SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
------- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
---------------------------------------
OR
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
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Associated Banc-Corp
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(Exact name of registrant as specified in its charter)
Wisconsin 39-1098068
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(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
1200 Hansen Road, Green Bay, Wisconsin 54304
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(Address of principal executive offices) (Zip code)
(920) 491-7000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal
year, if changed since last report)
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
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of registrant's common stock, par value $0.01
per share, at July 31, 2000, was 68,533,348 shares.
<PAGE>
ASSOCIATED BANC-CORP
TABLE OF CONTENTS
Page No.
------
PART I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets -
June 30, 2000, June 30, 1999 and
December 31, 1999
Consolidated Statements of Income -
Three and Six Months Ended
June 30, 2000 and 1999
Consolidated Statement of Changes in
Stockholders' Equity -
Six Months Ended June 30, 2000
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2000 and 1999
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
ASSOCIATED BANC-CORP
Consolidated Balance Sheets
(Unaudited)
June 30, June 30, December 31,
2000 1999 1999
-----------------------------------------
($ in Thousands, except share data)
ASSETS
Cash and due from banks $ 338,727 $ 248,019 $ 284,652
Interest-bearing deposits in other
financial institutions 4,721 5,333 4,394
Federal funds sold and securities
purchased under agreements to resell 116,320 35,500 25,120
Investment securities:
Held to maturity-at amortized cost
(fair value of $385,283, $483,922,
and $413,107, respectively) 391,414 479,142 414,037
Available for sale-at fair value
(amortized cost of $2,915,152,
$2,626,334, and $2,901,607,
respectively) 2,848,595 2,611,650 2,856,346
Loans held for sale 11,773 83,800 11,955
Loans 8,696,417 7,634,576 8,343,100
Allowance for loan losses (115,395) (103,735) (113,196)
--------------------------------------
Loans, net 8,581,022 7,530,841 8,229,904
Premises and equipment 134,924 137,513 140,100
Other assets 570,763 490,986 553,394
======================================
Total assets $12,998,259 $11,622,784 $12,519,902
======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 1,131,871 $ 973,854 $ 1,103,931
Interest-bearing deposits 8,113,520 7,515,832 7,587,898
----------------------------------------
Total deposits 9,245,391 8,489,686 8,691,829
Short-term borrowings 2,555,837 2,105,821 2,775,090
Long-term debt 122,792 25,661 24,283
Accrued expenses and other liabilities 144,016 104,410 118,911
----------------------------------------
Total liabilities 12,068,036 10,725,578 11,610,113
Stockholders' equity
Preferred stock --- --- ---
Common stock (par value $0.01
per share, authorized 100,000,000
shares, ssued 68,798,457,
69,728,707 and 69,728,707 shares,
respectively) 688 634 634
Surplus 355,279 225,757 226,042
Retained earnings 624,661 684,020 728,754
Accumulated other comprehensive loss (42,861) (9,609) (38,782)
Treasury stock at cost (262,718,
114,658 and 208,571 shares,
respectively) (7,544) (3,596) (6,859)
----------------------------------------
Total stockholders' equity 930,223 897,206 909,789
----------------------------------------
Total liabilities and
stockholders' equity $12,998,259 $11,622,784 $12,519,902
========================================
See accompanying notes to consolidated financial statements.
<PAGE>
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months
June 30, Ended June 30,
2000 1999 2000 1999
-----------------------------------------
(In Thousands, except per share data)
INTEREST INCOME
Interest and fees on loans $177,650 $151,576 $349,889 $301,959
Interest and dividends
on investment securities:
Taxable 40,782 40,170 82,504 80,349
Tax exempt 9,171 5,281 17,367 10,020
Interest on deposits in other
financial institutions 106 119 170 280
Interest on federal funds sold
and securities purchased under
agreements to resell 589 231 1,141 469
---------------------------------------
Total interest income 228,298 197,377 451,071 393,077
INTEREST EXPENSE
Interest on deposits 92,137 75,543 173,695 152,942
Interest on short-term borrowings 38,074 23,858 79,495 44,919
Interest on long-term debt 1,725 425 3,170 867
---------------------------------------
Total interest expense 131,936 99,826 256,360 198,728
---------------------------------------
NET INTEREST INCOME 96,362 97,551 194,711 194,349
Provision for loan losses 5,166 4,547 10,881 8,998
---------------------------------------
Net interest income after
provision for loan losses 91,196 93,004 183,830 185,351
NONINTEREST INCOME
Trust service fees 9,526 9,608 19,649 19,189
Service charges on deposit
accounts 8,207 6,773 15,681 13,690
Mortgage banking 4,902 8,043 9,492 19,435
Credit card and other nondeposit
fees 7,260 5,094 12,536 9,652
Retail commissions 5,337 4,897 10,945 8,783
Asset sale gains, net 13,043 321 21,307 603
Investment securities gains
(losses), net (5,490) 1,023 (7,192) 4,612
Other 7,703 5,129 14,014 9,131
---------------------------------------
Total noninterest income 50,488 40,888 96,432 85,095
NONINTEREST EXPENSE
Salaries and employee benefits 38,916 39,153 77,554 77,383
Occupancy 5,672 5,581 11,816 11,507
Equipment 3,755 3,725 7,852 7,417
Data processing 6,708 5,167 12,387 10,462
Business development and
advertising 3,269 3,270 6,499 6,329
Stationery and supplies 1,999 2,021 3,823 3,892
FDIC expense 421 716 898 1,578
Other 20,291 16,888 38,813 36,537
---------------------------------------
Total noninterest expense 81,031 76,521 159,642 155,105
---------------------------------------
Income before income taxes 60,653 57,371 120,620 115,341
Income tax expense 16,956 17,495 33,842 36,514
=======================================
NET INCOME $ 43,697 $ 39,876 $ 86,778 $ 78,827
=======================================
Earnings per share:
Basic $ 0.63 $ 0.57 $ 1.25 $ 1.13
Diluted $ 0.63 $ 0.57 $ 1.25 $ 1.12
Average shares outstanding:
Basic 68,918 69,670 69,211 69,603
Diluted 69,206 70,314 69,508 70,228
See accompanying notes to consolidated financial statements.
