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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended
December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the transition period
from to |
Commission file number: 0-5519
ASSOCIATED BANC-CORP
(Exact name of registrant as specified in its charter)
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Wisconsin |
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39-1098068 |
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(State or other jurisdiction of |
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(I.R.S. employer |
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incorporation or organization)
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identification no.) |
1200 Hansen Road
Green Bay, Wisconsin
(Address of principal executive offices) |
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54304
(Zip code) |
Registrant’s telephone number, including area code:
(920) 491-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
Common stock, par value — $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K (§229.405
of this chapter) is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act).
Yes X No
As of June 30, 2004, (the last business day of the
registrant’s most recently completed second fiscal quarter)
the aggregate market value of the voting stock held by
nonaffiliates of the registrant was approximately
$3,083,051,000. Excludes approximately $177,661,000 of market
value representing the outstanding shares of the registrant
owned by all directors and officers who individually, in certain
cases, or collectively, may be deemed affiliates. Includes
approximately $208,750,000 of market value representing 6.40% of
the outstanding shares of the registrant held in a fiduciary
capacity by the trust company subsidiary of the registrant.
As of February 28, 2005, 129,633,078 shares of common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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Part of Form 10-K Into Which |
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Document
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Portions of Documents are Incorporated |
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Proxy Statement for Annual Meeting of |
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Part III |
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Shareholders on April 27, 2005
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ASSOCIATED BANC-CORP
2004 FORM 10-K TABLE OF CONTENTS
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Special Note Regarding Forward-Looking Statements
Statements made in this document and in documents that are
incorporated by reference which are not purely historical are
forward-looking statements, as defined in the Private Securities
Litigation Reform Act of 1995, including any statements
regarding descriptions of management’s plans, objectives,
or goals for future operations, products or services, and
forecasts of its revenues, earnings, or other measures of
performance. Forward-looking statements are based on current
management expectations and, by their nature, are subject to
risks and uncertainties. These statements may be identified by
the use of words such as “believe,”
“expect,” “anticipate,” “plan,”
“estimate,” “should,” “will,”
“intend,” or similar expressions.
Shareholders should note that many factors, some of which are
discussed elsewhere in this document and in the documents that
are incorporated by reference, could affect the future financial
results of Associated Banc-Corp and could cause those results to
differ materially from those expressed in forward-looking
statements contained or incorporated by reference in this
document. These factors, many of which are beyond Associated
Banc-Corp’s control, include the following:
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operating, legal, and regulatory risks; |
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economic, political, and competitive forces affecting Associated
Banc-Corp’s banking, securities, asset management, and
credit services businesses; |
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integration risks related to integration of First Federal
Capital Corp and other acquisitions; |
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impact on net interest income of changes in monetary policy and
general economic conditions; and |
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the risk that Associated Banc-Corp’s analyses of these
risks and forces could be incorrect and/or that the strategies
developed to address them could be unsuccessful. |
These factors should be considered in evaluating the
forward-looking statements, and undue reliance should not be
placed on such statements. Forward-looking statements speak only
as of the date they are made. Associated Banc-Corp undertakes no
obligation to update or revise any forward-looking statements,
whether as a result of new information, future events, or
otherwise.
PART I
ITEM 1. BUSINESS
General
Associated Banc-Corp (individually referred to herein as the
“Parent Company,” and together with all of its
subsidiaries and affiliates, collectively referred to herein as
the “Corporation”) is a bank holding company
registered pursuant to the Bank Holding Company Act of 1956, as
amended (the “BHC Act”). It was incorporated in
Wisconsin in 1964 and was inactive until 1969 when permission
was received from the Board of Governors of the Federal Reserve
System (the “FRB” or “Federal Reserve”) to
acquire three banks. At December 31, 2004, the Parent
Company owned three commercial banks located in Illinois,
Minnesota, and Wisconsin and one thrift located in Wisconsin,
serving their respective local communities and, measured by
total assets held at December 31, 2004, was the second
largest commercial bank holding company headquartered in
Wisconsin. The Parent Company also owned 26 limited purpose
banking and nonbanking subsidiaries located in Arizona,
California, Illinois, Minnesota, Nevada, Vermont, and Wisconsin,
that are closely related or incidental to the business of
banking.
On October 29, 2004, we consummated our acquisition of
First Federal Capital Corp (“First Federal”), a
$4 billion thrift that had over 90 offices,
predominantly in Wisconsin. The Corporation plans to complete
the integration of First Federal’s operations with its own
in the first quarter of 2005 and collapse the thrift charter
into one of its commercial banks.
The Parent Company provides its subsidiaries with leadership, as
well as financial and managerial assistance in areas such as
corporate development, auditing, marketing, legal/ compliance,
human resources management,
3
risk management, facilities management, security, purchasing,
credit administration, asset and liability management and other
treasury-related activities, budgeting, accounting and other
finance support.
Responsibility for the management of the subsidiaries remains
with their respective boards of directors and officers. Services
rendered to the subsidiaries by the Parent Company are intended
to assist the local management of these subsidiaries to expand
the scope of services offered by them. At December 31,
2004, bank and thrift subsidiaries of the Parent Company
provided services through 307 locations in
173 communities.
Services
Through its banking subsidiaries and various nonbanking
subsidiaries, the Corporation provides a diversified range of
banking and nonbanking products and services to individuals and
businesses in the communities it serves. The Corporation
organizes its business into two reportable segments: Banking and
Wealth Management. The Corporation’s banking and wealth
management activities are conducted predominantly in Wisconsin,
Minnesota, and Illinois, and are primarily delivered through
branch facilities in this tri-state area, as well as
supplemented through loan production offices, supermarket
branches, a customer service call center and 24-hour
phone-banking services, an interstate Automated Teller Machine
(ATM) network, and internet banking services. See also
Note 19, “Segment Reporting,” of the notes to
consolidated financial statements within Part II,
Item 8. As disclosed in Note 19, the banking segment
represents 90% of total revenues, as defined in the note. The
Corporation’s profitability is predominantly dependent on
net interest income, noninterest income, the level of the
provision for loan losses, noninterest expense, and taxes of its
banking segment.
Banking consists of lending and deposit gathering (as well as
other banking-related products and services) to businesses,
governments, and consumers, and the support to deliver, fund,
and manage such banking services. The Corporation offers a
variety of loan and deposit products to retail customers,
including but not limited to: home equity loans and lines of
credit, residential mortgage loans and mortgage refinancing,
education loans, personal and installment loans, checking,
savings, money market deposit accounts, IRA accounts,
certificates of deposit, and safe deposit boxes. As part of its
management of originating and servicing residential mortgage
loans, nearly all of the Corporation’s long-term,
fixed-rate residential real estate mortgage loans are sold in
the secondary market with servicing rights retained. Loans,
deposits, and related banking services to businesses (including
small and larger businesses, governments/ municipalities, metro
or niche markets, and companies with specialized lending needs
such as floor plan lending or asset-based lending) primarily
include, but are not limited to: business checking and other
business deposit products, business loans, lines of credit,
commercial real estate financing, construction loans, letters of
credit, revolving credit arrangements, and to a lesser degree
business credit cards and equipment and machinery leases. To
further support business customers and correspondent financial
institutions, the Corporation provides safe deposit and night
depository services, cash management, international banking, as
well as check clearing, safekeeping and other banking-based
services.
Lending involves credit risk. Credit risk is controlled and
monitored through active asset quality management including the
use of lending standards, thorough review of potential
borrowers, and active asset quality administration. Credit risk
management is discussed under Part II sections
“Critical Accounting Policies,” “Loans,”
“Allowance for Loan Losses,” and “Nonperforming
Loans, Potential Problem Loans, and Other Real Estate
Owned,” in “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” and
under Note 1, “Summary of Significant Accounting
Policies,” and Note 4, “Loans,” of the notes
to consolidated financial statements.
The wealth management segment provides products and a variety of
fiduciary, investment management, advisory and corporate agency
services to assist customers in building, investing, or
protecting their wealth. Customers include individuals,
corporations, small businesses, charitable trusts, endowments,
foundations, and institutional investors. The wealth management
segment is comprised of a) a full range of personal and
business insurance products and services (including life,
property, casualty, credit and mortgage insurance, fixed
annuities, and employee group benefits consulting and
administration), b) full-service investment brokerage,
variable annuities, and discount and on-line brokerage, and
c) trust/ asset management, investment
4
management, administration of pension, profit-sharing and other
employee benefit plans, personal trusts, and estate planning.
The Corporation is not dependent upon a single or a few
customers, the loss of which would have a material adverse
effect on the Corporation. No material portion of the business
of the Corporation is seasonal.
Employees
At December 31, 2004, the Corporation had
5,158 full-time equivalent employees.
Competition
The financial services industry is highly competitive. The
Corporation competes for loans, deposits, and financial services
in all of its principal markets. The Corporation competes
directly with other bank and nonbank institutions located within
its markets, with out-of-market banks and bank holding companies
that advertise or otherwise serve the Corporation’s
markets, money market and other mutual funds, brokerage houses,
and various other financial institutions. Additionally, the
Corporation competes with insurance companies, leasing
companies, regulated small loan companies, credit unions,
governmental agencies, and commercial entities offering
financial services products. Competition involves efforts to
obtain new deposits, the scope and type of services offered,
interest rates paid on deposits and charged on loans, as well as
other aspects of banking. The Corporation also faces direct
competition from members of bank holding company systems that
have greater assets and resources than those of the Corporation.
Supervision and Regulation
Financial institutions are highly regulated both at the federal
and state levels. Numerous statutes and regulations affect the
business of the Corporation.
As a registered bank holding company under the BHC Act, the
Parent Company and its nonbanking subsidiaries are regulated and
supervised by the FRB. The nationally chartered bank
subsidiaries are supervised and examined by the Office of the
Comptroller of the Currency (the “OCC”). The sole
state chartered bank subsidiary is supervised and examined by
the applicable Illinois state banking agency and by the Federal
Deposit Insurance Corporation (the “FDIC”). The thrift
subsidiary is regulated by the Office of Thrift Supervision (the
“OTS”). All subsidiaries of the Parent Company that
accept insured deposits are subject to examination by the FDIC.
The Corporation and the subsidiary banks and thrift are subject
to various regulatory capital requirements administered by the
federal banking agencies noted above. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the
Corporation’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, the Corporation must meet specific capital guidelines
that involve quantitative measures of the Corporation’s
assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting policies. The
Corporation’s capital amounts and classification are also
subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. The Corporation
and the subsidiary banks have consistently maintained regulatory
capital ratios at or above the well capitalized standards. For
further detail on capital and capital ratios see sections,
“Liquidity” and “Capital,” and Note 17,
“Regulatory Matters,” of the notes to consolidated
financial statements.
The Gramm-Leach-Bliley Act of 1999 significantly amended the BHC
Act. The amendments, among other things, allow certain
qualifying bank holding companies to engage in activities that
are financial in nature and that explicitly include the
underwriting and sale of insurance. The BHC Act’s
provisions governing the scope and manner of the FRB’s
supervision of bank holding companies, the manner in which
activities may be found to be financial in nature, and the
extent to which state laws on insurance will apply to insurance
activities of banks and bank subsidiaries were also amended. The
FRB has issued regulations implementing these provisions. The
BHC Act, as amended, allows for the expansion of activities by
banking organizations and permits consolidation among financial
organizations generally. Under the BHC Act, the Parent Company is
5
required to act as a source of financial strength to each of its
subsidiaries pursuant to which it may be required to commit
financial resources to support such subsidiaries in
circumstances when, absent such requirements, it might not
otherwise do so. The BHC Act also requires the prior approval of
the FRB to enable the Parent Company to acquire direct or
indirect control of more than five percent of any class of
voting shares of any bank or bank holding company. The BHC Act
further regulates the Corporation’s activities, including
requirements and limitations relating to capital, transactions
with officers, directors and affiliates, securities issuances,
dividend payments, inter-affiliate liabilities, extensions of
credit, and expansion through mergers and acquisitions.
The federal regulatory authorities have broad authority to
enforce the regulatory requirements imposed on the Corporation.
In particular, the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (“FIRREA”) and the Federal
Deposit Insurance Corporation Improvement Act of 1991
(“FDICIA”), and their implementing regulations, carry
greater enforcement powers. Under FIRREA, all commonly
controlled FDIC insured depository institutions may be held
liable for any loss incurred by the FDIC resulting from a
failure of, or any assistance given by the FDIC to, any commonly
controlled institutions. Pursuant to certain provisions under
FDICIA, the federal regulatory agencies have broad powers to
take prompt corrective action if a depository institution fails
to maintain certain capital levels. Prompt corrective action may
include, without limitation, restricting the ability of the
Corporation to pay dividends, restricting acquisitions or other
activities, and placing limitations on asset growth.
Pursuant to the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (“Riegle-Neal Act”), an
adequately capitalized and managed bank holding company may
acquire banks in states other than its home state without regard
to the permissibility of such acquisitions under state law, but
remain subject to state requirements that a bank has been
organized and operating for a period of time. Subject to certain
other restrictions, the Riegle-Neal Act also authorizes banks to
merge across state lines to create interstate branches. The
Riegle-Neal Amendments Act of 1997 provides guidance on the
application of host state laws to any branch located outside the
host state.
The FDIC maintains the Bank Insurance Fund (“BIF”) and
the Savings Association Insurance Fund (“SAIF”) by
assessing depository institutions an insurance premium twice a
year. The amount each institution is assessed is based both on
the balance of insured deposits held during the preceding two
quarters, as well as on the degree of risk the institution poses
to the insurance fund. FDIC assesses higher rates on those
institutions that pose greater risks to the insurance funds.
Effective April 1, 2000, the FDIC Board of Directors
(“FDIC Board”) adopted revisions to the FDIC’s
regulation governing deposit insurance assessments which it
believed enhanced the system by allowing institutions with
improving capital positions to benefit from the improvement more
quickly while requiring those with failing capital to pay a
higher assessment sooner. The Federal Deposit Insurance Act
governs the authority of the FDIC Board to set BIF and SAIF
assessment rates and directs the FDIC Board to establish a
risk-based assessment system for insured depository institutions
and set assessments to the extent necessary to maintain the
reserve ratio at 1.25%.
The banking and thrift subsidiaries of the Corporation are
subject to periodic Community Reinvestment Act (“CRA”)
review by their respective primary federal regulators.
Associated Bank, National Association, underwent a CRA
examination by the Comptroller of the Currency on
November 10, 2003, for which it received a Satisfactory
rating. Associated Bank Chicago underwent a CRA examination by
the FDIC on December 1, 2003, and received a Satisfactory
rating. Associated Bank Minnesota, National Association,
formerly known as Signal Bank, National Association, underwent a
CRA examination by the Comptroller of the Currency on
October 2, 2000, for which it received a Satisfactory
rating. Prior to its merger with Signal Bank, Associated Bank
Minnesota had a CRA examination by the FDIC for which it
received an Outstanding rating.
In 2001, Congress enacted the Uniting and Strengthening America
by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism (USA Patriot Act) Act of 2001 (the
“Patriot Act”). The Patriot Act is designed to deny
terrorists and criminals the ability to obtain access to the
United States’ financial system and has significant
implications for depository institutions, brokers, dealers, and
other businesses involved in the transfer of money. The Patriot
Act mandates financial services companies to implement
additional policies
6
and procedures with respect to additional measures designed to
address any or all of the following matters: money laundering,
terrorist financing, identifying and reporting suspicious
activities and currency transactions, and currency crimes.
The laws and regulations to which the Corporation is subject are
constantly under review by Congress, the federal regulatory
agencies, and the state authorities. These laws and regulations
could be changed drastically in the future, which could affect
the profitability of the Corporation, its ability to compete
effectively, or the composition of the financial services
industry in which the Corporation competes.
Government Monetary Policies and Economic Controls
The earnings and growth of the banking industry and the
Corporation are affected by the credit policies of monetary
authorities, including the FRB. An important function of the
Federal Reserve is to regulate the national supply of bank
credit in order to combat recession and curb inflationary
pressures. Among the instruments of monetary policy used by the
Federal Reserve to implement these objectives are open market
operations in U.S. government securities, changes in
reserve requirements against member bank deposits, and changes
in the Federal Reserve discount rate. These means are used in
varying combinations to influence overall growth of bank loans,
investments, and deposits, and may also affect interest rates
charged on loans or paid for deposits. The monetary policies of
the Federal Reserve authorities have had a significant effect on
the operating results of commercial banks in the past and are
expected to continue to have such an effect in the future.
In view of changing conditions in the national economy and in
the money markets, as well as the effect of credit policies by
monetary and fiscal authorities, including the Federal Reserve,
no prediction can be made as to possible future changes in
interest rates, deposit levels, and loan demand, or their effect
on the business and earnings of the Corporation.
Available Information
The Corporation files annual, quarterly, and current reports,
proxy statements, and other information with the SEC. These
filings are available to the public over the Internet at the
SEC’s web site at www.sec.gov. Shareholders may also read
and copy any document that the Corporation files at the
SEC’s public reference room located at 450 Fifth
Street, NW, Washington, DC 20549. Shareholders may call the SEC
at 1-800-SEC-0330 for further information on the public
reference room.
The Corporation’s principal Internet address is
www.associatedbank.com. The Corporation makes available free of
charge on or through its website its annual report on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably
practicable after the Corporation electronically files such
material with, or furnishes it to, the SEC. In addition,
shareholders may request a copy of any of the Corporation’s
filings (excluding exhibits) at no cost by writing, telephoning,
faxing, or e-mailing the Corporation at the following address,
telephone number, fax number or e-mail address: Associated
Banc-Corp, Attn: Shareholder Relations, 1200 Hansen Road,
Green Bay, WI 54304; phone 920-491-7006;
fax 920-491-7010; or e-mail to
[email protected]. The Corporation’s
Code of Ethics for Directors and Executive Officers, corporate
governance guidelines and Board of Directors committee charters
are all available on the Corporation’s website.
Information contained on any of the Corporation’s websites
is not deemed to be a part of this Annual Report.
ITEM 2. PROPERTIES
The Corporation’s headquarters are located in the Village
of Ashwaubenon, Wisconsin, in a leased facility with
approximately 30,000 square feet of office space. The space is
subject to a five-year lease with one consecutive five-year
extension.
At December 31, 2004, the bank subsidiaries occupied 307
offices in 173 different communities within Illinois, Minnesota,
and Wisconsin. The main offices of Associated Bank, National
Association, and First Federal
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Capital Bank are owned. The bank subsidiary main offices in
downtown Chicago and Minneapolis are located in leased space in
the lobbies of multistory office buildings. Most bank subsidiary
branch offices are freestanding buildings that provide adequate
customer parking, including drive-through facilities of various
numbers and types for customer convenience. Some bank
subsidiaries also have branch offices in supermarket locations
or in retirement communities. In addition, the Corporation owns
other real property that, when considered in the aggregate, is
not material to its financial position.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, the Corporation may be named
as defendant in or be a party to various pending and threatened
legal proceedings. Since it is not possible to formulate a
meaningful opinion as to the range of possible outcomes and
plaintiffs’ ultimate damage claims, management cannot
estimate the specific possible loss or range of loss that may
result from these proceedings. Management believes, based upon
advice of legal counsel and current knowledge, that liabilities
arising out of any such current proceedings will not have a
material adverse effect on the consolidated financial position,
results of operations or liquidity of the Corporation.
ITEM 4. SUBMISSION OF MATTERS TO
A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders
during the fourth quarter of the fiscal year ended
December 31, 2004.
PART II
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MARKET FOR THE CORPORATION’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Information in response to this item is incorporated by
reference to the table “Market Information” on
Page 93 and the discussion of dividend restrictions in
Note 10, “Stockholders’ Equity,” of the
notes to consolidated financial statements included under
Item 8 of this document. The Corporation’s common
stock is traded on The Nasdaq Stock Market under the symbol ASBC.
The approximate number of equity security holders of record of
common stock, $.01 par value, as of February 28, 2005, was
10,860. Certain of the Corporation’s shares are held in
“nominee” or “street” name and the number of
beneficial owners of such shares is approximately 32,581.
Payment of future dividends is within the discretion of the
Board of Directors and will depend, among other factors, on
earnings, capital requirements, and the operating and financial
condition of the Corporation. At the present time, the
Corporation expects that dividends will continue to be paid in
the future.
Following are the Corporation’s monthly common stock
purchases during the fourth quarter of 2004. For a detailed
discussion of the common stock repurchase authorizations and
repurchases during the period, see section “Capital”
included under Item 7 of this document and Note 10,
“Stockholders’ Equity,” of the notes to
consolidated financial statements included under Item 8 of
this document.
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Total Number of | |
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Average Price Paid | |
| Period |
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Shares Purchased | |
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per Share | |
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October 1, 2004 - October 31, 2004
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— |
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$ |
— |
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November 1, 2004 - November 30, 2004
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220,000 |
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33.76 |
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December 1, 2004 - December 31, 2004
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156,000 |
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32.53 |
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Total
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376,000 |
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$ |
33.25 |
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ITEM 6. SELECTED FINANCIAL
DATA
TABLE 1: EARNINGS SUMMARY AND SELECTED FINANCIAL DATA
(In Thousands, except per share data)
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% | |
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5-Year | |
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Change | |
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Compound | |
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2003 to | |
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Growth | |
| Years ended December 31, |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
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Rate (4) | |
| | |
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Interest income
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$ |
767,122 |
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|
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5.5 |
% |
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$ |
727,364 |
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|
$ |
792,106 |
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$ |
880,622 |
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$ |
931,157 |
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(1.2 |
)% |
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Interest expense
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|
|
214,495 |
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|
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(1.0 |
) |
|
|
216,602 |
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290,840 |
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|
|
458,637 |
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|
|
547,590 |
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(12.5 |
) |
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Net interest income
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|
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552,627 |
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8.2 |
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510,762 |
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501,266 |
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421,985 |
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383,567 |
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6.9 |
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Provision for loan losses
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14,668 |
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(68.7 |
) |
|
|
46,813 |
|
|
|
50,699 |
|
|
|
28,210 |
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|
|
20,206 |
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(5.3 |
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|
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Net interest income after provision for loan losses
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|
|
537,959 |
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|
|
16.0 |
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|
|
463,949 |
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|
|
450,567 |
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|
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393,775 |
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363,361 |
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7.4 |
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Noninterest income
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210,247 |
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(3.1 |
) |
|
|
216,882 |
|
|
|
185,347 |
|
|
|
172,355 |
|
|
|
174,194 |
|
|
|
5.2 |
|
|
Noninterest expense
|
|
|
377,869 |
|
|
|
5.2 |
|
|
|
359,115 |
|
|
|
339,588 |
|
|
|
315,121 |
|
|
|
307,734 |
|
|
|
4.6 |
|
| |
|
|
|
Income before income taxes
|
|
|
370,337 |
|
|
|
15.1 |
|
|
|
321,716 |
|
|
|
296,326 |
|
|
|
251,009 |
|
|
|
229,821 |
|
|
|
9.3 |
|
|
Income tax expense
|
|
|
112,051 |
|
|
|
20.4 |
|
|
|
93,059 |
|
|
|
85,607 |
|
|
|
71,487 |
|
|
|
61,838 |
|
|
|
9.1 |
|
| |
|
|
|
NET INCOME
|
|
$ |
258,286 |
|
|
|
13.0 |
% |
|
$ |
228,657 |
|
|
$ |
210,719 |
|
|
$ |
179,522 |
|
|
$ |
167,983 |
|
|
|
9.4 |
% |
| |
|
|
|
Basic earnings per share(1)
|
|
$ |
2.28 |
|
|
|
10.1 |
% |
|
$ |
2.07 |
|
|
$ |
1.88 |
|
|
$ |
1.65 |
|
|
$ |
1.49 |
|
|
|
9.8 |
% |
|
Diluted earnings per share(1)
|
|
|
2.25 |
|
|
|
9.8 |
|
|
|
2.05 |
|
|
|
1.86 |
|
|
|
1.64 |
|
|
|
1.49 |
|
|
|
9.6 |
|
|
Cash dividends per share(1)
|
|
|
0.98 |
|
|
|
10.1 |
|
|
|
0.89 |
|
|
|
0.81 |
|
|
|
0.74 |
|
|
|
0.67 |
|
|
|
8.9 |
|
|
Weighted average shares outstanding(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
113,532 |
|
|
|
2.6 |
|
|
|
110,617 |
|
|
|
112,027 |
|
|
|
108,881 |
|
|
|
112,507 |
|
|
|
(0.3 |
) |
| |
Diluted
|
|
|
115,025 |
|
|
|
2.9 |
|
|
|
111,761 |
|
|
|
113,240 |
|
|
|
109,751 |
|
|
|
112,877 |
|
|
|
(0.2 |
) |
|
SELECTED FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-End Balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
13,881,887 |
|
|
|
34.9 |
% |
|
$ |
10,291,810 |
|
|
$ |
10,303,225 |
|
|
$ |
9,019,864 |
|
|
$ |
8,913,379 |
|
|
|
10.7 |
% |
|
Allowance for loan losses
|
|
|
189,762 |
|
|
|
6.8 |
|
|
|
177,622 |
|
|
|
162,541 |
|
|
|
128,204 |
|
|
|
120,232 |
|
|
|
10.9 |
|
|
Investment securities
|
|
|
4,815,344 |
|
|
|
27.6 |
|
|
|
3,773,784 |
|
|
|
3,362,669 |
|
|
|
3,197,021 |
|
|
|
3,260,205 |
|
|
|
8.0 |
|
|
Total assets
|
|
|
20,520,136 |
|
|
|
34.6 |
|
|
|
15,247,894 |
|
|
|
15,043,275 |
|
|
|
13,604,374 |
|
|
|
13,128,394 |
|
|
|
10.4 |
|
|
Deposits
|
|
|
12,786,239 |
|
|
|
30.6 |
|
|
|
9,792,843 |
|
|
|
9,124,852 |
|
|
|
8,612,611 |
|
|
|
9,291,646 |
|
|
|
8.0 |
|
|
Long-term funding
|
|
|
2,604,540 |
|
|
|
28.0 |
|
|
|
2,034,160 |
|
|
|
2,096,956 |
|
|
|
1,103,395 |
|
|
|
122,420 |
|
|
|
154.7 |
|
|
Stockholders’ equity
|
|
|
2,017,419 |
|
|
|
49.6 |
|
|
|
1,348,427 |
|
|
|
1,272,183 |
|
|
|
1,070,416 |
|
|
|
968,696 |
|
|
|
17.3 |
|
|
Book value per share(1)
|
|
|
15.55 |
|
|
|
26.8 |
|
|
|
12.26 |
|
|
|
11.42 |
|
|
|
9.93 |
|
|
|
8.88 |
|
|
|
14.4 |
|
| |
|
|
|
Average Balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
11,174,856 |
|
|
|
5.2 |
% |
|
$ |
10,622,499 |
|
|
$ |
10,002,478 |
|
|
$ |
9,092,699 |
|
|
$ |
8,688,086 |
|
|
|
7.5 |
% |
|
Investment securities
|
|
|
3,983,416 |
|
|
|
20.6 |
|
|
|
3,302,460 |
|
|
|
3,262,843 |
|
|
|
3,143,787 |
|
|
|
3,317,499 |
|
|
|
5.0 |
|
|
Total assets
|
|
|
16,365,762 |
|
|
|
9.3 |
|
|
|
14,969,860 |
|
|
|
14,297,418 |
|
|
|
13,103,754 |
|
|
|
12,810,235 |
|
|
|
6.9 |
|
|
Deposits
|
|
|
10,144,528 |
|
|
|
9.1 |
|
|
|
9,299,506 |
|
|
|
8,912,534 |
|
|
|
8,581,233 |
|
|
|
9,102,940 |
|
|
|
3.3 |
|
|
Stockholders’ equity
|
|
|
1,499,606 |
|
|
|
15.3 |
|
|
|
1,300,990 |
|
|
|
1,231,977 |
|
|
|
1,037,158 |
|
|
|
920,169 |
|
|
|
10.4 |
|
| |
|
|
|
Financial Ratios:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average equity
|
|
|
17.22 |
% |
|
|
(35 |
) |
|
|
17.58 |
% |
|
|
17.10 |
% |
|
|
17.31 |
% |
|
|
18.26 |
% |
|
|
|
|
|
Return on average assets
|
|
|
1.58 |
|
|
|
5 |
|
|
|
1.53 |
|
|
|
1.47 |
|
|
|
1.37 |
|
|
|
1.31 |
|
|
|
|
|
|
Net interest margin
|
|
|
3.80 |
|
|
|
(4 |
) |
|
|
3.84 |
|
|
|
3.95 |
|
|
|
3.62 |
|
|
|
3.36 |
|
|
|
|
|
|
Average equity to average assets
|
|
|
9.16 |
|
|
|
47 |
|
|
|
8.69 |
|
|
|
8.62 |
|
|
|
7.91 |
|
|
|
7.18 |
|
|
|
|
|
|
Dividend payout ratio(3)
|
|
|
42.84 |
|
|
|
1 |
|
|
|
42.83 |
|
|
|
42.97 |
|
|
|
44.81 |
|
|
|
45.04 |
|
|
|
|
|
| |
|
|
|
|
| (1) |
Share and per share data adjusted retroactively for stock splits
and stock dividends. |
| (2) |
Change in basis points. |
| (3) |
Ratio is based upon basic earnings per share. |
| (4) |
Base year used in 5-year compound growth rate is 1999
consolidated financial data. |
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion is management’s analysis to assist
in the understanding and evaluation of the consolidated
financial condition and results of operations of the
Corporation. It should be read in conjunction with the
consolidated financial statements and footnotes and the selected
financial data presented elsewhere in this report.
The financial discussion that follows may refer to the effect of
the Corporation’s business combination activity, detailed
under section, “Business Combinations,” and
Note 2, “Business Combinations,” of the notes to
9
consolidated financial statements. The detailed financial
discussion focuses on 2004 results compared to 2003. Discussion
of 2003 results compared to 2002 is predominantly in section
“2003 Compared to 2002.”
On April 28, 2004, the Board of Directors declared a
3-for-2 stock split, effected in the form of a stock dividend,
payable May 12 to shareholders of record at the close of
business on May 7. All share and per share data in the
accompanying consolidated financial statements has been adjusted
to reflect the effect of this stock split.
Certain amounts in the 2003 and 2002 consolidated financial
statements have been reclassified to conform with the 2004
Form 10-K presentation. In particular, for presentation
purposes and greater comparability with industry practice,
mortgage servicing rights expense in the consolidated statements
of income, which was previously presented in noninterest
expense, was reclassified into mortgage banking income. These
reclassifications resulted in a decrease to both noninterest
income and noninterest expense of $29.6 million in 2003 and
$30.5 million in 2002. The reclassifications had no effect
on stockholders’ equity or net income as previously
reported.
Critical Accounting Policies
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, mortgage servicing rights valuation, derivative
financial instruments and hedging activities, and income taxes.
The consolidated financial statements of the Corporation are
prepared in conformity with U.S. generally accepted accounting
principles and follow general practices within the industries in
which it operates. This preparation requires management to make
estimates, assumptions, and judgments that affect the amounts
reported in the financial statements and accompanying notes.
These estimates, assumptions, and judgments are based on
information available as of the date of the financial
statements; accordingly, as this information changes, actual
results could differ from the estimates, assumptions, and
judgments reflected in the financial statements. Certain
policies inherently have a greater reliance on the use of
estimates, assumptions, and judgments and, as such, have a
greater possibility of producing results that could be
materially different than originally reported. Management
believes the following policies are both important to the
portrayal of the Corporation’s financial condition and
results and require subjective or complex judgments and,
therefore, management considers the following to be critical
accounting policies. The critical accounting policies are
discussed directly with the Audit Committee of the Corporation.
Allowance for Loan Losses: Management’s
evaluation process used to determine the adequacy of the
allowance for loan losses is subject to the use of estimates,
assumptions, and judgments. The evaluation process combines
several factors: management’s ongoing review and grading of
the loan portfolio, consideration of past loan loss and
delinquency 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 qualitative and quantitative
factors which could affect probable credit losses. Because
current economic conditions can change and future events are
inherently difficult to predict, the anticipated amount of
estimated loan losses, and therefore the adequacy of the
allowance, could change significantly. As an integral part of
their examination process, various regulatory agencies also
review the allowance for loan losses. Such agencies may require
that certain loan balances be charged off when their credit
evaluations differ from those of management, based on their
judgments about information available to them at the time of
their examination. The Corporation believes the allowance for
loan losses is adequate as recorded in the consolidated
financial statements. See Note 1, “Summary of
Significant Accounting Policies,” and Note 4,
“Loans,” of the notes to consolidated financial
statements and section “Allowance for Loan Losses.”
Mortgage Servicing Rights Valuation: The fair value
of the Corporation’s mortgage servicing rights asset is
important to the presentation of the consolidated financial
statements since the mortgage servicing rights are carried on
the consolidated balance sheet at the lower of amortized cost or
estimated fair value. Mortgage servicing rights do not trade in
an active open market with readily observable prices. As such,
like other
10
participants in the mortgage banking business, the Corporation
relies on an internal discounted cash flow model to estimate the
fair value of its mortgage servicing rights and consults
periodically with third parties as to the assumptions used and
that the resultant valuation is within the context of the
market. In addition, the Corporation periodically reviews the
assumptions underlying the valuation of mortgage servicing
rights. As part of this review, beginning with the third quarter
2004 valuation, the Corporation changed the external service
provider of prepayment speeds to a source management believed to
provide a better representation of market value. The impact of
this change at the time of the change (September 30, 2004)
was an increase in fair value of mortgage servicing rights of
$0.8 million. While the Corporation believes that the
values produced by its internal model are indicative of the fair
value of its mortgage servicing rights portfolio, these values
can change significantly depending upon key factors, such as the
then current interest rate environment, estimated prepayment
speeds of the underlying mortgages serviced, and other economic
conditions. To better understand the sensitivity of the impact
on prepayment speeds to changes in interest rates, if mortgage
interest rates moved up 50 basis points (“bp”) at year
end 2004 (holding all other factors unchanged), it is
anticipated that prepayment speeds would have slowed and the
modeled estimated value of mortgage servicing rights could have
been $4 million higher than that determined at year-end
2004 (leading to more valuation allowance reversal and an
increase in mortgage banking income). Conversely, if mortgage
interest rates moved down 50 bp, prepayment speeds would have
likely increased and the modeled estimated value of mortgage
servicing rights could have been $7 million lower (leading
to adding more valuation allowance and a decrease in mortgage
banking income). The proceeds that might be received should the
Corporation actually consider a sale of the mortgage servicing
rights portfolio could differ from the amounts reported at any
point in time. The Corporation believes the mortgage servicing
rights asset is properly recorded in the consolidated financial
statements. See Note 1, “Summary of Significant
Accounting Policies,” and Note 5, “Goodwill and
Intangible Assets,” of the notes to consolidated financial
statements and section “Noninterest Income.”
Derivative Financial Instruments and Hedge
Accounting: In various aspects of its business, the
Corporation uses derivative financial instruments to modify
exposures to changes in interest rates and market prices for
other financial instruments. Substantially all of these
derivative financial instruments are designated as hedges for
financial reporting purposes. The application of the hedge
accounting policy requires judgment in the assessment of hedge
effectiveness, identification of similar hedged item groupings,
and measurement of changes in the fair value of hedged items.
However, if in the future the derivative financial instruments
used by the Corporation no longer qualify for hedge accounting
treatment and, consequently, the change in the fair value of
hedged items could be recognized in earnings, the impact on the
consolidated results of operations and reported earnings could
be significant. The Corporation believes hedge effectiveness is
evaluated properly in the consolidated financial statements. See
Note 1, “Summary of Significant Accounting
Policies,” and Note 14, “Derivative and Hedging
Activities,” of the notes to consolidated financial
statements and section “Interest Rate Risk.”
Income Tax Accounting: The assessment of tax assets
and liabilities involves the use of estimates, assumptions,
interpretations, and judgments concerning certain accounting
pronouncements and federal and state tax codes. There can be no
assurance that future events, such as court decisions or
positions of federal and state taxing authorities, will not
differ from management’s current assessment, the impact of
which could be significant to the consolidated results of
operations and reported earnings. The Corporation believes the
tax assets and liabilities are adequate and properly recorded in
the consolidated financial statements. See Note 1,
“Summary of Significant Accounting Policies,” and
Note 12, “Income Taxes,” of the notes to
consolidated financial statements and section “Income
Taxes.”
Business Combinations
The Corporation’s business combination activity is
summarized in Note 2, “Business Combinations,” of
the notes to consolidated financial statements. All the
Corporation’s business combinations since 2002 were
accounted for under the purchase method of accounting; thus, the
results of operations of the acquired institutions prior to
their respective consummation dates were not included in the
accompanying consolidated financial statements.
11
In 2004 there were two completed business
combinations: First Federal Capital Corp (“First
Federal”): On October 29, 2004, the Corporation
consummated its acquisition of 100% of the outstanding shares of
First Federal, based in La Crosse, Wisconsin. As of the
acquisition date, First Federal operated a $4 billion
savings bank with over 90 banking locations serving more than 40
communities in Wisconsin, northern Illinois, and southern
Minnesota, building upon and complementing the
Corporation’s footprint. As a result of the acquisition,
the Corporation will enhance its current branch distribution
(including supermarket locations which are new to the
Corporation’s distribution model), improve its operational
and managerial efficiencies, increase revenue streams, and
strengthen its community banking model. Subsequent to year-end
2004, the Corporation merged First Federal into its Associated
Bank, National Association banking subsidiary during February
2005.
Per the definitive agreement signed on April 27, 2004,
First Federal shareholders received 0.9525 shares (restated for
the Corporation’s 3-for-2 stock split in May 2004) of the
Corporation’s common stock for each share of First Federal
common stock held, an equivalent amount of cash, or a
combination thereof. Further, the aggregate consideration paid
by the Corporation for the First Federal outstanding common
stock must be equal to 90% stock and 10% cash, with the cash
consideration based upon the Corporation’s closing stock
price on the effective date of the merger. The value of the
common stock consideration was based upon the Corporation’s
average market price surrounding the date of signing and
announcing the definitive agreement. Based upon the
aforementioned values for the 90% stock/10% cash, the
consummation of the transaction included the issuance of
approximately 19.4 million shares of common stock (valued
at approximately $535 million) and $75 million in
cash. Goodwill of approximately $447 million, a core
deposit intangible of approximately $17 million, and other
intangibles of $4 million recognized at acquisition were
assigned to the banking segment.
Jabas Group, Inc. (“Jabas”): On April 1, 2004,
the Corporation (through its subsidiary, Associated Financial
Group, LLC) consummated its cash acquisition of 100% of the
outstanding shares of Jabas. Jabas is an insurance agency
specializing in employee benefit products headquartered in
Kimberly, Wisconsin, and was acquired to enhance the
Corporation’s existing insurance business. Jabas operates
as part of Associated Financial Group, LLC. The acquisition was
individually immaterial to the consolidated financial results.
Goodwill of approximately $8 million and other intangibles
of approximately $6 million recognized in the transaction
at acquisition were assigned to the wealth management segment.
In addition, goodwill may increase up to $8 million in the
future as contingent payments may be made to the former Jabas
shareholders through December 31, 2007, if Jabas exceeds
certain performance targets. Goodwill during 2004 was increased
by approximately $0.7 million for contingent consideration
paid in 2004 per the agreement.
In 2003 there was one completed business
combination. On April 1, 2003, the Corporation
consummated its cash acquisition of 100% of the outstanding
shares of CFG Insurance Services, Inc. (“CFG”), a
closely held insurance agency headquartered in Minnetonka,
Minnesota. Effective in June 2003, CFG operated as Associated
Financial Group, LLC. CFG, an independent, full-line insurance
agency, was acquired to enhance the growth of the
Corporation’s existing insurance business. The acquisition
was individually immaterial to the consolidated financial
results. Goodwill of approximately $12 million and other
intangibles of approximately $15 million recognized
initially in the transaction were assigned to the wealth
management segment.
In 2002 there was one completed business
combination. On February 28, 2002, the Corporation
consummated its acquisition of 100% of the outstanding common
shares of Signal Financial Corporation (“Signal”), a
financial holding company headquartered in Mendota Heights,
Minnesota. Signal operated banking branches in nine locations in
the Twin Cities and Eastern Minnesota. As a result of the
acquisition, the Corporation expanded its Minnesota presence,
particularly in the Twin Cities area. The Signal transaction was
consummated through the issuance of approximately
6.1 million shares of common stock and $58 million in
cash for a purchase price of $193 million. The value of the
shares was determined using the closing stock price of the
Corporation’s stock on September 10, 2001, the
initiation date of the transaction. Goodwill of approximately
$120 million and a core deposit intangible of approximately
$6 million recognized initially in the transaction were
assigned to the banking segment.
12
Segment Review
As described in Part I, section “Services,” and
in Note 19, “Segment Reporting,” of the notes to
consolidated financial statements, the Corporation’s
primary reportable segment is banking. Banking consists of
lending and deposit gathering (as well as other banking-related
products and services) to businesses, governments, and consumers
and the support to deliver, fund, and manage such banking
services. The Corporation’s wealth management segment
provides products and a variety of fiduciary, investment
management, advisory, and Corporate agency services to assist
customers in building, investing, or protecting their wealth,
including insurance, brokerage, and trust/asset management.
Note 19, “Segment Reporting,” of the notes to
consolidated financial statements, indicates that the banking
segment represents 90% of total revenues, as defined in the
Note. The Corporation’s profitability is predominantly
dependent on net interest income, noninterest income, the level
of the provision for loan losses, noninterest expense, and taxes
of its banking segment. The consolidated discussion is therefore
predominantly describing the banking segment results. The
critical accounting policies primarily affect the banking
segment, with the exception of income tax accounting, which
affects both the banking and wealth management segments (see
section “Critical Accounting Policies”).
Overview
The Corporation is a multi-bank holding company headquartered in
Wisconsin, providing a diversified range of banking and
nonbanking services to individuals and businesses primarily in
its three-state footprint (Wisconsin, Illinois and Minnesota).
The Corporation’s primary sources of revenue are net
interest income (predominantly from loans and deposits, and also
from investments and other funding sources), and noninterest
income, particularly fees and other revenue from financial
services provided to customers. Business volumes and pricing
drive revenue potential, and tend to be influenced by overall
economic factors, including market interest rates, business
spending, consumer confidence, economic growth, and competitive
conditions within the marketplace as well.
Net interest income, including two months of contribution from
the First Federal acquisition, increased in 2004 compared to
2003, primarily due to an increase in average earning assets.
The net interest margin declined from 3.84% in 2003 to 3.80% in
2004. The Corporation has been asset-sensitive for 2003 and
2004, positioned to benefit from rising rates. However, the
flattening of the yield curve and competitive pricing pressures
substantially offset the benefits to the margin from the
interest rate increases that occurred through the second half of
2004. The Corporation continues to be positioned to benefit from
rising rates, assuming anticipated rate increases by the Federal
Reserve and a steepening of the yield curve.
Noninterest income declined in 2004 compared to 2003,
particularly from lower net mortgage banking income. The
Corporation anticipated mortgage originations to fall
dramatically in 2004, and as such also expected lower net
mortgage banking income (down $33.2 million or 62% versus
2003). During 2003, interest rates reached record lows,
resulting in an unprecedented volume of mortgage loan
originations and refinances and strong net mortgage banking
income for 2003. A rapid rise in mortgage interest rates,
particularly during late third quarter of 2003, slowed mortgage
loan volume, and industry expectations were for mortgage
originations to fall dramatically in 2004, which materialized.
The Corporation’s 2004 insurance agency acquisition and
organic growth from its 2003 insurance agency acquisition aided
growth in retail commissions (up $21.6 million or 84%
compared to 2003). Noninterest income sources continue to be
diversified, cross-selling of services remains a focus, and
pricing is routinely evaluated. Full year contributions in 2005
from the Jabas and First Federal acquisitions are expected to
further enhance noninterest revenues.
Commercial loans and home equity loans were strategically
emphasized in 2004 and showed momentum particularly in the
second half of 2004. Period end loans at December 31, 2004,
were $13.9 billion, up 35% over year-end 2003, with
commercial, home equity, residential mortgage and installment
loans up 27%, 64%, 37%, and 51%, respectively. Excluding the
First Federal acquisition, total loans grew 8%, with commercial
loans up 11%, home equity up 22%, and residential mortgages and
installment loans down 2% and 7%, respectively, compared to
year-end 2003. The Corporation’s loan mix changed during
2004, with emphasis on
13
commercial and home equity loan growth, but influenced as well
from the First Federal acquisition. The mix of loans at
December 31, 2004, including First Federal, was 59%
commercial (versus 63% last year), 20% residential mortgage
(versus 19% last year), 13% home equity (compared to 11% a year
ago), and 8% installment loans (versus 7% last year). The loan
mix at year-end 2004 excluding the First Federal acquisition
would have been 65%, 17%, 12%, and 6% commercial, residential
mortgage, home equity, and installment, respectively. Increases
in business spending and consumer confidence in 2005 and
strategic growth objectives are expected to create an
environment for increased earnings from loans.
Period end deposits at December 31, 2004, were
$12.8 billion, up 31% over the prior year end, with minimal
shift in deposit mix. The Corporation’s deposit mix at
December 31, 2004, including First Federal, was 19%
noninterest-bearing demand (compared to 18% last year end), 34%
time deposits (versus 33% last year) and 47% interest-bearing
transaction accounts (versus 49% last year), where transaction
accounts include savings, money market, and interest-bearing
demand deposits. Excluding the First Federal acquisition, period
end deposits grew 3% compared to year-end 2003. Competition for
deposits has been high for many years. Deposit retention is most
at risk in the first year following acquisition. Further, there
will be competitive pressures in 2005, such as pricing deposits
up in the anticipated rising rate environment and potential
disintermediation to improving stock markets. Rational and
balanced deposit growth initiatives will be used in 2005.
The Corporation anticipated that, among other factors, improving
credit quality indicators and favorable workouts of credits, if
sustained, could lead to a lower provision for loan losses for
2004. Asset quality administration activities in 2004 resulted
in early identification of potential problem credits, favorable
resolution to problem credits, lower nonperforming loans as a
percentage of loans, and net charge offs to average loans of
0.15%. As a result, the 2004 provision for loan losses was
reduced to $14.7 million, compared to $46.8 million
for 2003. At December 31, 2004, an allowance for loan
losses to loans ratio of 1.37% (impacted in part by the
acquisition of First Federal’s thrift loan mix and lower
ratio of allowance for loan losses to loans) was deemed adequate
by management, covering 165% of nonperforming loans at year-end
2004, compared to 1.73% at December 31, 2003, covering 146%
of nonperforming loans. Certain economic indicators suggest that
business spending has begun to increase and that business and
consumer financial positions are improving in line with recent
economic improvements. Conversely, it is unknown how rising
interest rates, particularly seen in the second half of 2004 and
anticipated for 2005, will ultimately impact profitability of
businesses or the ability to service potentially rising debt of
businesses and consumers for 2005. Management expects that the
2005 provision for loan losses will be higher than in 2004, but
anticipates it will be commensurate with credit quality
indicators, net charge off levels, and unique circumstances of
individual credits.
Noninterest expenses rose 5% year-over-year, reflecting the
larger operating base attributable to the 2004 acquisitions.
Excluding only First Federal, noninterest expense for 2004 would
have been unchanged from last year, evidencing that noninterest
expenses remained both well controlled and a critical focus of
2004. The efficiency ratio (defined as noninterest expense
divided by the sum of taxable equivalent net interest income
plus noninterest income, excluding net asset and securities
gains) was 48.04% for 2004 and 47.86% for 2003. The Corporation
has and will continue to monitor costs, and anticipates certain
cost savings from integrating First Federal onto centralized
operating systems in first quarter 2005.
