119 6.21% 194 5.97% 1,182 6.46% 1,198
Mortgage-related
securities (V) 100 6.50% 249 7.01% 20 7.06% 5 7.15% 145 6.21% 187 6.54% 706 6.65% 711
Municipal
securities (F) 37 6.68% 19 7.63% 28 7.21% 29 7.03% 27 6.72% 231 6.27% 371 6.54% 376
Residential real
estate loans
(F) 626 7.73% 471 7.70% 359 7.68% 252 7.62% 189 7.60% 441 7.53% 2,338 7.66% 2,361
Residential real
estate loans
(V) 348 6.57% 194 6.06% 161 6.09% 128 6.02% 106 6.27% 430 6.88% 1,367 6.46% 1,377
Commercial loans
(F) 666 8.30% 305 7.98% 329 7.90% 142 7.71% 225 7.57% 233 7.20% 1,900 7.91% 1,932
Commercial loans
(V) 926 7.68% 17 5.08% 7 5.08% 4 5.07% 4 5.07% 9 5.07% 967 7.57% 966
Consumer loans
(F) 90 9.16% 63 9.11% 43 8.93% 20 8.72% 6 8.60% 1 8.87% 223 9.04% 225
Consumer loans
(V) 478 9.73% -- -- -- -- -- -- -- -- -- -- 478 9.73% 478
---------------------------------------------------------------------------------------------------------
Total interest
earning assets $ 4,209 7.58% $1,559 7.31% $1,199 7.31% $ 850 6.97% $ 900 6.87% $ 1,797 6.84% $10,514 7.27% $10,630
---------------------------------------------------------------------------------------------------------
Interest-bearing
deposits (F) $ 3,560 5.45% $ 766 5.65% $ 91 5.58% $ 39 5.81% $ 39 5.44% $ 2 6.07% $ 4,497 5.49% $ 4,510
Interest-bearing
deposits (V) 1,285 3.47% 203 2.19% 197 2.22% 197 2.23% 197 2.23% 983 2.23% 3,062 2.75% 3,062
Short-term
borrowings (V) 1,568 5.10% -- -- -- -- -- -- -- -- -- -- 1,568 5.10% 1,568
Short-term
borrowings (F) 27 5.22% 5 5.35% -- -- 47 5.53% 1 4.99% 23 4.07% 103 5.11% 103
Long-term
borrowings (F) -- -- 2 6.66% 3 5.61% -- -- -- -- 21 6.50% 26 6.41% 28
---------------------------------------------------------------------------------------------------------
Total interest-
bearing
liabilities $ 6,440 4.97% $ 976 4.93% $ 291 3.31% $ 283 3.27% $ 237 2.77% $ 1,029 2.36% $ 9,256 4.51% $ 9,271
---------------------------------------------------------------------------------------------------------
(V) Variable repricing terms
(F) Fixed repricing terms
32
Expected Period of Maturity
-----------------------------------------------------------------------------
Within 1-2 2-3 3-4 4-5 Greater Than
1 Year Years Years Years Years 5 Years Total
----------------------------------------------------------------------------------------------------
Fair
Yield/ Yield/ Yield/ Yield/ Yield/ Yield/ Market
December 31, 1997 Bal. Rate Bal. Rate Bal. Rate Bal. Rate Bal. Rate Bal. Rate Bal. Rate Value
- -----------------------------------------------------------------------------------------------------------------------
($ In Millions)
Short-term
investments (V) $ 16 5.36% $ -- -- $ -- -- $ -- -- $ -- -- $ -- -- $ 16 5.36% $ 16
Loans held for
sale (V) 114 7.44% -- -- -- -- -- -- -- -- -- -- 114 7.44% 114
Treasury,
Agency, Other
Securities (F) 284 5.70% 113 6.20% 80 6.36% 103 6.35% 102 6.65% 73 6.95% 755 6.18% 778
Treasury,
Agency, Other
Securities (V) 13 4.38% -- -- 3 5.11% 1 7.75% 31 5.51% 1 7.58% 49 5.26% 49
Mortgage-related
securities (F) 2 6.16% 3 6.78% 2 6.10% 60 6.93% 42 6.77% 356 7.13% 465 7.06% 471
Mortgage-related
securities (V) -- -- -- -- -- -- -- -- -- -- 1,433 6.59% 1,433 6.59% 1,452
Municipal
securities (F) 23 7.21% 24 7.61% 18 7.75% 26 7.61% 26 7.20% 81 7.23% 198 7.37% 200
Residential real
estate
loans (F) 491 8.03% 341 8.07% 264 8.08% 156 7.95% 115 7.89% 234 7.98% 1,601 8.02% 1,614
Residential real
estate
loans (V) 745 8.56% 283 7.40% 240 7.55% 127 7.51% 102 7.53% 275 7.53% 1,772 7.94% 1,791
Commercial loans
(F) 594 8.86% 266 8.57% 248 8.44% 90 8.31% 68 8.34% 133 8.28% 1,399 8.61% 1,399
Commercial loans
(V) 883 8.82% 32 8.47% 30 8.46% 28 8.45% 27 8.45% 82 8.44% 1,082 8.75% 1,082
Consumer loans
(F) 252 8.92% 157 8.82% 110 8.72% 64 8.50% 39 8.31% 69 8.08% 691 8.71% 693
Consumer loans
(V) 515 10.04% 16 13.38% -- -- -- -- -- -- -- -- 531 10.14% 530
----------------------------------------------------------------------------------------------------
Total interest
earning assets $3,932 8.53% $1,235 8.01% $995 7.97% $655 7.63% $552 7.45% $2,737 7.08% $10,106 7.90% $10,189
----------------------------------------------------------------------------------------------------
Interest-bearing
deposits (F) $3,221 5.69% $1,038 5.97% $181 6.11% $ 39 5.72% $ 25 5.84% $ 2 6.34% $ 4,506 5.78% $ 4,520
Interest-bearing
deposits (V) 2,949 2.82% 4 5.55% -- -- -- -- -- -- -- -- 2,953 2.83% 2,953
Short-term
borrowings (V) 1,337 5.67% -- -- -- -- -- -- -- -- -- -- 1,337 5.67% 1,337
Long-term
borrowings (F) -- -- 4 14.27% 1 6.42% 1 7.17% 1 6.80% 8 6.62% 15 8.94% 15
----------------------------------------------------------------------------------------------------
Total interest-
bearing
liabilities $7,507 4.56% $1,046 6.01% $182 6.11% $ 40 5.75% $ 26 5.85% $ 10 6.56% $ 8,811 4.78% $ 8,825
----------------------------------------------------------------------------------------------------
(V) Variable repricing terms
(F) Fixed repricing terms
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.
Additionally, the Corporation may enter into interest rate swap agreements to
assist in managing interest rate risk. Management's philosophy is to maintain
an appropriate rate sensitive asset and liability position to provide for
stability in earnings in the event of significant interest rate changes. There
were no interest rate swaps at December 31, 1998. At December 31, 1997 $3.3
million of "pay-fixed" swaps were in effect converting a fixed rate commercial
loan to a variable rate.
Capital
Stockholders' equity at December 31, 1998, increased to $878.7 million or
$13.97 per share compared with $813.7 million or $12.92 per share at the end
of 1997. The growth in stockholders' equity in 1998 was primarily a function
of net income, the issuance of stock in connection with the Citizens
acquisition, and the exercise of stock options. Offsetting this 1998 growth
was primarily cash dividends paid and the purchase of treasury stock in
relation to acquisitions. Capital at year-end 1998 includes a $23.2 million
equity component compared to $26.1 million at December 31, 1997, related to
unrealized gains on securities AFS, net of their tax effect, included as other
comprehensive income. Period-end stockholders' equity to assets in 1998 was
7.81% compared to 7.61% at the end of 1997.
Cash dividends paid in 1998 were $1.04 per share compared with $0.89 per share
in 1997, an increase of 17.4%. Cash dividends have increased at a 15.8%
compounded rate during the past five years.
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, 1998 and 1997, 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 well in excess of regulatory requirements. Management of
the Corporation expects to continue to exceed the minimum standards in the
future. Capital ratios are included in Note 18, Regulatory Matters, of the
notes to consolidated financial statements.
The Corporation's Board of Directors (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 and 125,000 per quarter, in
1998 and 1997, respectively. In 1998, the BOD also authorized the repurchase
of up to 900,000 shares in connection with two purchase acquisitions. Shares
repurchased are held as treasury stock and, accordingly, are accounted for as
a reduction of stockholders' equity.
Under these actions the Corporation purchased 1.27 million shares of its
common shares in 1998 and approximately 102,200 shares in 1997. For 1998,
approximately 371,600 shares were repurchased and 338,800 shares reissued in
connection with employee incentive plans. For 1998, 900,000 shares and 448,600
shares were repurchased and reissued, respectively, in connection with
acquisitions, with the remainder being reissued in connection with the
February 1999 purchase acquisition of Windsor.
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. The Corporation's capital
level remains strong, but must also be maintained at an appropriate level that
provides the opportunity for a superior return on capital employed. Management
actively reviews capital strategies for the Corporation and each of its
subsidiaries to ensure that capital levels are appropriate based on the
perceived business risks, future growth opportunities, industry standards, and
regulatory requirements.
FOURTH QUARTER 1998 RESULTS
Net income for fourth quarter 1998 ("4Q98") was $37.8 million, up $1.7 million
from the $36.0 million operating net income earned in the fourth quarter of
1997 ("4Q97"). Return on average equity was 17.08%, up 62 basis points from
4Q97, while return on average assets increased 4 basis points to 1.38%.
Primary events of 4Q98 were a) the November 12 conversion of FFB's systems and
accounts into the Corporation's affiliates, b) the December 1998 consummation
of the acquisition of Citizens, and c) the October 1998 purchase of $100
million in BOLI.
