-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FYB2KurU89qf7s8xafcAfLDkZb64OzlJkL8dxztTC63kK8PbviPcmgPAqcmt6Kck MDmFxsOkDF6yOlMMTM+LPA== 0000007789-98-000008.txt : 19980515 0000007789-98-000008.hdr.sgml : 19980515 ACCESSION NUMBER: 0000007789-98-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASSOCIATED BANC-CORP CENTRAL INDEX KEY: 0000007789 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 391098068 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-05519 FILM NUMBER: 98620054 BUSINESS ADDRESS: STREET 1: 112 NORTH ADAMS ST STREET 2: P O BOX 13307 CITY: GREEN BAY STATE: WI ZIP: 54301 BUSINESS PHONE: 4144333166 MAIL ADDRESS: STREET 1: 112 NORTH ADAMS STREET STREET 2: P O BOX 13307 CITY: GREEN BAY STATE: WI ZIP: 54307-3307 FORMER COMPANY: FORMER CONFORMED NAME: ASSOCIATED BANK SERVICES INC DATE OF NAME CHANGE: 19770626 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES X EXCHANGE ACT OF 1934 ------- For the quarterly period ended March 31, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------- For the transition period from to ------------------- ------------------- Commission file number 0-5519 ---------------------------------------------------------- Associated Banc-Corp - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Wisconsin 39-1098068 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS employer identification no.) incorporation or organization) 112 North Adams Street, Green Bay, Wisconsin 54301 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (920) 433-3166 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: The number of shares outstanding of registrant's common stock, par value $0.01 per share, at March 31, 1998, was 50,581,331 shares. ASSOCIATED BANC-CORP TABLE OF CONTENTS Page No. ------- PART I. Financial Information Item 1. Financial Statements: Consolidated Statements of Financial Condition - March 31, 1998 and December 31, 1997 Consolidated Statements of Income - Three Months Ended March 31, 1998 and 1997 Consolidated Statements of Cash Flows - Three Months Ended March 31, 1998 and 1997 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II. Other Information Item 6. Exhibits and Reports on Form 8-K See Footnote (8) in Part I Item I Signatures Special Note Regarding Forward-Looking Statements Forward-looking statements have been made in this document, and in documents that are incorporated by reference, that are subject to risks and uncertainties. These forward-looking statements, which are included in Management's Discussion and Analysis, describe future plans or strategies and include the Corporation's expectations of future results of operations. The words "believes," "expects," "anticipates" or similar expressions identify forward-looking statements. Shareholders should note that many factors, some of which are discussed elsewhere in this document and in the documents that are incorporated by reference, could affect the future financial results of the Corporation and could cause those results to differ materially from those expressed in forward-looking statements contained or incorporated by reference in this document. These factors include the following: * operating, legal and regulatory risks; * economic, political and competitive forces affecting the Corporation's banking, securities, asset management and credit services businesses; and *the risk that the Corporation's analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful. These factors should be considered in evaluating the forward-looking statements, and undue reliance should not be placed on such statements. PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements: ASSOCIATED BANC-CORP Consolidated Statements of Financial Condition (Unaudited) March 31, December 31, 1998 1997 ---- ---- (In Thousands, Except Share Data) ASSETS Cash and due from banks $ 286,476 $ 288,021 Interest-bearing deposits in other financial institutions 101,007 4,154 Federal funds sold and securities purchased under agreements to resell 33,301 11,511 Investment securities: Held to maturity at amortized cost (Fair value of approximately $745,401 and $782,240 at March 31, 1998 and December 31, 1997, respectively) 734,928 772,524 Available for sale-stated at fair value 2,024,805 2,167,694 Loans, held for sale 101,833 114,001 Loans, net of unearned income 7,167,335 7,076,576 Less: Allowance for possible loan losses (93,415) (92,731) --------- --------- Loans, net 7,073,920 6,983,845 Premises and equipment 125,822 127,823 Other assets 210,440 221,866 --------- --------- Total assets $10,692,532 $10,691,439 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Noninterest-bearing