Performance Summary
The Corporation recorded net income of $258.3 million for
the year ended December 31, 2004, an increase of
$29.6 million or 13.0% over the $228.7 million earned
in 2003. Basic earnings per share for 2004 were $2.28, a 10.1%
increase over 2003 basic earnings per share of $2.07. Earnings
per diluted share were $2.25, a 9.8% increase over 2003 diluted
earnings per share of $2.05. Return on average assets and return
on average equity for 2004 were 1.58% and 17.22%, respectively,
compared to 1.53% and 17.58%, respectively, for 2003. Cash
dividends of $0.98 per share paid in 2004 increased by 10.1%
over 2003. Key factors behind these results are discussed below.
|
|
| • |
Taxable equivalent net interest income was $578.2 million
for 2004, $42.5 million or 7.9% higher than 2003. Taxable
equivalent interest income increased $40.4 million, while
interest expense decreased by $2.1 mil- |
14
|
|
|
lion. The increase in taxable equivalent net interest income was
attributable to favorable volume variances (with balance sheet
growth and differences in the mix of average earning assets and
average interest-bearing liabilities adding $50.6 million
to taxable equivalent net interest income), offset partly by
unfavorable rate variances (as the impact of changes in the
interest rate environment reduced taxable equivalent net
interest income by $8.1 million). Average earning assets
increased $1.3 billion to $15.2 billion, while
interest-bearing liabilities increased $1.0 billion to
$12.9 billion. |
| |
| • |
Net interest income and net interest margin were impacted by
generally stable and historically low interest rates during 2003
and the first half of 2004. Since mid-year 2004, the Federal
Reserve raised interest rates five times. The average Federal
funds rate of 1.34% in 2004 was 22 bp higher than the 1.12%
average rate in 2003. |
| |
| • |
The net interest margin for 2004 was 3.80%, compared to 3.84% in
2003. The 4 bp decrease in net interest margin was attributable
to a 2 bp decrease in interest rate spread (the net of an 18 bp
decrease in the yield on earning assets, substantially offset by
a 16 bp lower cost of interest-bearing liabilities), and a 2 bp
lower contribution from net free funds. |
| |
| • |
Total loans were $13.9 billion at December 31, 2004,
up $3.6 billion over December 31, 2003, attributable
largely to the $2.7 billion First Federal loans acquired.
Excluding First Federal, total loans grew 8.2%, with commercial
loans up $692 million (10.7%), home equity up
$253 million (22.2%), and with both residential mortgage
and installment loans down, $47 million and
$49 million, respectively. Total deposits were
$12.8 billion at December 31, 2004, up
$3.0 billion over year-end 2003, attributable largely to
the $2.7 billion First Federal deposits acquired. Excluding
First Federal, total deposits grew 3.0% over December 31,
2003. |
| |
| • |
Asset quality during 2003 was affected by the impact of
challenging economic conditions on customers, while 2004
benefited from general economic improvements and resolution of
problem credits. Nonperforming loans were $115.0 million,
representing 0.83% of total loans at year-end 2004, compared to
$121.5 million or 1.18% of total loans at year-end 2003.
Net charge offs were $17.3 million, a decrease of
$14.4 million from 2003, with the majority of the decrease
attributable to lower charge offs in the commercial loan
portfolio. Net charge offs were 0.15% of average loans compared
to 0.30% in 2003. Given asset quality improvements, favorable
resolution to problem credits, and an adequate level of
allowance for loan losses, the provision for loan losses
decreased to $14.7 million compared to $46.8 million
in 2003. The ratio of allowance for loan losses to loans was
1.37% and 1.73% at December 31, 2004 and 2003, respectively. |
| |
| • |
Noninterest income was $210.2 million for 2004,
$6.6 million or 3.1% lower than 2003, impacted by
significantly less net mortgage banking. Net mortgage banking
income decreased $33.2 million (62.0%) to
$20.3 million, driven by reduced secondary mortgage
production and resultant loan sales. Retail commissions grew
$21.6 million (84.5%) over 2003, primarily attributable to
the acquisitions of the Jabas and CFG insurance agencies in
April 2004 and 2003, respectively (see section “Business
Combinations”). |
| |
| • |
Noninterest expense was $377.9 million, up
$18.8 million or 5.2% over 2003, reflecting the larger
operating base attributable to the 2004 acquisitions. Personnel
expense rose $16.5 million or 7.9% over 2003, while all
remaining noninterest expense categories increased 1.5% on a
combined basis. |
| |
| • |
Income tax expense increased to $112.1 million, up
$19.0 million from 2003. The effective tax rate increased
to 30.3% in 2004 compared to 28.9% in 2003, primarily
attributable to the increase in income before tax and the
acquisitions of First Federal and Jabas, with both having higher
effective tax rates than the Corporation prior to the
acquisitions. |
|
|
|
INCOME STATEMENT ANALYSIS |
Net Interest Income
Net interest income in the consolidated statements of income
(which excludes the taxable equivalent adjustment) was
$552.6 million, compared to $510.8 million in 2003.
The taxable equivalent adjustments (the adjustments to bring
tax-exempt interest to a level that would yield the same
after-tax income had that income
15
been subject to taxation using a 35% tax rate) of
$25.6 million for 2004 and $24.9 million for 2003
resulted in fully taxable equivalent net interest income of
$578.2 million and $535.7 million, respectively.
Net interest income is the primary source of the
Corporation’s revenue. Net interest income is the
difference between interest income on earning assets, such as
loans and securities, and the interest expense on
interest-bearing deposits and other borrowings used to fund
interest-earning and other assets or activities. Net interest
income is affected by changes in interest rates and by the
amount and composition of earning assets and interest-bearing
liabilities. Additionally, net interest income is impacted by
the sensitivity of the balance sheet to changes in interest
rates, which factors in characteristics such as the fixed or
variable nature of the financial instruments, contractual
maturities, repricing frequencies, and the use of interest rate
swaps and caps.
Interest rate spread and net interest margin are utilized to
measure and explain changes in net interest income. Interest
rate spread is the difference between the yield on earning
assets and the rate paid for interest-bearing liabilities that
fund those assets. The net interest margin is expressed as the
percentage of net interest income to average earning assets. The
net interest margin exceeds the interest rate spread because
noninterest-bearing sources of funds (“net free
funds”), principally demand deposits and stockholders’
equity, also support earning assets. To compare tax-exempt asset
yields to taxable yields, the yield on tax-exempt loans and
securities is computed on a taxable equivalent basis. Net
interest income, interest rate spread, and net interest margin
are discussed on a taxable equivalent basis.
Table 2 provides average balances of earning assets and
interest-bearing liabilities, the associated interest income and
expense, and the corresponding interest rates earned and paid,
as well as net interest income, interest rate spread, and net
interest margin on a taxable equivalent basis for the three
years ended December 31, 2004. Tables 3 through 5 present
additional information to facilitate the review and discussion
of taxable equivalent net interest income, interest rate spread,
and net interest margin.
Taxable equivalent net interest income was $578.2 million
for 2004, an increase of $42.5 million or 7.9% from 2003.
Taxable equivalent interest income increased $40.4 million
and interest expense decreased by $2.1 million. The
increase in taxable equivalent net interest income was
attributable to a higher level of earning assets, offset by
unfavorable interest rate changes. As shown in the rate/volume
analysis in Table 3, volume changes added $50.6 million to
taxable equivalent net interest income, while rate changes
resulted in an $8.1 million decrease, for a net increase of
$42.5 million. The growth and change in mix of earning
assets added $60.3 million to taxable equivalent net
interest income in 2004, while the growth and composition of
interest-bearing liabilities cost an additional
$9.7 million. Rate changes on earning assets reduced
interest income by $19.9 million, while the changes in
rates on interest-bearing liabilities lowered interest expense
by $11.8 million, for a net unfavorable impact of
$8.1 million. The Corporation has been asset-sensitive for
2003 and 2004, positioned to benefit from rising rates. However,
the flattening of the yield curve and competitive pricing
pressures substantially offset the benefits to the margin from
the interest rate increases that occurred through the second
half of 2004. See additional discussion in section
“Interest Rate Risk.”
The net interest margin for 2004 was 3.80%, compared to 3.84% in
2003. The 4 bp compression in net interest margin was
attributable to a 2 bp decrease in interest rate spread (with an
18 bp decrease in the yield on earning assets, substantially
offset by a 16 bp lower cost of interest-bearing liabilities),
and a 2 bp lower contribution from net free funds (a function of
the overall decrease in the cost of interest-bearing
liabilities). Interest rates were generally stable and
historically low during 2003 and the first half of 2004. Since
mid-year 2004, the Federal government raised interest rates five
times, each time by 25 bp. At December 31, 2004 the Federal
Funds rate was 2.25%, 125 bp higher than the 45-year low of
1.00% at December 31, 2003. On average, the Federal funds
rate was 1.34% for 2004, 22 bp higher than for 2003.
For 2004, the yield on earning assets fell 18 bp to 5.21%,
comprised of a 30 bp decrease in the yield on securities and
other short-term investments (to 4.89%) and a 13 bp decline in
loan yield (to 5.33%). The yield on investment securities
decreased as maturities and principal paydowns were reinvested
in securities with lower yields. Competitive pricing on new and
refinanced loans, the portion of the loan portfolio that is
fixed rate and the lag in repricing of variable rate loans in
the rising interest rate environment put pressure on loan yields
in 2004, resulting in the 13 bp decline in yield. The earning
asset rate changes reduced interest income
16
by $19.9 million, a combination of $13.9 million lower
interest on loans and $6.0 million lower interest on
securities and short-term investments combined.
For 2004, the cost of interest-bearing liabilities of 1.67% was
16 bp lower than 2003, aided by the continued low rate
environment during the first half of 2004 and the lag in
repricing of deposit products in the second half of 2004. The
combined average cost of interest-bearing deposits was 1.43%,
down 19 bp from 2003, benefiting from a larger mix of
lower-costing transaction accounts, as well as timing
differences in repricing interest-bearing deposit products as
interest rates began to rise. The cost of wholesale funds
(comprised of all short-term borrowings and long-term funding)
decreased 11 bp to 2.10% for 2004, benefiting from a favorable
mix of lower costing short-term borrowings and timing of the
maturity of and reinvestment in higher-rate long-term funds
during the year. The interest-bearing liability rate changes
resulted in $11.8 million lower interest expense, with
$10.2 million attributable to interest-bearing deposits and
$1.6 million due to wholesale funding.
Average earning assets were $15.2 billion in 2004, an
increase of $1.3 billion, or 9.0%, from 2003. The majority
(54%) of the growth in average earning assets was organic, with
the remainder attributable to the acquisition of First Federal.
Balances of average securities and short-term investments
combined grew $704 million, or 21.2%, partly due to the
First Federal acquisition but more reflective of a corporate
decision to increase the investment portfolio as a percent of
earning assets. For 2004, securities and short-term investments
combined represented 26.5% of average earning assets compared to
23.8% for 2003. Taxable equivalent interest income on securities
and short-term investments for 2004 increased $30.4 million
from volume changes, but decreased $6.0 million due to the
impact of the rate environment, for a net $24.4 million
increase to taxable equivalent interest income. As previously
noted, the majority of securities growth occurred in early 2004,
when yields were lower than the second half of 2004. Loans
increased $552 million, or 5.2%, to $11.2 billion on
average in 2004 and represented 73.5% of average earning assets
compared to 76.2% for 2003. Taxable equivalent interest income
on loans increased $29.8 million from growth, but decreased
$13.9 million due to rate changes (as described above), for
a net increase of $15.9 million versus last year.
Average interest-bearing liabilities increased
$1.0 billion, or 8.5%, from 2003, while net free funds
increased $243 million, both supporting the growth in
earning assets. Approximately half of the increase in average
interest-bearing liabilities was attributable to the First
Federal acquisition. Average interest-bearing deposits grew
$656 million, or 8.6%, to $8.3 billion and average
noninterest-bearing demand deposits (a component of net free
funds) increased by $189 million, or 11.3%. Interest
expense on interest-bearing deposits for 2004 decreased
$10.2 million from the impact of the rate environment but
increased $5.3 million from volume and mix changes, for a
net $4.9 million decrease to interest expense. Average
wholesale funding sources increased by $357 million,
principally in short-term borrowings. The Corporation decreased
its average long-term funding by $98 million to 15.5% of
average interest-bearing liabilities (compared to 17.7% for
2003). For 2004, interest expense on wholesale funding increased
by $4.4 million due to volume changes and decreased by
$1.6 million from lower rates, for a net increase of
$2.8 million versus the prior year.
17
TABLE 2: Average Balances and Interest Rates (interest and
rates on a taxable equivalent basis)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
| |
|
Average | |
|
|
|
Average | |
|
Average | |
|
|
|
Average | |
|
Average | |
|
|
|
Average | |
| |
|
Balance | |
|
Interest | |
|
Rate | |
|
Balance | |
|
Interest | |
|
Rate | |
|
Balance | |
|
Interest | |
|
Rate | |
| |
|
| |
| |
|
($ in Thousands) | |
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:(1)(2)(3)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$ |
6,928,494 |
|
|
$ |
350,889 |
|
|
|
5.06 |
% |
|
$ |
6,450,523 |
|
|
$ |
329,695 |
|
|
|
5.11 |
% |
|
$ |
5,929,113 |
|
|
$ |
348,082 |
|
|
|
5.87 |
% |
| |
|
Residential mortgage
|
|
|
2,170,600 |
|
|
|
122,453 |
|
|
|
5.64 |
|
|
|
2,377,438 |
|
|
|
142,359 |
|
|
|
5.99 |
|
|
|
2,378,990 |
|
|
|
163,629 |
|
|
|
6.88 |
|
| |
|
Retail
|
|
|
2,075,762 |
|
|
|
122,406 |
|
|
|
5.90 |
|
|
|
1,794,538 |
|
|
|
107,808 |
|
|
|
6.01 |
|
|
|
1,694,375 |
|
|
|
115,791 |
|
|
|
6.83 |
|
| |
|
|
| |
|
|
Total loans
|
|
|
11,174,856 |
|
|
|
595,748 |
|
|
|
5.33 |
|
|
|
10,622,499 |
|
|
|
579,862 |
|
|
|
5.46 |
|
|
|
10,002,478 |
|
|
|
627,502 |
|
|
|
6.27 |
|
| |
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Taxable
|
|
|
3,110,907 |
|
|
|
130,774 |
|
|
|
4.20 |
|
|
|
2,474,791 |
|
|
|
108,394 |
|
|
|
4.38 |
|
|
|
2,431,713 |
|
|
|
125,299 |
|
|
|
5.15 |
|
| |
|
Tax exempt(1)
|
|
|
872,509 |
|
|
|
65,286 |
|
|
|
7.48 |
|
|
|
827,669 |
|
|
|
63,617 |
|
|
|
7.69 |
|
|
|
831,130 |
|
|
|
62,719 |
|
|
|
7.55 |
|
| |
Short-term investments
|
|
|
44,620 |
|
|
|
842 |
|
|
|
1.89 |
|
|
|
21,873 |
|
|
|
394 |
|
|
|
1.80 |
|
|
|
29,270 |
|
|
|
658 |
|
|
|
2.25 |
|
| |
|
|
| |
|
Securities and short-term investments
|
|
|
4,028,036 |
|
|
|
196,902 |
|
|
|
4.89 |
|
|
|
3,324,333 |
|
|
|
172,405 |
|
|
|
5.19 |
|
|
|
3,292,113 |
|
|
|
188,676 |
|
|
|
5.73 |
|
| |
|
|
|
Total earning assets
|
|
$ |
15,202,892 |
|
|
$ |
792,650 |
|
|
|
5.21 |
% |
|
$ |
13,946,832 |
|
|
$ |
752,267 |
|
|
|
5.39 |
% |
|
$ |
13,294,591 |
|
|
$ |
816,178 |
|
|
|
6.14 |
% |
| |
|
|
|
Allowance for loan losses
|
|
|
(181,297 |
) |
|
|
|
|
|
|
|
|
|
|
(174,703 |
) |
|
|
|
|
|
|
|
|
|
|
(148,801 |
) |
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
307,888 |
|
|
|
|
|
|
|
|
|
|
|
289,866 |
|
|
|
|
|
|
|
|
|
|
|
302,856 |
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
1,036,279 |
|
|
|
|
|
|
|
|
|
|
|
907,865 |
|
|
|
|
|
|
|
|
|
|
|
848,772 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Total assets
|
|
$ |
16,365,762 |
|
|
|
|
|
|
|
|
|
|
$ |
14,969,860 |
|
|
|
|
|
|
|
|
|
|
$ |
14,297,418 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Savings deposits
|
|
$ |
967,930 |
|
|
$ |
3,487 |
|
|
|
0.36 |
% |
|
$ |
928,147 |
|
|
$ |
4,875 |
|
|
|
0.53 |
% |
|
$ |
891,105 |
|
|
$ |
6,813 |
|
|
|
0.76 |
% |
| |
Interest-bearing demand deposits
|
|
|
2,406,280 |
|
|
|
19,874 |
|
|
|
0.83 |
|
|
|
1,827,304 |
|
|
|
15,348 |
|
|
|
0.84 |
|
|
|
1,118,546 |
|
|
|
9,581 |
|
|
|
0.86 |
|
| |
Money market deposits
|
|
|
1,628,208 |
|
|
|
14,259 |
|
|
|
0.88 |
|
|
|
1,623,438 |
|
|
|
15,085 |
|
|
|
0.93 |
|
|
|
1,876,988 |
|
|
|
24,717 |
|
|
|
1.32 |
|
| |
Time deposits, excluding Brokered CDs
|
|
|
3,042,933 |
|
|
|
76,930 |
|
|
|
2.53 |
|
|
|
3,063,873 |
|
|
|
84,957 |
|
|
|
2.77 |
|
|
|
3,263,766 |
|
|
|
122,181 |
|
|
|
3.74 |
|
| |
|
|
| |
|
Total interest-bearing deposits, excluding Brokered CDs
|
|
|
8,045,351 |
|
|
|
114,550 |
|
|
|
1.42 |
|
|
|
7,442,762 |
|
|
|
120,265 |
|
|
|
1.62 |
|
|
|
7,150,405 |
|
|
|
163,292 |
|
|
|
2.28 |
|
| |
Brokered CDs
|
|
|
232,066 |
|
|
|
3,686 |
|
|
|
1.59 |
|
|
|
178,853 |
|
|
|
2,857 |
|
|
|
1.60 |
|
|
|
264,023 |
|
|
|
5,729 |
|
|
|
2.17 |
|
| |
|
|
| |
|
Total interest-bearing deposits
|
|
|
8,277,417 |
|
|
|
118,236 |
|
|
|
1.43 |
|
|
|
7,621,615 |
|
|
|
123,122 |
|
|
|
1.62 |
|
|
|
7,414,428 |
|
|
|
169,021 |
|
|
|
2.28 |
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
2,038,981 |
|
|
|
28,984 |
|
|
|
1.42 |
|
|
|
1,821,220 |
|
|
|
23,288 |
|
|
|
1.28 |
|
|
|
2,058,163 |
|
|
|
42,143 |
|
|
|
2.05 |
|
|
Other short-term borrowings
|
|
|
553,658 |
|
|
|
9,956 |
|
|
|
1.80 |
|
|
|
315,599 |
|
|
|
5,868 |
|
|
|
1.86 |
|
|
|
250,919 |
|
|
|
9,229 |
|
|
|
3.68 |
|
|
Long-term funding
|
|
|
1,998,314 |
|
|
|
57,319 |
|
|
|
2.87 |
|
|
|
2,096,802 |
|
|
|
64,324 |
|
|
|
3.07 |
|
|
|
1,673,071 |
|
|
|
70,447 |
|
|
|
4.21 |
|
| |
|
|
| |
|
Total wholesale funding
|
|
|
4,590,953 |
|
|
|
96,259 |
|
|
|
2.10 |
|
|
|
4,233,621 |
|
|
|
93,480 |
|
|
|
2.21 |
|
|
|
3,982,153 |
|
|
|
121,819 |
|
|
|
3.06 |
|
| |
|
|
|
Total interest-bearing liabilities
|
|
$ |
12,868,370 |
|
|
$ |
214,495 |
|
|
|
1.67 |
% |
|
$ |
11,855,236 |
|
|
$ |
216,602 |
|
|
|
1.83 |
% |
|
$ |
11,396,581 |
|
|
$ |
290,840 |
|
|
|
2.55 |
% |
| |
|
|
|
Noninterest-bearing demand deposits
|
|
|
1,867,111 |
|
|
|
|
|
|
|
|
|
|
|
1,677,891 |
|
|
|
|
|
|
|
|
|
|
|
1,498,106 |
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
|
|
130,675 |
|
|
|
|
|
|
|
|
|
|
|
135,743 |
|
|
|
|
|
|
|
|
|
|
|
170,754 |
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
1,499,606 |
|
|
|
|
|
|
|
|
|
|
|
1,300,990 |
|
|
|
|
|
|
|
|
|
|
|
1,231,977 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Total liabilities and stockholders’ equity
|
|
$ |
16,365,762 |
|
|
|
|
|
|
|
|
|
|
$ |
14,969,860 |
|
|
|
|
|
|
|
|
|
|
$ |
14,297,418 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Net interest income and rate spread(1)
|
|
|
|
|
|
$ |
578,155 |
|
|
|
3.54 |
% |
|
|
|
|
|
$ |
535,665 |
|
|
|
3.56 |
% |
|
|
|
|
|
$ |
525,338 |
|
|
|
3.59 |
% |
| |
|
|
|
Net interest margin(1)
|
|
|
|
|
|
|
|
|
|
|
3.80 |
% |
|
|
|
|
|
|
|
|
|
|
3.84 |
% |
|
|
|
|
|
|
|
|
|
|
3.95 |
% |
| |
|
|
|
Taxable equivalent adjustment
|
|
|
|
|
|
$ |
25,528 |
|
|
|
|
|
|
|
|
|
|
$ |
24,903 |
|
|
|
|
|
|
|
|
|
|
$ |
24,072 |
|
|
|
|
|
| |
|
|
|
|
| (1) |
The yield on tax-exempt loans and securities is computed on a
taxable equivalent basis using a tax rate of 35% for all periods
presented and is net of the effects of certain disallowed
interest deductions. |
| |
| (2) |
Nonaccrual loans and loans held for sale have been included in
the average balances. |
| |
| (3) |
Interest income includes net loan fees. |
| |
| (4) |
Commercial includes commercial, financial, and agricultural,
real estate construction, commercial real estate, and lease
financing; residential mortgage includes residential mortgage
first liens; retail includes home equity lines, residential
mortgage junior liens, and installment loans (such as
educational and other consumer loans). |
18
TABLE 3: Rate/ Volume Analysis(1)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 Compared to 2003 | |
|
2003 Compared to 2002 | |
| |
|
Increase (Decrease) Due to Increase (Decrease) Due to | |
| |
|
| |
| |
|
| |
| |
|
Volume | |
|
Rate | |
|
Net | |
|
Volume | |
|
Rate | |
|
Net | |
| |
|
| |
| |
|
($ in Thousands) | |
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Commercial
|
|
$ |
24,911 |
|
|
$ |
(3,717 |
) |
|
$ |
21,194 |
|
|
$ |
25,599 |
|
|
$ |
(43,986 |
) |
|
$ |
(18,387 |
) |
| |
|
Residential mortgage
|
|
|
(11,119 |
) |
|
|
(8,787 |
) |
|
|
(19,906 |
) |
|
|
(1,827 |
) |
|
|
(19,443 |
) |
|
|
(21,270 |
) |
| |
|
Retail
|
|
|
16,008 |
|
|
|
(1,410 |
) |
|
|
14,598 |
|
|
|
6,109 |
|
|
|
(14,092 |
) |
|
|
(7,983 |
) |
| |
|
|
| |
Total loans
|
|
|
29,800 |
|
|
|
(13,914 |
) |
|
|
15,886 |
|
|
|
29,881 |
|
|
|
(77,521 |
) |
|
|
(47,640 |
) |
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Taxable
|
|
|
26,716 |
|
|
|
(4,336 |
) |
|
|
22,380 |
|
|
|
1,805 |
|
|
|
(18,710 |
) |
|
|
(16,905 |
) |
| |
|
|
Tax-exempt(2)
|
|
|
3,385 |
|
|
|
(1,716 |
) |
|
|
1,669 |
|
|
|
(259 |
) |
|
|
1,157 |
|
|
|
898 |
|
|
Short-term investments
|
|
|
345 |
|
|
|
103 |
|
|
|
448 |
|
|
|
(92 |
) |
|
|
(172 |
) |
|
|
(264 |
) |
| |
|
|
| |
Securities and short-term investments
|
|
|
30,446 |
|
|
|
(5,949 |
) |
|
|
24,497 |
|
|
|
1,454 |
|
|
|
(17,725 |
) |
|
|
(16,271 |
) |
| |
|
|
|
Total earning assets(2)
|
|
$ |
60,246 |
|
|
$ |
(19,863 |
) |
|
$ |
40,383 |
|
|
$ |
31,335 |
|
|
$ |
(95,246 |
) |
|
$ |
(63,911 |
) |
| |
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Savings deposits
|
|
$ |
201 |
|
|
$ |
(1,589 |
) |
|
$ |
(1,388 |
) |
|
$ |
195 |
|
|
$ |
(2,133 |
) |
|
$ |
(1,938 |
) |
| |
|
Interest-bearing demand deposits
|
|
|
4,786 |
|
|
|
(260 |
) |
|
|
4,526 |
|
|
|
5,953 |
|
|
|
(186 |
) |
|
|
5,767 |
|
| |
|
Money market deposits
|
|
|
44 |
|
|
|
(870 |
) |
|
|
(826 |
) |
|
|
(2,356 |
) |
|
|
(7,276 |
) |
|
|
(9,632 |
) |
| |
|
Time deposits, excluding Brokered CDs
|
|
|
(577 |
) |
|
|
(7,450 |
) |
|
|
(8,027 |
) |
|
|
(5,543 |
) |
|
|
(31,681 |
) |
|
|
(37,224 |
) |
| |
|
|
| |
|
|
Total interest-bearing deposits, excluding Brokered CDs
|
|
|
4,454 |
|
|
|
(10,169 |
) |
|
|
(5,715 |
) |
|
|
(1,751 |
) |
|
|
(41,276 |
) |
|
|
(43,027 |
) |
| |
Brokered CDs
|
|
|
846 |
|
|
|
(17 |
) |
|
|
829 |
|
|
|
(1,361 |
) |
|
|
(1,511 |
) |
|
|
(2,872 |
) |
| |
|
|
| |
|
|
Total interest-bearing deposits
|
|
|
5,300 |
|
|
|
(10,186 |
) |
|
|
(4,886 |
) |
|
|
(3,112 |
) |
|
|
(42,787 |
) |
|
|
(45,899 |
) |
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
2,984 |
|
|
|
2,712 |
|
|
|
5,696 |
|
|
|
(3,030 |
) |
|
|
(15,825 |
) |
|
|
(18,855 |
) |
|
Other short-term borrowings
|
|
|
4,303 |
|
|
|
(215 |
) |
|
|
4,088 |
|
|
|
1,203 |
|
|
|
(4,564 |
) |
|
|
(3,361 |
) |
|
Long-term funding
|
|
|
(2,898 |
) |
|
|
(4,107 |
) |
|
|
(7,005 |
) |
|
|
14,639 |
|
|
|
(20,762 |
) |
|
|
(6,123 |
) |
| |
|
|
| |
|
|
Total wholesale funding
|
|
|
4,389 |
|
|
|
(1,610 |
) |
|
|
2,779 |
|
|
|
12,812 |
|
|
|
(41,151 |
) |
|
|
(28,339 |
) |
| |
|
|
|
Total interest-bearing liabilities
|
|
$ |
9,689 |
|
|
$ |
(11,796 |
) |
|
$ |
(2,107 |
) |
|
$ |
9,700 |
|
|
$ |
(83,938 |
) |
|
$ |
(74,238 |
) |
| |
|
|
|
Net interest income(2)
|
|
$ |
50,557 |
|
|
$ |
(8,067 |
) |
|
$ |
42,490 |
|
|
$ |
21,635 |
|
|
$ |
(11,308 |
) |
|
$ |
10,327 |
|
| |
|
|
|
|
| (1) |
The change in interest due to both rate and volume has been
allocated in proportion to the relationship to the dollar
amounts of the change in each. |
| |
| (2) |
The yield on tax-exempt loans and securities is computed on a
fully taxable equivalent basis using a tax rate of 35% for all
periods presented and is net of the effects of certain
disallowed interest deductions. |
19
TABLE 4: Interest Rate Spread and Interest Margin (on a
taxable equivalent basis)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 Average | |
|
2003 Average | |
|
2002 Average | |
| |
|
| |
| |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
| |
|
|
|
Earning | |
|
|
|
Earning | |
|
|
|
Earning | |
|
|
| |
|
Balance | |
|
Assets | |
|
Yield/Rate | |
|
Balance | |
|
Assets | |
|
Yield/Rate | |
|
Balance | |
|
Assets | |
|
Yield/Rate | |
| |
|
| |
| |
|
($ in Thousands) | |
|
Total loans
|
|
$ |
11,174,856 |
|
|
|
73.5 |
% |
|
|
5.33% |
|
|
$ |
10,622,499 |
|
|
|
76.2 |
% |
|
|
5.46% |
|
|
$ |
10,002,478 |
|
|
|
75.2 |
% |
|
|
6.27% |
|
|
Securities and short-term investments
|
|
|
4,028,036 |
|
|
|
26.5 |
% |
|
|
4.89% |
|
|
|
3,324,333 |
|
|
|
23.8 |
% |
|
|
5.19% |
|
|
|
3,292,113 |
|
|
|
24.8 |
% |
|
|
5.73% |
|
| |
|
|
| |
Earning assets
|
|
$ |
15,202,892 |
|
|
|
100.0 |
% |
|
|
5.21% |
|
|
$ |
13,946,832 |
|
|
|
100.0 |
% |
|
|
5.39% |
|
|
$ |
13,294,591 |
|
|
|
100.0 |
% |
|
|
6.14% |
|
| |
|
|
|
Financed by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing funds
|
|
$ |
12,868,370 |
|
|
|
84.6 |
% |
|
|
1.67% |
|
|
$ |
11,855,236 |
|
|
|
85.0 |
% |
|
|
1.83% |
|
|
$ |
11,396,581 |
|
|
|
85.7 |
% |
|
|
2.55% |
|
|
Noninterest-bearing funds
|
|
|
2,334,522 |
|
|
|
15.4 |
% |
|
|
|
|
|
|
2,091,596 |
|
|
|
15.0 |
% |
|
|
|
|
|
|
1,898,010 |
|
|
|
14.3 |
% |
|
|
|
|
| |
|
|
| |
Total funds sources
|
|
$ |
15,202,892 |
|
|
|
100.0 |
% |
|
|
1.41% |
|
|
$ |
13,946,832 |
|
|
|
100.0 |
% |
|
|
1.55% |
|
|
$ |
13,294,591 |
|
|
|
100.0 |
% |
|
|
2.19% |
|
| |
|
|
|
Interest rate spread
|
|
|
|
|
|
|
|
|
|
|
3.54% |
|
|
|
|
|
|
|
|
|
|
|
3.56% |
|
|
|
|
|
|
|
|
|
|
|
3.59% |
|
|
Contribution from net free funds
|
|
|
|
|
|
|
|
|
|
|
0.26% |
|
|
|
|
|
|
|
|
|
|
|
0.28% |
|
|
|
|
|
|
|
|
|
|
|
0.36% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.80% |
|
|
|
|
|
|
|
|
|
|
|
3.84% |
|
|
|
|
|
|
|
|
|
|
|
3.95% |
|
| |
|
|
|
Average prime rate*
|
|
|
|
|
|
|
|
|
|
|
4.35% |
|
|
|
|
|
|
|
|
|
|
|
4.12% |
|
|
|
|
|
|
|
|
|
|
|
4.68% |
|
|
Average federal funds rate*
|
|
|
|
|
|
|
|
|
|
|
1.34% |
|
|
|
|
|
|
|
|
|
|
|
1.12% |
|
|
|
|
|
|
|
|
|
|
|
1.67% |
|
|
Average spread
|
|
|
|
|
|
|
|
|
|
|
301bp |
|
|
|
|
|
|
|
|
|
|
|
300bp |
|
|
|
|
|
|
|
|
|
|
|
301bp |
|
| |
|
|
20
TABLE 5: Selected Average Balances
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Dollar | |
|
Percent | |
| |
|
2004 | |
|
2003 | |
|
Change | |
|
Change | |
| |
|
| |
| |
|
($ in Thousands) | |
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Commercial
|
|
$ |
6,928,494 |
|
|
$ |
6,450,523 |
|
|
$ |
477,971 |
|
|
|
7.4 |
% |
| |
Residential mortgage
|
|
|
2,170,600 |
|
|
|
2,377,438 |
|
|
|
(206,838 |
) |
|
|
(8.7 |
) |
| |
Retail
|
|
|
2,075,762 |
|
|
|
1,794,538 |
|
|
|
281,224 |
|
|
|
15.7 |
|
| |
|
|
| |
|
Total loans
|
|
|
11,174,856 |
|
|
|
10,622,499 |
|
|
|
552,357 |
|
|
|
5.2 |
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Taxable
|
|
|
3,110,907 |
|
|
|
2,474,791 |
|
|
|
636,116 |
|
|
|
25.7 |
|
| |
Tax-exempt
|
|
|
872,509 |
|
|
|
827,669 |
|
|
|
44,840 |
|
|
|
5.4 |
|
|
Short-term investments
|
|
|
44,620 |
|
|
|
21,873 |
|
|
|
22,747 |
|
|
|
104.0 |
|
| |
|
|
| |
Securities and short-term investments
|
|
|
4,028,036 |
|
|
|
3,324,333 |
|
|
|
703,703 |
|
|
|
21.2 |
|
| |
|
|
|
Total earning assets
|
|
|
15,202,892 |
|
|
|
13,946,832 |
|
|
|
1,256,060 |
|
|
|
9.0 |
|
|
Other assets
|
|
|
1,162,870 |
|
|
|
1,023,028 |
|
|
|
139,842 |
|
|
|
13.7 |
|
| |
|
|
|
Total assets
|
|
$ |
16,365,762 |
|
|
$ |
14,969,860 |
|
|
$ |
1,395,902 |
|
|
|
9.3 |
% |
| |
|
|
|
LIABILITIES & STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Savings deposits
|
|
$ |
967,930 |
|
|
$ |
928,147 |
|
|
$ |
39,783 |
|
|
|
4.3 |
% |
| |
Interest-bearing demand deposits
|
|
|
2,406,280 |
|
|
|
1,827,304 |
|
|
|
578,976 |
|
|
|
31.7 |
|
| |
Money market deposits
|
|
|
1,628,208 |
|
|
|
1,623,438 |
|
|
|
4,770 |
|
|
|
0.3 |
|
| |
Time deposits, excluding Brokered CDs
|
|
|
3,042,933 |
|
|
|
3,063,873 |
|
|
|
(20,940 |
) |
|
|
(0.7 |
) |
| |
|
|
| |
|
Total interest-bearing deposits, excluding Brokered CDs
|
|
|
8,045,351 |
|
|
|
7,442,762 |
|
|
|
602,589 |
|
|
|
8.1 |
|
| |
Brokered CDs
|
|
|
232,066 |
|
|
|
178,853 |
|
|
|
53,213 |
|
|
|
29.8 |
|
| |
|
|
| |
|
Total interest-bearing deposits
|
|
|
8,277,417 |
|
|
|
7,621,615 |
|
|
|
655,802 |
|
|
|
8.6 |
|
|
Short-term borrowings
|
|
|
2,592,639 |
|
|
|
2,136,819 |
|
|
|
455,820 |
|
|
|
21.3 |
|
|
Long-term funding
|
|
|
1,998,314 |
|
|
|
2,096,802 |
|
|
|
(98,488 |
) |
|
|
(4.7 |
) |
| |
|
|
|
Total interest-bearing liabilities
|
|
|
12,868,370 |
|
|
|
11,855,236 |
|
|
|
1,013,134 |
|
|
|
8.5 |
|
|
Noninterest-bearing demand deposits
|
|
|
1,867,111 |
|
|
|
1,677,891 |
|
|
|
189,220 |
|
|
|
11.3 |
|
|
Accrued expenses and other liabilities
|
|
|
130,675 |
|
|
|
135,743 |
|
|
|
(5,068 |
) |
|
|
(3.7 |
) |
|
Stockholders’ equity
|
|
|
1,499,606 |
|
|
|
1,300,990 |
|
|
|
198,616 |
|
|
|
15.3 |
|
| |
|
|
|
Total liabilities and stockholders’ equity
|
|
$ |
16,365,762 |
|
|
$ |
14,969,860 |
|
|
$ |
1,395,902 |
|
|
|
9.3 |
% |
| |
|
|
Provision for Loan Losses
The provision for loan losses in 2004 was $14.7 million,
lower than last year given asset quality improvements and
favorable resolution of problem credits. The provision for loan
losses for 2003 was $46.8 million and $50.7 million
for 2002. Net charge offs were $17.3 million for 2004,
compared to $31.7 million for 2003 and $28.3 million
for 2002. Net charge offs as a percent of average loans were
0.15%, 0.30%, and 0.28% for 2004, 2003, and 2002, respectively.
Nonperforming loans at December 31, 2004, were
$115.0 million (including approximately $16 million
acquired from First Federal at year-end), compared to
$121.5 million at December 31, 2003, and
$99.3 million at December 31, 2002, representing
0.83%, 1.18%, and 0.96% of total loans, respectively. At
December 31, 2004, the allowance for loan losses was
$189.8 million (including $14.8 million from First
Federal at acquisition), compared to $177.6 million at
December 31, 2003, and $162.5 million at
December 31, 2002. The ratio of the allowance for loan
losses to total loans was 1.37% (influenced in part by the
acquisition of the First Federal thrift balance sheet), down
from 1.73% at December 31, 2003, and 1.58% at
December 31, 2002.
21
The provision for loan losses is predominantly a function of the
methodology and other qualitative and quantitative factors 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 and delinquencies 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 sections, “Allowance for Loan
Losses,” and “Nonperforming Loans, Potential Problem
Loans, and Other Real Estate Owned.”
Noninterest Income
Noninterest income was $210.2 million for 2004,
$6.6 million or 3.1% lower than 2003. Fee income as a
percentage of total revenues (defined as total noninterest
income less gains or losses on asset and investment sales
(“fee income”) divided by taxable equivalent net
interest income plus fee income) was 26.5% for 2004 compared to
28.6% for 2003. The comparison of noninterest income between
2004 and 2003 was affected by significantly less net mortgage
banking income (down $33.2 million or 62.0%), while retail
commissions were up ($21.6 million or 84.5%) aided by the
2004 Jabas and the 2003 CFG insurance agency acquisitions.
TABLE 6: Noninterest Income
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
% Change | |
| |
|
|
|
From Prior | |
| |
|
Years Ended December 31, | |
|
Year | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
|
|
|
|
Trust service fees
|
|
$ |
31,791 |
|
|
$ |
29,577 |
|
|
$ |
27,875 |
|
|
|
7.5 |
% |
|
|
6.1 |
% |
|
Service charges on deposit accounts
|
|
|
56,153 |
|
|
|
50,346 |
|
|
|
46,059 |
|
|
|
11.5 |
|
|
|
9.3 |
|
|
Mortgage banking income
|
|
|
37,070 |
|
|
|
83,037 |
|
|
|
66,415 |
|
|
|
(55.4 |
) |
|
|
25.0 |
|
|
Mortgage servicing rights expense
|
|
|
16,739 |
|
|
|
29,553 |
|
|
|
30,473 |
|
|
|
(43.4 |
) |
|
|
(3.0 |
) |
| |
|
|
| |
Mortgage banking, net
|
|
|
20,331 |
|
|
|
53,484 |
|
|
|
35,942 |
|
|
|
(62.0 |
) |
|
|
48.8 |
|
|
Credit card and other nondeposit fees
|
|
|
26,181 |
|
|
|
23,669 |
|
|
|
27,492 |
|
|
|
10.6 |
|
|
|
(13.9 |
) |
|
Retail commissions
|
|
|
47,171 |
|
|
|
25,571 |
|
|
|
18,264 |
|
|
|
84.5 |
|
|
|
40.0 |
|
|
Bank owned life insurance (“BOLI”) income
|
|
|
13,101 |
|
|
|
13,790 |
|
|
|
13,841 |
|
|
|
(5.0 |
) |
|
|
(0.4 |
) |
|
Other
|
|
|
13,701 |
|
|
|
18,174 |
|
|
|
15,644 |
|
|
|
(24.6 |
) |
|
|
16.2 |
|
| |
|
|
| |
Subtotal (“fee income”)
|
|
$ |
208,429 |
|
|
$ |
214,611 |
|
|
$ |
185,117 |
|
|
|
(2.9 |
)% |
|
|
15.9 |
% |
|
Asset sale gains, net
|
|
|
1,181 |
|
|
|
1,569 |
|
|
|
657 |
|
|
|
N/M |
|
|
|
N/M |
|
|
Investment securities gains (losses), net
|
|
|
637 |
|
|
|
702 |
|
|
|
(427 |
) |
|
|
N/M |
|
|
|
N/M |
|
| |
|
|
| |
|
Total noninterest income
|
|
$ |
210,247 |
|
|
$ |
216,882 |
|
|
$ |
185,347 |
|
|
|
(3.1 |
)% |
|
|
17.0 |
% |
| |
|
|
N/ M = not meaningful
Trust service fees for 2004 were $31.8 million, up
$2.2 million (7.5%) from 2003. The change was the result of
new business, increases in the fee structure on personal trust
accounts that started in mid-2003, and an improving stock
market. The market value of assets under management at
December 31, 2004, was $4.6 billion compared to
$4.1 billion at December 31, 2003, primarily
reflecting higher year-end equity values compared to 2003. More
than half this growth between year ends was from employee
benefits business, which earns fixed fees. Equities represented
over 60% of the market value of assets under management for 2004
and 2003.
Service charges on deposit accounts were $56.2 million,
$5.8 million (11.5%) higher than 2003. The increase was a
function of higher volumes associated with the larger deposit
account base (particularly including First Federal), and
moderate fee increases in second quarter 2004 related to account
service charges and nonsufficient funds.
22
Net mortgage banking income was $20.3 million,
$33.2 million (62.0%) lower than 2003. Net mortgage banking
income consists of gross mortgage banking income less mortgage
servicing rights expense. Gross mortgage banking income (which
includes servicing fees and the gain or loss on sales of
mortgage loans to the secondary market and other related fees)
was $37.1 million in 2004, a decrease of $46.0 million
(55.4%) compared to 2003. The lower income was primarily the
result of significantly reduced secondary mortgage loan
production (mortgage loan production to be sold to the secondary
market) and resultant sales. Secondary mortgage loan production
was $1.6 billion for 2004, down 62.1% from the
$4.3 billion for 2003. Gains on loan sales and fees were
down $48.4 million (including a $4.8 million lower
reduction in the fair value of the mortgage derivatives position
between year ends — see also, Note 14,
“Derivative and Hedging Activities,” of the notes to
consolidated financial statements). On the other hand, mortgage
servicing fees increased $2.4 million (16.5%) over 2003.
The average mortgage portfolio serviced for others was
approximately 17% higher for 2004 compared to 2003.
Mortgage servicing rights expense includes both the base
amortization of the mortgage servicing rights asset and
increases or decreases to the valuation allowance associated
with the mortgage servicing rights asset. Mortgage servicing
rights expense was $16.7 million for 2004,
$12.8 million lower than 2003. Base amortization was
$17.9 million (up $0.7 million from last year), while
a $1.2 million recovery to the valuation allowance was
recorded in 2004 (compared to a $12.3 million addition to
the valuation allowance during 2003). The favorable change to
the valuation allowance was principally due to slower loan
prepayment speeds in 2004 versus 2003, a predominant valuation
factor used in the Corporation’s internal discounted cash
flow model, increasing the recorded value of the mortgage
servicing rights asset and requiring less valuation reserve.
Mortgage servicing rights, net of any valuation allowance, are
carried in intangible assets on the consolidated balance sheets
at the lower of amortized cost or estimated fair value. At
December 31, 2004, mortgage servicing rights (including
$31.8 million from First Federal at acquisition) were
$76.2 million, net of a $15.5 million valuation
allowance, and represented 80 bp of the $9.5 billion
mortgage portfolio serviced for others (including the
$3.5 billion servicing portfolio from First Federal). In
comparison, at December 31, 2003, mortgage servicing rights
were $42.5 million, net of a $22.6 million valuation
allowance, and represented 72 bp of the $5.9 billion
portfolio of residential mortgage loans serviced for others.
Mortgage servicing rights are considered a critical accounting
policy given that estimating their fair value involves an
internal discounted cash flow model and assumptions that involve
judgment, particularly of estimated prepayment speeds of the
underlying mortgages serviced and the overall level of interest
rates. See section “Critical Accounting Policies,” as
well as Note 1, “Summary of Significant Accounting
Policies,” of the notes to consolidated financial
statements for the Corporation’s accounting policy for
mortgage servicing rights and Note 5, “Goodwill and
Intangible Assets,” of the notes to consolidated financial
statements for additional disclosure.
Credit card and other nondeposit fees were $26.2 million
for 2004, an increase of $2.5 million or 10.6% from 2003.
Credit card related fees were $15.7 million, up slightly
(1.5%) over 2003, primarily due to the inclusion of First
Federal. Without First Federal, credit card revenues were down,
particularly lower merchant fees given the merchant processing
sale and services agreement consummated in March 2003. In
February 2003, the Corporation entered into a 10-year agreement
with an outside vendor to provide merchant processing services
for the Corporation’s merchant customers. The agreement
resulted in a gain of $3.4 million (recorded in other
noninterest income in 2003) and replaces gross merchant discount
fees with revenue sharing on new and existing merchant business
over the life of the agreement. Other nondeposit fees were up
$2.3 million, from increased pricing and volumes on retail
and commercial service charges, as well as increased CFG-related
insurance advisory fees.
Retail commission income (which includes commissions from
insurance and brokerage product sales) was $47.2 million,
up $21.6 million or 84.5% compared to 2003, primarily due
to a full year contribution from CFG and the April 2004 Jabas
acquisition. Other insurance revenues were up
$17.5 million, primarily due to the CFG and Jabas insurance
agency acquisitions. Fixed annuities commissions increased
$3.1 million compared to 2003, benefiting from targeted
sales campaigns in 2004 and increased customer interest given
rising rates in the second half of 2004 following the prolonged
low-rate environment, and the recent recovery in the equity
markets. Brokerage commissions, including variable annuities,
were up $1.0 million, reflecting renewed customer interest
in the recently improving stock market.
23
BOLI income was $13.1 million, down $0.7 million from
2003. During 2004, the mid-year repricing of a large investment
of BOLI reduced income by approximately $2.3 million, but
was partly offset by a number of BOLI death claim gains of
approximately $1.6 million. Other income was
$13.7 million, a decrease of $4.5 million versus 2003,
primarily from non-recurring gains in 2003. Other income for
2003 included a $1.5 million gain on the sale of
out-of-market credit card accounts and a $3.4 million gain
recognized in connection with the aforementioned credit card
merchant processing sale and services agreement.