From a balance sheet perspective, 4Q98 period end balances were up, with loans
increasing $92 million since September 30, 1998, and increasing $200 million
since December 31, 1997. The acquisition of Citizens accounted for $105
million increase in loans. Deposits at year end 1998 were up $58 million over
September 30, 1998 balances and up $163 million since year end 1997. Citizens
accounted for $117 million of the deposit increase. Other assets increased
principally by the goodwill recorded from the purchase of Citizens ($11.9
million) and the investment in BOLI. At December 31, 1998, the Corporation had
total assets of $11.3 billion, an increase of 5.2% or $440 million over year-
end 1997. Citizens accounted for $161 million of the asset growth.
In summary for 4Q98 versus 4Q97 on an operating basis, net interest income was
down $2.8 million. This was primarily a function of the shift in the yield
curve between the fourth quarter periods, as discussed previously. The
provision for possible loan losses was down $342,000. Noninterest income
excluding securities gains was up $6.7 million. Mortgage banking income was
the largest contributor to noninterest income growth (up $5.1 million),
particularly a result of continued strong mortgage production
34
between the fourth quarters and the growth of the servicing portfolio; and
BOLI contributed $1.2 million to 4Q98. Noninterest expense for 4Q98 was up
$8.5 million over 4Q97, led by the increase in personnel expense (up $5.2
million), via the combination of increased headcount between the quarters,
conversion efforts (leading to increased overtime and temporary labor), and
sales commissions and other incentives. Data processing expense and supplies
and stationery also increased (up $1.8 million on a combined basis)
particularly due to the 4Q98 conversion of FFB systems and FFB branches.
Professional fees were up $3.1 million, mostly due to Year 2000 consulting and
conversion related consulting. Taxes were down $5.5 million between the fourth
quarters. The effective tax rate for 4Q98 was 27.96%, lower principally from
tax planning strategies which were incorporated into the fourth quarter
integration process to allow for the utilization of net operating losses.
TABLE 21: Selected Quarterly Financial Data:
The following is selected financial data summarizing the results of operations
for each quarter in the years ended December 31, 1998 and 1997:
1998 Quarter Ended
------------------------------------------
December 31 September 30 June 30 March 31
------------------------------------------
(In Thousands Except Per Share Data)
Interest income $194,323 $196,405 $196,413 $198,624
Interest expense 101,599 102,723 102,598 104,108
Provision for possible 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
1997 Quarter Ended
------------------------------------------
December 31 September 30 June 30 March 31
------------------------------------------
(In Thousands Except Per Share Data)
Interest income $201,990 $200,809 $195,205 $189,915
Interest expense 106,418 105,857 101,419 97,943
Provision for possible loan losses 21,371 3,738 3,186 3,373
Investment securities gains
(losses), net (35,011) 852 188 1,195
Income (loss) before income tax
expense (47,562) 56,859 54,771 52,200
Net income (loss) (53,802) 36,821 35,480 33,860
Basic net income (loss) per share $ (0.86) $ 0.58 $ 0.57 $ 0.54
Diluted net income (loss) per share $ (0.85) $ 0.58 $ 0.56 $ 0.53
Basic weighted average shares 62,925 62,738 62,696 63,183
Diluted weighted average shares 63,745 64,020 63,559 64,420
Net income in the fourth quarter of 1997 includes $89.8 million of merger,
integration, and other one-time charges.
1997 COMPARED TO 1996
The Corporation's 1997 operating net income grew to $142.2 million, a 9.6%
increase over the $129.7 million earned in 1996. Basic operating earnings per
share increased 10.5% to $2.26 in 1997 compared to $2.05 in 1996. On a diluted
operating earnings per share basis, the Corporation recorded $2.22 in 1997,
compared to $2.02 in 1996.
The improvement in the Corporation's 1997 operating net income was led by a
$20.6 million increase in FTE net interest income. Growth in earning assets of
$745 million more than offset a 10 basis point decline in the net interest
margin. FTE net interest income increased $56.3 million while interest expense
increased $35.7 million.
35
The PFLL (excluding the $16.8 million merger-related charges) increased to
$14.9 million compared to $13.7 million in 1996. The increase in the provision
reflects the loan growth recorded in 1997. Including the additional provision,
the ratio of AFLL to total loans increased to 1.31%, up from 1.08% at December
31, 1996. Net charge-offs for 1997 decreased to $11.4 million, or .16% of
average loans, compared to $14.0 million, or .21% of average loans, in 1996 as
the Corporation recorded lower charge-off levels of commercial loans and
installment loans to individuals.
Noninterest income (excluding net securities gains) increased $1.3 million to
$128.8 million in 1997 over the $127.5 million recorded in 1996. Noninterest
income for 1996 includes an $11.2 million gain on the sale of credit card
loans recorded by FFC. The Corporation recorded increases in trust service
fees, service charges on deposits, mortgage banking income, loan fees and
retail commission income.
Noninterest expense (excluding merger, integration, and other one-time
charges) increased 4.5%, or $11.8 million, to $272.0 million in 1997.
Increases in salaries and employee benefits, business development and
advertising, data processing, and other expenses were offset by a decrease in
FDIC premiums.
Accounting Developments
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments
and Hedging Activities," in June 1998. SFAS No. 133 standardizes the
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts. Under the standard, entities are
required to carry all derivative instruments in the statement of financial
position at fair value. The accounting for changes in the fair value (i.e.,
gains or losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and, if so, on the
reason for holding it. If certain conditions are met, entities may elect to
designate a derivative instrument as a hedge of exposures to changes in fair
values, cash flows, or foreign currencies. If the hedged exposure is a fair
value exposure, the gain or loss on the derivative instrument is recognized in
earnings in the period of change together with the offsetting loss or gain on
the hedged item attributable to the risk being hedged. If the hedged exposure
is a cash flow exposure, the effective portion of the gain or loss on the
derivative instrument is reported initially as a component of other
comprehensive income (outside earnings) and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts
excluded from the assessment of hedge effectiveness as well as the ineffective
portion of the gain or loss is reported in earnings immediately. SFAS No. 133
is effective for all quarters of fiscal years beginning after June 15, 1999.
Earlier application is encouraged, but is permitted only as of the beginning
of any fiscal quarter that begins after the issuance of the statement. This
statement should not be applied retroactively to financial statements of prior
periods. The Corporation has not determined whether it will adopt the
statement early, yet anticipates that the adoption of SFAS No. 133 will not
have a material impact in the Corporation's financial statements.
The FASB has issued SFAS No. 134, "Accounting for Mortgage-Backed Securities
after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise: an amendment of FASB Statement No. 65," which is effective for the
first fiscal quarter beginning after December 31, 1998. This statement
requires that after the securitization of a mortgage loan held for sale, an
entity engaged in mortgage banking activities classify the resulting mortgage-
backed securities or other retained interests based on its ability and intent
to sell or hold those investments. This statement conforms the subsequent
accounting for securities retained after the securitization of mortgage loans
by a mortgage banking entity with the required accounting for securities
retained after the securitization of other types of assets by a nonmortgage
banking enterprise. The Corporation, as required, will adopt SFAS No. 134 in
first quarter 1999, which is not anticipated to have a material impact in the
Corporation's financial statements.
36
Year 2000
The Corporation's Year 2000 Project is proceeding on schedule. The Year 2000
Project relates to systems designed to use two digits rather than four to
define the applicable year. The Corporation has 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 are provided
to each of the Corporation's affiliates and the Corporation's Board of
Directors monitors progress on a quarterly basis. The Corporation has
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 has
established policy guidelines and time frames that are 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 is adhering to FFIEC guidelines for completing Year 2000
remediation, testing and implementation for all Mission Critical products and
services by June 30, 1999, and for Significant Products and services by
December 31, 1999. The Corporation is currently on schedule to complete Year
2000 compliance activities within these designated timeframes.
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 is for
products processed by service bureaus. The Corporation must conduct Year 2000
testing with these service bureaus and/or verify that the service bureau's
systems that the Corporation utilizes have successfully completed Year 2000
tests. The Corporation must determine not only that the service bureau's
systems will function properly in the Year 2000 and beyond, but also test that
the specific functions utilized by the Corporation will properly perform.
The Corporation has no custom developed system code. Therefore, the
remediation phase of the Corporation's Year 2000 compliance effort does not
include code renovation. Product and service upgrades provided by the
Corporation's service bureaus and other vendors are the primary remediation
strategy. This also impacts the testing phase of the overall project plan and
requires that it will 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 has contacted vendors
of non-information technology systems to determine Year 2000 compliance of
these systems and products and anticipates the completion of testing of these
systems and products during 1999. The Corporation has 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 is
being reviewed and appropriate steps are being taken to ensure continued
operation for all areas.
The Corporation's customers who are not preparing for the Year 2000 may
experience a disruption in business that could potentially result in
significant financial difficulties. Through the use of personal contacts and
questionnaires, the Corporation has taken an active role in heightening
customer awareness
37
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 is being monitored by the Corporation on a quarterly basis
and prospective credit customers are also assessed for Year 2000 compliance as
part of the underwriting process. Additionally, consideration of Year 2000
credit risk has been incorporated into the Corporation's loan reserve
methodology.
The estimated costs for Year 2000 compliance are not expected to have a
significant impact on the Corporation's results of operations, liquidity or
capital resources. The Corporation estimates the total cost of addressing Year
2000 issues will be approximately $12 million, of which approximately $6
million has been expended as of December 31, 1998. Additional expenditures
will continue through 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 estimated Year 2000 costs,
even though certain of these expenses may result 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 can and
will be addressed prior to the Year 2000. However, if required product or
service upgrades are not made or are not completed on a timely basis prior to
the Year 2000, the Year 2000 issue could disrupt normal business operations.
Normal business operations could also be disrupted if third party servicers,
upon which the Corporation depends for services, including service bureaus,
payment systems, utilities, etc., encounter difficulties relating to the Year
2000 issue.
The most reasonable likely worst case Year 2000 scenarios foreseeable at this
time would include the Corporation temporarily not being able to process, in
some combination, various types of customer transactions. This could affect
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 a material
adverse effect on the Corporation. Because of the serious implications of
these scenarios, contingency plans have been established and are being
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. Additionally, a business resumption
contingency plan is being developed to mitigate risks associated with the
failure at critical dates of systems that support core business processes. A
liquidity contingency plan is being written and will be tested, including
working with the Federal Reserve to ensure that adequate currency will be
available to meet anticipated customer needs, as well as ensuring adequate
access to funding as needed by the Corporation. The Year 2000 business
resumption contingency plan is designed to ensure that Mission Critical core
business processes will continue if one or more supporting systems fail and
would allow for limited transactions, including the ability to make certain
deposit withdrawals, until the Year 2000 problems are fixed.
