10-K 1 r10k2000.txt FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark One) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- ----------- Commission file number: 0-5519 ASSOCIATED BANC-CORP (Exact name of registrant as specified in its charter) Wisconsin 39-1098068 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 1200 Hansen Road Green Bay, Wisconsin 54304 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (920) 491-7000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT Common stock, par value - $0.01 per share (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 1, 2001, 66,172,712 shares of Common Stock were outstanding and the aggregate market value of the voting stock held by nonaffiliates of the Registrant was approximately $2,226,522,000. Excludes approximately $107,100,000 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 $182,708,000 of market value representing 7.83% of the outstanding shares of the Registrant held in a fiduciary capacity by the trust company subsidiary of the Registrant. DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K Into Which Document Portions of Documents are Incorporated Proxy Statement for Annual Meeting of Part III Shareholders on April 25, 2001 ================================================================================ ASSOCIATED BANC-CORP 2000 FORM 10-K TABLE OF CONTENTS Page ---- PART I Item 1. Business 3 Item 2. Properties 7 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 7 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 10 Item 6. Selected Financial Data 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 39 Item 8. Financial Statements and Supplementary Data 40 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 70 PART III Item 10. Directors and Executive Officers of the Registrant 70 Item 11. Executive Compensation 70 Item 12. Security Ownership of Certain Beneficial Owners and Management 70 Item 13. Certain Relationships and Related Transactions 70 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 71 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 describe future plans or strategies and include Associated Banc-Corp's expectations of future results of operations. The words "believes," "expects," "anticipates," or similar expressions identify forward-looking statements. Shareholders should note that many factors, some of which are discussed elsewhere in this document and in the documents that are incorporated by reference, could affect the future financial results of Associated Banc-Corp and could cause those results to differ materially from those expressed in forward-looking statements contained or incorporated by reference in this document. These factors include the following: - operating, legal, and regulatory risks; - economic, political, and competitive forces affecting Associated Banc-Corp's banking, securities, asset management, and credit services businesses; and - the risk that Associated Banc-Corp's analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. Associated Banc-Corp undertakes no obligation to update or revise any forward looking statements, whether as a result of new information, future events, or otherwise. PART I ITEM 1 BUSINESS GENERAL Associated Banc-Corp (the "Corporation") is a bank holding company registered pursuant to the Bank Holding Company Act of 1956, as amended (the "Act"). It was incorporated in Wisconsin in 1964 and was inactive until 1969 when permission was received from the Board of Governors of the Federal Reserve System to acquire three banks. At December 31, 2000, the Corporation owned nine commercial banks located in Illinois, Minnesota, and Wisconsin (the "affiliates") serving their local communities and, measured by total assets held at December 31, 2000, was the third largest commercial bank holding company headquartered in Wisconsin. The Corporation also owned 31 nonbanking subsidiaries (the "subsidiaries") located in Arizona, California, Illinois, Missouri, Nevada, and Wisconsin. Effective in the second quarter of 2001, the Corporation will merge all of the Wisconsin bank affiliates into a single national banking charter, headquartered in Green Bay, Wisconsin, under the name Associated Bank, National Association. Certain subsidiaries will also merge with and into the resultant bank, becoming departments of the Wisconsin national bank. At the completion of the foregoing mergers, the Corporation will have four commercial bank affiliates and 20 subsidiaries. SERVICES The Corporation provides advice and specialized services to its affiliates in banking policy and operations, including auditing, data processing, marketing/advertising, investing, legal/compliance, personnel services, trust services, risk management, facilities management, security, purchasing, treasury, finance, accounting, and other financial services functionally related to banking. Responsibility for the management of the affiliates remains with their respective Boards of Directors and officers. Services rendered to the affiliates by the Corporation are intended to assist the local management of these affiliates to expand the scope of services offered by them. Bank affiliates of the Corporation at December 31, 2000, provided services through 214 locations in 149 communities. The Corporation, through its affiliates, provides a complete range of banking services to individuals and businesses. These services include checking, savings, and money market deposit accounts, business, personal, 3 educational, residential, and commercial mortgage loans, other consumer-oriented financial services, including IRA and Keogh accounts, and safe deposit and night depository facilities. Automated Teller Machines (ATMs), which provide 24-hour banking services to customers of the affiliates, are installed in many locations in the affiliates' service areas. The affiliates are members of an interstate shared ATM network, which allows their customers to perform banking transactions from their checking, savings, or credit card accounts at ATMs in a multi-state environment. Among the services designed specifically to meet the needs of businesses are various types of specialized financing, cash management services, and transfer/collection facilities. The affiliates provide lending, depository, and related financial services to individual, commercial, industrial, financial, and governmental customers. Term loans, revolving credit arrangements, letters of credit, inventory and accounts receivable financing, real estate construction lending, and international banking services are available. Lending involves credit risk. Credit risk is controlled and monitored through active asset quality management and the use of lending standards, thorough review of potential borrowers, and active asset quality administration. Active asset quality administration, including early problem loan identification and timely resolution of problems, further ensures appropriate management of credit risk and minimization of loan losses. The allowance for loan losses ("AFLL") represents management's estimate of an amount adequate to provide for probable losses inherent in the loan portfolio. Management's evaluation of the adequacy of the AFLL is based on management's ongoing review and grading of the loan portfolio, consideration of past loan loss experience, trends in past due and nonperforming loans, risk characteristics of the various classifications of loans, current economic conditions, the fair value of underlying collateral, and other factors which could affect potential credit losses. Credit risk management is discussed under sections "Loans," "Allowance for Loan Losses," and "Nonperforming Loans, Potential Problem Loans, and Other Real Estate Owned" and under Notes 1 and 5 in the notes to consolidated financial statements. Additional emphasis is given to noncredit services for commercial customers, such as advice and assistance in the placement of securities, corporate cash management, and financial planning. The affiliates make available check clearing, safekeeping, loan participations, lines of credit, portfolio analyses, and other services to approximately 120 correspondent financial institutions. A trust company subsidiary and an investment management subsidiary offer a wide variety of fiduciary, investment management, advisory, and corporate agency services to individuals, corporations, charitable trusts, foundations, and institutional investors. They also administer (as trustee and in other fiduciary and representative capacities) pension, profit sharing and other employee benefit plans, and personal trusts and estates. Investment subsidiaries provide discount and full-service brokerage services, including the sale of fixed and variable annuities, mutual funds, and securities, to the affiliates' customers and the general public. Insurance subsidiaries provide commercial and individual insurance services and engage in reinsurance. Various life, property, casualty, credit, and mortgage insurance products are available to the affiliates' customers and the general public. Seven investment subsidiaries located in Nevada hold, manage, and trade cash, stocks, and securities transferred from the affiliates and reinvest investment income. Three additional investment subsidiaries formed in Nevada and headquartered and domiciled in the Cayman Islands provide investment services for their parent bank, as well as provide management of their respective Real Estate Investment Trust ("REIT") subsidiaries. A leasing subsidiary provides lease financing for a variety of capital equipment for commerce and industry. An appraisal subsidiary provides real estate appraisals for customers, government agencies, and the general public. The mortgage banking subsidiaries are involved in the origination, servicing, and warehousing of mortgage loans, and the sale of such loans to investors. The primary focus is on commercial and one- to four-family residential and multi-family properties, which are generally salable into the secondary mortgage market. The principal mortgage lending areas of these subsidiaries are Wisconsin and Illinois. Nearly all long-term, fixed-rate real estate mortgage loans generated are sold in the secondary market and to other financial institutions, with the subsidiaries retaining the servicing of those loans. 4 In addition to real estate loans, the Corporation's affiliates and subsidiaries originate and/or service consumer loans, business credit card loans, and student loans. Consumer, home equity, and student lending activities are principally conducted in Wisconsin and Illinois, while the credit card base and resulting loans are principally centered in the Midwest. In April 2000, the Corporation entered into an agreement with Citibank USA ("Citi") for the acquisition of the Corporation's retail credit card portfolio. That agreement, along with a five-year agency agreement entered into contemporaneously with Citi, provides for agent fees and other income on new and existing card business. The Corporation, its affiliates, and subsidiaries are not dependent upon a single or a few customers, the loss of which would have a material adverse effect on the Corporation. No material portion of the business of the Corporation, its affiliates, or its subsidiaries is seasonal. FOREIGN OPERATIONS The Corporation, its affiliates, and subsidiaries do not engage in any operations in foreign countries, other than three investment subsidiaries all formed under the General Corporation Law of the State of Nevada. These investment subsidiaries are headquartered and commercially domiciled in the Cayman Islands. Each subsidiary has at least one employee who is a resident of the Cayman Islands. In addition, Associated Bank Green Bay, National Association, a banking affiliate of the Corporation, has established a branch in the Cayman Islands under a Class B Banking License issued by the Cayman Islands Monetary Authority. It has at least one employee who is a resident of the Cayman Islands. EMPLOYEES At December 31, 2000, the Corporation, its affiliates, and subsidiaries, as a group, had 3,835 full-time equivalent employees. COMPETITION The financial services industry is highly competitive. The Corporation competes for loans, deposits, and financial services in all of its principal markets. The Corporation competes directly with other bank and nonbank institutions located within its markets, with out-of-market banks and bank holding companies that advertise or otherwise serve the Corporation's markets, money market and other mutual funds, brokerage houses, and various other financial institutions. Additionally, the Corporation competes with insurance companies, leasing companies, regulated small loan companies, credit unions, governmental agencies, and commercial entities offering financial services products. Competition involves efforts to obtain new deposits, the scope and type of services offered, interest rates paid on deposits and charged on loans, as well as other aspects of banking. All of the affiliates also face direct competition from members of bank holding company systems that have greater assets and resources than those of the Corporation. SUPERVISION AND REGULATION Financial institutions are highly regulated both at the federal and state level. Numerous statutes and regulations presently affect the business of the Corporation, its affiliates, and its subsidiaries. Proposed comprehensive statutory and regulatory changes could have an effect on the Corporation's business. As a registered bank holding company under the Act, the Corporation and its nonbanking affiliates are regulated and supervised by the Board of Governors of the Federal Reserve System (the "Board"). The affiliates of the Corporation with a national charter are supervised and examined by the Comptroller of the Currency. The affiliates with a state charter are supervised and examined by their respective state banking agency, and either the Board, if such affiliate is a member of the Federal Reserve System, or by the Federal Deposit Insurance Corporation (the "FDIC"), if a nonmember. Currently, all affiliates with a state charter are nonmember banks. All affiliates of the Corporation that accept insured deposits are subject to examination by the FDIC. 5 The activities of the Corporation, its affiliates, and subsidiaries, are limited by the Act to those activities that are banking or those nonbanking activities that are closely related or incidental to banking. The Corporation is required to act as a source of financial strength to each of its affiliates pursuant to which it may be required to commit financial resources to support such affiliates in circumstances when, absent such requirements, it might not do so. The Act also requires the prior approval of the Board for the Corporation to acquire direct or indirect control of more than five percent of any class of voting shares of any bank or bank holding company. Further restrictions imposed by the Act include capital requirements, restrictions on transactions with affiliates, on issuances of securities, on dividend payments, on inter-affiliate liabilities, on extensions of credit, and on expansion through merger and acquisition. The federal regulatory authorities have broad authority to enforce the regulatory requirements imposed on the Corporation, its affiliates, and subsidiaries. In particular, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), and their implementing regulations, carry greater enforcement powers. Under FIRREA, all commonly controlled FDIC insured depository institutions may be held liable for any loss incurred by the FDIC resulting from a failure of, or any assistance given by the FDIC to, any commonly controlled institutions. Pursuant to certain provisions under FDICIA, the federal regulatory agencies have broad powers to take prompt corrective action if a depository institution fails to maintain certain capital levels. Prompt corrective action may include the inability of the Corporation to pay dividends, restrictions in acquisitions or activities, limitations on asset growth, and other restrictions. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 contains provisions which amended the Act to allow an adequately-capitalized and adequately-managed bank holding company to acquire a bank located in another state as of September 29, 1995. Effective June 1, 1997, interstate branching was permitted. The Riegle-Neal Amendments Act of 1997 clarifies the applicability of host state laws to any branch in such state of an out-of-state bank. The FDIC maintains the Bank Insurance Fund (BIF) and the Savings Association Insurance Fund (SAIF) by assessing depository institutions an insurance premium twice a year. The amount each institution is assessed is based both on the balance of insured deposits held during the preceding two quarters, as well as on the degree of risk the institution poses to the insurance fund. FDIC assesses higher rates on those institutions that pose greater risks to the insurance funds. Effective April 1, 2000, the FDIC Board of Directors (FDIC Board) adopted revisions to the FDIC's regulation governing deposit insurance assessments which it believes enhance the present system by allowing institutions with improving capital positions to benefit from the improvement more quickly while requiring those whose capital is failing to pay a higher assessment sooner. The Federal Deposit Insurance Act governs the authority of the FDIC Board to set BIF and SAIF assessment rates and directs the FDIC Board to establish a risk-based assessment system for insured depository institutions and set assessments to the extent necessary to maintain the reserve ratio at 1.25%. The current BIF assessment rate is 1.34% and the SAIF assessment rate is 1.44%. The Gramm-Leach-Bliley Act of 1999, P.L. 106-102, enacted on November 12, 1999, has made major amendments to the Act. The amendments, among other things, allow certain qualifying bank holding companies to engage in activities that are financial in nature and that explicitly include the underwriting and sale of insurance. The amendments also amend the Act provisions governing the scope and manner of the Board's supervision of bank holding companies, the manner in which activities may be found to be financial in nature, and the extent to which state laws on insurance will apply to insurance activities of banks and bank affiliates. The Board has issued regulations implementing these provisions. The amendments allow for the expansion of activities by banking organizations and permit consolidation among financial organizations generally. The laws and regulations to which the Corporation, its affiliates, and subsidiaries are subject are constantly under review by Congress, the federal regulatory agencies, and the state authorities. These laws and regulations could be changed drastically in the future, which could affect the profitability of the Corporation, its ability to compete effectively, or the composition of the financial services industry in which the Corporation competes. 6 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 subject to a five-year lease with two consecutive five-year extensions. At December 31, 2000, the affiliates occupied 214 offices in 149 different communities within Illinois, Minnesota, and Wisconsin. All affiliate main offices are owned, except Associated Bank Milwaukee, Associated Bank Chicago, Associated Bank Illinois, and Associated Bank Minnesota. The affiliate main offices in downtown Milwaukee, Chicago, Rockford, and Minneapolis are located in the lobbies of multi-story office buildings. Most affiliate branch offices are free-standing buildings that provide adequate customer parking, including drive-in facilities of various numbers and types for customer convenience. Some affiliates also have branch offices in various supermarket locations, as well as offices in retirement communities. In addition, the Corporation owns other real property that, when considered in the aggregate, is not material to its financial position. ITEM 3 LEGAL PROCEEDINGS There are legal proceedings pending against certain affiliates and subsidiaries of the Corporation which arose in the normal course of their business. Although litigation is subject to many uncertainties and the ultimate exposure with respect to these matters cannot be ascertained, management believes, based upon discussions with counsel, that the Corporation has meritorious defenses, and any ultimate liability would not have a material adverse effect on the consolidated financial position or results of operations of the Corporation. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year ending December 31, 2000. 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 25, 2001. 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 7 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 of Associated Banc-Corp March 1, 1975 Age: 65 Prior to April 2000, Chairman and Chief Executive Officer of Associated Banc-Corp Prior to October 1998, Chairman, President, and Chief Executive Officer of Associated Banc-Corp Robert C. Gallagher President, Chief Executive Officer, and April 28, 1982 Age: 62 Director of Associated Banc-Corp Prior to April 2000, President, Chief Operating Officer, and 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) Brian R. Bodager Chief Administrative Officer, General July 22, 1992 Age: 45 Counsel and Corporate Secretary of Associated Banc-Corp Prior to July 1997, Senior Vice President, General Counsel, and Corporate Secretary of Associated Banc-Corp Joseph B. Selner Chief Financial Officer of Associated January 25, 1978 Age: 54 Banc-Corp Arthur E. Olsen, III General Auditor of Associated Banc-Corp July 28, 1993 Age: 49 Mary Ann Bamber Director of Retail Banking of Associated January 22, 1997 Age: 50 Banc-Corp From January 1996 to January 1997, independent consultant From January 1996 to January 1997, Senior Officer of an Iowa-based bank Robert J. Johnson Director of Human Resources of Associated January 22, 1997 Age: 55 Banc-Corp Prior to January 1997, Officer of a Wisconsin manufacturing company
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NAME OFFICES AND POSITIONS HELD DATE OF ELECTION Donald E. Peters Director of Systems and Operations of October 27, 1997 Age: 51 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 Banc-Corp April 20, 1998 Age: 39 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 Teresa A. Rosengarten Treasurer of Associated Banc-Corp October 25, 2000 Age: 40 From March 1994 to August 2000, Treasurer of a Tennessee-based bank holding company David E. Cleveland President and Director of Associated Bank August 31, 1999 Age: 67 Minnesota (affiliate) John P. Evans Chief Executive Officer and Director of August 16, 1993 Age: 51 Associated Bank North (affiliate) David J. Handy President, Chief Executive Officer, and May 31, 1991 Age: 61 Director of Associated Bank, National Association (affiliate) Michael B. Mahlik President, Chief Operating Officer, and January 1, 1991 Age: 48 Director of Associated Trust Company (affiliate);Director of Associated Bank, National Association (affiliate) Prior to July 1999, Executive Vice President, Managing Trust Officer, and Director of Associated Bank, National Association (affiliate) George J. McCarthy President, Chief Executive Officer, and November 11, 1983 Age: 50 Director of Associated Bank Chicago (affiliate) Mark J. McMullen Chairman and Chief Executive Officer of June 2, 1981 Age: 52 Associated Trust Company (affiliate) Prior to July 1999, Senior Executive Vice President and Director of Associated Bank Green Bay (affiliate) Prior to July 1996, Executive Vice President and Director of Associated Bank Green Bay (affiliate) Randall J. Peterson President, Chief Executive Officer, and August 2, 1982 Age: 55 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 Bank March 1, 1995 Age: 51 South Central (affiliate)
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NAME OFFICES AND POSITIONS HELD DATE OF ELECTION Thomas R. Walsh President, Chief Executive Officer, and January 1, 1994 Age: 43 Director of Associated Bank Illinois (affiliate) From January 1994 to November 12, 1998, President, Chief Executive Officer, and Director of Associated Bank Lakeshore (affiliate) Gordon J. Weber President, Chief Executive Officer, and December 15, 1993 Age: 53 Director of Associated Bank Milwaukee (affiliate); Director of Associated Bank South Central (affiliate) Scott A. Yeoman President, Chief Executive Officer, and October 1, 1994 Age: 43 Director of Associated Bank Lakeshore (affiliate) From October 1, 1994, to September 15, 1998, Senior Vice President of Associated Bank Lakeshore (affiliate)
PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information in response to this item is incorporated by reference to the table "Market Information" on Page 70 and the discussion of dividend restrictions in Note 11 "Stockholders' Equity" of the notes to consolidated financial statements included under Item 8 of this document. The Corporation's common stock is currently being traded on The Nasdaq Stock Market under the symbol ASBC. The approximate number of equity security holders of record of common stock, $.01 par value, as of March 1, 2001, was 10,000. Certain of the Corporation's shares are held in "nominee" or "street" name and the number of beneficial owners of such shares is approximately 23,700. Payment of future dividends is within the discretion of the Corporation's Board of Directors and will depend, among other factors, on earnings, capital requirements, and the operating and financial condition of the Corporation. At the present time, the Corporation expects that dividends will continue to be paid in the future. 10 ITEM 6 SELECTED FINANCIAL DATA TABLE 1: EARNINGS SUMMARY AND SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
% 5-YEAR CHANGE COMPOUND 1999 TO GROWTH YEARS ENDED DECEMBER 31, 2000 2000 1999 1998 1997 1996 1995 RATE ------------------------------------------------------------------------------------------------------------------------------------ Interest income $ 931,157 14.3% $ 814,520 $ 785,765 $ 787,919 $ 731,763 $ 696,858 6.0% Interest expense 547,590 30.8 418,775 411,028 411,637 375,922 360,499 8.7 ------------------------------------------------------------------------------------------------- Net interest income 383,567 (3.1) 395,745 374,737 376,282 355,841 336,359 2.7 Provision for loan losses 20,206 5.0 19,243 14,740 31,668 13,695 14,029 7.6 ------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 363,361 (3.5) 376,502 359,997 344,614 342,146 322,330 2.4 Noninterest income 184,196 11.0 165,906 167,928 94,854 115,265 104,989 11.9 Noninterest expense 317,736 4.1 305,092 294,962 323,200 292,222 252,927 4.7 ------------------------------------------------------------------------------------------------- Income before income taxes and extraordinary item 229,821 (3.2) 237,316 232,963 116,268 165,189 174,392 5.7 Income tax expense 61,838 (14.6) 72,373 75,943 63,909 57,487 62,381 (0.2) Extraordinary item --- --- --- --- --- (686) --- N/M ------------------------------------------------------------------------------------------------- NET INCOME $ 167,983 1.8% $ 164,943 $ 157,020 $ 52,359 $ 107,016 $ 112,011 8.4% ================================================================================================= Basic earnings per share (1): Income before extraordinary item $ 2.46 4.2% $ 2.36 $ 2.26 $ 0.76 $ 1.55 $ 1.66 8.2% Net income 2.46 4.2 2.36 2.26 0.76 1.54 1.66 8.2 Diluted earnings per share (1): Income before extraordinary item 2.46 5.1 2.34 2.24 0.74 1.52 1.63 8.6 Net income 2.46 5.1 2.34 2.24 0.74 1.51 1.63 8.6 Cash dividends per share (1) 1.11 5.0 1.05 0.95 0.81 0.69 0.59 13.4 Weighted average shares outstanding: Basic 68,186 (2.4) 69,858 69,438 69,172 69,526 67,525 0.2 Diluted 68,410 (2.9) 70,468 70,168 70,329 70,818 68,720 (0.1) SELECTED FINANCIAL DATA Year-End Balances: Loans $ 8,913,379 6.8% $ 8,343,100 $ 7,272,697 $ 7,072,550 $ 6,654,914 $ 6,366,706 7.0% Allowance for loan losses 120,232 6.2 113,196 99,677 92,731 71,767 68,560 11.9 Investment securities 3,260,205 (0.3) 3,270,383 2,907,735 2,940,218 2,753,938 2,266,895 7.5 Assets 13,128,394 4.9 12,519,902 11,250,667 10,690,442 10,120,413 9,393,609 6.9 Deposits 9,291,646 6.9 8,691,829 8,557,819 8,395,277 7,959,240 7,570,201 4.2 Long-term debt 122,420 404.1 24,283 26,004 15,270 33,329 36,907 27.1 Stockholders' equity 968,696 6.5 909,789 878,721 813,692 803,562 725,211 6.0 Book value per share (1) 14.65 12.0 13.09 12.70 13.35 14.74 13.57 1.5 --------------------------------------------------------------------------------------------------- Average Balances: Loans $ 8,688,086 11.4% $ 7,800,791 $ 7,255,850 $ 6,959,018 $ 6,580,758 $ 6,157,655 7.1% Investment securities 3,317,499 6.3 3,119,923 2,737,556 2,905,921 2,526,571 2,421,379 6.5 Assets 12,810,235 9.5 11,698,104 10,628,695 10,391,718 9,640,471 9,123,981 7.0 Deposits 9,102,940 5.5 8,631,652 8,430,701 8,121,945 7,778,177 7,409,409 4.2 Stockholders' equity 920,169 0.7 914,082 856,425 839,859 775,180 674,368 6.4 --------------------------------------------------------------------------------------------------- Financial Ratios: Return on average equity (2) 18.26% 22bp 18.04% 18.33% 16.93% 16.64% 17.21% Return on average assets (2) 1.31 (10) 1.41 1.48 1.37 1.35 1.27 Net interest margin (tax-equivalent) 3.36 (38) 3.74 3.79 3.86 3.95 3.95 Average equity to average assets 7.18 (63) 7.81 8.06 8.08 8.04 7.39 Dividend payout ratio (2)(3) 45.01 33 44.68 41.93 39.38 37.07 35.71 ===================================================================================================
