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 193
For the quarterly period ended March 31, 2001
------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 $0.01
per share, at April 30, 2001, was 66,172,713.
1
ASSOCIATED BANC-CORP
TABLE OF CONTENTS
Page No.
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PART I. Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets -
March 31, 2001, March 31, 2000 and
December 31, 2000 3
Consolidated Statements of Income -
Three Months Ended March 31, 2001 and 2000 4
Consolidated Statement of Changes in
Stockholders' Equity -
Three Months Ended March 31, 2001 5
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 23
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements:
ASSOCIATED BANC-CORP
Consolidated Balance Sheets
(Unaudited)
March 31, March 31, December 31,
2001 2000 2000
---------------------------------------------
($ in Thousands, except share data)
ASSETS
Cash and due from banks $ 298,766 $ 289,243 $ 368,186
Interest-bearing deposits in other financial institutions 10,201 4,550 5,024
Federal funds sold and securities purchased under agreements
to resell 38,150 83,285 23,310
Investment securities:
Held to maturity-at amortized cost (fair value of
$401,951, and $372,873, in 2000, respectively) --- 406,227 368,558
Available for sale-at fair value (amortized cost of
$3,148,341, $2,853,866, and $2,867,109, respectively) 3,230,949 2,786,209 2,891,647
Loans held for sale 121,820 7,284 24,593
Loans 8,935,543 8,589,984 8,913,379
Allowance for loan losses (123,668) (116,297) (120,232)
---------------------------------------------
Loans, net 8,811,875 8,473,687 8,793,147
Premises and equipment 124,555 136,092 127,600
Other assets 486,070 548,043 526,329
---------------------------------------------
Total assets $ 13,122,386 $ 12,734,620 $ 13,128,394
=============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing deposits $ 1,209,762 $ 1,112,924 $ 1,243,949
Interest-bearing deposits 7,477,929 8,084,860 8,047,697
---------------------------------------------
Total deposits 8,687,691 9,197,784 9,291,646
Short-term borrowings 3,150,476 2,381,852 2,598,203
Long-term debt 122,277 122,834 122,420
Accrued expenses and other liabilities 137,964 111,362 147,429
---------------------------------------------
Total liabilities 12,098,408 11,813,832 12,159,698
Stockholders' equity
Preferred stock --- --- ---
Common stock (Par value $0.01 per share,
authorized 100,000,000 shares, issued
66,402,157, 69,728,707, and
66,402,157 shares, respectively) 664 634 664
Surplus 296,479 226,042 296,479
Retained earnings 685,443 750,683 663,566
Accumulated other comprehensive income (loss) 49,220 (43,590) 15,581
Treasury stock at cost (267,588, 499,479 and 285,948
shares, respectively) (7,828) (12,981) (7,594)
---------------------------------------------
Total stockholders' equity 1,023,978 920,788 968,696
---------------------------------------------
Total liabilities and stockholders' equity $ 13,122,386 $ 12,734,620 $ 13,128,394
=============================================
See accompanying notes to consolidated financial statements.
3
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
----------------------
2001 2000
----------------------
(In Thousands, except
per share data)
INTEREST INCOME
Interest and fees on loans $ 184,375 $ 172,239
Interest and dividends on investment
securities:
Taxable 38,572 41,722
Tax exempt 10,164 8,196
Interest on deposits in other financial
institutions 121 64
Interest on federal funds sold and securities
purchased under agreements to resell 447 552
----------------------
Total interest income 233,679 222,773
INTEREST EXPENSE
Interest on deposits 91,427 81,558
Interest on short-term borrowings 43,304 41,421
Interest on long-term debt 1,945 1,445
----------------------
Total interest expense 136,676 124,424
----------------------
NET INTEREST INCOME 97,003 98,349
Provision for loan losses 5,582 5,715
----------------------
Net interest income after provision for loan 91,421 92,634
losses
NONINTEREST INCOME
Trust service fees 8,072 10,123
Service charges on deposit accounts 8,745 7,474
Mortgage banking 9,174 4,590
Credit card and other nondeposit fees 6,786 5,276
Retail commission income 4,484 5,608
Asset sale gains, net 532 8,264
Investment securities gains (losses), net 246 (1,702)
Other 6,280 6,311
----------------------
Total noninterest income 44,319 45,944
NONINTEREST EXPENSE
Personnel expense 40,305 38,638
Occupancy 6,354 6,144
Equipment 3,680 4,097
Data processing 4,843 5,679
Business development and advertising 3,001 3,230
Stationery and supplies 1,732 1,824
FDIC expense 434 477
Other 18,101 18,522
----------------------
Total noninterest expense 78,450 78,611
----------------------
Income before income taxes 57,290 59,967
Income tax expense 15,204 16,886
----------------------
NET INCOME $ 42,086 $ 43,081
======================
Earnings per share:
Basic $ 0.64 $ 0.62
Diluted $ 0.63 $ 0.62
Average shares outstanding:
Basic 66,150 69,504
Diluted 66,688 69,812
See accompanying notes to consolidated financial statements.
4
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
Accumulated
Common Other
Stock Retained Comprehensive Treasury
Amount Surplus Earnings Income (Loss) Stock Total
---------------------------------------------------------------------
($ in Thousands, except per share data)
Balance, December 31, 2000 $ 664 $296,479 $663,566 $15,581 $(7,594) $ 968,696
Comprehensive income:
Net income --- --- 42,086 --- --- 42,086
Cumulative effect of
accounting change, net of tax --- --- --- (1,265) --- (1,265)
Net loss on derivative
instruments, net of tax --- --- --- (2,441) --- (2,441)
Net unrealized holding
gains, net of tax --- --- --- 37,345 --- 37,345
-------
Comprehensive income 75,725
-------
Cash dividends, $0.29 per share --- --- (19,184) --- --- (19,184)
Common stock issued:
Incentive stock options --- --- (1,025) --- 3,249 2,224
Purchase of treasury stock --- --- --- --- (3,483) (3,483)
---------- ----------- ----------- ---------------- ----------- -----
Balance, March 31, 2001 $ 664 $296,479 $685,443 $49,220 $(7,828) $1,023,978
=====================================================================
See accompanying notes to consolidated financial statements.