deposits $ 842,051 $ 904,710 Interest-bearing deposits 7,651,454 7,459,427 --------- --------- Total deposits 8,493,505 8,364,137 Short-term borrowings 1,181,363 1,337,008 Accrued expenses and other liabilities 150,688 161,331 Long-term borrowings 30,150 15,270 --------- --------- Total liabilities 9,855,706 9,877,746 Commitments and contingent liabilities --- --- Stockholders' equity Preferred stock --- --- Common stock (par value $0.01 per share, authorized 100,000,000 shares issued 50,711,787 and 50,394,647 shares, respectively) 507 504 Surplus 221,850 218,072 Retained earnings 592,169 569,996 Accumulated other comprehensive income 29,287 26,144 Less: Treasury stock (130,456 and 18,894 shares, respectively at cost) (6,987) (1,023) ------- ------- Total stockholders' equity 836,826 813,693 ------- ------- Total liabilities and stockholders' equity $10,692,532 $10,691,439 ========== ========== (See accompanying notes to Consolidated Financial Statements.) ITEM 1. Financial Statements Continued: ASSOCIATED BANC-CORP Consolidated Statements of Income (Unaudited) Three Months Ended March 31, -------- 1998 1997 ---- ---- (In Thousands) INTEREST INCOME Interest and fees on loans $150,884 $142,255 Interest and dividends on investment securities: Taxable 44,273 44,565 Tax exempt 2,462 2,350 Interest on deposits in other financial institutions 577 277 Interest on federal funds sold and securities purchased under agreements to resell 255 295 ------- ------- Total interest income 198,451 189,742 INTEREST EXPENSE Interest on deposits 86,297 81,035 Interest on short-term borrowings 17,370 16,420 Interest on long-term borrowings 441 488 ------- ------- Total interest expense 104,108 97,943 ------- ------- NET INTEREST INCOME 94,343 91,799 Provision for possible loan losses 3,759 3,373 ------- ------- Net interest income after provision for possible loan losses 90,584 88,426 NONINTEREST INCOME Trust service fees 7,915 6,948 Service charges on deposit accounts 6,370 6,499 Investment securities gains, net 5,311 1,195 Mortgage banking activity 10,896 5,117 Retail commission income 3,390 3,870 Loan fees 4,160 3,684 Asset sale gains, net 185 198 Other 3,522 3,127 ------- ------- Total noninterest income 41,749 30,638 NONINTEREST EXPENSE Salaries and employee benefits 35,943 33,322 Net occupancy expense 5,168 5,662 Equipment rentals, depreciation and maintenance 3,409 3,179 Data processing expense 4,654 4,128 Stationery and supplies 1,396 1,328 Business development and advertising 3,266 3,904 FDIC expense 830 802 Other 16,908 14,539 ------- ------- Total noninterest expense 71,574 66,864 ------- ------- Income before income taxes 60,759 52,200 Income tax expense 20,899 18,340 ------- ------- NET INCOME $ 39,860 $ 33,860 ======= ======= Earnings per share: Basic $ 0.79 $ 0.67 Diluted $ 0.78 $ 0.66 (See accompanying notes to Consolidated Financial Statements) ITEM 1. Financial Statements Continued: ASSOCIATED BANC-CORP Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, 1998 1997 ---- ---- (In Thousands) OPERATING ACTIVITIES Net income $ 39,860 $ 33,859 Adjustments to reconcile net income to net cash used by operating activities: Provision for possible loan losses 3,759 3,373 Depreciation and amortization 3,884 3,748 Amortization of mortgage servicing rights 1,748 1,210 Amortization of intangibles 1,460 1,558 Net amortization (accretion) of premiums and discounts 248 (2,771) Gain on sales of investment securities, net 5,311 (1,193) Decrease in interest receivable and other assets 12,563 3,243 Decrease in interest payable and other liabilities (10,643) (9,330) Amortization of loan fees and costs 82 185 Net decrease in mortgage loans acquired for sale 18,033 15,575 Gain on sales of mortgage loans held for sale (5,865) (1,102) Gain on other asset sales (185) (198) ------ ------ Net cash provided by operating activities 70,255 48,157 INVESTING ACTIVITIES Net decrease (increase) in federal funds sold and securities purchased under agreements to resell (21,790) 10,346 Net increase in interest-bearing deposits in other financial institutions (96,853) (47,581) Purchases of held to maturity securities (10,019) (35,220) Purchases of available for sale securities (84,737) (303,877) Proceeds from sales of available for sale securities 57,090 41,534 Maturities of held to maturity securities 47,380 75,420 Maturities of available for sale securities 170,199 112,468 Net increase in loans (96,951) (65,468) Proceeds from sales of other real estate 1,696 1,968 Purchases of premises and equipment, net of disposals (1,899) (5,171) Purchase of mortgage servicing rights (4,915) (1,571) Net cash received in purchase of subsidiary --- 5,051 Proceeds from sale of other assets 265 314 ------ ------ Net cash used in investing activities (40,534) (211,787) FINANCING ACTIVITIES Net increase (decrease) in deposits 129,368 (23,505) Net increase (decrease) in short-term borrowings (156,265 70,481 Cash dividends (14,695) (10,822) Proceeds from issuance of long-term borrowings 15,500 30,975 Proceeds from exercise of stock options 4,768 1,551 Purchase of treasury stock (9,942) (15,807) ------- ------- Net cash provided by (used in) financing activities (31,266) 52,873 ------- ------- Net decrease in cash and cash equivalents (1,545) (110,757) Cash and due from banks at beginning of period 288,021 369,843 ------- ------- Cash and due from banks at end of period $ 286,476 $ 259,086 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 102,596 $ 95,444 Income taxes 2,146 2,498 Supplemental schedule of noncash investing activities: Loans transferred to other real estate $ 3,035 $ 2,281 Loans made in connection with the disposition of other real estate --- 35 (See accompanying notes to Consolidated Financial Statements.) ITEM 1. Financial Statements Continued: ASSOCIATED BANC-CORP Notes to Consolidated Financial Statements NOTE 1: In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly Associated Banc-Corp's ("Corporation") financial position, results of its operations and cash flows for the periods presented. All adjustments necessary to the fair presentation of the financial statements are of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. In preparing the 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 relate to the determination of the allowance for possible loan losses. NOTE 2: The consolidated financial statements include the accounts of all subsidiaries. All material intercompany transactions and balances are eliminated. The Corporation has not changed its accounting and reporting policies from those stated in the Corporation's 1997 Form 10-K Annual Report. NOTE 3: Business Combinations The following table summarizes completed transactions during 1997 and 1998 (through March 31): Consideration Paid -------------------- Shares Total Cash of Assets Intangibles Date Method of (In Common (In (In Name of Acquired Acquired Accounting Millions) Stock Millions) Millions) - -------------------------------------------------------------------------------- Centra Financial, Pooling of Inc. [A] 2/97 Interests $--- 414,365 $ 76 $--- West Allis, Wisconsin First Financial Corporation [B] 10/97 Pooling of 0.1 27,835,929 6,005 --- Stevens Point, Interests Wisconsin - -------------------------------------------------------------------------------- [A] The transaction, accounted for using the pooling-of interests method, was not material to operating results for years prior to the acquisition and, accordingly, results for years prior to the acquisition were not restated. [B] All consolidated financial information has been restated as if the transaction had been effected as of the beginning of the earliest period presented. NOTE 4: Investment Securities The amortized cost and fair values of investment securities held to maturity and securities available for sale for the periods indicated were as follows: Investment Securities Held to Maturity - -------------------------------------------------------------------------------- (In thousands) March 31, 1998 - -------------------------------------------------------------------------------- Amortized Cost Fair Value - -------------------------------------------------------------------------------- U.S. Treasury securities $ 249 $ 250 Federal agency securities 131,433 132,120 Mortgage-related securities 339,078 343,956 Obligations of state and political subdivisions 183,986 187,265 Other securities (debt) 80,182 81,810 - -------------------------------------------------------------------------------- Total $734,928 $745,401 ================================================================================ (In thousands) December 31, 1997 - -------------------------------------------------------------------------------- Amortized Cost Fair Value - -------------------------------------------------------------------------------- U.S. Treasury securities $ 498 $ 500 Federal agency securities 146,259 146,818 Mortgage-related securities 361,298 365,952 Obligations of state and political subdivisions 183,286 186,300 Other securities (debt) 81,183 82,670 - -------------------------------------------------------------------------------- Total $772,524 $782,240 ================================================================================ Investment Securities Available for Sale - -------------------------------------------------------------------------------- (In thousands) March 31, 1998 - -------------------------------------------------------------------------------- Amortized Cost Fair Value - -------------------------------------------------------------------------------- U.S. Treasury securities $ 97,782 $ 98,598 Federal agency securities 266,909 267,238 Mortgage-related securities 1,453,363 1,483,010 Obligations of state and political subdivisions 25,587 25,795 Other securities (debt and equity) 134,918 150,164 - -------------------------------------------------------------------------------- Total $1,978,559 $2,024,805 ================================================================================ (In thousands) December 31, 1997 - -------------------------------------------------------------------------------- Amortized Cost Fair Value - -------------------------------------------------------------------------------- U.S. Treasury securities $ 109,200 $ 109,841 Federal agency securities 324,708 330,542 Mortgage-related securities 1,536,134 1,557,603 Obligations of state and political subdivisions 14,312 14,136 Other securities (debt and equity) 142,081 155,572 - -------------------------------------------------------------------------------- Total $2,126,435 $2,167,694 ================================================================================ NOTE 5: Allowance for Possible Loan Losses A summary of the changes in the allowance for possible loan losses for the periods indicated is as follows: For the Three For the Year Months Ended Ended March 31, December 31 1998 1997 ---- ---- (In Thousands) - -------------------------------------------------------------------------------- Balance at beginning of period $ 92,731 $ 71,767 Balance related to acquisition -- 728 Provisions charged to operating expense 3,759 31,668 Net loan charge-offs (3,075) (11,432) ------ ------ Balance at end of period $ 93,415 $ 92,731 - -------------------------------------------------------------------------------- NOTE 6: Mortgage Servicing Rights The Corporation recognizes as separate assets (capitalized) the rights to service mortgage loans for others whether the servicing rights are acquired through purchases or loan origination. The fair value of capitalized mortgage servicing rights is based upon the present value of estimated expected future cash flows. Based upon current fair values, capitalized mortgage servicing rights are assessed periodically for impairment, which is recognized in the statement of income during the period in which impairment occurs by establishing a corresponding valuation allowance. For purposes of performing its impairment evaluation, the Corporation stratifies its portfolio of capitalized mortgage servicing rights on the basis of certain risk characteristics. A summary of the changes in the balance of mortgage servicing rights is as follows: For the Three For the Year Months Ended Ended March 31, December 31 1998 1997 ---- ---- (In Thousands) - -------------------------------------------------------------------------------- Balance at beginning of period $ 22,535 $ 20,238 Additions 4,915 9,801 Amortization (1,748) (6,472) Sales of servicing rights --- --- Change in valuation allowance (305) (1,032) ------ ------ Balance at end of period $ 25,397 $ 22,535 - -------------------------------------------------------------------------------- NOTE 7: Per Share Computations The Corporation adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," which became effective at year end 1997 for all periods presented. Under the provisions of SFAS No. 128, primary and fully diluted earnings per share were replaced with basic and diluted earnings per share. Basic earnings per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by dividing net income by the weighted average number of shares adjusted for the dilutive effect of outstanding stock options. The Corporation issued 500,995 shares of common stock to a wholly-owned subsidiary as part of the 1996 acquisition of F&M Bankshares of Reedsburg, Inc. These shares are not reflected on the Consolidated Statements of Financial Condition as issued or outstanding. NOTE 8: Earnings Per Share Presented below are the calculations for basic and diluted earnings per share: Three Months Ended March 31, 1998 1997 ---- ---- (In Thousands, Except Per Share Data) --------------------- Basic: Net income available to common stockholders $39,860 $33,860 Weighted average shares outstanding 50,625 50,546 Basic