(1) Per share data adjusted retroactively for stock splits and stock dividends. (2) Ratio is based upon income prior to merger integration and other one-time charges or extraordinary items for 1997, 1996, and 1995. (3) Ratio is based upon basic earnings per share. N/M = not meaningful 11 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is management's analysis to assist in the understanding and evaluation of the consolidated financial condition and results of operations of Associated Banc-Corp (the "parent company"), together with its affiliates and subsidiaries (the "Corporation"). It should be read in conjunction with the consolidated financial statements and footnotes and the selected financial data presented elsewhere in this report. The financial discussion that follows may refer to the impact of the Corporation's business combination activity, detailed under section "Business Combinations," and Note 2 of the notes to consolidated financial statements. The detailed financial discussion focuses on 2000 results compared to 1999. Discussion of 1999 results to 1998 is predominantly in section "1999 Compared to 1998." PERFORMANCE SUMMARY The Corporation recorded net income of $168.0 million for the year ended December 31, 2000, an increase of $3.0 million or 1.8% over the $164.9 million earned in 1999. Basic earnings per share for 2000 were $2.46, a 4.2% increase over 1999 basic earnings per share of $2.36. Earnings per diluted share were $2.46, a 5.1% increase over 1999 diluted earnings per share of $2.34. Return on average assets ("ROA") and return on average equity ("ROE") for 2000 were 1.31% and 18.26%, respectively, compared to 1.41% and 18.04%, respectively, for 1999. Cash dividends paid in 2000 increased by 5.0% to $1.11 per share over the $1.05 per share paid in 1999. Key factors behind these results were: - Taxable equivalent net interest income was $405.3 million for 2000, $4.1 million or 1.0% lower than 1999. Taxable equivalent interest income increased by $124.7 million, while interest expense increased $128.8 million. The volume of average earning assets increased $1.1 billion to $12.0 billion, which exceeded the $1.0 billion increase in interest-bearing liabilities. Although increases in the volume of earning assets and interest-bearing liabilities, as well as changes in product mix, added $32.4 million to taxable equivalent net interest income, changes in interest rates resulted in a $36.5 million decrease. - Net interest income and net interest margin were also impacted in 2000 by the rising interest rate environment, competitive pricing pressures, branch deposit and credit card receivable sales, and funding of stock repurchases. The Federal Reserve raised interest rates six times between July 1999 and December 2000, producing an average Federal funds rate for 2000 that was 131 basis points ("bp") higher than the average for 1999. - The net interest margin was 3.36% for 2000, a 38 bp decline from 3.74% for 1999, the net result of the 45 bp decrease in interest rate spread, offset by a 7 bp improvement in the net free funds contribution. Rates on interest-bearing liabilities in 2000 were 80 bp higher than last year, while the yield on earning assets increased 35 bp, bringing the interest rate spread down by 45 bp. - Total loans were $8.9 billion at December 31, 2000, an increase of $570 million or 6.8% over December 31, 1999, predominantly in commercial loans. Excluding the sale of $128 million of credit card loan receivables in 2000, total loans were 8.4% higher at year-end 2000 than a year earlier. Total deposits were $9.3 billion at December 31, 2000, $600 million higher than December 31, 1999, despite the sale of six Illinois branch offices in 2000 with deposits totaling $109 million. The growth was predominantly in brokered CDs. - Asset quality remained relatively strong. The provision for loan losses ("PFLL") increased to $20.2 million compared to $19.2 million in 1999. Net charge-offs ("NCOs") decreased $4.8 million, primarily due to fewer NCOs on credit cards between the years, given the sale of credit card receivables in April 2000. NCOs were 0.10% of average loans compared to 0.18% in 1999. The ratio of allowance for loan losses to loans was 1.35% and 1.36% at December 31, 2000 and 1999, respectively. Nonperforming loans were $47.7 million, representing 0.54% of total loans at year-end 2000, compared to $36.9 million or 0.44% of total loans last year. 12 - Noninterest income was $184.2 million for 2000, $18.3 million or 11.0% higher than 1999. Net gains on the sales of assets and investment securities totaled $16.8 million in 2000 compared to net gains of $8.0 million in 1999. Key sales in 2000 included a $12.9 million gain on the sale of the credit card receivables, the $11.1 million net premium on the sales of deposits of six branches, and $7.6 million net losses on the sale of investment securities. Excluding these asset and security sales, noninterest income was $167.4 million, or $9.5 million (6.0%) higher than 1999. With the exception of mortgage banking, which was impacted by a year-over-year slowdown in secondary mortgage production, all other noninterest income categories collectively increased $20.0 million or 15.7% in 2000 compared to 1999. - Noninterest expense was $317.7 million, up $12.6 million or 4.1% over 1999. However, 1999 expenses were reduced by two large items totaling $12.0 million, namely the reversal of mortgage servicing rights ("MSR") valuation allowance and a reduction in profit sharing expense. Not including these items, noninterest expense was relatively unchanged (up $0.6 million or 0.2%), despite adding $10.9 million of incremental expenses in 2000 from the 1999 purchase acquisitions. Excluding the acquisitions, as well as the two 1999 items noted above, noninterest expense was $10.3 million (3.4%) lower than 1999. - Income tax expense decreased to $61.8 million, down $10.5 million from 1999. The effective tax rate in 2000 was 26.9% compared to 30.5% for 1999, due to the tax benefits of additional municipal securities, real estate investment trusts, bank owned life insurance, and tax valuation allowance adjustments. BUSINESS COMBINATIONS There were no completed or pending business combination transactions during 2000. During 1999, the Corporation acquired $591 million in assets through three acquisition transactions. All were accounted for under the purchase method, and therefore the financial position and results of operations of each entity were included in the consolidated financial statements as of the consummation date of each transaction. The Corporation's business combination activity is further summarized in Note 2 of the notes to consolidated financial statements. Share repurchase activity related to the acquisitions is described under the section "Capital." INCOME STATEMENT ANALYSIS NET INTEREST INCOME Net interest income is the primary source of the Corporation's revenue. Net interest income is the difference between interest income on earning assets ("EAs"), such as loans and securities, and the interest expense on interest-bearing deposits and other borrowings, used to fund those and other assets or activities. The amount of net interest income is affected by changes in interest rates and by the amount and composition of EAs and interest-bearing liabilities ("IBLs"). Additionally, net interest income is impacted by the sensitivity of the balance sheet to changes in interest rates which factors in characteristics such as the fixed or variable nature of the financial instruments, contractual maturities, and repricing frequencies. Net interest income in the consolidated statements of income (which excludes the taxable equivalent adjustment on tax exempt assets) was $383.6 million, compared to $395.7 million last year. The taxable equivalent adjustments (the adjustments to bring tax-exempt interest to a level that would yield the same after-tax income had that income been subject to taxation, using a 35% tax rate) of $21.7 million for 2000 and $13.7 million for 1999, resulted in fully taxable equivalent ("FTE") net interest income of $405.3 million and $409.4 million, respectively. The $8.0 million increase in the taxable equivalent adjustment between years was in line with the 52% growth in average municipal securities balances. The impact of carrying more tax exempt assets in 2000 is reflected in the consolidated statements of income as a reduction to income tax expense between the years. FTE net interest income was $405.3 million for 2000, a decrease of $4.1 million or 1.0% from 1999. The 1999 acquisitions, net of the cost to fund them, contributed approximately $15 million more net interest income in 2000 than in 1999. For 2000 compared to 1999, the decrease in FTE net interest income was due to the combination of a number of factors, including a rising interest rate environment, an inverted yield curve during 13 the year, funding of stock repurchases, greater average bank owned life insurance ("BOLI") balances, the sale of branch deposits and credit card receivables, and continued competitive pressures for both loan and deposit products. Interest rate spread and net interest margin are utilized to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on EAs and the rate paid for IBLs that fund those assets. The net interest margin is expressed as the percentage of net interest income to average EAs. The net interest margin exceeds the interest rate spread because noninterest-bearing sources of funds (net free funds), principally demand deposits and stockholders' equity, also support EAs. To compare tax-exempt asset yields to taxable yields, the yield on tax-exempt loans and securities is computed on an FTE basis. Net interest income, interest rate spread, and net interest margin are discussed further on an FTE basis. Table 2 provides average balances of EAs and IBLs, the associated interest income and expense, and the corresponding interest rates earned and paid, as well as net interest income, interest rate spread, and net interest margin on an FTE basis for the three years ended December 31, 2000. Tables 3 through 5 present additional information to facilitate the review and discussion of FTE net interest income, interest rate spread, and net interest margin. As indicated in Tables 2 and 3, increases in volume and changes in the mix of both EAs and IBLs added $32.4 million to FTE net interest income, whereas changes in the rates resulted in a $36.5 million decline, for a net decrease of $4.1 million. The net interest margin for 2000 was 3.36%, compared to 3.74% in 1999. For 2000, the yield on EAs rose 35 basis points, increasing interest earned by $35.8 million (with loans accounting for $28.1 million of the increase), while the cost of IBLs increased 80 bp, raising interest expense by $72.3 million (with interest-bearing deposits, principally brokered CDs, accounting for $46.3 million), for a net decline of $36.5 million in FTE net interest income. The decline in net interest margin was unfavorably impacted by tighter credit spreads in increasingly competitive markets and by increased reliance of funding loan growth with market-rate sensitive liabilities in a rising rate environment, particularly wholesale funding. In addition, the lower margin reflects the cost of funding the Corporation's share repurchases during 2000 and funding more BOLI (an asset whose earnings are recorded as fee income), as well as the sales of branch deposits (replaced with higher-costing wholesale funds) and the sale of higher-yielding credit card receivables. While these actions negatively impacted the margin, they supported other corporate objectives, such as capital management, revenue diversity, and streamlining strategies. In combination, the growth and composition change of EAs contributed an additional $88.9 million to FTE net interest income, while the growth and composition of IBLs cost an additional $56.5 million, netting a $32.4 million increase to FTE net interest income. Average EAs were $12.0 billion in 2000, an increase of $1.1 billion, or 10.0%, from 1999. On average, the acquisitions contributed approximately $275 million to this increase, while the sale of the credit card receivables reduced average EAs by approximately $96 million. Loans accounted for the majority of the growth in EAs, increasing to 72.1% of average EAs, compared to 71.2% for 1999. Average loans were $8.7 billion in 2000, up $887 million or 11.4% compared to 1999 (up 9.8% excluding the net impact from acquisitions and the sale of credit card receivables). During 2000, the Corporation focused on shifting the composition of its loan portfolio, growing the proportion of commercial loans, which represented 36% of average EAs for 2000 compared to 31% for 1999. For 2000, FTE interest income on loans increased $101.7 million over last year, with $73.5 million contributed from loan growth and $28.2 million added from the rate environment impact on loans (See Table 3). The average loan yield for 2000 was 8.38%, up 35 bp over last year. The loan yield lagged the change in the market rate in part due to repricing frequencies in the portfolio, competitive pricing pressures on new production, the sale of the higher yielding credit card receivables, and other loan mix changes. The increase seen in investment yields was primarily a result of the rising rate environment. Average IBLs were $10.7 billion in 2000, an increase of $1.0 billion or 10.5% from 1999. Although the Corporation has been successful in attracting transactional demand deposit accounts, loan growth outpaced 14 deposit growth, increasing the Corporation's reliance on brokered CDs and other wholesale funding sources. The mix of IBLs shifted from lower-rate deposits (which represented 75.1% of average IBLs for 2000 compared to 79.0% for 1999) to higher-cost wholesale funding. Average interest-bearing deposits were $8.0 billion in 2000, up $388 million or 5.1% compared to 1999 (up 5.0% excluding the net impact from acquisitions and branch deposit sales). For 2000, interest expense on interest-bearing deposits increased $65.8 million, with $19.5 million contributed from the growth in volume and $46.3 million added from the impact of the rate environment. Brokered CDs were the predominant driver of the change in interest-bearing deposits, up $599 million on average over last year, and costing 112 bp more in 2000 than 1999. Total wholesale funds (including all funding sources other than interest-bearing deposits) were $2.7 billion on average for 2000, up $622 million or 30.6%. Total interest-bearing deposits cost 4.74% on average for 2000 (62 bp more than last year), while wholesale funding on a combined basis cost 6.32% (117 bp higher than last year). 15 TABLE 2: AVERAGE BALANCES AND INTEREST RATES (INTEREST AND RATES ON A TAX-EQUIVALENT BASIS)
YEARS ENDED DECEMBER 31, --------------------------------------------------------------------------------------------------- 2000 1999 1998 --------------------------------------------------------------------------------------------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE --------------------------------------------------------------------------------------------------- ($ IN THOUSANDS) ASSETS Earning assets: Loans (1)(2)(3) $ 8,688,086 $ 728,128 8.38% $ 7,800,791 $ 626,407 8.03% $ 7,255,850 $ 603,423 8.32% Investment securities: Taxable 2,523,492 163,768 6.49 2,597,760 163,769 6.30 2,500,470 168,536 6.74 Tax exempt(1) 794,007 58,233 7.33 522,163 36,201 6.93 237,086 17,028 7.18 Short-term investments 41,309 2,775 6.72 34,110 1,806 5.29 68,776 3,479 5.06 --------------------------------------------------------------------------------------------------- Total earning assets $12,046,894 $ 952,904 7.91% $10,954,824 $ 828,183 7.56% $10,062,182 $ 792,466 7.88% --------------------------------------------------------------------------------------------------- Allowance for loan losses (115,580) (105,488) (92,175) Cash and due from banks 268,267 263,288 246,596 Other assets 610,654 585,480 412,092 --------------------------------------------------------------------------------------------------- Total assets $12,810,235 $11,698,104 $10,628,695 =================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Savings deposits $ 956,177 $ 19,704 2.06% $ 919,163 $ 14,998 1.63% $ 981,630 $ 20,812 2.12% Interest-bearing demand deposits 803,779 11,091 1.38 796,506 10,645 1.34 473,123 8,212 1.74 Money market deposits 1,407,502 65,702 4.67 1,373,010 52,478 3.82 1,377,503 45,430 3.30 Time deposits 4,848,900 283,395 5.84 4,539,286 235,954 5.20 4,753,959 270,938 5.70 --------------------------------------------------------------------------------------------------- Total interest-bearing deposits 8,016,358 379,892 4.74 7,627,965 314,075 4.12 7,586,215 345,392 4.55 Federal funds purchased and securities sold under agreements to repurchase 1,724,291 107,732 6.25 1,057,269 52,843 5.00 517,344 26,174 5.06 Other short-term borrowings 816,553 52,698 6.45 951,524 50,214 5.28 660,761 37,600 5.69 Long-term debt 114,374 7,268 6.35 24,644 1,643 6.67 27,055 1,862 6.88 --------------------------------------------------------------------------------------------------- Total interest-bearing liabilities $10,671,576 $ 547,590 5.13% $ 9,661,402 $ 418,775 4.33% $ 8,791,375 $ 411,028 4.68% --------------------------------------------------------------------------------------------------- Demand deposits 1,086,582 1,003,687 844,486 Accrued expenses and other liabilities 131,908 118,933 136,409 Stockholders' equity 920,169 914,082 856,425 --------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $12,810,235 $11,698,104 $10,628,695 =================================================================================================== Net interest income and rate spread (1) $ 405,314 2.78% $ 409,408 3.23% $ 381,438 3.20% =================================================================================================== Net interest margin (1) 3.36% 3.74% 3.79% =================================================================================================== Taxable equivalent adjustment $ 21,747 $ 13,663 $ 6,701 ===================================================================================================
(1) The yield on tax exempt loans and securities is computed on a tax-equivalent basis using a tax rate of 35% for all periods presented and is net of the effects of certain disallowed interest deductions. (2) Nonaccrual loans and loans held for sale have been included in the average balances. (3) Interest income includes net loan fees. 16 TABLE 3: RATE/VOLUME ANALYSIS (1)
2000 COMPARED TO 1999 1999 COMPARED TO 1998 INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO ---------------------------------------------------------------------- VOLUME RATE NET VOLUME RATE NET ---------------------------------------------------------------------- ($ IN THOUSANDS) Interest income: Loans (2) $ 73,540 $ 28,181 $101,721 $ 44,213 $(21,229) $ 22,984 Investment securities: Taxable (4,907) 4,906 (1) 6,398 (11,165) (4,767) Tax-exempt (2) 19,834 2,198 22,032 19,783 (610) 19,173 Short-term investments 455 514 969 (1,768) 95 (1,673) ----------------------------------------------------------------------- Total earning assets (2) $ 88,922 $ 35,799 $124,721 $ 68,626 $(32,909) $ 35,717 ----------------------------------------------------------------------- Interest expense: Savings deposits $ 662 $ 4,044 $ 4,706 $ (1,258) $ (4,556) $ (5,814) Interest-bearing demand deposits 124 322 446 4,648 (2,215) 2,433 Money market deposits 1,425 11,799 13,224 (149) 7,197 7,048 Time deposits 17,319 30,122 47,441 (11,870) (23,114) (34,984) ----------------------------------------------------------------------- Total interest-bearing deposits 19,530 46,287 65,817 (8,629) (22,688) (31,317) Federal funds purchased and securities sold under agreements to repurchase 39,307 15,582 54,889 26,989 (320) 26,669 Other short-term borrowings (8,058) 10,542 2,484 15,515 (2,901) 12,614 Long-term debt 5,707 (82) 5,625 (162) (57) (219) ----------------------------------------------------------------------- Total interest-bearing liabilities $ 56,486 $ 72,329 $128,815 $ 33,713 $(25,966) $ 7,747 ----------------------------------------------------------------------- Net interest income (2) $ 32,436 $ (36,530) $ (4,094) $ 34,913 $ (6,943) $ 27,970 =======================================================================
(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)
2000 AVERAGE 1999 AVERAGE 1998 AVERAGE --------------------------------------------------------------------------------------------- % OF % OF % OF EARNING YIELD EARNING YIELD EARNING YIELD BALANCE ASSETS / RATE BALANCE ASSETS / RATE BALANCE ASSETS / RATE --------------------------------------------------------------------------------------------- ($ IN THOUSANDS) Earning assets $12,046,894 100.0% 7.91% $10,954,824 100.0% 7.56% $10,062,182 100.0% 7.88% --------------------------------------------------------------------------------------------- Financed by: Interest-bearing funds 10,671,576 88.6% 5.13% 9,661,402 88.2% 4.33% 8,791,375 87.4% 4.68% Noninterest-bearing funds 1,375,318 11.4% 1,293,422 11.8% 1,270,807 12.6% --------------------------------------------------------------------------------------------- Total funds sources $12,046,894 100.0% 4.55% $10,954,824 100.0% 3.82% $10,062,182 100.0% 4.09% ============================================================================================= Interest rate spread 2.78% 3.23% 3.20% Contribution from net free funds .58% .51% .59% ----- ----- ----- Net interest margin 3.36% 3.74% 3.79% ============================================================================================= Average prime rate* 9.23% 8.00% 8.35% Average fed funds rate* 6.26% 4.95% 5.36% Average spread 297bp 305bp 299bp =============================================================================================
*Source: Bloomberg 17 TABLE 5: SELECTED AVERAGE BALANCES
2000 AS 1999 AS PERCENT % OF % OF 2000 1999 CHANGE TOTAL ASSETS TOTAL ASSETS ----------------------------------------------------------------------- ($ IN THOUSANDS) ASSETS Loans $ 8,688,086 $ 7,800,791 11.4% 67.8% 66.7% Investment securities Taxable 2,523,492 2,597,760 (2.9) 19.7 22.2 Tax-exempt 794,007 522,163 52.1 6.2 4.4 Short-term investments 41,309 34,110 21.1 0.3 0.3 ----------------------------------------------------------------------- Total earning assets 12,046,894 10,954,824 10.0 94.0 93.6 Other assets 763,341 743,280 2.7 6.0 6.4 ----------------------------------------------------------------------- Total assets $12,810,235 $11,698,104 9.5% 100.0% 100.0% ======================================================================= LIABILITIES & STOCKHOLDERS' EQUITY Interest-bearing deposits $8,016,358 $7,627,965 5.1% 62.6% 65.2% Short-term borrowings 2,540,844 2,008,793 26.5 19.8 17.2 Long-term debt 114,374 24,644 364.1 0.9 0.2 ----------------------------------------------------------------------- Total interest-bearing liabilities 10,671,576 9,661,402 10.5 83.3 82.6 Demand deposits 1,086,582 1,003,687 8.3 8.5 8.6 Accrued expenses and other liabilities 131,908 118,933 10.9 1.0 1.0 Stockholders' equity 920,169 914,082 0.7 7.2 7.8 ----------------------------------------------------------------------- Total liabilities and stockholders' equity $12,810,235 $11,698,104 9.5% 100.0% 100.0% =======================================================================
PROVISION FOR LOAN LOSSES The PFLL in 2000 was $20.2 million. In comparison, the PFLL for 1999 was $19.2 million, and $14.7 million for 1998. The PFLL is predominantly a function of the methodology used to determine the adequacy of the allowance for loan losses which focuses on changes in the size and character of the loan portfolio, changes in levels of impaired and other nonperforming loans, historical losses on each portfolio category, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of underlying collateral, and other factors which could affect potential credit losses. The ratio of the allowance for loan losses to total loans was 1.35%, down slightly from 1.36% at December 31, 1999, and down from 1.37% at December 31, 1998. See additional discussion under section, "Allowance for Loan Losses." NONINTEREST INCOME Noninterest income was $184.2 million for 2000, $18.3 million or 11.0% higher than 1999. Of the $18.3 million increase, $8.8 million was from increased net gains on asset and investment sales. Thus, excluding asset and investment sales, noninterest income was 6.0% higher than last year, despite a dramatic decrease in mortgage banking income as discussed below. Excluding mortgage banking income and the net gains on asset and investment sales, noninterest income increased by $20.0 million or 15.7% in 2000, of which the 1999 acquisitions contributed approximately $2.8 million. Fee income as a percentage of total revenues (defined as total noninterest income less gains or losses on asset and investment sales ("fee income") divided by taxable equivalent net interest income plus fee income) was 29.2% for 2000 compared to 27.8% last year. 18 TABLE 6: NONINTEREST INCOME
% CHANGE FROM PRIOR YEARS ENDED DECEMBER 31, YEAR ----------------------------------------------------------------- 2000 1999 1998 2000 1999 ----------------------------------------------------------------- ($ IN THOUSANDS) Trust service fees $ 37,617 $ 37,996 $ 33,328 (1.0)% 14.0% Service charges on deposit accounts 33,296 29,584 27,464 12.5 7.7 Mortgage banking income 19,944 30,417 46,105 (34.4) (34.0) Credit card and other nondeposit fees 25,739 20,763 17,514 24.0 18.6 Retail commission income 20,187 18,372 14,823 9.9 23.9 BOLI income 12,377 9,456 1,174 30.9 N/M Asset sale gains, net 24,420 4,977 7,166 N/M (30.5) Other 18,265 11,315 13,523 61.4 (16.3) ----------------------------------------------------------------- Subtotal 191,845 162,880 161,097 17.8% 1.1% Investment securities gains (losses), net (7,649) 3,026 6,831 N/M (55.7) ------------------------------------------------------------------ Total noninterest income $184,196 $165,906 $167,928 11.0% (1.2)% ================================================================== Subtotal, excluding asset sale gains ("fee income") $167,425 $157,903 $153,931 6.0% 2.6% ================================================================== Subtotal, excluding asset sale gains and mortgage banking income $147,481 $127,486 $107,826 15.7% 18.2 ================================================================== N/M = not meaningful