5
ITEM 1. Financial Statements Continued:
ASSOCIATED BANC-CORP
Consolidated Statements of Cash Flows
(Unaudited)
For the Three Months
Ended March 31,
2001 2000
------------------------
($ in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 42,086 $ 43,081
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 5,582 5,715
Depreciation and amortization 4,797 5,078
Amortization (accretion) of:
Mortgage servicing rights 2,253 2,429
Intangibles 2,102 2,253
Investment securities premiums and discounts (355) 293
Deferred loan fees and costs 735 807
(Gain) loss on sales of investment securities, net (246) 1,702
Gain on sales of other assets, net (532) (8,264)
Gain on sales of loans held for sale and servicing rights, net (3,926) (439)
Mortgage loans originated and acquired for sale (344,712) (59,704)
Proceeds from sales of mortgage loans held for sale 251,411 64,814
Decrease in interest receivable and other assets 6,818 3,494
Decrease in interest payable and other liabilities (9,465) (7,549)
------------------------
Net cash provided by (used in) operating activities (43,452) 53,710
------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (26,245) (251,442)
Capitalization of mortgage servicing rights (2,208) (739)
Purchases of:
Securities available for sale (120,303) (281,127)
Premises and equipment, net of disposals (2,254) (2,664)
Proceeds from:
Sales of securities available for sale 57,384 262,634
Maturities of securities available for sale 155,161 79,158
Maturities of securities held to maturity -- 7,739
Sales of other assets 4,782 3,461
------------------------
Net cash provided by (used in) investing activities 66,317 (182,980)
------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (603,955) 588,326
Net increase (decrease) in short-term borrowings 552,273 (393,239)
Repayment of long-term debt (143) (1,448)
Proceeds from issuance of long-term debt -- 100,000
Cash dividends (19,184) (18,340)
Proceeds from exercise of incentive stock options 2,224 1,829
Sales of branch deposits -- (74,183)
Purchase of treasury stock (3,483) (10,763)
------------------------
Net cash provided by (used in) financing activities (72,268) 192,182
------------------------
Net increase (decrease) in cash and cash equivalents (49,403) 62,912
Cash and cash equivalents at beginning of period 396,520 314,166
------------------------
Cash and cash equivalents at end of period $ 347,117 $ 377,078
========================
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 147,390 $ 122,781
Income taxes 65 3,275
Supplemental schedule of noncash investing activities:
Securities held to maturity transferred to securities
available for sale 372,873 ---
Loans transferred to other real estate 1,200 1,137
============= ===========
See accompanying notes to consolidated financial statements.
6
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 ("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 accounting principles generally accepted in the United States of
America have been omitted or abbreviated. The information contained in the
consolidated financial statements and footnotes in the Corporation's 2000 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 investment
securities and mortgage servicing rights.
NOTE 2: Reclassifications
Certain items in prior period consolidated financial statements have been
reclassified to conform with the March 31, 2001 presentation.
NOTE 3: Adoption of Statements of Financial Accounting Standards ("SFAS")
As required, on January 1, 2001 the Corporation adopted 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"). The adoption
of SFAS No. 133 had an immaterial impact on the consolidated financial
statements. See Note 5 of the notes to consolidated financial statements for a
more detailed discussion.
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, and is to be applied prospectively with certain exceptions. The adoption
is not expected to be material to the
7
Corporation's financial position or results of operations.
NOTE 4: 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.
Presented below are the calculations for basic and diluted earnings per share:
For the three months
ended March 31,
2001 2000
-------------------------
(In Thousands, except
per share data)
Net income available to common stockholders $ 42,086 $ 43,081
Weighted average shares outstanding 66,150 69,504
Effect of dilutive stock options outstanding 538 308
-------------------------
Diluted weighted average shares outstanding 66,688 69,812
=========================
Basic earnings per common share $ 0.64 $ 0.62
Diluted earnings per common share $ 0.63 $ 0.62
=========================
NOTE 5: Derivatives and Hedging Activities
Effective January 1, 2001, the Corporation adopted SFAS 133, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
All derivatives, whether designated in hedging relationships or not, are
required to be recorded on the balance sheet at fair value. If the derivative is
designated as a fair value hedge, the changes in the fair value of the
derivative and of the hedged item attributable to the hedged risk are recognized
in earnings. If the derivative is designated as a cash flow hedge, the effective
portions of changes in the fair value of the derivative are recorded in other
comprehensive income ("OCI") and are recognized in the income statement when the
hedged item affects earnings. Ineffective portions of changes in the fair value
of cash flow hedges are recognized in earnings.
The Corporation uses derivative instruments primarily to hedge the variability
in interest payments or protect the value of certain assets and liabilities
recorded on its balance sheet from changes in interest rates. The predominant
activities affected by the statement include the Corporation's use of interest
rate swaps and certain mortgage banking activities. The adoption of the
statement included the following:
- - Under SFAS No. 133, the Corporation was allowed a one-time opportunity to
reclassify investment assets from held-to-maturity ("HTM") to
available-for-sale ("AFS"). Thus upon adoption, the Corporation
reclassified all its HTM securities to AFS. The amortized cost and fair
value of the securities transferred were $369 million and $373 million,
respectively.