Asset sale gains for 2004 were $1.2 million, including a
$0.8 million net premium on the sales of $20 million
in deposits from two branches, and a $0.6 million net gain
on the sale of three larger commercial other real estate owned
properties. Asset sale gains for 2003 were $1.6 million,
including a $1.3 million net premium on the sales of
$17 million in deposits from two branches and a
$0.4 million net gain on the sale of other real estate
owned properties. Investment securities net gains for 2004 were
$0.6 million, which included gains on sales of Sallie Mae
stock during 2004 of $2.6 million, as well as a
$2.2 million other-than-temporary impairment charge taken
in the fourth quarter on the Corporation’s holdings of
Federal Home Loan Mortgage Corporation (“FHLMC”)
preferred stock securities (bringing their carrying value to
$8.4 million at year-end 2004). For 2003, investment
securities net gains were $0.7 million, attributable to a
$1.0 million gain on the sale of Sallie Mae stock,
partially offset by a $0.3 million other-than-temporary
write down on a collateralized mortgage obligation security. For
additional data see section, “Investment Securities
Portfolio,” and Note 1, “Summary of Significant
Accounting Policies,” and Note 3, “Investment
Securities,” of the notes to consolidated financial
statements.
Noninterest Expense
Total noninterest expense for 2004 was $377.9 million, an
increase of $18.8 million or 5.2% over 2003, reflecting the
substantially larger operating base attributable to the 2004
acquisitions. Personnel expense, the largest noninterest expense
category, increased 7.9% over 2003, and all remaining categories
combined increased 1.5%. Excluding only First Federal, total
noninterest expense for 2004 would have been approximately
$359 million, unchanged from 2003.
TABLE 7: Noninterest Expense
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
% Change | |
| |
|
|
|
From Prior | |
| |
|
Years Ended December 31, | |
|
Year | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
|
|
|
|
Personnel expense
|
|
$ |
224,548 |
|
|
$ |
208,040 |
|
|
$ |
189,066 |
|
|
|
7.9 |
% |
|
|
10.0 |
% |
|
Occupancy
|
|
|
29,572 |
|
|
|
28,077 |
|
|
|
26,049 |
|
|
|
5.3 |
|
|
|
7.8 |
|
|
Equipment
|
|
|
12,754 |
|
|
|
12,818 |
|
|
|
14,835 |
|
|
|
(0.5 |
) |
|
|
(13.6 |
) |
|
Data processing
|
|
|
23,632 |
|
|
|
23,273 |
|
|
|
21,024 |
|
|
|
1.5 |
|
|
|
10.7 |
|
|
Business development and advertising
|
|
|
14,975 |
|
|
|
15,194 |
|
|
|
13,812 |
|
|
|
(1.4 |
) |
|
|
10.0 |
|
|
Stationery and supplies
|
|
|
5,436 |
|
|
|
6,705 |
|
|
|
7,044 |
|
|
|
(18.9 |
) |
|
|
(4.8 |
) |
|
Intangible amortization expense
|
|
|
4,350 |
|
|
|
2,961 |
|
|
|
2,283 |
|
|
|
46.9 |
|
|
|
29.7 |
|
|
Loan expense
|
|
|
6,536 |
|
|
|
7,550 |
|
|
|
14,555 |
|
|
|
(13.4 |
) |
|
|
(48.1 |
) |
|
Other
|
|
|
56,066 |
|
|
|
54,497 |
|
|
|
50,920 |
|
|
|
2.9 |
|
|
|
7.0 |
|
| |
|
|
| |
Total noninterest expense
|
|
$ |
377,869 |
|
|
$ |
359,115 |
|
|
$ |
339,588 |
|
|
|
5.2 |
% |
|
|
5.8 |
% |
| |
|
|
Personnel expense (which includes salary-related expenses and
fringe benefit expenses) increased $16.5 million or 7.9%
over 2003. Average full-time equivalent employees were 4,190 for
2004, up 1.6% compared to 4,123 for 2003, despite the addition
of approximately 75 and 1,286 full-time equivalent employees
upon acquisition for Jabas and First Federal, respectively.
Total salary-related expenses were up $11.1 million or 6.9%
in 2004, with increases from the timing of acquisitions, merit
increases between the years, and higher commission-based pay
(particularly related to insurance and brokerage). Fringe
benefits increased $5.4 million or 11.6% in 2004, primarily
attributable to the increased cost of premium-based benefits (up
$2.4 million
24
or 15.6%). Particularly, First Federal accounted for
approximately $8.0 million in salary-related expenses and
$2.9 million to fringe benefits expense, as these employees
remained under pre-existing plans and benefits.
Occupancy expense increased $1.5 million or 5.3% to support
the larger branch and office network, particularly attributable
to the First Federal acquisition. Equipment expense declined
slightly despite the inclusion of First Federal, primarily due
to aging equipment and lower replacement and rental costs. Data
processing costs increased by $0.4 million, due to
processing for a larger base operation, but offset largely by
lower mortgage processing costs given lower production volumes
compared to last year. Compared to 2003, business development
and advertising decreased by $0.2 million and stationery
and supplies decreased $1.3 million, primarily given
controlled discretionary spending efforts in 2004.
Intangible amortization expense increased $1.4 million,
primarily due to additional core deposit and other intangible
assets resulting from the 2004 First Federal and Jabas
acquisitions. Loan expense was down $1.0 million from 2003,
predominantly due to lower mortgage loan-related activity, and
to a lesser degree lower merchant processing costs given the
sale of merchant processing during the first quarter of 2003 (as
noted in section “Noninterest Income”). Other expense
was up $1.6 million compared to 2003, largely due to the
inclusion of First Federal and higher bank insurance coverage
costs. Other expense for 2003 included non-recurring charges of
$2.5 million on a commercial letter of credit given the
deterioration of the financial condition of a borrower, and a
$0.5 million write down on one commercial other real estate
owned property.
Income Taxes
Income tax expense for 2004 was $112.1 million, up
$19.0 million from 2003 income tax expense of
$93.1 million. The Corporation’s effective tax rate
(income tax expense divided by income before taxes) was 30.3% in
2004 and 28.9% in 2003. The increase in the effective tax rate
was primarily attributable to the increase in income before tax
and the acquisitions of First Federal and Jabas, with both
having higher effective tax rates than the Corporation prior to
the acquisitions.
See Note 1, “Summary of Significant Accounting
Policies,” of the notes to consolidated financial
statements for the Corporation’s income tax accounting
policy and section “Critical Accounting Policies.”
Income tax expense recorded in the consolidated statements of
income involves interpretation and application of certain
accounting pronouncements and federal and state tax codes, and
is, therefore, considered a critical accounting policy. The
Corporation undergoes examination by various taxing authorities.
Such taxing authorities may require that changes in the amount
of tax expense or valuation allowance be recognized when their
interpretations differ from those of management, based on their
judgments about information available to them at the time of
their examinations. See Note 12, “Income Taxes,”
of the notes to consolidated financial statements for more
information.
The Corporation’s growth comes predominantly from loans and
investments. See sections “Loans” and “Investment
Securities Portfolio.” The Corporation has generally
financed its growth through increased deposits and issuance of
debt (see sections, “Deposits,” “Other Funding
Sources,” and “Liquidity”), as well as retention
of earnings and the issuance of common stock, particularly in
the case of certain acquisitions (see section
“Capital”).
Loans
Total loans were $13.9 billion at December 31, 2004,
an increase of $3.6 billion or 34.9% over December 31,
2003, largely attributable to the First Federal acquisition,
which added $2.7 billion in loans at consummation.
Excluding First Federal, total loans grew 8.2%, with commercial
loans up $692 million (10.7%), home equity up
$253 million (22.2%), and with both residential mortgage
and installment loans down, $47 million (2.4%) and
$49 million (7.1%), respectively. Commercial loans and home
equity were strategically emphasized in 2004. Including First
Federal, the mix of loans shifted. Commercial loans were
$8.2 billion, up $1.8 billion or 27.3%, and
represented 59% of total loans at the end of 2004, compared to
63% at year-end 2003. Retail loans grew $1.1 billion or
59.1% to represent 21% of total loans compared to 18% at
December 31, 2003, while
25
residential mortgage loans increased $739 million or 37.4%
to represent 20% of total loans versus 19% for the prior year.
TABLE 8: Loan Composition
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
| |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
| |
|
Amount | |
|
Total | |
|
Amount | |
|
Total | |
|
Amount | |
|
Total | |
|
Amount | |
|
Total | |
|
Amount | |
|
Total | |
| |
|
| |
| |
|
($ in Thousands) | |
|
Commercial, financial, and agricultural
|
|
$ |
2,803,333 |
|
|
|
20 |
% |
|
$ |
2,116,463 |
|
|
|
21 |
% |
|
$ |
2,213,986 |
|
|
|
22 |
% |
|
$ |
1,783,300 |
|
|
|
20 |
% |
|
$ |
1,657,512 |
|
|
|
19 |
% |
|
Real estate construction
|
|
|
1,459,629 |
|
|
|
11 |
|
|
|
1,077,731 |
|
|
|
10 |
|
|
|
910,581 |
|
|
|
9 |
|
|
|
801,887 |
|
|
|
9 |
|
|
|
664,111 |
|
|
|
7 |
|
|
Commercial real estate
|
|
|
3,933,131 |
|
|
|
28 |
|
|
|
3,246,954 |
|
|
|
32 |
|
|
|
3,128,826 |
|
|
|
30 |
|
|
|
2,626,811 |
|
|
|
29 |
|
|
|
2,284,380 |
|
|
|
26 |
|
|
Lease financing
|
|
|
50,718 |
|
|
|
— |
|
|
|
38,968 |
|
|
|
— |
|
|
|
38,352 |
|
|
|
— |
|
|
|
11,629 |
|
|
|
— |
|
|
|
14,854 |
|
|
|
— |
|
| |
|
|
| |
Commercial
|
|
|
8,246,811 |
|
|
|
59 |
|
|
|
6,480,116 |
|
|
|
63 |
|
|
|
6,291,745 |
|
|
|
61 |
|
|
|
5,223,627 |
|
|
|
58 |
|
|
|
4,620,857 |
|
|
|
52 |
|
| |
Residential mortgage
|
|
|
2,714,580 |
|
|
|
20 |
|
|
|
1,975,661 |
|
|
|
19 |
|
|
|
2,221,682 |
|
|
|
22 |
|
|
|
2,319,709 |
|
|
|
26 |
|
|
|
2,903,658 |
|
|
|
33 |
|
|
Home equity(1)
|
|
|
1,866,485 |
|
|
|
13 |
|
|
|
1,138,311 |
|
|
|
11 |
|
|
|
1,073,695 |
|
|
|
10 |
|
|
|
813,744 |
|
|
|
9 |
|
|
|
764,039 |
|
|
|
8 |
|
|
Installment
|
|
|
1,054,011 |
|
|
|
8 |
|
|
|
697,722 |
|
|
|
7 |
|
|
|
716,103 |
|
|
|
7 |
|
|
|
662,784 |
|
|
|
7 |
|
|
|
624,825 |
|
|
|
7 |
|
| |
|
|
| |
Retail
|
|
|
2,920,496 |
|
|
|
21 |
|
|
|
1,836,033 |
|
|
|
18 |
|
|
|
1,789,798 |
|
|
|
17 |
|
|
|
1,476,528 |
|
|
|
16 |
|
|
|
1,388,864 |
|
|
|
15 |
|
| |
|
|
|
Total loans
|
|
$ |
13,881,887 |
|
|
|
100 |
% |
|
$ |
10,291,810 |
|
|
|
100 |
% |
|
$ |
10,303,225 |
|
|
|
100 |
% |
|
$ |
9,019,864 |
|
|
|
100 |
% |
|
$ |
8,913,379 |
|
|
|
100 |
% |
| |
|
|
|
|
| (1) |
Home equity includes home equity lines and residential mortgage
junior liens. |
Commercial, financial, and agricultural loans were
$2.8 billion at the end of 2004, up $687 million or
32.5% since year-end 2003, and comprised 20% of total loans
outstanding, down from 21% at the end of 2003. The commercial,
financial, and agricultural loan classification primarily
consists of commercial loans to middle market companies and
small businesses. Loans of this type are in a diverse range of
industries. The credit risk related to commercial loans is
largely influenced by general economic conditions and the
resulting impact on a borrower’s operations or on the value
of underlying collateral, if any. Borrower demand in this loan
sector improved during 2004, and price competition has been
strong. Within the commercial, financial, and agricultural
classification, loans to finance agricultural production totaled
less than 0.5% for all periods presented.
Real estate construction loans grew $382 million or 35.4%
to $1.5 billion, representing 11% of the total loan
portfolio at the end of 2004, compared to $1.1 billion or
10% at the end of 2003. Loans in this classification are
primarily short-term interim loans that provide financing for
the acquisition or development of commercial real estate, such
as multifamily or other commercial development projects. Real
estate construction loans are made to developers and project
managers who are well known to the Corporation, have prior
successful project experience, and are well capitalized.
Projects undertaken by these developers are carefully reviewed
by the Corporation to ensure that they are economically viable.
Loans of this type are primarily made to customers based in the
Corporation’s tri-state market in which the Corporation has
a thorough knowledge of the local market economy. The credit
risk associated with real estate construction loans is generally
confined to specific geographic areas but is also influenced by
general economic conditions. The Corporation controls the credit
risk on these types of loans by making loans in familiar markets
to developers, underwriting the loans to meet the requirements
of institutional investors in the secondary market, reviewing
the merits of individual projects, controlling loan structure,
and monitoring project progress and construction advances.
Commercial real estate includes commercial-based loans that are
secured by multifamily properties and nonfarm/nonresidential
real estate properties, and to a lesser degree by farmland.
Commercial real estate totaled $3.9 billion at
December 31, 2004, up $686 million or 21.1% over
December 31, 2003, and comprised 28% of total loans
outstanding versus 32% at year-end 2003. Commercial real estate
loans involve borrower characteristics similar to those
discussed above for commercial loans and real estate
construction projects. Loans of this type are mainly for
business and industrial properties, multifamily properties, and
community purpose properties. Loans are primarily made to
customers based in Wisconsin, Illinois, and Minnesota. Credit
risk is managed in a similar manner to commercial loans and real
estate construction by employing sound
26
underwriting guidelines, lending to borrowers in local markets
and businesses, periodically evaluating the underlying
collateral, and formally reviewing the borrower’s financial
soundness and relationship on an ongoing basis. In many cases
the Corporation will take additional real estate collateral to
further secure the overall lending relationship.
Residential mortgage loans totaled $2.7 billion at the end
of 2004, up $739 million or 37.4% from the prior year and
comprised 20% of total loans outstanding versus 19% at year-end
2003. Residential mortgage loans include conventional first lien
home mortgages and generally limit the maximum loan to 80% of
collateral value.
Retail loans totaled $2.9 billion at December 31,
2004, up $1.1 billion or 59.1% compared to 2003, and
represented 21% of the 2004 year-end loan portfolio versus
18% at year-end 2003. Loans in this classification include home
equity and installment loans. Home equity consists of home
equity lines and residential mortgage junior liens, while
installment loans consist of educational loans, and short-term
and other personal installment loans, such as direct and
indirect automobile loans, recreational vehicle loans, credit
card loans, and other personal loans. Individual borrowers may
be required to provide related collateral or a satisfactory
endorsement or guaranty from another person, depending on the
specific type of loan and the creditworthiness of the borrower.
Credit risk for these types of loans is generally greatly
influenced by general economic conditions, the characteristics
of individual borrowers, and the nature of the loan collateral.
Credit risk is primarily controlled by reviewing the
creditworthiness of the borrowers as well as taking appropriate
collateral and guaranty positions.
Factors that are important to managing overall credit quality
are sound loan underwriting and administration, systematic
monitoring of existing loans and commitments, effective loan
review on an ongoing basis, early identification of potential
problems, an adequate allowance for loan losses, and sound
nonaccrual and charge off policies.
An active credit risk management process is used for commercial
loans to further ensure that sound and consistent credit
decisions are made. Credit risk is controlled by detailed
underwriting procedures, comprehensive loan administration, and
periodic review of borrowers’ outstanding loans and
commitments. Borrower relationships are formally reviewed and
graded on an ongoing basis for early identification of potential
problems. Further analyses by customer, industry, and geographic
location are performed to monitor trends, financial performance,
and concentrations.
The loan portfolio is widely diversified by types of borrowers,
industry groups, and market areas within our primary three-state
area. Significant loan concentrations are considered to exist
for a financial institution when there are amounts loaned to
numerous borrowers engaged in similar activities that would
cause them to be similarly impacted by economic or other
conditions. At December 31, 2004, no significant
concentrations existed in the Corporation’s portfolio in
excess of 10% of total loans.
TABLE 9: Loan Maturity Distribution and Interest Rate
Sensitivity
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Maturity(1) | |
| December 31, 2004 |
|
| |
| |
|
Within 1 Year(2) | |
|
1-5 Years | |
|
After 5 Years | |
|
Total | |
|
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Commercial, financial, and agricultural
|
|
$ |
2,323,902 |
|
|
$ |
439,913 |
|
|
$ |
39,518 |
|
|
$ |
2,803,333 |
|
|
|
|
|
|
Real estate construction
|
|
|
1,261,132 |
|
|
|
151,328 |
|
|
|
47,169 |
|
|
|
1,459,629 |
|
|
|
|
|
| |
|
|
| |
Total
|
|
$ |
3,585,034 |
|
|
$ |
591,241 |
|
|
$ |
86,687 |
|
|
$ |
4,262,962 |
|
|
|
|
|
| |
|
|
|
Fixed rate
|
|
$ |
709,765 |
|
|
$ |
468,692 |
|
|
$ |
84,845 |
|
|
$ |
1,263,302 |
|
|
|
|
|
|
Floating or adjustable rate
|
|
|
2,875,269 |
|
|
|
122,549 |
|
|
|
1,842 |
|
|
|
2,999,660 |
|
|
|
|
|
| |
|
|
| |
Total
|
|
$ |
3,585,034 |
|
|
$ |
591,241 |
|
|
$ |
86,687 |
|
|
$ |
4,262,962 |
|
|
|
|
|
| |
|
|
|
Percent by maturity distribution
|
|
|
84 |
% |
|
|
14 |
% |
|
|
2 |
% |
|
|
100 |
% |
|
|
|
|
|
|
| (1) |
Based upon scheduled principal repayments. |
| |
| (2) |
Demand loans, past due loans, and overdrafts are reported in the
“Within 1 Year” category. |
27
Allowance for Loan Losses
Credit risks within the loan portfolio are inherently different
for each loan type. 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, aids in the management of credit risk and minimization
of loan losses. Credit risk management for each loan type is
discussed briefly in the section entitled “Loans.”
The allowance for loan losses represents management’s
estimate of an amount adequate to provide for probable credit
losses in the loan portfolio at the balance sheet date. To
assess the adequacy of the allowance for loan losses, an
allocation methodology is applied by the Corporation which
focuses on changes in the size and character of the loan
portfolio, changes in levels of impaired or other nonperforming
loans, the risk inherent in specific loans, concentrations of
loans to specific borrowers or industries, existing economic
conditions, the fair value of underlying collateral, historical
losses and delinquencies on each portfolio category, and other
qualitative and quantitative factors which could affect probable
credit losses. Assessing these factors involves significant
judgment. Management considers the allowance for loan losses a
critical accounting policy—see section “Critical
Accounting Policies” and further discussion in this
section. See also management’s allowance for loan losses
accounting policy in Note 1, “Summary of Significant
Accounting Policies,” and Note 4, “Loans,”
of the notes to consolidated financial statements for additional
allowance for loan losses disclosures.
Table 8 provides information on loan growth and composition,
Tables 10 and 11 provide additional information regarding
activity in the allowance for loan losses, and Table 12 provides
additional information regarding nonperforming loans and assets.
At December 31, 2004, the allowance for loan losses was
$189.8 million, compared to $177.6 million at
December 31, 2003, and $162.5 million at year-end
2002. As of December 31, 2004, the allowance for loan
losses to total loans was 1.37% and covered 165% of
nonperforming loans, compared to 1.73% and 146%, respectively,
at December 31, 2003, and 1.58% and 164%, respectively, at
December 31, 2002. The decline in the ratio of allowance to
total loans at year-end 2004 compared to year-end 2003 was in
part a result of acquiring the First Federal thrift balance
sheet, which added $14.8 million allowance for loan losses
and $2.7 billion of loans (or 0.54% allowance to total
loans ratio) at consummation.
Changes in the allowance for loan losses are shown in Table 10.
Credit losses, net of recoveries, are deducted from the
allowance for loan losses. A direct increase to the allowance
for loan losses comes from acquisitions at consummation.
Finally, the provision for loan losses, a charge against
earnings, is recorded to bring the allowance for loan losses to
a level that, in management’s judgment, is adequate to
absorb probable losses in the loan portfolio. With favorable
resolution to problem credits in 2004, lower net charge off and
nonperforming loans ratios, and management’s assessment of
the adequacy of the allowance for loan losses, the provision for
loan losses of $14.7 million for 2004 was less than 2003 of
$46.8 million, and 2002 of $50.7 million.
Net charge offs were $17.3 million or 0.15% of average
loans for 2004, compared to $31.7 million or 0.30% of
average loans for 2003, and $28.3 million or 0.28% of
average loans for 2002 (see Table 10). The $14.4 million
decrease in net charge offs for 2004 versus 2003 was primarily
due to lower commercial net charge offs. The sluggish and varied
economic conditions of 2003 and 2002 particularly affected the
Corporation’s commercial borrowers, peaking commercial net
charge offs in 2003, while 2004 benefited from general economic
improvements and resolution to certain problem credits.
Commercial net charge offs as a percent of total net charge offs
were 53%, 77%, and 73% for 2004, 2003 and 2002, respectively.
Commercial net charge offs for 2004 were $9.2 million,
lower than $24.4 million for 2003 and $20.8 million
for 2002. More specifically, net charge offs of commercial real
estate loans were $6.2 million, $13.0 million, and
$5.3 million for 2004, 2003, and 2002, respectively, and
net charge offs of commercial, financial, and agricultural loans
were $2.8 million, $9.8 million, and
$13.9 million for the same respective years. Six commercial
credits in a variety of industries accounted for approximately
$6.6 million of the 2004 net charge offs. Five commercial
credits in the construction and hospitality industries accounted
for approximately $16.5 million of the 2003 net charge
offs. Several commercial credits with greater than
$0.5 million charged off accounted for approximately
$13.0 mil-
28
lion of the 2002 net charge offs. Loans charged off are subject
to continuous review, and specific efforts are taken to achieve
maximum recovery of principal, accrued interest, and related
expenses.
TABLE 10: Loan Loss Experience
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Allowance for loan losses, at beginning of year
|
|
$ |
177,622 |
|
|
$ |
162,541 |
|
|
$ |
128,204 |
|
|
$ |
120,232 |
|
|
$ |
113,196 |
|
|
Balance related to acquisitions
|
|
|
14,750 |
|
|
|
— |
|
|
|
11,985 |
|
|
|
— |
|
|
|
— |
|
|
Decrease from sale of credit card receivables
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,216 |
) |
|
Provision for loan losses
|
|
|
14,668 |
|
|
|
46,813 |
|
|
|
50,699 |
|
|
|
28,210 |
|
|
|
20,206 |
|
|
Loans charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Commercial, financial, and agricultural
|
|
|
4,640 |
|
|
|
12,858 |
|
|
|
15,497 |
|
|
|
11,328 |
|
|
|
2,424 |
|
| |
Real estate construction
|
|
|
16 |
|
|
|
1,140 |
|
|
|
1,402 |
|
|
|
1,631 |
|
|
|
38 |
|
| |
Commercial real estate
|
|
|
7,677 |
|
|
|
13,659 |
|
|
|
6,124 |
|
|
|
3,578 |
|
|
|
795 |
|
| |
Lease financing
|
|
|
245 |
|
|
|
385 |
|
|
|
268 |
|
|
|
78 |
|
|
|
3 |
|
| |
Residential mortgage(1)
|
|
|
924 |
|
|
|
1,080 |
|
|
|
1,757 |
|
|
|
591 |
|
|
|
2,176 |
|
| |
Home equity(1)
|
|
|
2,571 |
|
|
|
2,196 |
|
|
|
1,535 |
|
|
|
671 |
|
|
|
747 |
|
| |
Installment
|
|
|
6,129 |
|
|
|
5,789 |
|
|
|
5,596 |
|
|
|
4,762 |
|
|
|
4,972 |
|
| |
|
|
| |
|
Total loans charged off
|
|
|
22,202 |
|
|
|
37,107 |
|
|
|
32,179 |
|
|
|
22,639 |
|
|
|
11,155 |
|
|
Recoveries of loans previously charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Commercial, financial, and agricultural
|
|
|
1,873 |
|
|
|
3,054 |
|
|
|
1,622 |
|
|
|
1,045 |
|
|
|
851 |
|
| |
Real estate construction
|
|
|
— |
|
|
|
3 |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
| |
Commercial real estate
|
|
|
1,498 |
|
|
|
633 |
|
|
|
787 |
|
|
|
242 |
|
|
|
153 |
|
| |
Lease financing
|
|
|
3 |
|
|
|
— |
|
|
|
74 |
|
|
|
— |
|
|
|
— |
|
| |
Residential mortgage(1)
|
|
|
303 |
|
|
|
233 |
|
|
|
52 |
|
|
|
109 |
|
|
|
195 |
|
| |
Home equity(1)
|
|
|
107 |
|
|
|
126 |
|
|
|
89 |
|
|
|
83 |
|
|
|
102 |
|
| |
Installment
|
|
|
1,140 |
|
|
|
1,326 |
|
|
|
1,205 |
|
|
|
922 |
|
|
|
900 |
|
| |
|
|
| |
|
Total recoveries
|
|
|
4,924 |
|
|
|
5,375 |
|
|
|
3,832 |
|
|
|
2,401 |
|
|
|
2,201 |
|
| |
|
|
|
Net loans charged off
|
|
|
17,278 |
|
|
|
31,732 |
|
|
|
28,347 |
|
|
|
20,238 |
|
|
|
8,954 |
|
| |
|
|
|
Allowance for loan losses, at end of year
|
|
$ |
189,762 |
|
|
$ |
177,622 |
|
|
$ |
162,541 |
|
|
$ |
128,204 |
|
|
$ |
120,232 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of allowance for loan losses to net charge offs
|
|
|
11.0 |
|
|
|
5.6 |
|
|
|
5.7 |
|
|
|
6.3 |
|
|
|
13.4 |
|
|
Ratio of net charge offs to average loans
|
|
|
0.15 |
% |
|
|
0.30 |
% |
|
|
0.28 |
% |
|
|
0.22 |
% |
|
|
0.10 |
% |
|
Ratio of allowance for loan losses to total loans at end of year
|
|
|
1.37 |
% |
|
|
1.73 |
% |
|
|
1.58 |
% |
|
|
1.42 |
% |
|
|
1.35 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
For 2004, 2003, and 2002, home equity includes home equity lines
and residential mortgage junior liens; for 2001 and 2000 home
equity includes only home equity lines as the residential
mortgage junior liens were included in residential mortgage and
a separate breakdown is not available for these years. |
29
TABLE 11: Allocation of the Allowance for Loan Losses
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, | |
| |
|
| |
| |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
| |
|
|
|
Loan | |
|
|
|
Loan | |
|
|
|
Loan | |
|
|
|
Loan | |
|
|
|
Loan | |
| |
|
|
|
Type to | |
|
|
|
Type to | |
|
|
|
Type to | |
|
|
|
Type to | |
|
|
|
Type to | |
| |
|
|
|
Total | |
|
|
|
Total | |
|
|
|
Total | |
|
|
|
Total | |
|
|
|
Total | |
| |
|
2004 | |
|
Loans | |
|
2003 | |
|
Loans | |
|
2002 | |
|
Loans | |
|
2001 | |
|
Loans | |
|
2000 | |
|
Loans | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Allowance allocation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, & agricultural
|
|
$ |
79,882 |
|
|
|
20 |
% |
|
$ |
63,939 |
|
|
|
21 |
% |
|
$ |
64,965 |
|
|
|
22 |
% |
|
$ |
44,071 |
|
|
|
20 |
% |
|
$ |
45,571 |
|
|
|
19 |
% |
|
Real estate construction
|
|
|
12,263 |
|
|
|
11 |
|
|
|
10,777 |
|
|
|
10 |
|
|
|
9,106 |
|
|
|
9 |
|
|
|
7,977 |
|
|
|
9 |
|
|
|
6,531 |
|
|
|
7 |
|
|
Commercial real estate
|
|
|
62,200 |
|
|
|
28 |
|
|
|
69,947 |
|
|
|
32 |
|
|
|
57,010 |
|
|
|
30 |
|
|
|
47,810 |
|
|
|
29 |
|
|
|
25,925 |
|
|
|
26 |
|
|
Lease financing
|
|
|
502 |
|
|
|
— |
|
|
|
234 |
|
|
|
— |
|
|
|
230 |
|
|
|
— |
|
|
|
327 |
|
|
|
— |
|
|
|
149 |
|
|
|
— |
|
|
Residential real estate(1)
|
|
|
23,668 |
|
|
|
33 |
|
|
|
15,784 |
|
|
|
30 |
|
|
|
17,778 |
|
|
|
32 |
|
|
|
14,084 |
|
|
|
35 |
|
|
|
25,236 |
|
|
|
41 |
|
|
Installment
|
|
|
11,247 |
|
|
|
8 |
|
|
|
7,449 |
|
|
|
7 |
|
|
|
4,613 |
|
|
|
7 |
|
|
|
5,683 |
|
|
|
7 |
|
|
|
6,194 |
|
|
|
7 |
|
|
Unallocated
|
|
|
— |
|
|
|
— |
|
|
|
9,492 |
|
|
|
— |
|
|
|
8,839 |
|
|
|
— |
|
|
|
8,252 |
|
|
|
— |
|
|
|
10,626 |
|
|
|
— |
|
| |
|
|
| |
Total allowance for loan losses
|
|
$ |
189,762 |
|
|
|
100 |
% |
|
$ |
177,622 |
|
|
|
100 |
% |
|
$ |
162,541 |
|
|
|
100 |
% |
|
$ |
128,204 |
|
|
|
100 |
% |
|
$ |
120,232 |
|
|
|
100 |
% |
| |
|
|
|
Allowance category as a percent of total allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, & agricultural
|
|
|
42 |
% |
|
|
|
|
|
|
36 |
% |
|
|
|
|
|
|
40 |
% |
|
|
|
|
|
|
34 |
% |
|
|
|
|
|
|
38 |
% |
|
|
|
|
|
Real estate construction
|
|
|
6 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
Commercial real estate
|
|
|
33 |
|
|
|
|
|
|
|
39 |
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
22 |
|
|
|
|
|
|
Lease financing
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Residential real estate
|
|
|
13 |
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
21 |
|
|
|
|
|
|
Installment
|
|
|
6 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
Unallocated
|
|
|
— |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
9 |
|
|
|
|
|
| |
|
|
|
Total allowance for loan losses
|
|
|
100 |
% |
|
|
|
|
|
|
100 |
% |
|
|
|
|
|
|
100 |
% |
|
|
|
|
|
|
100 |
% |
|
|
|
|
|
|
100 |
% |
|
|
|
|
| |
|
|
|
|
| (1) |
Residential real estate includes home equity lines, residential
mortgage junior liens, and residential mortgage loans for all
periods presented. |
Determining the adequacy of the allowance for loan losses is a
function of evaluating a number of factors, including but not
limited to changes in the loan portfolio (see Table 8), net
charge offs (see Table 10), nonperforming loans (see Table 12),
and evaluating specific credits. As previously discussed, 2004
net charge offs as a percent of average loans steadied after two
years of higher than historical levels, particularly in
commercial charge offs. As discussed under section
“Loans,” total loans were $13.9 billion at
December 31, 2004, up $3.6 billion over
December 31, 2003, attributable largely to the
$2.7 billion First Federal loans acquired. Excluding First
Federal, total loans grew 8.2%, with commercial loans up
$692 million (10.7%), home equity up $253 million
(22.2%), and with both residential mortgage and installment
loans down, $47 million and $49 million, respectively.
Despite the strong growth in commercial loans, the mix of loans
including First Federal shifted at year-end 2004, as evidenced
in Table 8, with commercial loans representing 59% of total
loans (compared to 63% year-end 2003 and 61% year-end 2002).
Growth and mix of loans impacts the overall inherent risk
characteristics of the loan portfolio (see section
“Loans” which discusses credit risks related to the
different loan types). Nonperforming loans moved similarly to
net charge off activity, representing 0.83% of total loans at
December 31, 2004, down from 1.18% and 0.96% at year-end
2003 and 2002, respectively. Nonperforming loans were
$115.0 million at December 31, 2004 (including
approximately $16 million acquired from First Federal at
year-end and the addition of a $16 million commercial
credit in the food industry during December 2004), down from
$121.5 million at year-end 2003 and up from
$99.3 million at year-end 2002. The majority of the
improvement in nonperforming loans in 2004 compared to year-end
2003 was attributable to the paydowns or other resolutions on
several large problem credits (totaling approximately
$27 million). The impact of the sluggish economy on various
commercial borrowers was a key contributor to the rise in
nonperforming loans for 2003 over 2002. See Table 12 and section
“Nonperforming Loans, Potential Problem Loans, and Other
Real Estate Owned” for additional details and discussion.
The Corporation’s process designed to assess the adequacy
of the allowance for loan losses includes an allocation
methodology, as well as management’s ongoing review and
grading of the loan portfolio into criticized loan categories
(defined as specific loans warranting either specific
allocation, or a criticized status of watch, special mention,
substandard, doubtful or loss). The allocation methodology
focuses on evaluation of facts and issues related to specific
loans, the risk inherent in specific loans, changes in the size
and character of
30
the loan portfolio, changes in levels of impaired and other
nonperforming loans, concentrations of loans to specific
borrowers or industries, existing economic conditions,
underlying collateral, historical losses and delinquencies on
each portfolio category, and other qualitative and quantitative
factors. Because each of the criteria used is subject to change,
the allocation of the allowance for loan losses is made for
analytical purposes and is not necessarily indicative of the
trend of future loan losses in any particular loan category. The
total allowance is available to absorb losses from any segment
of the portfolio. The allocation of the Corporation’s
allowance for loan losses for the last five years is shown in
Table 11.
The allocation methodology was similar for all years, with a
refinement beginning in 2004, whereby the Corporation segregated
its loss factors allocations (used for both criticized and
non-criticized loans) into a component primarily based on
historical loss rates and a component primarily based on other
qualitative factors that may affect loan collectibility.
Management does not believe the refined method produced a
significantly different result from the prior year’s
method. The following describes the Corporation’s process
for 2004. Management allocates the allowance for loan losses for
credit losses by pools of risk. First, a valuation allowance
estimate is established for specifically identified commercial
and commercial real estate loans determined to be impaired by
the Corporation, using discounted cash flows, estimated fair
value of underlying collateral, and/or other data available.
Second, management allocates allowance for loan losses with loss
factors, for criticized loan pools by loan type as well as for
non-criticized loan pools by loan type, primarily based on
historical loss rates after considering loan type, historical
loss and delinquency experience, and industry statistics. Loans
that have been criticized are considered to have greater
inherent risk of loss than non-criticized loans, as
circumstances were present to support the lower loan grade,
warranting higher loss factors. The loss factors applied in the
methodology are expected to be relatively static year-over-year
but are periodically re-evaluated. Between 2004 and 2003, loss
factors assigned to criticized and non-criticized loan pools by
type were similar (but with reductions made in factors for
commercial real estate and residential real estate types to
align closer to historical loss levels). And third, management
allocates allowance for loan losses to absorb unrecognized
losses that may not be provided for by the other components due
to other factors evaluated by management, such as limitations
within the credit risk grading process, known current economic
or business conditions that may not yet show in trends, industry
or other concentrations with current issues that impose higher
inherent risks than are reflected in the loss factors, and other
relevant considerations. At December 31, 2004, this third
allocation, which was previously noted in Table 11 as
unallocated, was completely assigned to loan types, as reflected
in Table 11.
At year-end 2004, 45% of the allowance for loan losses (compared
to 57% at year-end 2003) was allocated to criticized loans,
including $10 million of allowance identified for a
previously disclosed commercial manufacturing credit
($15 million outstanding at December 31, 2004) for
which management had doubts concerning the future collectibility
of the loan. The primary shift in the allowance allocation
between 2004 and 2003 was from commercial real estate to
commercial, financial, and agricultural. The amount allocated to
commercial real estate loans at year-end 2004 was
$62.2 million, representing 33% (down from 39% at year-end
2003) of the allowance for loan losses, partly due to applying
lower loss factors to this loan type in 2004 versus 2003 as
mentioned earlier. Supporting this lower allocation was: a) a
lesser amount of these loans in criticized categories (7% versus
10% at year-end 2003); b) lower gross charge offs
($7.7 million compared to $13.7 million for 2003); and
c) fewer commercial real estate loans in nonperforming loans
(33% compared to 44% at year-end 2003). On the other hand, the
allowance allocated to commercial, financial, and agricultural
loans was $79.9 million at year-end 2004, representing 42%
(versus 36% at year-end 2003) of the allowance for loan losses.
While certain indicators were relatively steady for commercial,
financial and agricultural loans, such as minimal change in
their percentage of total loans (20% at year-end 2004 versus
21%) or of their percentage of nonperforming loans (35% compared
to 36% last year end), and lower gross charge offs, the higher
allocation was made given additional loans which are currently
not criticized but exhibit concerns to management due to
industry issues or the slower than expected improvement in the
individual credit relationships. Allowance allocations were
higher to residential real estate (particularly influenced by
the growth of home equity) and to installment loans as current
economic conditions of rising rates and growing consumer debt
carried uncertainties requiring management’s judgment as to
the impact on individual borrowers.
31
The allocation methods used for December 31, 2003 and 2002
were comparable. Factors used for criticized loans, as well as
for non-criticized loan categories, were unchanged between the
years. At both December 31, 2003 and 2002, current economic
conditions carried various uncertainties requiring
management’s judgment as to the impact on the business
results of numerous individual borrowers and certain industries.
Additionally, the pace at which the financial results of a
borrower’s company can take a downturn from challenging and
varied economic conditions continued to be a factor for both
years. At year-end 2003, 57% of the allowance (compared to 55%
at year-end 2002) was allocated to criticized loans, including
$10 million of allowance identified for a previously
disclosed commercial manufacturing credit ($17 million
outstanding at December 31, 2003) for which management had
doubts concerning the future collectibility of the loan. The
primary shift in the allowance allocation was the amount
allocated to commercial real estate loans at year-end 2003,
which was $69.9 million, representing 39% (compared to 35%
at year-end 2002) of the allowance for loan losses. A greater
amount of these loans were in criticized categories (10% versus
9% at year-end 2002); charge offs of this loan type increased
(to $13.7 million for 2003, more than double) between the
years; these loans represented 44% of nonperforming loans
(compared to 24% at year-end 2002); and commercial real estate
loans grew to represent 32% of total loans at December 31,
2003 (compared to 30% at year-end 2002). As noted under the
section “Loans,” the credit risk of this loan category
is largely influenced by the impact on borrowers of general
economic conditions, which have been noted to be challenging and
uncertain. The allowance allocated to commercial, financial, and
agricultural loans was $63.9 million at year-end 2003,
representing 36% (versus 40% at year-end 2002) of the allowance
for loan losses. Commercial, financial and agricultural loans
declined 4.4% since year-end 2002, to represent 21% of total
loans at December 31, 2003 compared to 22% at
December 31, 2002; net charge offs were $9.8 million
(down $4.1 million); and as a percent of nonperforming
loans, these loans represented 36% (versus 49% at year-end 2002).
Management believes the allowance for loan losses to be adequate
at December 31, 2004.
Consolidated net income could be affected if management’s
estimate of the allowance for loan losses is subsequently
materially different, requiring additional or less provision for
loan losses to be recorded. Management carefully considers
numerous detailed and general factors, its assumptions, and the
likelihood of materially different conditions that could alter
its assumptions. While management uses currently available
information to recognize losses on loans, future adjustments to
the allowance for loan losses may be necessary based on changes
in economic conditions and the impact of such change on the
Corporation’s borrowers. Additionally, the number of large
credit relationships over the Corporation’s
$25 million internal hurdle has been increasing over 2004.
Larger credits do not inherently create more risk, but can
create wider fluctuations in asset quality measures. As an
integral part of their examination process, various regulatory
agencies also review the allowance for loan losses. Such
agencies may require that certain loan balances be charged off
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, Potential Problem Loans, and Other Real
Estate Owned
Management is committed to an aggressive nonaccrual and problem
loan identification philosophy. This philosophy is implemented
through the ongoing monitoring and review 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 are considered one indicator of potential
future loan losses. Nonperforming loans are defined as
nonaccrual loans, loans 90 days or more past due but still
accruing, and restructured loans. The Corporation specifically
excludes from its definition of nonperforming loans student loan
balances that are 90 days or more past due and still
accruing and that have contractual government guarantees as to
collection of principal and interest. The Corporation had
approximately $14.5 million, $13.0 million, and
$20.2 million at December 31, 2004, 2003, and 2002,
respectively, of nonperforming student loans.
Loans are generally placed on nonaccrual status when
contractually past due 90 days or more as to interest or
principal payments. Additionally, whenever management becomes
aware of facts or circumstances that may adversely impact the
collectibility of principal or interest on loans, it is
management’s practice to place such loans on nonaccrual
status immediately, rather than delaying such action until the
loans become 90 days past
32
due. Previously accrued and uncollected interest on such loans
is reversed, amortization of related loan fees is suspended, and
income is recorded only to the extent that interest payments are
subsequently received in cash and a determination has been made
that the principal balance of the loan is collectible. If
collectibility of the principal is in doubt, payments received
are applied to loan principal.
Loans past due 90 days or more but still accruing interest
are also included in nonperforming loans. Loans past due
90 days or more but still accruing are classified as such
where the underlying loans are both well secured (the collateral
value is sufficient to cover principal and accrued interest) and
are in the process of collection. Also included in nonperforming
loans are “restructured” loans. Restructured loans
involve the granting of some concession to the borrower
involving the modification of terms of the loan, such as changes
in payment schedule or interest rate.
TABLE 12: Nonperforming Loans and Other Real Estate
Owned
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Nonaccrual loans
|
|
$ |
112,761 |
|
|
$ |
113,944 |
|
|
$ |
94,132 |
|
|
$ |
48,238 |
|
|
$ |
41,045 |
|
|
Accruing loans past due 90 days or more
|
|
|
2,153 |
|
|
|
7,495 |
|
|
|
3,912 |
|
|
|
3,649 |
|
|
|
6,492 |
|
|
Restructured loans
|
|
|
37 |
|
|
|
43 |
|
|
|
1,258 |
|
|
|
238 |
|
|
|
159 |
|
| |
|
|
| |
Total nonperforming loans
|
|
$ |
114,951 |
|
|
$ |
121,482 |
|
|
$ |
99,302 |
|
|
$ |
52,125 |
|
|
$ |
47,696 |
|
|
Other real estate owned
|
|
|
3,915 |
|
|
|
5,457 |
|
|
|
11,448 |
|
|
|
2,717 |
|
|
|
4,032 |
|
| |
|
|
| |
Total nonperforming assets
|
|
$ |
118,866 |
|
|
$ |
126,939 |
|
|
$ |
110,750 |
|
|
$ |
54,842 |
|
|
$ |
51,728 |
|
| |
|
|
|
Ratios at year end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans
|
|
|
0.83 |
% |
|
|
1.18 |
% |
|
|
0.96 |
% |
|
|
0.58 |
% |
|
|
0.54 |
% |
|
Nonperforming assets to total assets
|
|
|
0.58 |
% |
|
|
0.83 |
% |
|
|
0.74 |
% |
|
|
0.40 |
% |
|
|
0.39 |
% |
|
Allowance for loan losses to nonperforming loans
|
|
|
165 |
% |
|
|
146 |
% |
|
|
164 |
% |
|
|
246 |
% |
|
|
252 |
% |
|
Allowance for loan losses to total loans at end of year
|
|
|
1.37 |
% |
|
|
1.73 |
% |
|
|
1.58 |
% |
|
|
1.42 |
% |
|
|
1.35 |
% |
| |
|
|
Nonperforming loans at December 31, 2004, were
$115.0 million, compared to $121.5 million at
December 31, 2003, and $99.3 million at
December 31, 2002. The ratio of nonperforming loans to
total loans at the end of 2004 was 0.83%, as compared to 1.18%
and 0.96% at December 31, 2003 and 2002, respectively. Of
the $6.5 million decrease in nonperforming loans between
year-end 2003 and 2004, nonaccrual loans decreased
$1.2 million and accruing loans past due 90 days or
more decreased $5.3 million. Of the $22.2 million
increase in nonperforming loans between year-end 2002 and 2003,
nonaccrual loans increased $19.8 million and accruing loans
past due 90 days or more increased $3.6 million, while
restructured loans decreased $1.2 million. The
Corporation’s allowance for loan losses to nonperforming
loans was 165% at year-end 2004, up from 146% at year-end 2003
and 164% at year-end 2002.
The improving trend in nonperforming loans was primarily due to
decreases in commercial nonperforming loans (primarily
attributable to the payment or resolution of specific larger
commercial credits), despite approximately $16 million in
nonperforming loans acquired with First Federal at year-end and
the addition of a $16 million commercial credit in the food
industry in late 2004. Subsequent to year-end, the Corporation
received a substantial paydown on the $16 million food
industry commercial credit, reducing the balance outstanding to
approximately $3 million as of the end of February 2005.
Commercial nonaccrual loans were $86.0 million at
December 31, 2004 (down $9.8 million from year-end
2003), and represented 76%, 84%, and 78% of total nonaccrual
loans at year-end 2004, 2003, and 2002, respectively.
Additionally, accruing commercial loans past due 90 days or
more were $0.7 million at December 31, 2004 (down
$5.1 million from year-end 2003), and represented 31%, 77%,
and 27% of total accruing loans past due 90 days or more at
year-end 2004, 2003 and 2002, respectively.
33
For year-end 2004 versus 2003, the $9.8 million improvement
in commercial nonaccrual loans was predominantly attributable to
the paydowns or other resolutions on several large problem
credits (including resolutions of the two credits totaling
$20 million at year-end 2003, which at December 31,
2004 one credit was paid in full and the other credit had a
remaining outstanding balance of $0.6 million), net of the
addition of a $16 million commercial credit in the food
industry (see previous paragraph for details on a paydown
received subsequent to year-end) and acquired First Federal
commercial nonaccrual loans of approximately $9 million at
year-end. The $5.3 million decrease from year-end 2003 to
year-end 2004 in accruing loans past due 90 days or more
was primarily attributable to one large commercial credit
($2.5 million at December 31, 2003), which was
subsequently transferred to nonaccrual status.
For year-end 2003 versus 2002, the $22.8 million increase
in commercial nonaccrual loans was predominantly attributable to
the addition, during the second quarter of 2003, of two large
commercial credits (totaling approximately $20 million at
December 31, 2003, one in the construction industry and one
in the hospitality industry). The $3.6 million increase
from year-end 2002 to year-end 2003 in accruing loans past due
90 days or more was primarily attributable to one large
commercial credit ($2.5 million at December 31, 2003),
while the decrease in restructured loans was due to one large
commercial credit that was transferred to nonaccrual status and
subsequently charged off during 2003.