Trust service fees for 2000 were $37.6 million, down 1% from last year. The change was predominantly due to a decrease in the market value of assets under management, a function of the declines in the stock and bond markets during 2000 compared to 1999, and competitive market conditions. Trust assets under management totaled $4.6 billion and $5.2 billion at December 31, 2000 and 1999, respectively. Service charges on deposits were $33.3 million, $3.7 million (12.5%) higher than 1999 due to mid-year rate increases and initiatives to reduce the volume of service charges waived. Mortgage banking income consists of servicing fees, the gain or loss on sale of mortgage loans to the secondary market, and production-related revenue (origination, underwriting, and escrow waiver fees). Mortgage banking income was $19.9 million in 2000, a decrease of $10.5 million or 34.4% from 1999. The decrease was driven primarily by a 61% drop in secondary mortgage loan production in response to the rising interest rate environment in 2000 compared to 1999. The lower production levels adversely impacted gains on sales of mortgages (down $8.1 million or 72%) and volume related fees (down $2.2 million or 56%). The portfolio of loans serviced for others was relatively unchanged ($5.5 billion at December 31, 2000, down 1% from $5.6 billion at year-end 1999), directly affecting servicing fees which were $14.9 million, down $0.2 million or 1% between the years. Credit card and other nondeposit fees were $25.7 million for 2000, an increase of $5.0 million or 24.0% over 1999, with $1.6 million in increased merchant income, $2.8 million in all other credit card revenue, and $0.6 million in other nondeposit charges. The other credit card revenue was enhanced by the April 2000 acquisition agreement and five-year agency agreement with Citibank USA ("Citi") which provide for agent fees and other income on new and existing card business. Retail commission income (which includes commissions from insurance and brokerage product sales) was $20.2 million, up $1.8 million or 9.9% compared to last year. The increase was led by higher insurance revenue, particularly from fixed annuities and credit life production. Asset sale gains for 2000 were $24.4 million, including the $12.9 million gain recognized on the sale of $128 million credit card receivables to Citi and the $11.1 million net premium on the sales of $109 million in 19 deposits from six branches during 2000. Asset sale gains in 1999 of $5.0 million were primarily attributable to the net premium on deposits of three branches sold in the fourth quarter of 1999. BOLI income was $12.4 million, up $2.9 million or 30.9% over last year, in line with the 20% increase in the average base investment and rate increases effective in the first quarter of 2000. Other noninterest income was $18.3 million for 2000, up $7.0 million from 1999. The increase included $1.5 million recognized in connection with an interim servicing agreement with Citi related to the credit card receivable sale, and $3.6 million in connection with the Corporation's mid-2000 change in data processing and management information system vendors, both of which compensated for certain additional costs incurred by the Corporation. Investment securities losses for 2000 were $7.6 million. The net losses were primarily from various securities sold and the proceeds either reinvested to mitigate interest rate risk and enhance future yields or to pay down higher cost borrowings. Investment securities gains for 1999 were $3.0 million, primarily due to a $3.6 million gain on the partial sale of an agency security that carried an other than temporary impairment amount reported in 1997. The remaining portion of this security was sold during 2000 for a $1.5 million loss. NONINTEREST EXPENSE Total noninterest expense ("NIE") for 2000 was $317.7 million, a $12.6 million or 4.1% increase over 1999 NIE. However, 1999 expenses were reduced by two large items totaling $12.0 million (the $8.0 million reversal of MSR valuation allowance and a $4.0 million reduction in profit sharing expense). Not including these items, NIE was relatively unchanged between the years (up $0.6 million or 0.2%), despite adding approximately $10.9 million of incremental expenses in 2000 from the 1999 purchase acquisitions. Excluding the acquisitions, and the two noted items from 1999, NIE decreased $10.3 million or 3.4% over 1999. Primary categories impacting the change between 2000 and 1999 are noted below. TABLE 7: NONINTEREST EXPENSE
% CHANGE FROM PRIOR YEARS ENDED DECEMBER 31, YEAR ------------------------------------------------------ 2000 1999 1998 2000 1999 ------------------------------------------------------ ($ IN THOUSANDS) Personnel expense $157,007 $151,644 $148,490 3.5% 2.1% Occupancy 23,258 22,576 20,205 3.0 11.7 Equipment 15,272 15,987 13,250 (4.5) 20.7 Data processing 22,375 21,695 18,714 3.1 15.9 Business development and advertising 13,359 11,919 13,177 12.1 (9.5) Stationery and supplies 7,961 8,110 6,858 (1.8) 18.3 FDIC expense 1,818 3,313 3,267 (45.1) 1.4 Amortization of mortgage servicing rights, net 9,406 1,668 13,823 N/M (87.9) Intangible amortization 8,905 8,134 5,844 9.5 39.2 Legal and professional fees 7,595 8,051 11,889 (5.7) (32.3) Other 50,780 51,995 39,445 (2.3) 31.8 ------------------------------------------------------ Total noninterest expense $317,736 $305,092 $294,962 4.1% 3.4% ====================================================== N/M = not meaningful
Personnel expense increased $5.4 million or 3.5% over 1999, and represented 49.4% of total NIE in 2000 compared to 49.7% in 1999. Salary expenses remained level, increasing only $0.8 million or 0.6% in 2000, principally due to operational efficiencies. Merit increases between the years were offset by fewer full-time equivalent employees ("FTEs") and lower temporary contract labor. Average FTEs of 3,909 during 2000 were down 128 or 3.2% from the 4,037 FTEs during 1999. FTEs were reduced throughout the year primarily in operational areas as centralization of processes and other operational-related synergies were achieved. Fringe benefits increased $4.6 million in 2000, primarily the result of a $4.0 million increase in profit sharing expense. 20 Rising costs of health, dental, and life insurance coverages were nearly offset by reductions in other fringe benefits (up $0.6 million or 2.1% on a combined basis). Occupancy and equipment expense on a combined basis was $38.5 million for 2000, essentially unchanged from last year. Data processing costs increased to $22.4 million, up $680,000 or 3.1% over last year, attributable to increased costs for software and system enhancements during 2000, partially offset by lower credit card processing costs given the credit card receivables sale in 2000. Business development and advertising increased to $13.4 million for 2000, up $1.4 million compared to 1999, primarily in television advertising for a branding campaign in 2000. FDIC expense decreased to $1.8 million, down $1.5 million, reflecting the net rate reduction in the combined BIF and SAIF effective for 2000 on a minimally changed deposit base. Amortization of MSRs includes the amortization of the MSR asset and increases or decreases to the valuation allowance associated with the MSR asset. Amortization of MSRs increased by $7.7 million between 2000 and 1999, predominantly driven by the recovery of an $8.0 million valuation adjustment during 1999 (see Note 6 of the notes to consolidated financial statements). Intangible amortization was $8.9 million, up due to a full year of amortization during 2000 on the intangibles added from the 1999 purchase acquisitions. Legal and professional fees were down $456,000 compared to last year, primarily due to Y2K consulting costs not recurring in 2000. Other expense was $50.8 million for 2000, down $1.2 million compared to 1999, most directly attributable to lower loan expenses (down $1.2 million and in line with lower mortgage loan production in 2000 and lower credit card expenses following the sale of the credit card receivables in April 2000). INCOME TAXES Income tax expense for 2000 was $61.8 million, down $10.5 million from 1999 income tax expense of $72.4 million. The Corporation's effective tax rate (income tax expense divided by income before taxes) was 26.9% in 2000 compared to 30.5% in 1999. This decrease was attributable to the tax benefits of increased municipal securities (average balances of municipal securities were 52% higher than 1999), increased BOLI income, real estate investment trusts, and tax valuation allowance adjustments. BALANCE SHEET ANALYSIS LOANS Total loans were $8.9 billion at December 31, 2000, an increase of $570 million or 6.8% over December 31, 1999, predominantly in commercial loans. Excluding the sale of $128 million of credit card receivables in the second quarter of 2000, total loans were 8.4% higher at year-end 2000 than a year ago. Commercial loans were $4.6 billion, up $721 million or 18.5%. Commercial loans grew to represent 52% of total loans at the end of 2000, up from 47% at year-end 1999. Changing the mix of loans to include more commercial loans continued to be a strategic initiative during 2000. 21 TABLE 8: LOAN COMPOSITION
AS OF DECEMBER 31, ------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------- % OF % OF % OF % OF % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL ------------------------------------------------------------------------------------------- ($ IN THOUSANDS) Commercial, financial, and agricultural $1,657,322 19% $1,412,338 17% $ 962,208 13% $ 986,839 14% $ 841,145 13% Real estate - construction 660,732 7 560,450 7 461,157 7 335,978 5 235,478 3 Commercial real estate 2,287,946 26 1,903,633 23 1,384,524 19 1,273,174 18 1,175,992 18 Lease financing 14,854 -- 23,229 -- 19,231 -- 14,072 -- 10,449 -- ------------------------------------------------------------------------------------------- Commercial 4,620,854 52 3,899,650 47 2,827,120 39 2,610,063 37 2,263,064 34 Residential real estate 3,158,721 35 3,274,767 39 3,362,885 46 3,263,977 46 3,215,433 48 Home equity 508,979 6 408,577 5 331,861 5 405,086 6 362,542 6 ------------------------------------------------------------------------------------------- Residential mortgage 3,667,700 41 3,683,344 44 3,694,746 51 3,669,063 52 3,577,975 54 Consumer 624,825 7 760,106 9 750,831 10 793,424 11 813,875 12 ------------------------------------------------------------------------------------------- Total loans $8,913,379 100% $8,343,100 100% $7,272,697 100% $7,072,550 100% $6,654,914 100% ===========================================================================================
Commercial, financial, and agricultural loans were $1.7 billion at the end of 2000, up $245 million or 17.3% since year-end 1999, and comprised 19% of total loans outstanding, up from 17% at the end of 1999. The commercial, financial, and agricultural loan classification primarily consists of commercial loans to middle market companies and small businesses. Loans of this type are in a broad range of industries. The credit risk related to commercial loans is largely influenced by general economic conditions and the resulting impact on a borrower's operations. Within the commercial, financial, and agricultural classification at December 31, 2000, loans to finance agricultural production totaled $19.6 million or 0.2% of total loans. Real estate construction loans grew $100 million or 17.9% to $661 million, representing 7% of the total loan portfolio at the end of 2000, compared to $560 million or 7% at the end of 1999. Loans in this classification are primarily short-term interim loans that provide financing for the acquisition or development of commercial real estate, such as multi-family or other commercial development projects. Real estate construction loans are made to developers and project managers who are well known to the Corporation, have prior successful project experience, and are well capitalized. Projects undertaken by these developers are carefully reviewed by the Corporation to ensure that they are economically viable. Loans of this type are primarily made in the Corporation's tri-state market in which the Corporation has a thorough knowledge of the local market economy. The credit risk associated with real estate construction loans is generally confined to specific geographic areas. The Corporation controls the credit risk on these types of loans by making loans in familiar markets to developers, underwriting the loans to meet the requirements of institutional investors in the secondary market, reviewing the merits of individual projects, controlling loan structure, and monitoring project progress and construction advances. Commercial real estate includes loans secured by farmland, multifamily properties, and nonfarm/nonresidential real estate properties. Commercial real estate totaled $2.3 billion at December 31, 2000, up $384 million or 20.2% over last year and comprised 26% of total loans outstanding versus 23% at year-end 1999. Commercial real estate loans involve borrower characteristics similar to those discussed above for commercial loans and real estate-construction projects. Loans of this type are mainly for business and industrial properties, multi-family properties, community purpose properties, and similar properties. Loans are primarily made to borrowers in Wisconsin, Illinois, and Minnesota. Credit risk is managed in a similar manner to commercial loans and real estate construction by employing sound underwriting guidelines, lending to borrowers in known markets and businesses, and formally reviewing the borrower's financial soundness and relationship on an ongoing basis. Residential mortgage loans totaled $3.7 billion at the end of 2000 and 1999. Loans in this classification include residential real estate, which consists of conventional home mortgages, home equity lines, and second mortgages. Residential real estate loans generally limit the maximum loan to 75%-80% of collateral value. Residential real estate loans were $3.2 billion at December 31, 2000, down $116 million or 3.5% compared to 22 last year, principally due to lower production as a result of a higher rate environment in 2000 compared to 1999 and strong price competition. Home equity lines grew by $100 million, or 24.6%, to $509 million in 2000, in response to promotional efforts in 2000. TABLE 9: LOAN MATURITY DISTRIBUTION AND INTEREST RATE SENSITIVITY (1)
MATURITY (2) -------------------------------------------------------------- DECEMBER 31, 2000 WITHIN 1 YEAR 1-5 YEARS AFTER 5 YEARS TOTAL ------------------------ -------------------------------------------------------------- ($ IN THOUSANDS) Commercial, financial, and agricultural $1,125,657 $ 436,365 $ 95,300 $1,657,322 Real estate-construction 413,954 183,569 63,209 660,732 -------------------------------------------------------------- Total $1,539,611 $ 619,934 $158,509 $2,318,054 ============================================================== Fixed rate $ 348,679 $ 532,468 $134,420 $1,015,567 Floating or adjustable rate 1,190,932 87,466 24,089 1,302,487 -------------------------------------------------------------- Total $1,539,611 $ 619,934 $158,509 $2,318,054 ============================================================== Percent 66% 27% 7% 100% -------------------------------------- (1) Based upon scheduled principal repayments. (2) Demand loans, past due loans, and overdrafts are reported in the "Within 1 Year" category.
Consumer loans to individuals totaled $625 million at December 31, 2000, down $135 million or 17.8% compared to 1999, with $128 million of retail credit card receivables sold in April 2000. Installment loans include short-term installment loans, direct and indirect automobile loans, recreational vehicle loans, credit card loans (which are primarily business-oriented since the April 2000 sale), student loans, and other personal loans. Individual borrowers may be required to provide related collateral or a satisfactory endorsement or guaranty from another person, depending on the specific type of loan and the creditworthiness of the borrower. Credit risk for these types of loans is generally greatly influenced by general economic conditions, the characteristics of individual borrowers, and the nature of the loan collateral. Credit risk is primarily controlled by reviewing the creditworthiness of the borrowers as well as taking appropriate collateral and guaranty positions on such loans. An active credit risk management process is used for commercial loans to ensure that sound and consistent credit decisions are made. Credit risk is controlled by detailed underwriting procedures, comprehensive loan administration, and periodic review of borrowers' outstanding loans and commitments. Borrower relationships are formally reviewed on an ongoing basis for early identification of potential problems. Further analyses by customer, industry, and geographic location are performed to monitor trends, financial performance, and concentrations. Factors that are critical to managing overall credit quality are sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early identification of potential problems, an adequate allowance for loan losses, and sound nonaccrual and charge-off policies. The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At December 31, 2000, no concentrations existed in the Corporation's portfolio in excess of 10% of total loans. ALLOWANCE FOR LOAN LOSSES The investment and loan portfolios are the Corporation's primary interest earning assets. While the investment portfolio is structured with minimum credit exposure to the Corporation, the loan portfolio is the primary asset subject to credit risk. Credit risk is controlled and monitored through the use of lending standards, thorough review of potential borrowers, and on-going review of loan payment performance. Active asset quality 23 administration, including early problem loan identification and timely resolution of problems, further ensures appropriate management of credit risk and minimization of loan losses. Credit risk management for each loan type is discussed briefly in the section entitled "Loans." At December 31, 2000, the allowance for loan losses ("AFLL") was $120.2 million, compared to $113.2 million at December 31, 1999. The $7.0 million increase was the net result of $20.2 million provision for loan losses, offset by $9.0 million of NCOs and a $4.2 million decrease related to the sale of credit card receivables in the second quarter of 2000. As of December 31, 2000, the AFLL to total loans was 1.35% and covered 252% of nonperforming loans, compared to 1.36% and 307%, respectively, at December 31, 1999. Tables 10 and 11 provide additional information regarding activity in the AFLL and Table 12 provides additional information regarding nonperforming loans. TABLE 10: LOAN LOSS EXPERIENCE
YEARS ENDED DECEMBER 31, ------------------------------------------------------ 2000 1999 1998 1997 1996 ------------------------------------------------------ ($ IN THOUSANDS) AFLL, at beginning of year $113,196 $ 99,677 $ 92,731 $ 71,767 $ 68,560 Balance related to acquisitions --- 8,016 3,636 728 3,511 Decrease from sale of credit card receivables (4,216) --- --- --- --- Provision for loan losses (PFLL) 20,206 19,243 14,740 31,668 13,695 Loans charged off: Commercial, financial, and agricultural 1,679 2,222 3,533 1,327 2,916 Real estate - construction 38 --- 202 600 193 Real estate - mortgage 3,718 3,472 3,256 3,222 2,813 Consumer 5,717 10,925 9,839 9,900 11,693 Lease financing 3 2 209 --- 1 ------------------------------------------------------ Total loans charged off 11,155 16,621 17,039 15,049 17,616 Recoveries of loans previously charged off: Commercial, financial, and agricultural 772 726 2,384 513 1,255 Real estate - construction --- 1 --- --- 3 Real estate - mortgage 450 655 1,582 1,312 837 Consumer 979 1,464 1,641 1,792 1,514 Lease financing --- 35 2 --- 8 ------------------------------------------------------ Total recoveries 2,201 2,881 5,609 3,617 3,617 ------------------------------------------------------ Net loans charged off (NCOs) 8,954 13,740 11,430 11,432 13,999 ------------------------------------------------------ AFLL, at end of year $120,232 $113,196 $ 99,677 $ 92,731 $ 71,767 ====================================================== Ratio of AFLL to NCOs 13.4 8.2 8.7 8.1 5.1 Ratio of NCOs to average loans outstanding .10% .18% .16% .16% .21% Ratio of AFLL to total loans at end of period 1.35% 1.36% 1.37% 1.31% 1.08% ========== ========== =========== =========== =========
The AFLL represents management's estimate of an amount adequate to provide for probable incurred credit losses in the loan portfolio at the balance sheet date. 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, existing economic conditions, the fair value of underlying collateral, and other factors which could affect potential credit losses. In general, the change in the AFLL is a function of a number of factors, including but not limited to changes in the loan portfolio (see Table 8), NCOs (see Table 10), and nonperforming loans (see Table 12). First, total loan growth from year-end 1999 to 2000 was up 6.8% (or 8.4% when factoring in the $128 million of credit card receivables sold during 2000). The growth was strongest in the commercial portfolio (particularly commercial real estate; commercial, financial, and agricultural loans; and construction loans), which grew 24 $721 million or 18.5% to represent 52% of total loans at year-end 2000 compared to 47% last year-end. This segment of the loan portfolio carries greater inherent credit risk (described under section "Loans"). While NCOs for 2000 have decreased $4.8 million to $9.0 million, the decline is due to having sold the credit card receivables and thus, no longer incurring related charge-offs. Excluding NCOs on credit cards, NCOs would be relatively unchanged between 1999 and 2000. Finally, nonperforming loans to total loans grew to 0.54% for 2000 compared to 0.44% last year. 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. Because each of the criteria used is subject to change, the allocation of the allowance for loan losses is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the portfolio. Management continues to target and maintain the AFLL equal to the allocation methodology plus an unallocated portion, as determined by economic conditions on the Corporation's borrowers. For both 1999 and 1998, estimation methods and assumptions included consideration of Year 2000 issues on significant customers. Management allocates the AFLL for credit losses by pools of risk. The business loan (commercial real estate; commercial, financial, and agricultural; leases; and real estate construction) allocation is based on a quarterly review of individual loans, loan types, and industries. The retail loan (residential mortgage, home equity, and consumer) allocation is based on analysis of historical delinquency and charge-off statistics and trends. Minimum loss factors used by the Corporation for criticized loan categories are consistent with regulatory agency factors. Loss factors for non-criticized loan categories are based primarily on historical loan loss experience and peer group statistics. The mechanism used to address differences between estimated and actual loan loss experience includes review of recent nonperforming loan trends, underwriting trends, and external factors. The allocation methods used for December 31, 2000 and 1999 were generally comparable. For 2000, the amount allocated to commercial, financial, and agricultural loans increased, representing 38% of the AFLL, compared to 28% last year. The increase was a function of changes in the commercial, financial, and agricultural loans category, including: a greater amount of these loans in criticized loan categories and for which specific allocations were made for 2000 compared to 1999; increased loan balances, growing to represent 19% of total loans at year-end 2000 versus 17% last year; and more of these loans in nonperforming loan categories at year-end 2000 versus last year (28% versus 16%, respectively). For 2000, the amount allocated to consumer loans decreased to represent 5% of the AFLL versus 13% for 1999. This decrease was predominantly a function of the sale of $128 million of credit card receivables in mid-2000. For 1999 compared to 1998, the allocation for credit card loans was reduced based on delinquencies and charge-offs trending below national averages and the maturation of the portfolio, which indicated lower risk of loss, and the allocation factor for commercial real estate loans (included in real estate-mortgage) was increased given the increased risk associated with a rising interest rate environment on this loan category. Management believes the AFLL to be adequate at December 31, 2000. While management uses available information to recognize losses on loans, future adjustments to the AFLL may be necessary based on changes in economic conditions and the impact of such change on the Corporation's borrowers. As an integral part of their examination process, various regulatory agencies also review the AFLL. Such agencies may require that changes in the AFLL be recognized when their credit evaluations differ from those of management, based on their judgments about information available to them at the time of their examination. 25 TABLE 11: ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
AS OF DECEMBER 31, ---------------------------------------------------- 2000 1999 1998 1997 1996 ---------------------------------------------------- ($ IN THOUSANDS) Commercial, financial, and agricultural $ 45,571 $ 31,648 $ 25,385 $ 33,682 $ 27,943 Real estate - construction 6,531 5,605 3,369 2,016 1,047 Real estate - mortgage 51,161 50,267 40,216 30,360 19,116 Consumer 6,194 14,904 16,924 16,870 16,239 Lease financing 149 184 426 493 530 Unallocated 10,626 10,588 13,357 9,310 6,892 ---------------------------------------------------- Total AFLL $120,232 $113,196 $ 99,677 $ 92,731 $ 71,767 ====================================================
The PFLL in 2000 was $20.2 million. In comparison, the PFLL for 1999 was $19.2 million and $14.7 million in 1998. NCOs were $9.0 million or 0.10% of average loans for 2000, compared to $13.7 million or 0.18% of average loans for 1999, and were $11.4 million or 0.16% of average loans for 1998. The $4.8 million decrease in NCOs was primarily driven by lower charge-offs of consumer loans in 2000 versus 1999 (down $5.2 million as shown in Table 10). This decline is predominantly due to having sold the retail credit card receivables in 2000 and, thus, no longer incurring related charge-offs. Excluding NCOs on credit cards, NCOs would have been relatively unchanged between 1999 and 2000. Loans charged off are subject to continuous review, and specific efforts are taken to achieve maximum recovery of principal, accrued interest, and related expenses. NONPERFORMING LOANS, POTENTIAL PROBLEM LOANS, AND OTHER REAL ESTATE OWNED Management is committed to an aggressive nonaccrual and problem loan identification philosophy. This philosophy is embodied through the ongoing monitoring and reviewing of all pools of risk in the loan portfolio to ensure that all problem loans are identified quickly and the risk of loss is minimized. Nonperforming loans are defined as nonaccrual loans, loans 90 days or more past due but still accruing, and restructured loans. The Corporation specifically excludes from its definition of nonperforming loans student loan balances that are 90 days or more past due and still accruing and that have contractual government guarantees as to collection of principal and interest. Such past due student loans were approximately $19.5 million and $16.9 million at December 31, 2000 and 1999, respectively. Loans are generally placed on nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectibility of principal or interest on loans, it is management's practice to place such loans on nonaccrual status immediately, rather than delaying such action until the loans become 90 days past due. Previously accrued and uncollected interest on such loans is reversed, amortization of related loan fees is suspended, and income is recorded only to the extent that interest payments are subsequently received in cash and a determination has been made that the principal balance of the loan is collectible. If collectibility of the principal is in doubt, payments received are applied to loan principal. Loans past due 90 days or more but still accruing interest are also included in nonperforming loans. Loans past due 90 days or more but still accruing are classified as such where the underlying loans are both well secured (the collateral value is sufficient to cover principal and accrued interest) and in the process of collection. Also included in nonperforming loans are "restructured" loans. Restructured loans involve the granting of some concession to the borrower involving the modification of terms of the loan, such as changes in payment schedule or interest rate. 26 TABLE 12: NONPERFORMING LOANS AND OTHER REAL ESTATE OWNED
DECEMBER 31, ------------------------------------------------------ 2000 1999 1998 1997 1996 ------------------------------------------------------ ($ IN THOUSANDS) Nonaccrual loans $41,045 $32,076 $48,150 $32,415 $32,287 Accruing loans past due 90 days or more 6,492 4,690 5,252 1,324 1,801 Restructured loans 159 148 485 558 534 ------------------------------------------------------ Total nonperforming loans $47,696 $36,914 $53,887 $34,297 $34,622 ====================================================== Other real estate owned $ 4,032 $ 3,740 $ 6,025 $ 2,067 $ 1,939 ====================================================== Ratio of nonperforming loans to total loans at period end .54% .44% .74% .48% .52% Ratio of the AFLL to nonperforming loans at period end 252% 307% 185% 270% 207% =======================================================
Nonperforming loans at December 31, 2000, were $47.7 million, an increase of $10.8 million from December 31, 1999. The ratio of nonperforming loans to total loans at the end of 2000 was 0.54%, as compared to 0.44% and 0.74% at December 31, 1999 and 1998, respectively. Nonaccrual loans accounted for $9.0 million of the increase in nonperforming loans. Commercial nonaccrual loans (representing approximately 67% of nonaccrual loans at year-end 2000 versus 44% at year-end 1999) increased $13.5 million, predominantly due to the addition of three large commercial credits (totaling approximately $12.8 million). The Corporation's AFLL to nonperforming loans was 252% at year-end 2000, down from 307% at year-end 1999 and up from 185% at year-end 1998. The following table shows, for those loans accounted for on a nonaccrual basis and restructured loans for the years ended as indicated, the gross interest that would have been recorded if the loans had been current in accordance with their original terms and the amount of interest income that was included in interest income for the period. TABLE 13: FOREGONE LOAN INTEREST