- - The Corporation designated its interest rate swaps existing at December 31,
2000, to qualify for hedge accounting. The swaps hedge the exposure to
variability in interest payments of variable rate liabilities. These hedges
represent cash flow hedges and were highly effective at adoption. On
adoption, the cumulative effect, net of taxes of $843,000, was recorded as
a decrease to OCI of $1.3 million.
8
- - The Corporation's commitments to sell groups of residential mortgage loans
that it originates or purchases as part of its mortgage banking business,
as well as its commitments to originate residential mortgage loans are
considered derivatives under SFAS No. 133. The fair value of these
derivatives at adoption, an $11,000 net gain, was recorded directly to the
consolidated statements of income in mortgage banking income.
In accordance with the statement, the Corporation measures the effectiveness of
its hedges on a periodic basis. Any difference between the fair value change of
the hedge versus the fair value change of the hedged item is considered to be
the "ineffective" portion of the hedge. The ineffective portion of the hedge is
recorded as an increase or decrease in the related income statement
classification of the item being hedged. For the mortgage derivatives which are
not accounted for as hedges, changes in fair value are recorded as an adjustment
to mortgage banking income.
At March 31, 2001, the swaps designated as cash flow hedges have a notional
amount of $300 million, have a weighted average pay/receive rate of 6.36% and
6.06%, respectively, and a weighted average maturity of 14 months. At March 31,
2001, the estimated fair value of the swaps was a $6.2 million loss, or $3.7
million, net of taxes of $2.5 million, carried as a component of OCI. There was
no ineffective portion to be recorded. Currently, none of the existing losses
within OCI are expected to be reclassified into earnings within the next 12
months.
At March 31, 2001, a swap designated as a fair value hedge had a notional amount
of $3 million, a weighted average pay/receive rate of 7.55% and 7.49%,
respectively, and a weighted average maturity of 59 months. The change in fair
value of the mortgage derivatives since adoption of SFAS 133 was $634,000, and
is recorded in mortgage banking income for the three months ended March 31,
2001.
NOTE 6: Segment Reporting
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires selected financial and descriptive information about
reportable operating segments. The statement uses a "management approach"
concept as the basis for identifying reportable segments. The management
approach is based on the way that management organizes the segments within the
enterprise for making operating decisions, allocating resources, and assessing
performance. Consequently, the segments are evident from the structure of the
enterprise's internal organization, focusing on financial information that an
enterprise's chief operating decision-makers use to make decisions about the
enterprise's operating matters.
The Corporation's reportable segment is banking, conducted through its bank,
leasing, mortgage, insurance and brokerage subsidiaries. For purposes of segment
disclosure under this statement, these entities have similar economic
characteristics and the nature of their products, services, processes,
customers, delivery channels and regulatory environment are similar.
The "other" segment is comprised of smaller nonreportable segments, including
asset management, consumer finance, treasury, holding company investments, as
well as inter-segment eliminations and residual revenues and expenses,
representing the difference between actual amounts incurred and the amounts
allocated to operating segments.
9
Selected segment information is presented below.
Consolidated
Banking Other Eliminations Total
-------------------------------------------------------
As of and for the three months ($ in Thousands)
ended March 31, 2001
Total assets $14,121,805 $ 1,303,131 $(2,302,550) $13,122,386
=======================================================
Interest income $ 246,831 $ 4,521 $ (17,673) $ 233,679
Interest expense 150,921 3,428 (17,673) 136,676
-------------------------------------------------------
Net interest income 95,910 1,093 --- 97,003
Provision for loan losses 5,288 294 --- 5,582
Noninterest income 45,599 32,064 (33,344) 44,319
Depreciation and amortization 8,190 2,604 --- 10,794
Other noninterest expense 72,523 28,477 (33,344) 67,656
Income taxes 14,154 1,050 --- 15,204
-------------------------------------------------------
Net income $ 41,354 $ 732 $ --- $ 42,086
=======================================================
As of and for the three months ended
March 31, 2000
Total assets $13,297,757 $ 1,208,353 $(1,771,490) $12,734,620
=======================================================
Interest income $ 234,803 $ 5,027 $ (17,057) $ 222,773
Interest expense 137,699 3,782 (17,057) 124,424
-------------------------------------------------------
Net interest income 97,104 1,245 --- 98,349
Provision for loan losses 5,497 218 --- 5,715
Noninterest income 46,511 33,179 (33,746) 45,944
Depreciation and amortization 7,246 2,514 --- 9,760
Other noninterest expense 75,458 27,139 (33,746) 68,851
Income taxes 15,432 1,454 --- 16,886
-------------------------------------------------------
Net income $ 39,982 $ 3,099 $ --- $ 43,081
=======================================================
10
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 (the "Corporation")
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 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 consolidated
financial statements, footnotes, and supplemental financial data appearing
elsewhere in this Form 10-Q and should be read in conjunction therewith.
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 three months ended March 31, 2001 ("1Q01") totaled $42.1
million, or $.64 and $.63 for basic and diluted earnings per share ("EPS"),
respectively. Comparatively, net income for the first quarter of 2000 ("1Q00")
was $43.1 million, or $.62 for both basic and diluted EPS. For 1Q01 the
annualized return on average assets ("ROA") was 1.31% and the annualized return
on average equity ("ROE") was 17.18%, compared to 1.38% and 19.33%,
respectively, for the comparable period in 2000. The net interest margin for
1Q01 was 3.34% compared to 3.46% for 1Q00.