Other real estate owned decreased to $3.9 million at
December 31, 2004, compared to $5.5 million and
$11.4 million at year-end 2003 and 2002, respectively. The
change in other real estate owned was predominantly due to the
addition and subsequent sale of commercial real estate
properties. An $8.0 million property was added during 2002,
three commercial properties (at $1.1 million,
$1.5 million, and $2.7 million) were added during
2003, and a $1.3 million commercial property was added
during first quarter 2004. During 2004 the $1.1 million
property was sold (at a net gain of $0.4 million) and the
$1.3 million property was sold (at a net loss of
$0.2 million). During 2003 the $1.5 million property
was sold (at a net loss of $0.6 million), the
$8.0 million property was sold (at a net gain of
$1.0 million), and the $2.7 million property was sold
(at a small gain). Also during 2003, a $0.5 million write
down was recorded in other noninterest expense on another
commercial property in other real estate owned, which was
subsequently sold in 2004 (at a small loss). Net gains on sales
of other real estate owned were $661,000, $472,000, and $53,000
for 2004, 2003, and 2002, respectively. Management actively
seeks to ensure properties held are monitored to minimize the
Corporation’s risk of loss.
The following table shows, for those loans accounted for on a
nonaccrual basis and restructured loans for the years ended as
indicated, the approximate gross interest that would have been
recorded if the loans had been current in accordance with their
original terms and the amount of interest income that was
included in interest income for the period.
TABLE 13: Foregone Loan Interest
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Interest income in accordance with original terms
|
|
$ |
7,427 |
|
|
$ |
7,620 |
|
|
$ |
6,866 |
|
|
Interest income recognized
|
|
|
(2,866 |
) |
|
|
(2,898 |
) |
|
|
(4,313 |
) |
| |
|
|
|
Reduction in interest income
|
|
$ |
4,561 |
|
|
$ |
4,722 |
|
|
$ |
2,553 |
|
| |
|
|
Potential problem loans are certain loans bearing criticized
loan risk ratings by management but that are not in
nonperforming status; however, there are circumstances present
to create doubt as to the ability of the borrower to comply with
present repayment terms. The decision of management to include
performing loans in potential problem loans does not necessarily
mean that the Corporation expects losses to occur but that
management recognizes a higher degree of risk associated with
these loans. The level of potential problem loans is another
predominant factor in determining the relative level of risk in
the loan portfolio and in the determination of the level of the
allowance for loan losses. The loans that have been reported as
potential problem loans are not concentrated in a particular
industry but rather cover a diverse range of businesses. At
34
December 31, 2004, potential problem loans totaled
$234 million, compared to $245 million at
December 31, 2003. The $11 million decrease from
December 31, 2003 to December 31, 2004, is primarily
attributable to the paydown or other resolution during 2004 of
several larger commercial credits in potential problem loans at
year-end 2003.
Investment Securities Portfolio
The investment securities portfolio is intended to provide the
Corporation with adequate liquidity, flexibility in
asset/liability management, a source of stable income, and is
structured with minimum credit exposure to the Corporation. At
the time of purchase, the Corporation generally classifies its
investment purchases as available for sale, consistent with
these investment objectives, including possible securities sales
in response to changes in interest rates or prepayment risk, the
need to manage liquidity or regulatory capital, and other
factors. Investment securities classified as available for sale
are carried at fair market value in the consolidated balance
sheet. At December 31, 2004, the total carrying value of
investment securities was $4.8 billion, up
$1.0 billion or 27.6% over year-end 2003 (with
$665 million from First Federal at acquisition),
representing 23% of total assets, compared to 25% at year-end
2003. On average, the investment portfolio represented 26% and
24% of average earning assets for 2004 and 2003, respectively,
growing in response to a corporate decision to increase the
investment portfolio, particularly during first quarter 2004.
The Corporation primarily purchased mortgage-related securities
to achieve this objective.
TABLE 14: Investment Securities Portfolio
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At December 31, | |
| |
|
| |
| |
|
|
|
% of | |
|
|
|
% of | |
|
|
|
% of | |
| |
|
2004 | |
|
Total | |
|
2003 | |
|
Total | |
|
2002 | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Investment Securities Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$ |
33,177 |
|
|
|
1 |
% |
|
$ |
36,588 |
|
|
|
1 |
% |
|
$ |
44,967 |
|
|
|
1 |
% |
|
Federal agency securities
|
|
|
175,290 |
|
|
|
4 |
|
|
|
167,859 |
|
|
|
4 |
|
|
|
222,787 |
|
|
|
7 |
|
|
Obligations of state and political subdivisions
|
|
|
876,208 |
|
|
|
18 |
|
|
|
868,974 |
|
|
|
24 |
|
|
|
851,710 |
|
|
|
26 |
|
|
Mortgage-related securities
|
|
|
3,238,502 |
|
|
|
68 |
|
|
|
2,232,920 |
|
|
|
61 |
|
|
|
1,672,542 |
|
|
|
52 |
|
|
Other securities (debt and equity)
|
|
|
413,938 |
|
|
|
9 |
|
|
|
368,388 |
|
|
|
10 |
|
|
|
440,126 |
|
|
|
14 |
|
| |
|
|
| |
Total amortized cost
|
|
$ |
4,737,115 |
|
|
|
100 |
% |
|
$ |
3,674,729 |
|
|
|
100 |
% |
|
$ |
3,232,132 |
|
|
|
100 |
% |
| |
|
|
|
U.S. Treasury securities
|
|
$ |
33,023 |
|
|
|
1 |
% |
|
$ |
36,759 |
|
|
|
1 |
% |
|
$ |
45,882 |
|
|
|
1 |
% |
|
Federal agency securities
|
|
|
176,064 |
|
|
|
4 |
|
|
|
172,713 |
|
|
|
4 |
|
|
|
233,930 |
|
|
|
7 |
|
|
Obligations of state and political subdivisions
|
|
|
921,713 |
|
|
|
19 |
|
|
|
927,485 |
|
|
|
25 |
|
|
|
904,023 |
|
|
|
27 |
|
|
Mortgage-related securities
|
|
|
3,237,485 |
|
|
|
67 |
|
|
|
2,233,412 |
|
|
|
59 |
|
|
|
1,705,236 |
|
|
|
51 |
|
|
Other securities (debt and equity)
|
|
|
447,059 |
|
|
|
9 |
|
|
|
403,415 |
|
|
|
11 |
|
|
|
473,598 |
|
|
|
14 |
|
| |
|
|
| |
Total fair value and carrying value
|
|
$ |
4,815,344 |
|
|
|
100 |
% |
|
$ |
3,773,784 |
|
|
|
100 |
% |
|
$ |
3,362,669 |
|
|
|
100 |
% |
| |
|
|
|
Net unrealized holding gains
|
|
$ |
78,229 |
|
|
|
|
|
|
$ |
99,055 |
|
|
|
|
|
|
$ |
130,537 |
|
|
|
|
|
| |
|
|
At December 31, 2004, the Corporation’s securities
portfolio did not contain securities of any single issuer that
were payable from and secured by the same source of revenue or
taxing authority where the aggregate carrying value of such
securities exceeded 10% of stockholders’ equity or
approximately $202 million.
At December 31, 2004 and 2003, mortgage-related securities
(which include predominantly mortgage-backed securities and
collateralized mortgage obligations (CMOs)) represented 67% and
59%, respectively, of total investment securities based on
carrying value. The fair value of mortgage-related securities is
subject to inherent risks based upon the future performance of
the underlying collateral (i.e. mortgage loans) for these
securities, such as prepayment risk and interest rate changes.
During 2004, the Corporation’s FHLMC preferred stock
securities (included in other securities) were determined to
have other-than-temporary impairment that resulted in a
write-down on these securities of
35
$2.2 million. At December 31, 2004, the carrying value
of the FHLMC preferred stock was $8.4 million. A CMO
(included in mortgage-related securities) was determined to have
other-than-temporary impairment that resulted in write downs on
the security of $0.8 million during 2002, $0.3 million
during 2003, and $0.2 million during 2004, based on
continued evaluation. At December 31, 2004, this CMO had a
carrying value of $1.0 million. See Note 1,
“Summary of Significant Accounting Policies,” and
Note 3, “Investment Securities,” of the notes to
consolidated financial statements for additional information.
TABLE 15: Investment Securities Portfolio Maturity
Distribution(1)— At December 31, 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Investment Securities Available for Sale - Maturity Distribution and Weighted Average Yield | |
| |
|
| |
| |
|
|
|
After one | |
|
After five | |
|
|
|
Mortgage-related | |
|
|
|
|
| |
|
Within | |
|
but within | |
|
but within | |
|
After | |
|
and | |
|
Total Amortized | |
|
Total Fair | |
| |
|
one year | |
|
five years | |
|
ten years | |
|
ten years | |
|
equity securities | |
|
Cost | |
|
Value | |
| |
|
| |
| |
|
Amount | |
|
Yield | |
|
Amount | |
|
Yield | |
|
Amount | |
|
Yield | |
|
Amount | |
|
Yield | |
|
Amount | |
|
Yield | |
|
Amount | |
|
Yield | |
|
Amount | |
| |
|
| |
| |
|
($ in Thousands) | |
|
U. S. Treasury securities
|
|
$ |
1,199 |
|
|
|
2.55 |
% |
|
$ |
31,978 |
|
|
|
2.52 |
% |
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
33,177 |
|
|
|
2.52 |
% |
|
$ |
33,023 |
|
|
Federal agency securities
|
|
|
19,127 |
|
|
|
6.60 |
|
|
|
96,105 |
|
|
|
4.28 |
|
|
|
60,058 |
|
|
|
3.52 |
% |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
175,290 |
|
|
|
4.27 |
|
|
|
176,064 |
|
|
Obligations of states and political subdivisions(2)
|
|
|
80,555 |
|
|
|
7.45 |
|
|
|
250,347 |
|
|
|
6.91 |
|
|
|
269,950 |
|
|
|
7.07 |
|
|
|
275,356 |
|
|
|
7.23 |
% |
|
|
— |
|
|
|
— |
|
|
|
876,208 |
|
|
|
7.11 |
|
|
|
921,713 |
|
|
Other debt securities
|
|
|
79,631 |
|
|
|
3.44 |
|
|
|
104,423 |
|
|
|
6.08 |
|
|
|
200 |
|
|
|
4.00 |
|
|
|
10,000 |
|
|
|
3.20 |
|
|
|
— |
|
|
|
— |
|
|
|
194,254 |
|
|
|
4.85 |
|
|
|
199,748 |
|
|
Mortgage-related securities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,238,502 |
|
|
|
4.25 |
% |
|
|
3,238,502 |
|
|
|
4.25 |
|
|
|
3,237,485 |
|
|
Equity securities
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
219,684 |
|
|
|
5.48 |
|
|
|
219,684 |
|
|
|
5.48 |
|
|
|
247,311 |
|
| |
|
|
|
Total amortized cost
|
|
$ |
180,512 |
|
|
|
5.56 |
% |
|
$ |
482,853 |
|
|
|
5.92 |
% |
|
$ |
330,208 |
|
|
|
6.43 |
% |
|
$ |
285,356 |
|
|
|
7.09 |
% |
|
$ |
3,458,186 |
|
|
|
4.32 |
% |
|
$ |
4,737,115 |
|
|
|
4.85 |
% |
|
$ |
4,815,344 |
|
| |
|
|
|
Total fair value and carrying value
|
|
$ |
182,134 |
|
|
|
|
|
|
$ |
501,858 |
|
|
|
|
|
|
$ |
346,053 |
|
|
|
|
|
|
$ |
300,503 |
|
|
|
|
|
|
$ |
3,484,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,815,344 |
|
| |
|
|
|
|
| (1) |
Expected maturities will differ from contractual maturities, as
borrowers may have the right to call or repay obligations with
or without call or prepayment penalties. |
| |
| (2) |
Yields on tax-exempt securities are computed on a taxable
equivalent basis using a tax rate of 35% and have not been
adjusted for certain disallowed interest deductions. |
Deposits
Deposits are the Corporation’s largest source of funds.
Selected period-end deposit information is detailed in
Note 7, “Deposits,” of the notes to consolidated
financial statements, including a maturity distribution of all
time deposits at December 31, 2004. A maturity distribution
of certificates of deposits and other time deposits of $100,000
or more at December 31, 2004 is shown in Table 17. Table 16
summarizes the distribution of average deposit balances. See
also section “Liquidity.”
The Corporation competes with other bank and nonbank
institutions, as well as with investment alternatives such as
money market or other mutual funds and brokerage houses, for
deposits. The Corporation’s nonbrokered deposit growth was
impacted by competitive factors, as well as other investment
opportunities available to customers. During both 2004 and 2003,
the Corporation has actively marketed its transaction accounts
(business demand deposits, interest-bearing demand deposits, and
money market accounts), which offer competitive, market-indexed
rates and greater customer flexibility.
At December 31, 2004, deposits were $12.8 billion, up
$3.0 billion or 30.6% over December 31, 2003,
including $2.7 billion added from First Federal at
acquisition. Excluding First Federal, total deposits grew 3.0%
over December 31, 2003. The sale of two branches during
2004 reduced deposits by $20 million, while the sale of two
branches during 2003 reduced deposits by $17 million.
The mix of period-end deposits changed slightly, affected in
part by the First Federal acquisition. At December 31,
2004, noninterest-bearing demand deposits were 19% of deposits
compared to 18% at year-end 2003, total time deposits were 34%
of deposits versus 33% at year-end 2003, and interest-bearing
transaction accounts (savings, interest-bearing demand, and
money market deposits) were 47% of deposits versus 49% at the
end of 2003.
The mix of average deposits shifted. Average deposits were
$10.1 billion for 2004, up $845 million or 9.1% over
the average for 2003. Average nonbrokered deposits for 2004 were
$9.9 billion, up $792 million or 8.7%
36
compared to 2003. Given the lower interest rate environment,
total average time deposits declined to 32% of average deposits
for 2004 compared to 35% for 2003, shifting into
interest-bearing transaction accounts at 50% for 2004 versus 47%
for 2003.
TABLE 16: Average Deposits Distribution
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
Amount | |
|
% of Total | |
|
Amount | |
|
% of Total | |
|
Amount | |
|
% of Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Noninterest-bearing demand deposits
|
|
$ |
1,867,111 |
|
|
|
18 |
% |
|
$ |
1,677,891 |
|
|
|
18 |
% |
|
$ |
1,498,106 |
|
|
|
17 |
% |
|
Interest-bearing demand deposits
|
|
|
2,406,280 |
|
|
|
24 |
|
|
|
1,827,304 |
|
|
|
20 |
|
|
|
1,118,546 |
|
|
|
12 |
|
|
Savings deposits
|
|
|
967,930 |
|
|
|
10 |
|
|
|
928,147 |
|
|
|
10 |
|
|
|
891,105 |
|
|
|
10 |
|
|
Money market deposits
|
|
|
1,628,208 |
|
|
|
16 |
|
|
|
1,623,438 |
|
|
|
17 |
|
|
|
1,876,988 |
|
|
|
21 |
|
|
Brokered certificates of deposit
|
|
|
232,066 |
|
|
|
2 |
|
|
|
178,853 |
|
|
|
2 |
|
|
|
264,023 |
|
|
|
3 |
|
|
Other time and certificates of deposit
|
|
|
3,042,933 |
|
|
|
30 |
|
|
|
3,063,873 |
|
|
|
33 |
|
|
|
3,263,766 |
|
|
|
37 |
|
| |
|
|
|
Total deposits
|
|
$ |
10,144,528 |
|
|
|
100 |
% |
|
$ |
9,299,506 |
|
|
|
100 |
% |
|
$ |
8,912,534 |
|
|
|
100 |
% |
| |
|
|
|
Nonbrokered deposits
|
|
$ |
9,912,462 |
|
|
|
98 |
% |
|
$ |
9,120,653 |
|
|
|
98 |
% |
|
$ |
8,648,511 |
|
|
|
97 |
% |
| |
|
|
TABLE 17: Maturity Distribution-Certificates of Deposit
and Other Time Deposits of $100,000 or More
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
| |
|
| |
| |
|
|
|
Total Certificates of | |
| |
|
Certificates | |
|
|
|
Deposits and Other | |
| |
|
of Deposit | |
|
Other Time Deposits | |
|
Time Deposits | |
| |
|
| |
| |
|
| |
| |
|
($ in Thousands) | |
|
Three months or less
|
|
$ |
581,203 |
|
|
$ |
41,085 |
|
|
$ |
622,288 |
|
|
Over three months through six months
|
|
|
173,552 |
|
|
|
35,172 |
|
|
|
208,724 |
|
|
Over six months through twelve months
|
|
|
186,512 |
|
|
|
35,400 |
|
|
|
221,912 |
|
|
Over twelve months
|
|
|
332,336 |
|
|
|
— |
|
|
|
332,336 |
|
| |
|
|
|
Total
|
|
$ |
1,273,603 |
|
|
$ |
111,657 |
|
|
$ |
1,385,260 |
|
| |
|
|
Other Funding Sources
Other funding sources, including short-term borrowings and
long-term funding (“wholesale funds”), were
$5.5 billion at December 31, 2004, up
$1.5 billion from $4.0 billion at December 31,
2003. See also section “Liquidity.” Short-term
borrowings increased $998 million, primarily in Federal
funds purchased and securities sold under agreements to
repurchase. Short-term borrowings are primarily comprised of
Federal funds purchased; securities sold under agreements to
repurchase; short-term Federal Home Loan Bank advances; notes
payable to banks; and treasury, tax, and loan notes. The Federal
Home Loan Bank advances included in short-term borrowings are
generally those with original maturities of less than one year.
The treasury, tax, and loan notes are demand notes representing
secured borrowings from the U.S. Treasury, collateralized by
qualifying securities and loans. This funding program provides
funds at the discretion of the U.S. Treasury that may be called
at any time. Many short-term borrowings, particularly Federal
funds purchased and securities sold under agreements to
repurchase, are expected to be reissued and, therefore, do not
represent an immediate need for cash. See Note 8,
“Short-term Borrowings,” of the notes to consolidated
financial statements for additional information on short-term
borrowings, and Table 18 for specific disclosure required for
major short-term borrowing categories. Long-term debt at
December 31, 2004, was $2.6 billion, up
$570 million from December 31, 2003, due primarily to
the issuance of $996 million of long-term Federal Home Loan
Bank advances (including $396 million acquired with the
First Federal acquisition), $450 million of long-term
repurchase agreements, and $350 million of bank notes, net
of the repayments of $750 million of
37
long-term Federal Home Loan Bank advances, $329 million of
long-term repurchase agreements, and $150 million of bank
notes. See Note 9, “Long-term Funding,” of the
notes to consolidated financial statements for additional
information on long-term funding.
Wholesale funds on average were $4.6 billion for 2004, up
$357 million or 8.4% over 2003. The mix of wholesale
funding shifted toward short-term borrowing instruments, with
average long-term funding declining to 43.5% of wholesale funds
compared to 49.5% in 2003, in response to certain
asset/liability objectives and low interest rates. Within the
short-term borrowing categories, average Federal funds purchased
and securities sold under agreements to repurchase increased
$218 million, while other short-term borrowing sources were
up $238 million.
TABLE 18: Short-Term Borrowings
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Federal funds purchased and securities sold under agreements to
repurchase:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Balance end of year
|
|
$ |
2,437,088 |
|
|
$ |
1,340,996 |
|
|
$ |
2,240,286 |
|
| |
Average amounts outstanding during year
|
|
|
2,038,981 |
|
|
|
1,821,220 |
|
|
|
2,058,163 |
|
| |
Maximum month-end amounts outstanding
|
|
|
2,509,956 |
|
|
|
2,235,928 |
|
|
|
2,264,557 |
|
| |
Average interest rates on amounts outstanding at end of year
|
|
|
2.13 |
% |
|
|
1.05 |
% |
|
|
1.49 |
% |
| |
Average interest rates on amounts outstanding during year
|
|
|
1.42 |
% |
|
|
1.28 |
% |
|
|
2.05 |
% |
Liquidity
The objective of liquidity management is to ensure that the
Corporation has the ability to generate sufficient cash or cash
equivalents in a timely and cost-effective manner to satisfy the
cash flow requirements of depositors and borrowers and to meet
its other commitments as they fall due, including the ability to
pay dividends to shareholders, service debt, invest in
subsidiaries, repurchase common stock, and satisfy other
operating requirements.
Funds are available from a number of basic banking activity
sources, primarily from the core deposit base and from loans and
securities repayments and maturities. Additionally, liquidity is
provided from sales of the securities portfolio, lines of credit
with major banks, the ability to acquire large and brokered
deposits, and the ability to securitize or package loans for
sale. The Corporation’s capital can be a source of funding
and liquidity as well. See section “Capital.”
The Corporation’s internal liquidity management framework
includes measurement of several key elements, such as wholesale
funding as a percent of total assets and liquid assets to
short-term wholesale funding. Strong capital ratios, credit
quality, and core earnings are essential to retaining high
credit ratings and, consequently, cost-effective access to the
wholesale funding markets. A downgrade or loss in credit ratings
could have an impact on the Corporation’s ability to access
wholesale funding at favorable interest rates. As a result,
capital ratios, asset quality measurements, and profitability
ratios are monitored on an ongoing basis as part of the
liquidity management process. At December 31, 2004, the
Corporation was in compliance with its liquidity objectives.
The Corporation’s liquidity framework also incorporates
contingency planning to assess the nature and volatility of
funding sources and to determine alternatives to these sources.
The contingency plan would be activated to ensure the
Corporation’s funding commitments could be met in the event
of general market disruption or adverse economic conditions.
While core deposits and loan and investment repayment are
principal sources of liquidity, funding diversification is
another key element of liquidity management. Diversity is
achieved by strategically varying depositor type, term, funding
market, and instrument. As noted below, the Parent Company and
certain subsidiary
38
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.
TABLE 19: Credit Ratings at December 31, 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Fitch | |
| |
|
Moody’s | |
|
S&P | |
|
Ratings | |
| |
|
| |
|
| |
|
| |
|
Bank short-term
|
|
|
P1 |
|
|
|
A2 |
|
|
|
F1 |
|
|
Bank long-term
|
|
|
A2 |
|
|
|
A- |
|
|
|
A- |
|
|
Corporation short-term
|
|
|
P2 |
|
|
|
A2 |
|
|
|
F1 |
|
|
Corporation long-term
|
|
|
A3 |
|
|
|
BBB |
+ |
|
|
A- |
|
|
Subordinated debt long-term
|
|
|
Baa1 |
|
|
|
BBB |
|
|
|
BBB |
+ |
The Parent Company’s primary funding sources are dividends
and service fees from subsidiaries and proceeds from the
issuance of equity. Dividends received in cash from subsidiaries
totaled $124.5 million in 2004. At December 31, 2004,
$210.8 million in dividends could be paid to the parent by
its subsidiaries without obtaining prior regulatory approval,
subject to the capital needs of the banks. As discussed in
Item 1, 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 shareholders
or for other cash needs.
The Parent Company also has multiple funding sources that could
be used to increase liquidity and provide additional financial
flexibility. These sources include two shelf registrations to
issue debt and preferred securities or a combination thereof
and, used to a lesser degree, a revolving credit facility and
commercial paper issuances. The Parent Company has available a
$100 million revolving credit facility with established
lines of credit from nonaffiliated banks, of which
$100 million was available at December 31, 2004. In
addition, $200 million of commercial paper was available at
December 31, 2004, under the Parent Company’s
$200 million commercial paper program.
In May 2002, the Parent Company filed a “shelf”
registration statement under which the Parent Company may offer
up to $300 million of trust preferred securities. In May
2002 $175 million of trust preferred securities were
issued, bearing a 7.625% fixed coupon rate. At December 31,
2004, $125 million was available under the trust preferred
shelf. In May 2001, the Parent Company filed a “shelf”
registration statement whereby the Parent Company may offer up
to $500 million of any combination of the following
securities, either separately or in units: debt securities,
preferred stock, depositary shares, common stock, and warrants.
In August 2001, the Parent Company issued $200 million in a
subordinated note offering, bearing a 6.75% fixed coupon rate
and 10-year maturity. At December 31, 2004,
$300 million was available under the shelf registration.
Investment securities are an important tool to the
Corporation’s liquidity objective. As of December 31,
2004, all securities are classified as available for sale and
are reported at fair value on the consolidated balance sheet. Of
the $4.8 billion investment portfolio, $2.5 billion
were pledged to secure certain deposits, Federal Home Loan Bank
advances, or for other purposes as required or permitted by law.
The majority of remaining securities could be pledged or sold to
enhance liquidity, if necessary.
The bank and thrift subsidiaries have a variety of funding
sources (in addition to key liquidity sources, such as core
deposits, loan and investment portfolio repayments and
maturities, and loan and investment portfolio sales) available
to increase financial flexibility. A $2 billion bank note
program associated with Associated Bank, National Association,
was established during 2000. Under this program, short-term and
long-term debt may be issued. As of December 31, 2004,
$500 million of long-term bank notes and $200 million
of short-term bank notes were outstanding. The banks have also
established federal funds lines with major banks and the ability
to borrow from the Federal Home Loan Bank ($1.3 billion was
outstanding at December 31, 2004). In addition, the bank
subsidiaries also issue institutional certificates of deposit,
from time to time offer brokered certificates of deposit, and to
a lesser degree, accept Eurodollar deposits.
39
As reflected in Table 22, the Corporation has various financial
obligations, including contractual obligations and other
commitments, which may require future cash payments. Shorter
maturities of time deposits seen in Table 22 could imply
near-term liquidity risk if such deposit balances do not
rollover at maturity into new time or non-time deposits at the
Corporation. However, the relatively shorter maturities in time
deposits are not out of the ordinary to the Corporation’s
experience of its customer base preference and there has been
growth in deposits. Continued strategic emphasis on deposit
growth should further support this liquidity source. Many
short-term borrowings, particularly Federal funds purchased and
securities sold under agreements to repurchase, are expected to
be reissued and, therefore, do not represent an immediate need
for cash. The Corporation has been purposely extending its
long-term funding sources primarily to take advantage of
extending maturities in the lower rate environment. While this
commits the Corporation contractually to future cash payments,
it is supportive of interest rate risk and liquidity management
strategies. As a financial services provider, the Corporation
routinely enters into commitments to extend credit. While
contractual obligations represent future cash requirements of
the Corporation, a significant portion of commitments to extend
credit may expire without being drawn upon.
For the year ended December 31, 2004, net cash provided
from operating and financing activities was $383.5 million
and $968.2 million, respectively, while investing
activities used net cash of $1.3 billion, for a net
increase in cash and cash equivalents of $58.2 million
since year-end 2003. In general, net asset growth since year-end
2003 was strong, primarily due to the First Federal acquisition,
as well as organic growth. Therefore, various funding sources
were utilized to support the net asset growth, particularly
deposits, short-term borrowings, and long-term funding. These
funding sources partially financed the First Federal and Jabas
acquisitions, provided for the repayment of short-term
borrowings and long-term funding, common stock repurchases, and
the payment of cash dividends to the Corporation’s
shareholders.
For the year ended December 31, 2003, net cash provided
from operating and financing activities was $496.8 million
and $9.1 million, respectively, while investing activities
used net cash of $551.0 million, for a net decrease in cash
and cash equivalents of $45.1 million since year-end 2002.
Generally, during 2003, deposit growth was strong, while net
asset growth since year-end 2002 was moderate (up 1.4%). Thus,
the reliance on other funding sources was reduced, particularly
short-term borrowings and long-term debt. The deposit growth
provided for the repayment of short-term borrowings and
long-term debt, common stock repurchases, and the payment of
cash dividends to the Corporation’s shareholders.
Quantitative and Qualitative Disclosures about Market Risk
Market risk arises from exposure to changes in interest rates,
exchange rates, commodity prices, and other relevant market rate
or price risk. The Corporation faces market risk in the form of
interest rate risk through other than trading activities. Market
risk from other than trading activities in the form of interest
rate risk is measured and managed through a number of methods.
The Corporation uses financial modeling techniques that measure
the sensitivity of future earnings due to changing rate
environments to measure interest rate risk. Policies established
by the Corporation’s Asset/ Liability Committee and
approved by the Board of Directors limit exposure of earnings at
risk. General interest rate movements are used to develop
sensitivity as the Corporation feels it has no primary exposure
to a specific point on the yield curve. These limits are based
on the Corporation’s exposure to a 100 bp and 200 bp
immediate and sustained parallel rate move, either upward or
downward.
Interest Rate Risk
In order to measure earnings sensitivity to changing rates, the
Corporation uses three different measurement tools: static gap
analysis, simulation of earnings, and economic value of equity.
These three measurement tools represent static (i.e.,
point-in-time) measures that do not take into account subsequent
interest rate changes, changes in management strategies and
market conditions, and future production of assets or
liabilities, among other factors.
Static gap analysis: The static gap analysis starts with
contractual repricing information for assets, liabilities, and
off-balance sheet instruments. These items are then combined
with repricing estimations for administered
40
rate (interest-bearing demand deposits, savings, and money
market accounts) and non-rate related products (demand deposit
accounts, other assets, and other liabilities) to create a
baseline repricing balance sheet. In addition to the contractual
information, residential mortgage whole loan products and
mortgage-backed securities are adjusted based on industry
estimates of prepayment speeds that capture the expected
prepayment of principal above the contractual amount based on
how far away the contractual coupon is from market coupon rates.
The following table represents the Corporation’s
consolidated static gap position as of December 31, 2004.
TABLE 20: Interest Rate Sensitivity Analysis
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
| |
|
| |
| |
|
Interest Sensitivity Period | |
| |
|
|
|
Total Within | |
|
|
| |
|
0-90 Days | |
|
91-180 Days | |
|
181-365 Days | |
|
1 Year | |
|
Over 1 Year | |
|
Total | |
| |
|
| |
| |
|
($ in Thousands) | |
|
Earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Loans held for sale
|
|
$ |
64,964 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
64,964 |
|
|
$ |
— |
|
|
$ |
64,964 |
|
| |
Investment securities, at fair value
|
|
|
619,348 |
|
|
|
300,309 |
|
|
|
594,211 |
|
|
|
1,513,868 |
|
|
|
3,301,476 |
|
|
|
4,815,344 |
|
| |
Loans
|
|
|
7,732,006 |
|
|
|
563,394 |
|
|
|
2,124,700 |
|
|
|
10,420,100 |
|
|
|
3,461,787 |
|
|
|
13,881,887 |
|
| |
Interest rate swaps
|
|
|
305,881 |
|
|
|
(5,201 |
) |
|
|
(13,235 |
) |
|
|
287,445 |
|
|
|
(287,445 |
) |
|
|
— |
|
| |
Other earning assets
|
|
|
68,761 |
|
|
|
— |
|
|
|
— |
|
|
|
68,761 |
|
|
|
— |
|
|
|
68,761 |
|
| |
|
|
|
Total earning assets
|
|
$ |
8,790,960 |
|
|
$ |
858,502 |
|
|
$ |
2,705,676 |
|
|
$ |
12,355,138 |
|
|
$ |
6,475,818 |
|
|
$ |
18,830,956 |
|
| |
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest-bearing deposits(1)(2)
|
|
$ |
1,779,534 |
|
|
$ |
1,566,301 |
|
|
$ |
2,493,044 |
|
|
$ |
5,838,879 |
|
|
$ |
6,585,801 |
|
|
$ |
12,424,680 |
|
| |
Other interest-bearing liabilities(2)
|
|
|
4,250,399 |
|
|
|
231,729 |
|
|
|
289,690 |
|
|
|
4,771,818 |
|
|
|
1,120,997 |
|
|
|
5,892,815 |
|
| |
Interest rate swaps(3)
|
|
|
175,000 |
|
|
|
— |
|
|
|
— |
|
|
|
175,000 |
|
|
|
(175,000 |
) |
|
|
— |
|
| |
|
|
|
Total interest-bearing liabilities
|
|
$ |
6,204,933 |
|
|
$ |
1,798,030 |
|
|
$ |
2,782,734 |
|
|
$ |
10,785,697 |
|
|
$ |
7,531,798 |
|
|
$ |
18,317,495 |
|
| |
|
|
|
Interest sensitivity gap
|
|
$ |
2,586,027 |
|
|
$ |
(939,528 |
) |
|
$ |
(77,058 |
) |
|
$ |
1,569,441 |
|
|
$ |
(1,055,980 |
) |
|
$ |
513,461 |
|
|
Cumulative interest sensitivity gap
|
|
$ |
2,586,027 |
|
|
$ |
1,646,499 |
|
|
$ |
1,569,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 Month cumulative gap as a percentage of earning assets at
December 31, 2004
|
|
|
13.7 |
% |
|
|
8.7 |
% |
|
|
8.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
| (1) |
The interest rate sensitivity assumptions for demand deposits,
savings accounts, money market accounts, and interest-bearing
demand deposit accounts are based on current and historical
experiences regarding portfolio retention and interest rate
repricing behavior. Based on these experiences, a portion of
these balances is considered to be long-term and fairly stable
and is, therefore, included in the “Over 1 Year”
category. |
| |
| (2) |
For analysis purposes, Brokered CDs of $362 million have
been included with other interest-bearing liabilities and
excluded from interest-bearing deposits. |
| |
| (3) |
Interest rate swaps on funding are presented on a net basis. |
The static gap analysis in Table 20 provides a representation of
the Corporation’s earnings sensitivity to changes in
interest rates. It is a static indicator that does not reflect
various repricing characteristics and may not necessarily
indicate the sensitivity of net interest income in a changing
interest rate environment. As of December 31, 2004, the
12-month cumulative gap results were within the
Corporation’s interest rate risk policy.
At the end of 2003, the Corporation’s balance sheet was
asset sensitive to interest rate movements. (Asset sensitive
means that assets will reprice faster than liabilities. In a
rising rate environment, an asset sensitive bank will generally
benefit.) During 2004, the Corporation remained asset sensitive
as a result of issuing long-term funding, growth in demand
deposits, and shortening of the mortgage portfolio and
investment portfolio due to faster prepayment experience.
However, the flattening of the yield curve and competitive
pricing pressures substantially offset the benefits to net
interest income from the interest rate increases that occurred
during the second half of 2004. For 2005, the Corporation is
positioned to benefit from rising rates, assuming
41
anticipated increases by the Federal Reserve and a steepening of
the yield curve. See also section “Net Interest
Income.”
Interest rate risk of embedded positions (including prepayment
and early withdrawal options, lagged interest rate changes,
administered interest rate products, and cap and floor options
within products) require a more dynamic measuring tool to
capture earnings risk. Earnings simulation and economic value of
equity are used to more completely assess interest rate risk.
Simulation of earnings: Along with the static gap
analysis, determining the sensitivity of short-term future
earnings to a hypothetical plus or minus 100 bp and
200 bp parallel rate shock can be accomplished through the
use of simulation modeling. In addition to the assumptions used
to create the static gap, simulation of earnings includes the
modeling of the balance sheet as an ongoing entity. Future
business assumptions involving administered rate products,
prepayments for future rate-sensitive balances, and the
reinvestment of maturing assets and liabilities are included.
These items are then modeled to project net interest income
based on a hypothetical change in interest rates. The resulting
net interest income for the next 12-month period is compared to
the net interest income amount calculated using flat rates. This
difference represents the Corporation’s earnings
sensitivity to a plus or minus 100 bp parallel rate shock.
The resulting simulations for December 31, 2004, projected
that net interest income would increase by approximately 1.2% of
budgeted net interest income if rates rose by a 100 bp
shock, and projected that the net interest income would decrease
by approximately 2.6% if rates fell by a 100 bp shock. At
December 31, 2003, the 100 bp shock up was projected
to increase budgeted net interest income by approximately 1.7%,
and the 100 bp shock down was projected to decrease
budgeted net interest income by approximately 1.1%. As of
December 31, 2004, the simulation of earnings results was
within the Corporation’s interest rate risk policy.
Economic value of equity: Economic value of equity
is another tool used to measure the impact of interest rates on
the present value of assets, liabilities, and off-balance sheet
financial instruments. This measurement is a longer-term
analysis of interest rate risk as it evaluates every cash flow
produced by the current balance sheet.
These results are based solely on immediate and sustained
parallel changes in market rates and do not reflect the earnings
sensitivity that may arise from other factors. These factors may
include changes in the shape of the yield curve, the change in
spread between key market rates, or accounting recognition of
the impairment of certain intangibles. The above results are
also considered to be conservative estimates due to the fact
that no management action to mitigate potential income variances
is included within the simulation process. This action could
include, but would not be limited to, delaying an increase in
deposit rates, extending liabilities, using financial derivative
products to hedge interest rate risk, changing the pricing
characteristics of loans, or changing the growth rate of certain
assets and liabilities.
The projected changes for earnings simulation and economic value
of equity for both 2004 and 2003 were within the
Corporation’s interest rate risk policy.
The Corporation uses interest rate derivative financial
instruments as an asset/liability management tool to hedge
mismatches in interest rate exposure indicated by the net
interest income simulation described above. They are used to
modify the Corporation’s exposures to interest rate
fluctuations and provide more stable spreads between loan yields
and the rate on their funding sources. Derivative financial
instruments are also discussed in Note 14, “Derivative
and Hedging Activities,” of the notes to consolidated
financial statements.
In 2004, the Corporation entered into $58 million in
notional amounts of new interest rate swaps to reduce interest
rate risk. Interest rate swaps involve the exchange of fixed-
and variable-rate payments without the exchange of the
underlying notional amount on which the interest payments are
calculated. Not included in the table below were customer swaps
and caps with a notional amount of $118.0 million as of
December 31, 2004, for which the Corporation has mirror
swaps and caps. The change in fair value of these customer swaps
and caps is recorded in earnings. The net impact of these swaps
and caps for 2004 was immaterial.
42
|
|
| Table 21: |
Interest Rate Swap Hedging Portfolio Notional Balances and
Yield by Maturity Date at December 31, 2004 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted Average | |
|
Weighted Average | |
| Maturity |
|
Notional Amount | |
|
Rate Received | |
|
Rate Paid | |
| | |
| |
|
($ in Thousands) | |
|
|
|
Less than 1 year
|
|
$ |
33,552 |
|
|
|
4.60 |
% |
|
|
6.40 |
% |
|
1 - 5 years
|
|
|
217,698 |
|
|
|
4.55 |
|
|
|
6.26 |
|
|
5 - 10 years
|
|
|
457,890 |
|
|
|
4.46 |
|
|
|
4.80 |
|
|
Over 10 years
|
|
|
186,857 |
|
|
|
7.39 |
|
|
|
3.68 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
895,997 |
|
|
|
5.10 |
% |
|
|
4.98 |
% |
| |
|
|
|
|
|
|
|
|
|
To hedge against rising interest rates, the Corporation may use
interest rate caps. Counterparties to these interest cap
agreements pay the Corporation based on the notional amount and
the difference between current rates and strike rates. At
December 31, 2004, there were $200 million of interest
rate caps outstanding, which have a six-month LIBOR strike of
4.72%. To hedge against falling interest rates, the Corporation
may use interest rate floors. Like caps, counterparties to
interest rate floor agreements pay the Corporation based on the
notional amount and the difference between current rates and
strike rates. There were no floors outstanding at
December 31, 2004.
Contractual Obligations, Commitments, Off-Balance Sheet
Arrangements, and Contingent Liabilities
Through the normal course of operations, the Corporation has
entered into certain contractual obligations and other
commitments, including but not limited to those most usually
related to funding of operations through deposits or debt,
commitments to extend credit, derivative contracts to assist
management of interest rate exposure, and to a lesser degree
leases for premises and equipment. Table 22 summarizes
significant contractual obligations and other commitments at
December 31, 2004, at those amounts contractually due to
the recipient, not including any interest, unamortized premiums
or discounts, hedge basis adjustments, or other similar carrying
value adjustments. Further discussion of the nature of each
obligation is included in the referenced note to the
consolidated financial statements.
Table 22: Contractual Obligations and Other
Commitments
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Note | |
|
One Year | |
|
One to | |
|
Three to | |
|
Over Five | |
|
|
| |
|
Reference | |
|
or Less | |
|
Three Years | |
|
Five Years | |
|
Years | |
|
Total | |
| |
|
| |
| |
|
($ in Thousands) | |
|
Time deposits
|
|
|
7 |
|
|
$ |
2,819,989 |
|
|
$ |
1,226,389 |
|
|
$ |
209,174 |
|
|
$ |
121,366 |
|
|
$ |
4,376,918 |
|
|
Short-term borrowings
|
|
|
8 |
|
|
|
2,926,716 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,926,716 |
|
|
Long-term funding
|
|
|
9 |
|
|
|
374,111 |
|
|
|
1,671,866 |
|
|
|
115,948 |
|
|
|
431,239 |
|
|
|
2,593,164 |
|
|
Operating leases
|
|
|
6 |
|
|
|
11,155 |
|
|
|
19,729 |
|
|
|
13,296 |
|
|
|
22,558 |
|
|
|
66,738 |
|
|
Commitments to extend credit
|
|
|
13 |
|
|
|
3,436,354 |
|
|
|
620,125 |
|
|
|
322,453 |
|
|
|
57,927 |
|
|
|
4,436,859 |
|
| |
|
|
|
|
|
| |
Total
|
|
|
|
|
|
$ |
9,568,325 |
|
|
$ |
3,538,109 |
|
|
$ |
660,871 |
|
|
$ |
633,090 |
|
|
$ |
14,400,395 |
|
| |
|
|
|
|
|
The Corporation also has obligations under its retirement plans
as described in Note 11, “Retirement Plans,” of
the notes to consolidated financial statements.
The Corporation may have a variety of financial transactions
that, under generally accepted accounting principles, are either
not recorded on the balance sheet or are recorded on the balance
sheet in amounts that differ from the full contract or notional
amounts.
The Corporation’s derivative contracts, under which the
Corporation is required to either receive cash from or pay cash
to counterparties depending on changes in interest rates applied
to notional amounts, are carried at fair value on the
consolidated balance sheet with the fair value representing the
net present value of expected future cash receipts or payments
based on market interest rates as of the balance sheet date. The
fair value of the contracts changes daily as market interest
rates change. Because neither the derivative assets and
43
liabilities, nor their notional amounts, do not represent the
amounts that may ultimately be paid under these contracts, they
are not included in the Table 22. For further information and
discussion of derivative contracts, see section “Interest
Rate Risk,” and Table 21, and Note 1, “Summary of
Significant Accounting Policies,” and Note 14,
“Derivative and Hedging Activities,” of the notes to
consolidated financial statements.
The Corporation does not have significant off-balance sheet
arrangements such as the use of special-purpose entities or
securitization trusts. Related to the $125.9 million
commitments to originate residential mortgage loans in Table 22,
the Corporation had outstanding forward commitments to sell
$148.6 million of loans to various investors as of
December 31, 2004, both of which are derivatives (see
Note 14, “Derivative and Hedging Activities,” of
the notes to consolidated financial statements). Residential
mortgage loans sold to others are sold on a nonrecourse basis,
though First Federal retained the credit risk on the underlying
loans it sold to the Federal Home Loan Bank
(“FHLB”), prior to its acquisition by the Corporation,
in exchange for a monthly credit enhancement fee. At
December 31, 2004, there were $2.4 billion of such
loans with credit risk recourse, upon which there have been
negligible historical losses. The Corporation also has standby
letters of credit (guarantees for payment to third parties of
specified amounts if customers fail to pay, carried on-balance
sheet at an estimate of their fair value) of
$409.2 million, and commercial letters of credit
(off-balance sheet commitments generally authorizing a third
party to draw drafts on us up to a stated amount and typically
having underlying goods shipments as collateral) of
$22.8 million at December 31, 2004. Since most of
these commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent
future cash requirements. See section, “Liquidity.”
See also Note 13, “Commitments, Off-Balance Sheet
Arrangements, and Contingent Liabilities,” of the notes to
consolidated financial statements for further information.
Capital
On April 28, 2004, the Board of Directors declared a
3-for-2 stock split, effected in the form of a stock dividend,
payable May 12 to shareholders of record at the close of
business on May 7. All share and per share data in the
accompanying consolidated financial statements has been adjusted
to reflect the effect of this stock split. As a result of the
stock split, the Corporation distributed approximately
37 million shares of common stock. Any fractional shares
resulting from the dividend were paid in cash.
Stockholders’ equity at December 31, 2004, increased
$669 million to $2.0 billion, or $15.55 per share
compared with $12.26 per share at the end of 2003. Book
value per share increased at year-end 2004, primarily due to
recording the shares issued in the First Federal transaction at
market value, as prescribed by the purchase accounting method.
Stockholders’ equity is also described in Note 10,
“Stockholders’ Equity,” of the notes to
consolidated financial statements.
The increase in stockholders’ equity for 2004 was primarily
composed of the issuance of common stock in connection with the
First Federal acquisition, the retention of earnings, and the
exercise of stock options, with offsetting decreases to
stockholders’ equity from the payment of cash dividends and
the repurchase of common stock. Additionally, stockholders’
equity at year-end 2004 included $41.2 million of
accumulated other comprehensive income versus $52.1 million
at December 31, 2003. The decrease in accumulated other
comprehensive income was predominantly related to a lower level
of unrealized gains on securities available for sale, net of
lower unrealized losses on cash flow hedges and the related tax
effect. Stockholders’ equity to assets at December 31,
2004 was 9.83%, compared to 8.84% at the end of 2003.
44
TABLE 23: Capital
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
At December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In Thousands, except per share data) | |
|
Total stockholders’ equity
|
|
$ |
2,017,419 |
|
|
$ |
1,348,427 |
|
|
$ |
1,272,183 |
|
|
Tier 1 capital
|
|
|
1,420,386 |
|
|
|
1,221,647 |
|
|
|
1,165,481 |
|
|
Total capital
|
|
|
1,817,016 |
|
|
|
1,572,770 |
|
|
|
1,513,424 |
|
|
Market capitalization
|
|
|
4,312,257 |
|
|
|
3,137,330 |
|
|
|
2,521,480 |
|
| |
|
|
|
Book value per common share
|
|
$ |
15.55 |
|
|
$ |
12.26 |
|
|
$ |
11.42 |
|
|
Cash dividends per common share
|
|
|
0.9767 |
|
|
|
0.8867 |
|
|
|
0.8079 |
|
|
Stock price at end of period
|
|
|
33.23 |
|
|
|
28.53 |
|
|
|
22.63 |
|
|
Low closing price for the period
|
|
|
27.09 |
|
|
|
21.43 |
|
|
|
18.13 |
|
|
High closing price for the period
|
|
|
34.85 |
|
|
|
28.75 |
|
|
|
25.50 |
|
| |
|
|
|
Total equity / assets
|
|
|
9.83 |
% |
|
|
8.84 |
% |
|
|
8.46 |
% |
|
Tier 1 leverage ratio
|
|
|
7.79 |
|
|
|
8.37 |
|
|
|
7.94 |
|
|
Tier 1 risk-based capital ratio
|
|
|
9.64 |
|
|
|
10.86 |
|
|
|
10.52 |
|
|
Total risk-based capital ratio
|
|
|
12.33 |
|
|
|
13.99 |
|
|
|
13.66 |
|
| |
|
|
|
Shares outstanding (period end)
|
|
|
129,770 |
|
|
|
109,966 |
|
|
|
111,422 |
|
|
Basic shares outstanding (average)
|
|
|
113,532 |
|
|
|
110,617 |
|
|
|
112,027 |
|
|
Diluted shares outstanding (average)
|
|
|
115,025 |
|
|
|
111,761 |
|
|
|
113,240 |
|
| |
|
|
Cash dividends paid in 2004 were $0.9767 per share,
compared with $0.8867 per share in 2003, an increase of
10.1%. Cash dividends per share have increased at an 8.9%
compounded rate during the past five years.