YEARS ENDED DECEMBER 31, ------------------------------------ 2000 1999 1998 ------------------------------------ ($ IN THOUSANDS) Interest income in accordance with original terms $ 3,951 $ 3,074 $ 5,046 Interest income recognized (2,609) (1,637) (2,884) ------------------------------------- Reduction in interest income $ 1,342 $ 1,437 $ 2,162 =====================================
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, 2000, potential problem loans totaled $137.8 million. The loans that have been reported as potential problem loans are not concentrated in a particular industry, but rather cover a diverse range of businesses. Management does not presently expect significant losses from credits in the potential problem loan category. Other real estate owned ("OREO") increased to $4.0 million at December 31, 2000, compared to $3.7 million and $6.0 million at year-end 1999 and 1998, respectively. Net gains on sales of OREO were $116,000, $403,000, and $426,000 for 2000, 1999, and 1998, respectively. Management actively seeks to ensure properties held are monitored to minimize the Corporation's risk of loss. 27 INVESTMENT SECURITIES PORTFOLIO The investment securities portfolio is intended to provide the Corporation with adequate liquidity, flexibility in asset/liability management, and a source of stable income. Investment securities classified as held to maturity ("HTM") are carried in the consolidated balance sheet at amortized cost while investment securities classified as available for sale ("AFS") are carried at fair market value. At December 31, 2000, the total carrying value of investment securities represented 25% of total assets, compared to 26% at year-end 1999. On average, the investment portfolio represented 28% of average earning assets for both 2000 and 1999. TABLE 14: INVESTMENT SECURITIES PORTFOLIO
AT DECEMBER 31, ------------------------------------------ 2000 1999 1998 ------------------------------------------ ($ IN THOUSANDS) Investment Securities Held to Maturity (HTM): Federal agency securities $ 25,055 $ 26,012 $ 66,204 Obligations of states and political subdivisions 110,182 128,833 153,663 Mortgage-related securities 182,299 204,725 262,111 Other securities (debt) 51,022 54,467 68,797 ------------------------------------------ Total amortized cost and carrying value $ 368,558 $ 414,037 $ 550,775 ========================================== Total fair value $ 372,873 $ 413,107 $ 562,940 ========================================== Investment Securities Available for Sale (AFS): U.S. Treasury securities $ 23,847 $ 47,092 $ 68,488 Federal agency securities 341,929 406,275 248,697 Obligations of state and political subdivisions 756,914 550,975 217,153 Mortgage-related securities 1,425,290 1,578,089 1,625,403 Other securities (debt and equity) 319,129 334,024 160,499 ------------------------------------------ Total amortized cost $ 2,867,109 $ 2,916,455 $ 2,320,240 ========================================== Total fair value and carrying value $ 2,891,647 $ 2,856,346 $ 2,356,960 ========================================== Total Investment Securities: Total amortized cost $ 3,235,667 $ 3,330,492 $ 2,871,015 Total fair value 3,264,520 3,269,453 2,919,900 Total carrying value 3,260,205 3,270,383 2,907,735 ==========================================
At December 31, 2000 and 1999, mortgage-related securities represented 49.7% and 53.5%, respectively, of total investment securities based on amortized cost. The fair value of mortgage-related securities are subject to inherent risks based upon the future performance of the underlying collateral (i.e. mortgage loans) for these securities, such as prepayment risk and interest rate changes. Tax exempt securities grew to represent 26.8% of total securities based on amortized cost, compared to 20.4% at year-end 1999, due to higher comparable yields combined with tax advantages and additional call protection. The aggregate fair value of total securities was approximately $3.26 billion (100.1% of carrying value) and $3.27 billion (100.0% of carrying value) at December 31, 2000 and 1999, respectively. At December 31, 2000, the Corporation's securities portfolio did not contain securities, other than U.S. Treasury and federal agencies, of any single issuer that were payable from and secured by the same source of revenue or taxing authority where the aggregate carrying value of such securities exceeded 10% of stockholders' equity or $96.9 million. The classification of securities as HTM or AFS is determined at the time of purchase. Beginning in 1998, the Corporation began to classify most investment purchases as AFS. This is consistent with the Corporation's investment philosophy of maintaining flexibility to manage the investment portfolio, particularly in light of asset/liability management strategies, including possible securities sales in response to changes in interest 28 rates or prepayment risk, the need to manage regulatory capital, and other factors. Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Investments and Hedging Activities," which was adopted by the Corporation as required on January 1, 2001, provides for the option, upon adoption, to change the classification of investments held. Thus, effective January 1, 2001, the Corporation elected to reclassify all of the $369 million of HTM investments to the AFS classification. SFAS No. 133 is more fully described under the section "Accounting Developments." TABLE 15: INVESTMENT SECURITIES PORTFOLIO MATURITY DISTRIBUTION (1) - AT DECEMBER 31, 2000
INVESTMENT SECURITIES HELD TO MATURITY - MATURITY DISTRIBUTION AND WEIGHTED AVERAGE YIELD -------------------------------------------------------------------------------------------------------------- AFTER ONE BUT AFTER FIVE BUT WITHIN FIVE WITHIN TEN AFTER TEN MORTGAGE-RELATED WITHIN ONE YEAR YEARS YEARS YEARS SECURITIES TOTAL TOTAL -------------------------------------------------------------------------------------------------------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD FAIR VALUE -------------------------------------------------------------------------------------------------------------- ($ IN THOUSANDS) Federal agency securities $15,100 6.58% $ 9,955 6.73% $ --- --- $ --- --- $ --- --- $ 25,055 6.64% $ 25,141 Obligations of states and political subdivisions (2) 22,801 7.50% 84,267 7.19% 3,114 7.36% --- --- --- --- 110,182 7.26% 111,223 Other debt securities 5,786 7.00% 43,836 6.82% 1,400 6.63% --- --- --- --- 51,022 6.84% 51,346 Mortgage-related securities --- --- --- --- --- --- --- --- 182,299 7.41% 182,299 7.41% 185,163 -------------------------------------------------------------------------------------------------------------- Total amortized cost $43,687 7.12% $138,058 7.04% $ 4,514 7.13% $ --- --- $ 182,299 7.41% $ 368,558 7.23% $ 372,873 ============================================================================================================== Total fair value $43,828 $139,306 $ 4,576 $ --- $ 185,163 $ 372,873 ============================================================================================================== INVESTMENT SECURITIES AVAILABLE FOR SALE - MATURITY DISTRIBUTION AND WEIGHTED AVERAGE YIELD -------------------------------------------------------------------------------------------------------------- AFTER ONE BUT AFTER FIVE BUT MORTGAGE-RELATED WITHIN FIVE WITHIN TEN AFTER TEN AND EQUITY WITHIN ONE YEAR YEARS YEARS YEARS SECURITIES TOTAL TOTAL -------------------------------------------------------------------------------------------------------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD FAIR VALUE -------------------------------------------------------------------------------------------------------------- ($ IN THOUSANDS) U. S. Treasury securities $18,337 5.54% $ 4,993 6.20% $ 517 5.84% $ --- --- $ --- --- $ 23,847 5.68% $ 23,860 Federal agency securities 39,544 5.84% 292,181 6.02% 10,052 6.45% 152 7.39% --- --- 341,929 6.01% 342,748 Obligations of states and political subdivisions (2) 6,942 6.46% 62,902 6.68% 294,774 6.63% 392,296 7.87% --- --- 756,914 7.29% 764,941 Other debt securities 20,748 5.44% 73,870 6.48% 123,534 6.13% --- --- --- --- 218,152 6.18% 214,574 Mortgage-related securities --- --- --- --- --- --- --- --- 1,425,290 6.81% 1,425,290 6.81% 1,427,617 Equity securities --- --- --- --- --- --- --- --- 100,977 6.22% 100,977 6.22% 117,907 -------------------------------------------------------------------------------------------------------------- Total amortized cost $85,571 5.55% $433,946 6.25% $428,877 6.46% $392,448 7.87% $1,526,267 6.78% $2,867,109 6.76% $2,891,647 ============================================================================================================== Total fair value $85,494 $434,513 $424,698 $401,418 $1,545,524 $2,891,647 ==============================================================================================================
(1) Expected maturities will differ from contractual maturities, as borrowers may have the right to call or repay obligations with or without call or prepayment penalties. (2) Yields on tax-exempt securities are computed on a tax-equivalent basis using a tax rate of 35% and have not been adjusted for certain disallowed interest deductions. DEPOSITS Deposits are the Corporation's largest source of funds. At December 31, 2000, deposits were $9.3 billion, up $600 million or 6.9% over last year, primarily in brokered certificates of deposit ("CDs") (up $579 million). Total deposits excluding brokered CDs ("retail deposits") were essentially flat between year-end periods. The sale of deposits of six branches during 2000 decreased deposits by $109 million. Thus, without the branch sales, retail deposits were up $130 million or 1.6% over year-end 1999. One of the primary factors influencing the Corporation's retail deposit growth has been competitive pressure from other financial institutions, as well as other investment opportunities available to customers. During 2000, the Corporation particularly marketed its money market accounts, which offer competitive rates and greater customer flexibility, as well as business demand deposits. 29 On average, deposits were $9.1 billion for 2000, up $471 million or 5.5% over the average for 1999. However, excluding the increase in brokered CDs, deposits were down 1.5%. As previously mentioned under section "Net Interest Income," the decline in average deposits, excluding brokered CDs, increased the Corporation's reliance on wholesale funding, as discussed under section " Other Funding Sources." Table 16 summarizes the distribution of average deposits. A maturity distribution of certificates of deposits and other time deposits of $100,000 or more at December 31, 2000, is shown in Table 17. TABLE 16: AVERAGE DEPOSITS DISTRIBUTION
2000 1999 1998 --------------------------------------------------------------------------- % OF % OF AMOUNT TOTAL AMOUNT % OF TOTAL AMOUNT TOTAL --------------------------------------------------------------------------- ($ IN THOUSANDS) Noninterest-bearing demand deposits $1,086,582 12% $1,003,687 12% $ 844,486 10% Interest-bearing demand deposits 803,779 9 796,506 9 473,123 6 Savings deposits 956,177 11 919,163 11 981,630 12 Money market deposits 1,407,502 15 1,373,010 16 1,377,503 16 Brokered certificates of deposit 840,518 9 241,309 3 117,011 1 Other time deposits 4,008,382 44 4,297,977 49 4,636,948 55 --------------------------------------------------------------------------- Total deposits $9,102,940 100% $8,631,652 100% $8,430,701 100% ===========================================================================
TABLE 17: MATURITY DISTRIBUTION-CERTIFICATES OF DEPOSIT AND OTHER TIME DEPOSITS OF $100,000 OR MORE DECEMBER 31, 2000 ---------------------------------- CERTIFICATES OF OTHER TIME DEPOSIT DEPOSITS ---------------------------------- ($ IN THOUSANDS) Three months or less $410,854 $118,755 Over three months through six months 106,000 70,225 Over six months through twelve months 202,216 41,337 Over twelve months 252,093 2,821 ---------------------------------- Total $971,163 $233,138 ================================== OTHER FUNDING SOURCES Other funding sources, including both long-term debt and short-term borrowings ("wholesale funds"), were $2.7 billion at December 31, 2000, down $79 million from $2.8 billion at December 31, 1999. Long-term debt at December 31, 2000, was $122.4 million, up from $24.3 million at the end of last year. See Note 10 of the notes to consolidated financial statements for additional information on long-term debt. Short-term borrowings are primarily comprised of Federal funds purchased, securities sold under agreements to repurchase, short-term Federal Home Loan Bank ("FHLB") advances, notes payable to banks, treasury, tax, and loan notes ("TT&L notes"), and commercial paper. Of note, the FHLB advances included in short-term borrowings are those with original maturities of less than one year and callable notes that have one-year call premiums which the Corporation expects may be called, even if the notes have maturities exceeding one year. The TT&L notes are demand notes representing secured borrowings from the U.S. Treasury, collateralized by qualifying securities and loans. The funds are placed with the subsidiary banks at the discretion of the U.S. Treasury and may be called at any time. See Note 9 of the Notes to Consolidated Financial Statements for additional information on short-term borrowings, and Table 18 for specific disclosure required for major short-term borrowing categories. Wholesale funds on average were $2.7 billion for 2000, up $622 million or 30.6% over 1999. The reliance on wholesale funds increased during 2000 as mentioned under both sections "Net Interest Income" and "Deposits." The mix of wholesale funding shifted slightly toward longer-term instruments, with average 30 long-term debt representing 4.3% of wholesale funds from 1.2% last year, in response to certain asset/liability objectives. Within the short-term borrowing categories, average Federal funds purchased and securities sold under agreements to repurchase were up $667 million. TABLE 18: SHORT-TERM BORROWINGS
DECEMBER 31, ---------------------------------------- 2000 1999 1998 ---------------------------------------- ($ IN THOUSANDS) Federal funds purchased and securities sold under agreements to repurchase: Balance end of year $ 1,691,796 $ 1,344,396 $ 502,586 Average amounts outstanding during year 1,724,291 1,057,269 517,344 Maximum month-end amounts outstanding 2,012,529 1,640,043 704,113 Average interest rates on amounts outstanding at end of year 6.59% 5.30% 4.72% Average interest rates on amounts outstanding during year 6.25% 5.00% 5.06% Federal Home Loan Bank advances: Balance end of year $ 750,000 $ 531,652 $ 937,021 Average amounts outstanding during year 541,909 778,245 564,166 Maximum month-end amounts outstanding 1,375,653 1,173,021 937,021 Average interest rates on amounts outstanding at end of year 6.42% 6.37% 4.78% Average interest rates on amounts outstanding during year 6.39% 5.22% 5.52%
LIQUIDITY Effective liquidity management ensures the cash flow requirements of depositors and borrowers, as well as the operating cash needs of the Corporation, are met. Funds are available from a number of sources, including the securities portfolio, the core deposit base, lines of credit with major banks, the ability to acquire large and brokered deposits, and the ability to securitize or package loans for sale. Additionally, liquidity is provided from loans and securities repayments and maturities. During 2000, the four largest subsidiary banks (Associated Bank Illinois, National Association, Associated Bank Milwaukee, Associated Bank Green Bay, National Association, and Associated Bank North) established a $2.0 billion bank note program. Under this program, short-term and long-term debt may be issued. As of December 31, 2000, there was $2.0 billion available under this program. The parent company's primary funding sources to meet its liquidity requirements are dividends and service fees from subsidiaries, borrowings with major banks, commercial paper issuance, and proceeds from the issuance of equity. The parent company manages its liquidity position to provide the funds necessary to pay dividends to stockholders, service debt, invest in subsidiaries, repurchase common stock, and satisfy other operating requirements. Dividends received in cash from subsidiaries totaled $168.2 million in 2000 and represent a primary funding source. At December 31, 2000, $148.5 million in dividends could be paid to the parent by its subsidiaries and affiliates without obtaining prior regulatory approval, subject to the capital needs of the banks. Additionally, the parent company had $200 million of established lines of credit with nonaffiliated banks, of which $83.7 million was outstanding at December 31, 2000. During 2000, a $200 million commercial paper program was initiated, of which $34.3 million was outstanding at December 31, 2000. As discussed in Item 1 of Form 10-K, subsidiary banks are subject to regulation and, among other things, may be limited in their ability to pay dividends or transfer funds to the parent company. Accordingly, consolidated cash flows as presented in the Consolidated Statements of Cash Flows may not represent cash immediately available for the payment of cash dividends to the Corporation's stockholders. 31 Maintaining adequate credit ratings on debt issues is important to liquidity as it affects the ability of the Corporation to attract funds from various sources on a cost-competitive basis. The parent company and its four largest subsidiary banks had the following agency ratings: TABLE 19: CREDIT RATINGS AT DECEMBER 31, 2000 Moody's S&P Fitch Bankwatch ------- --- ----- --------- Bank ST P1 A2 F1 TBW-1 Bank LT A2 A- A1 --- Corporation ST P2 A2 F1 TBW-1 Corporation LT A3 BBB+ BBB+ --- 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 Corporation's Asset/Liability Committee and approved by the Corporation's Board of Directors limit exposure of earnings at risk. General interest rate movements are used to develop sensitivity, as the Corporation feels it has no primary exposure to a specific point on the yield curve. These limits are based on the Corporation's exposure to a 100 bp immediate and sustained parallel rate move, either upward or downward. INTEREST RATE RISK In order to measure earnings sensitivity to changing rates, the Corporation uses 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 (interest-bearing demand deposits, savings, and money market accounts) and non-rate related products (demand deposit accounts, other assets, and other liabilities) to create a baseline repricing balance sheet. In addition to the contractual information, residential mortgage whole loan products and mortgage-backed securities are adjusted based on industry estimates of 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. 32 The following table represents the Corporation's consolidated static gap position as of December 31, 2000. TABLE 20: INTEREST RATE SENSITIVITY ANALYSIS
DECEMBER 31, 2000 ------------------------------------------------------------------------------------------- INTEREST SENSITIVITY PERIOD TOTAL 181-365 WITHIN 0-90 DAYS 91-180 DAYS DAYS 1 YEAR OVER 1 YEAR TOTAL ------------------------------------------------------------------------------------------- ($ IN THOUSANDS) Earning assets: Loans, held for sale $ 24,593 $ --- $ --- $ 24,593 $ --- $ 24,593 Investment securities, at amortized cost 436,142 97,154 198,231 731,527 2,504,140 3,235,667 Loans 3,067,675 631,138 1,254,978 4,953,791 3,959,588 8,913,379 Other earning assets 28,334 --- --- 28,334 --- 28,334 ------------------------------------------------------------------------------------------- Total earning assets $ 3,556,744 $ 728,292 $ 1,453,209 $ 5,738,245 $ 6,463,728 $ 12,201,973 =========================================================================================== Interest-bearing liabilities: Interest-bearing deposits(1) $ 1,978,404 $1,190,810 $ 1,690,696 $ 4,859,910 $ 3,187,787 $ 8,047,697 Other interest-bearing liabilities 2,050,529 2,625 555,132 2,608,286 112,337 2,720,623 ------------------------------------------------------------------------------------------- Total interest-bearing liabilities $ 4,028,933 $1,193,435 $ 2,245,828 $ 7,468,196 $ 3,300,124 $ 10,768,320 =========================================================================================== Interest sensitivity gap $ (472,189) $ (465,143) $ (792,619) $(1,729,951) $ 3,163,604 $ 1,433,653 Cumulative interest sensitivity gap $ (472,189) $ (937,332) $(1,729,951) Cumulative ratio of rate sensitive assets to rate sensitive liabilities at December 31, 2000 88.3% 82.1% 76.8% ===========================================================================================
(1) The interest rate sensitivity assumptions for demand deposits, savings accounts, money market accounts, and interest-bearing demand deposit accounts are based on current and historical experiences regarding portfolio retention and interest rate repricing behavior. Based on these experiences, a portion of these balances is considered to be long-term and fairly stable and is therefore included in the "Over 1 Year" category. The static gap analysis in Table 20 provides a representation of the Corporation's earnings sensitivity to changes in interest rates. It is a static indicator which does not reflect various repricing characteristics and may not necessarily indicate the sensitivity of net interest income in a changing interest rate environment. Interest rate risk of embedded positions, including prepayment and early withdrawal options, lagged interest rate changes, administered interest rate products, and cap and floor options, within products require a more dynamic measuring tool to capture earnings risk. Earnings simulation is used to create a more complete assessment of interest rate risk. Along with the static gap analysis, determining the sensitivity of future earnings to a hypothetical plus or minus 100 and 200 basis point parallel rate shock can be accomplished through the use of simulation modeling. In addition to the assumptions used to create the static gap, simulation of earnings includes the modeling of the balance sheet as an ongoing entity. Future business assumptions involving administered rate products, prepayments for future rate sensitive balances, and the reinvestment of maturing assets and liabilities are included. These items are then modeled to project income based on a hypothetical change in interest rates. The resulting net income for the next 12-month period is compared to the net income amount calculated using flat rates. This difference represents the Corporation's earnings sensitivity to a plus or minus 100 basis point parallel rate shock. The resulting simulations for December 31, 2000, projected that net income would decrease by approximately 5.5% of stable-rate net income if rates rose by a 100 basis point shock, and projected that net income would increase by approximately 4.1% if rates fell by a 100 basis point shock. At December 31, 1999, the 100 basis point shock up was projected to decrease net income by 6.6%, and the 100 basis point shock down projected that net income would increase by 5.9%. The projected changes for both 2000 and 1999 were within the Corporation's interest rate risk policy. According to the earnings simulation model, the Corporation's sensitivity to interest rate changes decreased during 2000. In response to higher rates in the first half of 2000, the Corporation's sensitivity was decreased through the use of intermediate term borrowings. 33 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 could include, but would not be limited to, delaying an increase in deposit rates, extending liabilities, hedging, changing the pricing characteristics of loans, or changing the growth rate of certain assets and liabilities. CAPITAL Stockholders' equity at December 31, 2000, increased to $968.7 million or $14.65 per share, compared with $909.8 million or $13.09 per share at the end of 1999. Stockholders' equity is also described in Note 11, Stockholders' Equity, of the Notes to Consolidated Financial Statements. The increase in stockholders' equity in 2000 was primarily composed of retention of earnings and the exercise of stock options. Offsetting increases to stockholders' equity were the payment of cash dividends and the purchase of treasury stock. Additionally, stockholders' equity at year-end 2000 included a $15.6 million equity component (included in accumulated other comprehensive income) related to unrealized gains on securities AFS, net of the tax effect, predominately due to the impact of the rate environment at the end of 2000 on that portfolio. At December 31, 1999, stockholders' equity included $38.8 million related to unrealized losses on securities AFS, net of the tax effect. Stockholders' equity to assets at December 31, 2000 was 7.38%, compared to 7.27% at the end of 1999. Excluding the unrealized gains (losses) on securities AFS, net of the tax effect, stockholders' equity to assets would be 7.27% and 7.55% at December 31, 2000 and 1999, respectively. TABLE 21: CAPITAL AT DECEMBER 31, ----------------------------------------- 2000 1999 1998 -------------- -------------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Total stockholders' equity $ 968,696 $ 909,789 $ 878,721 Tier 1 capital 846,371 831,907 815,069 Total capital 966,994 941,005 906,326 Market capitalization 2,008,274 2,164,623 2,149,828 ----------------------------------------- Book value per common share $ 14.65 $ 13.09 $ 12.70 Cash dividend per common share 1.11 1.05 0.95 Stock price at end of period 30.38 31.14 31.08 Low closing price for the period 20.29 27.56 24.32 High closing price for the period 30.63 39.15 39.82 ----------------------------------------- Total equity / assets 7.38% 7.27% 7.81% Total equity / assets (1) 7.27 7.55 7.62 Tangible common equity / assets 6.62 6.39 7.48 Tier 1 leverage ratio 6.52 6.80 7.56 Tier 1 risk-based capital ratio 9.37 9.72 11.05 Total risk-based capital ratio 10.70 10.99 12.28 ----------------------------------------- Shares outstanding (period end) 66,116 69,520 69,175 Basic shares outstanding (average) 68,186 69,858 69,438 Diluted shares outstanding (average) 68,410 70,468 70,168 ========================================= (1) Ratio is based upon total equity and assets excluding the unrealized gains (losses) arising during the year, net of income tax effect. Cash dividends paid in 2000 were $1.11 per share, compared with $1.05 per share in 1999, an increase of 5.0%. Cash dividends per share have increased at a 13.4% compounded rate during the past five years. 