11
- ------------------------------------------------------------------------------------------------
TABLE 1
Summary Results of Operations: Trends
($ in Thousands, except per share data)
1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
2001 2000 2000 2000 2000
- -----------------------------------------------------------------------------------------------------
Net income (Qtr) $ 42,086 $ 39,701 $ 41,504 $ 43,697 $ 43,081
Net income (YTD) $ 42,086 $ 167,983 $ 128,282 $ 86,778 $ 43,081
Earnings per share - basic (Qtr) $ 0.64 $ 0.60 $ 0.61 $ 0.63 $ 0.62
Earnings per share - basic (YTD) $ 0.64 $ 2.46 $ 1.86 $ 1.25 $ 0.62
Earnings per share - diluted (Qtr) $ 0.63 $ 0.60 $ 0.61 $ 0.63 $ 0.62
Earnings per share - diluted (YTD) $ 0.63 $ 2.46 $ 1.86 $ 1.25 $ 0.62
Earnings per share - cash diluted (Qtr) * $ 0.66 $ 0.63 $ 0.63 $ 0.66 $ 0.65
Earnings per share - cash diluted (YTD) * $ 0.66 $ 2.57 $ 1.94 $ 1.31 $ 0.65
ROA (Qtr) 1.31% 1.21% 1.28% 1.39% 1.38%
ROA (YTD) 1.31% 1.31% 1.35% 1.38% 1.38%
ROE (Qtr) 17.18% 16.95% 17.75% 19.06% 19.33%
ROE (YTD) 17.18% 18.26% 18.70% 19.19% 19.33%
Efficiency ratio (Qtr) ** 53.68% 54.08% 56.63% 56.03% 55.19%
Efficiency ratio (YTD) ** 53.68% 55.48% 55.95% 55.61% 55.19%
Net interest margin (Qtr) 3.34% 3.20% 3.25% 3.37% 3.46%
Net interest margin (YTD) 3.34% 3.36% 3.35% 3.41% 3.46%
* 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, net,
and asset sales gains, net.
Net Interest Income and Net Interest Margin
Net interest income on a fully taxable equivalent basis ("FTE NII") for the
three months ended March 31, 2001, was $102.6 million, relatively unchanged
(down $462,000, or less than 1%) from the comparable quarter last year. As
indicated in Tables 2 and 3, the $462,000 decrease in FTE NII was due to rate
(as the impact of changes in the interest rate environment reduced FTE NII by
$3.2 million), and volume (with balance sheet growth and differences in the mix
of average earning assets ("EAs") and average interest-bearing liabilities
("IBLs") adding $2.7 million to FTE NII).
FTE NII and net interest margin ("NIM") have been impacted by competitive
pricing pressures and the interest rate environment. Interest rates fell during
1Q01, but rose during 1Q00. Comparatively, while the average Federal funds rate
for 1Q01 was only 8 basis points ("bp") lower than for 1Q00, the rate at March
31, 2001 was 100 bp lower than that at March 31, 2000.
The NIM for 1Q01 was 3.34%, down 12 bp from 3.46% in 1Q00. This comparable
quarter decline is attributable to an 18 bp decrease in interest rate spread,
offset in part by a 6 bp higher contribution from net free funds. The yield on
EAs was 7.87% for 1Q01, up 21 bp over the comparable quarter last year. The
average loan yield was 8.25%, up 13 bp over 1Q00. This was primarily a function
of increasing the mix of commercial loans to total loans, which are generally
higher-yielding. The average investment yield was 6.81%, up 31 bp over 1Q00, due
to the rising rate environment during 2000. Finally, the increase in the yield
on EAs was impacted by the mix of loans and investments. The ratio of average
loans to EAs (representing 73.7% of EAs for 1Q01 compared to 71.4% for 1Q00).
The cost of IBLs was 5.11% for 1Q01, up 39 bp compared to 1Q00. The average cost
of interest-bearing deposits excluding brokered CDs was 4.65%, up 42 bp over
1Q00, primarily in the cost of time deposits and money market accounts, impacted
strongly by competitive pricing pressures and the higher rate environment
through the year 2000. The cost of brokered CDs was 6.53%, up 62 bp over 1Q00,
also impacted by the
12
higher rate environment during 2000. The cost of wholesale funds was up 6 bp
between comparable first quarter periods. Given the growth in EAs, the decline
in interest-bearing deposit balances (excluding brokered CDs), and other funding
needs (such as funding the Corporation's share repurchases during 2000) between
comparable quarters, there was greater reliance on higher-costing brokered CDs
and wholesale funds (which on a combined basis represented 34.9% of total IBLs
in 1Q01 versus 31.5% last year).
EAs increased by $355 million (3.0%) over the comparable quarter last year,
while IBLs grew $265 million (2.5%). The growth in EAs came from loans, up an
average of $526 million (6.2%); excluding the impact of the credit card
receivables sale, loans were up $654 million (7.7%). In line with the
Corporation's focus on increasing the mix of commercial lending in its
portfolio, the growth was predominantly from commercial loans. Average
investments decreased $171 million (5.1%), attributable primarily to lower
average mortgage related securities and US government agencies. IBLs increased
$265 million or 2.5%. The growth in IBLs is attributed primarily to increases in
wholesale funding and brokered CDs, which on a combined basis were up $442
million, offset by a decline in interest-bearing deposits of $177 million.