<PAGE>
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
<TABLE>
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Loss Stock Total
------------------------------------------------- ------------
($ in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 $634 $226,042 $728,754 $(38,782) $(6,859) $909,789
Comprehensive income:
Net income --- --- 86,778 --- --- 86,778
Net unrealized holding
losses arising during
the period --- --- --- (13,640) --- (13,640)
Add back:
reclassification
adjustment for net gains
(losses) realized in net
income --- --- --- 7,192 --- 7,192
Income tax effect --- --- --- 2,369 --- 2,369
--------
Comprehensive income 82,699
--------
Cash dividends, $0.53 per
share --- --- (36,566) --- --- (36,566)
Common stock issued:
Stock options exercised --- --- (3,072) --- 5,064 1,992
10% stock dividend 63 151,170 (151,233) --- --- ---
Purchase and retirement of
treasury stock in
connection with
repurchase program (9) (22,432) --- --- 7,782 (14,659)
Tax benefit of stock
options --- 499 --- --- --- 499
Purchase of treasury stock --- --- --- --- (13,531) (13,531)
==============================================================
Balance, June 30, 2000 $688 $355,279 $624,661 $(42,861) $( 7,544) $930,223
==============================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements Of Cash Flows
(Unaudited)
For the Six Months Ended
June 30,
2000 1999
-------------------------
($ in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 86,778 $ 78,827
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 10,881 8,998
Depreciation and amortization 9,957 9,002
Amortization (accretion) of:
Mortgage servicing rights 4,779 2,420
Intangibles 4,492 3,478
Investment premiums and discounts 235 970
Deferred loan fees and costs (1,369) (751)
(Gain) loss on sales of securities, net 7,192 (4,612)
Gain on sale of assets, net (21,307) (603)
Gain on sales of loans held for sale, net (1,135) (9,029)
Decrease in loans held for sale, net 1,317 90,399
Increase in interest receivable and other
assets (25,246) (32,958)
Increase (decrease) in interest payable and
other liabilities 5,105 (14,799)
-------------------------
Net cash provided by operating activities 81,679 131,342
-------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in federal funds sold and
securities purchased under
agreements to resell (91,200) (19,615)
Net (increase) decrease in interest-bearing
deposits in other financial institutions (327) 195,151
Net increase in loans (486,370) (296,914)
Purchases of:
Securities available for sale (632,145) (775,344)
Premises and equipment, net of disposals (6,413) (6,027)
Bank-owned life insurance --- (100,000)
Proceeds from:
Sales of securities available for sale 458,464 36,178
Maturities of securities available for sale 167,697 528,809
Maturities of securities held to maturity 22,483 71,405
Sale of credit card receivables 156,376 ---
Sales of other real estate owned and other assets 5,591 3,112
Net cash received in acquisition of subsidiary --- 3,956
-------------------------
Net cash used by investing activities (405,844) (359,289)
-------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 635,932 (220,247)
Net increase (decrease) in short-term borrowings (219,254) 417,014
Repayment of long-term debt (1,491) (420)
Proceeds from issuance of long-term debt 100,000 ---
Cash dividends (36,566) (36,861)
Proceeds from exercise of stock options 1,992 1,855
Sales of branch deposits (74,183) ---
Purchase of treasury stock (28,190) (16,907)
-------------------------
Net cash provided by financing activities 378,240 144,434
-------------------------
Net increase (decrease) in cash and due
from banks 54,075 (83,513)
Cash and due from banks at beginning of period 284,652 331,532
=========================
Cash and due from banks at end of period $338,727 $248,019
=========================
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $248,434 $203,858
Income taxes 42,995 38,501
Supplemental schedule of noncash investing
activities:
Loans transferred to other real estate 3,506 6,528
Mortgage loans securitized and transferred
to securities available for sale --- 41,201
See accompanying notes to consolidated financial statements.
<PAGE>
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Notes to Consolidated Financial Statements
NOTE 1: Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments necessary to present fairly Associated
Banc-Corp's (the "Corporation") financial position, results of its operations
and cash flows for the periods presented, and all such adjustments are of a
normal recurring nature. The consolidated financial statements include the
accounts of all subsidiaries. All material intercompany transactions and
balances are eliminated. The results of operations for the interim periods are
not necessarily indicative of the results to be expected for the full year.
These interim consolidated financial statements have been prepared according to
the rules and regulations of the Securities and Exchange Commission and,
therefore, certain information and footnote disclosures normally presented in
accordance with generally accepted accounting principles have been omitted or
abbreviated. The information contained in the consolidated financial statements
and footnotes in the Corporation's 1999 annual report on Form 10-K, should be
referred to in connection with the reading of these unaudited interim financial
statements.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and revenues and expenses for
the period. Actual results could differ significantly from those estimates.
Estimates that are particularly susceptible to significant change include the
determination of the allowance for loan losses and the valuation of investments
and mortgage servicing rights.
NOTE 2: Reclassifications
Certain items in the prior period consolidated financial statements have been
reclassified to conform with the June 30, 2000 presentation.
NOTE 3: Business Combinations
The following table summarizes completed business combination transactions
during 1999. There were no completed or pending business combination
transactions as of June 30, 2000.
<TABLE>
Consideration Paid
-------------------
Shares
Method of
Name of Acquired Date of Common Total
($ in millions) Acquired Accounting Stock Cash Assets Loans Deposits Intangibles
---------------------------- -------- -------- --------- --------- ------- -------- ------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BNC Financial Corporation 12/31/99 Purchase --- $5.3 $ 35 $ 33 $--- $ 1
("BNC")
St Cloud, Minnesota
Riverside Acquisition 8/31/99 Purchase 2,677,405 $--- $374 $266 $337 $67
Corp. ("Riverside")
Minneapolis, Minnesota
Windsor Bancshares, Inc. 2/3/99 Purchase 879,957 $--- $182 $113 $152 $17
("Windsor")
Minneapolis, Minnesota
</TABLE>
The consolidated financial statements include the results of operations for the
acquisitions accounted for under the purchase method since the date of
acquisition.
During the first quarter of 2000, Riverside and Windsor merged and became
Associated Bank Minnesota. Effective March 31, 2000, BNC operated as Associated
Commercial Finance, Inc.
NOTE 4: Adoption of Statements of Financial Accounting Standards ("SFAS")
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," requires derivative instruments be carried at fair value on the
balance sheet. The statement continues to allow derivative instruments to be
used to hedge various risks and sets forth specific criteria to be used to
determine when hedge accounting can be used. The statement also provides for
offsetting changes in fair value or cash flows of both the derivative and the
hedged asset or liability to be recognized in earnings in the same period;
however, any changes in fair value or cash flow that represent the ineffective
portion of a hedge are required to be recognized in earnings and cannot be
deferred. For derivative instruments not accounted for as hedges, changes in
fair value are required to be recognized in earnings.
The Corporation plans to adopt the provisions of this statement, as amended, for
its quarterly and annual reporting beginning January 1, 2001, the statement's
effective date. The impact of adopting the provisions of this statement on the
Corporation's financial position, results of operations, and cash flow
subsequent to the effective date is currently being evaluated, but will depend
on the financial position of the Corporation and the nature and purpose of the
derivative instruments in use at that time.
NOTE 5: Earnings Per Share
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.
On April 26, 2000, the Board of Directors declared a 10% stock dividend, payable
June 15 to shareholders of record at the close of business on June 1. All share
and per share data in the accompanying consolidated financial statements, except
for the share information in the consolidated statement of changes in
stockholders' equity, have been adjusted to reflect the 10% stock dividend paid.
As a result of the stock dividend, the Corporation distributed 6.3 million
shares of common stock, common stock was increased by $63,000, surplus was
increased by $151.2 million and retained earnings were decreased by $151.2
million. Any fractional shares resulting from the dividend were paid in cash.
Presented below are the calculations for basic and diluted earnings per share:
Three Months Ended Six Months
June 30, Ended June 30,
2000 1999 2000 1999
-----------------------------------------
($ in Thousands, except per share data)
Net income available to
common stockholders $43,697 $39,876 $86,778 $78,827
======================================
Weighted average shares outstanding 68,918 69,670 69,211 69,603
Effect of dilutive stock options
outstanding 288 644 297 625
======================================
Diluted weighted average shares
outstanding 69,206 70,314 69,508 70,228
======================================
Basic earnings per common share $ 0.63 $ 0.57 $ 1.25 $ 1.13
======================================
Diluted earnings per common share $ 0.63 $ 0.57 $ 1.25 $ 1.12
======================================
<PAGE>
NOTE 6: 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. 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 currently have a high degree of correlation with the related
balance sheet item during the hedge period. The pay fixed interest rate swaps
hedge money market deposits, and the pay variable interest rate swap hedges
certificates of deposit.
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 that was being hedged. Unrealized gains or losses on these contracts
are not recognized on the balance sheet. The table below summarizes the
Corporation's interest rate swaps at June 30, 2000. There were no interest rate
swaps at June 30, 1999.