The adequacy of the Corporation’s capital is regularly
reviewed to ensure that sufficient capital is available for
current and future needs and is in compliance with regulatory
guidelines. The assessment of overall capital adequacy depends
on a variety of factors, including asset quality, liquidity,
stability of earnings, changing competitive forces, economic
condition in markets served, and strength of management.
The Corporation and its bank and thrift subsidiaries continue to
have a strong capital base. As of December 31, 2004, the
Tier 1 risk-based capital ratios, total risk-based capital
(Tier 1 and Tier 2) ratios, and Tier 1 leverage
ratios for the Corporation and its bank and thrift subsidiaries
were in excess of regulatory minimum requirements and above well
capitalized requirements for its bank subsidiaries. It is
management’s intent to exceed the minimum requisite capital
levels. Capital ratios for the Corporation and its significant
subsidiaries are included in Note 17, “Regulatory
Matters,” of the notes to consolidated financial statements.
The Board of Directors 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. For the Corporation’s employee
incentive plans, the Board of Directors authorized the
repurchase of up to 3.0 million shares (750,000 shares
per quarter) in 2004 and up to 2.4 million shares
(600,000 shares per quarter) in 2003. Of these
authorizations, approximately 1.1 million shares were
repurchased for $33.7 million during 2004 at an average
cost of $30.45 per share (with approximately
1.0 million shares reissued in connection with stock
options exercised), while none were repurchased during 2003
(with approximately 1.6 million shares reissued in
connection with stock options exercised). Additionally, under
two separate actions in 2000 and one action in 2003, the Board
of Directors authorized the repurchase and cancellation of the
Corporation’s outstanding shares, not to exceed
approximately 16.5 million shares on a combined basis.
Under these authorizations, approximately 3.1 million
shares were repurchased for $74.5 million during 2003 at an
average cost of $24.11 per share, while none were
repurchased during 2004. At December 31, 2004,
approximately 5.6 million shares remain authorized to
repurchase. The repurchase of shares will be based on market
opportunities, capital levels, growth prospects, and other
investment opportunities.
45
Shares repurchased and not retired are held as treasury stock
and, accordingly, are accounted for as a reduction of
stockholders’ equity.
Management believes that a strong capital position is necessary
to take advantage of opportunities for profitable geographic and
product expansion, and to provide depositor and investor
confidence. Management actively reviews capital strategies for
the Corporation and each of its subsidiaries in light of
perceived business risks, future growth opportunities, industry
standards, and regulatory requirements. It is management’s
intent to maintain an optimal capital and leverage mix for
growth and for shareholder return.
Fourth Quarter 2004 Results
Net income for fourth quarter 2004 was $70.9 million,
$15.3 million (27.4%) higher than the $55.6 million
earned in the fourth quarter of 2003, in part due to the
inclusion of the Jabas and First Federal acquisitions in fourth
quarter 2004 results. Basic and diluted earnings per share for
fourth quarter 2004 were both $0.57, compared to $0.51 and
$0.50, respectively, for fourth quarter 2003. See Table 24 for
selected quarterly information.
Net interest income for fourth quarter 2004 was
$158.5 million, $31.3 million higher than fourth
quarter 2003. Taxable equivalent net interest income for fourth
quarter 2004 was $164.8 million, $31.4 million higher
than $133.4 million for fourth quarter 2003. Volume
variances (from both the First Federal acquisition and organic
growth) were favorable, adding $32.9 million to taxable
equivalent net interest income, while rate variances were
unfavorable by $1.5 million (with increased rates favorable
on earning assets adding $3.4 million to taxable equivalent
net interest income, but unfavorable on interest-bearing
liabilities costing $4.9 million more). The Corporation
continues to be positioned to benefit from rising rates, though
the flattening of the yield curve and competitive pressures
substantially offset benefits to taxable equivalent net interest
income from the interest rate increases that occurred in 2004.
Average earning assets increased to $17.4 billion, up
$3.6 billion, including a $2.5 billion increase in
average loans and a $1.1 billion increase in average
securities and short-term investments between the fourth quarter
periods. With the increase in securities, loans as a percentage
of average earning assets declined to 73.7% (compared to 74.9%
for fourth quarter 2003). Average interest-bearing liabilities
increased to $14.8 billion, up $3.1 billion, including
a $1.5 billion increase in average interest-bearing
deposits and a $1.6 billion increase in wholesale funding.
Average net free funds increased $0.5 billion, funding the
remaining earning asset growth. With the modest increase in
deposits and strong earning asset growth, wholesale funds as a
percentage of average interest-bearing liabilities grew to 36.0%
(compared to 32.1% for fourth quarter 2003).
To better understand the impact of acquiring First Federal,
taxable equivalent net interest income for fourth quarter 2004
excluding First Federal was approximately $143 million, or
$10 million (7%) higher than the comparable quarter in
2003. Average earning assets excluding First Federal grew
approximately $1.3 billion (10%), with loans increasing
$0.7 billion (6%) and securities and short-term investments
increasing $0.6 billion (18%), as the Corporation employed
leveraging in early 2004 to increase overall earning assets.
Total average deposits excluding First Federal grew
approximately $0.2 billion (2%) over the comparable quarter
in 2003, funding 28% of the loan growth. The remainder of the
growth in earning assets was funded predominantly by wholesale
borrowings (up approximately $1.1 billion).
The Federal Reserve raised rates by 25 bp five times since
mid-year 2004, resulting in an average Federal funds rate for
fourth quarter 2004 of 1.94%, 94 bp higher than fourth
quarter 2003. For fourth quarter 2004, the net interest margin
was 3.74%, down 7 bp compared to fourth quarter 2003, the
net result of an 8 bp lower interest rate spread and a
1 bp higher contribution from net free funds. The yield on
earning assets for fourth quarter 2004 was 5.31% or 9 bp
higher than fourth quarter 2003, primarily attributable to
higher loan yields (up 29 bp) though offset partly by lower
securities yields (down 48 bp, particularly impacted by the
flatter yield curve during 2004). The rate on interest-bearing
liabilities was up 17 bp, with the cost of funds repricing
upward in the rising rate environment. Interest-bearing deposits
cost 8 bp more, and wholesale funding cost 26 bp more
than the comparable quarter of 2003, comprised of short-term
borrowings up 80 bp and long-term funding down 8 bp
between comparable fourth quarter periods.
46
The provision for loan losses was $3.6 million for fourth
quarter 2004 compared to $9.6 million for fourth quarter
2003, reflecting year-over-year improvement in asset quality.
Net charge offs declined to $3.6 million (0.11% of average
loans), compared to $8.2 million (0.31% of average loans)
for fourth quarter 2003. Nonperforming loans to total loans
improved to 0.83% at December 31, 2004, compared to 1.18% a
year earlier. The allowance for loan losses at December 31,
2004, represented 1.37% of total loans (influenced by the
acquisition of the First Federal thrift balance sheet) and
covered 165% of nonperforming loans. At December 31, 2003,
the allowance for loan losses represented 1.73% of total loans
and covered 146% of nonperforming loans. See sections,
“Loans,” “Allowance for Loan Losses,” and
“Nonperforming Loans, Potential Problem Loans, and Other
Real Estate Owned” for additional discussion.
Noninterest income in fourth quarter 2004 was $59.0 million
(up $7.3 million or 14.1% over fourth quarter 2003), which
included the 2004 acquisitions of Jabas and First Federal.
Primary increases were seen in retail commissions (up
$4.7 million), service charges on deposits (up
$4.2 million), and credit card and other nondeposit fees
(up $2.5 million), while primary decreases occurred in net
mortgage banking income (down $3.0 million) and BOLI income
(down $0.9 million). Retail commission income benefited
from both the acquisitions and organic growth, with insurance
commissions up $3.8 million and fixed annuities income up
$0.7 million. Both service charges on deposits and credit
card and other nondeposit fees benefited from the additional
First Federal account volumes, as well as from mid-2004 fee
increases related to deposit service charges and nonsufficient
funds, increased pricing on nondeposit retail and commercial
service charges, and higher insurance-related advisory fees.
Gross mortgage banking income was up $2.6 million, with
$2.0 million higher servicing fees (particularly given the
addition of First Federal’s $3.5 billion servicing
portfolio), and $0.6 million increased gains on sale and
other income. Mortgage servicing rights expense, however, rose
$5.6 million, with $1.1 million more base amortization
on the larger mortgage servicing rights asset, and an addition
to the valuation reserve in fourth quarter 2004 of
$1.0 million versus a recovery to the valuation reserve in
fourth quarter 2003 of $3.5 million. Thus, net mortgage
banking income was down $3.0 million between fourth quarter
periods. BOLI income was down due to the 2004 mid-year repricing
of a large investment of BOLI.
Noninterest expense for fourth quarter 2004 was
$110.0 million (up $16.6 million or 17.8% over fourth
quarter 2003), which reflects the inclusion of the 2004
acquisitions of Jabas and First Federal. Personnel expense was
up $10.8 million and all remaining noninterest expenses
increased $5.8 million collectively. To isolate the impact
of First Federal, personnel expense excluding First Federal was
unchanged between comparable quarters and all other noninterest
expenses excluding First Federal were down $1.9 million
(2%), particularly given controlled discretionary spending
efforts of the Corporation during 2004. Income tax expense was
up $12.8 million between the fourth quarters, with
approximately $7.5 million due to higher net income before
taxes and approximately $5.3 million due to a higher
effective tax rate. The effective tax rate rose to 31.8% for
fourth quarter 2004 from 26.7% for fourth quarter 2003,
resulting from the acquisitions in 2004 of Jabas and First
Federal.
47
TABLE 24: Selected Quarterly Financial Data
The following is selected financial data summarizing the results
of operations for each quarter in the years ended
December 31, 2004 and 2003:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 Quarter Ended | |
| |
|
| |
| |
|
December 31 | |
|
September 30 | |
|
June 30 | |
|
March 31 | |
| |
|
| |
| |
|
(In Thousands, except per share data) | |
|
Interest income
|
|
$ |
227,550 |
|
|
$ |
184,475 |
|
|
$ |
178,551 |
|
|
$ |
176,546 |
|
|
Interest expense
|
|
|
69,093 |
|
|
|
51,259 |
|
|
|
46,672 |
|
|
|
47,471 |
|
| |
|
|
| |
Net interest income
|
|
|
158,457 |
|
|
|
133,216 |
|
|
|
131,879 |
|
|
|
129,075 |
|
|
Provision for loan losses
|
|
|
3,603 |
|
|
|
— |
|
|
|
5,889 |
|
|
|
5,176 |
|
|
Investment securities gains (losses), net
|
|
|
(719 |
) |
|
|
(6 |
) |
|
|
(569 |
) |
|
|
1,931 |
|
|
Income before income tax expense
|
|
|
103,923 |
|
|
|
91,344 |
|
|
|
91,869 |
|
|
|
83,201 |
|
|
Net income
|
|
|
70,854 |
|
|
|
63,367 |
|
|
|
64,506 |
|
|
|
59,559 |
|
| |
|
|
|
Basic net income per share
|
|
$ |
0.57 |
|
|
$ |
0.58 |
|
|
$ |
0.59 |
|
|
$ |
0.54 |
|
|
Diluted net income per share
|
|
|
0.57 |
|
|
|
0.57 |
|
|
|
0.58 |
|
|
|
0.53 |
|
|
Basic weighted average shares
|
|
|
123,509 |
|
|
|
110,137 |
|
|
|
110,116 |
|
|
|
110,294 |
|
|
Diluted weighted average shares
|
|
|
125,296 |
|
|
|
111,699 |
|
|
|
111,520 |
|
|
|
111,830 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2003 Quarter Ended | |
| |
|
| |
| |
|
December 31 | |
|
September 30 | |
|
June 30 | |
|
March 31 | |
| |
|
| |
| |
|
(In Thousands, except per share data) | |
|
Interest income
|
|
$ |
176,458 |
|
|
$ |
181,819 |
|
|
$ |
183,704 |
|
|
$ |
185,383 |
|
|
Interest expense
|
|
|
49,321 |
|
|
|
52,843 |
|
|
|
56,509 |
|
|
|
57,929 |
|
| |
|
|
| |
Net interest income
|
|
|
127,137 |
|
|
|
128,976 |
|
|
|
127,195 |
|
|
|
127,454 |
|
|
Provision for loan losses
|
|
|
9,603 |
|
|
|
12,118 |
|
|
|
12,132 |
|
|
|
12,960 |
|
|
Investment securities gains (losses), net
|
|
|
— |
|
|
|
1 |
|
|
|
1,027 |
|
|
|
(326 |
) |
|
Income before income tax expense
|
|
|
75,891 |
|
|
|
82,975 |
|
|
|
81,304 |
|
|
|
81,546 |
|
|
Net income
|
|
|
55,609 |
|
|
|
58,386 |
|
|
|
56,669 |
|
|
|
57,993 |
|
| |
|
|
|
Basic net income per share
|
|
$ |
0.51 |
|
|
$ |
0.53 |
|
|
$ |
0.51 |
|
|
$ |
0.52 |
|
|
Diluted net income per share
|
|
|
0.50 |
|
|
|
0.52 |
|
|
|
0.51 |
|
|
|
0.52 |
|
|
Basic weighted average shares
|
|
|
109,965 |
|
|
|
110,209 |
|
|
|
110,938 |
|
|
|
111,378 |
|
|
Diluted weighted average shares
|
|
|
111,499 |
|
|
|
111,485 |
|
|
|
112,025 |
|
|
|
112,461 |
|
2003 Compared to 2002
The Corporation recorded net income of $228.7 million for
the year ended December 31, 2003, an increase of
$18.0 million or 8.5% over the $210.7 million earned
in 2002. Basic earnings per share for 2003 were $2.07, compared
to 2002 basic earnings per share of $1.88. Earnings per diluted
share were $2.05, a 10.2% increase over 2002 diluted earnings
per share of $1.86. Return on average assets and return on
average equity for 2003 were 1.53% and 17.58%, respectively,
compared to 1.47% and 17.10%, respectively, for 2002. Cash
dividends of $0.89 per share paid in 2003 increased by 9.9%
over 2002. Table 1 shows additional selected financial data
of 2003 compared to 2002. Key factors behind 2003 results
compared to 2002 are discussed below.
Net interest income in the consolidated income statements (which
excludes the taxable equivalent adjustment) was
$510.8 million for 2003, compared to $501.3 million in
2002. Taxable equivalent net interest income was
$535.7 million for 2003, $10.3 million or 2.0% higher
than 2002. The increase in taxable equivalent net interest
income was a function of higher volumes of earning assets,
offset by unfavorable interest rate changes. As shown in the
rate/volume analysis in Table 3, volume changes added
$21.6 million to taxable equivalent net interest income
(with growth and composition of earning assets adding
$31.3 million, net of interest-bearing liability changes
costing an additional $9.7 million), while rate changes
resulted in an $11.3 million decrease to net interest
income (with rate changes on earning assets reducing interest
income by $95.2 million, but lowering interest expense cost
of interest-bearing liabilities by $83.9 million).
48
As shown in Table 2, average earning assets increased
$652 million (4.9%) to $13.9 billion for 2003 compared
to 2002, with loans accounting for the majority of the growth
(increasing $620 million, or 6.2%). Average
interest-bearing liabilities increased $459 million (4.0%)
to $11.9 billion for 2003, while net free funds increased
$194 million, both supporting the growth in earning assets.
Average noninterest-bearing demand deposits (a component of net
free funds) increased by $180 million (12.0%), while
interest-bearing deposits grew $207 million (2.8%).
Wholesale funding sources increased $251 million, and the
Corporation continued its shift toward longer-term funding given
the continued low interest rate environment, bringing its
average long-term funding to 17.7% of average interest-bearing
liabilities for 2003 (compared to 14.7% for 2002).
Net interest income and net interest margin were impacted in
2003 by the sustained low interest rate environment, competitive
pricing pressures, higher earning asset balances, and total
deposit growth. Interest rates were generally stable and
historically low during both 2003 and 2002. Comparatively, the
Federal funds rate at December 31, 2003, was at a 45-year
low of 1.00%, 25 bp lower than at December 31, 2002,
while the average Federal funds rate for 2003 was 55 bp
lower than the average for 2002 (see Table 4).
As shown in Table 2, the net interest margin for 2003 was 3.84%,
compared to 3.95% in 2002. The 11 bp decrease in net
interest margin was attributable to a 3 bp decrease in
interest rate spread (the net of a 75 bp decrease in the
yield on earning assets, substantially offset by a 72 bp
lower cost of interest-bearing liabilities), and an 8 bp
lower contribution from net free funds (impacted by the lower
2003 rate environment). The yield on average earning assets fell
75 bp to 5.39%, driven primarily by an 81 bp decline
in the loan yield to 5.46% for 2003 compared to 2002.
Competitive pricing on new and refinanced loans and the
repricing of variable rate loans in the lower interest rate
environment put downward pressure on loan yields in 2003. The
cost of interest-bearing liabilities decreased 72 bp to
1.83%, aided by the lower rate environment. The average cost of
interest-bearing deposits was down 66 bp from 2002,
benefiting from a larger mix of lower-costing transaction
accounts, as well as lower rates on deposit products in general.
The cost of wholesale funds decreased 85 bp, favorably
impacted by lower rates year-over-year and the maturity of
higher-rate wholesale funds during the year.
Total loans were $10.3 billion at December 31, 2003,
relatively unchanged from year-end 2002. The Corporation’s
loan mix changed during 2003 (see Table 8). Commercial loan
balances grew $188 million (3.0%) and represented 63% of
total loans at December 31, 2003, versus 61% at year-end
2002. Residential mortgage loans decreased $246 million,
strongly influenced by high refinance activity. Home equity (an
area of emphasis for 2003 and an attractive product to consumers
given the low rate environment) and installment loans combined
grew $46 million. Total deposits were $9.8 billion at
December 31, 2003, an increase of $668 million or 7.3%
from year-end 2002, particularly in lower-costing transaction
deposits. This growth reflects a number of strategic initiatives
to grow the deposit base, as well as customer preference to keep
funds more liquid in this prolonged low interest rate
environment.
Asset quality was affected by the impact of challenging economic
conditions on customers, and asset quality administration was
active during 2003 with early identification of potential
problems and progress on several larger problem credits. Net
charge offs were $31.7 million, an increase of
$3.4 million over 2002, with the majority of the increase
attributable to charge offs in the commercial loan portfolio.
Net charge offs were 0.30% of average loans compared to 0.28% in
2002. The provision for loan losses decreased to
$46.8 million compared to $50.7 million in 2002. The
ratio of allowance for loan losses to loans was 1.73% and 1.58%
at December 31, 2003 and 2002, respectively. Nonperforming
loans were $121.5 million, representing 1.18% of total
loans at year-end 2003, higher than historic levels, compared to
$99.3 million or 0.96% of total loans at year-end 2002. See
sections “Allowance for Loan Losses” and
“Nonperforming Loans, Potential Problem Loans, and Other
Real Estate Owned” for additional discussions of 2003
compared to 2002.
As shown in Table 6, noninterest income was $216.9 million
for 2003, $31.5 million or 17.0% higher than 2002, led by
strong results in mortgage banking and retail commissions.
During 2003, interest rates reached record lows, resulting in an
unprecedented volume of mortgage loan originations and
refinances and resultant loan sales. As a result, net mortgage
banking income was $53.5 million for 2003, up
$17.5 million (48.8%) over 2002. Retail commissions were
$25.6 million, up $7.3 million (40.0%) over 2002,
primarily attributable to the CFG insurance agency acquisition
in April 2003 (see section “Business Combinations”).
Service charges
49
on deposits of $50.3 million (up $4.3 million or 9.3%)
and trust service fees of $29.6 million (up
$1.7 million or 6.1%), both benefited from increased
business volumes and fee increases during 2003. Credit card and
nondeposit fees of $23.7 million for 2003 were down
$3.8 million from 2002, primarily due to lower merchant
fees given the merchant processing sale and services agreement
consummated in March 2003. Other income was $18.2 million
for 2003, which included a non-recurring $1.5 million gain
on the sale of out-of-market credit card accounts and
$3.4 million gain recognized in connection with the
aforementioned credit card merchant processing sale and services
agreement. Other income was $15.6 million for 2002, which
included a $0.5 million gain on sale of stock in a regional
ATM network. Asset sale gains for 2003 were $1.6 million,
including a $1.3 million net premium on the sales of
$17 million in deposits from two branches and a
$0.4 million net gain on the sale of other real estate
owned properties. Asset sale gains for 2002 were
$0.7 million. Investment securities net gains for 2003 were
$0.7 million, attributable to a $1.0 million gain on
the sale of Sallie Mae stock, partially offset by a
$0.3 million other-than-temporary write down on a CMO
security. The 2002 investment securities net losses of
$0.4 million included a $0.8 million
other-than-temporary write down on the same CMO security.
As shown in Table 7, noninterest expense was
$359.1 million, up $19.5 million or 5.8% over 2002,
due principally to personnel expense. Personnel expense was
$208.0 million for 2003, up $19.0 million or 10.0%,
primarily due to the timing of acquisitions, increased
severance, increased cost of premium-based benefits, and merit
increases between the years. All other nonpersonnel categories
combined were $151.1 million, relatively unchanged (up
$0.6 million) from 2002, despite the increased operating
base from acquisitions. The efficiency ratio was 47.86% for 2003
and 47.80% for 2002.
Income tax expense increased to $93.1 million, up
$7.5 million from 2002. The increase was primarily
attributable to higher net income before tax as the effective
tax rate was unchanged at 28.9%.
Subsequent Event
On January 26, 2005, the Board of Directors declared a
$0.25 per share dividend payable on February 15, 2005,
to shareholders of record as of February 7, 2005.
Future Accounting Pronouncements
Note 1, “Summary of Significant Accounting
Policies,” of the notes to consolidated financial
statements discusses new accounting policies adopted by the
Corporation during 2004 and the expected impact of accounting
policies recently issued or proposed but not yet required to be
adopted. To the extent the adoption of new accounting standards
materially affects the Corporation’s financial condition,
results of operations, or liquidity, the impacts are discussed
in the applicable sections of this financial review and the
notes to consolidated financial statements.
|
|
| ITEM 7A. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Information required by this item is set forth in Item 7
under the captions “Quantitative and Qualitative
Disclosures About Market Risk” and “Interest Rate
Risk.”
50
|
|
| ITEM 8. |
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
ASSOCIATED BANC-CORP
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In Thousands, | |
| |
|
except share data) | |
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$ |
389,311 |
|
|
$ |
389,140 |
|
|
Interest-bearing deposits in other financial institutions
|
|
|
13,321 |
|
|
|
7,434 |
|
|
Federal funds sold and securities purchased under agreements to
resell
|
|
|
55,440 |
|
|
|
3,290 |
|
|
Investment securities available for sale, at fair value
|
|
|
4,815,344 |
|
|
|
3,773,784 |
|
|
Loans held for sale
|
|
|
64,964 |
|
|
|
104,336 |
|
|
Loans
|
|
|
13,881,887 |
|
|
|
10,291,810 |
|
|
Allowance for loan losses
|
|
|
(189,762 |
) |
|
|
(177,622 |
) |
| |
| |
|
Loans, net
|
|
|
13,692,125 |
|
|
|
10,114,188 |
|
|
Premises and equipment
|
|
|
184,944 |
|
|
|
131,315 |
|
|
Goodwill
|
|
|
679,993 |
|
|
|
224,388 |
|
|
Other intangible assets
|
|
|
119,440 |
|
|
|
63,509 |
|
|
Other assets
|
|
|
505,254 |
|
|
|
436,510 |
|
| |
| |
|
Total assets
|
|
$ |
20,520,136 |
|
|
$ |
15,247,894 |
|
| |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing demand deposits
|
|
$ |
2,347,611 |
|
|
$ |
1,814,446 |
|
|
Interest-bearing deposits, excluding Brokered certificates of
deposit
|
|
|
10,077,069 |
|
|
|
7,813,267 |
|
|
Brokered certificates of deposit
|
|
|
361,559 |
|
|
|
165,130 |
|
| |
| |
|
Total deposits
|
|
|
12,786,239 |
|
|
|
9,792,843 |
|
|
Short-term borrowings
|
|
|
2,926,716 |
|
|
|
1,928,876 |
|
|
Long-term funding
|
|
|
2,604,540 |
|
|
|
2,034,160 |
|
|
Accrued expenses and other liabilities
|
|
|
185,222 |
|
|
|
143,588 |
|
| |
| |
|
Total liabilities
|
|
|
18,502,717 |
|
|
|
13,899,467 |
|
| |
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
| |
Preferred stock (Par value $1.00 per share, authorized
750,000 shares, no shares issued)
|
|
|
— |
|
|
|
— |
|
| |
Common stock (Par value $0.01 per share, authorized
250,000,000 shares, issued 130,042,415, and
110,163,832 shares at December 31, 2004 and 2003,
respectively)
|
|
|
1,300 |
|
|
|
734 |
|
| |
Surplus
|
|
|
1,127,205 |
|
|
|
575,975 |
|
| |
Retained earnings
|
|
|
858,847 |
|
|
|
724,356 |
|
| |
Accumulated other comprehensive income
|
|
|
41,205 |
|
|
|
52,089 |
|
| |
Deferred compensation
|
|
|
(2,122 |
) |
|
|
(1,981 |
) |
| |
Treasury stock, at cost (272,355 shares in 2004 and
122,863 shares in 2003)
|
|
|
(9,016 |
) |
|
|
(2,746 |
) |
| |
| |
|
Total stockholders’ equity
|
|
|
2,017,419 |
|
|
|
1,348,427 |
|
| |
| |
|
Total liabilities and stockholders’ equity
|
|
$ |
20,520,136 |
|
|
$ |
15,247,894 |
|
| |
See accompanying notes to consolidated financial statements.
51
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF INCOME
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In Thousands, except | |
| |
|
per share data) | |
|
INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$ |
594,702 |
|
|
$ |
578,816 |
|
|
$ |
626,378 |
|
|
Interest and dividends on investment securities and deposits
with other financial institutions:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Taxable
|
|
|
131,020 |
|
|
|
108,624 |
|
|
|
125,568 |
|
| |
Tax-exempt
|
|
|
40,804 |
|
|
|
39,761 |
|
|
|
39,771 |
|
|
Interest on federal funds sold and securities purchased under
agreements to resell
|
|
|
596 |
|
|
|
163 |
|
|
|
389 |
|
| |
| |
Total interest income
|
|
|
767,122 |
|
|
|
727,364 |
|
|
|
792,106 |
|
| |
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
|
118,236 |
|
|
|
123,122 |
|
|
|
169,021 |
|
|
Interest on short-term borrowings
|
|
|
38,940 |
|
|
|
29,156 |
|
|
|
51,372 |
|
|
Interest on long-term funding
|
|
|
57,319 |
|
|
|
64,324 |
|
|
|
70,447 |
|
| |
| |
Total interest expense
|
|
|
214,495 |
|
|
|
216,602 |
|
|
|
290,840 |
|
| |
|
NET INTEREST INCOME
|
|
|
552,627 |
|
|
|
510,762 |
|
|
|
501,266 |
|
|
Provision for loan losses
|
|
|
14,668 |
|
|
|
46,813 |
|
|
|
50,699 |
|
| |
|
Net interest income after provision for loan losses
|
|
|
537,959 |
|
|
|
463,949 |
|
|
|
450,567 |
|
| |
|
NONINTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust service fees
|
|
|
31,791 |
|
|
|
29,577 |
|
|
|
27,875 |
|
|
Service charges on deposit accounts
|
|
|
56,153 |
|
|
|
50,346 |
|
|
|
46,059 |
|
|
Mortgage banking, net
|
|
|
20,331 |
|
|
|
53,484 |
|
|
|
35,942 |
|
|
Credit card and other nondeposit fees
|
|
|
26,181 |
|
|
|
23,669 |
|
|
|
27,492 |
|
|
Retail commissions
|
|
|
47,171 |
|
|
|
25,571 |
|
|
|
18,264 |
|
|
Bank owned life insurance income
|
|
|
13,101 |
|
|
|
13,790 |
|
|
|
13,841 |
|
|
Asset sale gains, net
|
|
|
1,181 |
|
|
|
1,569 |
|
|
|
657 |
|
|
Investment securities gains (losses), net
|
|
|
637 |
|
|
|
702 |
|
|
|
(427 |
) |
|
Other
|
|
|
13,701 |
|
|
|
18,174 |
|
|
|
15,644 |
|
| |
| |
Total noninterest income
|
|
|
210,247 |
|
|
|
216,882 |
|
|
|
185,347 |
|
| |
|
NONINTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense
|
|
|
224,548 |
|
|
|
208,040 |
|
|
|
189,066 |
|
|
Occupancy
|
|
|
29,572 |
|
|
|
28,077 |
|
|
|
26,049 |
|
|
Equipment
|
|
|
12,754 |
|
|
|
12,818 |
|
|
|
14,835 |
|
|
Data processing
|
|
|
23,632 |
|
|
|
23,273 |
|
|
|
21,024 |
|
|
Business development and advertising
|
|
|
14,975 |
|
|
|
15,194 |
|
|
|
13,812 |
|
|
Stationery and supplies
|
|
|
5,436 |
|
|
|
6,705 |
|
|
|
7,044 |
|
|
Intangible amortization expense
|
|
|
4,350 |
|
|
|
2,961 |
|
|
|
2,283 |
|
|
Loan expense
|
|
|
6,536 |
|
|
|
7,550 |
|
|
|
14,555 |
|
|
Other
|
|
|
56,066 |
|
|
|
54,497 |
|
|
|
50,920 |
|
| |
| |
Total noninterest expense
|
|
|
377,869 |
|
|
|
359,115 |
|
|
|
339,588 |
|
| |
|
Income before income taxes
|
|
|
370,337 |
|
|
|
321,716 |
|
|
|
296,326 |
|
|
Income tax expense
|
|
|
112,051 |
|
|
|
93,059 |
|
|
|
85,607 |
|
| |
|
Net income
|
|
$ |
258,286 |
|
|
$ |
228,657 |
|
|
$ |
210,719 |
|
| |
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
2.28 |
|
|
$ |
2.07 |
|
|
$ |
1.88 |
|
| |
Diluted
|
|
$ |
2.25 |
|
|
$ |
2.05 |
|
|
$ |
1.86 |
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
113,532 |
|
|
|
110,617 |
|
|
|
112,027 |
|
| |
Diluted
|
|
|
115,025 |
|
|
|
111,761 |
|
|
|
113,240 |
|
| |
See accompanying notes to consolidated financial statements.
52
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
| |
|
Common Stock | |
|
|
|
|
|
Other | |
|
|
|
|
|
|
| |
|
| |
|
|
|
Retained | |
|
Comprehensive | |
|
Deferred | |
|
Treasury | |
|
|
| |
|
Shares | |
|
Amount | |
|
Surplus | |
|
Earnings | |
|
Income | |
|
Compensation | |
|
Stock | |
|
Total | |
| |
|
| |
| |
|
(In Thousands, except per share data) | |
|
Balance, December 31, 2001
|
|
|
66,174 |
|
|
$ |
662 |
|
|
$ |
289,751 |
|
|
$ |
760,031 |
|
|
$ |
47,176 |
|
|
$ |
— |
|
|
$ |
(27,204 |
) |
|
$ |
1,070,416 |
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
210,719 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
210,719 |
|
| |
Net unrealized loss on derivative instruments arising during the
year, net of taxes of $13.3 million
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(19,834 |
) |
|
|
— |
|
|
|
— |
|
|
|
(19,834 |
) |
| |
Add: reclassification adjustment to interest expense for
interest differential, net of taxes of $5.4 million
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,027 |
|
|
|
— |
|
|
|
— |
|
|
|
8,027 |
|
|
Change in minimum pension obligation, net of taxes of
$4.7 million
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,024 |
) |
|
|
— |
|
|
|
— |
|
|
|
(7,024 |
) |
| |
Net unrealized holding gains on available for sale securities
arising during the year, net of taxes of $18.1 million
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
31,712 |
|
|
|
— |
|
|
|
— |
|
|
|
31,712 |
|
| |
Add: reclassification adjustment for net losses on available for
sale securities realized in net income, net of taxes of
$0.2 million
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
256 |
|
|
|
— |
|
|
|
— |
|
|
|
256 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
223,856 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends, $0.8079 per share
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(90,166 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(90,166 |
) |
|
Common stock issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Business combinations
|
|
|
3,690 |
|
|
|
37 |
|
|
|
133,892 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
133,929 |
|
| |
|
Incentive stock options
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(14,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
30,564 |
|
|
|
16,564 |
|
| |
|
10% stock dividend
|
|
|
6,975 |
|
|
|
70 |
|
|
|
258,570 |
|
|
|
(258,640 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Purchase and retirement of treasury stock
|
|
|
(1,336 |
) |
|
|
(14 |
) |
|
|
(44,032 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(44,046 |
) |
|
Purchase of treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(44,145 |
) |
|
|
(44,145 |
) |
|
Tax benefits of stock options
|
|
|
— |
|
|
|
— |
|
|
|
5,775 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,775 |
|
| |
|
|
|
Balance, December 31, 2002
|
|
|
75,503 |
|
|
$ |
755 |
|
|
$ |
643,956 |
|
|
$ |
607,944 |
|
|
$ |
60,313 |
|
|
$ |
— |
|
|
$ |
(40,785 |
) |
|
$ |
1,272,183 |
|
| |
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
228,657 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
228,657 |
|
| |
Net unrealized loss on derivative instruments arising during the
year, net of taxes of $1.7 million
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,612 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2,612 |
) |
| |
Add: reclassification adjustment to interest expense for
interest differential, net of taxes of $3.1 million
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,603 |
|
|
|
— |
|
|
|
— |
|
|
|
4,603 |
|
|
Change in minimum pension obligation, net of taxes of
$6.2 million
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,252 |
|
|
|
— |
|
|
|
— |
|
|
|
9,252 |
|
| |
Net unrealized holding losses on available for sale securities
arising during the year, net of taxes of $11.8 million
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(19,018 |
) |
|
|
— |
|
|
|
— |
|
|
|
(19,018 |
) |
| |
Less: reclassification adjustment for net gains on available for
sale securities realized in net income, net of taxes of
$0.3 million
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(449 |
) |
|
|
— |
|
|
|
— |
|
|
|
(449 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220,433 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends, $0.8867 per share
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(98,169 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(98,169 |
) |
|
Common stock issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Incentive stock options
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(14,076 |
) |
|
|
— |
|
|
|
— |
|
|
|
38,907 |
|
|
|
24,831 |
|
|
Purchase and retirement of treasury stock
|
|
|
(2,061 |
) |
|
|
(21 |
) |
|
|
(74,512 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(74,533 |
) |
|
Purchase of treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(868 |
) |
|
|
(868 |
) |
|
Restricted stock awards granted, net of amortization
|
|
|
— |
|
|
|
— |
|
|
|
313 |
|
|
|
— |
|
|
|
— |
|
|
|
(1,981 |
) |
|
|
— |
|
|
|
(1,668 |
) |
|
Tax benefits of stock options
|
|
|
— |
|
|
|
— |
|
|
|
6,218 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,218 |
|
| |
|
|
|
Balance, December 31, 2003
|
|
|
73,442 |
|
|
$ |
734 |
|
|
$ |
575,975 |
|
|
$ |
724,356 |
|
|
$ |
52,089 |
|
|
$ |
(1,981 |
) |
|
$ |
(2,746 |
) |
|
$ |
1,348,427 |
|
| |
|
|
(continued on next page)
53
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY (continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
| |
|
Common Stock | |
|
|
|
|
|
Other | |
|
|
|
|
|
|
| |
|
| |
|
|
|
Retained | |
|
Comprehensive | |
|
Deferred | |
|
Treasury | |
|
|
| |
|
Shares | |
|
Amount | |
|
Surplus | |
|
Earnings | |
|
Income | |
|
Compensation | |
|
Stock | |
|
Total | |
| |
|
| |
| |
|
(In Thousands, except per share data) | |
|
Balance, December 31, 2003
|
|
|
73,442 |
|
|
$ |
734 |
|
|
$ |
575,975 |
|
|
$ |
724,356 |
|
|
$ |
52,089 |
|
|
$ |
(1,981 |
) |
|
$ |
(2,746 |
) |
|
$ |
1,348,427 |
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
258,286 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
258,286 |
|
| |
Net unrealized loss on derivative instruments arising during the
year, net of taxes of $0.8 million
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,201 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,201 |
) |
| |
Add: reclassification adjustment to interest expense for
interest differential, net of taxes of $2.9 million
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,359 |
|
|
|
— |
|
|
|
— |
|
|
|
4,359 |
|
| |
Net unrealized holding losses on available for sale securities
arising during the year, net of taxes of $6.5 million
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(13,660 |
) |
|
|
— |
|
|
|
— |
|
|
|
(13,660 |
) |
| |
Less: reclassification adjustment for net gains on available for
sale securities realized in net income, net of taxes of
$0.3 million
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(382 |
) |
|
|
— |
|
|
|
— |
|
|
|
(382 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
247,402 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends, $0.9767 per share
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(112,565 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(112,565 |
) |
|
Common stock issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Business combinations
|
|
|
19,447 |
|
|
|
194 |
|
|
|
537,803 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
537,997 |
|
| |
|
3-for-2 stock split effected in the form of a stock dividend
|
|
|
36,819 |
|
|
|
369 |
|
|
|
(369 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
Incentive stock options
|
|
|
334 |
|
|
|
3 |
|
|
|
7,699 |
|
|
|
(11,230 |
) |
|
|
— |
|
|
|
— |
|
|
|
27,385 |
|
|
|
23,857 |
|
|
Purchase of treasury stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(33,655 |
) |
|
|
(33,655 |
) |
|
Deferred compensation expense
|
|
|
— |
|
|
|
— |
|
|
|
141 |
|
|
|
— |
|
|
|
— |
|
|
|
(141 |
) |
|
|
— |
|
|
|
— |
|
|
Tax benefits of stock options
|
|
|
— |
|
|
|
— |
|
|
|
5,956 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,956 |
|
| |
|
|
|
Balance, December 31, 2004
|
|
|
130,042 |
|
|
$ |
1,300 |
|
|
$ |
1,127,205 |
|
|
$ |
858,847 |
|
|
$ |
41,205 |
|
|
$ |
(2,122 |
) |
|
$ |
(9,016 |
) |
|
$ |
2,017,419 |
|
| |
|
|
See accompanying notes to consolidated financial statements.
54
ASSOCIATED BANC-CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
258,286 |
|
|
$ |
228,657 |
|
|
$ |
210,719 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Provision for loan losses
|
|
|
14,668 |
|
|
|
46,813 |
|
|
|
50,699 |
|
| |
Depreciation and amortization
|
|
|
16,387 |
|
|
|
16,364 |
|
|
|
18,696 |
|
| |
Provision for (reversal of) valuation allowance on mortgage
servicing rights
|
|
|
(1,193 |
) |
|
|
12,341 |
|
|
|
17,642 |
|
| |
Amortization (accretion) of:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Mortgage servicing rights
|
|
|
17,932 |
|
|
|
17,212 |
|
|
|
12,831 |
|
| |
|
Intangible assets
|
|
|
4,350 |
|
|
|
2,961 |
|
|
|
2,283 |
|
| |
|
Premiums and discounts on investments, loans and funding
|
|
|
26,114 |
|
|
|
18,860 |
|
|
|
14,861 |
|
| |
Deferred income taxes
|
|
|
(23,100 |
) |
|
|
(13,202 |
) |
|
|
(14,878 |
) |
| |
(Gain) loss on sales of investment securities, net
|
|
|
(637 |
) |
|
|
(702 |
) |
|
|
427 |
|
| |
Gain on sales of assets, net
|
|
|
(1,181 |
) |
|
|
(1,569 |
) |
|
|
(657 |
) |
| |
Gain on sales of loans held for sale, net
|
|
|
(15,054 |
) |
|
|
(55,500 |
) |
|
|
(35,172 |
) |
| |
Mortgage loans originated and acquired for sale
|
|
|
(1,620,680 |
) |
|
|
(4,273,406 |
) |
|
|
(3,185,531 |
) |
| |
Proceeds from sales of mortgage loans held for sale
|
|
|
1,700,142 |
|
|
|
4,530,406 |
|
|
|
3,233,679 |
|
| |
(Increase) decrease in interest receivable and other assets
|
|
|
15,361 |
|
|
|
(12,237 |
) |
|
|
(13,351 |
) |
| |
Decrease in interest payable and other liabilities
|
|
|
(7,894 |
) |
|
|
(20,197 |
) |
|
|
(13,664 |
) |
| |
|
Net cash provided by operating activities
|
|
|
383,501 |
|
|
|
496,801 |
|
|
|
298,584 |
|
| |
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in loans
|
|
|
(882,063 |
) |
|
|
(36,062 |
) |
|
|
(547,159 |
) |
|
Additions to mortgage servicing rights
|
|
|
(18,732 |
) |
|
|
(39,707 |
) |
|
|
(30,730 |
) |
|
Purchases of:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Securities available for sale
|
|
|
(1,327,686 |
) |
|
|
(1,761,282 |
) |
|
|
(1,621,096 |
) |
| |
Premises and equipment, net of disposals
|
|
|
(14,965 |
) |
|
|
(13,290 |
) |
|
|
(12,864 |
) |
|
Proceeds from:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Sales of securities available for sale
|
|
|
132,639 |
|
|
|
1,263 |
|
|
|
27,793 |
|
| |
Maturities of securities available for sale
|
|
|
776,582 |
|
|
|
1,298,426 |
|
|
|
1,626,013 |
|
| |
Sales of other assets
|
|
|
11,480 |
|
|
|
17,650 |
|
|
|
5,214 |
|
|
Net cash received (paid) in acquisition of subsidiaries
|
|
|
29,274 |
|
|
|
(18,025 |
) |
|
|
17,982 |
|
| |
|
Net cash used in investing activities
|
|
|
(1,293,471 |
) |
|
|
(551,027 |
) |
|
|
(534,847 |
) |
| |
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in deposits
|
|
|
313,011 |
|
|
|
685,143 |
|
|
|
(271,203 |
) |
|
Net cash paid in sales of branch deposits
|
|
|
(19,540 |
) |
|
|
(15,845 |
) |
|
|
— |
|
|
Net increase (decrease) in short-term borrowings
|
|
|
526,460 |
|
|
|
(460,731 |
) |
|
|
(357,007 |
) |
|
Repayment of long-term debt
|
|
|
(1,229,469 |
) |
|
|
(558,114 |
) |
|
|
(235,675 |
) |
|
Proceeds from issuance of long-term funding
|
|
|
1,500,079 |
|
|
|
507,363 |
|
|
|
1,101,518 |
|
|
Cash dividends
|
|
|
(112,565 |
) |
|
|
(98,169 |
) |
|
|
(90,166 |
) |
|
Proceeds from exercise of incentive stock options
|
|
|
23,857 |
|
|
|
24,831 |
|
|
|
16,564 |
|
|
Purchase and retirement of treasury stock
|
|
|
— |
|
|
|
(74,533 |
) |
|
|
(44,046 |
) |
|
Purchase of treasury stock
|
|
|
(33,655 |
) |
|
|
(868 |
) |
|
|
(44,145 |
) |
| |
|
Net cash provided by financing activities
|
|
|
968,178 |
|
|
|
9,077 |
|
|
|
75,840 |
|
| |
|
Net increase (decrease) in cash and cash equivalents
|
|
|
58,208 |
|
|
|
(45,149 |
) |
|
|
(160,423 |
) |
|
Cash and cash equivalents at beginning of year
|
|
|
399,864 |
|
|
|
445,013 |
|
|
|
605,436 |
|
| |
|
Cash and cash equivalents at end of year
|
|
$ |
458,072 |
|
|
$ |
399,864 |
|
|
$ |
445,013 |
|
| |
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest
|
|
$ |
208,201 |
|
|
$ |
223,233 |
|
|
$ |
298,207 |
|
| |
Income taxes
|
|
|
89,397 |
|
|
|
110,423 |
|
|
|
91,098 |
|
|
Supplemental schedule of noncash investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Loans transferred to other real estate
|
|
|
10,283 |
|
|
|
11,654 |
|
|
|
14,158 |
|
| |
Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fair value of assets acquired, including cash and cash
equivalents
|
|
$ |
4,168,800 |
|
|
$ |
31,400 |
|
|
$ |
1,155,200 |
|
| |
|
Value ascribed to intangibles
|
|
|
481,300 |
|
|
|
27,000 |
|
|
|
125,300 |
|
| |
|
Liabilities assumed
|
|
|
3,522,900 |
|
|
|
10,500 |
|
|
|
962,700 |
|
| |
See accompanying Notes to Consolidated Financial Statements.
55
ASSOCIATED BANC-CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003, and 2002
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of the Corporation conform
to U.S. generally accepted accounting principles and to
general practice within the financial services industry. The
following is a description of the more significant of those
policies.
Business
The Corporation provides a full range of banking and related
financial services to individual and corporate customers through
its network of bank and nonbank subsidiaries. The Corporation is
subject to competition from other financial and non-financial
institutions that offer similar or competing products and
services. The Corporation is regulated by federal and state
agencies and is subject to periodic examinations by those
agencies.
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of
the Parent Company and subsidiaries, all of which are wholly
owned. All significant intercompany balances and transactions
have been eliminated in consolidation. Results of operations of
companies purchased are included from the date of acquisition.
Certain amounts in the 2003 and 2002 consolidated financial
statements have been reclassified to conform with the 2004
Form 10-K presentation. In particular, for presentation
purposes and greater comparability with industry practice,
mortgage servicing rights expense in the consolidated statements
of income, which was previously presented in noninterest
expense, was reclassified into mortgage banking income. These
reclassifications resulted in a decrease to both noninterest
income and noninterest expense of $29.6 million in 2003 and
$30.5 million in 2002. The reclassifications had no effect
on stockholders’ equity or net income as previously
reported.
On April 28, 2004, the Board of Directors declared a
3-for-2 stock split, effected in the form of a stock dividend,
payable May 12 to shareholders of record at the close of
business on May 7. All share and per share data in the
accompanying consolidated financial statements has been adjusted
to reflect the effect of this stock split.
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, mortgage servicing rights, derivative financial
instruments and hedging activities, and income taxes.
Investment Securities Available for Sale
At the time of purchase, investment securities are classified as
available for sale, as management has the intent and ability to
hold such securities for an indefinite period of time, but not
necessarily to maturity. Any decision to sell investment
securities available for sale would be based on various factors,
including but not limited to asset/liability management
strategies, changes in interest rates or prepayment risks,
liquidity needs, or regulatory capital considerations.
Investment securities available for sale are carried at fair
value, with unrealized gains and losses net of related deferred
income taxes included in stockholders’ equity as a separate
component of other comprehensive income. Premiums and discounts
are amortized or accreted into interest income over the
estimated life (earlier of call date, maturity, or estimated
life) of the related security, using a prospective method that
approximates level yield. Declines in the fair value of
investment securities available for sale that are deemed to be
other-than-temporary are charged to earnings as a realized loss,
and a new cost basis for the securities is established. In
evaluating other-than-temporary impairment, management considers
the length of time and extent to which the fair value has been
less than cost, the financial condition and near-
56
term prospects of the issuer, and the intent and ability of the
Corporation to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair
value in the near term. Realized securities gains or losses on
securities sales (using specific identification method) and
declines in value judged to be other-than-temporary are included
in investment securities gains (losses), net, in the
consolidated statements of income.