34 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, 2000 and 1999, the Corporation's Tier 1 risk-based capital ratios, total risk-based capital (Tier 1 and Tier 2) ratios, and Tier 1 leverage ratios were in excess of regulatory requirements. It is management's intent to exceed the minimum requisite capital levels. Capital ratios are included in Note 17, 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 1.3 million shares (330,000 shares per quarter) in 2000 and 1999. Of these authorizations, approximately 418,000 shares were repurchased for $10.6 million during 2000 (with 322,000 shares reissued in connection with stock options exercised), and 429,000 shares were repurchased for $13.6 million in 1999 (with 277,000 shares reissued for 1999 options exercised). In March 2000, the BOD also authorized the repurchase and cancellation of up to 5% of the Corporation's outstanding shares, not to exceed approximately 3.5 million shares. Under this authorization through December 31, 2000, 3.3 million shares were repurchased and retired at a cost of $81.9 million. In October 2000, the BOD authorized the repurchase and cancellation of an additional 3.2 million shares. The repurchase of shares under this authorization is expected to begin after repurchases under the March 2000 authorization are completed. The repurchase of shares will be based on market opportunities, capital levels, growth prospects, and other investment opportunities. In connection with specific 1999 and 1998 purchase acquisition transactions, the BOD authorized the repurchase and retirement of shares issued. During 1999, approximately 3,061,000 shares were repurchased and 2,764,000 shares were retired in connection with the Windsor and Riverside purchase acquisitions, with the difference being reissued in connection with the consummation of Riverside. In 1998, approximately 990,000 shares were repurchased and 493,000 shares were retired in connection with the Citizens and Windsor acquisitions, with the difference being reissued in connection with the February 1999 consummation of Windsor. Shares repurchased and not retired are held as treasury stock and, accordingly, are accounted for as a reduction of stockholders' equity. Management believes that a strong capital position is necessary to take advantage of opportunities for profitable geographic and product expansion, and to provide depositor and investor confidence. Management actively reviews capital strategies for the Corporation and each of its subsidiaries in light of perceived business risks, future growth opportunities, industry standards, and regulatory requirements. It is management's intent to maintain an optimal capital and leverage mix for growth and for shareholder return. FOURTH QUARTER 2000 RESULTS Net income for fourth quarter 2000 ("4Q00") was $39.7 million, $4.6 million lower than the $44.3 million earned in the fourth quarter of 1999 ("4Q99"). ROE was 16.95%, 210 bp lower than 4Q99, while ROA decreased 21 bp to 1.21%. FTE net interest income for 4Q00 was $100.2 million, $5.8 million lower than 4Q99. Factors impacting net interest income and net interest margin include the higher interest rate environment between the comparable quarters, as well as competitive pricing pressures, branch deposit and credit card receivable sales, and funding of stock repurchases. The $5.8 million decrease in net interest income was a function of a 45 bp decline in net interest margin, which reduced net interest income by approximately $13.5 million, offset by approximately $7.7 million of additional net interest income due to balance sheet growth and changes in the mix of earning assets and interest-bearing liabilities. For 4Q00, net interest margin was 3.20% compared to 3.65% in 4Q99. The average Fed funds rate of 6.50% in 4Q00 was 113 bp higher than the comparable quarter last year. The yield on earning assets, which are slower to reprice, rose 39 bp to 7.96% in 4Q00. The rate on interest-bearing 35 liabilities, on the other hand, increased 94 bp to 5.39% due to more frequent repricing of deposit products, and wholesale funds. The net result was a 55 bp decline in interest rate spread. The decline in spread was offset in part by a 10 bp improvement in net free funds contribution. Average earning asset growth (up $746 million to $12.3 billion) and decreases in interest-bearing deposits excluding brokered CDs (down $206 million) were funded primarily by higher-costing brokered CDs and other wholesale funds (together up $897 million). The provision for loan losses of $5.2 million in 4Q00 was down $0.5 million from 4Q99, as less was provided due to the sale of credit card balances in the second quarter of 2000, but offset by additional provision made for the strong growth in commercial real estate and other commercial loans between the comparable quarters. Noninterest income in 4Q00 was $2.0 million higher than the comparable quarter in 1999. 4Q99 included net gains of $2.8 million on the sale of assets and investment securities (due primarily to the sale of three branch locations in 4Q99), whereas losses of $0.5 million were recorded in 4Q00 (principally from sales of investment securities). Excluding these gains and losses from both periods, noninterest income rose $5.3 million or 13.6%. Credit card and other nondeposit fees were up $1.0 million, due to increases in merchant interchange income and other credit card revenue. Service charges on deposit accounts were up $0.7 million, due primarily to mid-2000 rate increases. Other noninterest income was up $4.2 million, attributable principally to $3.6 million recognized in connection with the Corporation's mid-2000 change in data processing vendors, which compensated for certain additional costs incurred by the Corporation. Trust service fees declined $1.2 million, predominantly due to the impact of the year-over-year change in market conditions on the market value of assets under management. The remaining noninterest income categories collectively increased $0.6 million or 4% over the same period last year. Noninterest expense between the comparable quarters was impacted by two significant items: 4Q99 included a $2.3 million MSR valuation reversal and profit sharing expense was $2.2 million higher in 4Q00 than 4Q99. Excluding these items, noninterest expense was $2.3 million (2.9%) lower in 4Q00 than 4Q99, reflecting the continued focus on expense control in 2000. Decreases were seen in numerous expense items. Income tax expense was down $2.7 million between the fourth quarters due to lower income before tax and a decrease in the effective tax rate, at 27.3% for 4Q00 compared to 28.3% for 4Q99. 36 TABLE 22: SELECTED QUARTERLY FINANCIAL DATA: The following is selected financial data summarizing the results of operations for each quarter in the years ended December 31, 2000 and 1999:
2000 QUARTER ENDED -------------------------------------------------------- DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 -------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) Interest income $ 242,194 $ 237,892 $ 228,298 $ 222,773 Interest expense 147,876 143,354 131,936 124,424 Provision for loan losses 5,203 4,122 5,166 5,715 Investment securities losses, net (455) (2) (5,490) (1,702) Income before income tax expense 54,581 54,620 60,653 59,967 Net income 39,701 41,504 43,697 43,081 ======================================================== Basic net income per share $ 0.60 $ 0.61 $ 0.63 $ 0.62 Diluted net income per share 0.60 0.61 0.63 0.62 Basic weighted average shares 66,314 68,031 68,918 69,504 Diluted weighted average shares 66,542 68,293 69,206 69,812 1999 QUARTER ENDED -------------------------------------------------------- DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31 -------------------------------------------- ----------- (IN THOUSANDS EXCEPT PER SHARE DATA) Interest income $ 216,258 $ 205,185 $ 197,377 $ 195,700 Interest expense 114,432 105,615 99,826 98,902 Provision for loan losses 5,704 4,541 4,547 4,451 Investment securities gains (losses), net (1,536) (50) 1,023 3,589 Income before income tax expense 61,874 60,101 57,371 57,970 Net income 44,334 41,782 39,876 38,951 ======================================================= Basic net income per share $ 0.63 $ 0.60 $ 0.57 $ 0.56 Diluted net income per share 0.63 0.59 0.57 0.55 Basic weighted average shares 70,034 70,183 69,670 69,535 Diluted weighted average shares 70,657 70,833 70,314 70,127
OUTLOOK FOR 2001 The following should be read in conjunction with the "Special Note Regarding Forward-Looking Statements" section noted on page 3. The Corporation currently estimates the first quarter of 2001 earnings per share to be modestly higher than 4Q00 levels. The Corporation expects additional improvements in each subsequent 2001 quarter, resulting in diluted earnings per share for 2001 of $2.60 to $2.65. These expectations assume decreases in interest rates and stable asset quality. The Corporation expects continued strong commercial loan growth, modest deposit growth, and expanding margins. Revenue is expected to grow approximately 8%, excluding asset sales. Noninterest expense should continue to be well-controlled, with only modest increases. 1999 COMPARED TO 1998 The Corporation recorded net income of $164.9 million for the year ended December 31, 1999, an increase of $7.9 million or 5.0% over the $157.0 million earned in 1998. Basic earnings per share were $2.36, a 4.4% increase over 1998 basic earnings per share of $2.26. Earnings per diluted share were $2.34, a 4.5% increase over 1998 diluted earnings per share of $2.24. Return on average assets and return on average equity were 1.41% and 18.04% for 1999, compared to 1.48% and 18.33%, respectively, for 1998. Cash dividends paid in 1999 increased by 10.5% to $1.05 per share over the $0.95 per share paid in 1998. Key factors behind these results were: 37 Taxable equivalent net interest income was $409.4 million for 1999, up $28.0 million or 7.3% over 1998. Taxable equivalent interest income increased by $35.7 million, while interest expense increased $7.7 million. The volume of average earning assets increased $892.6 million to $11.0 billion, which exceeded the $870.0 million increase in interest-bearing liabilities. Increases in volume and changes in product mix added $35.0 million to taxable equivalent net interest income, whereas changes in the rate environment resulted in a $7.0 million decline. The net interest margin, net taxable equivalent interest income divided by average interest-earning assets, was 3.74% for 1999, a 5 bp decline from 3.79% in 1998. The contribution from net free funds decreased 8 bp, offset by a 3 bp increase in interest spread, or the difference between the yield on earning assets and the rate on IBLs, to 3.23% for 1999. The yield on earning assets declined 32 bp to 7.56%, while the rate on IBLs decreased 35 bp to 4.33% for 1999, reflecting the year-over-year change in the interest rate environment. For 1999, the average prime rate of 8.00% was 35 bp lower than 1998 and the average fed funds rate of 4.95% was 41 bp lower than the prior year. Total loans and deposits were $8.3 billion and $8.7 billion, respectively, at December 31, 1999, compared to $7.3 billion and $8.6 billion, respectively, at December 31, 1998. These increases were from internal growth and acquisitions. Provision for loan losses increased to $19.2 million compared to $14.7 million in 1998. Net charge-offs increased $2.3 million, primarily due to lower recoveries in 1999 than in 1998, and were 0.18% of average loans compared to 0.16% in 1998. The ratio of AFLL to loans was 1.36% and 1.37% at December 31, 1999 and 1998, respectively. Nonperforming loans were $36.9 million, representing 0.44% of total loans at year-end 1999, compared to $53.9 million, or 0.74% of total loans last year. Noninterest income was $165.9 million for 1999, $2.0 million or 1.2% lower than 1998. A primary component impacting this decline was mortgage banking income, down $15.7 million in 1999 versus 1998, driven primarily by a 46% drop in secondary mortgage loan production (particularly refinancing activity) in response to the rising interest rate environment in 1999 compared to 1998. Gains on the sale of assets and investment securities were $6.0 million lower than the $14.0 million recorded in 1998. Excluding mortgage banking income and gains on asset and investment securities sales, noninterest income increased by $19.7 million or 18.2% in 1999, with increases in most other categories. Noninterest expense increased $10.1 million or 3.4% over 1998. Most categories of noninterest expense increased due to the acquisitions, which added $16.7 million. Partially offsetting the increases were lower expenses in MSR amortization (which decreased $12.2 million, principally due to lower valuation reserves during 1999) and professional fees (down $2.6 million from 1998, due principally to the completion of Year 2000 consultant work in mid-1999). Salary expenses increased $5.5 million or 4.6% in 1999, principally due to the acquisitions and base merit increases between the years. Fringe benefits decreased $2.3 million in 1999, the net result of a $7.7 million reduction in profit sharing expense offset in part by rising costs of health, dental, life, and other fringe benefits (up $5.4 million or 25.6%). Income tax expense decreased to $72.4 million, down $3.6 million from 1998. The 1999 effective tax rate was 30.5% or 210 bp lower than the 32.6% rate for 1998, due primarily to the tax benefit of increased municipal securities and BOLI revenue, and the use of tax loss carryforwards. SUBSEQUENT EVENTS On January 24, 2001, the BOD declared a $0.29 per share dividend payable on February 15, 2001, to shareholders of record as of February 1, 2001. A continuing strategic objective of the Corporation has been to streamline and simplify the Corporation. This has included review of the branch distribution network (and certain branch sales during 1999 and 2000), as well as centralization of functional and operational processes. As part of this objective, the Corporation will reduce the number of legal subsidiaries, including consolidating certain bank charters, particularly the Wisconsin bank charters, under a single national bank charter. It is anticipated that this plan will be completed during the second quarter of 2001. 38 These subsequent events have not been reflected in the accompanying consolidated financial statements. ACCOUNTING DEVELOPMENTS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," (collectively referred to as "SFAS No. 133" or as the "statement") requires derivative instruments, including derivative instruments embedded in other contracts, to be carried at fair value on the balance sheet. The statement continues to allow derivative instruments to be used to hedge various risks and sets forth specific criteria to be used to determine when hedge accounting can be used. For fair value hedges, the statement also provides for offsetting changes in fair value of both the derivative and the hedged asset or liability to be recognized in earnings in the same period. For cash flow hedges, the fair value of the derivative is recorded in other comprehensive income, to the extent it is effective. Any changes in fair value or cash flow that represent the ineffective portion of a hedge are required to be recognized in earnings and cannot be deferred. For derivative instruments not accounted for as hedges, changes in fair value are required to be recognized in earnings. The Corporation adopted the provisions of the statement, as required, beginning January 1, 2001. The predominant activities affected by the statement include the Corporation's use of interest rate swaps and certain mortgage banking activities. The interest rate swaps disclosed in Note 14 of the Notes to Consolidated Financial Statements were redesignated on January 1, 2001, and qualify for hedge accounting. In addition, the Corporation enters into commitments to sell groups of residential mortgage loans that it originates or purchases as part of its mortgage banking business, as well as commitments to originate loans. Both the commitments to sell, as well as the commitments to originate loans, are considered derivatives under SFAS No. 133, and beginning January 1, 2001, are carried at fair value on the balance sheet, with changes in fair value recognized in earnings. Further, as allowed by the statement, the Corporation transferred all HTM investment securities to the AFS category, effective January 1, 2001. Given the derivatives existing at January 1, 2001, the impact of adopting the provisions of this statement was not material to the Corporation's financial position or results of operations. The FASB continues to issue interpretive guidance which could require changes in the Corporation's application of the standard or adjustments to the transition amounts. SFAS No. 133, as applied to the Corporation's risk management strategies, may increase or decrease reported net income and stockholders' equity prospectively, depending on future levels of interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows or economic risk. SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," and rescinds SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125." The statement revises the standards for accounting for securitizations and other transfers of financial assets and requires certain disclosures, but it also carries over most of the provisions of SFAS No. 125 without modification. The statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on the application of a financial components approach that focuses on control. It is effective for transactions occurring after March 31, 2001. Certain disclosures about securitizations are effective on December 31, 2000. The adoption is not expected to be material to the Corporation's financial position or results of operations. 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." 39 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ASSOCIATED BANC-CORP CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------------- 2000 1999 --------------------------- ($ IN THOUSANDS EXCEPT SHARE DATA) ASSETS Cash and due from banks $ 368,186 $ 284,652 Interest-bearing deposits in other financial institutions 5,024 4,394 Federal funds sold and securities purchased under agreements to resell 23,310 25,120 Investment securities: Held to maturity - at amortized cost (fair value of approximately $372,873 and $413,107, respectively) 368,558 414,037 Available for sale - at fair value (amortized cost of $2,867,109 and $2,916,455 respectively) 2,891,647 2,856,346 Loans held for sale 24,593 11,955 Loans 8,913,379 8,343,100 Allowance for loan losses (120,232) (113,196) -------------------------------------------------------------------------------------------------------------- Loans, net 8,793,147 8,229,904 Premises and equipment 127,600 140,100 Other assets 526,329 553,394 -------------------------------------------------------------------------------------------------------------- Total assets $13,128,394 $12,519,902 ============================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Noninterest-bearing deposits $ 1,243,949 $ 1,103,931 Interest-bearing deposits 8,047,697 7,587,898 -------------------------------------------------------------------------------------------------------------- Total deposits 9,291,646 8,691,829 Short-term borrowings 2,598,203 2,775,090 Long-term debt 122,420 24,283 Accrued expenses and other liabilities 147,429 118,911 -------------------------------------------------------------------------------------------------------------- Total liabilities 12,159,698 11,610,113 -------------------------------------------------------------------------------------------------------------- Stockholders' equity Preferred stock (Par value $1.00 per share, authorized 750,000 shares, no shares issued) --- --- Common stock (Par value $0.01 per share, authorized 100,000,000 shares, issued 66,402,157 and 69,520,136 shares at December 31, 2000 and 1999, respectively) 664 634 Surplus 296,479 226,042 Retained earnings 663,566 728,754 Accumulated other comprehensive income (loss), net of tax 15,581 (38,782) Treasury stock at cost (285,948 shares in 2000 and 208,571 shares in 1999) (7,594) (6,859) -------------------------------------------------------------------------------------------------------------- Total stockholders' equity 968,696 909,789 -------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $13,128,394 $12,519,902 ============================================================================================================== See accompanying Notes to Consolidated Financial Statements.
40 ASSOCIATED BANC-CORP CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- 2000 1999 1998 ------------------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) INTEREST INCOME Interest and fees on loans $ 726,849 $ 625,529 $ 602,470 Interest and dividends on investment securities: Taxable 163,768 163,768 168,536 Tax-exempt 37,765 23,417 11,280 Interest on deposits in other financial institutions 432 454 1,679 Interest on federal funds sold and securities purchased under agreements to resell 2,343 1,352 1,800 ------------------------------------------------------------------------------------------------------ Total interest income 931,157 814,520 785,765 ------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Interest on deposits 379,892 314,075 345,392 Interest on short-term borrowings 160,430 103,057 63,774 Interest on long-term borrowings 7,268 1,643 1,862 ------------------------------------------------------------------------------------------------------ Total interest expense 547,590 418,775 411,028 ------------------------------------------------------------------------------------------------------ NET INTEREST INCOME 383,567 395,745 374,737 Provision for loan losses 20,206 19,243 14,740 ------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 363,361 376,502 359,997 ------------------------------------------------------------------------------------------------------ NONINTEREST INCOME Trust service fees 37,617 37,996 33,328 Service charges on deposit accounts 33,296 29,584 27,464 Mortgage banking 19,944 30,417 46,105 Credit card and other nondeposit fees 25,739 20,763 17,514 Retail commissions 20,187 18,372 14,823 Asset sale gains, net 24,420 4,977 7,166 Investment securities gains (losses), net (7,649) 3,026 6,831 Other 30,642 20,771 14,697 ------------------------------------------------------------------------------------------------------ Total noninterest income 184,196 165,906 167,928 ------------------------------------------------------------------------------------------------------ NONINTEREST EXPENSE Personnel expense 157,007 151,644 148,490 Occupancy 23,258 22,576 20,205 Equipment 15,272 15,987 13,250 Data processing 22,375 21,695 18,714 Business development and advertising 13,359 11,919 13,177 Stationery and supplies 7,961 8,110 6,858 FDIC expense 1,818 3,313 3,267 Legal and professional fees 7,595 8,051 11,889 Other 69,091 61,797 59,112 ------------------------------------------------------------------------------------------------------ Total noninterest expense 317,736 305,092 294,962 ------------------------------------------------------------------------------------------------------ Income before income taxes 229,821 237,316 232,963 Income tax expense 61,838 72,373 75,943 ------------------------------------------------------------------------------------------------------ Net income $ 167,983 $ 164,943 $ 157,020 ====================================================================================================== Earnings per share: Basic $ 2.46 $ 2.36 $ 2.26 Diluted $ 2.46 $ 2.34 $ 2.24 Average shares outstanding: Basic 68,186 69,858 69,438 Diluted 68,410 70,468 70,168 ====================================================================================================== See accompanying Notes to Consolidated Financial Statements.
41 ASSOCIATED BANC-CORP CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED OTHER COMMON STOCK RETAINED COMPREHENSIVE TREASURY SHARES AMOUNT SURPLUS EARNINGS INCOME (LOSS) STOCK TOTAL ----------------------------------------------------------------------------- (IN THOUSANDS) 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, $0.95 per share --- --- --- (65,841) --- --- (65,841) Common stock issued: Business combinations --- --- --- (3,425) 171 15,253 11,999 Incentive stock options 317 3 3,778 (11,678) --- 15,823 7,926 5-for-4 stock split effected in the form of a stock dividend 12,678 127 (127) --- --- --- --- Tax benefits of stock options --- --- 4,034 --- --- --- 4,034 Purchase of treasury stock --- --- --- --- --- (47,163) (47,163) -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 63,390 634 225,757 646,071 23,369 (17,110) 878,721 -------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income --- --- --- 164,943 --- --- 164,943 Net unrealized holding losses arising during year --- --- --- --- (93,803) --- (93,803) Less: reclassification adjustment for net gains realized in net income --- --- --- --- (3,026) --- (3,026) Income tax effect --- --- --- --- 34,832 --- 34,832 --------- Comprehensive income 102,946 --------- Cash dividends, $1.05 per share --- --- --- (73,743) --- --- (73,743) Common stock issued: Business combinations 2,513 25 90,063 (2,211) (154) 25,976 113,699 Incentive stock options --- --- --- (5,109) --- 8,530 3,421 Purchase and retirement of treasury stock in connection with business combinations (2,513) (25) (90,540) (1,197) --- --- (91,762) Tax benefits of stock options --- --- 762 --- --- --- 762 Purchase of treasury stock --- --- --- --- --- (24,255) (24,255) -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 63,390 634 226,042 728,754 (38,782) (6,859) 909,789 -------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income --- --- --- 167,983 --- --- 167,983 Net unrealized holding gains arising during year --- --- --- --- 76,998 --- 76,998 Less: reclassification adjustment for net losses realized in net income --- --- --- --- 7,649 --- 7,649 Income tax effect --- --- --- --- (30,284) --- (30,284) --------- Comprehensive income 222,346 --------- Cash dividends, $1.11 per share --- --- --- (75,719) --- --- (75,719) Common stock issued: Incentive stock options --- --- --- (6,219) --- 10,112 3,893 10% stock dividend 6,269 63 151,170 (151,233) --- --- --- Purchase and retirement of treasury stock in connection with repurchase program (3,257) (33) (81,847) --- --- 7,782 (74,098) Tax benefits of stock options --- --- 1,114 --- --- --- 1,114 Purchase of treasury stock --- --- --- --- --- (18,629) (18,629) -------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 66,402 $ 664 $ 296,479 $ 663,566 $ 15,581 $ (7,594) $ 968,696 ========================================================================================================================== See accompanying Notes to Consolidated Financial Statements.
42 ASSOCIATED BANC-CORP CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------- 2000 1999 1998 ------------------------------------------- ($ IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 167,983 $ 164,943 $ 157,020 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 20,206 19,243 14,740 Depreciation and amortization 19,396 19,266 15,027 Amortization (accretion) of: Mortgage servicing rights 9,406 9,690 6,833 Intangibles 8,905 8,134 5,844 Investment premiums and discounts (572) 1,959 (4,985) Deferred loan fees and costs 2,514 1,772 13 Deferred income taxes (13,936) 4,543 9,891 (Gain) loss on sales of investment securities, net 7,649 (3,026) (6,831) Gain on sales of other assets, net (24,420) (4,977) (7,166) Gain on sales of loans held for sale, net (3,113) (11,172) (24,341) Mortgage loans originated and acquired for sale (456,312) (1,169,843) (2,184,681) Proceeds from sales of mortgage loans held for sale 446,787 1,237,075 2,158,012 (Increase) decrease in interest receivable and other assets (3,859) (5,083) 14,085 Increase (decrease) in interest payable and other liabilities 8,518 (2,444) (14,892) ------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 189,152 270,080 138,569 ------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Net increase in loans (715,452) (682,837) (231,285) Capitalization of mortgage servicing rights (4,739) (12,389) (21,502) Purchases of: Securities held to maturity --- --- (1,717) Securities available for sale (933,197) (1,210,498) (800,724) Premises and equipment, net of disposals (11,828) (20,457) (30,268) Bank owned life insurance --- (100,000) (100,000) Proceeds from: Sales of securities available for sale 648,359 78,751 62,168 Maturities of securities available for sale 327,385 744,403 663,227 Maturities of securities held to maturity 45,201 136,292 222,869 Sales of other assets 169,793 16,832 41,831 Net cash received in acquisitions of subsidiaries --- 53,597 12,525 ------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (474,478) (996,306) (182,876) ------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits 709,017 (299,739) 45,475 Net increase (decrease) in short-term borrowings (176,887) 1,046,214 321,607 Repayment of long-term debt (1,863) (619) (1,464) Proceeds from issuance of long-term debt 100,000 53 13,538 Cash dividends (75,719) (73,743) (65,841) Proceeds from exercise of incentive stock options 3,893 3,421 7,926 Sales of branch deposits (98,034) (55,663) --- Purchase and retirement of treasury stock (74,098) (91,762) --- Purchase of treasury stock (18,629) (24,255) (47,163) ------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 367,680 503,907 274,078 ------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 82,354 (222,319) 229,771 Cash and due from banks at beginning of year 314,166 536,485 306,714 ------------------------------------------------------------------------------------------------------------- Cash and due from banks at end of year $ 396,520 $ 314,166 $ 536,485 ------------------------------------------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 529,017 $ 417,047 $ 405,841 Income taxes 49,814 53,512 70,109 Supplemental schedule of noncash investing activities: Loans transferred to other real estate 7,255 9,177 7,910 Loans made in connection with the disposition of other real estate --- 1,125 780 Mortgage loans securitized and transferred to securities available for sale --- 97,155 78,557 Acquisitions: Fair value of assets acquired, including cash and cash equivalents --- 590,845 161,033 Value ascribed to intangibles --- 85,090 11,903 Liabilities assumed --- 551,126 144,405 ============================================================================================================= See accompanying notes to consolidated financial statements.