Estimated Weighted Average
-----------------------------------
Notional Fair Market Remaining
Amount Value Pay Rate Receive Rate Maturity
--------------------------------------------------------------------------------
($ in Thousands)
Pay fixed swaps $ 300,000 $ 3,582 6.36% 6.32% 23 months
Pay variable swap $ 10,000 $ (8) 5.91% 6.35% 9 months
--------------------------------------------------------------------------------
NOTE 7: 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.
The Corporation's reportable segment is banking, conducted through its bank,
leasing, mortgage, insurance and brokerage subsidiaries. For purposes of segment
disclosure under this statement, these entities have similar economic
characteristics and the nature of their products, services, processes,
customers, delivery channels and regulatory environment are similar.
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.
<PAGE>
Selected segment information is presented below.
--------------------------------------------------------------------------------
Consolidated
Banking Other Eliminations Total
--------------------------------------------------------------------------------
As of and for the three ($ in Thousands)
months ended June 30, 2000
Total assets $13,747,340 $1,200,735 $(1,949,816) $12,998,259
=================================================
Interest income $ 241,106 $ 5,419 $ (18,227) 228,298
Interest expense 146,341 3,822 (18,227) 131,936
-------------------------------------------------
Net interest income 94,765 1,597 --- 96,362
Provision for loan losses 3,911 1,255 --- 5,166
Noninterest income 49,924 32,396 (31,832) 50,488
Depreciation and amortization 6,819 2,451 --- 9,270
Other noninterest expense 73,912 29,681 (31,832) 71,761
Income taxes 17,495 (539) --- 16,956
-------------------------------------------------
Net income $ 42,552 $ 1,145 $ --- 43,697
=================================================
As of and for the three
months ended June 30, 1999
Total assets $12,314,683 $1,103,619 $(1,795,518) $11,622,784
=================================================
Interest income $ 204,401 $ 3,950 $ (10,974) 197,377
Interest expense 107,553 3,247 (10,974) 99,826
-------------------------------------------------
Net interest income 96,848 703 --- 97,551
Provision for loan losses 4,397 150 --- 4,547
Noninterest income 38,213 29,752 (27,077) 40,888
Depreciation and amortization 3,284 2,172 --- 5,456
Other noninterest expense 76,257 21,887 (27,079) 71,065
Income taxes 14,826 2,186 483 17,495
-------------------------------------------------
Net income $ 36,297 $ 4,060 $ (481) $ 39,876
=================================================
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
Consolidated
Banking Other Eliminations Total
--------------------------------------------------------------------------------
As of and for the six months ($ in Thousands)
ended June 30, 2000
Total assets $13,747,340 $1,200,735 $(1,949,816) 12,998,259
=================================================
Interest income $ 475,909 $ 10,446 $ (35,284) 451,071
Interest expense 284,040 7,604 (35,284) 256,360
-------------------------------------------------
Net interest income 191,869 2,842 --- 194,711
Provision for loan losses 9,408 1,473 --- 10,881
Noninterest income 96,435 65,575 (65,578) 96,432
Depreciation and amortization 13,856 4,951 --- 18,807
Other noninterest expense 149,579 56,834 (65,578) 140,835
Income taxes 32,927 915 --- 33,842
-------------------------------------------------
Net income $ 82,534 $ 4,244 $ --- 86,778
=================================================
As of and for the six months
ended June 30, 1999
Total assets $12,314,683 $1,103,619 $(1,795,518) $11,622,784
=================================================
Interest income $ 402,612 $ 8,822 $ (18,357) $ 393,077
Interest expense 209,823 7,262 (18,357) 198,728
-------------------------------------------------
Net interest income 192,789 1,560 --- 194,349
Provision for loan losses 8,732 266 --- 8,998
Noninterest income 78,455 58,909 (52,269) 85,095
Depreciation and amortization 9,706 4,094 --- 13,800
Other noninterest expense 147,621 45,952 (52,268) 141,305
Income taxes 32,716 3,710 88 36,514
-------------------------------------------------
Net income $ 72,469 $ 6,447 $ (89) $ 78,827
=================================================
--------------------------------------------------------------------------------
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and the
Results of Operations
Forward-Looking Statements
Forward-looking statements have been made in this document 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 other similar
expressions identify forward-looking statements.
Shareholders should note that many factors, some of which may be discussed
elsewhere in this document could affect the future financial results of
Associated Banc-Corp (the "Corporation") and could cause those results to differ
materially from those expressed in forward-looking statements contained in this
document. These factors include the following:
- operating, legal, and regulatory risks;
- economic, political, and competitive forces affecting the
Corporation's banking, securities, asset management, and credit
services businesses; and
- the risk that the Corporation'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.
Overview
The following discussion and analysis is presented to assist in the
understanding and evaluation of the Corporation's financial condition and
results of operations. It is intended to complement the unaudited financial
statements, footnotes, and supplemental financial data appearing elsewhere in
this Form 10-Q and should be read in conjunction therewith.
On April 26, 2000, the Board of Directors declared a 10% stock dividend, payable
June 15 to shareholders of record at the close of business on June 1, 2000. All
share and per share financial information has been adjusted to reflect the 10%
stock dividend paid (see Note 5 of the Notes to Consolidated Financial
Statements).
The following discussion refers to the impact of the Corporation's business
combination activity (see Note 3 of the Notes to Consolidated Financial
Statements).
Management continually evaluates strategic acquisition opportunities and other
various strategic alternatives that could involve the sale or acquisition of
branches or other assets, or the consolidation or creation of subsidiaries.
Results of Operations - Summary
Net income for the first six months of 2000 ("YTD00") totaled $86.8 million, or
$1.25 for basic and diluted earnings per share ("EPS"). Comparatively, net
income for the first six months of 1999 ("YTD99") was $78.8 million, or $1.13
and $1.12 of basic and diluted EPS, respectively. YTD00 operating results
generated an annualized return on average assets ("ROA") of 1.38% and an
annualized return on average equity ("ROE") of 19.19%, compared to 1.41% and
17.54%, respectively, for the same period in 1999. YTD00 net interest margin was
3.41% compared to 3.76% for the comparable period in 1999.
--------------------------------------------------------------------------------
TABLE 1
Summary Results of Operations: Trends
($ in Thousands, except per share data)
2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr.
2000 2000 1999 1999 1999
--------------------------------------------------------------------------------
Net income (Qtr) $ 43,697 $ 43,081 $ 44,334 $ 41,782 $ 39,876
Net income (YTD) $ 86,778 $ 43,081 164,943 $ 120,609 $ 78,827
Earnings per share -
basic (Qtr) $ 0.63 $ 0.62 0.63 $ 0.60 $ 0.57
Earnings per share -
basic (YTD) $ 1.25 $ 0.62 2.36 $ 1.73 $ 1.13
Earnings per share -
diluted (Qtr) $ 0.63 $ 0.62 0.63 $ 0.59 $ 0.57
Earnings per share -
diluted (YTD) $ 1.25 $ 0.62 2.34 $ 1.71 $ 1.12
Earnings per share -
cash diluted (Qtr) * $ 0.66 $ 0.65 0.66 $ 0.61 $ 0.59
Earnings per share -
cash diluted (YTD) * $ 1.31 $ 0.65 2.43 $ 1.77 $ 1.16
ROA (Qtr) 1.39% 1.38% 1.42% 1.40% 1.40%
ROA (YTD) 1.38% 1.38% 1.41% 1.40% 1.41%
ROE (Qtr) 19.06% 19.33% 19.05% 18.01% 17.64%
ROE (YTD) 19.19% 19.33% 18.04% 17.70% 17.54%
Efficiency ratio (Qtr) ** 56.03% 55.19% 52.31% 52.15% 54.57%
Efficiency ratio (YTD) ** 55.61% 55.19% 53.78% 54.28% 55.37%
Net interest margin (Qtr) 3.37% 3.46% 3.65% 3.70% 3.74%
Net interest margin (YTD) 3.41% 3.46% 3.74% 3.74% 3.76%
*Cash diluted EPS excludes the after-tax effect of the amortization of
goodwill-related intangibles in net income.