- -----------------------------------------------------------------------------------------------------------------
TABLE 2
Net Interest Income Analysis
($ in Thousands)
- -----------------------------------------------------------------------------------------------------------------
Three months ended March 31, 2001 Three months ended March 31, 2000
------------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ---------------------------------------------------------------------------------------------------------------
Loans $ 8,985,659 $ 184,661 8.25% $ 8,459,281 $ 172,513 8.12%
Investments and other 3,211,356 54,619 6.81 3,382,629 54,977 6.50
------------------------ ------------------------
Total earning assets 12,197,015 239,280 7.87 11,841,910 227,490 7.66
Other assets, net 817,488 730,617
----------- ------------
Total assets $ 13,014,503 $ 12,572,527
=========== ============
Interest-bearing deposits,
excluding Brokered CDs $ 7,040,486 $ 80,748 4.65% $ 7,217,114 $ 75,875 4.23%
Brokered CDs 663,285 10,679 6.53 386,818 5,683 5.91
Wholesale funding 3,102,062 45,249 5.83 2,936,597 42,866 5.77
------------------------- ------------------------
Total interest-bearing liabilities 10,805,833 136,676 5.11 10,540,529 124,424 4.72
------- -------
Demand, non-interest bearing 1,084,769 1,027,324
Other liabilities 130,617 108,134
Stockholders' equity 993,284 896,540
------------ -----------
Total liabilities and equity $ 13,014,503 $12,572,527
============ ===========
Interest rate spread 2.76 2.94
Net free funds 0.58 0.52
---- ----
Net interest income and net
interest margin $ 102,604 3.34% $ 103,066 3.46%
=========== =========
Tax equivalent adjustment $5,601 $ 4,717
- ---------------------------------------------------------------------------------------------------------------
13
- --------------------------------------------------------------------------------
TABLE 3
Volume/Rate Variance
($ in Thousands)
- --------------------------------------------------------------------------------
Comparison of
Three months ended March 31, 2001 versus 2000
-----------------------------------------------
Variance Attributable to
------------------------------
Income/Expense
Variance * Volume Rate
- --------------------------------------------------------------------------------
INTEREST INCOME
Loans $ 12,148 $ 7,908 $ 4,240
Investments and other (358) (2,798) 2,440
-------- -------- --------
Total interest income 11,790 5,110 6,680
INTEREST EXPENSE
Interest-bearing deposits,
excluding Brokered CDs $ 4,873 $ (2,717) $ 7,590
Brokered CDs 4,996 3,149 1,847
Wholesale funding 2,383 1,938 445
-------- -------- --------
Total interest expense 12,252 2,370 9,882
-------- -------- --------
Net interest income $ (462) $ 2,740 $ (3,202)
======== ======== ========
* 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.
Provision for Loan Losses
The provision for loan losses ("PFLL") for 1Q01 was $5.6 million, up $379,000
from 4Q00 of $5.2 million, and down slightly from 1Q00 of $5.7 million.
Annualized net charge-offs as a percent of average loans for 1Q01 decreased to
0.10% from 0.11% and 0.12% for 4Q00 and 1Q00, respectively. The ratio of the
allowance for loan losses to total loans was 1.38%, up from 1.35% at both
December 31, and March 31, 2000. See Table 8.
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. See
additional discussion under the "Allowance for Loan Losses" section.
Noninterest Income
Noninterest income for 1Q01 was $44.3 million, down $1.6 million or 3.5% from
1Q00. Primary components impacting the change between comparable quarters were
mortgage banking income (which increased $4.6 million), and the combined net
gains (losses) on investment securities and asset sales, which were down $5.8
million. Noninterest income excluding these items was relatively unchanged, down
$425,000 or 1.2%.
14
- ----------------------------------------------------------------------------------------------
TABLE 4
Noninterest Income
($ in Thousands)
- ----------------------------------------------------------------------------------------------
1st Qtr. 1st Qtr. Dollar Percent
2001 2000 Change Change
- ----------------------------------------------------------------------------------------------
Trust service fees $ 8,072 $ 10,123 $ (2,051) (20.3)%
Service charges on deposit accounts 8,745 7,474 1,271 17.0
Mortgage banking income 9,174 4,590 4,584 99.9
Credit card and other nondeposit fees 6,786 5,276 1,510 28.6
Retail commission income 4,484 5,608 (1,124) (20.0)
BOLI income 3,134 2,899 235 8.1
Asset sale gains, net 532 8,264 (7,732) (93.6)
Other 3,146 3,412 (266) (7.8)
- ----------------------------------------------------------------------------------------------
Subtotal 44,073 47,646 (3,573) (7.5)
Investment securities gains (losses), net 246 (1,702) 1,948 (114.5)
- ----------------------------------------------------------------------------------------------
Total noninterest income $ 44,319 $ 45,944 $ (1,625) (3.5)%
==============================================================================================
Subtotal, excluding asset sale gains $ 43,541 $ 39,382 $ 4,159 10.6%
Subtotal, excluding asset sale gains and
mortgage banking income $ 34,367 $ 34,792 $ (425) (1.2)%
==============================================================================================
Trust service fees decreased $2.1 million between comparable first quarter
periods. 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 between the first quarter periods, and competitive market conditions.
Service charges on deposit accounts were up $1.3 million between comparable
first quarter periods, primarily due to 1Q01 benefiting from the 2000 mid-year
rate increases in NSF/OD charges.
Mortgage banking income consists of servicing fees, the gain or loss on sales of
mortgage loans to the secondary market, gains or sales of servicing, and
production-related revenue (origination, underwriting and escrow waiver fees).
Mortgage banking income increased $4.6 million, twice the 1Q00 level. The
increase was primarily a result of a significant increase in secondary mortgage
loan production and related sales between comparable periods ($345 million in
1Q01 versus $60 million in 1Q00). The higher production levels positively
impacted gains on sales (up $3.5 million, of which, $645,000 is related to gains
in the fair value of mortgage derivatives and $1.1 million was due to the sale
of servicing) and volume related fees (up $600,000). The portfolio of loans
serviced for others was relatively unchanged ($5.5 billion at 1Q01, down 1% from
$5.6 billion at 1Q00).
Credit card and other nondeposit fees were $6.8 million for 1Q01, an increase of
$1.5 million or 28.6% over 1Q00, with $366,000 in increased merchant income and
$1.1 million in all other credit card revenue. 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 down $1.1 million compared to 1Q00, primarily due
to a weaker stock market and lower interest rate environment between the
comparable quarters. Insurance commissions declined $611,000, while brokerage
commissions declined $514,000.