The costs of the Year 2000 project and the date on which the Corporation plans
to complete Year 2000 compliance are 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
can be no guarantee that these estimates will be achieved at the cost
disclosed or within the timeframe indicated, and actual results could differ
materially from these plans. Factors that might affect the timely and
efficient completion of the Corporation's Year 2000 project include, but are
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."
38
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ASSOCIATED BANC-CORP
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------
1998 1997
----------- -----------
(In Thousands
Except Share Data)
ASSETS
Cash and due from banks $ 331,532 $ 290,184
Interest-bearing deposits in other financial
institutions 200,467 5,019
Federal funds sold and securities purchased under
agreements to resell 4,485 11,511
Investment securities:
Held to maturity--at amortized cost (fair value of
approximately $562,940 and $782,240, respectively) 550,775 772,524
Available for sale--at fair value (amortized cost of
$2,320,240 and $2,126,435, respectively) 2,356,960 2,167,694
Loans held for sale 165,170 114,001
Loans 7,272,697 7,072,550
Allowance for possible loan losses (99,677) (92,731)
- -------------------------------------------------------------------------------
Loans, net 7,173,020 6,979,819
Premises and equipment 140,142 127,823
Other assets 328,116 221,867
- -------------------------------------------------------------------------------
Total assets $11,250,667 $10,690,442
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 998,379 $ 935,852
Interest-bearing deposits 7,559,440 7,459,425
- -------------------------------------------------------------------------------
Total deposits 8,557,819 8,395,277
Short-term borrowings 1,671,093 1,337,008
Long-term borrowings 26,004 15,270
Accrued expenses and other liabilities 117,030 129,195
- -------------------------------------------------------------------------------
Total liabilities 10,371,946 9,876,750
- -------------------------------------------------------------------------------
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 and
62,993,309 shares at December 31, 1998 and 1997,
respectively) 634 504
Surplus 225,757 218,072
Retained earnings 646,071 569,995
Accumulated other comprehensive income 23,369 26,144
Treasury stock at cost (503,158 shares in 1998 and
23,618 shares
in 1997 (17,110) (1,023)
- -------------------------------------------------------------------------------
Total stockholders' equity 878,721 813,692
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $11,250,667 $10,690,442
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
39
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended
December 31,
---------------------------
1998 1997 1996
-------- -------- --------
(In Thousands Except Per
Share Data)
INTEREST INCOME
Interest and fees on loans $602,470 $592,747 $564,265
Interest and dividends on investment
securities:
Taxable 168,623 184,330 157,070
Tax-exempt 11,193 9,064 8,724
Interest on deposits in other financial
institutions 1,679 779 437
Interest on federal funds sold and securities
purchased under agreements to resell 1,800 999 1,267
- ----------------------------------------------------------------------------
Total interest income 785,765 787,919 731,763
- ----------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 345,392 337,443 320,915
Interest on short-term borrowings 63,774 72,509 52,183
Interest on long-term borrowings 1,862 1,685 2,824
- ----------------------------------------------------------------------------
Total interest expense 411,028 411,637 375,922
- ----------------------------------------------------------------------------
NET INTEREST INCOME 374,737 376,282 355,841
Provision for possible loan losses 14,740 31,668 13,695
- ----------------------------------------------------------------------------
Net interest income after provision for
possible loan losses 359,997 344,614 342,146
- ----------------------------------------------------------------------------
NONINTEREST INCOME
Trust service fees 33,328 28,764 25,185
Service charges on deposit accounts 27,464 27,909 26,004
Mortgage banking 46,128 25,709 23,873
Credit card and other nondeposit fees 17,514 15,728 13,931
Retail commissions 14,823 15,444 12,734
Asset sale gains, net 7,166 852 12,520
Investment securities gains (losses), net 6,831 (32,776) (10,678)
Other 14,697 13,672 12,705
- ----------------------------------------------------------------------------
Total noninterest income 167,951 95,302 116,274
- ----------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 148,490 134,319 126,696
Occupancy 20,205 20,296 19,563
Equipment 13,250 12,600 12,033
Data processing 18,714 16,928 15,907
Business development and advertising 13,177 15,936 14,754
Stationery and supplies 6,858 5,532 5,030
FDIC expense 3,267 3,284 9,675
Professional fees 9,709 6,294 5,246
Merger, integration and other one-time charges -- 51,622 33,005
Other 61,315 56,837 51,322
- ----------------------------------------------------------------------------
Total noninterest expense 294,985 323,648 293,231
- ----------------------------------------------------------------------------
Income before income taxes and extraordinary
item 232,963 116,268 165,189
Income tax expense 75,943 63,909 57,487
- ----------------------------------------------------------------------------
Income before extraordinary item 157,020 52,359 107,702
Extraordinary item, net of income taxes of
$370 -- -- (686)
- ----------------------------------------------------------------------------
Net income $157,020 $ 52,359 $107,016
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Earnings per share:
Basic:
Income before extraordinary item $ 2.49 $ 0.83 $ 1.70
Extraordinary item -- -- (.01)
Net income $ 2.49 $ 0.83 $ 1.69
Earnings per share:
Diluted:
Income before extraordinary item $ 2.46 $ 0.82 $ 1.67
Extraordinary item -- -- (.01)
Net income $ 2.46 $ 0.82 $ 1.66
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
40
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated Common
Common Stock Other Stock
-------------- Retained Comprehensive Treasury Purchased
Shares Amount Surplus Earnings Income Stock by ESOP Total
------ ------ -------- -------- ------------- -------- --------- --------
(In Thousands)
Balance, December 31,
1995 46,072 $460 $237,697 $490,928 $ 88 $ (3,787) $(271) $725,115
Comprehensive income:
Net income -- -- -- 107,016 -- -- -- 107,016
Net unrealized holding
gains arising during
year -- -- -- -- 1,741 -- -- 1,741
Add back:
reclassification
adjustment for net
losses realized in net
income -- -- -- -- 10,678 -- -- 10,678
Income tax effect -- -- -- -- (4,234) -- -- (4,234)
--------
Comprehensive income 115,201
--------
Cash dividends, $0.76
per share -- -- -- (20,278) -- -- -- (20,278)
Cash dividends of pooled
affiliates -- -- -- (19,309) -- -- -- (19,309)
Common stock issued:
Business combinations 868 9 9,800 6,566 8 -- -- 16,383
Incentive stock options 303 3 966 -- -- 2,208 -- 3,177
Tax benefits of
restricted shares and
options -- -- 564 -- -- -- -- 564
Payment on ESOP loan -- -- -- -- -- -- 271 271
Retirement of stock
previously issued in
connection with a
business combination (212) (2) (3,760) -- -- 3,762 -- --
Purchase of treasury
stock -- -- -- -- -- (3,101) -- (3,101)
Pre-merger transactions
of pooled company (496) (5) (14,457) -- -- -- -- (14,462)
- --------------------------------------------------------------------------------------------------------
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
restricted shares and
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
restricted shares and
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
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
41
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December
31,
--------------------------------
1998 1997 1996
--------- --------- ----------
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 157,020 $ 52,359 $ 107,016
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for possible loan losses 14,740 31,668 13,695
Depreciation and amortization 15,027 14,418 14,415
Amortization (accretion) of:
Mortgage servicing rights 6,833 6,472 4,237
Intangibles 5,844 6,217 11,983
Investment premiums and discounts (4,985) (1,499) (9,116)
Deferred loan fees and costs 13 (522) 151
Deferred income taxes 9,891 (20,953) (4,342)
(Gain) loss on sales of securities, net (6,831) 32,776 10,678
Gain on other asset sales, net (7,166) (852) (12,520)
Gain on sales of loans held for sale, net (24,341) (8,981) (6,976)
(Increase) decrease in loans held for sale,
net (26,669) 5,810 29,586
(Increase) decrease in interest receivable
and other assets 14,085 (1,663) 7,517
Increase (decrease) in interest payable and
other liabilities (14,892) 35,585 7,842
- -------------------------------------------------------------------------------
Net cash provided by operating activities 138,569 150,835 174,166
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in federal funds sold and
securities purchased under agreements to
resell 29,476 20,891 31,698
Net (increase) decrease in interest-bearing
deposits in other financial institutions (193,661) (1,455) 32,398
Net increase in loans (231,285) (465,510) (418,676)
Mortgage servicing rights additions (21,502) (9,801) (8,867)
Purchases of:
Securities held to maturity (1,717) (203,759) (192,744)
Securities available for sale (800,724) (316,112) (1,156,929)
Premises and equipment, net of disposals (30,268) (11,805) (27,528)
Bank owned life insurance (100,000) -- --
Proceeds from:
Sales of securities available for sale 62,168 71,178 434,145
Maturities of securities available for sale 663,227 29,260 362,536
Maturities of securities held to maturity 222,869 258,034 351,966
Sales of other real estate owned 9,530 7,177 9,262
Sale of other assets 32,301 343 62,573
Net cash received (paid) in acquisition of
subsidiary (11,713) 5,051 461
- -------------------------------------------------------------------------------
Net cash used by investing activities (371,299) (616,508) (519,705)
- -------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 45,475 337,175 163,736
Net increase in short-term borrowings 321,607 117,555 264,186
Repayment of long-term borrowings (1,464) -- (2,644)
Proceeds from issuance of long-term
borrowings 13,538 -- 6,000
Cash dividends (65,841) (49,328) (39,587)
Proceeds from exercise of stock options 7,926 5,168 3,177
Proceeds from vesting of employee benefit
plans -- -- 271
Purchase of treasury stock (47,163) (3,599) (3,101)
Stock purchases by pooled company -- (21,048) (14,447)
- -------------------------------------------------------------------------------
Net cash provided by financing activities 274,078 385,923 377,591
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 41,348 (79,750) 32,052
Cash and due from banks at beginning of year 290,184 369,934 337,882
- -------------------------------------------------------------------------------
Cash and due from banks at end of year $ 331,532 $ 290,184 $ 369,934
- -------------------------------------------------------------------------------
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest $ 405,841 $ 409,797 $ 375,318
Income taxes 70,109 79,440 59,661
Supplemental schedule of noncash investing
activities:
Loans transferred to other real estate 7,910 5,263 9,135
Loans made in connection with the
disposition of other real estate 780 240 223
Mortgage loans securitized and transferred
to securities available for sale 78,557 -- 161,087
Securities transferred from held to
maturity to available for sale -- 251,946 --
Mortgage loans transferred to loans held
for sale 68,340 27,068
Acquisitions:
Fair value of assets acquired, including
cash and cash equivalents 161,033 -- 40,715
Value ascribed to intangibles 11,903 -- 1,900
Liabilities assumed 144,405 -- 34,772
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
42
ASSOCIATED BANC-CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
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 banking and mortgage banking
industries. The following is a description of the more significant of those
policies.