**Noninterest expense divided by sum of taxable equivalent net interest income
plus noninterest income, excluding investment securities gains (losses), net,
and asset sales gains, net.
Net Interest Income and Net Interest Margin
YTD00 net interest income on a fully taxable equivalent basis ("FTE NII") was
$204.7 million, up $4.5 million or 2.2% over YTD99. As indicated in Tables 2 and
3, changes in the volume and mix of average earning assets ("EAs") and
interest-bearing liabilities ("IBLs") contributed $19.0 million to FTE NII,
while changes in the rate environment impacted FTE NII unfavorably by $14.5
million. Acquisitions, net of the cost to fund them, added approximately $2.1
million to FTE NII between the periods.
The net interest margin ("NIM") was 3.41% for YTD00, down 35 basis points ("bp")
from 3.76% for YTD99, reflecting the sensitivity to rising interest rates (six
increases in the Fed Fund rate totaling 175 bp since July 1999) embodied within
the balance sheet, greater reliance on more costly wholesale funds and brokered
CDs, and certain balance sheet sales. The impact from balance sheet sales
includes the sale of the higher-yielding credit card receivables, branch deposit
sales replaced with more costly wholesale funds, and certain investment
securities sales sold to mitigate interest rate risk and enhance future yields.
In addition, the lower NIM reflects the cost of funding the Corporation's share
repurchases during late 1999 and YTD00 and the May 1999 purchase of an
additional $100 million in bank owned life insurance ("BOLI") (a non-interest
earning asset). The Corporation may continue to experience further compression
due to interest rate increases and competitive pricing pressures.
The interest rate spread (the difference between the EA yield and the average
rate paid on IBLs) dropped 39 bp to 2.86%, attributable to a 19 bp rise in the
yield on EAs and a 58 bp increase in the rate on IBLs. Yields increased on both
loans and investments and other (up 19 bp to 8.17% for loans and 20 bp to 6.59%
for investments and other). See Table 2. Wholesale funding costs climbed 112 bp
(to 5.98% in YTD00). The rate on total interest-bearing deposits increased 34 bp
(to 4.47%), a combination of a 97 bp increase in brokered CDs and a 19 bp
increase in retail interest-bearing deposits. Reliance on wholesale funding and
brokered CDs, whose cost increased faster than total retail deposits, has
increased to 31.9% for YTD00 compared to 20.6% last year.
On average, total assets for YTD00 increased to $12.6 billion, $1.3 billion
(11.7%) over YTD99, predominantly from EAs. Year-to-date average EAs increased
by $1.3 billion (12.2%) over the comparable period last year. EA growth occurred
in both loans and investments, with loans representing 71.7% of EAs for YTD00
compared to 71.5% for YTD99. Average loans were $8.5 billion, up $955 million
(12.6%) over the comparable six-month period last year. Excluding the net impact
of the purchase acquisitions and the sale of the credit card receivables,
average loans grew 8.3% year-over-year. As a result of the Corporation's focus
on increasing the mix of commercial lending in its portfolio, the majority of
loan growth has come from commercial loans. See Table 6. Total average
investments (including short-term investments) were up $335 million (of which
$290 million was in municipal securities).
YTD00 IBLs were $10.6 billion, up $1.2 billion (12.9%) over YTD99, principally
in wholesale funding which increased $863 million (46.1%). Interest-bearing
deposits grew $346 million (4.6%) (with $199 million acquired with Riverside).
Brokered CDs drove the growth in deposits, up $575 million on average between
the six-month periods. During YTD00, five branches with $82 million in deposits
were sold, and 3 branches with $56 million in deposits were sold during 4Q99.
<PAGE>
<TABLE>
--------------------------------------------------------------------------------------------------
TABLE 2
Net Interest Income Analysis-Taxable Equivalent Basis
($ in Thousands)
--------------------------------------------------------------------------------------------------
Three Months ended June 30, 2000 Three Months ended June 30, 1999
-------------------------------- --------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $ 8,596,648 $ 178,001 8.23% $ 7,641,973 $ 151,790 7.91%
Investments and other 3,334,295 55,618 6.67 3,066,820 48,712 6.35
----------------------- ----------------------
Total earning assets 11,930,943 233,619 7.79 10,708,793 200,502 7.47
Other assets, net 743,230 734,640
----------- ----------
Total assets $ 12,674,173 $11,443,433
=========== ==========
Interest-bearing deposits $ 8,028,650 92,137 4.62% $ 7,470,730 75,544 4.06%
Wholesale funding 2,535,132 39,799 6.21 1,991,406 24,282 4.82
---------------------- -----------------------
Total interest-bearing
liabilities 10,563,782 131,936 5.00 9,462,136 99,826 4.22
--------- -------
Demand, non-interest bearing 1,058,252 959,566
Other liabilities 130,154 115,228
Stockholders' equity 921,985 906,503
----------- ----------
Total liabilities and $
equity $ 12,674,173 $11,443,433
=========== ==========
Interest rate spread 2.79% 3.25%
Net free funds 0.58 0.49
===== ====
Net interest income and net $ 101,683 $ 100,676
interest margin 3.37% 3.74%
=============== ==================
Tax equivalent adjustment $ 5,321 $ 3,125
--------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
--------------------------------------------------------------------------------------------------
TABLE 2 (Continued)
Net Interest Income Analysis-Taxable Equivalent Basis
($ in Thousands)
--------------------------------------------------------------------------------------------------
Six Months ended June 30, 2000 Six Months ended June 30, 1999
------------------------------ ------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans $ 8,527,965 $ 350,515 8.17% $ 7,573,451 $ 302,389 7.98%
Investments and other 3,358,462 110,594 6.59 3,023,247 96,593 6.39
----------------------- ---------------------
Total earning assets 11,886,427 461,109 7.72 10,596,698 398,982 7.53
Other assets, net 736,885 703,925
----------- ----------
Total assets $ 12,623,312 $11,300,623
=========== ==========
Interest-bearing deposits $ 7,816,541 173,695 4.47% $ 7,470,359 152,943 4.13%
Wholesale funding 2,735,864 82,665 5.98 1,872,553 45,785 4.86
------------------------ --------------------
Total interest-bearing
liabilities 10,552,405 256,360 4.86 9,342,912 198,728 4.28
------- -------
Demand, non-interest bearing 1,042,500 931,906
Other liabilities 119,145 119,541
Stockholders' equity 909,262 906,264
----------- ----------
Total liabilities and
equity $ 12,623,312 $ 11,300,623
=========== ===========
Interest rate spread 2.86% 3.25%
Net free funds 0.55 0.51
===== =====
Net interest income and net
interest margin $204,749 3.41% $ 200,254 3.76%
============== ==============
Tax equivalent adjustment $ 10,038 $ 5,905
--------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
--------------------------------------------------------------------------------
TABLE 3
Volume / Rate Variance - Taxable Equivalent Basis
($ in Thousands)
--------------------------------------------------------------------------------
Comparison of
Three months ended June 30, 2000 versus 1999
Variance Attributable to
------------------------
Income/
Expense
Variance * Volume ** Rate **
--------------------------------------------------------------------------------
INTEREST INCOME
Loans $26,211 $19,802 $ 6,409
Investments and other 6,906 4,403 2,503
------
Total interest income 33,117 24,205 8,912
INTEREST EXPENSE
Interest-bearing deposits $16,593 $ 5,928 $10,665
Wholesale funding 15,517 7,549 7,968
------
Total interest expense 32,110 13,477 18,633
------
Net interest income $ 1,007 $10,728 $(9,721)
======
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
TABLE 3 (continued)
Volume / Rate Variance - Taxable Equivalent Basis
($ in Thousands)
--------------------------------------------------------------------------------
Comparison of
Three months ended June 30, 2000 versus 1999
Variance Attributable to
Income/ ------------------------
Expense
Variance * Volume ** Rate **
--------------------------------------------------------------------------------
INTEREST INCOME
Loans $48,126 $40,483 $ 7,643
Investments and Other 14,001 10,930 3,071
------
Total interest income 62,127 51,413 10,714
INTEREST EXPENSE
Interest-bearing deposits $20,752 $ 7,839 $ 12,913
Wholesale funding 36,880 24,594 12,286
------
Total interest expense 57,632 32,433 25,199
------
Net interest income $ 4,495 $18,980 $(14,485)
======
* The change in interest due to both rate and volume has been allocated
proportionately to volume variance and rate variance based on the relationship
of the absolute dollar change in each.