BOLI income was $3.1 million, up $235,000 or 8.1% over 1Q00. BOLI income is
included in other noninterest income on the consolidated statements of income.
15
Asset sale gains, net, decreased $7.7 million from 1Q00, principally
attributable to the $8.2 million net premium on deposits of five branches sold
during 1Q00.
Investment securities gains (losses), net, increased $1.9 million from 1Q00. The
1Q00 net losses of $1.7 million were from securities sold to mitigate interest
rate risk and enhance future yields.
Noninterest Expense
Noninterest expense ("NIE") remained relatively unchanged between comparable
periods, at $78.5 million for 1Q01 versus $78.6 million for 1Q00. However,
excluding a $1.6 million valuation adjustment on mortgage servicing rights
("MSRs") in 1Q01 (discussed below), NIE was $1.8 million (2%) lower than the
same quarter last year.
- ----------------------------------------------------------------------------------------
TABLE 5
Noninterest Expense
($ in Thousands)
- ----------------------------------------------------------------------------------------
1st Qtr. 1st Qtr. Dollar Percent
2001 2000 Change Change
- ----------------------------------------------------------------------------------------
Personnel expense $ 40,305 $ 38,638 $ 1,667 4.3%
Occupancy 6,354 6,144 210 3.4
Equipment 3,680 4,097 (417) (10.2)
Data processing 4,843 5,679 (836) (14.7)
Business development and advertising 3,001 3,230 (229) (7.1)
Stationery and supplies 1,732 1,824 (92) (5.0)
FDIC expense 434 477 (43) (9.0)
MSR amortization 3,898 2,429 1,469 60.5
Intangible amortization expense 2,102 2,253 (151) (6.7)
Legal and professional fees 892 1,594 (702) (44.0)
Other 11,209 12,246 (1,037) (8.5)
- ----------------------------------------------------------------------------------------
Total noninterest expense $ 78,450 $ 78,611 $ (161) (0.2)%
========================================================================================
Personnel expense increased $1.7 million or 4.3% over 1Q00, and represented
51.4% of total NIE in 1Q01 compared to 49.2% in 1Q00. Salary expenses increased
$555,000 or 1.8% between comparable quarters, due primarily to merit increases,
partially offset by the decline in full-time equivalent employees ("FTEs").
Average FTEs were down 97 employees or 2.5% to 3,840 for 1Q01. Fringe benefits
increased $1.1 million (14.2%) over 1Q00, primarily the result of increasing
health insurance costs.
Occupancy expense increased primarily due to rate increases in utilities.
Equipment expense declined predominantly in computer depreciation expense. Data
processing costs decreased due to the lower overall vendor costs and lower
credit card processing costs given the sale of the credit card receivables in
April 2000. Business development and advertising declined, primarily in
television advertising.
MSR amortization expense 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 $1.5 million between the comparable quarters,
predominantly driven by the addition of a $1.6 million valuation adjustment
during 1Q01. Legal and professional fees were down $702,000 between comparable
quarters.
Other expense was $11.2 million, down $1.0 million from 1Q00, principally
attributable to declines in ATM related processing costs and losses other than
loans.
16
Income Taxes
Income tax expense for 1Q01 was $15.2 million, down $1.7 million from 1Q00. The
effective tax rate (income tax expense divided by income before taxes) was 26.5%
and 28.2% for 1Q01 and 1Q00, respectively. This decrease is primarily the result
of the tax benefit of increased municipal securities (the average balance of
municipal securities increased 19% since 1Q00), increased BOLI income, and the
effect of real estate investment trusts.
Balance Sheet
At March 31, 2001, total assets were $13.1 billion, an increase of $388 million,
or 3.0%, over March 31, 2000. Loan growth since 1Q00 was $346 million or 4.0%,
almost exclusively in commercial loans, which now comprise 53% of total loans,
consistent with Corporate strategies. Loans held for sale grew $115 million as a
result of the increased residential mortgage activity between periods. Total
deposits were down $510 million or 5.5%; however, total deposits excluding
brokered CDs ("retail deposits") were down $177 million or 2.1%, with $26
million attributable to a 1Q00 branch deposit sale. Demand deposits grew $97
million (8.7%), representing 14% of total deposits and representing 15% of total
retail deposits at March 31, 2001, compared to 13% a year earlier.
Since year-end 2000, total assets have remained level at $13.1 billion. Loans
increased moderately, up $22 million, to $8.9 billion at March 31, 2001.