Throughout the notes to consolidated financial statements, references are made
to FFC (First Financial Corporation) and FFB (First Financial Bank). See Note
2.
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 in Wisconsin, Illinois, Nevada, Delaware, Minnesota,
Arizona, California and Missouri. 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
accounts 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 1997
and 1996 consolidated financial statements have been reclassified to conform
with the 1998 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 possible 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. 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.
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.
43
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 Possible Loan Losses
The allowance for possible 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
possible 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
borrower's 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
44
value of the collateral for collateral-dependent loans, or alternatively, the
present value of expected future cash flows discounted at the loan's effective
interest rate. Interest income on impaired loans is recorded when cash is
received and only if principal is considered to be fully collectible.
Management believes that the 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.
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.
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. Other intangibles are amortized on an accelerated basis over shorter
periods. 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.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value
less costs to sell.
During 1998 and 1997, the Corporation recorded additional goodwill of $11.9
million and $1.6 million, respectively. Goodwill and deposit base intangibles
outstanding, net of accumulated amortization, at December 31, 1998 and 1997
was $40.5 million and $34.4 million, respectively.
Mortgage Servicing Rights
The Corporation recognizes as separate assets the rights to service mortgage
loans for others, however those rights are acquired. Capitalized mortgage
servicing rights ("MSRs") are assessed for impairment based on the fair value
of those rights.
The fair value of MSRs is determined based on quoted market prices for
comparable transactions or a present value model of expected future cash
flows. MSRs are amortized proportionately in relation to the associated
servicing revenues over the estimated lives of the serviced loans. The
Corporation evaluates and measures impairment of its servicing rights using
stratifications based on the risk characteristics of the underlying loans.
Management has determined those risk characteristics to include method of
acquisition
45
(bulk versus loan-by-loan). Bulk acquisitions are further stratified by loan
type, while loan-by-loan acquisitions are further stratified by loan type and
interest rate. Impairment is recognized through a valuation allowance.
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. 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. The Corporation also files state income tax returns with several
jurisdictions.
Derivative Financial Instruments
The Corporation enters into interest rate swap agreements to manage interest
rate exposure in its loan portfolio from changes in market interest rates.
These agreements involve the receipt of fixed or floating rate amounts in
exchange for floating or fixed rate interest payments over the life of the
agreement without an exchange of the underlying principal amount. The
differential to be paid or received is accrued monthly and recognized as an
adjustment to interest income or expense. The related amount payable to or
receivable from counterparties is included in other liabilities or assets. The
fair values of the swap agreements are not recognized in the consolidated
financial statements. Gains or losses from terminated agreements are deferred
and accreted or amortized to interest income over the remaining life of the
asset related to the terminated agreement.
Interest rate futures contracts are commitments to either purchase or sell a
financial instrument at a specified dated on an agreed-upon future date. These
contracts may be settled either in cash or by delivery of the underlying
financial instruments. Positions which are designated and effectively hedge
specific securities are correlated based on certain duration and convexity
parameters. Realized gains and losses on positions used in the management of
specific asset positions are deferred and amortized over the terms of the item
hedged as adjustments to interest income. Gains or losses from terminated
contracts are recognized as an adjustment to the hedged asset's recognized
gain or loss in investment security sales gains or losses in noninterest
income.
Stock Option Plan
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, 1996, 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.
All per share financial information except for the share information in the
consolidated statements of changes in stockholders' equity, has been adjusted
to reflect the 5-for-4 stock split, effected as a 25% stock dividend, paid to
shareholders on June 12, 1998. See also Notes 12 and 19.
46
Current Accounting Matters
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued.
Pursuant to this rule, the consolidated statements of changes in stockholders'
equity now include a new measure called "comprehensive income," which includes
net income as well as certain items that are reported within a separate
component of shareholders' equity that bypass net income. Currently, the
Corporation's only component of other comprehensive income is its unrealized
gains (losses) on securities available for sale.
In June 1997, SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information," was issued. The provisions of this statement require
disclosure of financial and descriptive information about an enterprise's
operating segments. The statement defines an operating segment as a component
of an enterprise that engages in business activities that generate revenue and
incur expense. A segment is further defined as a component whose operating
results are reviewed by the chief operating decision-maker in the
determination of resource allocation and performance, and for which discrete
financial information is available. Note 20 of the notes to consolidated
financial statements includes segment information required by the new
standard.
NOTE 2 BUSINESS COMBINATIONS:
The following table summarizes completed transactions during the three years
ended December 31, 1998:
Consideration Paid
------------------------
Shares of
Date Method of Cash Common Total Assets Intangibles
Name of Acquired Company Acquired Accounting (In Millions) Stock(A) (In Millions) (In Millions)
- ----------------------------------------------------------------------------------------------------------------
Citizens Bankshares, Inc. ("Citizens") 12/98 Purchase $16.2 448,571 $ 161 $11.9
Shawano, Wisconsin
First Financial Corporation (B) 10/97 Pooling of 0.1 34,794,911 6,005 --
Stevens Point, Wisconsin interests
Centra Financial, Inc. (C) 2/97 Pooling of -- 517,956 76 --
West Allis, Wisconsin interests
F&M Bankshares of Reedsburg, Inc. 7/96 Pooling of -- 802,485 139 --
Reedsburg, Wisconsin (C) interests
Mid-America National Bancorp, Inc. 7/96 Purchase 7.8 -- 39 1.9
Chicago, Illinois
Greater Columbia Bank Shares, Inc (B) 4/96 Pooling of -- 1,451,451 211 --
Portage, Wisconsin interests
SBL Capital Bank Shares, Inc. (C) 3/96 Pooling of -- 499,435 68 --
Lodi, Wisconsin interests
(A) Share amounts have been restated to reflect the 5-for-4 stock split
effected as a 25% dividend paid on June 12, 1998.
(B) All consolidated financial information has been restated as if the
transaction had been effected as of the beginning of the earliest period
presented.
(C) The transaction was not material to prior years' reported operating
results and, accordingly, previously reported results were not restated.
On February 3, 1999, the Corporation consummated the acquisition of Windsor
Bancshares, Inc., a Minnesota bank holding company. Windsor's principal
subsidiary is Bank Windsor, which operates offices in the Minnesota
communities of Minneapolis, Nerstrand, Sleepy Eye, and Chisholm. At December
31, 1998, Windsor had total consolidated assets of approximately $178 million.
The transaction was consummated through the issuance of 799,961 shares of
common stock and was accounted for under the purchase method. It is,
therefore, not reflected in the accompanying consolidated financial
statements.
47
NOTE 3 MERGER, INTEGRATION AND OTHER ONE-TIME CHARGES:
The Corporation recorded merger, integration, and other one-time charges of
$51.6 million and $33.0 million in 1997 and 1996, respectively. No such
charges were recorded in 1998.
Merger, integration, and other one-time charges of $51.6 million recorded in
1997 were associated with the acquisition of FFC, and 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. As of December 31, 1998, $5.0 million remained to be paid. One-time
charges in 1996 consisted of $28.8 million associated with the
recapitalization of the Savings Association Insurance Fund (SAIF) and $4.2
million relating to a change in accounting for the amortization of goodwill
and other intangible assets. The components of the charges are shown below:
Year Ended
December 31,
1997 1996
---------------
(in thousands)
Employee/director severance and contract costs $12,598 $ --
SAIF recapitalization charge -- 28,767
Costs associated with duplicative facilities, computer
systems,
software, and integration 20,181 --
Investment banking, legal, and accounting fees 11,151 --
Change in accounting for the amortization of goodwill
and other intangible assets -- 4,238
Other 7,692 --
---------------
Total merger, integration, and other one-time charges $51,622 $33,005
===============
The pretax impact of merger, integration, and other one-time charges on basic
earnings per share was $0.82 and $0.52 in 1997 and 1996, respectively. The
pretax effect of these charges on diluted earnings per share was $0.81 in 1997
and $0.51 in 1996.
The Corporation recorded an additional provision for possible 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 $75.1 million at
December 31, 1998.
NOTE 5 INVESTMENT SECURITIES:
The amortized cost and fair values of securities HTM at December 31, 1998 and
1997 were as follows:
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
========================================
48
1997
----------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Leases Value
--------- ---------- ---------- --------
(In Thousands)
U. S. Treasury securities $ 498 $ 2 $ -- $ 500
Federal agency securities 146,259 896 (337) 146,818
Obligations of state and political
subdivisions 183,286 3,038 (24) 186,300
Mortgage-related securities 361,298 6,540 (1,886) 365,952
Other securities (debt) 81,183 1,491 (4) 82,670
----------------------------------------
Total securities HTM $772,524 $11,967 $(2,251) $782,240
========================================
The amortized cost and fair values of securities AFS at December 31, 1998 and
1997 were as follows:
1998
-------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Leases 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
===========================================
1997
-------------------------------------------
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Leases Value
---------- ---------- ---------- ----------
(In Thousands)
U. S. Treasury securities $ 109,200 $ 737 $ (96) $ 109,841
Federal agency securities 324,708 7,558 (1,724) 330,542
Obligations of state and political
subdivisions 14,312 229 (405) 14,136
Mortgage-related securities 1,536,134 21,848 (379) 1,557,603
Other securities (debt and equity) 142,081 14,178 (687) 155,572
-------------------------------------------
Total securities AFS $2,126,435 $44,550 $(3,291) $2,167,694
===========================================
The amortized cost and fair values of investment securities HTM and AFS at
December 31, 1998, 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.