earnings per share $0.79 $0.67 ==== ==== Diluted: Net income available to common stockholders $39,860 $33,860 Weighted average shares outstanding 50,625 50,546 Effect of dilutive stock options outstanding 625 990 ------ ------ Diluted weighted average shares outstanding 51,250 51,536 Diluted earnings per common share $0.78 $0.66 ==== ==== NOTE 9: Comprehensive Income The Financial Accounting Standards Board (FASB) has issued SFAS No. 130, "Reporting Comprehensive Income", which is effective for fiscal years beginning after December 15, 1997. This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. This statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Corporation adopted SFAS No. 130 on January 1, 1998, and all required disclosures will be included beginning with the Corporation's 1998 Form 10-K Annual Report. The Corporation's comprehensive income for the period ended March 31, 1998, is as follows: Three Months Ended March 31, 1998 1997 ---- ---- Net income $39,860 $33,860 Other comprehensive income, net of tax--unrealized gain on securities Unrealized holding gains arising during the period 6,595 (6,377) Less: reclassification adjustment for net gains realized in net income (3,452) (775) ----- ----- 3,143 (7,152) ----- ----- Comprehensive income $43,003 $26,708 ====== ====== ITEM 2. Management's Discussion and Analysis of Financial Condition and the Results of Operations The purpose of this discussion is to focus on information about the Corporation's financial condition and results of operations that are not otherwise apparent from the consolidated financial statements included in this report. Reference should be made to those statements presented elsewhere in this report for an understanding of the following discussion and analysis. EARNINGS The following discussion will focus upon "operating earnings", with respect to the fourth quarter of 1997, for Associated. Operating earnings for the fourth quarter of 1997 exclude the impact of the merger, integration and other one-time charges recorded by Associated (an $89.8 million reduction to net income). All references to pre-tax operating income, noninterest income, noninterest expense, tax expense, net income and net income per share are based upon operating earnings. In October 1997, Associated completed the acquisition of the $6.0 billion First Financial Corporation (FFC) in Stevens Point, WI. This acquisition was accounted for using the pooling-of-interests method. All consolidated financial information has been restated as if the transaction had been effected as of the beginning of the earliest reporting period. Net income for the first quarter of 1998 was $39.9 million, up 17.7% over 1997 first quarter net income of $33.9 million, and up from the $36.0 million reported in the fourth quarter of 1997. Earnings per basic share were $0.79 in the first quarter of 1998, up 17.9% over the $0.67 reported in the first quarter of 1997, and up from the $0.72 net income per share reported in the fourth quarter of 1997. Earnings per diluted share were $0.78 in the first quarter of 1998, up 18.2% over the $0.66 reported in the first quarter of 1997, and up from the $0.71 net income per diluted share reported in the fourth quarter of 1997. Diluted earnings take into account shares that could be issued through stock option plans, convertible securities or other contracts. Return on average assets (ROA) for the first quarter of 1998 was 1.53%, up from 1.36% during the same period last year. First quarter 1998 ROA increased from 1.34% in the fourth quarter of 1997. Return on average equity (ROE) for the first quarter of 1998 was 19.51%, up from 16.80% during the same period last year. First quarter 1998 ROE increased from the 16.46% reported in the fourth quarter of 1997. The change (increase of $6.0 million, or 17.7%) in first quarter 1998 net income, when compared to the same period last year, was a result of higher net interest income (up $2.5 million, or 2.8%), higher noninterest income (up $11.1 million, or 36.3%), offset by higher provision for loan losses (up $386,000, or 11.4%), higher noninterest expense (up $4.7 million, or 7.0%) and higher tax expense (up $2.6 million, or 14.0%). The change (increase of $3.8 million, or 10.7%) in first quarter 1998 net income, when compared to the fourth quarter of 1997, was a result of lower provision for loan losses (down $812,000, or 17.8%), higher noninterest income (up $6.4 million, or 18.1%), offset by lower net interest income (down $1.0 million, or 1.1%), higher noninterest expense (up $1.6 million, or 2.2%), and higher income tax expense (up $765,000, or 