43 ASSOCIATED BANC-CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000, 1999, and 1998 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The accounting and reporting policies of Associated Banc-Corp (the "parent company"), together with its affiliates and subsidiaries (the "Corporation"), conform to accounting principles generally accepted in the United States of America and to general practice within the financial services industry. The following is a description of the more significant of those policies. BUSINESS The Corporation provides a full range of banking and related financial services to individual and corporate customers through its network of bank and nonbank affiliates. The Corporation is subject to competition from other financial and non-financial institutions that offer similar or competing products and services. The Corporation is regulated by federal and state banking agencies and undergoes periodic examinations by those agencies. BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements include the accounts of the Corporation and subsidiaries, all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated in consolidation. Results of operations of companies purchased are included from the date of acquisition. Certain amounts in the 1999 and 1998 consolidated financial statements have been reclassified to conform with the 2000 presentation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Estimates that are particularly susceptible to significant change include the determination of the allowance for loan losses, income taxes, and mortgage servicing rights. INVESTMENT SECURITIES Securities are classified as held to maturity ("HTM"), available for sale ("AFS"), or trading at the time of purchase. In 2000 and 1999, all securities purchased were classified as AFS. Investment securities classified as HTM, which management has the positive intent and ability to hold to maturity, are reported at amortized cost, adjusted for amortization of premiums and accretion of discounts, using a method that approximates level yield. The amortized cost of debt securities classified as HTM or AFS is adjusted for amortization of premiums and accretion of discounts to the earlier of call date or maturity, or in the case of mortgage-related securities, over the estimated life of the security. Such amortization and accretion is included in interest income from the related security. AFS and trading securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes, included in stockholders' equity or income, respectively. Realized securities gains or losses and declines in value judged to be other than temporary are included in investment securities gains (losses), net in the consolidated statements of income. The cost of securities sold is based on the specific identification method. Any security for which there has been other than temporary impairment of value is written down to its estimated market value through a charge to earnings. 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. 44 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 the collectibility of principal or interest on loans, it is management's practice to place such loans on nonaccrual status immediately, rather than delaying such action until the loans become 90 days past due. Previously accrued and uncollected interest on such loans is reversed, amortization of related loan fees is suspended, and income is recorded only to the extent that interest payments are subsequently received in cash and a determination has been made that the principal balance of the loan is collectible. If collectibility of the principal is in doubt, payments received are applied to loan principal. A nonaccrual loan is returned to accrual status when the obligation has been brought current and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. Loan origination fees and certain direct loan origination costs are deferred, and the net amount is amortized over the contractual life of the related loans or over the commitment period as an adjustment of yield. LOANS HELD FOR SALE Loans held for sale are recorded at the lower of cost or market as determined on an aggregate basis and generally consist of current production of certain fixed-rate first mortgage loans. Holding costs are treated as period costs. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses ("AFLL") is a reserve for estimated credit losses. Credit losses arise primarily from the loan portfolio. Actual credit losses, net of recoveries, are deducted from the AFLL. A provision for loan losses, which is a charge against earnings, is added to bring the AFLL to a level that, in management's judgment, is adequate to absorb probable 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, historical losses on each portfolio category, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of underlying collateral, and other factors which could affect potential credit losses. Management continues to target and maintain the AFLL equal to the allocation methodology plus an unallocated portion, as determined by economic conditions, on the Corporation's borrowers. Management allocates the AFLL 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 consumer) allocation is based on analysis of historical delinquency and charge-off statistics and trends. Minimum loss factors used by the Corporation for criticized loan categories are consistent with regulatory agencies. Loss factors for non-criticized loan categories are based primarily on historical loan loss experience and peer group statistics. Management, considering current information and events regarding the borrowers' ability to repay their obligations, considers a loan to be impaired when it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the note agreement, including principal and interest. Management has determined that commercial loans and commercial real estate loans that have a nonaccrual status or have had their terms restructured meet this definition. Large groups of homogeneous loans, such as mortgage and consumer loans and leases, are collectively evaluated for impairment. The amount of impairment is measured based upon the loan's observable market price, the estimated fair value of the collateral for collateral-dependent loans, or alternatively, the present value of expected future cash flows discounted at the loan's effective interest rate. Interest income on impaired loans is recorded when cash is received and only if principal is considered to be fully collectible. Management believes that the 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 45 Corporation's AFLL. Such agencies may require the Corporation to recognize additions to the AFLL based on their judgments about information available to them at the time of their examinations. OTHER REAL ESTATE OWNED Other real estate owned ("OREO") is included in other assets in the consolidated balance sheets and is comprised of property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure, and loans classified as in-substance foreclosure. OREO is recorded at the lower of recorded investment in the loans at the time of acquisition or the fair value of the properties, less estimated selling costs. Any write-down in the carrying value of a property at the time of acquisition is charged to the AFLL. Any subsequent write-downs to reflect current fair market value, as well as gains and losses on disposition and revenues and expenses incurred in maintaining such properties, are recorded directly to the income statement. OREO totaled $4.0 million and $3.7 million at December 31, 2000 and 1999, respectively. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the related assets or the lease term. Maintenance and repairs are charged to expense as incurred, while additions or major improvements are capitalized and depreciated over their estimated useful lives. Estimated useful lives for premises include periods up to 50 years and for equipment include periods up to 10 years. INTANGIBLES The excess of the purchase price over the fair value of net assets of subsidiaries acquired consists primarily of goodwill and core deposit intangibles that are being amortized on straight-line and accelerated methods. These intangibles are included in other assets in the consolidated balance sheets. Goodwill is amortized to operating expense over periods of 10 to 40 years. Core deposit intangibles are amortized to expense over periods of 7 to 10 years. The Corporation reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, in which case an impairment charge would be recorded. As a result of acquisitions during 1999 and 1998, the Corporation recorded additional goodwill of $79.2 million and $11.9 million, respectively. Additionally, in 1999, the Corporation recorded additional core deposit intangibles of $5.9 million. Goodwill and deposit base intangibles outstanding, net of accumulated amortization, at December 31, 2000 and 1999 was $106.7 million and $116.6 million, respectively. MORTGAGE SERVICING RIGHTS The total cost of loans originated or purchased is allocated between loans and servicing rights based on the relative fair values of each. The servicing rights capitalized are amortized in proportion to and over the period of estimated servicing income. Capitalized mortgage servicing rights ("MSRs") are included in other assets. The value of MSRs is adversely affected when mortgage interest rates decline and mortgage loan prepayments increase. Impairment is assessed using stratifications based on the risk characteristics of the underlying loans, such as bulk acquisitions versus loan-by-loan, loan type, and interest rate. To the extent the carrying value of the MSRs exceed their fair value, a valuation reserve is established. 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. 46 The Corporation files a consolidated federal income tax return and individual subsidiary state income tax returns. Accordingly, amounts equal to tax benefits of those subsidiaries having taxable federal losses or credits are reimbursed by other subsidiaries that incur federal tax liabilities. DERIVATIVE FINANCIAL INSTRUMENTS As part of managing the Corporation's interest rate risk, a variety of derivative financial instruments could be used to hedge market values and to alter the cash flow characteristics of certain on-balance sheet instruments. The Corporation has principally used interest rate swaps. The derivative instruments used to manage interest rate risk are linked with a specific asset or liability or a group of related assets or liabilities at the inception of the derivative contract and have a high degree of correlation with the related balance sheet item during the hedge period. Net interest income or expense on derivative contracts used for interest rate risk management is recorded in the consolidated statements of income as a component of interest income or interest expense depending on the financial instrument to which the swap is designated. Realized gains and losses on contracts, either settled or terminated, are deferred and are recorded as either an adjustment to the carrying value of the related on-balance sheet asset or liability or in other assets or other liabilities. Deferred amounts are amortized into interest income or expense over either the remaining original life of the derivative instrument or the expected life of the related asset or liability. Unrealized gains or losses on these contracts are not recognized on the balance sheet. STOCK-BASED COMPENSATION As allowed under Statement of Financial Accounting Standards ("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 11 the impact of the fair value of employee stock-based compensation plans on net income and earnings per share on a pro forma basis. CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, cash and cash equivalents are considered to include cash and due from banks, interest-bearing deposits in other financial institutions, and federal funds sold. Cash and cash equivalents were $396.5 million and $314.2 million at December 31, 2000, and December 31, 1999, respectively. PER SHARE COMPUTATIONS Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares adjusted for the dilutive effect of outstanding stock options. See also Notes 11 and 18. RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," (collectively referred to as "SFAS No. 133" or as the "statement") requires derivative instruments, including derivative instruments embedded in other contracts, to be carried at fair value on the balance sheet. The statement continues to allow derivative instruments to be used to hedge various risks and sets forth specific criteria to be used to determine when hedge accounting can be used. For fair value hedges, the statement also provides for offsetting changes in fair value of both the derivative and the hedged asset or liability to be recognized in earnings in the same period. For cash flow hedges, the fair value of the derivative is recorded in other comprehensive income, to the extent it is effective. Any changes in fair value or cash flow that represent the ineffective portion of a hedge are required to be recognized in earnings and cannot be 47 deferred. For derivative instruments not accounted for as hedges, changes in fair value are required to be recognized in earnings. The Corporation adopted the provisions of the statement, as required, beginning January 1, 2001. The predominant activities affected by the statement include the Corporation's use of interest rate swaps and certain mortgage banking activities. The interest rate swaps disclosed in Note 14 of the Notes to Consolidated Financial Statements were redesignated on January 1, 2001, and qualify for hedge accounting. In addition, the Corporation enters into commitments to sell groups of residential mortgage loans that it originates or purchases as part of its mortgage banking business, as well as commitments to originate loans. Both the commitments to sell, as well as the commitments to originate loans, are considered derivatives under SFAS No. 133, and beginning January 1, 2001, are carried at fair value on the consolidated balance sheet, with changes in fair value recognized in earnings. Further, as allowed by the statement, the Corporation transferred all HTM investment securities to the AFS category, effective January 1, 2001. Given the derivatives existing at January 1, 2001, the impact of adopting the provisions of this statement was not material on the Corporation's financial position or results of operations. The Financial Accounting Standards Board continues to issue interpretive guidance which could require changes in the Corporation's application of the statement or adjustments to transition amounts. SFAS No. 133 as applied to the Corporation's risk management strategies may increase or decrease reported net income and stockholders' equity prospectively, depending on future levels of interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows or economic risk. SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," and rescinds SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS No. 125." The statement revises the standards for accounting for securitizations and other transfers of financial assets and requires certain disclosures, but it also carries over most of the provisions of SFAS No. 125 without modification. The statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on the application of a financial components approach that focuses on control. It is effective for transactions occurring after March 31, 2001. Certain disclosures about securitizations are effective on December 31, 2000. The adoption is not expected to be material to the Corporation's financial position or results of operations. NOTE 2 BUSINESS COMBINATIONS: The following table summarizes completed transactions during 1999 and 1998. There were no completed or pending business combination transactions during 2000.
CONSIDERATION PAID -------------------- SHARES OF DATE COMMON TOTAL METHOD OF NAME OF ACQUIRED COMPANY ACQUIRED STOCK (C) CASH ASSETS LOANS DEPOSITS ACCOUNTING ----------------------------------------------------------------------------------------------------------------------------- ( $ IN MILLIONS, EXCEPT SHARES) BNC Financial Corporation ("BNC") 12/31/99 --- $ 5.3 $ 35 $ 33 $ --- Purchase St. Cloud, Minnesota (a) Riverside Acquisition Corp. ("Riverside") 8/31/99 2,677,405 --- 374 266 337 Purchase Minneapolis, Minnesota (b) Windsor Bancshares, Inc. ("Windsor") 2/3/99 879,957 --- 182 113 152 Purchase Minneapolis, Minnesota (b) Citizens Bankshares, Inc. ("Citizens") 12/19/98 493,428 16.2 161 105 117 Purchase Shawano, Wisconsin
(a) Effective March 31, 2000, BNC operated as Associated Commercial Finance, Inc. (b) During the first quarter of 2000, Riverside and Windsor merged and became Associated Bank Minnesota (c) Share amounts have been restated to reflect the 10% stock dividend paid on June 15, 2000. 48 For the acquisitions accounted for under the purchase method, the results of their operations prior to their respective consummation dates are not included in the accompanying consolidated financial statements. Goodwill, core deposit intangibles, and other purchase accounting adjustments are recorded upon consummation of a purchase acquisition where the purchase price exceeds the fair value of net assets acquired. On December 31, 1999, the Corporation completed its acquisition of BNC, an asset-based commercial lender headquartered in St. Cloud, Minnesota. BNC had assets of approximately $35 million at December 31, 1999. The $5.3 million cash acquisition was accounted for under the purchase method, and goodwill of $1.2 million was recorded. BNC operates as a wholly-owned subsidiary of the Corporation. Effective March 31, 2000, BNC operated as Associated Commercial Finance, Inc. On August 31, 1999, the Corporation completed its acquisition of Riverside, a Minnesota bank holding company for Riverside Bank. Riverside had total assets of approximately $374 million upon consummation. The transaction was completed through the issuance of 2,677,405 shares of common stock, which were repurchased and retired during 1999 under authorization by the Board of Directors ("BOD"). The transaction was accounted for under the purchase method. Goodwill of $60.6 million and a core deposit intangible of $5.9 million were recorded. On February 3, 1999, the Corporation consummated the acquisition of Windsor, a Minnesota bank holding company for Bank Windsor. At consummation Windsor had total assets of approximately $182 million. The transaction was consummated through the issuance of 879,957 shares of common stock, which were repurchased and retired under authorization by the BOD. The transaction was accounted for under the purchase method, and goodwill of $17.4 million was recorded. On December 19, 1998, the Corporation completed its acquisition of Citizens, which had $161 million in assets and operated Citizens Bank and two consumer finance companies. The merger, accounted for as a purchase, was consummated with $16.2 million in cash and through the issuance of 493,428 shares of common stock, which were repurchased under authorization by the BOD. Goodwill of $11.9 million was recorded. In the second quarter of 1999, the Corporation merged Citizens Bank into its existing banks. The consumer finance companies continue to operate as wholly-owned subsidiaries of the Corporation. NOTE 3 RESTRICTIONS ON CASH AND DUE FROM BANKS: The Corporation's bank subsidiaries are required to maintain certain vault cash and reserve balances with the Federal Reserve Bank to meet specific reserve requirements. These requirements approximated $81.7 million at December 31, 2000. 49 NOTE 4 INVESTMENT SECURITIES: The amortized cost and fair values of securities HTM at December 31, 2000 and 1999 were as follows:
2000 -------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR COST GAINS LOSSES VALUE -------------------------------------------------- ($ IN THOUSANDS) Federal agency securities $ 25,055 $ 86 $ --- $ 25,141 Obligations of state and political subdivisions 110,182 1,041 --- 111,223 Mortgage-related securities 182,299 2,868 (4) 185,163 Other securities (debt) 51,022 324 --- 51,346 -------------------------------------------------- Total securities HTM $ 368,558 $ 4,319 $ (4) $ 372,873 ================================================== 1999 -------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR COST GAINS LOSSES VALUE -------------------------------------------------- ($ IN THOUSANDS) Federal agency securities $ 26,012 $ 33 $ (321) $ 25,724 Obligations of state and political subdivisions 128,833 584 (376) 129,041 Mortgage-related securities 204,725 1,267 (1,764) 204,228 Other securities (debt) 54,467 35 (388) 54,114 -------------------------------------------------- Total securities HTM $ 414,037 $ 1,919 $(2,849) $ 413,107 ==================================================
50 The amortized cost and fair values of securities AFS at December 31, 2000 and 1999 were as follows:
2000 ------------------------------------------------------ GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR COST GAINS LOSSES VALUE ------------------------------------------------------ ($ IN THOUSANDS) U. S. Treasury securities $ 23,847 $ 51 $ (38) $ 23,860 Federal agency securities 341,929 868 (49) 342,748 Obligations of state and political subdivisions 756,914 9,408 (1,381) 764,941 Mortgage-related securities 1,425,290 7,574 (5,247) 1,427,617 Other securities (debt and equity) 319,129 16,943 (3,591) 332,481 ------------------------------------------------------ Total securities AFS $ 2,867,109 $ 34,844 $ (10,306) $ 2,891,647 ====================================================== 1999 ------------------------------------------------------ GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR COST GAINS LOSSES VALUE ------------------------------------------------------ ($ IN THOUSANDS) U. S. Treasury securities $ 47,092 $ 53 $ (475) $ 46,670 Federal agency securities 406,275 --- (9,959) 396,316 Obligations of state and political subdivisions 550,975 257 (28,933) 522,299 Mortgage-related securities 1,578,089 28,915 (54,563) 1,552,441 Other securities (debt and equity) 334,024 15,870 (11,274) 338,620 ------------------------------------------------------ Total securities AFS $ 2,916,455 $ 45,095 $ (105,204) $ 2,856,346 ======================================================
The amortized cost and fair values of investment securities HTM and AFS at December 31, 2000, 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.
2000 -------------------------------------------------------- HELD TO MATURITY AVAILABLE FOR SALE -------------------------------------------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE -------------------------------------------------------- ($ IN THOUSANDS) Due in one year or less $ 43,687 $ 43,828 $ 85,571 $ 85,494 Due after one year through five years 138,058 139,306 433,946 434,513 Due after five years through ten years 4,514 4,576 428,877 424,698 Due after ten years --- --- 392,448 401,418 -------------------------------------------------------- Total debt securities 186,259 187,710 1,340,842 1,346,123 Mortgage-related securities 182,299 185,163 1,425,290 1,427,617 Equity securities --- --- 100,977 117,907 -------------------------------------------------------- Total $ 368,558 $ 372,873 $ 2,867,109 $ 2,891,647 ========================================================
Total proceeds and gross realized gains and losses from sale of securities AFS for each of the three years ended December 31 were: 2000 1999 1998 ------------------------------------- ($ IN THOUSANDS) Proceeds $ 648,359 $ 78,751 $ 62,168 Gross gains 2,889 4,615 9,357 Gross losses 10,538 1,589 2,526 Pledged securities with a carrying value of approximately $1.7 billion at December 31, 2000, and December 31, 1999, were pledged to secure certain deposits, Federal Home Loan Bank advances, or for other purposes as required or permitted by law. NOTE 5 LOANS: Loans at December 31 are summarized below. During 2000, $128 million of credit card receivables were sold to Citi for a $12.9 million gain. 2000 1999 --------------------------- ($ IN THOUSANDS) Commercial, financial, and agricultural $ 1,657,322 $ 1,412,338 Real estate - construction 660,732 560,450 Real estate - mortgage/commercial 2,287,946 1,903,633 Lease financing 14,854 23,229 --------------------------- Commercial 4,620,854 3,899,650 Real estate - mortgage/residential 3,158,721 3,274,767 Home equity 508,979 408,577 --------------------------- Residential mortgage 3,667,700 3,683,344 Consumer 624,825 760,106 --------------------------- Total loans $ 8,913,379 $ 8,343,100 =========================== 51 A summary of the changes in the allowance for loan losses for the years indicated is as follows: 2000 1999 1998 -------------------------------------- ($ IN THOUSANDS) Balance at beginning of year $ 113,196 $ 99,677 $ 92,731 Balance related to acquisitions --- 8,016 3,636 Decrease from sale of credit card receivables (4,216) --- --- Provision for loan losses 20,206 19,243 14,740 Charge-offs (11,155) (16,621) (17,039) Recoveries 2,201 2,881 5,609 -------------------------------------- Net charge-offs (8,954) (13,740) (11,430) -------------------------------------- Balance at end of year $ 120,232 $ 113,196 $ 99,677 ====================================== Nonaccrual loans totaled $41.0 million and $32.1 million at December 31, 2000 and 1999, respectively. Management has determined that commercial loans and commercial real estate loans that have nonaccrual status or have had their terms restructured are impaired loans. The following table presents data on impaired loans at December 31: 2000 1999 ----------------------- ($ IN THOUSANDS) Impaired loans for which an allowance has been provided $ 4,733 $ 3,174 Impaired loans for which no allowance has been provided 14,690 11,576 ----------------------- Total loans determined to be impaired $ 19,423 $ 14,750 ======================= AFLL related to impaired loans $ 2,315 $ 1,731 ======================= 2000 1999 1998 --------------------------------- FOR THE YEARS ENDED DECEMBER 31: ($ IN THOUSANDS) Average recorded investment in impaired loans $ 18,650 $ 16,640 $ 15,652 ================================= Cash basis interest income recognized from impaired loans $ 1,623 $ 1,081 $ 1,062 ================================= 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: 2000 ------------ ($ IN THOUSANDS) Balance at beginning of year $ 124,621 New loans 72,579 Repayments (35,371) Changes due to status of executive officers and directors (7,461) ------------ Balance at end of year $ 154,368 ============ The Corporation serves the credit needs of its customers by offering a wide variety of loan programs to customers, primarily in Wisconsin, Illinois, and Minnesota. The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At December 31, 2000, no concentrations existed in the Corporation's loan portfolio in excess of 10% of total loans. 52 NOTE 6 MORTGAGE SERVICING RIGHTS: A summary of changes in the balance of mortgage servicing rights is as follows: 2000 1999 ---------------------- ($ IN THOUSANDS) Balance at beginning of year $ 40,936 $ 30,214 Additions 4,739 12,389 Amortization (9,406) (9,690) Change in valuation allowance --- 8,023 ---------------------- Balance at end of year $ 36,269 $ 40,936 ====================== A summary of changes in the valuation allowance during 1999 and 1998 is as follows. There was no valuation allowance at December 31, 2000. 1999 1998 ---------------------- ($ IN THOUSANDS) Balance at beginning of year $ 8,023 $ 1,033 Additions --- 7,748 Reversals (8,023) (758) ---------------------- Balance at end of year $ --- $ 8,023 ====================== At December 31, 2000, the Corporation was servicing 1- to 4-family residential mortgage loans owned by other investors with balances totaling $5.50 billion compared to $5.57 billion and $5.21 billion at December 31, 1999 and 1998, respectively. NOTE 7 PREMISES AND EQUIPMENT: A summary of premises and equipment at December 31 is as follows: 2000 1999 ----------------------- ($ IN THOUSANDS) Premises $ 124,075 $ 124,947 Land and land improvements 25,834 26,638 Furniture and equipment 130,623 128,324 Leasehold improvements 14,872 14,575 Less: Accumulated depreciation and amortization (167,804) (154,384) ----------------------- Total $ 127,600 $ 140,100 ======================= Depreciation and amortization of premises and equipment totaled $17.1 million in 2000, $17.4 million in 1999, and $14.4 million in 1998. The Corporation and certain subsidiaries are obligated under a number of noncancelable operating leases for other facilities and equipment, certain of which provide for increased rentals based upon increases in cost of 53 living adjustments and other operating costs. The approximate minimum annual rentals and commitments under these noncancelable agreements and leases with remaining terms in excess of one year are as follows: ($ IN THOUSANDS) 2001 $ 5,682 2002 5,460 2003 4,738 2004 3,554 2005 3,230 Thereafter 16,848 --------- Total $ 39,512 ========= Total rental expense under leases, net of sublease income, totaled $7.1 million in 2000, $6.3 million in 1999, and $5.0 million in 1998. NOTE 8 DEPOSITS: The distribution of deposits at December 31 is as follows. During 2000, $109 million in deposits from six branches were sold for a net premium of $11.1 million. 2000 1999 ---------------------------- ($ IN THOUSANDS) Noninterest-bearing demand deposits $ 1,243,949 $ 1,103,931 Interest-bearing demand deposits 850,280 868,514 Savings deposits 857,247 838,201 Money market deposits 1,492,628 1,483,779 Brokered time deposits 916,060 337,243 Other time deposits 3,931,482 4,060,161 ---------------------------- Total deposits $ 9,291,646 $ 8,691,829 ============================ Time deposits of $100,000 or more were $1.2 billion and $804.9 million at December 31, 2000 and 1999, respectively. Aggregate annual maturities of certificate accounts at December 31, 2000 are as follows: MATURITIES DURING YEAR END DECEMBER 31, ($ IN THOUSANDS) ------------------------------------------------------------------------------- 2001 $ 3,476,627 2002 1,206,180 2003 101,627 2004 32,897 2005 29,302 Thereafter 909 ----------- Total $ 4,847,542 =========== 54 NOTE 9 SHORT-TERM BORROWINGS: Short-term borrowings at December 31 are as follows: 2000 1999 --------------------------- ($ IN THOUSANDS) Federal funds purchased and securities sold under agreements to repurchase $ 1,691,796 $ 1,344,396 Federal Home Loan Bank (FHLB) advances 750,000 531,652 Notes payable to banks 83,740 156,900 Treasury, tax, and loan notes 38,363 742,142 Commercial paper 34,304 --- --------------------------- Total $ 2,598,203 $ 2,775,090 =========================== The short-term FHLB advances are secured by blanket collateral agreements on the subsidiary banks' mortgage loan portfolios whereby qualifying mortgages (as defined) with unpaid principal balances aggregating no less than 167% of the FHLB advances are maintained. Included in short-term borrowings are FHLB advances with original maturities of less than one year and callable notes that have one-year call premiums, which the Corporation expects may be called, even if the notes have maturities exceeding one year. Notes payable to banks are unsecured borrowings under existing lines of credit. At December 31, 2000, the parent company had $200 million of established lines of credit with various nonaffiliated banks, of which $83.7 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. During 2000, a $200 million commercial paper program was initiated, of which $34.3 million was outstanding at December 31, 2000. NOTE 10 LONG-TERM DEBT: Long-term debt at December 31 is as follows: 2000 1999 ------------------------- ($ IN THOUSANDS) Federal Home Loan Bank advances (4.95% to 7.63% maturing in 2001 through 2014 in 2000, and 4.95% to 7.63% maturing in 2000 through 2014 in 1999) $ 116,765 $ 17,098 Other borrowed funds 5,655 7,185 ------------------------- Total long-term debt $ 122,420 $ 24,283 ========================= The table below summarizes the maturities of the Corporation's long-term debt at December 31, 2000: YEAR ($ IN THOUSANDS) ------------------------------------------------------------------------------- 2001 $ 735 2002 100,140 2003 2,579 2004 150 2005 --- Thereafter 18,816 ---------- Total long-term debt $ 122,420 ========== NOTE 11 STOCKHOLDERS' EQUITY: On June 15, 2000, the Corporation distributed 6.3 million shares of common stock in connection with a 10% stock dividend. During 1999, the Corporation issued shares in conjunction with merger and acquisition activity (see Note 2 of the Notes to Consolidated Financial Statements). 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 55 in the form of a 25% 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, 2000, subsidiary net assets equaled $1.0 billion, of which approximately $148.5 million could be transferred to the Corporation in the form of cash dividends without prior regulatory approval, subject to the capital needs of each subsidiary. The BOD 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 1.3 million shares (330,000 shares per quarter) in 2000 and 1999. Of these authorizations, approximately 418,000 shares were repurchased for $10.6 million during 2000 (with 322,000 shares reissued in connection with stock options exercised), and 429,000 shares were repurchased for $13.6 million in 1999 (with 277,000 shares reissued for 1999 options exercised). In March 2000, the BOD also authorized the repurchase and cancellation of up to 5% of the Corporation's outstanding shares, not to exceed approximately 3.5 million shares. Under this authorization through December 31, 2000, 3.3 million shares were repurchased and retired at a cost of $81.9 million. In October 2000, the BOD authorized the repurchase and cancellation of an additional 3.2 million shares. The repurchase of shares under this authorization is expected to begin after repurchases under the March 2000 authorization are completed. The repurchase of shares will be based on market opportunities, capital levels, growth prospects, and other investment opportunities. The BOD approved the implementation of a broad-based stock option grant, effective July 28, 1999. This stock option grant provided all qualifying employees with an opportunity and an incentive to buy shares of the Corporation and align their financial interest with the growth in value of the Corporation's shares. These options have 10-year terms, fully vest in two years, and have exercise prices equal to 100% of market value on the date of grant. As of December 31, 2000, 1,567,000 shares remain available for granting. The Amended and Restated Long-Term Incentive Stock Plan ("Stock Plan") was adopted by the BOD and originally approved by shareholders in 1987 and amended in 1994, 1997, and 1998. Options are generally exercisable up to 10 years from the date of grant and vest over two to three years. As of December 31, 2000, approximately 1,701,000 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.