- ---------------------------------------------------------------------------------------------------
TABLE 6
Period End Loan Composition
($ in Thousands)
- ---------------------------------------------------------------------------------------------------
March 31, % of March 31, % of Dec. 31, % of
2001 Total 2000 Total 2000 Total
- ---------------------------------------------------------------------------------------------------
Commercial, financial &
agricultural ("CF&A loans") $1,704,514 19% $1,489,403 17% $1,657,322 19%
Real estate-construction 689,496 8 530,514 6 660,732 7
Commercial real estate 2,328,863 26 2,109,211 25 2,287,946 26
Lease financing 14,639 -- 18,944 -- 14,854 --
-------------------------------------------------------------------
Commercial 4,737,512 53 4,148,072 48 4,620,854 52
Residential real estate 3,048,955 34 3,286,887 38 3,158,721 35
Home equity 511,911 6 421,931 5 508,979 6
-------------------------------------------------------------------
Residential mortgage 3,560,866 40 3,708,818 43 3,667,700 41
Consumer 637,165 7 733,094 9 624,825 7
-------------------------------------------------------------------
Total loans $8,935,543 100% $8,589,984 100% $8,913,379 100%
===================================================================
- ----------------------------------------------------------------------------------------------------
17
- --------------------------------------------------------------------------------------------------------
TABLE 7
Period End Deposit Composition
($ in Thousands)
- --------------------------------------------------------------------------------------------------------
March 31, % of March 31, % of Dec. 31, % of
2001 Total 2000 Total 2000 Total
- --------------------------------------------------------------------------------------------------------
Demand $1,209,762 14% $1,112,924 12% $1,243,949 14%
Savings 849,605 10 991,191 11 857,247 9
Interest bearing demand 790,819 9 829,490 9 850,280 9
Money market 1,628,030 19 1,379,980 15 1,492,628 16
Brokered CDs 502,567 6 835,896 9 916,060 10
Other time 3,706,908 42 4,048,303 44 3,931,482 42
- --------------------------------------------------------------------------------------------------------
Total deposits $8,687,691 100% $9,197,784 100% $9,291,646 100%
========================================================================================================
- --------------------------------------------------------------------------------------------------------
Retail deposits $8,185,124 94% $8,361,888 91% $8,375,586 90%
========================================================================================================
On average, total assets for 1Q01 increased to $13.0 billion, or $442 million
(3.5%) over 1Q00. Average earning assets for 1Q01 were $12.2 billion, an
increase of $355 million over 1Q00. Loan growth accounted for essentially all
the earning asset growth. For more information on average balances, refer to the
section titled "Net Interest Income and Net Interest Margin."
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.
As of March 31, 2001, the allowance for loan losses ("AFLL") was $123.7 million,
representing 1.38% of loans outstanding, compared to $116.3 million, or 1.35% of
loans, at March 31, 2000, and $120.2 million, or 1.35% at year-end 2000. At
March 31, 2001, the AFLL was 224% of nonperforming loans compared to 311% and
252% at March 31 and December 31, 2000, respectively. Table 8 provides
additional information regarding activity in the AFLL.
The AFLL at March 31, 2001 increased $7.4 million (6.3%) since March 31, 2000
and $3.5 million (2.9%) since December 31, 2000. The increase is, in part, in
response to continued growth in commercial loans, which by their nature carry
greater inherent risk, and the increase in nonperforming loans between
comparable periods (see Table 8 and section "Nonperforming Loans and Other Real
Estate Owned"). Loans at March 31, 2001, grew $346 million (4.0%) since March
31, 2000, predominately in commercial loans (see CF&A loans, commercial real
estate and real estate construction loans included in Table 6). Period end loans
grew $22 million (1.0% annualized) since year-end. The mix of commercial loans
increased as a percent of total loans to 53% at March 31, 2001 compared to 48%
at March 31, 2000 and 52% at December 31, 2000.
18
- ------------------------------------------------------------------------------------------------
TABLE 8
Allowance for Loan Losses and Nonperforming Assets
($ in Thousands)
- ------------------------------------------------------------------------------------------------
At and for the At and for the
three months ended Year ended
March 31, December 31,
- ------------------------------------------------------------------------------------------------
2001 2000 2000
- ------------------------------------------------------------------------------------------------
Allowance for Loan Losses (AFLL):
Balance at beginning of period $ 120,232 $ 113,196 $ 113,196
Decrease from sale of credit card receivables --- --- (4,216)
Provision for loan losses 5,582 5,715 20,206
Charge-offs (2,910) (3,296) (11,155)
Recoveries 764 682 2,201
-------------------------------------
Net loan charge-offs (NCOs) (2,146) (2,614) (8,954)
-------------------------------------
Balance at end of period $ 123,668 $ 116,297 $ 120,232
=====================================
Nonperforming Assets:
Nonaccrual loans $ 50,310 $ 32,716 $ 41,045
Accruing loans past due 90 days or more 4,788 4,615 6,492
Restructured loans 146 10 159
-------------------------------------
Total nonperforming loans (NPLs) 55,244 37,341 47,696
Other real estate owned (OREO) 3,285 3,366 4,032
-------------------------------------
Total nonperforming assets (NPAs) $ 58,529 $ 40,707 $ 51,728
=====================================
Ratios:
Ratio of AFLL to NCOs (annualized) 14.21x 11.06x 13.43x
Ratio of NCOs to average loans (annualized) 0.10% 0.12% 0.10%
Ratio of AFLL to total loans 1.38% 1.35% 1.35%
Ratio of NPLs to total loans 0.62% 0.43% 0.54%
Ratio of NPAs to total assets 0.45% 0.32% 0.39%
Ratio of AFLL to NPLs 224% 311% 252%
- ------------------------------------------------------------------------------------------------
Charge-offs were $2.9 million for the three months ending March 31, 2001, $3.3
million for the comparable period ending March 31, 2000 and $11.2 million for
year-end 2000, while recoveries for the corresponding periods were $0.8 million,
$0.7 million and $2.2 million, respectively. As a result, the ratio of NCOs to
average loans on an annualized basis was 0.10%, 0.12%, and 0.10% for 1Q01, 1Q00,
and for the 2000 year, respectively. With the slowing economy, management
expects higher levels of net charge-offs for the remainder of the year.
The AFLL represents management's estimate of an amount adequate to provide for
probable 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 probable credit losses. Thus, 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 6), NCOs and nonperforming loans (see Table 8).
19
Management believes the AFLL to be adequate at March 31, 2001. 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 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 problem loans are identified quickly and the risk of loss is minimized.
Nonperforming loans ("NPLs") are considered an indicator of potential 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 $20
million, $20 million and $16 million of these loans at March 31, 2001, December
31, 2000, and March 31, 2000, respectively.