Loans
Loans and leases are carried at the principal amount
outstanding, net of any unearned income. Loan origination fees
and certain direct loan origination costs are deferred, and the
net amount is amortized over the contractual life of the related
loans or over the commitment period as an adjustment of yield.
Loans are generally placed on nonaccrual status when
contractually past due 90 days or more as to interest or
principal payments. Additionally, whenever management becomes
aware of facts or circumstances that may adversely impact the
collectibility of principal or interest on loans, it is
management’s practice to place such loans on nonaccrual
status immediately, rather than delaying such action until the
loans become 90 days past due. Previously accrued and
uncollected interest on such loans is reversed, amortization of
related deferred loan fees or costs is suspended, and income is
recorded only to the extent that interest payments are
subsequently received in cash and a determination has been made
that the principal balance of the loan is collectible. If
collectibility of the principal is in doubt, payments received
are applied to loan principal. A nonaccrual loan is returned to
accrual status when the obligation has been brought current and
the ultimate collectibility of the total contractual principal
and interest is no longer in doubt. Management has defined
commercial, financial, and agricultural loans, commercial real
estate loans, and real estate construction loans that have
nonaccrual status or have had their terms restructured as
impaired loans.
Loans Held for Sale
Loans held for sale, which consist generally of current
production of certain fixed-rate first-lien mortgage loans, are
carried at the lower of cost or estimated market value as
determined on an aggregate basis. The amount by which cost
exceeds estimated market value is accounted for as a valuation
adjustment to the carrying value of the loans. Changes, if any,
in the valuation adjustment are included in mortgage banking
income in the consolidated statements of income. The carrying
value of loans held for sale includes a valuation adjustment of
$97,000 at December 31, 2004. Holding costs are treated as
period costs.
Allowance for Loan Losses
The allowance for loan losses is a reserve for estimated credit
losses. Actual credit losses, net of recoveries, are deducted
from the allowance for loan losses. A provision for loan losses,
which is a charge against earnings, is recorded to bring the
allowance for loan losses to a level that, in management’s
judgment, is adequate to absorb probable losses in the loan
portfolio.
The allocation methodology applied by the Corporation, designed
to assess the adequacy of the allowance for loan losses,
includes an allocation methodology, as well as management’s
ongoing review and grading of the loan portfolio into criticized
loan categories (defined as specific loans warranting either
specific allocation, or a criticized status of watch, special
mention, substandard, doubtful or loss). The allocation
methodology focuses on evaluation of facts and issues related to
specific loans, the risk inherent in specific loans, changes in
the size and character of the loan portfolio, changes in levels
of impaired and other nonperforming loans, concentrations of
loans to specific borrowers or industries, existing economic
conditions, underlying collateral, historical losses and
delinquencies on each portfolio category, and other qualitative
and quantitative factors. Because each of the criteria used is
subject to change, the allocation of the allowance for loan
losses is made for analytical purposes and is not necessarily
indicative of the trend of future loan losses in any particular
loan category. The total allowance is available to absorb losses
from any segment of the portfolio.
Management, considering current information and events regarding
the borrowers’ ability to repay their obligations,
considers a loan to be impaired when it is probable that the
Corporation will be unable to collect all amounts due according
to the contractual terms of the note agreement, including
principal and interest.
57
Management has determined that commercial, financial, and
agricultural loans, commercial real estate loans, and real
estate construction loans that are on nonaccrual status or have
had their terms restructured meet this definition. The amount of
impairment is measured based upon the loan’s observable
market price, the estimated fair value of the collateral for
collateral-dependent loans, or alternatively, the present value
of expected future cash flows discounted at the loan’s
effective interest rate. Large groups of homogeneous loans, such
as residential mortgage, home equity and installment loans, are
collectively evaluated for impairment. Interest income on
impaired loans is recorded when cash is received and only if
principal is considered to be collectible.
Management believes that the allowance for loan losses is
adequate. While management uses available information to
recognize losses on loans, future additions to the allowance for
loan losses may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review
the Corporation’s allowance for loan losses. Such agencies
may require that certain loan balances be charged off when their
credit evaluations differ from those of management based on
their judgments about information available to them at the time
of their examinations.
Other Real Estate Owned
Other real estate owned is included in other assets in the
consolidated balance sheets and is comprised of property
acquired through a foreclosure proceeding or acceptance of a
deed-in-lieu of foreclosure, and loans classified as
in-substance foreclosure. Other real estate owned is recorded at
the lower of recorded investment in the loans at the time of
acquisition or the fair value of the properties, less estimated
selling costs. Any write-down in the carrying value of a
property at the time of acquisition is charged to the allowance
for loan losses. Any subsequent write-downs to reflect current
fair market value, as well as gains and losses on disposition
and revenues and expenses incurred in maintaining such
properties, are treated as period costs. Other real estate owned
totaled $3.9 million and $5.5 million at
December 31, 2004 and 2003, respectively.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are
computed on the straight-line method over the estimated useful
lives of the related assets or the lease term. Maintenance and
repairs are charged to expense as incurred, while additions or
major improvements are capitalized and depreciated over their
estimated useful lives. Estimated useful lives of the assets are
3 to 20 years for land improvements, 5 to 40 years for
buildings, 3 to 5 years for computers, and 3 to
20 years for furniture, fixtures, and other equipment.
Leasehold improvements are amortized on a straight-line basis
over the lesser of the lease terms or the estimated useful lives
of the improvements.
Goodwill and Intangible Assets
Goodwill and Other Intangible Assets: The excess of
the cost of an acquisition over the fair value of the net assets
acquired consists primarily of goodwill, core deposit
intangibles, and other identifiable intangibles (primarily
related to customer relationships acquired). Core deposit
intangibles have estimated finite lives and are amortized on an
accelerated basis to expense over periods of 7 to 10 years.
The other intangibles have estimated finite lives and are
amortized on an accelerated basis to expense over a weighted
average life of 13 years. The Corporation reviews
long-lived assets and certain identifiable intangibles for
impairment at least annually, or whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable, in which case an impairment charge would be
recorded.
Goodwill is not amortized but is subject to impairment tests on
at least an annual basis. Any impairment of goodwill or
intangibles will be recognized as an expense in the period of
impairment. The Corporation completes the annual goodwill
impairment test by reporting unit as of May 1 of each year
and no impairment has been recognized. Note 5 includes a
summary of the Corporation’s goodwill, core deposit
intangibles, and other intangibles.
Mortgage Servicing Rights: The Corporation sells
residential mortgage loans in the secondary market and typically
retains the right to service the loans sold. Upon sale, a
mortgage servicing rights asset is capitalized,
58
which represents the then current fair value of future net cash
flows expected to be realized for performing servicing
activities. Mortgage servicing rights, when purchased, are
initially recorded at cost. Mortgage servicing rights are
carried at the lower of the initial capitalized amount, net of
accumulated amortization, or estimated fair value, and are
included in intangible assets in the consolidated balance
sheets. Mortgage servicing rights are amortized in proportion to
and over the period of estimated servicing income.
The Corporation periodically evaluates its mortgage servicing
rights asset for impairment. Impairment is assessed using
estimated prepayment speeds of the underlying mortgages serviced
and stratifications based on the risk characteristics of the
underlying loans (predominantly loan type and note interest
rate). The value of mortgage servicing rights is adversely
affected when mortgage interest rates decline and mortgage loan
prepayments increase. A valuation allowance is established,
through a charge to earnings, to the extent the amortized cost
of the mortgage servicing rights exceeds the estimated fair
value by stratification. If it is later determined that all or a
portion of the temporary impairment no longer exists for a
stratification, the valuation allowance is reduced through a
recovery to earnings. An other-than-temporary impairment (i.e.,
recoverability is considered remote when considering interest
rates and loan pay off activity) is recognized as a write-down
of the mortgage servicing rights asset and the related valuation
allowance (to the extent a valuation reserve is available) and
then against earnings. A direct write-down permanently reduces
the carrying value of the mortgage servicing rights asset and
valuation allowance, precluding subsequent recoveries.
Income Taxes
Amounts provided for income tax expense are based on income
reported for financial statement purposes and do not necessarily
represent amounts currently payable under tax laws. Deferred
income taxes, which arise principally from temporary differences
between the period in which certain income and expenses are
recognized for financial accounting purposes and the period in
which they affect taxable income, are included in the amounts
provided for income taxes. In assessing the realizability of
deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary
differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future
taxable income, and, if necessary, tax planning strategies in
making this assessment. Based upon the level of historical
taxable income and projections for future taxable income over
the period that the deferred tax assets are deductible,
management believes it is more likely than not the Corporation
will realize the benefits of these deductible differences, net
of the existing valuation allowances at December 31, 2004.
The Corporation files a consolidated federal income tax return
and individual Parent Company and subsidiary state income tax
returns. Accordingly, amounts equal to tax benefits of those
subsidiaries having taxable federal losses or credits are offset
by other subsidiaries that incur federal tax liabilities.
Derivative Financial Instruments and Hedging Activities
Derivative instruments, including derivative instruments
embedded in other contracts, are required to be carried at fair
value on the balance sheet with changes in the fair value
recorded directly in earnings. On the date the derivative
contract is entered into, the Corporation designates the
derivative, except for mortgage banking derivatives for which
changes in fair value of the derivative is recorded in earnings,
as either a fair value hedge (i.e., a hedge of the fair value of
a recognized asset or liability) or a cash flow hedge (i.e., a
hedge of the variability of cash flows to be received or paid
related to a recognized asset or liability). The Corporation
formally documents all relationships between hedging instruments
and hedging items, as well as its risk management objective and
strategy for undertaking various hedge transactions. This
process includes linking all derivatives that are designated as
fair value hedges or cash flow hedges to specific assets or
liabilities on the balance sheet. The Corporation also formally
assesses, both at the hedge’s inception and on an ongoing
basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair
values or cash flows of hedged items. If it is determined that a
derivative is not highly effective as a hedge or that it has
ceased to be a highly effective hedge, the Corporation
discontinues hedge accounting prospectively when it is
determined that the derivative is no longer effective in
offsetting changes in the fair value or cash
59
flows of the hedged item, the derivative expires or is sold,
terminated, or exercised, the derivative is dedesignated as a
hedging instrument, or management determines that designation of
the derivative as a hedging instrument is no longer appropriate.
When hedge accounting is discontinued because it is determined
that the derivative no longer qualifies as an effective fair
value hedge, the Corporation continues to carry the derivative
on the balance sheet at its fair value and no longer adjusts the
hedged asset or liability for changes in fair value. The
adjustment of the carrying amount of the hedged asset or
liability is accounted for in the same manner as other
components of the carrying amount of that asset or liability.
For a derivative 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 and the ineffective
portions of changes in the fair value of cash flow hedges are
recognized in earnings.
Stock-Based Compensation
As allowed under SFAS No. 123, “Accounting for
Stock-Based Compensation” (“SFAS 123”) and
SFAS No. 148, “Accounting for Stock-Based
Compensation— Transition and Disclosure— an amendment
of SFAS 123,” the Corporation accounts for stock-based
compensation cost under the intrinsic value method of Accounting
Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees” (APB Opinion 25), and related
Interpretations, under which no compensation cost has been
recognized for any periods presented, except with respect to
restricted stock awards. Compensation expense for employee stock
options is not recognized if the exercise price of the option
equals or exceeds the fair value of the stock on the date of
grant as such options would have no intrinsic value at the date
of grant.
The Corporation may issue common stock with restrictions to
certain key employees. The shares are restricted as to transfer,
but are not restricted as to dividend payment or voting rights.
Transfer restrictions lapse over three or five years, depending
upon whether the award is fixed or performance-based, are
contingent upon continued employment, and for performance awards
are based on earnings per share performance goals. The
Corporation amortizes the expense over the vesting period.
During 2003, 75,000 restricted stock shares were awarded,
and expense of approximately $764,000 and $451,000 was recorded
for the years ended December 31, 2004 and 2003,
respectively.
For purposes of providing the pro forma disclosures required
under SFAS 123, the fair value of stock options granted in
2004, 2003, and 2002 was estimated at the date of grant using a
Black-Scholes option pricing model, which was originally
developed for use in estimating the fair value of traded options
that have different characteristics from the Corporation’s
employee stock options. The model is also sensitive to changes
in the subjective assumptions that can materially affect the
fair value estimate. As a result, management believes the
Black-Scholes model may not necessarily provide a reliable
single measure of the fair value of employee stock
60
options. The following table illustrates the effect on net
income and earnings per share if the Corporation had applied the
fair value recognition provisions of SFAS 123.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands, except | |
| |
|
per share amounts) | |
|
Net income, as reported
|
|
$ |
258,286 |
|
|
$ |
228,657 |
|
|
$ |
210,719 |
|
|
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects
|
|
|
458 |
|
|
|
271 |
|
|
|
— |
|
|
Less: Total stock-based compensation expense determined under
fair value based method for all awards, net of related tax
effects
|
|
|
(3,737 |
) |
|
|
(2,956 |
) |
|
|
(3,156 |
) |
| |
|
|
|
Net income, as adjusted
|
|
$ |
255,007 |
|
|
$ |
225,972 |
|
|
$ |
207,563 |
|
| |
|
|
|
Basic earnings per share, as reported
|
|
$ |
2.28 |
|
|
$ |
2.07 |
|
|
$ |
1.88 |
|
|
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Less: Total stock-based compensation expense determined under
fair value based method for all awards, net of related tax
effects
|
|
|
(0.03 |
) |
|
|
(0.03 |
) |
|
|
(0.03 |
) |
| |
|
|
|
Basic earnings per share, as adjusted
|
|
$ |
2.25 |
|
|
$ |
2.04 |
|
|
$ |
1.85 |
|
| |
|
|
|
Diluted earnings per share, as reported
|
|
$ |
2.25 |
|
|
$ |
2.05 |
|
|
$ |
1.86 |
|
|
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Less: Total stock-based compensation expense determined under
fair value based method for all awards, net of related tax
effects
|
|
|
(0.04 |
) |
|
|
(0.03 |
) |
|
|
(0.03 |
) |
| |
|
|
|
Diluted earnings per share, as adjusted
|
|
$ |
2.21 |
|
|
$ |
2.02 |
|
|
$ |
1.83 |
|
| |
|
|
The following assumptions were used in estimating the fair value
for options granted in 2004, 2003 and 2002:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Dividend yield
|
|
|
3.01 |
% |
|
|
3.18 |
% |
|
|
3.65 |
% |
|
Risk-free interest rate
|
|
|
3.40 |
% |
|
|
3.27 |
% |
|
|
4.58 |
% |
|
Weighted average expected life
|
|
|
6 yrs |
|
|
|
7 yrs |
|
|
|
7 yrs |
|
|
Expected volatility
|
|
|
26.12 |
% |
|
|
28.29 |
% |
|
|
28.35 |
% |
The weighted average per share fair values of options granted in
2004, 2003, and 2002 were $6.26, $5.39, and $5.15, respectively.
The annual expense allocation methodology prescribed by
SFAS 123 attributes a higher percentage of the reported
expense to earlier years than to later years, resulting in an
accelerated expense recognition for proforma disclosure purposes.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash
and cash equivalents are considered to include cash and due from
banks, interest-bearing deposits in other financial
institutions, and federal funds sold and securities purchased
under agreements to resell.
Per Share Computations
Basic earnings per share are calculated by dividing net income
by the weighted average number of common shares outstanding.
Diluted earnings per share are calculated by dividing net income
by the weighted average number of shares adjusted for the
dilutive effect of outstanding stock options. Also see
Notes 10 and 18.
61
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123
(revised December 2004), “Share-Based Payment,”
(“SFAS 123R”), which replaces SFAS 123 and
supersedes APB Opinion 25. SFAS 123R is effective for all
stock-based awards granted on or after July 1, 2005.
SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be valued at fair
value on the date of grant and to be expensed over the
applicable vesting period. Pro forma disclosure of the income
statement effects of share-based payments is no longer an
alternative. In addition, companies must recognize compensation
expense related to any stock-based awards that are not fully
vested as of the effective date. Compensation expense for the
unvested awards will be measured based on the fair value of the
awards previously calculated in developing the pro forma
disclosures in accordance with the provisions of
SFAS No. 123. The Corporation anticipates adopting
SFAS 123R prospectively in the third quarter of 2005, as
required. The proforma information provided previously under
“Stock-Based Compensation” provides a reasonable
estimate of the projected impact of adopting SFAS 123R on
the Corporation’s results of operations.
In March 2004, the SEC issued Staff Accounting Bulletin
(“SAB”) No. 105, “Application of Accounting
Principles to Loan Commitments,”
(“SAB 105”). SAB 105 provides guidance
regarding loan commitments accounted for as derivative
instruments. Specifically, SAB 105 requires servicing
assets to be recognized only once the servicing asset has been
contractually separated from the underlying loan by sale or
securitization of the loan with servicing retained. As such,
consideration for the expected future cash flows related to the
associated servicing of the loan may not be recognized in
valuing the loan commitment. This will result in a lower fair
value mark of loan commitments, and recognition of the value of
the servicing asset later upon sale or securitization of the
underlying loan. The provisions of SAB 105 were effective
for loan commitments accounted for as derivatives entered into
after March 31, 2004. The adoption of SAB 105 did not
have a material impact on the Corporation’s results of
operations, financial position, or liquidity. See Note 14
for further discussion of the Corporation’s loan
commitments accounted for as derivative instruments.
In March 2004, the FASB ratified the consensus reached by the
Emerging Issues Task Force in Issue 03-1, “The Meaning
of Other-Than-Temporary Impairment and Its Application to
Certain Investments,” (“EITF 03-1”).
EITF 03-1 provides guidance for determining when an
investment is considered impaired, whether impairment is
other-than-temporary, and measurement of an impairment loss. An
investment is considered impaired if the fair value of the
investment is less than its cost. Generally, an impairment is
considered other-than-temporary unless the investor has the
ability and intent to hold an investment for a reasonable period
of time sufficient for a forecasted recovery of fair value up to
(or beyond) the cost of the investment, and evidence indicating
that the cost of the investment is recoverable within a
reasonable period of time outweighs evidence to the contrary. If
impairment is determined to be other-than-temporary, then an
impairment loss should be recognized through earnings equal to
the difference between the investment’s cost and its fair
value. In September 2004, the FASB delayed the accounting
requirements of EITF 03-1 until additional implementation
guidance is issued and goes into effect. The Corporation does
not expect the requirements of EITF 03-1 will have a
material impact on the Corporation’s results of operations,
financial position, or liquidity.
In December 2003, the FASB issued SFAS No. 132
(revised December 2003), “Employers’ Disclosures about
Pensions and Other Postretirement Benefits, an amendment of FASB
Statements No. 87, 88, and 106,”
(“SFAS 132”). SFAS 132 revises
employers’ disclosures about pension plans and other
postretirement benefit plans. This Statement does not change the
measurement or recognition of pension plans and other
postretirement benefit plans required by FASB Statements
No. 87, “Employers’ Accounting for
Pensions,” No. 88, “Employers’ Accounting
for Settlements and Curtailments of Defined Benefit Pension
Plans and for Termination Benefits,” and No. 106,
“Employers’ Accounting for Postretirement Benefits
Other Than Pensions.” The revised SFAS 132 retains the
disclosure requirements contained in the original SFAS 132
and requires additional disclosures about the assets,
obligations, cash flows, and net periodic benefit cost of
defined benefit pension plans and other defined benefit
postretirement plans. In general, the annual provisions of
SFAS 132 are effective for fiscal years ending after
December 15, 2003, and the interim-period disclosures are
effective for interim periods beginning after December 15,
2003. The adoption did not have a material impact on the
Corporation’s results of operations, financial position, or
liquidity.
62
In December 2003, the FASB reissued FIN 46
(“FIN 46R”) with certain modifications and
clarifications. Application of FIN 46R was effective for
interests in certain variable interest entities as of
December 31, 2003, and for all other types of variable
interest entities for periods ending after March 15, 2004,
unless FIN 46 was previously applied. The application of
FIN 46R resulted in the deconsolidation of a subsidiary
relating to the issuance of trust preferred securities. The
assets and liabilities of the subsidiary trust were
deconsolidated in the first quarter of 2004 and totaled
$180 million. See Note 9 for further discussion of
this trust and the Corporation’s related obligations. The
application of FIN 46R did not have a material impact on
the Corporation’s results of operations, financial
position, or liquidity.
In December 2003, the AICPA’s Accounting Standards
Executive Committee issued Statement of Position
(“SOP”) 03-3, “Accounting for Certain Loans or
Debt Securities Acquired in a Transfer,” (“SOP
03-3”). SOP 03-3 addresses accounting for differences
between contractual cash flows and cash flows expected to be
collected from an investor’s initial investment in loans or
debt securities acquired in a transfer if those differences are
attributable, at least in part, to credit quality. The
provisions of this SOP are effective for loans acquired in
fiscal years beginning after December 15, 2004. The
Corporation does not expect the requirements of SOP 03-3 to have
a material impact on the Corporation’s results of
operations, financial position, or liquidity.
In January 2003, the FASB issued Interpretation No. 46,
“Consolidation of Variable Interest Entities”
(“FIN 46”). This interpretation provides guidance
on how to identify a variable interest entity and determine when
the assets, liabilities, noncontrolling interests, and results
of operations of a variable interest entity are to be included
in an entity’s consolidated financial statements. A
variable interest entity exists when either the total equity
investment at risk is not sufficient to permit the entity to
finance its activities by itself, or the equity investors lack
one of three characteristics associated with owning a
controlling financial interest. Those characteristics include
the direct or indirect ability to make decisions about an
entity’s activities through voting rights or similar
rights, the obligation to absorb the expected losses of an
entity if they occur, or the right to receive the expected
residual returns of the entity if they occur. The adoption did
not have a material impact on the Corporation’s results of
operations, financial position, or liquidity.
|
|
| NOTE 2 |
BUSINESS COMBINATIONS: |
Completed Business Combinations: First Federal
Capital Corp (“First Federal”): On October 29,
2004, the Corporation consummated its acquisition of 100% of the
outstanding shares of First Federal, based in La Crosse,
Wisconsin. The acquisition was accounted for under the purchase
method of accounting; thus, the results of operations of First
Federal prior to the consummation date were not included in the
accompanying consolidated financial statements. As of the
acquisition date, First Federal operated a $4 billion
savings bank with over 90 banking locations serving more
than 40 communities in Wisconsin, northern Illinois, and
southern Minnesota, building upon and complementing the
Corporation’s footprint. As a result of the acquisition,
the Corporation will enhance its current branch distribution
(including supermarket locations which are new to the
Corporation’s distribution model), improve its operational
and managerial efficiencies, increase revenue streams, and
strengthen its community banking model. Subsequent to year-end
2004, the Corporation merged First Federal into its Associated
Bank, National Association, banking subsidiary during February
2005.
Per the definitive agreement signed on April 27, 2004 (the
“Merger Agreement”), First Federal shareholders
received 0.9525 shares (restated for the Corporation’s
3-for-2 stock split in May 2004) of the Corporation’s
common stock for each share of First Federal common stock held,
an equivalent amount of cash, or a combination thereof. The
Merger Agreement provided that the aggregate consideration paid
by the Corporation for the First Federal outstanding common
stock must be equal to 90% stock and 10% cash, with the cash
consideration based upon the Corporation’s closing stock
price on the effective date of the merger. The
Corporation’s closing stock price on October 29, 2004
was $34.69 per share. The value of the common stock
consideration was based upon the Corporation’s average
market price surrounding the date of signing and announcing the
definitive agreement. Based upon the aforementioned values for
the 90% stock/10% cash, the consummation of the transaction
included the issuance of approximately 19.4 million shares
of common stock (valued at approximately $535 million) and
$75 million in cash.
63
To record the transaction, the Corporation assigned estimated
fair values to the assets acquired and liabilities assumed. The
excess cost of the acquisition over the estimated fair value of
the net assets acquired was allocated to identifiable intangible
assets with the remainder then allocated to goodwill. Goodwill
of approximately $447 million, a core deposit intangible of
approximately $17 million (with a ten-year estimated life),
and other intangibles of $4 million recognized at
acquisition were assigned to the banking segment. If additional
evidence becomes available subsequent to the recording of the
transaction indicating a significant difference from an initial
estimated fair value used, goodwill could be adjusted.
The following table summarizes the estimated fair value of the
assets acquired and liabilities assumed of First Federal at the
date of the acquisition.
| |
|
|
|
|
|
| |
|
$ in Millions | |
| |
|
| |
|
Investment securities available for sale
|
|
$ |
665 |
|
|
Loans, net
|
|
|
2,727 |
|
|
Other assets
|
|
|
256 |
|
|
Mortgage servicing rights
|
|
|
32 |
|
|
Intangible assets
|
|
|
21 |
|
|
Goodwill
|
|
|
447 |
|
| |
|
|
|
| |
Total assets acquired
|
|
$ |
4,148 |
|
| |
|
|
|
|
Deposits
|
|
$ |
2,701 |
|
|
Borrowings
|
|
|
768 |
|
|
Other liabilities
|
|
|
51 |
|
| |
|
|
|
| |
Total liabilities assumed
|
|
$ |
3,520 |
|
| |
|
|
|
|
Net assets acquired
|
|
$ |
628 |
|
| |
|
|
|
The following represents required supplemental pro forma
disclosure of total revenue, net income, and earnings per share
as though the First Federal acquisition had been completed at
the beginning of 2004 and 2003, respectively.
| |
|
|
|
|
|
|
|
|
| |
|
For Year ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(In Thousands, except | |
| |
|
per share data) | |
|
Total revenue
|
|
$ |
918,429 |
|
|
$ |
900,911 |
|
|
Net income
|
|
|
282,190 |
|
|
|
263,882 |
|
|
Basic earnings per share
|
|
|
2.18 |
|
|
|
2.03 |
|
|
Diluted earnings per share
|
|
|
2.15 |
|
|
|
2.01 |
|
The pro forma results include amortization of newly created
intangibles, interest cost on the cash consideration, and
amortization of fair value adjustments on loans, investments,
deposits and debt. The pro forma weighted average common shares
used in the earnings per share calculations include adjustments
for shares issued for the acquisition and the estimated impact
of additional dilutive securities but does not assume any
incremental share repurchases. The pro forma results presented
do not reflect cost savings or revenue enhancements anticipated
from the acquisition and are not necessarily indicative of what
actually would have occurred if the acquisition had been
completed as of the beginning of each period presented, nor are
they necessarily indicative of future results.
Jabas Group, Inc. (“Jabas”): On April 1, 2004,
the Corporation (through its subsidiary, Associated Financial
Group, LLC) consummated its cash acquisition of 100% of the
outstanding shares of Jabas. Jabas is an insurance agency
specializing in employee benefit products headquartered in
Kimberly, Wisconsin, and was acquired to enhance the
Corporation’s existing insurance business. Jabas operates
as part of Associated Financial Group, LLC. The acquisition was
accounted for under the purchase method of accounting; thus, the
results of operations of Jabas prior to the consummation date
were not included in the accompanying
64
consolidated financial statements. The acquisition was
individually immaterial to the consolidated financial results.
Goodwill of approximately $8 million and other intangibles
of approximately $6 million recognized in the transaction
at acquisition were assigned to the wealth management segment.
Goodwill may increase by an additional $8 million in the
future as contingent payments may be made to the former Jabas
shareholders through December 31, 2007, if Jabas exceeds
certain performance targets. Goodwill during 2004 was increased
by approximately $0.7 million for contingent consideration
paid in 2004 per the agreement.
CFG Insurance Services, Inc. (“CFG”): On April 1,
2003, the Corporation consummated its cash acquisition of 100%
of the outstanding shares of CFG, a closely-held insurance
agency headquartered in Minnetonka, Minnesota. Effective in June
2003, CFG operated as Associated Financial Group, LLC. CFG, an
independent, full-line insurance agency, was acquired to enhance
the growth of the Corporation’s existing insurance
business. The acquisition was accounted for under the purchase
method of accounting; thus, the results of operations of CFG
prior to the consummation date were not included in the
accompanying consolidated financial statements. The acquisition
was individually immaterial to the consolidated financial
results. Goodwill of approximately $12 million and other
intangibles of approximately $15 million recognized in the
transaction at acquisition were assigned to the wealth
management segment.
Signal Financial Corporation (“Signal”): On
February 28, 2002, the Corporation consummated its
acquisition of 100% of the outstanding common shares of Signal.
Signal operated banking branches in nine locations in the Twin
Cities and Eastern Minnesota. As a result of the acquisition,
the Corporation expanded its Minnesota banking presence,
particularly in the Twin Cities area.
The Signal transaction was accounted for under the purchase
method of accounting; thus, the results of operations prior to
the consummation date were not included in the accompanying
consolidated financial statements. The Signal transaction was
consummated through the issuance of approximately
6.1 million shares of common stock and $58 million in
cash for a purchase price of $193 million. The value of the
shares was determined using the closing stock price of the
Corporation’s stock on September 10, 2001, the
initiation date of the transaction.
The following table summarizes the estimated fair value of the
assets acquired and liabilities assumed of Signal at the date of
the acquisition.
| |
|
|
|
|
|
| |
|
$ in Millions | |
| |
|
| |
|
Investment securities available for sale
|
|
$ |
164 |
|
|
Loans, net
|
|
|
748 |
|
|
Other assets
|
|
|
118 |
|
|
Intangible asset
|
|
|
6 |
|
|
Goodwill
|
|
|
120 |
|
| |
|
|
|
| |
Total assets acquired
|
|
$ |
1,156 |
|
| |
|
|
|
|
Deposits
|
|
$ |
785 |
|
|
Borrowings
|
|
|
166 |
|
|
Other liabilities
|
|
|
12 |
|
| |
|
|
|
| |
Total liabilities assumed
|
|
$ |
963 |
|
| |
|
|
|
|
Net assets acquired
|
|
$ |
193 |
|
| |
|
|
|
The $6 million other intangible asset represents a core
deposit intangible with a ten-year estimated life. The
$120 million of goodwill was assigned to the banking
segment.
65
|
|
| NOTE 3 |
INVESTMENT SECURITIES: |
The amortized cost and fair values of securities available for
sale at December 31, 2004 and 2003, were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
| |
|
| |
| |
|
|
|
Gross | |
|
Gross | |
|
|
| |
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
|
| |
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
| |
|
| |
| |
|
($ in Thousands) | |
|
U.S. Treasury securities
|
|
$ |
33,177 |
|
|
$ |
5 |
|
|
$ |
(159 |
) |
|
$ |
33,023 |
|
|
Federal agency securities
|
|
|
175,290 |
|
|
|
1,006 |
|
|
|
(232 |
) |
|
|
176,064 |
|
|
Obligations of state and political subdivisions
|
|
|
876,208 |
|
|
|
45,577 |
|
|
|
(72 |
) |
|
|
921,713 |
|
|
Mortgage-related securities
|
|
|
3,238,502 |
|
|
|
9,697 |
|
|
|
(10,714 |
) |
|
|
3,237,485 |
|
|
Other securities (debt and equity)
|
|
|
413,938 |
|
|
|
33,124 |
|
|
|
(3 |
) |
|
|
447,059 |
|
| |
|
|
|
Total securities available for sale
|
|
$ |
4,737,115 |
|
|
$ |
89,409 |
|
|
$ |
(11,180 |
) |
|
$ |
4,815,344 |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2003 | |
| |
|
| |
| |
|
|
|
Gross | |
|
Gross | |
|
|
| |
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
|
| |
|
Cost | |
|
Gains | |
|
Losses | |
|
Fair Value | |
| |
|
| |
| |
|
($ in Thousands) | |
|
U.S. Treasury securities
|
|
$ |
36,588 |
|
|
$ |
171 |
|
|
$ |
— |
|
|
$ |
36,759 |
|
|
Federal agency securities
|
|
|
167,859 |
|
|
|
4,944 |
|
|
|
(90 |
) |
|
|
172,713 |
|
|
Obligations of state and political subdivisions
|
|
|
868,974 |
|
|
|
58,579 |
|
|
|
(68 |
) |
|
|
927,485 |
|
|
Mortgage-related securities
|
|
|
2,232,920 |
|
|
|
12,128 |
|
|
|
(11,636 |
) |
|
|
2,233,412 |
|
|
Other securities (debt and equity)
|
|
|
368,388 |
|
|
|
36,040 |
|
|
|
(1,013 |
) |
|
|
403,415 |
|
| |
|
|
|
Total securities available for sale
|
|
$ |
3,674,729 |
|
|
$ |
111,862 |
|
|
$ |
(12,807 |
) |
|
$ |
3,773,784 |
|
| |
|
|
Equity securities include Federal Reserve and Federal Home
Loan Bank stock which had a fair value of
$25.5 million and $177.9 million, respectively, at
December 31, 2004, and $25.3 million and
$112.5 million, respectively, at December 31, 2003.
The following represents gross unrealized losses and the related
fair value of securities available for sale, aggregated by
investment category and length of time that individual
securities have been in a continuous unrealized loss position,
at December 31, 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less than 12 months | |
|
12 months or more | |
|
Total | |
| |
|
| |
| |
|
Unrealized | |
|
|
|
Unrealized | |
|
|
|
Unrealized | |
|
|
| |
|
Losses | |
|
Fair Value | |
|
Losses | |
|
Fair Value | |
|
Losses | |
|
Fair Value | |
| |
|
| |
| |
|
|
|
($ in Thousands) | |
|
|
|
U.S. Treasury securities
|
|
$ |
(153 |
) |
|
$ |
31,825 |
|
|
$ |
(6 |
) |
|
$ |
993 |
|
|
$ |
(159 |
) |
|
$ |
32,818 |
|
|
Federal agency securities
|
|
|
(104 |
) |
|
|
30,782 |
|
|
|
(128 |
) |
|
|
17,934 |
|
|
|
(232 |
) |
|
|
48,716 |
|
|
Obligations of state and political subdivisions
|
|
|
(60 |
) |
|
|
18,495 |
|
|
|
(12 |
) |
|
|
1,004 |
|
|
|
(72 |
) |
|
|
19,499 |
|
|
Mortgage-related securities
|
|
|
(3,345 |
) |
|
|
593,209 |
|
|
|
(7,369 |
) |
|
|
1,004,454 |
|
|
|
(10,714 |
) |
|
|
1,597,663 |
|
|
Other securities (equity)
|
|
|
(3 |
) |
|
|
297 |
|
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
|
297 |
|
| |
|
|
| |
Total
|
|
$ |
(3,665 |
) |
|
$ |
674,608 |
|
|
$ |
(7,515 |
) |
|
$ |
1,024,385 |
|
|
$ |
(11,180 |
) |
|
$ |
1,698,993 |
|
| |
|
|
Management does not believe any individual unrealized loss as of
December 31, 2004 represents an other-than-temporary
impairment. The unrealized losses reported for mortgage-related
securities relate primarily to securities issued by government
agencies such as the Federal National Mortgage Association and
Federal Home Loan Mortgage Corporation (“FHLMC”).
These unrealized losses are primarily attributable to changes in
interest rates and not credit deterioration and individually
were 3.5% or less of their respective
66
amortized cost basis. The Corporation currently has both the
intent and ability to hold the securities contained in the
previous table for a time necessary to recover the amortized
cost.
The Corporation owns (not included in the above table) a
collateralized mortgage obligation (“CMO”) determined
to have an other-than-temporary impairment that resulted in a
write-down on the security of $0.8 million during 2002,
$0.3 million during 2003, and $0.2 million during
2004, based on continued evaluation. As of December 31,
2004, this CMO had a carrying value of $1.0 million. The
Corporation also owns (not included in the above table) three
FHLMC preferred stock securities determined to have an
other-than-temporary impairment that resulted in a write-down on
these securities of $2.2 million during 2004. At
December 31, 2004, these FHLMC preferred shares had a
carrying value of $8.4 million.
The amortized cost and fair values of investment securities
available for sale at December 31, 2004, by contractual
maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
| |
|
| |
| |
|
Amortized | |
|
|
| |
|
Cost | |
|
Fair Value | |
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Due in one year or less
|
|
$ |
180,512 |
|
|
$ |
182,134 |
|
|
Due after one year through five years
|
|
|
482,853 |
|
|
|
501,858 |
|
|
Due after five years through ten years
|
|
|
330,208 |
|
|
|
346,053 |
|
|
Due after ten years
|
|
|
285,356 |
|
|
|
300,503 |
|
| |
|
|
|
Total debt securities
|
|
|
1,278,929 |
|
|
|
1,330,548 |
|
|
Mortgage-related securities
|
|
|
3,238,502 |
|
|
|
3,237,485 |
|
|
Equity securities
|
|
|
219,684 |
|
|
|
247,311 |
|
| |
|
|
|
Total securities available for sale
|
|
$ |
4,737,115 |
|
|
$ |
4,815,344 |
|
| |
|
|
Total proceeds and gross realized gains and losses from sale of
securities available for sale (with other-than-temporary
write-downs on securities included in gross losses) for each of
the three years ended December 31 were:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Proceeds
|
|
$ |
132,639 |
|
|
$ |
1,263 |
|
|
$ |
27,793 |
|
|
Gross gains
|
|
|
3,459 |
|
|
|
1,029 |
|
|
|
374 |
|
|
Gross losses
|
|
|
(2,822 |
) |
|
|
(327 |
) |
|
|
(801 |
) |
Pledged securities with a carrying value of approximately
$2.5 billion and $1.6 billion at December 31,
2004, and December 31, 2003, respectively, were pledged to
secure certain deposits, Federal Home Loan Bank advances,
or for other purposes as required or permitted by law.
67
NOTE 4 LOANS:
Loans at December 31 are summarized below.
| |
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Commercial, financial, and agricultural
|
|
$ |
2,803,333 |
|
|
$ |
2,116,463 |
|
|
Real estate construction
|
|
|
1,459,629 |
|
|
|
1,077,731 |
|
|
Commercial real estate
|
|
|
3,933,131 |
|
|
|
3,246,954 |
|
|
Lease financing
|
|
|
50,718 |
|
|
|
38,968 |
|
| |
|
|
| |
Commercial
|
|
|
8,246,811 |
|
|
|
6,480,116 |
|
| |
Residential mortgage
|
|
|
2,714,580 |
|
|
|
1,975,661 |
|
|
Home equity(1)
|
|
|
1,866,485 |
|
|
|
1,138,311 |
|
|
Installment
|
|
|
1,054,011 |
|
|
|
697,722 |
|
| |
|
|
| |
Retail
|
|
|
2,920,496 |
|
|
|
1,836,033 |
|
| |
|
|
| |
|
Total loans
|
|
$ |
13,881,887 |
|
|
$ |
10,291,810 |
|
| |
|
|
|
|
| (1) |
Home equity includes home equity lines and residential mortgage
junior liens. |
A summary of the changes in the allowance for loan losses for
the years indicated is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Balance at beginning of year
|
|
$ |
177,622 |
|
|
$ |
162,541 |
|
|
$ |
128,204 |
|
|
Balance related to acquisition
|
|
|
14,750 |
|
|
|
— |
|
|
|
11,985 |
|
|
Provision for loan losses
|
|
|
14,668 |
|
|
|
46,813 |
|
|
|
50,699 |
|
|
Charge offs
|
|
|
(22,202 |
) |
|
|
(37,107 |
) |
|
|
(32,179 |
) |
|
Recoveries
|
|
|
4,924 |
|
|
|
5,375 |
|
|
|
3,832 |
|
| |
|
|
| |
Net charge offs
|
|
|
(17,278 |
) |
|
|
(31,732 |
) |
|
|
(28,347 |
) |
| |
|
|
|
Balance at end of year
|
|
$ |
189,762 |
|
|
$ |
177,622 |
|
|
$ |
162,541 |
|
| |
|
|
The following table presents nonperforming loans at
December 31:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Nonaccrual loans
|
|
$ |
112,761 |
|
|
$ |
113,944 |
|
|
Accruing loans past due 90 days or more
|
|
|
2,153 |
|
|
|
7,495 |
|
|
Restructured loans
|
|
|
37 |
|
|
|
43 |
|
| |
|
|
| |
Total nonperforming loans
|
|
$ |
114,951 |
|
|
$ |
121,482 |
|
| |
|
|
Management has determined that commercial, financial, and
agricultural loans, commercial real estate loans, and real
estate construction loans that have nonaccrual status or have
had their terms restructured are impaired loans. The following
table presents data on impaired loans at December 31:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Impaired loans for which an allowance has been provided
|
|
$ |
58,237 |
|
|
$ |
68,571 |
|
|
Impaired loans for which no allowance has been provided
|
|
|
30,065 |
|
|
|
29,079 |
|
| |
|
|
|
Total loans determined to be impaired
|
|
$ |
88,302 |
|
|
$ |
97,650 |
|
| |
|
|
|
Allowance for loan losses related to impaired loans
|
|
$ |
25,609 |
|
|
$ |
33,497 |
|
| |
|
|
68
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
For the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average recorded investment in impaired loans
|
|
$ |
70,439 |
|
|
$ |
83,106 |
|
|
$ |
60,247 |
|
| |
|
|
|
Cash basis interest income recognized from impaired loans
|
|
$ |
2,500 |
|
|
$ |
2,489 |
|
|
$ |
3,849 |
|
| |
|
|
The Corporation has granted loans to their directors, executive
officers, or their related interests. These loans were made on
substantially the same terms, including rates and collateral, as
those prevailing at the time for comparable transactions with
other unrelated customers, and do not involve more than a normal
risk of collection. These loans to related parties are
summarized as follows:
| |
|
|
|
|
| |
|
2004 | |
| |
|
| |
| |
|
($ in Thousands) | |
|
Balance at beginning of year
|
|
$ |
29,486 |
|
|
New loans
|
|
|
31,652 |
|
|
Repayments
|
|
|
(17,875 |
) |
|
Changes due to status of executive officers and directors
|
|
|
(1,914 |
) |
| |
|
|
|
|
Balance at end of year
|
|
$ |
41,349 |
|
| |
|
|
|
The Corporation serves the credit needs of its customers by
offering a wide variety of loan programs to customers, primarily
in Wisconsin, Illinois, and Minnesota. The loan portfolio is
widely diversified by types of borrowers, industry groups, and
market areas. Significant loan concentrations are considered to
exist for a financial institution when there are amounts loaned
to a multiple number of borrowers engaged in similar activities
that would cause them to be similarly impacted by economic or
other conditions. At December 31, 2004, no significant
concentrations existed in the Corporation’s loan portfolio
in excess of 10% of total loans.
|
|
| NOTE 5 |
GOODWILL AND INTANGIBLE ASSETS: |
Goodwill: Goodwill is not amortized but is subject
to impairment tests on at least an annual basis. No impairment
loss was necessary in 2004, 2003, or 2002. At December 31,
2004, goodwill of $659 million is assigned to the banking
segment and goodwill of $21 million is assigned to the
wealth management segment. The change in the carrying amount of
goodwill was as follows.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Goodwill |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Balance at beginning of year
|
|
$ |
224,388 |
|
|
$ |
212,112 |
|
|
$ |
92,397 |
|
| |
Goodwill acquired
|
|
|
455,605 |
|
|
|
12,276 |
|
|
|
119,715 |
|
| |
|
|
|
Balance at end of year
|
|
$ |
679,993 |
|
|
$ |
224,388 |
|
|
$ |
212,112 |
|
| |
|
|
Other Intangible Assets: The Corporation has other
intangible assets that are amortized, consisting of core deposit
intangibles, other intangibles (primarily related to customer
relationships acquired in connection with the CFG and Jabas
acquisitions), and mortgage servicing rights. The core deposit
intangibles and mortgage servicing rights are assigned to the
Corporation’s banking segment, while other intangibles of
$17 million are assigned to the wealth management segment
and $4 million are assigned to the banking segment.
69
For core deposit intangibles and other intangibles, changes in
the gross carrying amount, accumulated amortization, and net
book value were as follows.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Core deposit intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$ |
33,468 |
|
|
$ |
28,165 |
|
|
$ |
28,165 |
|
|
Accumulated amortization
|
|
|
(11,335 |
) |
|
|
(20,682 |
) |
|
|
(18,923 |
) |
| |
|
|
|
Net book value
|
|
$ |
22,133 |
|
|
$ |
7,483 |
|
|
$ |
9,242 |
|
| |
|
|
|
Additions during the year
|
|
$ |
16,685 |
|
|
$ |
— |
|
|
$ |
5,600 |
|
|
Amortization during the year
|
|
|
(2,035 |
) |
|
|
(1,759 |
) |
|
|
(2,283 |
) |
|
Other intangibles:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$ |
24,578 |
|
|
$ |
14,751 |
|
|
$ |
— |
|
|
Accumulated amortization
|
|
|
(3,517 |
) |
|
|
(1,202 |
) |
|
|
— |
|
| |
|
|
|
Net book value
|
|
$ |
21,061 |
|
|
$ |
13,549 |
|
|
$ |
— |
|
| |
|
|
|
Additions during the year
|
|
$ |
9,827 |
|
|
$ |
14,751 |
|
|
$ |
— |
|
|
Amortization during the year
|
|
|
(2,315 |
) |
|
|
(1,202 |
) |
|
|
— |
|
A summary of changes in the balance of the mortgage servicing
rights asset and the mortgage servicing rights valuation
allowance was as follows.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mortgage servicing rights |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Mortgage servicing rights at beginning of year
|
|
$ |
65,062 |
|
|
$ |
60,685 |
|
|
$ |
42,786 |
|
|
Additions
|
|
|
50,508 |
|
|
|
39,707 |
|
|
|
30,730 |
|
|
Amortization
|
|
|
(17,932 |
) |
|
|
(17,212 |
) |
|
|
(12,831 |
) |
|
Other-than-temporary impairment
|
|
|
(5,855 |
) |
|
|
(18,118 |
) |
|
|
— |
|
| |
|
|
| |
Mortgage servicing rights at end of year
|
|
$ |
91,783 |
|
|
$ |
65,062 |
|
|
$ |
60,685 |
|
| |
|
|
|
Valuation allowance at beginning of year
|
|
|
(22,585 |
) |
|
|
(28,362 |
) |
|
|
(10,720 |
) |
|
Additions
|
|
|
(5,461 |
) |
|
|
(15,832 |
) |
|
|
(17,642 |
) |
|
Reversals
|
|
|
6,654 |
|
|
|
3,491 |
|
|
|
— |
|
|
Other-than-temporary impairment
|
|
|
5,855 |
|
|
|
18,118 |
|
|
|
— |
|
| |
|
|
| |
Valuation allowance at end of year
|
|
|
(15,537 |
) |
|
|
(22,585 |
) |
|
|
(28,362 |
) |
| |
|
|
| |
Mortgage servicing rights, net
|
|
$ |
76,246 |
|
|
$ |
42,477 |
|
|
$ |
32,323 |
|
| |
|
|
Included in the 2004 additions to mortgage servicing rights was
$31.8 million from First Federal at acquisition. The
Corporation evaluates its mortgage servicing rights asset for
other-than-temporary impairment. During the second and third
quarters of 2003 mortgage rates fell to record lows. Given the
extended period of historically low interest rates at that time
and the impact on mortgage banking volumes, refinances, and
secondary markets, the Corporation determined $18.1 million
of mortgage servicing rights to be other-than-temporarily
impaired during 2003. Impacted by the continued low interest
rate environment for 2004, the Corporation determined
$5.9 million of mortgage servicing rights to be
other-than-temporarily impaired during 2004. This resulted in a
similar decrease in mortgage servicing rights and the valuation
allowance.