** Variances are computed on a line-by-line basis and are non-additive.
--------------------------------------------------------------------------------
Provision for Loan Losses
YTD00 provision for loan losses ("PFLL") was $10.9 million, up $1.9 million from
YTD99. YTD00 net charge-offs as a percent of average loans (on an annualized
basis) were 0.11% compared to YTD99 of 0.19%. See Table 8.
The PFLL is a function of the methodology used to determine the adequacy of the
allowance for loan losses. See additional discussion under the "Allowance for
Loan Losses" section.
Noninterest Income
YTD00 noninterest income was $96.4 million, up $11.3 million (13.3%) compared to
YTD99. Primary categories that have impacted the change between comparable
periods were mortgage banking, and net gains (losses) on both investment
securities and asset sales. Excluding these categories, noninterest income was
$72.8 million, or $12.4 million (20.5%) higher than the comparable 1999 period,
with all other noninterest income categories showing increases over the same
period last year (See Table 4). Riverside and BNC, acquired in the second half
of 1999, added approximately $2.1 million of noninterest income YTD00.
<PAGE>
<TABLE>
-------------------------------------------------------------------------------------------------------
TABLE 4
Noninterest Income
($ in Thousands)
-------------------------------------------------------------------------------------------------------
2nd 2nd
Qtr. Qtr. Dollar Percent YTD YTD Dollar Percent
2000 1999 Change Change 2000 1999 Change Change
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Trust service fees $ 9,526 $ 9,608 $ (82) (0.9)% $ 19,649 $ 19,189 $ 460 2.4%
Service charges on
deposit accounts 8,207 6,773 1,434 21.2 15,681 13,690 1,991 14.5
Mortgage banking 4,902 8,043 (3,141) (39.1) 9,492 19,435 (9,943) (51.2)
Credit card & other
nondeposit fees 7,260 5,094 2,166 42.5 12,536 9,652 2,884 29.9
Retail commissions 5,337 4,897 440 9.0 10,945 8,783 2,162 24.6
BOLI income 3,131 2,270 861 37.9 6,030 3,548 2,482 70.0
Asset sale gains, net 13,043 321 12,722 N/M 21,307 603 20,704 N/M
Other 4,572 2,859 1,713 59.9 7,984 5,583 2,401 43.0
--------------------------------------------------------------------------
Subtotal $ 55,978 $ 39,865 $ 16,113 40.4% $103,624 $ 80,483 $ 23,141 28.8%
Investment securities
gains (losses), net (5,490) 1,023 (6,513) N/M (7,192) 4,612 (11,804) N/M
--------------------------------------------------------------------------
Total noninterest income $ 50,488 $ 40,888 $ 9,600 23.5% 96,432 $ 85,095 $ 11,337 13.3%
==========================================================================
Subtotal, net of asset
sale gains $ 42,935 $ 39,544 $ 3,391 8.6% $ 82,317 $ 79,880 $ 2,437 3.1%
Subtotal, net of asset
sale gains and mortgage
banking income $ 38,033 $ 31,501 $ 6,532 20.7% $ 72,825 $ 60,445 $ 12,380 20.5%
=======================================================================================================
N/M = not meaningful
</TABLE>
Trust service fees increased $460,000, or 2.4%, over the comparable period
six-month period last year. The rising rate environment and competitive market
conditions have slowed growth in trust business.
Service charges on deposit accounts were up $2.0 million, or 14.5%, primarily
due to YTD00 benefiting from the May 2000 and 1999 mid-year increases and
changes in NSF and other service charges.
Mortgage banking income consists of servicing fees, the gain or loss on sales of
mortgage loans to the secondary market, and production-related revenue
(origination, underwriting and escrow waiver fees). Mortgage banking income for
YTD00 decreased $9.9 million, or 51.2% from YTD99. Secondary mortgage production
was down 82% from the year-earlier period which adversely impacted gains on
sales of mortgages (down $7.8 million, or 86.9%), and volume-related fees (down
$2.1 million, or 72.7%).
Credit card and other nondeposit fees increased $2.9 million, or 29.9%, compared
to YTD99. The April acquisition agreement and the five year agency agreement
with Citibank USA ("Citi") provide for agent fees and other income on new and
existing card business. YTD00 includes $2.2 million from Citi. The remaining
increase was primarily seen in merchant discount fees and certain nondeposit
service charges.
Retail commission income (brokerage and insurance commissions) increased $2.2
million, or 24.6% compared to the same period last year. The majority of the
increase is insurance related (up $1.7 million) primarily in fixed annuity
income (up $1.0 million) since the comparable period last year.
BOLI income increased $2.5 million, or 70.0%, between comparable periods. The
increase was primarily attributable to the timing of the BOLI investments
purchased, with $100 million in October 1998 and an additional $100 million
investment made in May of 1999, and rate increases effective in March 2000. BOLI
income is included in other noninterest income in the consolidated statements of
income.
Net asset sale gains increased $20.7 million versus YTD99, due to the gain on
sale of $128 million credit card receivables ($12.9 million) and the net premium
on the sales of deposits of five branches ($8.2 million) during YTD00.
Other noninterest income increased $2.4 million, or 43.0% from YTD99, of which
$1.4 million was recognized in connection with an interim servicing agreement
with Citi related to the credit card receivable sale which concluded in June
2000.
Net investment securities gains (losses) decreased $11.8 million versus YTD99.
The YTD00 net losses of $7.2 million were from securities sold to mitigate
interest rate risk and enhance future yields. The YTD99 net gains of $4.6
million were primarily due to the partial sale of an agency security.
Noninterest Expense
While YTD00 noninterest expense ("NIE") was $159.6 million, up $4.5 million, or
2.9%, compared to YTD99, the acquisitions (Riverside and BNC) added nearly $8.1
million of noninterest expense in the first six months of 2000. Therefore,
excluding acquisitions the resulting net decrease in noninterest expense was the
result of initiatives to control expenses. Primary categories that have impacted
the change between comparable periods were data processing and other NIE. See
Table 5.