---------------------------------------------------------------------------- 2000 1999 1998 ---------------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE OUTSTANDING PRICE OUTSTANDING PRICE OUTSTANDING PRICE ---------------------------------------------------------------------------- Outstanding, January 1 3,206,489 $25.95 2,156,822 $20.28 2,635,732 $14.10 Granted 688,030 $27.57 1,428,508 $32.26 425,013 $36.65 Exercised (351,990) $11.05 (276,524) $12.35 (864,666) $ 9.18 Forfeited (234,082) $34.36 (102,317) $31.26 (39,257) $26.93 ---------------------------------------------------------------------------- Outstanding, December 31 3,308,447 $27.33 3,206,489 $25.95 2,156,822 $20.28 ============================================================================ Options exercisable at year-end 1,539,303 1,493,667 1,440,885 ============================================================================
56 The following table summarizes information about the Corporation's stock options outstanding at December 31, 2000:
------------------------------------------------------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE OPTIONS EXERCISE REMAINING GRANTS EXERCISE OUTSTANDING PRICE LIFE (YEARS) EXERCISABLE PRICE ------------------------------------------------------------------------ Range of Exercise Prices: $ 4.85 - $ 7.18 89,804 $ 7.04 1.85 89,804 $ 7.04 $11.22 - $12.74 31,401 11.73 3.33 31,401 11.73 $15.54 - $18.68 482,158 16.31 3.18 481,978 16.31 $22.35 - $25.61 545,387 24.27 5.56 492,108 24.21 $27.56 - $29.61 1,154,343 27.68 8.58 191,727 27.58 Greater than $35.90 1,005,354 36.18 8.01 252,285 36.64 ------------------------------------------------------------------------ TOTAL 3,308,447 $ 27.33 6.89 1,539,303 $ 22.94 ========================================================================
For purposes of providing the pro forma disclosures required under SFAS No. 123, the fair value of stock options granted in 1998, 1999, and 2000 was estimated at the date of grant using a Black-Scholes option pricing model which was originally developed for use in estimating the fair value of traded options which have different characteristics from the Corporation's employee stock options. The model is also sensitive to changes in the subjective assumptions which can materially affect the fair value estimate. As a result, management believes the Black-Scholes model may not necessarily provide a reliable single measure of the fair value of employee stock options. The following assumptions were used in estimating the fair value for options granted in 2000, 1999 and 1998: 2000 1999 1998 -------------------------------------- Dividend yield 3.82% 3.39% 3.39% Risk-free interest rate 6.63% 4.97% 5.61% Weighted average expected life 7 yrs. 5.50 yrs. 7 yrs. Expected volatility 25.73% 24.51% 21.95% The weighted average per share fair values of options granted in 2000, 1999, and 1998 were $6.97, $6.90, and $8.28, respectively. The annual expense allocation methodology prescribed by SFAS No. 123 attributes a higher percentage of the reported expense to earlier years than to later years, resulting in an accelerated expense recognition for pro forma disclosure purposes. Had the Corporation determined the compensation cost based on the fair value at grant date for its stock options under SFAS No. 123, the Corporation's net income and net income per share would have been as summarized below:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------ 2000 1999 1998 ---------------- -------------- ---------------- ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net Income As Reported $ 167,983 $ 164,943 $ 157,020 Pro Forma $ 164,394 $ 162,226 $ 155,356 Basic Earnings Per Share As Reported $ 2.46 $ 2.36 $ 2.26 Pro Forma $ 2.41 $ 2.32 $ 2.24 Diluted Earnings Per Share As Reported $ 2.46 $ 2.34 $ 2.24 Pro Forma $ 2.40 $ 2.30 $ 2.21
NOTE 12 RETIREMENT PLAN: The Corporation has a noncontributory defined benefit retirement plan (the "Plan") covering substantially all full-time employees. The benefits are based primarily on years of service and the employee's compensation 57 paid while a participant in the plan. The Corporation's funding policy is consistent with the funding requirements of federal law and regulations. The following tables set forth the Plan's funded status and net periodic benefit cost: 2000 1999 ----------------------- ($ IN THOUSANDS) Change in Benefit Obligation Net benefit obligation at beginning of year $ 37,052 $ 37,301 Service cost 3,576 3,858 Interest cost 2,858 2,549 Actuarial (gain) loss 2,223 (4,136) Gross benefits paid (4,801) (2,520) ------------------------ Net benefit obligation at end of year $ 40,908 $ 37,052 ======================== Change in Plan Assets Fair value of plan assets at beginning of year $ 37,018 $ 37,035 Actual return (loss) on plan assets (639) 511 Employer contributions 3,103 1,992 Gross benefits paid (4,801) (2,520) ------------------------ Fair value of plan assets at end of year $ 34,681 $ 37,018 ======================== Funded Status Funded status at end of year $ (6,227) $ (34) Unrecognized net actuarial (gain) loss 58 (5,974) Unrecognized prior service cost 594 657 Unrecognized net transition asset (1,707) (2,031) ------------------------ Net amount recognized at end of year in the balance sheet $ (7,282) $ (7,382) ======================== Weighted average assumptions as of December 31: Discount rate 7.50% 7.75% Rate of increase in compensation levels 5.00 5.00 ======================== 2000 1999 1998 ------------------------------ ($ IN THOUSANDS) Components of Net Periodic Benefit Cost Service cost $ 3,576 $ 3,858 $ 3,369 Interest cost 2,858 2,549 2,329 Expected return on plan assets (3,134) (2,789) (2,511) Amortization of: Transition asset (324) (324) (324) Prior service cost 62 63 35 Actuarial gain (36) -- -- ------------------------------- Total net periodic benefit cost $ 3,002 $ 3,357 $ 2,898 =============================== Weighted average assumptions used in cost calculations: Discount rate 7.75% 6.75% 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 =============================== The Corporation and its subsidiaries also have a Profit Sharing/Retirement Savings Plan (the "plan"). The Corporation's contribution is determined annually by the Administrative Committee of the BOD, based in part on performance-based formulas provided in the plan. Total expense related to contributions to the plan was $6.1 million, $2.3 million, and $9.1 million in 2000, 1999, and 1998, respectively. 58 NOTE 13 INCOME TAX EXPENSE: The current and deferred amounts of income tax expense (benefit) are as follows: YEARS ENDED DECEMBER 31, --------------------------------- 2000 1999 1998 ---- ---- ---- ($ IN THOUSANDS) Current: Federal $ 73,885 $ 66,735 $ 65,938 State 1,889 1,095 114 -------------------------------- Total current 75,774 67,830 66,052 Deferred: Federal (11,640) 3,894 8,087 State (2,296) 649 1,804 -------------------------------- Total deferred (13,936) 4,543 9,891 -------------------------------- Total income tax expense $ 61,838 $ 72,373 $ 75,943 ================================ 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: 2000 1999 ------------------------ ($ IN THOUSANDS) Gross deferred tax assets: Allowance for loan losses $ 47,895 $ 44,655 Accrued liabilities 4,363 5,557 Accrued pension expense 2,066 2,066 Deferred compensation 7,460 7,657 Securities valuation adjustment 15,012 14,095 Deposit base intangible 4,901 4,752 Benefit of tax loss carryforwards 12,182 10,227 Other 7,915 652 ----------------------- Total gross deferred tax assets 101,794 89,661 Valuation adjustment for deferred tax assets (13,198) (14,930) ----------------------- 88,596 74,731 Gross deferred tax liabilities: Premises and equipment 2,221 2,596 Deferred loan fee income and other loan yield adjustment 2,760 1,797 FHLB bank stock dividend 1,028 1,028 State income taxes 8,057 6,189 Other 7,646 11,905 ----------------------- Total gross deferred tax liabilities 21,712 23,515 ----------------------- Net deferred tax assets 66,884 51,216 Tax effect of unrealized gain (loss) related to available for sale securities (8,983) 21,327 ----------------------- Net deferred tax assets including unrealized gain related to available for sale securities $ 57,901 $ 72,543 ======================= Components of the 1999 deferred tax assets have been adjusted to reflect the filing of corporate income tax returns. For financial reporting purposes, a valuation allowance has been recognized to offset deferred tax assets related to state net operating loss carryforwards of certain subsidiaries and other temporary differences due to the uncertainty that the assets will be realized. If it is subsequently determined that all or a portion of these 59 deferred tax assets will be realized, the tax benefit for these items will be used to reduce current tax expense for that period. At December 31, 2000, the Corporation had net operating losses of $120 million that will expire in the years 2001 through 2014. The effective income tax rate differs from the statutory federal tax rate. The major reasons for this difference are as follows:
2000 1999 1998 ------------------------- Federal income tax rate at statutory rate 35.0% 35.0% 35.0% Increases (decreases) resulting from: Tax-exempt interest and dividends (5.0) (3.2) (1.7) State income taxes (net of federal income taxes) (0.1) 1.2 1.7 Change in valuation allowance for deferred tax assets (0.8) (1.7) (2.2) Increase in cash surrender value of life insurance (1.9) (1.4) (0.2) Other (0.3) 0.6 --- ------------------------- Effective income tax rate 26.9% 30.5% 32.6% =========================
A savings bank acquired by the Corporation in 1997 qualified under provisions of the Internal Revenue Code that permitted it to deduct from taxable income an allowance for bad debts that differed from the provision for such losses charged to income for financial reporting purposes. Accordingly, no provision for income taxes has been made for $79.2 million of retained income at December 31, 2000. If income taxes had been provided, the deferred tax liability would have been approximately $31.8 million. NOTE 14 COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENT LIABILITIES: COMMITMENTS AND OFF-BALANCE SHEET RISK The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage its own exposure to interest rate risk. These financial instruments include lending-related commitments and interest rate swaps. LENDING-RELATED COMMITMENTS Off-balance sheet lending-related commitments include commitments to extend credit, commercial letters of credit, and standby letters of credit. With the exception of commitments to originate residential mortgage loans (discussed below), these financial instruments are exercisable at the market rate prevailing at the date the underlying transaction will be completed and thus are deemed to have no current fair value, or the fair value based on fees currently charged to enter into similar agreements is not material at December 31, 2000 and 1999. Commitments to extend credit are agreements to lend to customers at predetermined interest rates as long as there is no violation of any condition established in the contracts. Standby and commercial letters of credit are conditional commitments issued by the Corporation to guarantee the performance and/or payment of a customer to a third party in connection with specified transactions. The following is a summary of lending-related off-balance sheet financial instruments at December 31: 2000 1999 --------------- ---------- ($ IN THOUSANDS) Commitments to extend credit $2,596,438 $3,165,411 Commercial letters of credit 45,248 26,666 Standby letters of credit 145,321 147,864 Loans sold with recourse 4,575 7,851 Forward commitments to sell loans 52,350 17,559 For commitments to extend credit, commercial letters of credit, and standby letters of credit, the Corporation's associated credit risk is essentially the same as that involved in extending loans to customers and is 60 subject to normal credit policies. The Corporation's exposure to credit loss in the event of nonperformance by the other party to these financial instruments is represented by the contractual amount of those instruments. The commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the customer. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. All loans currently sold to others are sold on a nonrecourse basis with the servicing rights of these loans retained by the Corporation. At December 31, 2000 and 1999, $4.6 million and $7.9 million, respectively, of the serviced loans were previously sold with recourse, the majority of which is either federally-insured or federally-guaranteed. Included in commitments to extend credit are commitments to originate residential mortgage loans held for sale ("pipeline loans") of approximately $55.2 million and $18.9 million at December 31, 2000 and 1999, respectively, with terms generally not exceeding 90 days. Also, the Corporation had $25 million and $12 million of mortgage loans held for sale ("MLHFS") in the consolidated balance sheets at December 31, 2000 and 1999, respectively. Adverse market interest rate changes between the time a customer receives a rate-lock commitment and the time the loan is sold to an investor can erode the value of that mortgage. Therefore, the Corporation uses forward commitments to sell residential mortgage loans to reduce its exposure to market risk resulting from changes in interest rates which could alter the underlying fair value of MLHFS and pipeline loans. The MLHFS are carried in the consolidated balance sheet at lower of cost or fair value, with fair value determined based on the fixed prices of the forward commitments, or quoted market prices on uncommitted MLHFS. The fair value of the pipeline loans and the forward commitments on a net basis at December 31, 2000 and 1999, was $12,000 and $68,000, respectively. INTEREST RATE SWAPS As part of managing the Corporation's interest rate risk, a variety of derivative financial instruments could be used to hedge market values and to alter the cash flow characteristics of certain on-balance sheet instruments. The Corporation has principally used interest rate swaps. In these swap agreements, the Corporation agrees to exchange, at specified intervals, the difference between fixed- and floating-interest amounts calculated on an agreed-upon notional principal amount. Pay fixed interest rate swaps are used to convert fixed rate assets into synthetic variable rate instruments and to convert variable rate funding sources into synthetic fixed rate funding instruments. Pay variable interest rate swaps are used to convert variable rate assets into synthetic fixed rate instruments and to convert fixed rate funding sources into synthetic variable rate funding instruments. Associated's interest rate swaps at December 31, 2000 and 1999, are summarized below. The effect on net interest income was an increase of $311,000 for 2000 and a decrease of $148,000 for 1999. The pay fixed swaps hedge money market deposits and the receive rate is based on 3 month LIBOR. The pay variable swaps hedge certificates of deposit and the pay rate is based on 3 month LIBOR. ESTIMATED WEIGHTED AVERAGE ---------------------------------------------------- NOTIONAL FAIR PAY RECEIVE REMAINING AMOUNT VALUE RATE RATE MATURITY ------------------------------------------------------------------------------- ($ IN THOUSANDS) Pay fixed swaps $300,000 $ (2,107) 6.36% 6.79% 18 months Pay variable swaps $ 10,000 $ 7 6.43% 6.35% 3 months CONTINGENT LIABILITIES There are legal proceedings pending against certain subsidiaries of the Corporation in the ordinary course of their business. Although litigation is subject to many uncertainties and the ultimate exposure with respect to 61 these matters cannot be ascertained, management believes, based upon discussions with counsel, that the Corporation has meritorious defenses, and any ultimate liability would not have a material adverse affect on the consolidated financial position or results of operations of the Corporation. NOTE 15 PARENT COMPANY ONLY FINANCIAL INFORMATION: Presented below are condensed financial statements for the parent company: BALANCE SHEETS ----------------------------- 2000 1999 ----------------------------- ($ IN THOUSANDS) ASSETS Cash and due from banks $ 516 $ 854 Notes receivable from subsidiaries 81,044 117,239 Investment in subsidiaries 1,005,256 928,237 Other assets 53,177 58,198 ----------------------------- Total assets $ 1,139,993 $ 1,104,528 ============================= LIABILITY AND STOCKHOLDERS' EQUITY Short-term borrowings $ 118,044 $ 156,900 Long-term debt --- 1,405 Accrued expenses and other liabilities 53,253 36,434 ----------------------------- Total liabilities 171,297 194,739 Stockholders' equity 968,696 909,789 ----------------------------- Total liabilities and stockholders' equity $ 1,139,993 $ 1,104,528 ============================= STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- 2000 1999 1998 ------------------------------------- ($ IN THOUSANDS) INCOME Dividends from subsidiaries $ 168,150 $ 73,675 $ 161,675 Management and service fees from subsidiaries 20,617 19,355 10,092 Interest income on notes receivable 8,442 8,007 9,432 Other income 3,234 1,919 1,543 ------------------------------------- Total income 200,443 102,956 182,742 ------------------------------------- EXPENSE Interest expense on borrowed funds 9,284 7,886 5,581 Provision for loan losses 2,000 --- --- Personnel expense 10,991 13,470 7,367 Other expense 11,565 8,948 6,342 ------------------------------------ Total expense 33,840 30,304 19,290 ------------------------------------ Income before income tax expense (benefit) and equity in undistributed income 166,603 72,652 163,452 Income tax expense (benefit) (4,670) (1,041) 751 ------------------------------------ Income before equity in undistributed net income of subsidiaries 171,273 73,693 162,701 Equity in undistributed net income (loss) of subsidiaries (3,290) 91,250 (5,681) ------------------------------------- Net income $ 167,983 $ 164,943 $ 157,020 =====================================
62 STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------- 2000 1999 1998 ------------------------------------- ($ IN THOUSANDS) OPERATING INCOME Net income $ 167,983 $ 164,943 $ 157,020 Adjustments to reconcile net income to net cash provided by operating activities: (Increase) decrease in equity in undistributed net income of subsidiaries 3,290 (91,250) 5,681 Depreciation and other amortization 476 388 298 Amortization of intangibles 420 404 443 Gain on sales of assets, net (1,016) (783) (1,321) (Increase) decrease in interest receivable and other assets 4,243 (12,911) 2,949 Increase in interest payable and other liabilities 16,819 4,732 6,226 ------------------------------------- Net cash provided by operating activities 192,215 65,523 171,296 ------------------------------------- INVESTING ACTIVITIES Proceeds from sales of investment securities 1,013 604 1,602 Net cash paid in acquisition of subsidiary --- (10,584) (16,021) Net decrease (increase) in notes receivable 36,195 138,274 (116,616) Purchase of premises and equipment, net of disposals (115) (503) (1,527) Capital (contributed to) received from subsidiaries (24,832) 52,464 (62,162) ------------------------------------- Net cash provided (used) by investing activities 12,261 180,255 (194,724) ------------------------------------- FINANCING ACTIVITIES Net increase (decrease) in short-term borrowings (38,856) (60,635) 129,146 Net increase (decrease) in long-term debt (1,405) 1,405 --- Cash dividends paid (75,719) (73,743) (65,841) Proceeds from exercise of stock options 3,893 3,421 7,926 Purchase and retirement of treasury stock (74,098) (91,762) --- Purchase of treasury stock (18,629) (24,255) (47,163) ------------------------------------- Net cash provided (used) by financing activities (204,814) (245,569) 24,068 ------------------------------------- Net increase (decrease) in cash and cash equivalents (338) 209 640 Cash and due from banks at beginning of year 854 645 5 ------------------------------------- Cash and due from banks at end of year $ 516 $ 854 $ 645 =====================================
NOTE 16 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. 63 The estimated fair values of the Corporation's financial instruments at December 31, 2000 and 1999 are as follows:
2000 1999 ------------------------------------------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE ------------------------------------------------------- ($ IN THOUSANDS) Financial assets: Cash and due from banks $ 368,186 $ 368,186 $ 284,652 $ 284,652 Interest-bearing deposits in other financial institutions 5,024 5,024 4,394 4,394 Federal funds sold and securities purchase under purchased under agreements to resell 23,310 23,310 25,120 25,120 Accrued interest receivable 96,163 96,163 82,032 82,032 Investment securities: Held to maturity 368,558 372,873 414,037 413,107 Available for sale 2,891,647 2,891,647 2,856,346 2,856,346 Loans held for sale 24,593 24,693 11,955 12,001 Loans 8,913,379 8,949,770 8,343,100 8,280,945 Financial liabilities: Deposits 9,291,646 9,318,802 8,691,829 8,677,444 Accrued interest payable 60,744 60,744 42,172 42,172 Short-term borrowings 2,598,203 2,598,203 2,775,090 2,775,090 Long-term debt 122,420 123,821 24,283 25,283 Off-balance sheet: Interest rate swap agreements --- (2,100) --- 1,812 -------------------------------------------------------
At December 31, 2000 and 1999, the notional amount of off-balance sheet instruments was $310 million and $300 million, respectively, of interest rate swap agreements. See Note 14 for information on the fair value of lending-related off-balance sheet financial instruments. CASH AND DUE FROM BANKS, INTEREST-BEARING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS, FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL, AND ACCRUED INTEREST RECEIVABLE - For these short-term instruments, the carrying amount is a reasonable estimate of fair value. INVESTMENT SECURITIES HELD TO MATURITY, INVESTMENT SECURITIES AVAILABLE FOR SALE, AND TRADING ACCOUNT SECURITIES - The fair value of investment securities held to maturity, investment securities available for sale, and trading account securities, except certain state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. There were no trading account securities at December 31, 2000 or 1999. LOANS HELD FOR SALE - Fair value is estimated using the prices of the Corporation's existing commitments to sell such loans and/or the quoted market prices for commitments to sell similar loans. LOANS - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage, credit card, and other consumer. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar maturities. Future cash flows are also adjusted for estimated reductions or delays due to delinquencies, nonaccruals, or potential charge-offs. DEPOSITS - The fair value of deposits with no stated maturity such as noninterest-bearing demand deposits, savings, interest-bearing demand deposits, and money market accounts, is equal to the amount payable on 64 demand as of December 31. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. ACCRUED INTEREST PAYABLE AND SHORT-TERM BORROWINGS - For these short-term instruments, the carrying amount is a reasonable estimate of fair value. LONG-TERM DEBT - Rates currently available to the Corporation for debt with similar terms and remaining maturities are used to estimate fair value of existing borrowings. INTEREST RATE SWAP AGREEMENTS - The fair value of interest rate swap agreements is obtained from dealer quotes. These values represent the estimated amount the Corporation would receive or pay to terminate the agreements, taking into account current interest rates and, when appropriate, the current creditworthiness of the counter-parties. LIMITATIONS - Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Corporation's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. NOTE 17 REGULATORY MATTERS: The Corporation and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory--and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation must meet specific capital guidelines that involve quantitative measures of the Corporation's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Corporation's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2000, that the Corporation and the subsidiary banks meet all capital adequacy requirements to which they are subject. As of December 31, 2000 and 1999, the most recent notifications from the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation categorized the subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the subsidiary banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institutions' category. The actual capital amounts and ratios of the Corporation and its significant subsidiaries are presented below. No deductions from capital were made for interest rate risk in 2000 or 1999. 65
TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE FOR CAPITAL ACTION ($ IN THOUSANDS) ACTUAL ADEQUACY PURPOSES PROVISIONS: (2) ----------------------------------------------------------------------------------------------------------- AMOUNT RATIO (1) AMOUNT RATIO (1) AMOUNT RATIO (1) ----------------------------------------------------------------------------------------------------------- AS OF DECEMBER 31, 2000: ----------------------- Associated Banc-Corp -------------------- Total Capital $ 966,994 10.70% $ 722,655 +8.00% Tier I Capital 846,371 9.37 361,327 +4.00% Leverage 846,371 6.52 519,200 +4.00% Associated Bank Illinois, N.A. ------------------------------ Total Capital 172,611 10.28 134,346 +8.00% $ 167,932 +10.00% Tier I Capital 152,894 9.10 67,173 +4.00% 100,759 +6.00% Leverage 152,894 5.42 112,864 +4.00% 141,080 +5.00% Associated Bank Milwaukee ------------------------- Total Capital 194,400 10.36 150,087 +8.00% 187,609 +10.00% Tier I Capital 171,179 9.12 75,043 +4.00% 112,565 +6.00% Leverage 171,179 5.86 116,782 +4.00% 145,977 +5.00% Associated Bank Green Bay, N.A. ------------------------------- Total Capital 183,848 10.75 136,771 +8.00% 170,964 +10.00% Tier I Capital 159,577 9.33 68,386 +4.00% 102,578 +6.00% Leverage 159,577 6.46 98,883 +4.00% 123,603 +5.00% Associated Bank North --------------------- Total Capital 112,506 11.90 75,636 +8.00% 94,545 +10.00% Tier I Capital 100,491 10.63 37,818 +4.00% 56,727 +6.00% Leverage 100,491 6.77 59,358 +4.00% 74,197 +5.00% AS OF DECEMBER 31, 1999: ----------------------- Associated Banc-Corp -------------------- Total Capital $ 941,105 10.99% $ 684,739 +8.00% Tier I Capital 831,907 9.72 342,369 +4.00% Leverage 831,907 6.80 489,083 +4.00% Associated Bank Illinois, N.A. ------------------------------ Total Capital 187,183 11.12 134,660 +8.00% $ 168,325 +10.00% Tier I Capital 166,084 9.87 67,330 +4.00% 100,995 +6.00% Leverage 166,084 6.03 110,108 +4.00% 137,635 +5.00% Associated Bank Milwaukee ------------------------- Total Capital 189,302 10.87 139,329 +8.00% 174,161 +10.00% Tier I Capital 166,283 9.55 69,664 +4.00% 104,497 +6.00% Leverage 166,283 6.05 109,988 +4.00% 137,485 +5.00% Associated Bank Green Bay, N.A. ------------------------------- Total Capital 176,525 10.75 131,339 +8.00% 164,174 +10.00% Tier I Capital 142,972 8.71 65,670 +4.00% 98,505 +6.00% Leverage 142,972 6.60 86,632 +4.00% 108,290 +5.00% Associated Bank North --------------------- Total Capital 114,485 12.43 73,705 +8.00% 92,132 +10.00% Tier I Capital 101,650 11.03 36,853 +4.00% 55,279 +6.00% Leverage 101,650 7.14 56,983 +4.00% 71,229 +5.00%