1998
----------------------------------------
Held to maturity Available for Sale
------------------ ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- ---------- ----------
(In Thousands)
Due in one year or less $ 70,189 $ 70,664 $ 233,703 $ 250,038
Due after one year through five years 156,822 162,095 220,452 223,384
Due after five years through ten
years 61,448 63,541 153,513 154,945
Due after ten years 205 232 87,169 86,062
Total (excluding mortgage-related
securities) 288,664 296,532 694,837 714,429
Mortgage-related securities 262,111 266,408 1,625,403 1,642,531
----------------------------------------
Total $550,775 $562,940 $2,320,240 $2,356,960
========================================
49
Total proceeds and gross realized gains and losses from sale of securities AFS
for each of the three years ended December 31 were:
1998 1997 1996
------- ------- --------
(In Thousands)
Proceeds $62,168 $71,178 $434,145
Gross gains 9,357 2,462 6,875
Gross losses 2,526 -- 17,588
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 the fourth quarter of 1997. This security is highly
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. The estimated fair value of this
security at the time of the other than temporary impairment charge was based
on quoted prices of instruments with similar characteristics and cash flow
valuation techniques.
Additionally, 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.
In November 1996, the Corporation sold securities classified as HTM prior to
their maturity dates. These securities were sold for $1.3 million which
approximated amortized cost. These sales were made due to a significant
deterioration in the issuer's creditworthiness and, therefore, were not
considered to be inconsistent with their original classification.
Pledged securities HTM with an amortized cost and securities AFS at fair value
totaled approximately $653 million at December 31, 1998 and $836 million at
December 31, 1997 to secure certain deposits, Federal Home Loan Bank advances,
or for other purposes as required or permitted by law.
50
NOTE 6 LOANS:
Loans at December 31 are summarized below:
1998 1997
---------- ----------
(In Thousands)
Commercial and financial $ 929,844 $ 951,396
Agricultural 32,364 35,443
Real estate--construction 461,157 335,978
Real estate--mortgage 5,079,270 4,942,237
Installment loans to individuals 750,831 793,424
Lease financing 19,231 14,072
Total $7,272,697 $7,072,550
A summary of the changes in the allowance for possible loan losses for the
years indicated is as follows:
1998 1997 1996
-------- -------- --------
(In Thousands)
Balance at beginning of year $ 92,731 $ 71,767 $ 68,560
Balance related to acquisitions 3,636 728 3,511
Provision for possible loan losses 14,740 31,668 13,695
Charge-offs (17,039) (15,049) (17,616)
Recoveries 5,609 3,617 3,617
-------------
Net charge-offs (11,430) (11,432) (13,999)
-------------
Balance at end of year $ 99,677 $ 92,731 $ 71,767
-------------
-------------
Nonaccrual loans totaled $48.2 million and $32.4 million at December 31, 1998
and 1997, 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:
1998 1997
------- -------
(In Thousands)
Impaired loans for which an allowance has been provided $ 1,887 $ 2,252
Impaired loans for which no allowance has been provided 13,540 10,652
---------------
Total loans determined to be impaired $15,427 $12,904
===============
AFLL related to impaired loans $ 805 $ 1,206
===============
For the years ended December 31:
1998 1997 1996
------- ------- -------
(In Thousands)
Average recorded investment in impaired loans $15,652 $13,103 $12,280
=======================
Cash basis interest income recognized from impaired
loans $ 1,062 $ 650 $ 594
=======================
51
The Corporation's subsidiaries have granted loans to their directors,
executive officers, or their related affiliates. These loans were made on
substantially the same terms, including rates and collateral, as those
prevailing at the time for comparable transactions with other unrelated
customers, and do not involve more than a normal risk of collection. These
loans to related parties are summarized as follows:
1998
--------------
(In Thousands)
--------------
Balance at beginning of year $ 72,861
New loans 109,209
Repayments (78,510)
Changes due to status of executive officers and directors (11,263)
--------
Balance at end of year $ 92,297
========
The Corporation serves the credit needs of its customers by offering a wide
variety of loan programs to customers, primarily in Wisconsin and Illinois.
The loan portfolio is widely diversified by types of borrowers, industry
groups and market areas. Significant loan concentrations are considered to
exist for a financial institution when there are amounts loaned to a multiple
number of borrowers engaged in similar activities that would cause them to be
similarly impacted by economic or other conditions. At December 31, 1998, no
concentrations existed in the Corporation's loan portfolio in excess of 10% of
total loans, or $727 million.
Other real estate owned, which is included in other assets, totaled $6.0
million and $2.1 million at December 31, 1998 and 1997, respectively.
NOTE 7 MORTGAGE SERVICING RIGHTS:
A summary of changes in the balance of mortgage servicing rights is as
follows:
1998 1997 1996
------- ------- -------
(In Thousands)
Balance at beginning of year $22,535 $20,238 $15,634
Additions 21,502 9,801 8,867
Amortization (6,833) (6,472) (4,237)
Valuation allowance (6,990) (1,032) (26)
-------------------------
Balance at end of year $30,214 $22,535 $20,238
=========================
The valuation allowance was $8.0 million and $1.0 million at December 31, 1998
and 1997, respectively. At December 31, 1998, the Corporation was servicing 1-
to 4-family residential mortgage loans owned by other investors with balances
totaling $5.21 billion compared with $4.97 billion and $4.80 billion at
December 31, 1997 and 1996, respectively.
NOTE 8 PREMISES AND EQUIPMENT:
A summary of premises and equipment at December 31 is as follows:
1998 1997
--------- ---------
(In Thousands)
Premises $ 120,013 $ 120,570
Land and land improvements 26,150 26,180
Furniture and equipment 119,758 102,193
Leasehold improvements 11,500 11,476
Less: Accumulated depreciation and amortization (137,279) (132,596)
--------------------
Total $ 140,142 $ 127,823
====================
Depreciation and amortization of premises and equipment totaled $14.4 million
in 1998, $14.2 million in 1997, and $13.2 million in 1996.
52
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 agreement, in effect through March 2003, calls for
monthly fixed and variable fees covering the cost of systems operations and
the migration to new systems. System migration fees are amortized over the
life of the agreement, while operational costs are expensed as incurred.
Operational costs are subject to annual adjustment, indexed to changes in the
Consumer Price Index (CPI). The facilities housing the data processing
operations are owned by the Corporation, although remote processing locations
are provided by vendors. Certain data processing and other related equipment
is leased on a month-to-month basis. 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:
(InThousands)
-------------
1999 $ 9,789
2000 9,661
2001 9,055
2002 8,707
2003 4,234
Thereafter 18,663
-------
Total $60,109
=======
Total rental and service expense under leases and other agreements, net of
sublease income, totaled $23.7 million in 1998, $21.6 million in 1997, and
$21.1 million in 1996.
NOTE 9 DEPOSITS:
The distribution of deposits at December 31 is as follows:
1998 1997
---------- ----------
(In Thousands)
Noninterest-bearing demand deposits $ 998,379 $ 935,852
Interest-bearing demand deposits 814,188 736,539
Savings deposits 980,151 1,012,049
Money market deposits 1,142,067 1,014,365
Time deposits 4,623,034 4,696,472
---------------------
Total deposits $8,557,819 $8,395,277
=====================
Time deposits of $100,000 or more were $853.6 million and $779.9 million at
December 31, 1998 and 1997, respectively. Aggregate annual maturities of
certificate accounts at December 31, 1998 are as follows:
Maturities
during
Year Ended
December
31, (In Thousands)
- ---------- -------------
1999 $3,679,661
2000 772,046
2001 92,080
2002 38,857
2003 39,194
Thereafter 1,196
----------
Total $4,623,034
==========
53
NOTE 10 SHORT-TERM BORROWINGS:
Short-term borrowings at December 31 are as follows:
1998 1997
---------- ----------
(In Thousands)
Federal funds purchased and securities sold under
agreements to purchase $ 502,586 $ 712,250
Federal Home Loan Bank advances 937,021 525,317
Notes payable to banks 217,535 87,139
Other borrowed funds 13,951 12,302
---------------------
Total $1,671,093 $1,337,008
=====================
Notes payable to banks are unsecured borrowings under existing lines of
credit. At December 31, 1998, the Corporation's parent company had $225
million of established lines of credit with various nonaffiliated banks, of
which $217.5 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.
Subsidiary banks have collateral pledge agreements whereby they have agreed to
keep on hand at all times, free of all other pledges, liens, and encumbrances,
whole first mortgages on improved residential property with unpaid principal
balances aggregating no less than 167% of all outstanding borrowings from the
Federal Home Loan Bank. Loans totaling approximately $1.6 billion and $1.1
billion were maintained as collateral to secure Federal Home Loan Bank
advances at December 31, 1998, and December 31, 1997, respectively. In
addition, at December 31, 1998, certain affiliate banks maintained as
collateral to secure Federal Home Loan Bank advances $34.7 million of
mortgage-related securities.
Included in short-term Federal Home Loan Bank advances are callable notes that
have original maturities exceeding one year. However, these notes have one-
year call premiums, which the Corporation expects may be called.
NOTE 11 LONG-TERM BORROWINGS:
Long-term borrowings at December 31 are as follows:
1998 1997
------- -------
(In Thousands)
Federal Home Loan Bank (4.95% to 7.63% maturing in 2000
through
2013 in 1998, and 4.84% to 7.63% maturing in 1999 through
2004 in 1997) $18,200 $ 5,882
Industrial development revenue bonds (6.60% to 7.25% in 1998,
and 6.40%
to 7.25% in 1997) 5,780 5,900
Collateralized mortgage obligations 2,024 3,488
---------------
Total $26,004 $15,270
===============
The table below summarizes the maturities of the Corporation's long-term
borrowings at December 31, 1998:
Year (In Thousands)
- ---- -------------
1999 $ --
2000 1,439
2001 9,735
2002 140
2003 7,247
Thereafter 7,443
-------
Total long-term borrowings $26,004
=======
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
54
$8,679,000 and $8,828,000, respectively, at December 31, 1998. The Corporation
has a loan receivable from the buyer of $5,589,000 at December 31, 1998, which
is secured by a first mortgage on the apartment project.