Table 8 provides detailed information regarding nonperforming assets. Total NPLs
at March 31, 2001 were up $7.5 million and $17.9 million, from year-end 2000,
and 1Q00, respectively. The ratio of nonperforming loans to total loans was .62%
at 1Q01, as compared to .54% and .43% at year-end 2000, and 1Q00, respectively.
Nonaccrual loans account for the majority of the $17.9 million increase in NPLs
between the comparable first quarter periods, with nonaccrual loans increasing
$17.6 million (of which, $15.4 million was attributable to the addition of three
large commercial credits). Nonaccrual loans also account for the majority of the
$7.5 million increase in NPLs since year-end 2000. Nonaccrual loans increased
$9.2 million (of which, $8.2 million was attributable to the addition of two
large commercial credits), accruing loans past due 90 or more days decreased
$1.7 million (due to the transfer of one large commercial credit from this
category to the nonaccrual category), and restructured loans were relatively
unchanged.
OREO was $3.3 million at 1Q01, down slightly ($747,000) from December 31, 2000,
and relatively unchanged from 1Q00.
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 March 31, 2001, potential
problem loans totaled $157 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.
20
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 March 31, 2001, 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. Additionally, the parent
company had $200 million of established lines of credit with nonaffiliated
banks, of which $82 million was outstanding at March 31, 2001. During 2000, a
$200 million commercial paper program was initiated, of which $54.7 was
outstanding at March 31, 2001.
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.
The parent company and its four largest subsidiary banks are rated by Moody's,
Standard and Poor's (S&P), and Fitch. 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 ("BOD") 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.
Stockholders' equity at March 31, 2001 increased to $1.0 billion, compared to
$920.8 million at March 31, 2000. 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 March 31,
2001, included $49.2 million related to unrealized gains on securities
available-for-sale, net of the tax effect. At March 31, 2000, stockholders'
equity included $43.6 million related to unrealized losses on securities
available-for-sale, net of the tax effect. Excluding the unrealized gains
(losses) on securities AFS, net of the tax effect, stockholders' equity to
assets would be 7.46% and 7.55% at March 31, 2001 and 2000, respectively.
Stockholders' equity grew $55.0 million since year-end 2000. 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 $15.6 million related to unrealized
gains on securities available-for-sale, net of the tax effect. Excluding the
unrealized gains (losses) on securities AFS, net of the tax effect,
stockholders' equity to assets would be 7.46% and 7.27% at March 31, 2001 and
December 31, 2000, respectively.
Cash dividends of $0.29 per share were paid in 1Q01, compared to $0.26 per share
in 1Q00, an increase of 10.0%.
21
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 330,000 shares
per quarter in 2001. During 1Q01, 100,000 shares were repurchased under this
authorization, at an average cost of $34.49 per share. In March 2000, the BOD
authorized the repurchase and cancellation of up to 5% of the Corporation's
outstanding shares, not to exceed approximately 3.5 million shares, and in
October 2000, the BOD authorized the repurchase and cancellation of an
additional 3.2 million shares. Approximately 3.4 million shares remain
authorized to repurchase under these authorizations. None were repurchased
during 1Q01. The repurchase of shares will be based on market opportunities,
capital levels, growth prospects, and other investment opportunities.
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.
TABLE 9
Capital Ratios
(In Thousands, except per share data)
- ---------------------------------------------------------------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
2001 2000 2000 2000 2000
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity $1,023,978 $ 968,696 $ 931,183 $ 930,223 $ 920,788
Tier 1 capital 870,096 846,371 840,180 961,874 850,931
Total capital 989,683 966,994 957,530 971,089 959,208
Market capitalization 2,198,989 2,008,274 1,751,531 1,494,770 1,880,260
----------------------------------------------------------------
Book value per common share $ 15.48 $14.65 $13.94 $13.57 $13.30
Cash dividend per common share 0.29 0.29 0.29 0.26 0.26
Stock price at end of period 33.25 30.38 26.25 21.81 27.16
Low closing price for the period 29.75 21.84 22.13 21.81 20.29
High closing price for the period 36.19 30.63 26.63 27.27 30.06
----------------------------------------------------------------
Total equity / assets 7.80% 7.38% 7.09% 7.16% 7.23%
Total equity / assets (1) 7.46 7.27 7.22 7.46 7.55
Tangible common equity / assets 7.06 6.62 6.31 6.36 6.40
Tier 1 leverage ratio 6.74 6.52 6.57 6.86 6.83
Tier 1 risk-based capital ratio 9.69 9.37 9.41 10.03 9.97
Total risk-based capital ratio 11.02 10.70 10.72 11.30 11.24
----------------------------------------------------------------
Shares outstanding (period end) 66,135 66,116 66,725 68,536 69,229
Basic shares outstanding (average) 66,150 66,314 68,031 68,918 69,504
Diluted shares outstanding (average) 66,688 66,542 68,293 69,206 69,812
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(1) - Ratio is based upon total equity and assets excluding the unrealized
gains (losses) arising during the year, net of income tax.
Subsequent Events
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 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.
On April 25, 2001, the BOD declared a $0.31 per share dividend payable on May
15, 2001, to shareholders of record as of May 1, 2001.
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These subsequent events have not been reflected in the accompanying consolidated
financial statements.
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, 2000, from that disclosed in the Corporation's 2000
Form 10-K Annual Report.
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ASSOCIATED BANC-CORP
PART II - OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11, Statement regarding computation of
per-share earnings. See Note 4 of the notes to
consolidated financial statements in Part I Item I.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended
March 31, 2001.
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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
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(Registrant)
Date: May 15, 2001 /s/ Robert C. Gallagher
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Robert C. Gallagher
President and Chief Executive Officer
Date: May 15, 2001 /s/ Joseph B. Selner
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Joseph B. Selner
Principal Financial Officer
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