+ Represents the "greater than or equal to" sign (1) Total Capital ratio is defined as Tier 1 Capital plus Tier 2 Capital divided by total risk-weighted assets. The Tier 1 Capital ratio is defined as Tier 1 capital divided by total risk-weighted assets. The leverage ratio is defined as Tier 1 capital divided by the most recent quarter's average total assets. (2) Prompt corrective action provisions are not applicable at the bank holding company level. 66 NOTE 18 EARNINGS PER SHARE: Presented below are the calculations for basic and diluted earnings per share: FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Basic: Net income $ 167,983 $ 164,943 $ 157,020 Weighted average shares outstanding 68,186 69,858 69,438 Basic earnings per common share $ 2.46 $ 2.36 $ 2.26 ================================ Diluted: Net income $ 167,983 $ 164,943 $ 157,020 Weighted average shares outstanding 68,186 69,858 69,438 Effect of dilutive stock options outstanding 224 610 730 -------------------------------- Diluted weighted average shares outstanding 68,410 70,468 70,168 Diluted earnings per common share $ 2.46 $ 2.34 $ 2.24 ================================ NOTE 19 SEGMENT REPORTING SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," requires selected financial and descriptive information about reportable operating segments. The statement replaces the "industry segment" concept of SFAS No. 14 with a "management approach" concept as the basis for identifying reportable segments. The management approach is based on the way that management organizes the segments within the enterprise for making operating decisions, allocating resources, and assessing performance. Consequently, the segments are evident from the structure of the enterprise's internal organization, focusing on financial information that an enterprise's chief operating decision-makers use to make decisions about the enterprise's operating matters. While the Corporation continues developing a process toward evaluating business lines and products across its subsidiaries through 2000, management decision-making has been and is still strongly based on financial information by legal entity. The Corporation 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 - consumer, mortgage, and other real estate lending, credit cards, insurance, brokerage, and deposits. The "other" segment is comprised of smaller nonreportable segments, including asset management, consumer finance, treasury, holding company investments, as well as inter-segment eliminations and residual revenues and expenses, representing the difference between actual amounts incurred and the amounts allocated to operating segments. 67 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) 2000 Interest income $ 982,870 $ 20,916 $ (72,629) $ 931,157 Interest expense 604,598 15,621 (72,629) 547,590 --------------------------------------------------------- Net interest income 378,272 5,295 --- 383,567 Provision for loan losses 17,216 2,990 --- 20,206 Noninterest income 178,329 133,603 (127,736) 184,196 Depreciation and amortization 27,811 9,896 --- 37,707 Other noninterest expense 292,992 114,773 (127,736) 280,029 Income taxes 61,493 345 --- 61,838 --------------------------------------------------------- Net income $ 157,089 $ 10,894 $ --- $ 167,983 ========================================================= Total assets $13,906,539 $ 1,249,204 $(2,027,349) $13,128,394 ========================================================= 1999 Interest income $ 844,606 $ 15,378 $ (45,464) $ 814,520 Interest expense 452,362 11,877 (45,464) 418,775 --------------------------------------------------------- Net interest income 392,244 3,501 --- 395,745 Provision for loan losses 18,616 627 --- 19,243 Noninterest income 161,180 121,717 (116,991) 165,906 Depreciation and amortization 28,068 9,022 --- 37,090 Other noninterest expense 287,653 97,340 (116,991) 268,002 Income taxes 65,611 6,762 --- 72,373 --------------------------------------------------------- Net income $ 153,476 $ 11,467 $ --- $ 164,943 ========================================================= Total assets $13,460,394 $ 1,218,536 $(2,159,028) $12,519,902 ========================================================= 1998 Interest income $ 813,561 $ 10,374 $ (38,170) $ 785,765 Interest expense 441,771 7,427 (38,170) 411,028 --------------------------------------------------------- Net interest income 371,790 2,947 -- 374,737 Provision for loan losses 14,740 -- -- 14,740 Noninterest income 137,159 86,489 (55,720) 167,928 Depreciation and amortization 32,855 3,785 (1,354) 35,286 Other noninterest expense 246,419 58,431 (45,174) 259,676 Income taxes 69,197 6,571 175 75,943 --------------------------------------------------------- Net income $ 145,738 $ 20,649 $ (9,367) $ 157,020 ========================================================= Total assets $11,479,306 $ 1,235,362 $(1,464,001) $11,250,667 =========================================================
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, 2000 and 1999, 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, 2000. 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 conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Associated Banc-Corp and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP KPMG LLP Chicago, Illinois January 18, 2001 69 Market Information MARKET PRICE RANGE SALES PRICES ----------------------------- DIVIDENDS BOOK PAID VALUE HIGH LOW CLOSE ------------------------------------------------------------------------------- 2000 4th Quarter $.2900 $14.65 $30.63 $21.84 $30.38 3rd Quarter .2900 13.94 26.63 22.13 26.25 2nd Quarter .2636 13.57 27.27 21.81 21.81 1st Quarter .2636 13.30 30.06 20.29 27.16 ------------------------------------------------------------------------------- 1999 4th Quarter $.2636 $13.09 $36.70 $30.68 $31.14 3rd Quarter .2636 13.22 37.44 31.90 32.90 2nd Quarter .2636 12.89 39.15 28.01 37.73 1st Quarter .2636 12.97 32.05 27.56 29.04 ------------------------------------------------------------------------------- Annual dividend rate: $1.16 Market information has been restated for the 10% stock dividend declared April 26, 2000, paid on June 15, 2000, to shareholders of record at the close of business on June 1, 2000. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information in the Corporation's definitive Proxy Statement, prepared for the 2001 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 2001 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 2001 Annual Meeting of Shareholders, which contains information concerning this item, under the caption "Stock Ownership," is incorporated herein by reference. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information in the Corporation's definitive Proxy Statement, prepared for the 2001 Annual Meeting of Shareholders, which contains information concerning this item under the caption "Interest of Management in Certain Transactions," is incorporated herein by reference. 70 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1 and 2 Financial Statements and Financial Statement Schedules The following financial statements and financial statement schedules are included under a separate caption "Financial Statements and Supplementary Data" in Part II, Item 8 hereof and are incorporated herein by reference. Consolidated Balance Sheets - December 31, 2000 and 1999 Consolidated Statements of Income - For the Years Ended December 31, 2000, 1999, and 1998 Consolidated Statements of Changes in Stockholders' Equity - For the Years Ended December 31, 2000, 1999, and 1998 Consolidated Statements of Cash Flows - For the Years Ended December 31, 2000, 1999, and 1998 Notes to Consolidated Financial Statements Independent Auditors' Reports 71 (a) 3 EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
EXHIBIT SEQUENTIAL PAGE NUMBER OR NUMBER DESCRIPTION INCORPORATE BY REFERENCE TO -------------------------------------------------------------------------------------------------- (3)(a) Articles of Incorporation Exhibit (3)(a) to Report on Form 10-K for fiscal year ended December 31, 1999 (3)(b) Bylaws Exhibit (3)(b) to Report on Form 10-K for fiscal year ended December 31, 1999 (4) Instruments Defining the Rights of Security Holders, Including Indentures The Registrant, by signing this report, agrees to furnish the Securities and Exchange Commission, upon its request, a copy of any instrument that defines the rights of holders of long-term debt of the Registrant and all of its subsidiaries for which consolidated or unconsolidated financial statements are required to be filed and that authorizes a total amount of securities not in excess of 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis *(10)(a) The 1982 Incentive Stock Option Plan of the Exhibit (10) to Report on Form Registrant 10-K for fiscal year ended December 31, 1987 *(10)(b) The Restated Long-Term Incentive Stock Plan of Exhibits filed with the Registrant Associated's registration statement (333-46467) on Form S-8 filed under the Securities Act of 1933 *(10)(c) Change of Control Plan of the Registrant Exhibit (10)(d) to Report on effective April 25, 1994 Form 10-K for fiscal year ended December 31, 1994 *(10)(d) Deferred Compensation Plan and Exhibit (10)(e) to Report on Form Deferred Compensation Trust effective 10-K for fiscal year ended as of December 16, 1993, and Deferred December 31, 1994 Compensation Agreement of the Registrant dated December 31, 1994 (11) Statement Re Computation of Per Share Earnings See Note 19 in Part II Item 8 (21) Subsidiaries of the Corporation Filed herewith (23) Consents of Independent Auditors Filed herewith (24) Power of Attorney Filed herewith (27) Financial Data Schedule Filed herewith
* Management contracts and arrangements. Schedules and exhibits other than those listed are omitted for the reasons that they are not required, are not applicable or that equivalent information has been included in the financial statements, and notes thereto, or elsewhere herein. (b) Reports on Form 8-K None 72 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ASSOCIATED BANC-CORP Date: March 22, 2001 By: /s/ ROBERT C. GALLAGHER ------------------------ ------------------------------------------ Robert C. Gallagher President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ H. B. Conlon * /s/ William R. Hutchinson * ----------------------------- -------------------------------- H. B. Conlon William R. Hutchinson Chairman of the Board Director /s/ JOSEPH B. SELNER /s/ Robert P. Konopacky * ----------------------------- -------------------------------- Joseph B. Selner Robert P. Konopacky Chief Financial Officer Director Principal Financial Officer and Principal Accounting Officer /s/ ROBERT C. GALLAGHER /s/ Dr. George R. Leach * ----------------------------- -------------------------------- Robert C. Gallagher Dr. George R. Leach President, Chief Executive Director Officer, and a Director /s/ John C. Seramur * /s/ John C. Meng * ----------------------------- -------------------------------- John C. Seramur John C. Meng Vice Chairman Director /s/ Robert S. Gaiswinkler * /s/ J. Douglas Quick * ----------------------------- -------------------------------- Robert S. Gaiswinkler J. Douglas Quick Director Director /s/ Ronald R. Harder * /s/ John H. Sproule * ----------------------------- -------------------------------- Ronald R. Harder John H. Sproule Director Director * /s/ BRIAN R. BODAGER ----------------------------- Brian R. Bodager Attorney-in-Fact Date: March 22, 2001 73 EXHIBIT 21 Subsidiaries of the Corporation The following bank subsidiaries are national banks and are organized under the laws of the United States: Associated Bank, National Association Associated Bank Green Bay, National Association Associated Bank Illinois, National Association Associated Bank Lakeshore, National Association Associated Card Services Bank, National Association Associated Trust Company, National Association The following bank subsidiaries are state banks and are organized under the laws of the State of Wisconsin: Associated Bank North Associated Bank Milwaukee Associated Bank South Central The following bank subsidiaries are state banks and are organized under the laws of the State of Illinois: Associated Bank Chicago The following bank subsidiaries are state banks and are organized under the laws of the State of Minnesota: Associated Bank Minnesota The following non-bank subsidiaries are organized under the laws of the State of Wisconsin: Associated Banc-Corp Services, Inc. Associated Leasing, Inc. Associated Commercial Finance, Inc. Associated Mortgage, Inc. Associated Commercial Mortgage, Inc. Appraisal Services, Inc. Associated Investment Management Group, Inc. Associated Investment Management, LLC Associated Investment Services, Inc. Wisconsin Finance Corporation Associated Green Bay Real Estate Corp. Associated Neenah Real Estate Corp. Associated Illinois Real Estate Corp.
The following non-bank subsidiary is organized under the laws of the State of Illinois: Citizens Financial Services, Inc. The following non-bank subsidiary is organized under the laws of the State of Arizona: Banc Life Insurance Corporation The following non-bank subsidiary is organized under the laws of the State of California: Mortgage Finance Corporation 1 The following non-bank subsidiary is organized under the laws of the State of Missouri: Illini Service Corporation The following non-bank subsidiaries are organized under the laws of the State of Nevada: ASBC Investment Corp - Green Bay ASBC Investment Corp - Neenah ASBC Investment Corp - Lakeshore ASBC Investment Corp - North ASBC Investment Corp - Milwaukee ASBC Investment Corp - South Central ASBC Investment Corp - Illinois Associated Green Bay Investment Corp. Associated Illinois Investment Corp. Associated Neenah Investment Corp.
2 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors Associated Banc-Corp: Re: Registration Statement on Form S-8 - #2-77435 - #33-63545 - #2-99096 - #33-67436 - #33-16952 - #33-86790 - #33-24822 - #333-46467 - #33-35560 - #333-74307 - #33-54658 Re: Registration Statement on Form S-3 - #2-98922 - #33-63557 - #33-28081 - #33-67434 We consent to incorporation by reference in the subject Registration Statements on Form S-8 and S-3 of Associated Banc-Corp of our report dated January 18, 2001, relating to the consolidated balance sheets of Associated Banc-Corp and subsidiaries as of December 31, 2000 and 1999, 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, 2000, which report appears in the December 31, 2000 annual report on Form 10-K of Associated Banc-Corp. /s/ KPMG LLP Chicago, Illinois March 19, 2001 1 EXHIBIT 24 DIRECTOR'S POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), which is planning to file with the Securities and Exchange Commission (the "SEC"), Washington, D.C., under the provisions of the Securities Act of 1934 (the "Act"), a Form 10-K, the form which must be used for annual reports pursuant to Section 13 or 15(d) of the Act, and Proxy Statement in accordance with Regulation 14A and Schedule 14A under the Act and Regulation S-K and Rule 14a-3(b) under the Act, for the reporting period ending December 31, 2000, hereby constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact and agent. Said attorney-in-fact and agent shall have full power to act for him and in his name, place, and stead in any and all capacities, to sign such Form 10-K and Proxy Statement and any and all amendments thereto (including post-effective amendments), with power where appropriate to affix the corporate seal of the Corporation thereto and to attest such seal, and to file such Form 10-K and Proxy Statement and each amendment (including post-effective amendments) so signed, with all exhibits thereto, and any and all documents in connection therewith, with the SEC, and to appear before the SEC in connection with any matter relating to such Form 10-K and Proxy Statement and to any and all amendments thereto (including post-effective amendments). The undersigned hereby grants such attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done as he might or could do in person, and hereby ratifies and confirms all that such attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 24th day of January, 2001. /s/ Harry B. Conlon ---------------------------------------- Harry B. Conlon Director 1 DIRECTOR'S POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), which is planning to file with the Securities and Exchange Commission (the "SEC"), Washington, D.C., under the provisions of the Securities Act of 1934 (the "Act"), a Form 10-K, the form which must be used for annual reports pursuant to Section 13 or 15(d) of the Act, and Proxy Statement in accordance with Regulation 14A and Schedule 14A under the Act and Regulation S-K and Rule 14a-3(b) under the Act, for the reporting period ending December 31, 2000, hereby constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact and agent. Said attorney-in-fact and agent shall have full power to act for him and in his name, place, and stead in any and all capacities, to sign such Form 10-K and Proxy Statement and any and all amendments thereto (including post-effective amendments), with power where appropriate to affix the corporate seal of the Corporation thereto and to attest such seal, and to file such Form 10-K and Proxy Statement and each amendment (including post-effective amendments) so signed, with all exhibits thereto, and any and all documents in connection therewith, with the SEC, and to appear before the SEC in connection with any matter relating to such Form 10-K and Proxy Statement and to any and all amendments thereto (including post-effective amendments). The undersigned hereby grants such attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done as he might or could do in person, and hereby ratifies and confirms all that such attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 24th day of January, 2001. /s/ Robert S. Gaiswinkler ---------------------------------------- Robert S. Gaiswinkler Director 2 DIRECTOR'S POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), which is planning to file with the Securities and Exchange Commission (the "SEC"), Washington, D.C., under the provisions of the Securities Act of 1934 (the "Act"), a Form 10-K, the form which must be used for annual reports pursuant to Section 13 or 15(d) of the Act, and Proxy Statement in accordance with Regulation 14A and Schedule 14A under the Act and Regulation S-K and Rule 14a-3(b) under the Act, for the reporting period ending December 31, 2000, hereby constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact and agent. Said attorney-in-fact and agent shall have full power to act for him and in his name, place, and stead in any and all capacities, to sign such Form 10-K and Proxy Statement and any and all amendments thereto (including post-effective amendments), with power where appropriate to affix the corporate seal of the Corporation thereto and to attest such seal, and to file such Form 10-K and Proxy Statement and each amendment (including post-effective amendments) so signed, with all exhibits thereto, and any and all documents in connection therewith, with the SEC, and to appear before the SEC in connection with any matter relating to such Form 10-K and Proxy Statement and to any and all amendments thereto (including post-effective amendments). The undersigned hereby grants such attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done as he might or could do in person, and hereby ratifies and confirms all that such attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 24th day of January, 2001. /s/ Ronald R. Harder ---------------------------------------- Ronald R. Harder Director 3 DIRECTOR'S POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), which is planning to file with the Securities and Exchange Commission (the "SEC"), Washington, D.C., under the provisions of the Securities Act of 1934 (the "Act"), a Form 10-K, the form which must be used for annual reports pursuant to Section 13 or 15(d) of the Act, and Proxy Statement in accordance with Regulation 14A and Schedule 14A under the Act and Regulation S-K and Rule 14a-3(b) under the Act, for the reporting period ending December 31, 2000, hereby constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact and agent. Said attorney-in-fact and agent shall have full power to act for him and in his name, place, and stead in any and all capacities, to sign such Form 10-K and Proxy Statement and any and all amendments thereto (including post-effective amendments), with power where appropriate to affix the corporate seal of the Corporation thereto and to attest such seal, and to file such Form 10-K and Proxy Statement and each amendment (including post-effective amendments) so signed, with all exhibits thereto, and any and all documents in connection therewith, with the SEC, and to appear before the SEC in connection with any matter relating to such Form 10-K and Proxy Statement and to any and all amendments thereto (including post-effective amendments). The undersigned hereby grants such attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done as he might or could do in person, and hereby ratifies and confirms all that such attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 24th day of January, 2001. /s/ William R. Hutchinson ---------------------------------------- William R. Hutchinson Director 4 DIRECTOR'S POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), which is planning to file with the Securities and Exchange Commission (the "SEC"), Washington, D.C., under the provisions of the Securities Act of 1934 (the "Act"), a Form 10-K, the form which must be used for annual reports pursuant to Section 13 or 15(d) of the Act, and Proxy Statement in accordance with Regulation 14A and Schedule 14A under the Act and Regulation S-K and Rule 14a-3(b) under the Act, for the reporting period ending December 31, 2000, hereby constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact and agent. Said attorney-in-fact and agent shall have full power to act for him and in his name, place, and stead in any and all capacities, to sign such Form 10-K and Proxy Statement and any and all amendments thereto (including post-effective amendments), with power where appropriate to affix the corporate seal of the Corporation thereto and to attest such seal, and to file such Form 10-K and Proxy Statement and each amendment (including post-effective amendments) so signed, with all exhibits thereto, and any and all documents in connection therewith, with the SEC, and to appear before the SEC in connection with any matter relating to such Form 10-K and Proxy Statement and to any and all amendments thereto (including post-effective amendments). The undersigned hereby grants such attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done as he might or could do in person, and hereby ratifies and confirms all that such attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 24th day of January, 2001. /s/ Robert P. Konopacky ---------------------------------------- Robert P. Konopacky Director 5 DIRECTOR'S POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), which is planning to file with the Securities and Exchange Commission (the "SEC"), Washington, D.C., under the provisions of the Securities Act of 1934 (the "Act"), a Form 10-K, the form which must be used for annual reports pursuant to Section 13 or 15(d) of the Act, and Proxy Statement in accordance with Regulation 14A and Schedule 14A under the Act and Regulation S-K and Rule 14a-3(b) under the Act, for the reporting period ending December 31, 2000, hereby constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact and agent. Said attorney-in-fact and agent shall have full power to act for him and in his name, place, and stead in any and all capacities, to sign such Form 10-K and Proxy Statement and any and all amendments thereto (including post-effective amendments), with power where appropriate to affix the corporate seal of the Corporation thereto and to attest such seal, and to file such Form 10-K and Proxy Statement and each amendment (including post-effective amendments) so signed, with all exhibits thereto, and any and all documents in connection therewith, with the SEC, and to appear before the SEC in connection with any matter relating to such Form 10-K and Proxy Statement and to any and all amendments thereto (including post-effective amendments). The undersigned hereby grants such attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done as he might or could do in person, and hereby ratifies and confirms all that such attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 24th day of January, 2001. /s/ George R. Leach ---------------------------------------- George R. Leach Director 6 DIRECTOR'S POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), which is planning to file with the Securities and Exchange Commission (the "SEC"), Washington, D.C., under the provisions of the Securities Act of 1934 (the "Act"), a Form 10-K, the form which must be used for annual reports pursuant to Section 13 or 15(d) of the Act, and Proxy Statement in accordance with Regulation 14A and Schedule 14A under the Act and Regulation S-K and Rule 14a-3(b) under the Act, for the reporting period ending December 31, 2000, hereby constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact and agent. Said attorney-in-fact and agent shall have full power to act for him and in his name, place, and stead in any and all capacities, to sign such Form 10-K and Proxy Statement and any and all amendments thereto (including post-effective amendments), with power where appropriate to affix the corporate seal of the Corporation thereto and to attest such seal, and to file such Form 10-K and Proxy Statement and each amendment (including post-effective amendments) so signed, with all exhibits thereto, and any and all documents in connection therewith, with the SEC, and to appear before the SEC in connection with any matter relating to such Form 10-K and Proxy Statement and to any and all amendments thereto (including post-effective amendments). The undersigned hereby grants such attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done as he might or could do in person, and hereby ratifies and confirms all that such attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 24th day of January, 2001. /s/ John C. Meng ---------------------------------------- John C. Meng Director 7 DIRECTOR'S POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), which is planning to file with the Securities and Exchange Commission (the "SEC"), Washington, D.C., under the provisions of the Securities Act of 1934 (the "Act"), a Form 10-K, the form which must be used for annual reports pursuant to Section 13 or 15(d) of the Act, and Proxy Statement in accordance with Regulation 14A and Schedule 14A under the Act and Regulation S-K and Rule 14a-3(b) under the Act, for the reporting period ending December 31, 2000, hereby constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact and agent. Said attorney-in-fact and agent shall have full power to act for him and in his name, place, and stead in any and all capacities, to sign such Form 10-K and Proxy Statement and any and all amendments thereto (including post-effective amendments), with power where appropriate to affix the corporate seal of the Corporation thereto and to attest such seal, and to file such Form 10-K and Proxy Statement and each amendment (including post-effective amendments) so signed, with all exhibits thereto, and any and all documents in connection therewith, with the SEC, and to appear before the SEC in connection with any matter relating to such Form 10-K and Proxy Statement and to any and all amendments thereto (including post-effective amendments). The undersigned hereby grants such attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done as he might or could do in person, and hereby ratifies and confirms all that such attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 24th day of January, 2001. /s/ J. Douglas Quick ---------------------------------------- J. Douglas Quick Director 8 DIRECTOR'S POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), which is planning to file with the Securities and Exchange Commission (the "SEC"), Washington, D.C., under the provisions of the Securities Act of 1934 (the "Act"), a Form 10-K, the form which must be used for annual reports pursuant to Section 13 or 15(d) of the Act, and Proxy Statement in accordance with Regulation 14A and Schedule 14A under the Act and Regulation S-K and Rule 14a-3(b) under the Act, for the reporting period ending December 31, 2000, hereby constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact and agent. Said attorney-in-fact and agent shall have full power to act for him and in his name, place, and stead in any and all capacities, to sign such Form 10-K and Proxy Statement and any and all amendments thereto (including post-effective amendments), with power where appropriate to affix the corporate seal of the Corporation thereto and to attest such seal, and to file such Form 10-K and Proxy Statement and each amendment (including post-effective amendments) so signed, with all exhibits thereto, and any and all documents in connection therewith, with the SEC, and to appear before the SEC in connection with any matter relating to such Form 10-K and Proxy Statement and to any and all amendments thereto (including post-effective amendments). The undersigned hereby grants such attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done as he might or could do in person, and hereby ratifies and confirms all that such attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 24th day of January, 2001. /s/ John C. Seramur ---------------------------------------- John C. Seramur Director 9 DIRECTOR'S POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned director of Associated Banc-Corp, a Wisconsin corporation (the "Corporation"), which is planning to file with the Securities and Exchange Commission (the "SEC"), Washington, D.C., under the provisions of the Securities Act of 1934 (the "Act"), a Form 10-K, the form which must be used for annual reports pursuant to Section 13 or 15(d) of the Act, and Proxy Statement in accordance with Regulation 14A and Schedule 14A under the Act and Regulation S-K and Rule 14a-3(b) under the Act, for the reporting period ending December 31, 2000, hereby constitutes and appoints Brian R. Bodager his true and lawful attorney-in-fact and agent. Said attorney-in-fact and agent shall have full power to act for him and in his name, place, and stead in any and all capacities, to sign such Form 10-K and Proxy Statement and any and all amendments thereto (including post-effective amendments), with power where appropriate to affix the corporate seal of the Corporation thereto and to attest such seal, and to file such Form 10-K and Proxy Statement and each amendment (including post-effective amendments) so signed, with all exhibits thereto, and any and all documents in connection therewith, with the SEC, and to appear before the SEC in connection with any matter relating to such Form 10-K and Proxy Statement and to any and all amendments thereto (including post-effective amendments). The undersigned hereby grants such attorney-in-fact and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done as he might or could do in person, and hereby ratifies and confirms all that such attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the 24th day of January, 2001. /s/ John H. Sproule ---------------------------------------- John H. Sproule Director 10