UFS Capital Corporation and FFS Funding Corporation, wholly-owned finance
subsidiaries of the Corporation, have issued the collateralized mortgage
obligations. Principal repayments are scheduled in varying amounts through
January 2003. The obligations are collateralized by mortgage-backed securities
held by UFS Capital Corporation with a carrying value of $4,779,000, and a
fair value of $4,939,000 at December 31, 1998.
In January 1996, FFC redeemed all of its outstanding 8% subordinated notes due
November 1999, which aggregated $54,925,000 at the date of redemption. The
after-tax cost of $686,000 associated with the redemption has been reported as
an extraordinary charge in 1996.
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).
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, 1998, subsidiary net assets equaled $826.4 million, of which
approximately $61.7 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 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 of December 31, 1998, 11,107 shares remain available
for granting. No options have been granted from this plan since 1985.
In January 1998, the Board of Directors, 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 Board of Directors 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, 1998, approximately 2,596,000 shares remain
available for grants.
The stock incentive plans of acquired companies were terminated at each
respective merger date. Option holders under such plans received the
Corporation's common stock, or options to buy the Corporation's common stock,
based on the conversion terms of the various merger agreements. The historical
option information presented below has been restated to reflect the options
originally granted under the acquired companies' plans.
1998 1997 1996
-----------------------------------------------------------------------------
Range of Range of Range of
Options Exercise Options Exercise Options Exercise
Outstanding Prices Outstanding Prices Outstanding Prices
-----------------------------------------------------------------------------
Outstanding, January 1 2,396,119 $ 2.59-$32.58 2,695,339 $ 2.59-$24.58 2,748,840 $ 2.59-$19.34
Granted 386,375 40.30- 42.80 317,213 28.17- 32.58 454,830 17.36- 24.58
Exercised (786,060) 2.59- 28.17 (608,378) 2.71- 24.58 (479,469) 2.59- 19.34
Forfeited (35,686) 7.49- 40.30 (8,055) 12.34- 28.17 (28,862) 8.36- 24.58
---------------------------------------------------------------------------------
Outstanding, December 31 1,960,748 $ 2.59-$42.80 2,396,119 $ 2.59-$32.58 2,695,339 $ 2.59-$24.58
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Options exercisable at
year end 1,297,179 1,821,573 1,737,679
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
55
The following table summarizes information about the Corporation's stock
option's outstanding at December 31, 1998:
Options Weighted Average Remaining Grants Weighted Average
Outstanding Exercise Price Life (Years) Exercisable Exercise Price
----------- ---------------- ----------- ----------- ----------------
Range of Exercise
Prices:
$ 2.59--$ 5.33 60,014 $ 3.59 2.15 60,014 $ 3.58
$ 6.69--$ 8.36 325,724 8.10 3.04 325,724 8.10
$11.40--$17.09 329,624 16.38 4.51 328,429 16.40
$17.36--$24.58 577,706 20.93 6.30 491,500 20.40
$28.17--$32.58 290,930 28.26 8.09 91,512 28.17
Greater than $40.30 376,750 40.31 9.07 -- --
------------------------------------------------------------
TOTAL 1,960,748 $22.31 6.13 1,297,179 $16.07
============================================================
The Corporation applies APB Opinion No. 25 in accounting for the Stock Plan
and, accordingly, compensation cost based on fair value at grant date has not
been recognized for its stock options in the consolidated financial statements
during the three years ended December 31, 1998. 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 would have been
reduced to the pro forma amounts indicated below:
For the Years Ended
December 31,
-------------------------
1998 1997 1996
-------- ------- --------
(In Thousands, except per
share)
Net Income As Reported $157,020 $52,359 $107,016
Pro Forma 155,268 51,179 106,293
Basic Net Income Per Share As Reported 2.49 0.83 1.69
Pro Forma 2.46 0.81 1.68
Diluted Net Income Per Share As Reported 2.46 0.82 1.66
Pro Forma 2.43 0.80 1.65
Pro forma net income reflects only options granted in 1998, 1997, and 1996.
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, 1996, is not considered. However, 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.
The fair value of each option granted is estimated on the grant date using the
Black-Scholes option-pricing model. The following assumptions were used in
estimating the fair value for options granted in 1998, 1997, and 1996:
1998 1997 1996
------ ------ ------
Dividend yield 3.39% 2.10% 3.00%
Risk-free interest rate 5.61% 6.47% 5.46%
Weighted average expected life 7 yrs. 7 yrs. 7 yrs.
Expected volatility 21.95% 19.64% 20.49%
The weighted average per share fair values of options granted in 1998, 1997,
and 1996 were $9.88, $8.00, and $5.54, respectively.
NOTE 13 RETIREMENT PLAN:
The Corporation has a noncontributory defined benefit retirement plan covering
substantially all full-time employees. The benefits are based primarily on
years of service and the employee's compensation paid while a participant in
the plan. The Corporation's funding policy is consistent with the funding
requirements of federal law and regulations. Plan assets are actively managed
by investment professionals.
56
In February 1998, SFAS No. 132 "Employer's Disclosures about Pensions and
Other Postretirement Benefits" was issued, and is effective for fiscal years
beginning after December 31, 1997. The statement revises the required
disclosures for pensions and other post retirement plans but does not change
the measurement or recognition of such plans. The following tables set forth
the plan's funded status and net periodic benefit cost as per the disclosure
requirements of SFAS No. 132:
1998 1997
------- -------
($ in
Thousands)
Change In Benefit Obligation
Net benefit obligation at beginning of year $31,144 $26,353
Service cost 3,369 1,957
Interest cost 2,329 2,015
Plan amendments 92 189
Actuarial loss 2,282 2,619
Gross benefits paid (1,915) (1,989)
----------------
Net benefit obligation at end of year $37,301 $31,144
================
Change In Plan Assets
Fair value of plan assets at beginning of year $34,230 $28,863
Actual return on plan assets 3,856 6,685
Employer contributions 864 671
Gross benefits paid (1,915) (1,989)
----------------
Fair value of plan assets at end of year $37,035 $34,230
================
Funded Status
Funded status at end of year $ (266) $ 3,086
Unrecognized net actuarial gain (4,117) (5,054)
Unrecognized prior service cost 719 663
Unrecognized net transition asset (2,354) (2,678)
----------------
Net amount recognized at end of year in the balance sheet $(6,018) $(3,983)
================
Weighted Average Assumptions As Of December 31:
Discount rate 6.75% 7.00%
Rate of increase in compensation levels 5.00 5.00
================
1998 1997 1996
------ ------ ------
($ in Thousands)
Components Of Net Peri-
odic Benefit Cost
Service cost $3,369 $1,957 $1,827
Interest cost 2,329 2,015 1,849
Expected return on plan
assets (2,511) (2,151) (1,946)
Amortization of:
Transition asset (324) (324) (324)
Prior service cost 35 31 31
Actuarial loss -- 3 5
----------------------
Total net periodic
benefit cost $2,898 $1,531 $1,442
======================
Weighted average
assumptions used in
cost calculations:
Discount rate 7.00% 7.50% 7.00%
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
======================
57
FFC had a noncontributory defined benefit retirement plan covering
substantially all Illinois-based employees. The benefits were based primarily
on years of service and the employee's compensation paid while a participant
in the plan. 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's disclosure above.
The Corporation and its subsidiaries also have a Profit Sharing/Retirement
Savings Plan. The profit sharing contribution is determined annually by the
Administrative Committee of the Board of Directors, based on a formula which
utilizes return on average equity of each affiliate and the Corporation. Total
expense related to contributions to the plan was $9.1 million, $4.5 million,
and $4.4 million in 1998, 1997, and 1996, respectively. Prior to 1998, FFC had
a defined-contribution profit sharing plan, under which corporate
contributions were discretionary. This plan was merged with the Corporation's
plan in January 1998. Total expense related to contributions to the FFC plan
was $3.5 million and $2.1 million in 1997 and 1996, respectively.
FFC sponsored a supplemental executive retirement plan for certain executive
officers, which is partially funded through life insurance and provides
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. Expense for the supplemental retirement
plan and defined-benefit retirement plan for outside directors was $480,000
for 1996.
NOTE 14 INCOME TAX EXPENSE:
The current and deferred amounts of income tax expense (benefit) are as
follows:
Years ended
December 31,
------------------------
1998 1997 1996
------- ------- -------
(In Thousands)
Current:
Federal $65,938 $75,238 $55,660
State 114 9,624 6,169
------------------------
Total current 66,052 84,862 61,829
------------------------
Deferred:
Federal 8,087 (17,860) (2,875)
State 1,804 (3,093) (1,467)
------------------------
Total deferred 9,891 (20,953) (4,342)
------------------------
Total income tax expense 75,943 63,909 57,487
------------------------
Extraordinary item -- -- (370)
------------------------
Total after extraordinary item $75,943 $63,909 $57,117
========================
58
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:
1998 1997
------- -------
(In Thousands)
Gross deferred tax assets:
Allowance for possible loan losses $39,331 $37,218
Accrued liabilities 6,886 14,098
Accrued pension expense 1,395 1,372
Deferred compensation 7,151 7,370
Securities valuation adjustment 18,580 17,389
Deposit base intangible amortization 4,696 4,406
Benefit of tax loss carryforwards 15,184 15,546
Other 2,648 2,655
---------------------
Total gross deferred tax assets 95,871 100,054
Valuation adjustment for deferred tax assets (21,146) (23,965)
---------------------
74,725 76,089
Gross deferred tax liabilities:
Premises and equipment 3,692 3,875
Deferred loan fee income and other loan yield
adjustment 718 740
FHLB bank stock dividend 1,059 1,059
State income taxes 5,093 5,559
Other 8,217 4,959
---------------------
Total gross deferred tax liabilities 18,779 16,192
---------------------
Net deferred tax assets 55,946 59,897
---------------------
Tax effect of unrealized gain related to available for
sale securities (13,362) (14,938)
---------------------
Net deferred tax assets including unrealized gain
related to available for sale securities $42,584 $44,959
================
Components of the 1997 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:
1998 1997 1996
---- ---- ----
Federal income tax rate at statutory rate 35.0% 35.0% 35.0%
Increases (decreases) resulting from:
Tax-exempt interest and dividends (1.7) (2.9) (2.0)
State income taxes (net of federal income taxes) 1.7 3.3 1.8
Merger, integration, and other one-time charges -- 3.4 --
Change in valuation allowance for deferred tax assets (2.4) 15.7 --
Other -- 0.5 0.1
----------------
Effective income tax rate 32.6% 55.0% 34.9%
================
As of December 31, 1998, the Corporation had approximately $9.1 million of
purchased net operating loss carryforwards available to reduce state tax
liability through the year 2012. Utilization of the net operating loss
carryforwards is reflected as a charge in lieu of current tax expense and
recorded in the consolidated balance sheets as a reduction to goodwill.