<PAGE>
<TABLE>
-------------------------------------------------------------------------------------------------------
TABLE 5
Noninterest Expense
($ in Thousands)
-------------------------------------------------------------------------------------------------------
2nd 2nd
Qtr. Qtr. Dollar Percent YTD YTD Dollar Percent
2000 1999 Change Change 2000 1999 Change Change
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee
benefits $ 38,916 $ 39,153 $ (237) (0.6)% $ 77,554 $ 77,383 $ 171 0.2%
Occupancy 5,672 5,581 91 1.6 11,816 11,507 309 2.7
Equipment 3,755 3,725 30 0.8 7,852 7,417 435 5.9
Data processing 6,708 5,167 1,541 29.8 12,387 10,462 1,925 18.4
Business development &
advertising 3,269 3,270 (1) --- 6,499 6,329 170 2.7
Stationery and supplies 1,999 2,021 (22) (1.1) 3,823 3,892 (69) (1.8)
FDIC expense 421 716 (295) (41.2) 898 1,578 (680 (43.1)
Other 20,291 16,888 3,403 20.2 38,813 36,537 2,276 6.2
-------------------------------------------------------------------------------------------------------
Total noninterest expense $ 81,031 $ 76,521 $ 4,510 5.9% 159,642 $155,105 $ 4,537 2.9%
=======================================================================================================
</TABLE>
Salaries and employee benefit expenses remained essentially unchanged at $77.6
million, up only $171,000, or 0.2%, from YTD99. Despite the additional staff of
acquired entities, which added approximately 136 full time equivalent employees
("FTEs"), the number of FTEs has been reduced primarily in operational areas as
centralization of processes and other operational-related synergies were
achieved throughout 1999 (with approximately 100 fewer FTEs at June 30, 2000
than a year ago).
Occupancy and equipment on a combined basis increased to $19.7 million, up
$744,000, or 3.9%, over the comparable period last year. The increase is
primarily due to higher rental expenses and computer depreciation expense
associated with computer upgrades during 1999 and 2000.
Data processing increased to $12.4 million, up $1.9 million, or 18.4%, to the
same period last year. The majority of the increase is attributable to software
and system enhancements, volume-driven
increases in processing costs and higher software maintenance.
FDIC expense decreased to $898,000, down $680,000, or 43.1%, from YTD99,
reflective of the net rate reduction in the combined banking insurance fund
(BIF) and savings association insurance fund (SAIF) effective for 2000.
Other expenses were up $2.3 million, or 6.2%, over YTD99. Mortgage servicing
rights amortization increased $3.4 million since YTD99 included the reversal of
$3.3 million of mortgage servicing rights valuation reserve, and intangible
amortization expense increased $1.0 million due to the acquisitions. These
increases were offset by lower professional fees (down $2.1 million between
periods, principally due to $1.8 million of Y2K consulting expenses in YTD99).
Income Taxes
Income tax expense for YTD00 was $33.8 million, down $2.7 million or 7.3% from
YTD99. The effective tax rate (income tax expense divided by income before
taxes) was 28.1% and 31.7% for YTD00 and YTD99, respectively. This decrease is
primarily the result of the tax benefit of increased municipal securities (the
average balance of municipal securities increased 64% since YTD99), BOLI income,
and the utilization of tax loss carryforwards. Balance Sheet
At June 30, 2000, total assets reached $13.0 billion, an increase of $1.4
billion, or 11.8%, over June 30, 1999. The growth is in part due to the purchase
acquisitions (see Note 3 in the notes to consolidated financial statements).
Riverside and BNC accounted for $477 million (including intangibles) of the
increase between the comparable year-to-date periods. Excluding the two
acquisitions, the year-over-year growth rate of total assets was 7.7%.
Period end loans grew $1.1 billion or 13.9% since June 30, 1999, predominately
in commercial-oriented loans (CF&A loans, commercial real estate and real estate
construction loans included in Table 6). Excluding the net of the $299 million
of loans acquired (Riverside and BNC) and the $128 million of credit card
receivable sold, loans grew year-over-year by approximately $891 million or
11.7%.
Period end deposits grew $756 million or 8.9% since June 30, 1999, primarily in
brokered CDs (up $759 million). Total deposits excluding brokered CDs ("retail
deposits") were relatively unchanged, down $3.3 million or 0.04%; however,
excluding the net of the acquisitions ($337 million) and branch sales ($139),
retail deposits were down approximately $199 million, or 2.4%. One of the
primary factors influencing deposit growth has been due to competitive pressures
from other investment opportunities available to customers.
Since year-end 1999, total assets grew $478 million, primarily in loans. Loans
increased $353 million (8.5% annualized), to $8.7 billion at June 30, 2000.
Deposits increased $554 million (12.8% annualized), to $9.2 billion at June 30,
2000.
<TABLE>
-------------------------------------------------------------------------------------------------
TABLE 6
Period End Loan Composition
($ in Thousands)
-------------------------------------------------------------------------------------------------
June 30, % of June 30, % of Dec. 31, % of
2000 Total 1999 Total 1999 Total
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
& agricultural
("CF&A loans") $ 1,552,203 18% $ 1,188,765 16% $ 1,412,338 17%
Real estate-construction 564,084 6 481,200 6 560,450 7
Real estate-mortgage/commercial 2,265,142 26 1,612,011 21 1,903,633 23
Real estate-mortgage/residential 3,695,456 43 3,580,185 47 3,683,344 44
Installment loans to individuals 597,049 7 748,656 10 760,106 9
Lease financing 22,483 -- 23,759 -- 23,229 --
----------------------------------------------------------------
Total loans $ 8,696,417 100% $ 7,634,576 100% $ 8,343,100 100%
================================================================
-------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
-------------------------------------------------------------------------------------------------
TABLE 7
Period End Deposit Composition
($ in Thousands)
-------------------------------------------------------------------------------------------------
June 30, % of June 30, % of Dec. 31, % of
2000 Total 1999 Total 1999 Total
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand $ 1,131,871 12% $ 973,854 11% $ 1,103,931 13%
Savings 968,610 11 934,188 11 838,201 9
NOW 784,077 8 743,138 9 868,514 10
Money Market 1,366,995 15 1,366,095 16 1,483,779 17
Brokered CDs 966,755 10 207,731 3 337,243 4
Other time 4,027,083 44 4,264,680 50 4,060,161 47
--------------------------------------------------------------
Total deposits $ 9,245,391 100% 8,489,686 100% $ 8,691,829 100%
==============================================================
-------------------------------------------------------------------------------------------------
</TABLE>
Allowance For Loan Losses
The loan portfolio is the Corporation's primary asset subject to credit risk.
Credit risk is controlled and monitored through the use of lending standards, a
thorough review of potential borrowers, and on-going review of loan payment
performance. Active asset quality administration, including early problem loan
identification and timely resolution of problems, further ensures appropriate
management of credit risk and minimization of loan losses.
--------------------------------------------------------------------------------
TABLE 8
Allowance for Loan Losses and Nonperforming Assets
($ in Thousands)
--------------------------------------------------------------------------------
At and for the At and for the
Six months ended year ended
June 30, December 31,
--------------------------------------------------------------------------------
2000 1999 1999
------------------------------------
Allowance for Loan Losses (AFLL):
Balance at beginning of period $ 113,196 $ 99,677 $ 99,677
Balance related to acquisitions --- 2,037 8,016
Decrease from sale of credit
card receivables (4,216) --- ---
Provision for loan losses 10,881 8,998 19,243
Charge-offs (5,758) (7,969) (16,621)
Recoveries 1,292 992 2,881
------------------------------------
Net charge-offs (NCOs) (4,466) (6,977) (13,740)
------------------------------------
Balance at end of period $ 115,395 $ 103,735 $ 113,196
====================================
Nonperforming Assets (NPAs):
Nonaccrual loans $ 35,155 $ 37,431 $ 32,076
Accruing loans past due 90
days or more 4,886 4,243 4,690
Restructured loans --- 283 148
------------------------------------
Total nonperforming loans (NPLs) 40,041 41,957 36,914
Other real estate owned (OREO) 3,954 9,759 3,740
------------------------------------
Total nonperforming assets $ 43,995 $ 51,716 $ 40,654
====================================
Ratios:
AFLL to NCOs (annualized) 12.85 7.37 8.24
NCOs to average loans (annualized) 0.11% 0.19% 0.18%
AFLL to total loans 1.33% 1.36% 1.36%
NPLs to total loans 0.46% 0.55% 0.44%
NPAs to total assets 0.34% 0.44% 0.32%
AFLL to NPLs 288% 247% 307%
--------------------------------------------------------------------------------
As of June 30, 2000, the allowance for loan losses ("AFLL") was $115.4 million,
representing 1.33% of loans outstanding, compared to $103.7 million (or 1.36% of
loans) at June 30, 1999, and $113.2 million (or 1.36% of loans) at year-end
1999.