At December 31, 2004, the Corporation was servicing one- to
four-family residential mortgage loans owned by other investors
with balances totaling $9.5 billion (including
$3.5 billion from First Federal at acquisition) compared to
$5.9 billion and $5.4 billion at December 31,
2003 and 2002, respectively. The fair value of mortgage
servicing rights was approximately $76.2 million
(representing 80 bp of total loans serviced) at
December 31, 2004, compared to $42.5 million
(representing 72 bp of loans serviced) at December 31,
2003, and $32.3 million (representing 59 bp of loans
serviced) at December 31, 2002.
70
Mortgage servicing rights expense, which includes the
amortization of the mortgage servicing rights and increases or
decreases to the valuation allowance associated with the
mortgage servicing rights, was $16.7 million,
$29.6 million, and $30.5 million for the years ended
December 31, 2004, 2003, and 2002, respectively.
The following table shows the estimated future amortization
expense for amortizing intangible assets. The projections of
amortization expense for the next five years are based on
existing asset balances, the current interest rate environment,
and prepayment speeds as of December 31, 2004. The actual
amortization expense the Corporation recognizes in any given
period may be significantly different depending upon changes in
interest rates, market conditions, regulatory requirements, and
events or circumstances that indicate the carrying amount of an
asset may not be recoverable.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Estimated amortization expense |
|
Core Deposit Intangibles | |
|
Other Intangibles | |
|
Mortgage Servicing Rights | |
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Year ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$ |
4,000 |
|
|
$ |
3,700 |
|
|
$ |
21,500 |
|
|
2006
|
|
|
3,300 |
|
|
|
3,000 |
|
|
|
17,900 |
|
|
2007
|
|
|
2,900 |
|
|
|
1,300 |
|
|
|
14,700 |
|
|
2008
|
|
|
2,500 |
|
|
|
1,200 |
|
|
|
11,800 |
|
|
2009
|
|
|
2,100 |
|
|
|
1,100 |
|
|
|
8,800 |
|
| |
|
|
|
|
| NOTE 6 |
PREMISES AND EQUIPMENT: |
A summary of premises and equipment at December 31 is as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
2004 | |
|
2003 | |
| |
|
|
|
| |
|
| |
| |
|
Estimated | |
|
|
|
Accumulated | |
|
Net Book | |
|
Net Book | |
| |
|
Useful Lives | |
|
Cost | |
|
Depreciation | |
|
Value | |
|
Value | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Land
|
|
|
— |
|
|
$ |
42,820 |
|
|
$ |
— |
|
|
$ |
42,820 |
|
|
$ |
27,595 |
|
|
Land improvements
|
|
|
3 – 20 years |
|
|
|
3,616 |
|
|
|
2,458 |
|
|
|
1,158 |
|
|
|
869 |
|
|
Buildings
|
|
|
5 – 40 years |
|
|
|
176,696 |
|
|
|
80,464 |
|
|
|
96,232 |
|
|
|
73,589 |
|
|
Computers
|
|
|
3 – 5 years |
|
|
|
33,611 |
|
|
|
24,783 |
|
|
|
8,828 |
|
|
|
6,212 |
|
|
Furniture, fixtures and other equipment
|
|
|
3 – 20 years |
|
|
|
109,972 |
|
|
|
82,108 |
|
|
|
27,864 |
|
|
|
17,623 |
|
|
Leasehold improvements
|
|
|
5 – 30 years |
|
|
|
20,070 |
|
|
|
12,028 |
|
|
|
8,042 |
|
|
|
5,427 |
|
| |
|
|
|
|
|
| |
Total premises and equipment
|
|
|
|
|
|
$ |
386,785 |
|
|
$ |
201,841 |
|
|
$ |
184,944 |
|
|
$ |
131,315 |
|
| |
|
|
|
|
|
Depreciation and amortization of premises and equipment totaled
$15.3 million in 2004, $15.1 million in 2003, and
$17.1 million in 2002.
The Corporation and certain subsidiaries are obligated under
noncancelable operating leases for other facilities and
equipment, certain of which provide for increased rentals based
upon increases in cost of living adjustments and other operating
costs. The approximate minimum annual rentals and commitments
under these noncancelable agreements and leases with remaining
terms in excess of one year are as follows:
| |
|
|
|
|
| |
|
($ in Thousands) | |
|
2005
|
|
$ |
11,143 |
|
|
2006
|
|
|
10,624 |
|
|
2007
|
|
|
9,105 |
|
|
2008
|
|
|
7,364 |
|
|
2009
|
|
|
5,932 |
|
|
Thereafter
|
|
|
22,558 |
|
| |
|
|
|
|
Total
|
|
$ |
66,726 |
|
| |
|
|
|
71
Total rental expense under leases, net of sublease income,
totaled $10.0 million in 2004, $9.2 million in 2003,
and $8.3 million in 2002.
The distribution of deposits at December 31 is as follows.
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Noninterest-bearing demand deposits
|
|
$ |
2,347,611 |
|
|
$ |
1,814,446 |
|
|
Savings deposits
|
|
|
1,116,158 |
|
|
|
890,092 |
|
|
Interest-bearing demand deposits
|
|
|
2,854,880 |
|
|
|
2,330,478 |
|
|
Money market deposits
|
|
|
2,083,717 |
|
|
|
1,573,678 |
|
|
Brokered certificates of deposit
|
|
|
361,559 |
|
|
|
165,130 |
|
|
Other time deposits
|
|
|
4,022,314 |
|
|
|
3,019,019 |
|
| |
|
|
| |
Total deposits
|
|
$ |
12,786,239 |
|
|
$ |
9,792,843 |
|
| |
|
|
Time deposits of $100,000 or more were $1.4 billion and
$999 million at December 31, 2004 and 2003,
respectively. Aggregate annual maturities of all time deposits
at December 31, 2004, are as follows:
| |
|
|
|
|
| Maturities During Year Ending |
|
|
| December 31, |
|
($ in Thousands) | |
| |
|
| |
|
2005
|
|
$ |
2,824,145 |
|
|
2006
|
|
|
766,817 |
|
|
2007
|
|
|
461,880 |
|
|
2008
|
|
|
141,802 |
|
|
2009
|
|
|
67,832 |
|
|
Thereafter
|
|
|
121,397 |
|
| |
|
|
|
|
Total
|
|
$ |
4,383,873 |
|
| |
|
|
|
NOTE 8 SHORT-TERM BORROWINGS:
Short-term borrowings at December 31 are as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
$ |
2,437,088 |
|
|
$ |
1,340,996 |
|
|
Bank notes
|
|
|
200,000 |
|
|
|
200,000 |
|
|
Federal Home Loan Bank advances
|
|
|
169,400 |
|
|
|
— |
|
|
Treasury, tax, and loan notes
|
|
|
35,825 |
|
|
|
361,894 |
|
|
Other borrowed funds
|
|
|
84,403 |
|
|
|
25,986 |
|
| |
|
|
| |
Total short-term borrowings
|
|
$ |
2,926,716 |
|
|
$ |
1,928,876 |
|
| |
|
|
Included in short-term borrowings are Federal Home
Loan Bank advances with original maturities of less than
one year. The short-term bank notes are variable rate and have
original maturities of less than one year. The treasury, tax,
and loan notes are demand notes representing secured borrowings
from the U.S. Treasury, collateralized by qualifying
securities and loans.
The Parent Company had $100 million of established lines of
credit with various nonaffiliated banks, which were not drawn on
at December 31, 2004 or 2003. Borrowings under these lines
accrue interest at short-term market rates. Under the terms of
the credit agreement, a variety of advances and interest periods
may be selected by the Parent Company. During 2000, a
$200 million commercial paper program was initiated, of
which, no amounts were outstanding at December 31, 2004 or
2003.
72
|
|
| NOTE 9 |
LONG-TERM FUNDING: |
Long-term debt (debt with original contractual maturities
greater than one year) at December 31 is as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Federal Home Loan Bank advances
|
|
$ |
1,158,294 |
|
|
$ |
912,138 |
|
|
Bank notes
|
|
|
500,000 |
|
|
|
300,000 |
|
|
Repurchase agreements
|
|
|
550,000 |
|
|
|
429,175 |
|
|
Subordinated debt, net
|
|
|
204,168 |
|
|
|
204,351 |
|
|
Junior subordinated debentures, net
|
|
|
185,517 |
|
|
|
— |
|
|
Other borrowed funds
|
|
|
6,561 |
|
|
|
6,555 |
|
| |
|
|
| |
Total long-term debt
|
|
$ |
2,604,540 |
|
|
$ |
1,852,219 |
|
|
Company-obligated mandatorily redeemable preferred securities,
net
|
|
|
— |
|
|
|
181,941 |
|
| |
|
|
| |
Total long-term funding
|
|
$ |
2,604,540 |
|
|
$ |
2,034,160 |
|
| |
|
|
Federal Home Loan Bank advances: Long-term
advances from the Federal Home Loan Bank had maturities
through 2019 and had weighted-average interest rates of 2.91% at
December 31, 2004 and 2.96% at December 31, 2003.
These advances had a combination of fixed and variable rates, of
which 26% and 5% were variable at December 31, 2004 and
2003, respectively.
Bank notes: The long-term bank notes had maturities
through 2007 and had weighted-average interest rates of 2.54% at
December 31, 2004 and 2.20% at December 31, 2003.
These notes had a combination of fixed and variable rates, of
which 70% and 50% were variable at December 31, 2004 and
2003, respectively.
Repurchase agreements: The long-term repurchase
agreements had maturities through 2007 and had weighted-average
interest rates of 1.89% at December 31, 2004 and 1.67% at
December 31, 2003. These repurchase agreements had a
combination of fixed and variable rates, of which 82% was
variable rate at December 31, 2004 and 35% was variable
rate at December 31, 2003.
Subordinated debt: In August 2001, the Corporation issued
$200 million of 10-year subordinated debt. This debt was
issued at a discount and has a fixed coupon interest rate of
6.75%. The Corporation also entered into a fair value hedge to
hedge the interest rate risk on the subordinated debt. As of
December 31, 2004 and 2003, the fair value of the
derivative was a $5.2 million gain and a $5.5 million
gain, respectively. Given the fair value hedge, the subordinated
debt is carried on the consolidated balance sheet at fair value.
The subordinated debt qualifies under the risk-based capital
guidelines as Tier 2 supplementary capital for regulatory
purposes.
Junior subordinated debentures and Company-obligated
Mandatorily Redeemable Preferred Securities: On May 30,
2002, ASBC Capital I (the “ASBC Trust”), a Delaware
business trust whose common stock was wholly owned by the
Corporation, completed the sale of $175 million of 7.625%
preferred securities (the “Preferred Securities”). The
Preferred Securities are traded on the New York Stock Exchange
under the symbol “ABW PRA.” The ASBC Trust used the
proceeds from the offering to purchase a like amount of 7.625%
Junior Subordinated Debentures (the “Debentures”) of
the Corporation. The Debentures are the sole assets of the ASBC
Trust and were eliminated, along with the related income
statement effects, in the consolidated financial statements for
2003 and prior years.
Effective in the first quarter of 2004, in accordance with
guidance provided on the application of FIN 46R, the
Corporation was required to deconsolidate the ASBC Trust from
its consolidated financial statements. Accordingly, the
Debentures issued by the Corporation to ASBC Trust (as opposed
to the trust preferred securities issued by the ASBC Trust) are
reflected in the Corporation’s consolidated balance sheet
as long-term funding. The deconsolidation of the net assets and
results of operations of this trust did not have a material
impact on the Corporation’s financial statements since the
Corporation continues to be obligated to repay the Debentures
held by the ASBC Trust and guarantees repayment of the Preferred
Securities issued by the ASBC Trust. The consolidated long-term
funding obligation related to the ASBC Trust increased from
73
$175 million to $180 million upon deconsolidation,
with the difference representing the Corporation’s common
ownership interest in the ASBC Trust recorded in investment
securities available for sale.
The Preferred Securities accrue and pay dividends quarterly at
an annual rate of 7.625% of the stated liquidation amount of
$25 per Preferred Security. The Corporation has fully and
unconditionally guaranteed all of the obligations of the ASBC
Trust. The guarantee covers the quarterly distributions and
payments on liquidation or redemption of the Preferred
Securities, but only to the extent of funds held by the ASBC
Trust. The Preferred Securities are mandatorily redeemable upon
the maturity of the Debentures on June 15, 2032, or upon
earlier redemption as provided in the Indenture. The Corporation
has the right to redeem the Debentures on or after May 30,
2007. The Preferred Securities qualify under the risk-based
capital guidelines as Tier 1 capital for regulatory
purposes within certain limitations.
During 2002, the Corporation entered into a fair value hedge to
hedge the interest rate risk on the Debentures. The fair value
of the derivative was a $5.1 million gain at
December 31, 2004 and a $6.9 million gain at
December 31, 2003. Given the fair value hedge, the
Debentures are carried on the consolidated balance sheet at fair
value.
The table below summarizes the maturities of the
Corporation’s long-term debt at December 31, 2004:
| |
|
|
|
|
|
| Year |
|
($ in Thousands) | |
| |
|
| |
|
2005
|
|
$ |
375,000 |
|
|
2006
|
|
|
970,225 |
|
|
2007
|
|
|
702,850 |
|
|
2008
|
|
|
115,953 |
|
|
2009
|
|
|
— |
|
|
Thereafter
|
|
|
440,512 |
|
| |
|
|
|
| |
Total long-term debt
|
|
$ |
2,604,540 |
|
| |
|
|
|
Under agreements with the Federal Home Loan Banks of
Chicago and Des Moines, Federal Home Loan Bank advances
(short-term and long-term) are secured by the subsidiary
banks’ qualifying mortgages (such as residential mortgage,
residential mortgage loans held for sale, home equity, and
commercial real estate) and by specific investment securities
for certain Federal Home Loan Bank advances.
|
|
| NOTE 10 |
STOCKHOLDERS’ EQUITY: |
On April 28, 2004, the Board of Directors declared a
3-for-2 stock split, effected in the form of a stock dividend,
payable May 12 to shareholders of record at the close of
business on May 7. All share and per share data in the
accompanying consolidated financial statements has been adjusted
to reflect the effect of this stock split. As a result of the
stock split, the Corporation distributed approximately
37 million shares of common stock. Any fractional shares
resulting from the dividend were paid in cash. On April 24,
2002, the Board of Directors declared a 10% stock dividend,
payable May 15 to shareholders of record at the close of
business on April 29. 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 approximately
7 million shares of common stock. Any fractional shares
resulting from the dividend were paid in cash.
The Corporation’s Articles of Incorporation authorize the
issuance of 750,000 shares of preferred stock at a par
value of $1.00 per share. No shares have been issued.
At December 31, 2004, subsidiary net assets equaled
$2.1 billion, of which approximately $210.8 million
could be paid to the Corporation in the form of cash dividends
without prior regulatory approval, subject to the capital needs
of each subsidiary.
The Board of Directors 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. For the Corporation’s employee
incentive plans, the Board of
74
Directors authorized the repurchase of up to 3.0 million
shares (750,000 shares per quarter) in 2004 and up to
2.4 million shares (600,000 shares per quarter) in
2003. Of these authorizations, approximately 1.1 million
shares were repurchased for $33.7 million during 2004 at an
average cost of $30.45 per share (with approximately
1.0 million shares reissued in connection with stock
options exercised), while none were repurchased during 2003
(with approximately 1.6 million shares reissued in
connection with stock options exercised). Additionally, under
two separate actions in 2000 and one action in 2003, the Board
of Directors authorized the repurchase and cancellation of the
Corporation’s outstanding shares, not to exceed
approximately 16.5 million shares on a combined basis.
Under these authorizations, approximately 3.1 million
shares were repurchased for $74.5 million during 2003 at an
average cost of $24.11 per share, while none were
repurchased during 2004. At December 31, 2004,
approximately 5.6 million shares remain authorized to
repurchase. The repurchase of shares will be based on market
opportunities, capital levels, growth prospects, and other
investment opportunities.
The Board of Directors approved the implementation of a
broad-based stock option grant effective July 28, 1999.
This stock option grant provided all qualifying employees with
an opportunity and an incentive to buy shares of the Corporation
and align their financial interest with the growth in value of
the Corporation’s shares. These options have 10-year terms,
fully vest in two years, and have exercise prices equal to 100%
of market value on the date of grant. As of December 31,
2004, approximately 2.8 million shares remain available for
granting.
In January 2002, the Board of Directors, with subsequent
approval of the Corporation’s shareholders, approved an
amendment to the Amended and Restated Long-Term Incentive Stock
Plan (“Stock Plan”), increasing the number of shares
available to be issued by an additional 5.0 million shares.
The Stock Plan was adopted by the Board of Directors and
originally approved by shareholders in 1987 and amended in 1994,
1997, and 1998. Options are generally exercisable up to
10 years from the date of grant and vest over two to three
years. As of December 31, 2004, approximately
4.1 million shares remain available for grants.
In January 2003, the Board of Directors, with subsequent
approval of the Corporation’s shareholders, approved the
adoption of the 2003 Long-Term Incentive Plan (“2003
Plan”), which provides for the granting of options to key
employees. Options are generally exercisable up to 10 years
from the date of grant and vest over three years. As of
December 31, 2004, approximately 4.0 million shares
remain available for grants.
The stock incentive plans of acquired companies were terminated
as to future option grants at each respective merger date.
Option holders under such plans received the Corporation’s
common stock, or options to buy the Corporation’s common
stock, based on the conversion terms of the various merger
agreements.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
| |
|
Options | |
|
Weighted Average | |
|
Options | |
|
Weighted Average | |
|
Options | |
|
Weighted Average | |
| |
|
Outstanding | |
|
Exercise Price | |
|
Outstanding | |
|
Exercise Price | |
|
Outstanding | |
|
Exercise Price | |
| |
|
| |
|
Outstanding, January 1
|
|
|
6,375,979 |
|
|
$ |
19.19 |
|
|
|
7,122,741 |
|
|
$ |
17.41 |
|
|
|
6,030,025 |
|
|
$ |
17.40 |
|
|
Granted
|
|
|
1,258,250 |
|
|
|
29.06 |
|
|
|
1,053,263 |
|
|
|
23.00 |
|
|
|
1,147,935 |
|
|
|
21.29 |
|
|
Options from acquisitions
|
|
|
264,247 |
|
|
|
16.10 |
|
|
|
— |
|
|
|
— |
|
|
|
1,614,690 |
|
|
|
9.43 |
|
|
Exercised
|
|
|
(1,394,279 |
) |
|
|
17.25 |
|
|
|
(1,650,764 |
) |
|
|
13.73 |
|
|
|
(1,469,678 |
) |
|
|
11.27 |
|
|
Forfeited
|
|
|
(145,077 |
) |
|
|
22.94 |
|
|
|
(149,261 |
) |
|
|
21.74 |
|
|
|
(200,231 |
) |
|
|
20.06 |
|
| |
|
|
|
Outstanding, December 31
|
|
|
6,359,120 |
|
|
$ |
21.35 |
|
|
|
6,375,979 |
|
|
$ |
19.19 |
|
|
|
7,122,741 |
|
|
$ |
17.41 |
|
| |
|
|
|
Options exercisable at year-end
|
|
|
4,209,543 |
|
|
|
|
|
|
|
4,434,584 |
|
|
|
|
|
|
|
5,059,880 |
|
|
|
|
|
| |
|
|
75
The following table summarizes information about the
Corporation’s stock options outstanding at
December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options | |
|
Weighted Average | |
|
Remaining | |
|
Options | |
|
Weighted Average | |
| |
|
Outstanding | |
|
Exercise Price | |
|
Life (Years) | |
|
Exercisable | |
|
Exercise Price | |
| |
|
| |
|
Range of Exercise Prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$6.29 — $9.95
|
|
|
96,788 |
|
|
$ |
8.54 |
|
|
|
2.48 |
|
|
|
96,788 |
|
|
$ |
8.54 |
|
|
$10.65 — $12.54
|
|
|
63,510 |
|
|
|
11.38 |
|
|
|
2.60 |
|
|
|
63,510 |
|
|
|
11.38 |
|
|
$13.20 — $15.82
|
|
|
586,504 |
|
|
|
14.66 |
|
|
|
2.90 |
|
|
|
586,504 |
|
|
|
14.66 |
|
|
$16.40 — $19.98
|
|
|
1,596,253 |
|
|
|
17.82 |
|
|
|
5.14 |
|
|
|
1,596,253 |
|
|
|
17.82 |
|
|
$20.01 — $23.29
|
|
|
2,795,542 |
|
|
|
22.07 |
|
|
|
6.40 |
|
|
|
1,866,488 |
|
|
|
21.88 |
|
|
$27.11 — $33.67
|
|
|
1,220,523 |
|
|
|
29.06 |
|
|
|
9.22 |
|
|
|
|
|
|
|
|
|
| |
|
|
|
TOTAL
|
|
|
6,359,120 |
|
|
$ |
21.35 |
|
|
|
6.18 |
|
|
|
4,209,543 |
|
|
$ |
18.87 |
|
| |
|
|
The pro forma disclosures required under SFAS 123, as
amended by SFAS 148, are included in Note 1.
|
|
| NOTE 11 |
RETIREMENT PLANS: |
The Corporation has a noncontributory defined benefit retirement
plan (the “Associated Plan”) covering substantially
all full-time employees. The benefits are based primarily on
years of service and the employee’s compensation paid. The
Corporation’s funding policy is to pay at least the minimum
amount required by the funding requirements of federal law and
regulations.
In connection with the First Federal acquisition on
October 29, 2004, the Corporation assumed the First Federal
pension plan (the “First Federal Plan”). The First
Federal Plan was frozen on December 31, 2004 and qualified
participants in this plan will become eligible to participate in
the Associated Plan as of January 1, 2005. The funded
status and net periodic benefit cost of the retirement plans is
as follows.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Associated(1) | |
|
First Federal(2) | |
|
Total | |
|
Associated | |
| |
|
| |
| |
|
2004 | |
|
2004 | |
|
2004 | |
|
2003 | |
| |
|
| |
| |
|
($ in Thousands) | |
|
Change in Fair Value of Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$ |
69,384 |
|
|
$ |
16,433 |
|
|
$ |
85,817 |
|
|
$ |
45,429 |
|
|
Actual gain on plan assets
|
|
|
6,374 |
|
|
|
823 |
|
|
|
7,197 |
|
|
|
9,795 |
|
|
Employer contributions
|
|
|
— |
|
|
|
3,000 |
|
|
|
3,000 |
|
|
|
17,542 |
|
|
Gross benefits paid
|
|
|
(6,723 |
) |
|
|
(70 |
) |
|
|
(6,793 |
) |
|
|
(3,382 |
) |
| |
|
|
| |
Fair value of plan assets at end of year
|
|
$ |
69,035 |
|
|
$ |
20,186 |
|
|
$ |
89,221 |
|
|
$ |
69,384 |
|
| |
|
|
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit obligation at beginning of year
|
|
$ |
62,825 |
|
|
$ |
27,802 |
|
|
$ |
90,627 |
|
|
$ |
54,464 |
|
|
Service cost
|
|
|
6,694 |
|
|
|
195 |
|
|
|
6,889 |
|
|
|
5,857 |
|
|
Interest cost
|
|
|
3,854 |
|
|
|
259 |
|
|
|
4,113 |
|
|
|
3,603 |
|
|
Actuarial loss
|
|
|
3,086 |
|
|
|
— |
|
|
|
3,086 |
|
|
|
2,283 |
|
|
Gross benefits paid
|
|
|
(6,723 |
) |
|
|
(70 |
) |
|
|
(6,793 |
) |
|
|
(3,382 |
) |
| |
|
|
| |
Net benefit obligation at end of year
|
|
$ |
69,736 |
|
|
$ |
28,186 |
|
|
$ |
97,922 |
|
|
$ |
62,825 |
|
| |
|
|
|
Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess (deficit) of plan assets over (under) benefit
obligation
|
|
$ |
(701 |
) |
|
$ |
(8,001 |
) |
|
$ |
(8,702 |
) |
|
$ |
6,559 |
|
|
Unrecognized net actuarial loss (gain)
|
|
|
18,389 |
|
|
|
(599 |
) |
|
|
17,790 |
|
|
|
15,762 |
|
|
Unrecognized prior service cost
|
|
|
515 |
|
|
|
— |
|
|
|
515 |
|
|
|
589 |
|
|
Unrecognized net transition asset
|
|
|
(412 |
) |
|
|
— |
|
|
|
(412 |
) |
|
|
(736 |
) |
| |
|
|
| |
Net prepaid asset at end of year in the balance sheet
|
|
$ |
17,791 |
|
|
$ |
(8,600 |
) |
|
$ |
9,191 |
|
|
$ |
22,174 |
|
| |
|
|
76
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Associated(1) | |
|
First Federal(2) | |
|
Total | |
|
Associated | |
| |
|
| |
| |
|
2004 | |
|
2004 | |
|
2004 | |
|
2003 | |
| |
|
| |
| |
|
($ in Thousands) | |
|
Amounts Recognized in the Statement of Financial Position
Consists of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid benefit cost
|
|
$ |
17,791 |
|
|
$ |
— |
|
|
$ |
17,791 |
|
|
$ |
22,174 |
|
|
Accrued benefit cost
|
|
|
— |
|
|
|
(8,600 |
) |
|
|
(8,600 |
) |
|
|
— |
|
| |
|
|
| |
Net amount recognized
|
|
$ |
17,791 |
|
|
$ |
(8,600 |
) |
|
$ |
9,191 |
|
|
$ |
22,174 |
|
| |
|
|
|
|
| (1) |
Associated does not include the First Federal Plan. The First
Federal Plan is shown separately. |
| (2) |
The beginning of the year balance for the First Federal Plan
represents the balance at acquisition. |
The accumulated benefit obligation for the Associated Plan was
$68.0 million and $61.2 million at December 31,
2004 and 2003, respectively. The accumulated benefit obligation
for the First Federal Plan was $28.2 million at
December 31, 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Associated | |
|
First Federal | |
|
Total | |
|
Associated | |
| |
|
| |
| |
|
2004 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
| |
|
($ in Thousands) | |
|
Components of Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
6,694 |
|
|
$ |
195 |
|
|
$ |
6,889 |
|
|
$ |
5,857 |
|
|
$ |
4,582 |
|
|
Interest cost
|
|
|
3,854 |
|
|
|
260 |
|
|
|
4,114 |
|
|
|
3,603 |
|
|
|
3,257 |
|
|
Expected return on plan assets
|
|
|
(6,286 |
) |
|
|
(224 |
) |
|
|
(6,510 |
) |
|
|
(5,301 |
) |
|
|
(3,963 |
) |
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Transition asset
|
|
|
(324 |
) |
|
|
— |
|
|
|
(324 |
) |
|
|
(324 |
) |
|
|
(323 |
) |
| |
Prior service cost
|
|
|
74 |
|
|
|
— |
|
|
|
74 |
|
|
|
74 |
|
|
|
74 |
|
| |
Actuarial loss
|
|
|
370 |
|
|
|
— |
|
|
|
370 |
|
|
|
73 |
|
|
|
— |
|
| |
|
|
|
Total net periodic benefit cost
|
|
$ |
4,382 |
|
|
$ |
231 |
|
|
$ |
4,613 |
|
|
$ |
3,982 |
|
|
$ |
3,627 |
|
| |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Associated | |
|
First Federal | |
|
Total | |
|
Associated | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
2004 | |
|
2004 | |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Weighted average assumptions used to determine benefit
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.75 |
% |
|
|
5.75 |
% |
|
|
|
|
|
|
6.25 |
% |
|
|
|
|
|
Rate of increase in compensation levels
|
|
|
5.00 |
|
|
|
NA |
|
|
|
|
|
|
|
5.00 |
|
|
|
|
|
|
Weighted average assumptions used to determine net periodic
benefit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.25 |
% |
|
|
5.75 |
% |
|
|
|
|
|
|
6.75 |
% |
|
|
7.25 |
% |
|
Rate of increase in compensation levels
|
|
|
5.00 |
|
|
|
NA |
|
|
|
|
|
|
|
5.00 |
|
|
|
5.00 |
|
|
Expected long-term rate of return on plan assets
|
|
|
8.75 |
|
|
|
8.50 |
|
|
|
|
|
|
|
8.75 |
|
|
|
9.00 |
|
| |
|
|
The overall expected long-term rate of return on the Associated
Plan assets was 8.75% as of both December 31, 2004 and
2003, while the overall expected long-term rate of return on the
First Federal Plan assets was 8.50%. The expected long-term rate
of return was estimated using market benchmarks for equities and
bonds applied to the plan’s anticipated asset allocations.
The expected return on equities was computed utilizing a
valuation framework, which projected future returns based on
current equity valuations rather than historical returns.
In anticipation of the First Federal Plan being frozen, as
discussed above, all of First Federal Plan assets were
temporarily moved into money market accounts at year-end 2004.
The Corporation subsequently reinvested the First Federal Plan
assets based on the Corporation’s investment strategies for
plan assets. The asset classes used to manage plan assets will
include common stocks, fixed income or debt securities, and cash
equivalents. A diversified portfolio using these assets will
provide liquidity, current income, and growth of income and
77
growth of principal. The anticipated asset allocation ranges are
equity securities of 55-65%, debt securities of 35-45%, and
other cash equivalents of 0-5%.
The asset allocation for the Associated Plans as of the
measurement date in 2004 and 2003, respectively, and First
Federal Plan as of the measurement date in 2004 by asset
category were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Associated | |
|
First Federal | |
|
Associated | |
| |
|
| |
|
| |
|
| |
| Asset Category |
|
2004 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
Equity securities
|
|
|
65 |
% |
|
|
— |
|
|
|
66 |
% |
|
Debt securities
|
|
|
33 |
|
|
|
— |
|
|
|
32 |
|
|
Money market
|
|
|
— |
|
|
|
100 |
% |
|
|
— |
|
|
Other
|
|
|
2 |
|
|
|
— |
|
|
|
2 |
|
| |
|
|
| |
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
| |
|
|
Subsequent to year-end 2004, the Corporation contributed
$8 million to its pension plans. The Corporation regularly
reviews the funding of its pension plans and generally
contributes to its plan assets based on the minimum amounts
required by funding requirements with consideration given to the
maximum funding amounts allowed.
The Corporation also has a Profit Sharing/ Retirement Savings
Plan (the “plan”). First Federal’s retirement
plan was merged into the Corporation’s plan on
December 31, 2004. The Corporation’s contribution is
determined annually by the Administrative Committee of the Board
of Directors, based in part on performance-based formulas
provided in the plan. Total expense related to contributions to
the plan was $13.8 million, $12.3 million, and
$11.8 million in 2004, 2003, and 2002, respectively.
The projected benefit payments for the Associated Plan and the
First Federal Plan combined at December 31, 2004, were as
follows. The projected benefit payments were calculated using
the same assumptions as those used to calculate the benefit
obligations listed above.
| |
|
|
|
|
| |
|
($ in Thousands) | |
|
Estimated future benefit payments:
|
|
|
|
|
|
2005
|
|
$ |
6,705 |
|
|
2006
|
|
|
6,950 |
|
|
2007
|
|
|
7,082 |
|
|
2008
|
|
|
7,742 |
|
|
2009
|
|
|
8,321 |
|
|
Years 2010 - 2014
|
|
|
50,389 |
|
The current and deferred amounts of income tax expense (benefit)
are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
| |
|
($ in Thousands) | |
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
$ |
127,799 |
|
|
$ |
103,321 |
|
|
$ |
99,730 |
|
| |
State
|
|
|
7,352 |
|
|
|
2,940 |
|
|
|
755 |
|
| |
|
|
|
Total current
|
|
|
135,151 |
|
|
|
106,261 |
|
|
|
100,485 |
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
|
(23,206 |
) |
|
|
(12,793 |
) |
|
|
(16,214 |
) |
| |
State
|
|
|
106 |
|
|
|
(409 |
) |
|
|
1,336 |
|
| |
|
|
|
Total deferred
|
|
|
(23,100 |
) |
|
|
(13,202 |
) |
|
|
(14,878 |
) |
| |
|
|
|
Total income tax expense
|
|
$ |
112,051 |
|
|
$ |
93,059 |
|
|
$ |
85,607 |
|
| |
|
|
78
Temporary differences between the amounts reported in the
financial statements and the tax bases of assets and liabilities
resulted in deferred taxes. Deferred tax assets and liabilities
at December 31 are as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
| |
|
($ in Thousands) | |
|
Gross deferred tax assets:
|
|
|
|
|
|
|
|
|
| |
Allowance for loan losses
|
|
$ |
77,643 |
|
|
$ |
72,319 |
|
| |
Accrued liabilities
|
|
|
9,427 |
|
|
|
5,970 |
|
| |
Deferred compensation
|
|
|
18,105 |
|
|
|
9,190 |
|
| |
Securities valuation adjustment
|
|
|
12,805 |
|
|
|
10,445 |
|
| |
Benefit of tax loss carryforwards
|
|
|
20,589 |
|
|
|
16,716 |
|
| |
Other
|
|
|
5,689 |
|
|
|
5,680 |
|
| |
|
|
|
Total gross deferred tax assets
|
|
|
144,258 |
|
|
|
120,320 |
|
|
Valuation adjustment for deferred tax assets
|
|
|
(8,414 |
) |
|
|
(7,335 |
) |
| |
|
|
| |
|
|
135,844 |
|
|
|
112,985 |
|
|
Gross deferred tax liabilities:
|
|
|
|
|
|
|
|
|
| |
Real estate investment trust income
|
|
|
13,817 |
|
|
|
27,635 |
|
| |
FHLB stock dividends
|
|
|
12,539 |
|
|
|
3,700 |
|
| |
Prepaids
|
|
|
4,368 |
|
|
|
6,608 |
|
| |
Purchase acquisition adjustments
|
|
|
9,021 |
|
|
|
4,795 |
|
| |
Mortgage banking activity
|
|
|
18,835 |
|
|
|
4,500 |
|
| |
Deferred loan fee income
|
|
|
8,554 |
|
|
|
7,364 |
|
| |
State income taxes
|
|
|
10,506 |
|
|
|
9,647 |
|
| |
Leases
|
|
|
5,796 |
|
|
|
2,670 |
|
| |
Other
|
|
|
5,810 |
|
|
|
3,321 |
|
| |
|
|
|
Total gross deferred tax liabilities
|
|
|
89,246 |
|
|
|
70,240 |
|
| |
|
|
|
Net deferred tax assets
|
|
|
46,598 |
|
|
|
42,745 |
|
|
Tax effect of unrealized gain related to available for sale
securities
|
|
|
(28,267 |
) |
|
|
(35,843 |
) |
|
Tax effect of unrealized loss related to derivative instruments
|
|
|
5,874 |
|
|
|
7,991 |
|
| |
|
|
| |
|
|
(22,393 |
) |
|
|
(27,852 |
) |
| |
|
|
|
Net deferred tax assets including tax effected items
|
|
$ |
24,205 |
|
|
$ |
14,893 |
|
| |
|
|
Components of the 2003 net deferred tax assets have been
adjusted to reflect the filing of corporate income tax returns.
For financial reporting purposes, a valuation allowance has been
recognized to offset deferred tax assets related to state net
operating loss carryforwards of certain subsidiaries and other
temporary differences due to the uncertainty that the assets
will be realized. If it is subsequently determined that all or a
portion of these deferred tax assets will be realized, the tax
benefit for these items will be used to reduce deferred tax
expense for that period.
At December 31, 2004, the Corporation had state net
operating losses of $257 million and federal net operating
losses of $0.8 million that will expire in the years 2005
through 2018.
79
The effective income tax rate differs from the statutory federal
tax rate. The major reasons for this difference are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Federal income tax rate at statutory rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
Increases (decreases) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Tax-exempt interest and dividends
|
|
|
(3.8 |
) |
|
|
(4.2 |
) |
|
|
(4.6 |
) |
| |
State income taxes (net of federal income taxes)
|
|
|
0.7 |
|
|
|
0.5 |
|
|
|
0.5 |
|
| |
Other
|
|
|
(1.6 |
) |
|
|
(2.4 |
) |
|
|
(2.0 |
) |
| |
|
|
|
Effective income tax rate
|
|
|
30.3 |
% |
|
|
28.9 |
% |
|
|
28.9 |
% |
| |
|
|
Savings banks acquired by the Corporation in prior years
qualified under provisions of the Internal Revenue Code that
permitted them to deduct from taxable income an allowance for
bad debts that differed from the provision for such losses
charged to income for financial reporting purposes. Accordingly,
no provision for income taxes has been made for
$100.3 million of retained income at December 31,
2004. If income taxes had been provided, the deferred tax
liability would have been approximately $40.3 million.
Management does not expect this amount to become taxable in the
future, therefore no provision for income taxes has been made.
|
|
| NOTE 13 |
COMMITMENTS, OFF-BALANCE SHEET ARRANGEMENTS, AND CONTINGENT
LIABILITIES: |
Commitments and Off-Balance Sheet Arrangements
The Corporation utilizes a variety of financial instruments in
the normal course of business to meet the financial needs of its
customers and to manage its own exposure to fluctuations in
interest rates. These financial instruments include
lending-related commitments (see below) and derivative
instruments (see Note 14).
Lending-related Commitments
As a financial services provider, the Corporation routinely
enters into commitments to extend credit. Such commitments are
subject to the same credit policies and approval process
accorded to loans made by the Corporation. A significant portion
of commitments to extend credit may expire without being drawn
upon.
Lending-related commitments include commitments to extend
credit, commitments to originate residential mortgage loans held
for sale, commercial letters of credit, and standby letters of
credit. Commitments to extend credit are agreements to lend to
customers at predetermined interest rates as long as there is no
violation of any condition established in the contracts.
Commercial and standby letters of credit are conditional
commitments issued to guarantee the performance of a customer to
a third party. Commercial letters of credit are issued
specifically to facilitate commerce and typically result in the
commitment being drawn on when the underlying transaction is
consummated between the customer and the third party, while
standby letters of credit generally are contingent upon the
failure of the customer to perform according to the terms of the
underlying contract with the third party.
Commitments to originate residential mortgage loans held for
sale and forward commitments to sell residential mortgage loans
are defined as derivatives and are therefore required to be
recorded on the consolidated balance sheet at fair value. The
Corporation’s derivative and hedging activity is further
summarized in Note 14. The following is a summary of
lending-related commitments at December 31:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
Commitments to extend credit, excluding commitments to originate
mortgage loans(1)
|
|
$ |
4,310,944 |
|
|
$ |
3,732,150 |
|
|
Commercial letters of credit(1)
|
|
|
22,824 |
|
|
|
19,665 |
|
|
Standby letters of credit(2)
|
|
|
409,156 |
|
|
|
338,954 |
|
80
|
|
| (1) |
These off-balance sheet financial instruments are exercisable at
the market rate prevailing at the date the underlying
transaction will be completed and thus are deemed to have no
current fair value, or the fair value is based on fees currently
charged to enter into similar agreements and is not material at
December 31, 2004 or 2003. |
| |
| (2) |
As required by FASB Interpretation No. 45, an
interpretation of FASB Statements No. 5, 57, and 107,
“Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others,” the Corporation has established a liability of
$4.6 million and $2.3 million at December 31,
2004 and 2003, respectively, as an estimate of the fair value of
these financial instruments. |
The Corporation’s exposure to credit loss in the event of
nonperformance by the other party to these financial instruments
is represented by the contractual amount of those instruments.
The commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The
Corporation uses the same credit policies in making commitments
as it does for extending loans to customers. The Corporation
evaluates each customer’s creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Corporation upon extension of credit, is based
on management’s credit evaluation of the customer. Since
many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Contingent Liabilities
In the ordinary course of business, the Corporation may be named
as defendant in or be a party to various pending and threatened
legal proceedings. Since it is not possible to formulate a
meaningful opinion as to the range of possible outcomes and
plaintiffs’ ultimate damage claims, management cannot
estimate the specific possible loss or range of loss that may
result from these proceedings. Management believes, based upon
advice of legal counsel and current knowledge, that liabilities
arising out of any such current proceedings will not have a
material adverse effect on the consolidated financial position,
results of operations or liquidity of the Corporation.
Residential mortgage loans sold to others are sold on a
nonrecourse basis, though First Federal retained the credit risk
on the underlying loans it sold to the Federal Home
Loan Bank (“FHLB”), prior to its acquisition by
the Corporation, in exchange for a monthly credit enhancement
fee. At December 31, 2004, there were $2.4 billion of
such loans with credit risk recourse, upon which there have been
negligible historical losses.
A contingent liability is required to be established if it is
probable that the Corporation will incur a loss on the
performance of a letter of credit. During the second quarter of
2003, given the deterioration of the financial condition of a
borrower, the Corporation established a $2.5 million
liability for commercial letters of credit, of which
$1.6 million was drawn on and $0.9 million remained at
December 31, 2004.
|
|
| NOTE 14 |
DERIVATIVE AND HEDGING ACTIVITIES: |
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 consolidated
balance sheet from changes in interest rates. The contract or
notional amount of a derivative is used to determine, along with
the other terms of the derivative, the amounts to be exchanged
between the counterparties. Because the contract or notional
amount does not represent amounts exchanged by the parties, it
is not a measure of loss exposure related to the use of
derivatives nor of exposure to liquidity risk. The Corporation
is exposed to credit risk in the event of nonperformance by
counterparties to financial instruments. As the Corporation
generally enters into transactions only with high quality
counterparties, no losses with counterparty nonperformance on
derivative financial instruments have occurred. Further, the
Corporation obtains collateral and uses master netting
arrangements when available. To mitigate counterparty risk,
interest rate swap agreements generally contain language
outlining collateral pledging requirements for each
counterparty. Collateral must be posted when the market value
exceeds a certain threshold. The threshold limits are determined
from the credit ratings of each counterparty. Upgrades or
downgrades to the credit ratings of either counterparty would
lower or raise the threshold limits. Market risk is the adverse
effect on the value of a financial instrument that results from
a change in interest rates, currency exchange rates, or
commodity prices. The market risk associated with interest rate
contracts is managed by establishing and monitoring parameters
that limit the types and degree of market risk that may be
undertaken.
81
Interest rate swap contracts are entered into primarily as an
asset/liability management strategy to modify interest rate
risk. Interest rate swap contracts are exchanges of interest
payments, such as fixed rate payments for floating rate
payments, based on a notional principal amount. Payments related
to the Corporation’s swap contracts are made monthly,
quarterly, or semi-annually by one of the parties depending on
the specific terms of the related contract. The primary risk
associated with all swaps is the exposure to movements in
interest rates and the ability of the counterparties to meet the
terms of the contract. At December 31, 2004 and 2003, the
Corporation had $896 million and $936 million,
respectively, of interest rate swaps outstanding. Included in
this amount were $321 million and $361 million,
respectively, at December 31, 2004 and 2003, in receive
variable/pay fixed interest rate swaps used to convert specific
fixed rate loans into floating rate assets. The remaining swap
contracts used for interest rate risk management of
$575 million both at December 31, 2004 and 2003, were
used to hedge interest rate risk of various other specific
liabilities. At December 31, 2004, the Corporation pledged
$12.1 million of collateral for swap agreements compared to
$24.8 million at December 31, 2003. Included in the
table below for December 31, 2004 and 2003, were customer
swaps and caps for which the Corporation has mirror swaps and
caps. The fair value of these customer swaps and caps is
recorded in earnings and the net impact for 2004 and 2003 was
immaterial.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted Average | |
| |
|
Notional | |
|
Fair Value | |
|
| |
| |
|
Amount | |
|
Gain / (Loss) | |
|
Receive Rate | |
|
Pay Rate | |
|
Maturity | |
| |
|
| |
| |
|
($ in Thousands) | |
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Interest Rate Risk Management Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps—receive variable / pay fixed(1),(3)
|
|
$ |
200,000 |
|
|
$ |
(14,732 |
) |
|
|
2.06 |
% |
|
|
5.03 |
% |
|
|
76 months |
|
|
Swaps—receive fixed / pay variable(2),(4)
|
|
|
375,000 |
|
|
|
10,262 |
|
|
|
7.21 |
% |
|
|
3.80 |
% |
|
|
199 months |
|
|
Caps—written(1),(3)
|
|
|
200,000 |
|
|
|
97 |
|
|
|
Strike 4.72 |
% |
|
|
— |
|
|
|
20 months |
|
|
Swaps—receive variable / pay fixed(2),(5)
|
|
|
320,997 |
|
|
|
(3,731 |
) |
|
|
4.42 |
% |
|
|
6.34 |
% |
|
|
50 months |
|
|
Customer Swaps and Caps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer swaps
|
|
$ |
94,457 |
|
|
$ |
— |
|
|
|
2.80 |
% |
|
|
2.80 |
% |
|
|
89 months |
|
|
Customer caps
|
|
|
23,550 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
78 months |
|
| |
|
|
|
December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Interest Rate Risk Management Hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps—receive variable / pay fixed(1),(3)
|
|
$ |
200,000 |
|
|
$ |
(21,132 |
) |
|
|
1.15 |
% |
|
|
5.03 |
% |
|
|
88 months |
|
|
Swaps—receive fixed / pay variable(2),(4)
|
|
|
375,000 |
|
|
|
12,432 |
|
|
|
7.21 |
% |
|
|
2.79 |
% |
|
|
211 months |
|
|
Caps—written(1),(3)
|
|
|
200,000 |
|
|
|
1,222 |
|
|
|
Strike 4.72 |
% |
|
|
— |
|
|
|
32 months |
|
|
Swaps—receive variable / pay fixed(2),(5)
|
|
|
361,189 |
|
|
|
(9,876 |
) |
|
|
3.31 |
% |
|
|
6.27 |
% |
|
|
50 months |
|
|
Customer Swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer swaps
|
|
$ |
41,400 |
|
|
$ |
— |
|
|
|
1.96 |
% |
|
|
1.96 |
% |
|
|
69 months |
|
| |
|
|
|
|
| (1) |
Cash flow hedges |
| |
| (2) |
Fair value hedges |
| |
| (3) |
Hedges variable rate long-term debt |
| |
| (4) |
Hedges fixed rate long-term debt |
| |
| (5) |
Hedges specific longer-term fixed rate commercial loans |
Interest rate floors and caps are interest rate protection
instruments that involve the payment from the seller to the
buyer of an interest differential. This differential represents
the difference between a short-term rate (e.g., six-month LIBOR)
and an agreed upon rate (the strike rate) applied to a notional
principal amount. By buying a cap, the Corporation will be paid
the differential by a counterparty should the short-term rate
rise above the strike level of the agreement. The primary risk
associated with purchased floors and caps is the ability of the
counterparties to meet the terms of the agreement. As of
December 31, 2004 and 2003, the Corporation had purchased
caps for asset/liability management of $200 million.
82
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.
At December 31, 2004, the estimated net fair value of the
interest rate swaps and the cap designated as cash flow hedges
was a $14.6 million unrealized loss, or $8.8 million,
net of tax benefit of $5.8 million, carried as a component
of accumulated other comprehensive income. At December 31,
2003, the estimated fair value of the interest rate swaps and
the cap designated as cash flow hedges was a $19.9 million
unrealized loss, or $11.9 million, net of tax benefit of
$8.0 million, carried as a component of accumulated other
comprehensive income. These instruments are used to hedge the
exposure to the variability in interest payments of variable
rate liabilities. The ineffective portion of the hedges recorded
through the statements of income was immaterial. For the years
ended December 31, 2004 and 2003, the Corporation
recognized interest expense of $7.3 million and
$7.7 million, respectively, for interest rate swaps
accounted for as cash flow hedges. As of December 31, 2004,
approximately $5.9 million of the deferred net losses on
derivative instruments that are recorded in accumulated other
comprehensive income are expected to be reclassified to interest
expense within the next twelve months.