59
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 income at December 31, 1998. If income taxes had been
provided, the deferred tax liability would have been approximately
$31,804,000.
NOTE 15 COMMITMENTS AND CONTINGENT LIABILITIES:
Commitments and Letters of Credit
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 commitments to extend credit, commercial letters
of credit, standby letters of credit and financial guarantees, and interest
rate swaps.
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. The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
The following is a summary of financial instruments with off-balance sheet
risk at December 31:
1998 1997
---------- ----------
(In Thousands)
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit $2,929,012 $2,459,154
Commercial letters of credit 9,795 3,981
Standby letters of credit and financial guarantees
written 113,155 95,410
Financial instruments whose notional or contract amount
exceeds the amount of credit risk:
Interest rate swap agreements -- 3,300
Futures -- 70,500
Loans sold with recourse 11,904 12,000
Commitments to extend credit are agreements to lend funds to a customer as
long as there is no violation of any condition established in the contract.
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 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. Collateral held
varies but may include accounts receivable, inventory, property, plant,
equipment, securities, certificates of deposit and income producing commercial
properties.
A letter of credit is a document issued by the Corporation on behalf of its
customer (the account party) authorizing a third party (the beneficiary), or
in special cases the account party, to draw drafts on the Corporation up to a
stipulated amount and with specified terms and conditions. The letter of
credit is a conditional commitment (except when prepaid by the account party)
on the part of the Corporation to provide payment on drafts drawn in
accordance with the terms of the document.
A commercial letter of credit is issued specifically to facilitate trade or
commerce. Under the terms of a commercial letter of credit, as a general rule,
drafts will be drawn when the underlying transaction is consummated as
intended.
A standby letter of credit is a letter of credit or similar arrangement that
represents an obligation on the part of the Corporation to a designated third
party (the beneficiary) contingent upon the failure of the Corporation's
customer (the account party) to perform under the terms of the underlying
contract with the beneficiary, or obligates the Corporation to guarantee or
stand as surety for the benefit of a third party to the extent permitted by
law or regulation.
60
The underlying contract may entail either financial or nonfinancial
undertakings of the account party with the beneficiary. The underlying
contract may involve such things as the customer's payment of commercial
paper, delivery of merchandise, completion of a construction contract, or
repayment of the account party's obligations to the beneficiary. Under the
terms of a standby letter, as a general rule, drafts will be drawn only when
the underlying event fails to occur as intended.
The credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loans to customers.
The Corporation may enter into various interest rate swaps to assist managing
its interest rate risk. In these swaps, the Corporation agrees to exchange, at
specified intervals, the difference between fixed- and floating-interest
amounts calculated on an agreed-upon notional principal amount.
There were no interest rate swaps at December 31, 1998. At December 31, 1997,
$3.3 million of "pay-fixed" swaps were in effect converting a fixed rate
commercial loan to a variable rate. At December 31, 1997, the market value of
interest rate swaps was a positive $14,000.
If an interest rate swap that is used to manage interest rate risk is
terminated early, any resulting gain or loss is deferred and accreted or
amortized to noninterest income or expense over the remaining life of the
asset related to the terminated agreement. Deferred gains totaling $10,000 at
December 31, 1998, resulting from interest rate swaps terminated during 1994
with notional amounts of $19.8 million, are included in other liabilities and
will be recognized as part of interest income in 1999.
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
outstanding at year-end 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.
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,
1998 and 1997, $12 million of the serviced loans were previously sold with
recourse, the majority of which is either federally-insured or federally-
guaranteed.
Legal
There are legal proceedings pending against certain 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.
61
NOTE 16 PARENT COMPANY FINANCIAL INFORMATION:
Presented below are condensed financial statements for the Parent Company:
BALANCE SHEETS
1998 1997
---------- --------
(In Thousands)
ASSETS
Cash and due from banks $ 645 $ 5
Notes receivable from subsidiaries 255,513 138,897
Investment in subsidiaries 826,403 746,081
Other assets 45,397 41,939
-------------------
Total assets $1,127,958 $926,922
===================
LIABILITY AND STOCKHOLDERS' EQUITY
Short-term borrowings $ 217,535 $ 88,389
Accrued expenses and other liabilities 31,702 24,841
-------------------
Total liabilities 249,237 113,230
Stockholders' equity 878,721 813,692
-------------------
Total liabilities and stockholders' equity $1,127,958 $926,922
===================
STATEMENTS OF INCOME
For the Years Ended
December 31,
---------------------------
1998 1997 1996
-------- ------- --------
(In Thousands)
INCOME
Dividends from subsidiaries $161,675 $63,355 $ 51,283
Management and service fees from subsidiaries 10,092 4,685 4,267
Interest income on notes receivable 9,432 7,615 6,088
Other income 1,543 514 234
---------------------------
Total income 182,742 76,169 61,872
---------------------------
EXPENSE
Interest expense on borrowed funds 5,571 4,634 4,449
Salaries and employee benefits 7,367 3,871 3,287
Merger, integration and other one-time charges -- 20,837 --
Other expense 6,352 5,203 5,030
---------------------------
Total expense 19,290 34,545 12,766
---------------------------
Income before income tax expense (benefit) and
equity in undistributed income 163,452 41,624 49,106
Income tax expense (benefit) 751 (6,155) (547)
---------------------------
Income before equity in undistributed net income
of subsidiaries 162,701 47,779 49,653
Equity in undistributed net income of
subsidiaries (5,681) 4,580 57,363
---------------------------
Net income $157,020 $52,359 $107,016
===========================
62
STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
-----------------------------
1998 1997 1996
--------- -------- --------
(In Thousands)
OPERATING INCOME
Net income $ 157,020 $ 52,359 $107,016
Adjustments to reconcile net income to net cash
provided by operating activities:
(Increase) decrease in equity in undistributed
net income of subsidiaries 5,681 (4,580) (57,363)
Depreciation and other amortization 298 161 135
Amortization of intangibles 443 446 805
Loss (gain) on sales of assets, net (1,321) (356) --
(Increase) decrease in interest receivable and
other assets 2,949 (10,714) 599
Increase (decrease) in interest payable and
other liabilities 6,226 12,080 (252)
Other, net -- -- (154)
-----------------------------
Net cash provided by operating activities 171,296 49,396 50,786
-----------------------------
INVESTING ACTIVITIES
Proceeds from sales of investment securities 1,602 357 --
Net cash paid in acquisition of subsidiary (16,021) -- --
Net increase in notes receivable (116,616) (16,335) (12,374)
Purchase of premises and equipment, net of
disposals (1,527) (176) (82)
Capital contribution to subsidiaries (62,162) -- (9,200)
-----------------------------
Net cash used by investing activities (194,724) (16,154) (21,656)
-----------------------------
FINANCING ACTIVITIES
Net increase (decrease) in short-term
borrowings 129,146 14,213 (8,546)
Cash dividends (65,841) (49,328) (20,278)
Proceeds from exercise of stock options 7,926 5,168 1,476
Purchase of treasury stock (47,163) (3,599) (3,101)
-----------------------------
Net cash provided (used) by financing
activities 24,068 (33,546) (30,449)
-----------------------------
Net increase (decrease) in cash and cash
equivalents 640 (304) (1,319)
Cash and due from banks at beginning of year 5 309 1,628
-----------------------------
Cash and due from banks at end of year $ 645 $ 5 $ 309
=============================
63
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.
The estimated fair values of the Corporation's financial instruments at
December 31, 1998 and 1997 are as follows:
1998 1997
- ------------------------------------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------
(In Thousands)
Financial assets:
Cash and due from banks $ 331,532 $ 331,532 $ 290,184 $ 290,184
Interest-bearing deposits
in other financial institutions 200,467 200,467 5,019 5,019
Federal funds sold
and securities purchase under
agreements to resell 4,485 4,485 11,511 11,511
Investment securities:
Held to maturity 550,775 562,940 772,524 782,240
Available for sale 2,356,960 2,356,960 2,167,694 2,167,694
Loans held for sale 165,170 166,011 114,001 114,160
Loans 7,272,697 7,339,376 7,072,550 7,105,289
Financial liabilities:
Deposits 8,557,819 8,569,915 8,395,277 8,409,633
Short-term borrowings 1,671,093 1,671,093 1,337,008 1,337,008
Long-term borrowings 26,004 27,814 15,270 15,387
Off balance sheet:
Interest swap agreements -- -- 2 14
Futures contracts -- -- (1,421) (1,421)
--------------------------------------------
There were no interest rate swaps or futures contracts at December 31, 1998.
At December 31, 1997, the contract or notional amount of off balance sheet
instruments was $3.3 million of interest swap agreements and $70.5 million of
futures contracts.
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, 1998 or 1997.
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
64
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 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 borrowings
Rates currently available to the Corporation for debt with similar terms and
remaining maturities are used to estimate fair value of existing borrowings.