The AFLL at June 30, 2000 was up $11.7 million since June 30, 1999, of which
$6.0 million was acquired with the purchase transactions during the second half
of 1999, offset by a $4.2 million decrease related to the sale of credit card
receivables in the second quarter of 2000. Period end loans grew $1.1 billion
since June 30, 1999, predominately in commercial-oriented loans (CF&A loans,
commercial real estate and real estate construction loans included in Table 6)
which by their nature carry greater inherent credit risk. The mix of
commercial-oriented loans increased as a percent of total loans to 50% at June
30, 2000, compared to 43% last year.
The AFLL at June 30, 2000, increased $2.2 million since December 31, 1999. Since
year-end 1999, the AFLL was decreased by $4.2 million related to the
aforementioned sale of the credit card portfolio, but increased through
provision for loan losses in connection with loan growth. Period end loans grew
$353 million since year-end, commercial-oriented loans increased to 50% of total
loans at June 30, 2000, compared to 47% at December 31, 1999. The AFLL was 288%
of nonperforming loans compared to 247% and 307% at June 30 and December 31,
1999, respectively. Table 8 provides additional information regarding activity
in the AFLL.
Charge-offs were $5.8 million for YTD00, $8.0 million for YTD99 and $16.6
million for year-end 1999, while recoveries for the corresponding periods were
$1.3 million, $1.0 million and $2.9 million, respectively.
The AFLL represents management's estimate of an amount adequate to provide for
losses inherent in the loan portfolio. Management's evaluation of the adequacy
of the AFLL is based on management's ongoing review and grading of the loan
portfolio, consideration of past loan loss experience, trends in past due and
nonperforming loans, risk characteristics of the various classifications of
loans, current economic conditions, the fair value of underlying collateral, and
other factors which could affect credit losses.
Management believes the AFLL to be adequate at June 30, 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.
Nonperforming Loans And Other Real Estate Owned
Management's philosophy of the identification of nonaccrual and problem loans is
embodied through the ongoing monitoring and reviewing of all pools of risk in
the loan portfolio to ensure that problem loans are identified quickly and the
risk of loss is minimized.
Nonperforming loans ("NPLs") are considered an indicator of future loan losses.
NPLs are defined as nonaccrual loans, loans 90 days or more past due but still
accruing and restructured loans. The Corporation specifically excludes 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,
from its definition of NPLs. The Corporation had $17 million, $11 million and
$17 million of these loans at June 30, 2000, June 30, 1999, and December 31,
1999, respectively.
Table 8 provides detailed information regarding nonperforming assets. Total NPLs
at June 30, 2000 were $40.0 million, down $1.9 million and up $3.1 million, from
June 30 and December 31, 1999, respectively. The ratio of nonperforming loans to
total loans for the corresponding periods was .46%, .55% and .44% at June 30,
2000, June 30, 1999 and December 31, 1999, respectively. Nonaccrual loans
account for approximately $2.3 million of the decrease in NPLs between
comparable periods. Nonaccrual commercial and industrial loans increased $3.5
million, while all other categories decreased by $5.8 million since June 30,
1999.
OREO was $4.0 million at June 30, 2000, down significantly ($5.8 million) from a
year ago, and up slightly ($214,000) from December 31, 1999. Approximately $4.0
million of the change between periods was primarily due to one large commercial
property that was included in OREO at June 30, 1999 and subsequently sold before
year-end 1999. 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 mean that the
Corporation expects losses to occur but that management recognizes that a higher
degree of risk is associated with these performing loans. At June 30, 2000,
potential problem loans totaled $130 million. The loans that have been reported
as potential problem loans are not concentrated in a particular industry.
Management does not presently expect significant losses from credits in this
category.
Liquidity
Effective liquidity management ensures the cash flow requirements of depositors
and borrowers, as well as the operating cash needs of the Corporation, are met.
Funds are available from a number of sources, including the securities
portfolio, the core deposit base, lines of credit with major banks, the ability
to acquire large deposits, and the ability to securitize or package loans for
sale. Additionally, liquidity is provided from loans and securities repayments
and maturities.
The parent company's primary funding sources to meet its liquidity requirements
are dividends and service fees from subsidiaries, borrowings with major banks,
and proceeds from the issuance of equity. The parent company manages its
liquidity position to provide the funds necessary to pay dividends to
stockholders, service debt, invest in subsidiaries, repurchase common stock, and
satisfy other operating requirements. Additionally, the parent company had $225
million of established lines of credit with nonaffiliated banks, of which $96
million was outstanding at June 30, 2000.
The subsidiary banks are subject to regulation and, among other things, may be
limited in their ability to pay dividends or transfer funds to the parent
company. Accordingly, consolidated cash flows as presented in the consolidated
statements of cash flows may not represent cash immediately available for the
payment of cash dividends to the Corporation's stockholders.
During 1999, the parent company and its four largest subsidiary banks were rated
by Moody's and Standard and Poor's (S&P). These ratings, along with the
Corporation's other ratings, provide opportunity for greater funding capacity
and funding alternatives.
Capital
On April 26, 2000, the Board of Directors declared a 10% stock dividend, payable
June 15 to shareholders of record at the close of business on June 1. All share
and per share data in the accompanying consolidated financial statements has
been adjusted to reflect the 10% stock dividend paid. As a result of the stock
dividend, the Corporation distributed 6.3 million shares of common stock, common
stock was increased by $63,000, surplus was increased by $151.2 million and
retained earnings were decreased by $151.2 million. Any fractional shares
resulting from the dividend were paid in cash.
Stockholders' equity at June 30, 2000 increased to $930.2 million, compared to
$897.2 million at June 30, 1999. The increase in equity between the two periods
was primarily composed of the retention of earnings and the exercise of stock
options, with offsetting decreases to equity from the payment of dividends and
the repurchase of common stock. Additionally, stockholders' equity at June 30,
2000, included a $42.9 million equity component (included in accumulated other
comprehensive loss) related to unrealized losses on securities
available-for-sale, net of the tax effect, predominantly due to the impact of
the rising rate environment on that portfolio. At June 30, 1999, stockholders'
equity included $9.6 million related to unrealized losses on securities
available-for-sale, net of the tax effect. The ratio of period-end equity to
assets at June 30, 2000 was 7.16%, compared to 7.72% at June 30, 1999.
Stockholders' equity grew $20.4 million since year-end 1999. The increase in
equity between the two periods was primarily composed of the retention of
earnings and the exercise of stock options, with offsetting decreases to equity
from the payment of dividends and the repurchase of common stock. Additionally,
stockholders' equity at year-end, included a $38.8 million equity component
(included in accumulated other comprehensive loss) related to unrealized losses
on securities available-for-sale, net of the tax effect, predominantly due to
the impact of the rising rate environment on that portfolio. The ratio of
period-end equity to assets at June 30, 2000 was 7.16%, compared to 7.27% at
December 31, 1999.