At December 31, 2004 and 2003, the estimated net fair value
of the interest rate swaps designated as fair value hedges was
an unrealized gain of $6.5 million and $2.6 million,
respectively. These swaps hedge against changes in the fair
value of certain loans and long-term debt.
For the mortgage derivatives, which are not accounted for as
hedges, changes in the fair value are recorded to mortgage
banking income. The fair value of the mortgage derivatives at
December 31, 2004 was a net loss of $0.7 million,
compared to a net loss of $0.2 million at December 31,
2003, with the change of $0.5 million reducing mortgage
banking income for 2004. The $0.7 million net fair value
loss for mortgage derivatives at December 31, 2004 was
composed of the net loss on commitments to sell approximately
$148.6 million of loans to various investors and the net
loss on commitments to fund approximately $125.9 million of
loans to individual borrowers. The $0.2 million net fair
value loss for mortgage derivatives at December 31, 2003
was composed of the net loss on commitments to sell
approximately $152.0 million of loans to various investors
and the net gain on commitments to fund approximately
$114.1 million of loans to individual borrowers.
|
|
| NOTE 15 |
PARENT COMPANY ONLY FINANCIAL INFORMATION: |
Presented below are condensed financial statements for the
Parent Company:
BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
| |
|
($ in Thousands) | |
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$ |
265 |
|
|
$ |
924 |
|
|
Notes receivable from subsidiaries
|
|
|
259,827 |
|
|
|
374,878 |
|
|
Investment in subsidiaries
|
|
|
2,085,144 |
|
|
|
1,316,773 |
|
|
Other assets
|
|
|
110,638 |
|
|
|
103,837 |
|
| |
|
|
|
Total assets
|
|
$ |
2,455,874 |
|
|
$ |
1,796,412 |
|
| |
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$ |
389,685 |
|
|
$ |
391,705 |
|
|
Accrued expenses and other liabilities
|
|
|
48,770 |
|
|
|
56,280 |
|
| |
|
|
|
Total liabilities
|
|
|
438,455 |
|
|
|
447,985 |
|
|
Stockholders’ equity
|
|
|
2,017,419 |
|
|
|
1,348,427 |
|
| |
|
|
|
Total liabilities and stockholders’ equity
|
|
$ |
2,455,874 |
|
|
$ |
1,796,412 |
|
| |
|
|
83
STATEMENTS OF INCOME
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
| |
|
($ in Thousands) | |
|
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiaries
|
|
$ |
124,500 |
|
|
$ |
179,500 |
|
|
$ |
172,000 |
|
|
Management and service fees from subsidiaries
|
|
|
46,913 |
|
|
|
43,146 |
|
|
|
35,346 |
|
|
Interest income on notes receivable
|
|
|
11,979 |
|
|
|
9,172 |
|
|
|
5,641 |
|
|
Other income
|
|
|
4,562 |
|
|
|
2,464 |
|
|
|
3,510 |
|
| |
|
|
|
Total income
|
|
|
187,954 |
|
|
|
234,282 |
|
|
|
216,497 |
|
| |
|
|
| |
|
EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense on borrowed funds
|
|
|
12,718 |
|
|
|
11,474 |
|
|
|
12,627 |
|
|
Provision for loan losses
|
|
|
— |
|
|
|
— |
|
|
|
500 |
|
|
Personnel expense
|
|
|
28,936 |
|
|
|
29,219 |
|
|
|
22,918 |
|
|
Other expense
|
|
|
20,755 |
|
|
|
20,241 |
|
|
|
15,191 |
|
| |
|
|
|
Total expense
|
|
|
62,409 |
|
|
|
60,934 |
|
|
|
51,236 |
|
| |
|
|
|
Income before income tax benefit and equity in undistributed
income
|
|
|
125,545 |
|
|
|
173,348 |
|
|
|
165,261 |
|
|
Income tax benefit
|
|
|
(1,510 |
) |
|
|
(1,093 |
) |
|
|
(1,759 |
) |
| |
|
|
|
Income before equity in undistributed net income of subsidiaries
|
|
|
127,055 |
|
|
|
174,441 |
|
|
|
167,020 |
|
|
Equity in undistributed net income of subsidiaries
|
|
|
131,231 |
|
|
|
54,216 |
|
|
|
43,699 |
|
| |
|
|
|
Net income
|
|
$ |
258,286 |
|
|
$ |
228,657 |
|
|
$ |
210,719 |
|
| |
|
|
84
STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
| |
|
($ in Thousands) | |
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
258,286 |
|
|
$ |
228,657 |
|
|
$ |
210,719 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Increase in equity in undistributed net income of subsidiaries
|
|
|
(131,231 |
) |
|
|
(54,216 |
) |
|
|
(43,699 |
) |
| |
Depreciation and other amortization
|
|
|
495 |
|
|
|
378 |
|
|
|
335 |
|
| |
(Gain) loss on sales of assets, net
|
|
|
(8 |
) |
|
|
2 |
|
|
|
2 |
|
| |
(Increase) decrease in interest receivable and other assets
|
|
|
1,935 |
|
|
|
(269 |
) |
|
|
(41,651 |
) |
| |
Increase in interest payable and other liabilities
|
|
|
(27,200 |
) |
|
|
(24,392 |
) |
|
|
(14,351 |
) |
|
Capital received from (contributed to) subsidiaries
|
|
|
(10,000 |
) |
|
|
95,470 |
|
|
|
(12,997 |
) |
| |
|
|
|
Net cash provided by operating activities
|
|
|
92,277 |
|
|
|
245,630 |
|
|
|
98,358 |
|
| |
|
|
| |
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of available for sale securities
|
|
|
1,398 |
|
|
|
— |
|
|
|
— |
|
|
Purchase of available for sale securities
|
|
|
— |
|
|
|
— |
|
|
|
(319 |
) |
|
Net cash paid in acquisition of subsidiary
|
|
|
(72,723 |
) |
|
|
— |
|
|
|
(78,055 |
) |
|
Net (increase) decrease in notes receivable
|
|
|
114,847 |
|
|
|
(95,630 |
) |
|
|
(79,551 |
) |
|
Purchase of premises and equipment, net of disposals
|
|
|
(320 |
) |
|
|
(975 |
) |
|
|
(614 |
) |
| |
|
|
|
Net cash provided by (used in) investing activities
|
|
|
43,202 |
|
|
|
(96,605 |
) |
|
|
(158,539 |
) |
| |
|
|
| |
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in short-term borrowings
|
|
|
(13,775 |
) |
|
|
— |
|
|
|
— |
|
|
Net increase in long-term debt
|
|
|
— |
|
|
|
— |
|
|
|
221,998 |
|
|
Cash dividends paid
|
|
|
(112,565 |
) |
|
|
(98,169 |
) |
|
|
(90,166 |
) |
|
Proceeds from exercise of stock options
|
|
|
23,857 |
|
|
|
24,831 |
|
|
|
16,564 |
|
|
Purchase and retirement of treasury stock
|
|
|
— |
|
|
|
(74,533 |
) |
|
|
(44,046 |
) |
|
Purchase of treasury stock
|
|
|
(33,655 |
) |
|
|
(868 |
) |
|
|
(44,145 |
) |
| |
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(136,138 |
) |
|
|
(148,739 |
) |
|
|
60,205 |
|
| |
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(659 |
) |
|
|
286 |
|
|
|
24 |
|
|
Cash and cash equivalents at beginning of year
|
|
|
924 |
|
|
|
638 |
|
|
|
614 |
|
| |
|
|
|
Cash and cash equivalents at end of year
|
|
$ |
265 |
|
|
$ |
924 |
|
|
$ |
638 |
|
| |
|
|
|
|
| NOTE 16 |
FAIR VALUE OF FINANCIAL INSTRUMENTS: |
SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments,” requires that the Corporation
disclose estimated fair values for its financial instruments.
Fair value estimates, methods, and assumptions are set forth
below for the Corporation’s financial instruments.
85
The estimated fair values of the Corporation’s financial
instruments on the balance sheet at December 31 are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
| |
|
Carrying | |
|
|
|
Carrying | |
|
|
| |
|
Amount | |
|
Fair Value | |
|
Amount | |
|
Fair Value | |
| |
|
| |
| |
|
($ in Thousands) | |
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash and due from banks
|
|
$ |
389,311 |
|
|
$ |
389,311 |
|
|
$ |
389,140 |
|
|
$ |
389,140 |
|
| |
Interest-bearing deposits in other financial institutions
|
|
|
13,321 |
|
|
|
13,321 |
|
|
|
7,434 |
|
|
|
7,434 |
|
| |
Federal funds sold and securities purchased under purchase under
agreements to resell
|
|
|
55,440 |
|
|
|
55,440 |
|
|
|
3,290 |
|
|
|
3,290 |
|
| |
Accrued interest receivable
|
|
|
88,953 |
|
|
|
88,953 |
|
|
|
67,264 |
|
|
|
67,264 |
|
| |
Investment securities available for sale
|
|
|
4,815,344 |
|
|
|
4,815,344 |
|
|
|
3,773,784 |
|
|
|
3,773,784 |
|
| |
Loans held for sale
|
|
|
64,964 |
|
|
|
64,964 |
|
|
|
104,336 |
|
|
|
104,504 |
|
| |
Loans
|
|
|
13,881,887 |
|
|
|
13,980,035 |
|
|
|
10,291,810 |
|
|
|
10,503,111 |
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Deposits
|
|
|
12,786,239 |
|
|
|
12,814,524 |
|
|
|
9,792,843 |
|
|
|
9,855,813 |
|
| |
Accrued interest payable
|
|
|
28,300 |
|
|
|
28,300 |
|
|
|
22,006 |
|
|
|
22,006 |
|
| |
Short-term borrowings
|
|
|
2,926,716 |
|
|
|
2,926,716 |
|
|
|
1,928,876 |
|
|
|
1,928,876 |
|
| |
Long-term funding
|
|
|
2,604,540 |
|
|
|
2,616,153 |
|
|
|
2,034,160 |
|
|
|
2,065,094 |
|
| |
Interest rate swap and cap agreements(1)(3)
|
|
|
(8,104 |
) |
|
|
(8,104 |
) |
|
|
17,354 |
|
|
|
17,354 |
|
| |
Standby letters of credit(2)(3)
|
|
|
(4,558 |
) |
|
|
(4,558 |
) |
|
|
2,275 |
|
|
|
2,275 |
|
| |
Commitments to originate mortgage loans held for sale(3)
|
|
|
(450 |
) |
|
|
(450 |
) |
|
|
680 |
|
|
|
680 |
|
| |
Forward commitments to sell residential mortgage loans(3)
|
|
|
(274 |
) |
|
|
(274 |
) |
|
|
(905 |
) |
|
|
(905 |
) |
| |
|
|
|
|
| (1) |
At both December 31, 2004 and 2003, the notional amount of
non-trading interest rate swap and cap agreements was
$1.1 billion. See Notes 13 and 14 for information on
the fair value of lending-related commitments and derivative
financial instruments. |
| |
| (2) |
At December 31, 2004 and 2003, the commitment on standby
letters of credit was $0.4 billion and $0.3 billion,
respectively. See Note 13 for additional information on the
standby letters of credit. |
| |
| (3) |
If carrying amount or fair value is bracketed, represents a loss
position of the financial instrument. |
Cash and due from banks, interest-bearing deposits in other
financial institutions, federal funds sold and securities
purchased under agreements to resell, and accrued interest
receivable— For these short-term instruments, the
carrying amount is a reasonable estimate of fair value.
Investment securities available for sale— The fair
value of investment securities available for sale, except
certain state and municipal securities, is estimated based on
bid prices published in financial newspapers or bid quotations
received from securities dealers. The fair value of certain
state and municipal securities is not readily available through
market sources other than dealer quotations, so fair value
estimates are based on quoted market prices of similar
instruments, adjusted for differences between the quoted
instruments and the instruments being valued.
Loans held for sale— Fair value is estimated using
the prices of the Corporation’s existing commitments to
sell such loans and/or the quoted market prices for commitments
to sell similar loans.
Loans— Fair values are estimated for portfolios of
loans with similar financial characteristics. Loans are
segregated by type such as commercial, commercial real estate,
lease financing, residential mortgage, credit card, and other
consumer. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar
credit ratings and for similar maturities. Future cash flows are
also adjusted for estimated reductions or delays due to
delinquencies, nonaccruals, or potential charge offs.
86
Deposits— The fair value of deposits with no stated
maturity such as noninterest-bearing demand deposits, savings,
interest-bearing demand deposits, and money market accounts, is
equal to the amount payable on demand as of December 31.
The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of
similar remaining maturities.
Accrued interest payable and short-term borrowings—
For these short-term instruments, the carrying amount is a
reasonable estimate of fair value.
Long-term funding— Rates currently available to the
Corporation for debt with similar terms and remaining maturities
are used to estimate fair value of existing borrowings.
Interest rate swap and cap agreements— The fair
value of interest rate swap and cap agreements is obtained from
dealer quotes. These values represent the estimated amount the
Corporation would receive or pay to terminate the agreements,
taking into account current interest rates and, when
appropriate, the current creditworthiness of the counterparties.
Standby letters of credit— The fair value of standby
letters of credit represent deferred fees arising from the
related off-balance sheet financial instruments. These deferred
fees approximate the fair value of these instruments and are
based on several factors, including the remaining terms of the
agreement and the credit standing of the customer.
Commitments to originate mortgage loans held for
sale— The fair value of commitments to originate
mortgage loans held for sale is estimated by comparing the
Corporation’s cost to acquire mortgages and the current
price for similar mortgage loans, taking into account the terms
of the commitments and the creditworthiness of the
counterparties.
Forward commitments to sell residential mortgage
loans— The fair value of forward commitments to sell
residential mortgage loans is the estimated amount that the
Corporation would receive or pay to terminate the forward
delivery contract at the reporting date based on market prices
for similar financial instruments.
Limitations— Fair value estimates are made at a
specific point in time, based on relevant market information and
information about the financial instrument. These estimates do
not reflect any premium or discount that could result from
offering for sale at one time the Corporation’s entire
holdings of a particular financial instrument. Because no market
exists for a significant portion of the Corporation’s
financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
|
|
| NOTE 17 |
REGULATORY MATTERS: |
Restrictions on Cash and Due From Banks
The Corporation’s bank subsidiaries are required to
maintain certain vault cash and reserve balances with the
Federal Reserve Bank to meet specific reserve requirements.
These requirements approximated $31.9 million at
December 31, 2004.
Regulatory Capital Requirements
The Corporation, as well as the subsidiary banks and thrift, are
subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the
Corporation’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, the Corporation must meet specific capital guidelines
that involve quantitative measures of the Corporation’s
assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The
Corporation’s capital amounts
87
and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Corporation to maintain minimum
amounts and ratios (set forth in the table below) of total and
Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management
believes, as of December 31, 2004, that the Corporation
meets all capital adequacy requirements to which it is subject.
As of December 31, 2004 and 2003, the most recent
notifications from the Office of the Comptroller of the Currency
and the Federal Deposit Insurance Corporation categorized the
subsidiary banks as well capitalized under the regulatory
framework for prompt corrective action and the thrift subsidiary
was adequately capitalized at December 31, 2004. To be
categorized as well capitalized, the subsidiary banks must
maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the table. There are
no conditions or events since that notification that management
believes have changed the institutions’ category.
The actual capital amounts and ratios of the Corporation and its
significant subsidiaries are presented below. No deductions from
capital were made for interest rate risk in 2004 or 2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
To Be Well Capitalized | |
| |
|
|
|
For Capital | |
|
Under Prompt Corrective | |
| |
|
Actual | |
|
Adequacy Purposes | |
|
Action Provisions: (2) | |
| |
|
| |
|
| |
|
| |
| |
|
Amount | |
|
Ratio (1) | |
|
Amount | |
|
Ratio (1) | |
|
Amount | |
|
Ratio (1) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
($ In Thousands) | |
|
As of December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Associated Banc-Corp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
|
|
$ |
1,817,016 |
|
|
|
12.33% |
|
|
$ |
1,178,460 |
|
|
|
+8.00% |
|
|
|
|
|
|
|
|
|
|
Tier I Capital
|
|
|
1,420,386 |
|
|
|
9.64 |
|
|
|
589,230 |
|
|
|
³4.00% |
|
|
|
|
|
|
|
|
|
|
Leverage
|
|
|
1,420,386 |
|
|
|
7.79 |
|
|
|
729,025 |
|
|
|
³4.00% |
|
|
|
|
|
|
|
|
|
|
Associated Bank, N.A.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
|
|
|
1,093,698 |
|
|
|
10.79 |
|
|
|
810,620 |
|
|
|
³8.00% |
|
|
$ |
1,013,275 |
|
|
|
³10.00% |
|
|
Tier I Capital
|
|
|
885,340 |
|
|
|
8.74 |
|
|
|
405,310 |
|
|
|
³4.00% |
|
|
|
607,965 |
|
|
|
+ 6.00% |
|
|
Leverage
|
|
|
885,340 |
|
|
|
6.46 |
|
|
|
548,085 |
|
|
|
³4.00% |
|
|
|
685,106 |
|
|
|
³5.00% |
|
|
First Federal Capital Bank(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
|
|
|
202,883 |
|
|
|
9.86 |
|
|
|
164,544 |
|
|
|
³8.00% |
|
|
|
205,680 |
|
|
|
³10.00% |
|
|
Core Capital
|
|
|
188,217 |
|
|
|
5.16 |
|
|
|
145,810 |
|
|
|
³4.00% |
|
|
|
182,263 |
|
|
|
³5.00% |
|
|
Tangible Capital
|
|
|
188,217 |
|
|
|
5.16 |
|
|
|
54,679 |
|
|
|
³4.00% |
|
|
|
|
|
|
|
|
|
|
Tier I Capital
|
|
|
188,217 |
|
|
|
9.15 |
|
|
|
|
|
|
|
|
|
|
|
123,408 |
|
|
|
³6.00% |
|
88
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
To Be Well Capitalized | |
| |
|
|
|
For Capital | |
|
Under Prompt Corrective | |
| |
|
Actual | |
|
Adequacy Purposes | |
|
Action Provisions: (2) | |
| |
|
| |
|
| |
|
| |
| |
|
Amount | |
|
Ratio (1) | |
|
Amount | |
|
Ratio (1) | |
|
Amount | |
|
Ratio (1) | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
($ In Thousands) | |
|
As of December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Associated Banc-Corp
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
|
|
$ |
1,572,770 |
|
|
|
13.99% |
|
|
$ |
899,596 |
|
|
|
³8.00% |
|
|
|
|
|
|
|
|
|
|
Tier I Capital
|
|
|
1,221,647 |
|
|
|
10.86 |
|
|
|
449,798 |
|
|
|
³4.00% |
|
|
|
|
|
|
|
|
|
|
Leverage
|
|
|
1,221,647 |
|
|
|
8.37 |
|
|
|
584,108 |
|
|
|
³4.00% |
|
|
|
|
|
|
|
|
|
|
Associated Bank, N.A.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
|
|
|
980,318 |
|
|
|
10.63 |
|
|
|
737,810 |
|
|
|
³8.00% |
|
|
$ |
922,262 |
|
|
|
+10.00% |
|
|
Tier I Capital
|
|
|
784,263 |
|
|
|
8.50 |
|
|
|
368,905 |
|
|
|
³4.00% |
|
|
|
553,357 |
|
|
|
+ 6.00% |
|
|
Leverage
|
|
|
784,263 |
|
|
|
6.34 |
|
|
|
495,138 |
|
|
|
³4.00% |
|
|
|
618,923 |
|
|
|
+ 5.00% |
|
| |
|
Associated Bank Minnesota, N.A.(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital
|
|
|
156,196 |
|
|
|
11.94 |
|
|
|
104,688 |
|
|
|
³8.00% |
|
|
|
130,860 |
|
|
|
+10.00% |
|
|
Tier I Capital
|
|
|
139,692 |
|
|
|
10.67 |
|
|
|
52,344 |
|
|
|
³4.00% |
|
|
|
78,516 |
|
|
|
+ 6.00% |
|
|
Leverage
|
|
|
139,692 |
|
|
|
8.29 |
|
|
|
67,424 |
|
|
|
³4.00% |
|
|
|
84,279 |
|
|
|
+ 5.00% |
|
|
|
| (1) |
Total Capital ratio is defined as Tier 1 Capital plus
Tier 2 Capital divided by total risk-weighted assets. The
Tier 1 Capital ratio is defined as Tier 1 Capital
divided by total risk-weighted assets. The leverage ratio is
defined as Tier 1 Capital divided by the most recent
quarter’s average total assets. The Core Capital ratio is
defined as Tier 1 (Core) Capital divided by adjusted total
assets. The Tangible Capital ratio is defined as tangible
capital divided by tangible assets. |
| |
| (2) |
Prompt corrective action provisions are not applicable at the
bank holding company level. |
| |
| (3) |
Prompt corrective action provisions are not applicable for
tangible capital, and capital adequacy provisions are not
applicable for Tier 1 Capital at thrift institutions.
Subsequent to year-end 2004, the Corporation merged First
Federal into its Associated Bank, National Association, banking
subsidiary during February 2005. |
| |
| (4) |
Not considered a significant subsidiary in 2004. |
NOTE 18 EARNINGS PER SHARE:
Basic earnings per share are calculated by dividing net income
by the weighted average number of common shares outstanding.
Diluted earnings per share are calculated by dividing net income
by the weighted average number of shares adjusted for the
dilutive effect of outstanding stock options.
On April 28, 2004, the Board of Directors declared a
3-for-2 stock split, effected in the form of a stock dividend,
payable May 12 to shareholders of record at the close of
business on May 7. All share and per share data in the
accompanying consolidated financial statements has been adjusted
to reflect the effect of this stock split. As a result of the
stock split, the Corporation distributed approximately
37 million shares of common stock. Any fractional shares
resulting from the dividend were paid in cash. On April 24,
2002, the Board of Directors declared a 10% stock dividend,
payable May 15 to shareholders of record at the close of
business on April 29. 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 approximately
7 million shares of common stock. Any fractional shares
resulting from the dividend were paid in cash.
89
Presented below are the calculations for basic and diluted
earnings per share.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Years Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(In Thousands, except per share data) | |
|
Net income, as reported
|
|
$ |
258,286 |
|
|
$ |
228,657 |
|
|
$ |
210,719 |
|
| |
|
|
|
Weighted average shares outstanding
|
|
|
113,532 |
|
|
|
110,617 |
|
|
|
112,027 |
|
|
Effect of dilutive stock options outstanding
|
|
|
1,493 |
|
|
|
1,144 |
|
|
|
1,213 |
|
| |
|
|
|
Diluted weighted average shares outstanding
|
|
|
115,025 |
|
|
|
111,761 |
|
|
|
113,240 |
|
|
Basic earnings per share
|
|
$ |
2.28 |
|
|
$ |
2.07 |
|
|
$ |
1.88 |
|
| |
|
|
|
Diluted earnings per share
|
|
$ |
2.25 |
|
|
$ |
2.05 |
|
|
$ |
1.86 |
|
| |
|
|
NOTE 19 SEGMENT REPORTING
SFAS No. 131, “Disclosures about Segments of an
Enterprise and Related Information,” requires selected
financial and descriptive information about reportable operating
segments. The statement 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 primary segment is banking, conducted
through its bank and lending subsidiaries. For purposes of
segment disclosure under this statement, these entities have
been combined as one segment that have similar economic
characteristics and the nature of their products, services,
processes, customers, delivery channels, and regulatory
environment are similar. Banking consists of lending and deposit
gathering (as well as other banking-related products and
services) to businesses, governments, and consumers (including
mortgages, home equity lending, and card products) and the
support to deliver, fund, and manage such banking services.
The wealth management segment provides products and a variety of
fiduciary, investment management, advisory, and Corporate agency
services to assist customers in building, investing, or
protecting their wealth, including insurance, brokerage, and
trust/asset management. The other segment includes intersegment
eliminations and residual revenues and expenses, representing
the difference between actual amounts incurred and the amounts
allocated to operating segments.
The accounting policies of the segments are the same as those
described in Note 1. Selected segment information is
presented below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Wealth | |
|
|
|
Consolidated | |
| |
|
Banking | |
|
Management | |
|
Other | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$ |
552,311 |
|
|
$ |
316 |
|
|
$ |
— |
|
|
$ |
552,627 |
|
|
Provision for loan losses
|
|
|
14,668 |
|
|
|
— |
|
|
|
— |
|
|
|
14,668 |
|
|
Noninterest income
|
|
|
150,225 |
|
|
|
79,609 |
|
|
|
(1,655 |
) |
|
|
228,179 |
|
|
Depreciation and amortization
|
|
|
36,174 |
|
|
|
2,495 |
|
|
|
— |
|
|
|
38,669 |
|
|
Other noninterest expense
|
|
|
303,720 |
|
|
|
55,067 |
|
|
|
(1,655 |
) |
|
|
357,132 |
|
|
Income taxes
|
|
|
103,106 |
|
|
|
8,945 |
|
|
|
— |
|
|
|
112,051 |
|
| |
|
|
| |
Net income
|
|
$ |
244,868 |
|
|
$ |
13,418 |
|
|
$ |
— |
|
|
$ |
258,286 |
|
| |
|
|
| |
|
Total assets
|
|
$ |
20,448,862 |
|
|
$ |
81,236 |
|
|
$ |
(9,962 |
) |
|
$ |
20,520,136 |
|
| |
|
|
|
Total revenues *
|
|
$ |
684,604 |
|
|
$ |
79,925 |
|
|
$ |
(1,655 |
) |
|
$ |
762,874 |
|
|
Percent of consolidated total revenues
|
|
|
90 |
% |
|
|
10 |
% |
|
|
— |
% |
|
|
100 |
% |
90
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Wealth | |
|
|
|
Consolidated | |
| |
|
Banking | |
|
Management | |
|
Other | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
($ in Thousands) | |
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$ |
510,213 |
|
|
$ |
549 |
|
|
$ |
— |
|
|
$ |
510,762 |
|
|
Provision for loan losses
|
|
|
46,813 |
|
|
|
— |
|
|
|
— |
|
|
|
46,813 |
|
|
Noninterest income
|
|
|
152,292 |
|
|
|
55,102 |
|
|
|
(2,853 |
) |
|
|
204,541 |
|
|
Depreciation and amortization
|
|
|
34,966 |
|
|
|
1,571 |
|
|
|
— |
|
|
|
36,537 |
|
|
Other noninterest expense
|
|
|
267,761 |
|
|
|
45,329 |
|
|
|
(2,853 |
) |
|
|
310,237 |
|
|
Income taxes
|
|
|
89,559 |
|
|
|
3,500 |
|
|
|
— |
|
|
|
93,059 |
|
| |
|
|
| |
Net income
|
|
$ |
223,406 |
|
|
$ |
5,251 |
|
|
$ |
— |
|
|
$ |
228,657 |
|
| |
|
|
| |
|
Total assets
|
|
$ |
15,195,428 |
|
|
$ |
62,383 |
|
|
$ |
(9,917 |
) |
|
$ |
15,247,894 |
|
| |
|
|
|
Total revenues *
|
|
$ |
674,846 |
|
|
$ |
55,651 |
|
|
$ |
(2,853 |
) |
|
$ |
727,644 |
|
|
Percent of consolidated total revenues
|
|
|
93 |
% |
|
|
7 |
% |
|
|
— |
% |
|
|
100 |
% |
| |
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$ |
501,244 |
|
|
$ |
22 |
|
|
$ |
— |
|
|
$ |
501,266 |
|
|
Provision for loan losses
|
|
|
50,699 |
|
|
|
— |
|
|
|
— |
|
|
|
50,699 |
|
|
Noninterest income
|
|
|
137,886 |
|
|
|
43,282 |
|
|
|
(13,463 |
) |
|
|
167,705 |
|
|
Depreciation and amortization
|
|
|
33,588 |
|
|
|
222 |
|
|
|
— |
|
|
|
33,810 |
|
|
Other noninterest expense
|
|
|
267,897 |
|
|
|
33,702 |
|
|
|
(13,463 |
) |
|
|
288,136 |
|
|
Income taxes
|
|
|
81,855 |
|
|
|
3,752 |
|
|
|
— |
|
|
|
85,607 |
|
| |
|
|
| |
Net income
|
|
$ |
205,091 |
|
|
$ |
5,628 |
|
|
$ |
— |
|
|
$ |
210,719 |
|
| |
|
|
| |
|
Total assets
|
|
$ |
15,015,136 |
|
|
$ |
43,737 |
|
|
$ |
(15,598 |
) |
|
$ |
15,043,275 |
|
| |
|
|
|
Total revenues*
|
|
$ |
656,772 |
|
|
$ |
43,304 |
|
|
$ |
(13,463 |
) |
|
$ |
686,613 |
|
|
Percent of consolidated total revenues
|
|
|
96 |
% |
|
|
6 |
% |
|
|
(2 |
)% |
|
|
100 |
% |
|
|
| * |
Total revenues for this segment disclosure are defined to be the
sum of net interest income plus noninterest income, net of
mortgage servicing rights expense. |
91
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Associated Banc-Corp:
We have audited the accompanying consolidated balance sheets of
Associated Banc-Corp and subsidiaries as of December 31,
2004 and 2003, and the related consolidated statements of
income, changes in stockholders’ equity, and cash flows for
each of the years in the three-year period ended
December 31, 2004. These consolidated financial statements
are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Associated Banc-Corp and subsidiaries as of
December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2004 in conformity
with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Associated Banc-Corp’s internal control
over financial reporting as of December 31, 2004, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 9,
2005 expressed an unqualified opinion on management’s
assessment of, and the effective operation of, internal control
over financial reporting.
KPMG LLP
Chicago, Illinois
March 9, 2005
92
Market Information
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Market Price Range Sales Prices | |
| |
|
|
|
|
|
| |
| |
|
Dividends Paid | |
|
Book Value | |
|
High | |
|
Low | |
|
Close | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
4th Quarter
|
|
$ |
0.2500 |
|
|
$ |
15.55 |
|
|
$ |
34.85 |
|
|
$ |
32.08 |
|
|
$ |
33.23 |
|
| |
3rd Quarter
|
|
|
0.2500 |
|
|
|
13.18 |
|
|
|
32.19 |
|
|
|
28.81 |
|
|
|
32.07 |
|
| |
2nd Quarter
|
|
|
0.2500 |
|
|
|
12.53 |
|
|
|
30.13 |
|
|
|
27.09 |
|
|
|
29.63 |
|
| |
1st Quarter
|
|
|
0.2267 |
|
|
|
12.67 |
|
|
|
30.37 |
|
|
|
28.08 |
|
|
|
29.86 |
|
| |
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
4th Quarter
|
|
$ |
0.2267 |
|
|
$ |
12.26 |
|
|
$ |
28.75 |
|
|
$ |
25.87 |
|
|
$ |
28.53 |
|
| |
3rd Quarter
|
|
|
0.2267 |
|
|
|
11.84 |
|
|
|
25.93 |
|
|
|
24.75 |
|
|
|
25.26 |
|
| |
2nd Quarter
|
|
|
0.2267 |
|
|
|
11.92 |
|
|
|
25.61 |
|
|
|
21.43 |
|
|
|
24.41 |
|
| |
1st Quarter
|
|
|
0.2067 |
|
|
|
11.60 |
|
|
|
23.48 |
|
|
|
21.55 |
|
|
|
21.55 |
|
| |
Annual dividend rate: $1.00
Market information has been restated for the 3-for-2 stock
split, effected in the form of a stock dividend, declared on
April 28, 2004, and paid on May 12, 2004, to
shareholders of record at the close of business on May 7,
2004.
|
|
| ITEM 9. |
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE |
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Corporation maintains disclosure controls and procedures as
required under Rule 13a-15 promulgated under the Securities
Exchange Act of 1934 that are designed to ensure that
information required to be disclosed in our Exchange Act reports
is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and that
such information is accumulated and communicated to the
Corporation’s management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
As of December 31, 2004, the Corporation carried out an
evaluation, under the supervision and with the participation of
the Corporation’s management, including its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of its
disclosure controls and procedures. Based on the foregoing, its
Chief Executive Officer and Chief Financial Officer concluded
that the Corporation’s disclosure controls and procedures
were effective as of December 31, 2004.
The Corporation acquired First Federal Capital Corp (“First
Federal”) on October 29, 2004 by means of a merger.
Following consummation of the merger, the Corporation began
integrating its internal controls into First Federal’s
operations and it is contemplated that this effort will be
completed during the quarter ended March 31, 2005. As
permitted under the rules of the Securities and Exchange
Commission, management excluded from its assessment of the
effectiveness of the Corporation’s internal control over
financial reporting as of December 31, 2004, total assets
of approximately $4.1 billion and total revenues of
approximately $43 million as of and for the year ended
December 31, 2004 associated with First Federal’s
business. Management’s assessment of the Corporation’s
internal control over financial reporting also excluded an
evaluation of the internal control over financial reporting of
First Federal. Other than with respect to the acquisition of
First Federal, during the quarter ended December 31, 2004,
there was no change in our internal control over financial
reporting as defined in Rule 13a-15(f) promulgated under
the Securities Exchange Act of 1934 that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
93
Management’s Annual Report on Internal Control Over
Financial Reporting
Management of Associated Banc-Corp (the “Corporation”)
is responsible for establishing and maintaining adequate
internal control over financial reporting. The
Corporation’s internal control over financial reporting is
a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of the
Corporation’s financial statements for external purposes in
accordance with generally accepted accounting principles.
Internal control over financial reporting is defined in
Rules 13a-15(f) and 15d —15(f) promulgated under the
Securities Exchange Act of 1934.
All internal control systems, no matter how well designed, have
inherent limitations. Therefore, internal control over financial
reporting may not prevent or detect misstatements. Projections
of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with
policies or procedures may deteriorate.
The Corporation acquired First Federal Capital Corp (“First
Federal”) on October 29, 2004 by means of a merger. As
permitted under the rules of the Securities and Exchange
Commission, management excluded from its assessment of the
effectiveness of the Corporation’s internal control over
financial reporting as of December 31, 2004, total assets
of approximately $4.1 billion and total revenues of
approximately $43 million as of and for the year ended
December 31, 2004 associated with First Federal’s
business. Management’s assessment of the Corporation’s
internal control over financial reporting also excluded an
evaluation of the internal control over financial reporting of
First Federal.
As of December 31, 2004, management assessed the
effectiveness of the Corporation’s internal control over
financial reporting based on criteria for effective internal
control over financial reporting established in “Internal
Control — Integrated Framework,” issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this assessment, management has determined that
the Corporation’s internal control over financial reporting
as of December 31, 2004 is effective.
KPMG LLP, the independent registered public accounting firm that
audited the consolidated financial statements of the Corporation
included in this Annual Report on Form 10-K, has issued an
attestation report on management’s assessment of the
effectiveness of the Corporation’s internal control over
financial reporting as of December 31, 2004. The report,
which expresses unqualified opinions on management’s
assessment and on the effectiveness of the Corporation’s
internal control over financial reporting as of
December 31, 2004, is included on page 95 under the
heading “Report of Independent Registered Public Accounting
Firm.”
94
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Associated Banc-Corp:
We have audited management’s assessment, included in the
accompanying Management’s Annual Report on Internal
Control Over Financial Reporting, that Associated Banc-Corp
maintained effective internal control over financial reporting
as of December 31, 2004, based on criteria established in
Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Associated Banc-Corp’s management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is
to express an opinion on management’s assessment and an
opinion on the effectiveness of Associated Banc-Corp’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Associated
Banc-Corp maintained effective internal control over financial
reporting as of December 31, 2004, is fairly stated, in all
material respects, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Also, in our opinion, Associated Banc-Corp maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2004, based on criteria
established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
Associated Banc-Corp acquired First Federal Capital Corp
(“First Federal”) during 2004; and management excluded
from its assessment of the effectiveness of Associated
Banc-Corp’s internal control over financial reporting as of
December 31, 2004, First Federal’s internal control
over financial reporting associated with total assets of
approximately $4.1 billion and total revenues of
approximately $43 million included in the consolidated
financial statements of Associated Banc-Corp and subsidiaries as
of and for the year ended December 31, 2004. Our audit of
internal control over financial reporting of Associated
Banc-Corp also excluded an evaluation of the internal control
over financial reporting of First Federal.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Associated Banc-Corp and
subsidiaries as of Decem-
95
ber 31, 2004 and 2003, and the related consolidated
statements of income, changes in stockholders’ equity, and
cash flows for each of the years in the three-year period ended
December 31, 2004, and our report dated March 9, 2005
expressed an unqualified opinion on those consolidated financial
statements.
KPMG LLP
Chicago, Illinois
March 9, 2005
96
ITEM 9B. OTHER INFORMATION
On January 26, 2005, the Administrative Committee of the
Board of Directors set the 2005 base salaries effective as of
February 21, 2005, for Paul S. Beideman, Gordon J. Weber,
Mark J. McMullen, Donald E. Peters, and Joseph B. Selner, the
Chief Executive Officer and the other four most highly
compensated executive officers of the Corporation in 2004, at
$726,000, $369,500, $331,750, $309,100, and $322,900,
respectively. Target bonuses for 2005 were established for these
named executive officers at 85%, 50%, 50%, 40%, and 50%,
respectively. These named executive officers also received
option grants for 73,500, 35,000, 40,000, 39,000, and 50,000
options, respectively, to purchase shares of the
Corporation’s common stock.
Based upon the 2005 compensation approved by the Administrative
Committee, the Corporation expects that Mr. Daniel C.
Fischer, Executive Vice President, Community Banking, will be
among the four other most highly compensated executive officers
in 2005. Mr. Fischer’s 2005 base salary is $341,250,
his 2005 target bonus is set at 50%, and he received a grant of
45,000 options to purchase shares of the Corporation’s
common stock.
Further, the Board of Directors set the 2005 Board fees at an
annual retainer of $20,000 and a meeting fee of $1,500 for each
board meeting attended. The directors will also receive $1,000
for each committee meeting attended, with an additional annual
retainer of $5,000 to the committee chairman. The Chairman of
the Board will continue to receive an additional $100,000
retainer. The common stock contribution to the Associated
Banc-Corp Director’s Deferred Compensation Plan will be
$35,000 for 2005, an increase of $10,000.
PART III
|
|
| ITEM 10. |
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
The information in the Corporation’s definitive Proxy
Statement, prepared for the 2005 Annual Meeting of Shareholders,
which contains information concerning directors of the
Corporation under the caption “Election of Directors,”
and information concerning executive officers of the Corporation
under the caption “Information About the Executive
Officers,” is incorporated herein by reference.
|
|
| ITEM 11. |
EXECUTIVE COMPENSATION |
The information in the Corporation’s definitive Proxy
Statement, prepared for the 2005 Annual Meeting of Shareholders,
which contains information concerning this item, under the
captions “Executive Compensation,” “Report of the
Administrative Committee on Executive Compensation,”
“Shareholder Return Performance Presentation,” and
“Compensation Agreements” is incorporated herein by
reference.
|
|
| ITEM 12. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT |
The information in the Corporation’s definitive Proxy
Statement, prepared for the 2005 Annual Meeting of Shareholders,
which contains information concerning this item, under the
captions “Stock Ownership,” and “Equity
Compensation Plan Information,” is incorporated herein by
reference.
|
|
| ITEM 13. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
The information in the Corporation’s definitive Proxy
Statement, prepared for the 2005 Annual Meeting of Shareholders,
which contains information concerning this item under the
caption “Certain Relationships and Related
Transactions,” is incorporated herein by reference.
|
|
| ITEM 14. |
PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information in the Corporation’s definitive Proxy
Statement, prepared for the 2005 Annual Meeting of Shareholders,
which contains information concerning this item under the
caption “Report of the Audit Committee — Audit
and Non-Audit Fees,” is incorporated herein by reference.
97
PART IV
|
|
| ITEM 15. |
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) 1 and 2 Financial Statements and Financial Statement
Schedules
|
|
| |
The following financial statements and financial statement
schedules are included under a separate caption “Financial
Statements and Supplementary Data” in Part II,
Item 8 hereof and are incorporated herein by reference. |
| |
| |
Consolidated Balance Sheets— December 31, 2004 and 2003 |
| |
| |
Consolidated Statements of Income— For the Years Ended
December 31, 2004, 2003, and 2002 |
| |
| |
Consolidated Statements of Changes in Stockholders’
Equity— For the Years Ended December 31, 2004, 2003,
and 2002 |
| |
| |
Consolidated Statements of Cash Flows— For the Years Ended
December 31, 2004, 2003, and 2002 |
| |
| |
Notes to Consolidated Financial Statements |
| |
| |
Report of Independent Registered Public Accounting Firm |
(a) 3 Exhibits Required by Item 601 of
Regulation S-K
| |
|
|
|
|
|
|
| Exhibit | |
|
|
|
|
| Number | |
|
Description |
|
|
| | |
|
|
|
|
| |
(3)(a) |
|
|
Articles of Incorporation |
|
Exhibit (3)(a) to Report on Form 10-K for fiscal year ended
December 31, 1999 |
| |
(3)(b) |
|
|
Articles of Amendment |
|
Exhibit (3) to Current Report on Form 8-K filed on
May 3, 2004 |
| |
(3)(c) |
|
|
Bylaws |
|
Exhibit (3)(b) to Report on Form 10-K for fiscal year ended
December 31, 1999 |
| |
(4) |
|
|
Instruments Defining the Rights of Security Holders, Including
Indentures
The Parent Company, by signing this report, agrees to furnish
the SEC, upon its request, a copy of any instrument that defines
the rights of holders of long-term debt of the Corporation for
which consolidated or unconsolidated financial statements are
required to be filed and that authorizes a total amount of
securities not in excess of 10% of the total assets of the
Corporation on a consolidated basis |
|
|
| |
*(10)(a) |
|
|
Associated Banc-Corp Amended and Restated Long-Term Incentive
Stock Plan |
|
Exhibit 99.1 to the Corporation’s registration
statement (333-121012) on Form S-8 filed under the
Securities Act of 1933 |
| |
*(10)(b) |
|
|
Change of Control Plan of the Corporation effective April 25,
1994 |
|
Exhibit (10)(d) to Report on Form 10-K for fiscal year
ended December 31, 1994 |
| |
*(10)(c) |
|
|
Deferred Compensation Plan and Deferred Compensation Trust
effective as of December 16, 1993, and Deferred Compensation
Agreement of the Corporation dated December 31, 1994 |
|
Exhibit (10)(e) to Report on Form 10-K for fiscal year
ended December 31, 1994 |
98
| |
|
|
|
|
|
|
| Exhibit | |
|
|
|
|
| Number | |
|
Description |
|
|
| | |
|
|
|
|
| |
*(10)(d) |
|
|
Incentive Compensation Agreement (form) and schedules dated as
of October 1, 2001 |
|
Exhibit (10)(e) to Report on Form 10-K for fiscal year
ended December 31, 2001 |
| |
*(10)(e) |
|
|
Employment Agreement between the Parent Company and Paul S.
Beideman effective April 28, 2003 |
|
Exhibit (10)(f) to Report on Form 10-K for fiscal year
ended December 31, 2003 |
| |
*(10)(f) |
|
|
Associated Banc-Corp Directors’ Deferred Compensation Plan |
|
Filed herewith |
| |
*(10)(g) |
|
|
Associated Banc-Corp 1999 Non-Qualified Stock Option Plan |
|
Exhibit 99.1 to the Corporation’s registration
statement (333-121010) on Form S-8 filed under the
Securities Act of 1933 |
| |
*(10)(h) |
|
|
Associated Banc-Corp 2003 Long-Term Incentive Plan |
|
Exhibit 99.1 to the Corporation’s registration
statement (333-121011) on Form S-8 filed under the
Securities Act of 1933 |
| |
*(10)(i) |
|
|
Associated Banc-Corp Incentive Compensation Plan |
|
Filed herewith |
| |
*(10)(j) |
|
|
Separation Agreement and General Release, dated as of October
29, 2004, by and among First Federal Capital Corp, First Federal
Capital Bank and Jack C. Rusch |
|
Filed herewith |
| |
*(10)(k) |
|
|
Noncompete Agreement, dated as of October 29, 2004, by and among
Associated Banc-Corp and Jack C. Rusch |
|
Filed herewith |
| |
*(10)(l) |
|
|
Consulting Agreement, dated as of October 29, 2004, by and
between Associated Bank and Jack C. Rusch |
|
Filed herewith |
| |
*(10)(m) |
|
|
First Federal Director Deferred Compensation Plan |
|
Incorporated by reference as Exhibit 10.2 to First Federal
Capital Corp’s 2003 Form 10-K from the 1989 Form 10-K. |
| |
*(10)(n) |
|
|
2005 Compensation of Named Executive Officers of the Registrant |
|
Filed herewith |
| |
*(10)(o) |
|
|
2005 Cash Compensation for Non- Management Directors of the
Registrant |
|
Filed herewith |
| |
(11) |
|
|
Statement Re Computation of Per Share Earnings |
|
See Note 18 in Part II Item 8 |
| |
(21) |
|
|
Subsidiaries of the Parent Company |
|
Filed herewith |
| |
(23) |
|
|
Consent of Independent Registered Public Accounting Firm |
|
Filed herewith |
| |
(24) |
|
|
Power of Attorney |
|
Filed herewith |
99
| |
|
|
|
|
|
|
| Exhibit | |
|
|
|
|
| Number | |
|
Description |
|
|
| | |
|
|
|
|
| |
(31.1) |
|
|
Certification Under Section 302 of Sarbanes-Oxley by Paul
S. Beideman, Chief Executive Officer |
|
Filed herewith |
| |
(31.2) |
|
|
Certification Under Section 302 of Sarbanes-Oxley by Joseph
B. Selner, Chief Financial Officer |
|
Filed herewith |
| |
(32) |
|
|
Certification by the CEO and CFO Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of
Sarbanes-Oxley. |
|
Filed herewith |
|
|
| * |
Management contracts and arrangements. |
Schedules and exhibits other than those listed are omitted for
the reasons that they are not required, are not applicable or
that equivalent information has been included in the financial
statements, and notes thereto, or elsewhere within.
100
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
| |
|
|
| |
|
ASSOCIATED BANC-CORP |
| |
|
Date: March 16, 2005 |
|
By: /s/ PAUL S.
BEIDEMAN
Paul
S. Beideman
President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
| |
|
|
| |
/s/ Paul S.
Beideman
Paul
S. Beideman
President and Chief Executive Officer |
|
/s/ Ronald R. Harder*
Ronald
R. Harder
Director |
| |
/s/ Joseph B.
Selner
Joseph
B. Selner
Chief Financial Officer
Principal Financial Officer and
Principal Accounting Officer |
|
/s/ William R. Hutchinson*
William
R. Hutchinson
Director |
| |
/s/ Karen T. Beckwith*
Karen
T. Beckwith
Director |
|
/s/ Richard T. Lommen*
Richard
T. Lommen
Director |
| |
/s/ H.B. Conlon*
H.
B. Conlon
Director |
|
/s/ John C. Meng
John
C. Meng
Director |
| |
/s/ Ruth M. Crowley*
Ruth
M. Crowley
Director |
|
/s/ J. Douglas Quick*
J.
Douglas Quick
Director |
| |
/s/ Robert C. Gallagher*
Robert
C. Gallagher
Chairman of the Board |
|
/s/ Jack C. Rusch*
Jack
C. Rusch
Director |
| |
* /s/ Brian R.
Bodager
Brian
R. Bodager
Attorney-in-Fact |
|
/s/ John C. Seramur*
John
C. Seramur
Vice Chairman |
| |
|
Date: March 16, 2005
|
|
|
101