Commitments to extend credit, commercial letters of credit, standby letters of
credit and financial guarantees written
Fair values for commitments to extend credit, commercial letters of credit,
standby letters of credit, and financial guarantees written are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements, the counterparties' credit standing and
discounted cash flow analyses. The fair value of these off-balance-sheet items
approximates the recorded amounts of the related fees and is not material at
December 31, 1998 and 1997.
Interest rate swap agreements and futures contracts
The fair value of interest rate swap agreements and futures contracts are
obtained from dealer quotes. These values represent the estimated amount the
Corporation would receive or pay to terminate the contracts or 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 affiliate 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
65
(as defined). Management believes, as of December 31, 1998, that the
Corporation and the subsidiary banks meet all capital adequacy requirements to
which they are subject.
As of December 31, 1998 and 1997, 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 1998 or 1997.
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions:
--------------- --------------- ---------------
Amount Ratio* Amount Ratio* Amount Ratio*
-------- ------ -------- ------ -------- ------
($ In Thousands)
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%
As of December
31, 1997:
- --------------
Associated
Banc-Corp
- ----------
Total Capital $841,883 11.86% $567,666 ^8.00% $709,852 ^10.00%
Tier I Capital $753,135 10.61% $283,833 ^4.00% $425,749 ^ 6.00%
Leverage $753,135 7.10% $424,482 ^4.00% $530,603 ^ 5.00%
First
Financial Bank
- --------------
Total Capital $396,629 13.63% $232,784 ^8.00% $290,980 ^10.00%
Tier I Capital $360,219 12.38% $116,387 ^4.00% $174,588 ^ 6.00%
Leverage $360,219 6.11% $235,823 ^4.00% $294,591 ^ 5.00%
Associated
Bank Green Bay
- --------------
Total Capital $108,061 10.39% $ 83,227 ^8.00% $104,033 ^10.00%
Tier I Capital $ 83,035 7.98% $ 41,613 ^4.00% $ 62,420 ^ 6.00%
Leverage $ 83,035 6.47% $ 51,318 ^4.00% $ 64,147 ^ 5.00%
*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.
66
NOTE 19 EARNINGS PER SHARE:
Presented below are the calculations for basic and diluted earnings per share:
For the Years Ended
December 31,
-------------------------
1998 1997 1996
-------- ------- --------
(in thousands, except per
share data)
Basic:
Income before extraordinary item $157,020 $52,359 $107,702
Extraordinary item -- -- (686)
-------------------------
Net income available to common stockholders $157,020 $52,359 $107,016
Weighted average shares outstanding 63,125 62,884 63,205
Basic earnings per common share before
extraordinary item $ 2.49 $ 0.83 $ 1.70
Basic earnings per common share $ 2.49 $ 0.83 $ 1.69
=========================
Diluted:
Income before extraordinary item $157,020 $52,359 $107,702
Extraordinary item -- -- (686)
-------------------------
Net income available to common stockholders $157,020 $52,359 $107,016
Weighted average shares outstanding 63,125 62,884 63,205
Effect of dilutive stock options outstanding 664 1,051 1,175
-------------------------
Diluted weighted average shares outstanding 63,789 63,935 64,380
Diluted earnings per common share before
extraordinary item $ 2.46 $ 0.82 $ 1.67
Diluted earnings per common share $ 2.46 $ 0.82 $ 1.66
=========================
NOTE 20 SEGMENT REPORTING
In June 1997, SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," was issued, requiring 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 is beginning in 1999 a process toward evaluating
business lines and products across its subsidiaries, 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.
67
The "other" segment is comprised of smaller nonreportable segments, including
asset management (conducted through a trust subsidiary and within trust
departments of certain bank subsidiaries), 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.
The accounting policies of the segments are the same as those described in
Note 1. Selected segment information is presented below.
Consolidated
Banking Other Eliminations Total
---------------------------------------
(In Thousands)
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 15,240 -- (500) 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 $ 145,238 $ 20,649 $ (8,867) $ 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 13,868 -- 1,000 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 $ 82,376 $ 6,935 $ 52,867 $ 142,178
---------------------------------------
---------------------------------------
Unusual charges, net of
tax* (89,819)
-----------
Net income $ 52,359
===========
Total assets $12,469,413 $1,400,046 $(3,179,017) $10,690,442
---------------------------------------
---------------------------------------
1996
Interest income $ 744,496 $ 7,981 $ (20,714) $ 731,763
Interest expense 390,256 6,380 (20,714) 375,922
Net interest income 354,240 1,601 -- 355,841
Provision for loan losses 13,695 -- -- 13,695
Noninterest income 94,273 17,687 4,314 116,274
Depreciation and
amortization 24,324 2,358 -- 26,682
Other noninterest expense 219,070 35,964 (21,490) 233,544
Income taxes 54,238 3,249 -- 57,487
---------------------------------------
Total $ 137,186 $ (22,283) $ 25,804 $ 140,707
---------------------------------------
---------------------------------------
Unusual charges, net of
tax* (33,691)
-----------
Net income $ 107,016
===========
Total assets $11,923,429 $1,004,941 $(2,807,957) $10,120,413
---------------------------------------
---------------------------------------
* Unusual charges are described in Notes 3 and 11.
68
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, 1998 and 1997, 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, 1998.
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 statements reflected total assets constituting 55.2% as of
December 31, 1997, and total revenues constituting 52.6% and 55.5% for the
years ended December 31, 1997 and 1996, respectively, of the related
consolidated totals. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
[KPMG LOGO APPEARS HERE]
KPMG LLP
Chicago, Illinois
January 21, 1999
69
INDEPENDENT AUDITORS' REPORT
FIRST FINANCIAL CORPORATION
The Board of Directors
First Financial Corporation
We have audited the consolidated balance sheet of First Financial Corporation
and subsidiaries (the "Corporation") as of December 31, 1997, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the two-year period ended December 31, 1997
(not presented separately herein). These consolidated financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
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 provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Financial Corporation and subsidiaries at December 31, 1997, and the results
of their operations and their cash flows for each of the years in the two-year
period ended December 31, 1997 in conformity with generally accepted
accounting principles.
[SIGNATURE OF ERNST & YOUNG APPEARS HERE]
Ernst & Young LLP
Milwaukee, Wisconsin
January 22, 1998
70
Market Information
Market Price
Range Sales
Prices
-------------
Dividends Paid Book Value High Low
-------------- ---------- ------ ------
1998
4th Quarter $.2900 $13.97 $37.00 $26.75
3rd Quarter $.2900 $13.96 $42.38 $31.44
2nd Quarter $.2320 $13.70 $43.70 $36.25
1st Quarter $.2320 $13.24 $43.80 $38.09
1997
4th Quarter $.2320 $12.92 $47.00 $36.59
3rd Quarter $.2320 $13.91 $39.16 $31.20
2nd Quarter $.2320 $13.44 $31.59 $28.59
1st Quarter $.1934 $12.94 $32.41 $27.61
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 1999 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 1999 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 1999 Annual Meeting of Shareholders, which contains information concerning
this item, under the captions "Security Ownership of Beneficial Holders" 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 1999 Annual Meeting of Shareholders, which contains information concerning
this item under the caption "Certain Transactions," is incorporated herein by
reference.
71
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 and 2Financial 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, 1998 and 1997
Consolidated Statements of Income--For the Years Ended December 31,
1998, 1997, and 1996
Consolidated Statements of Changes in Stockholders' Equity--For the
Years Ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows--For the Years Ended December
31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
Independent Auditors' Reports
(a) 3Exhibits Required by Item 601 of Regulation S-K
Exhibit Sequential Page Number or
Number Description Incorporate by Reference to
- -------------------------------------------------------------------------------
(3)(a) Articles of Incorporation Filed as Exhibit (3)(a) to Report
on Form 10-K for fiscal year
ended December 31, 1997
(3)(b) Bylaws Filed as Exhibit (3)(b) to Report
on Form 10-K for fiscal year
ended December 31, 1997
(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 Filed as Exhibit (10) to Report
Plan of the Registrant on Form 10-K for fiscal year
ended December 31, 1987
*(10)(b) The Restated Long-Term Incentive Exhibits filed with Associated's
Stock Plan of the Registrant registration statement (333-46467)
on Form S-8 filed under the
Securities Act of 1933
*(10)(c) Change of Control Plan of the Exhibit (10)(d) to Report on
Registrant effective April 25, Form 10-K for fiscal year ended
1994 December 31, 1994
72
Exhibit Sequential Page Number or
Number Description Incorporate by Reference to
- -------------------------------------------------------------------------------
*(10)(d) Deferred Compensation Plan and Exhibit (10)(e) to Report
Deferred Compensation Trust on Form 10-K for fiscal year
effective as of December 16, 1993, ended December 31, 1994
and Deferred Compensation Agreement
of the Registrant dated December 31,
1994
(11) Statement Re Computation of Per See Note 19 in Part II Item 8
Share Earnings
(21) Subsidiaries of the Corporation Filed herewith
(23) Consent of Independent Auditors Filed herewith
(24) Power of Attorney Filed herewith
- ---------------------
* Management contracts and arrangements.
Schedules and exhibits other than those listed are omitted for the reasons
that they are not required, are not applicable or that equivalent
information has been included in the financial statements, and notes
thereto, or elsewhere herein.
(b) Reports on Form 8-K
None
73
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.
/s/ H. B. Conlon
ASSOCIATED BANC-CORP
H. B. Conlon
Date: March 23, 1999 By: _________________________________
Chairman & Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ H. B. Conlon
By: ________________________________ *
By: ________________________________
H. B. Conlon William R. Hutchinson
Chairman and Chief Executive Director
Officer
*
By: ________________________________
/s/ Joseph B. Selner
By: ________________________________ Robert P. Konopacky
Joseph B. Selner Director
Chief Financial Officer
Principal Financial Officer and
Principal Accounting Officer
/s/ Robert C. Gallagher
By: ________________________________ *
By: ________________________________
Robert C. Gallagher Dr. George R. Leach
President, Chief Operating Director
Officer, 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
/s/ Brian R. Bodager
*By: ________________________________ *
By: ________________________________
Brian R. Bodager Norman L. Wanta
Attorney-in-Fact Director
Date: March 23, 1999