The 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 330,000
shares per quarter in 2000. 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. During the six months of 2000,
217,800 and 930,250 shares were repurchased under these two authorizations,
respectively, at a combined average cost of $24.17 per share.
Cash dividends of $0.5272 per share were paid, representing a payout ratio of
42.18% for YTD00.
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 conditions in
markets served and strength of management. The capital ratios of the Corporation
and its banking affiliates are greater than minimums required by regulatory
guidelines. The Corporation's capital ratios are summarized in Table 9.
<PAGE>
TABLE 9
Capital Ratios
--------------------------------------------------------------------------------
Total Capital Tier I Capital Tier I Leverage
--------------------------------------------------------------------------------
June 30, 2000 11.30% 10.03% 6.86%
December 31, 1999 10.99% 9.72% 6.80%
June 30, 1999 11.83% 10.48% 7.49%
Regulatory minimum
requirements for
well capitalized 10.00% 6.00% 5.00%
--------------------------------------------------------------------------------
Second Quarter Results
Net income for second quarter 2000 ("2Q00") was $43.7 million, up $3.8 million
from the $39.9 million net income earned in the second quarter of 1999 ("2Q99").
ROE was 19.06%, up 142 bp from 2Q99, while ROA remained virtually unchanged with
a decrease of 1 bp to 1.39%. Acquisition activity (further described in Note 3
of the notes to consolidated financial statements) impacted the comparable
quarter analysis. Financial results of 2Q99 do not include results of the
Riverside and BNC purchase acquisitions, while 2Q00 included financial results
of both acquisitions. These acquisitions accounted for approximately $538,000,
net of funding costs, of the increase in net income between comparable quarters.
FTE NII for 2Q00 was $101.7 million, $1.0 million higher than 2Q99. The NIM of
3.37% in 2Q00 was 37 bp lower than the NIM of 3.74% in 2Q99 (see Tables 2 and
3). The acquisitions, net of funding costs, added approximately $5.1 million to
FTE NII between comparable quarters.
Changes in the volume and mix of average EAs (such as the combination of
internal loan growth and loans acquired, offset by the sale of credit card
receivables) contributed $10.7 million to FTE NII, while changes in the rate
environment impacted FTE NII unfavorably by $9.7 million (see Table 3). Average
EA growth (up $1.2 billion to $11.9 billion) and a decrease in interest-bearing
deposits excluding brokered CDs (down $243 million), was funded primarily by
higher-costing brokered CDs (up $801 million) and other wholesale funds (up $544
million).
The NIM fell 37 bp to 3.37% for 2Q00, particularly reflecting the balance
sheet's sensitivity to rising interest rates (the average Fed funds rate for
2Q00 was 151 bp higher than 2Q99), greater reliance on more costly wholesale
funds and brokered CDs (which represented 32.3% of IBLs for 2Q00 compared to
21.8% for 2Q99), and the sale of the higher-yielding credit card receivables,
offset by positive NIM contributions from acquisitions, security reinvestment
opportunities, and earning asset growth.
The provision for loan losses was up $619,000 over the provision for 2Q99, in
part due to loan growth particularly in commercial-oriented loans (CF&A loans,
commercial real estate and real estate construction loans). The AFLL to loans at
June 30, 2000 was 1.33% compared to 1.36% at June 30, 1999 (see Table 8).
Noninterest income was $50.5 million for 2Q00, up $9.6 million over 2Q99 (see
Table 4). The change between comparable quarters was impacted by three primary
components: a) net asset sale gains (up $12.7 million, as a result of the $12.9
million gain recorded on the sale of the credit card receivables in 2Q00), b)
net investment gains (losses) (down $6.5 million, principally due to losses
incurred on mortgage-related securities sales in 2Q00), and c) mortgage banking
income (down $3.1 million, primarily due to a 72% decline in secondary mortgage
loan production, adversely impacting gains on the sale of mortgages and volume
related fees). Excluding these three components, noninterest income was up $6.5
million, or 20.7%. Increases were seen in all categories except trust service
fees which were relatively steady. Credit card and other nondeposit fees were up
$2.2 million (42.5%), due to the previously mentioned Citi arrangement. Service
charges on deposit accounts in 2Q00 were up $1.4 million (21.2%) and include fee
increases and changes in NSF and other service charges. Other income increased
$1.7 million, primarily due to $1.4 million recognized in connection with an
interim servicing agreement with Citi related to the credit card receivable
sale.
Noninterest expense for 2Q00 was up $4.5 million over 2Q99 (see Table 5), in
part due to a $3.3 million MSR valuation reversal which decreased 2Q99
noninterest expense, a $1.5 million increase in data processing costs due to
software and system enhancements in 2Q00, and higher intangible amortization of
$0.5 million due to the timing of acquisitions. Partially offsetting these
expense increases were lower FDIC expense (particularly due to the net rate
reduction from the 2000 combined BIF/SAIF rate) and other expense control
initiatives and efficiencies (such as reductions in salaries and employee
benefits, particularly due to fewer FTEs between the quarters, despite acquired
FTEs). Taxes were down $539,000 between comparable quarters, due to the decrease
in the effective tax rate, at 28.0% for 2Q00 compared to 30.5% for 2Q99, which
was offset partially by the increase in income before taxes.
Subsequent Event
The Corporation continually reviews its branch distribution network for
efficiencies and utilization of resources. In addition to the three branches
sold during 4Q99 and the five branches sold during 1Q00, the Corporation
completed in July 2000 the sale of deposits of a branch location with $26
million in deposits. A net gain of approximately $2.9 million will be recognized
in third quarter 2000.
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The Corporation has not experienced any material changes to its market risk
position since December 31, 1999, from that disclosed in the Corporation's 1999
Form 10-K Annual Report.
<PAGE>
ASSOCIATED BANC-CORP
PART II - OTHER INFORMATION(UPDATED W/ CURRENT DATA 5/11/00)
ITEM 4: Submission of matters to a vote of security holders
(a) The corporation held its Annual Meeting of Shareholders on April
26, 2000. Proxies were solicited by corporation management
pursuant to Regulation 14A under the Securities Exchange Act of
1934.
(b) Directors elected at the Annual Meeting were Harry B. Conlon,
Ronald R. Harder, J. Douglas Quick, and John H. Sproule.
(c) The matters voted upon and the results of the voting were as
follows:
(i) Election of the below-named nominees to the Board of
Directors of the Corporation:
FOR WITHHELD
All Nominees: 55,111,851 1,036,359
By Nominee:
Harry B. Conlon 53,906,779 1,241,431
Ronald R. Harder 53,968,221 1,179,989
J. Douglas Quick 54,007,163 1,141,047
John H. Sproule 53,851,350 1,296,860
(ii) Ratification of the selection of KPMG LLP as independent
auditors of Associated for the year ending December 31,
2000.
FOR AGAINST ABSTAIN
54,673,136 198,417 276,657
(d) Not applicable
<PAGE>
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11, Statement regarding computation of per-share
earnings. See Note 5 of the notes to consolidated financial
statements in Part I Item I.
Exhibit 27, Financial data schedule. Included in the
electronically filed document as required.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the six months ended June
30, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ASSOCIATED BANC-CORP
(Registrant)
Date: August 11, 2000 /s/ Robert C. Gallagher
-----------------------
Robert C. Gallagher
President and Chief Executive Officer
Date: August 11, 2000 /s/ Joseph B. Selner
--------------------
Joseph B. Selner
Principal Financial Officer