3.8%). Net Income Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1998 1997 1997 1997 1997 - -------------------------------------------------------------------------------- Operating Net Income (Qtr) $39,860 $ 36,018 $ 36,822 $35,479 $33,860 Operating Net Income (YTD) $39,860 $142,178 $106,161 $69,339 $33,860 Consolidated Net Income (Loss)(Qtr) $39,860 $(53,802) $ 36,822 $35,479 $33,860 Consolidated Net Income (YTD) $39,860 $ 52,359 $106,161 $69,339 $33,860 Operating EPS - Basic (Qtr) $.79 $ .72 $ .73 $ .71 $ .67 Operating EPS - Diluted (Qtr) $.78 $ .71 $ .72 $ .69 $ .66 Operating EPS - Basic (YTD) $.79 $ 2.83 $2.11 $1.38 $ .67 Operating EPS - Diluted (YTD) $.78 $ 2.78 $2.07 $1.35 $ .66 Consolidated EPS - Basic (Qtr) $.79 $(1.07) $ .73 $ .71 $ .67 Consolidated EPS - Diluted (Qtr) $.78 $(1.06) $ .72 $ .69 $ .66 Operating ROE - Quarter 19.51% 16.46% 17.33% 17.41% 16.80% Operating ROE - YTD 19.51% 16.93% 17.09% 17.10% 16.80% Operating ROA - Quarter 1.53% 1.34% 1.40% 1.38% 1.36% Operating ROA - YTD 1.53% 1.37% 1.38% 1.37% 1.36% - -------------------------------------------------------------------------------- NET INTEREST INCOME First Quarter 1998 Compared to First Quarter 1997: Fully taxable equivalent (FTE) net interest income in the first quarter of 1998 was $95.9 million, an increase of $2.6 million over the first quarter of 1997 FTE net interest income of $93.3 million. The consolidated increase in FTE net interest income was attributable to larger volumes of average earning assets (up $498 million) when compared to the first quarter of 1997. The increase in net interest income due to the volume variance (change in interest income from incremental earning assets less the change in interest expense from incremental volumes of interest-bearing liabilities) was $6.0 million. This increase was offset by a negative rate variance (change in interest income from incremental yields on earning assets less the change in interest expense from incremental rates on interest-bearing liabilities) of $3.4 million. The growth in earning assets was concentrated in loans, with loans increasing $473 million, when compared to the first quarter of 1997. The net interest margin for the first quarter of 1998 was 3.79%, compared with 3.88% in the first quarter of 1997. The contribution from net free funds in the first quarter of 1998 increased to 0.59% from 0.54% for the same period in 1997. The rate spread decreased to 3.20% from 3.34% reported a year ago. Net Interest Income Tax Equivalent Basis (In Thousands) - -------------------------------------------------------------------------------- 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1998 1997 1997 1997 1997 - -------------------------------------------------------------------------------- Interest Income $198,451 $201,798 $200,647 $195,056 $189,742 Tax Equivalent Adjustment 1,509 1,464 1,406 1,355 1,450 ------- ------- ------- ------- ------- Tax Equivalent Interest Income $199,960 $203,262 $202,053 $196,411 $191,192 Interest Expense 104,108 106,418 105,857 101,419 97,943 ------- ------- ------- ------- ------- Tax Equivalent Net Interest Income $ 95,852 $ 96,844 $ 96,196 $ 94,992 $ 93,249 - -------------------------------------------------------------------------------- Total average loans grew $473 million. The average loans to average deposits ratio increased to 86.5%, up from 85.1% in the first quarter of 1997. The average loan growth, of $473 million, was funded by increased wholesale borrowings (funds purchased, repurchase agreements, FHLB borrowings, and long-term borrowings) of $34 million, increased time deposits (personal CDs and brokered CDs) of $191 million ($160 million increase in personal CDs and a $31 million increase in brokered CDs), higher balances of savings, NOW and MMA of $147 million and higher net free funds of $126 million offset by an increase in the balances of investments and short-term investments of $25 million. First Quarter 1998 Compared to Fourth Quarter 1997: FTE net interest income in the first quarter of 1998 was $95.9 million, a decrease of $992,000 over the fourth quarter 1997 FTE net interest income of $96.8 million. Net Interest Margin Quarterly Trends (Quarterly Info Only) - -------------------------------------------------------------------------------- 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1998 1997 1997 1997 1997 - -------------------------------------------------------------------------------- Yield on Earning Assets 7.97% 7.95% 8.07% 8.01% 8.02% Cost of Interest-Bearing Liabilities 4.77% 4.78% 4.79% 4.69% 4.68% ---- ---- ---- ---- ---- Interest Rate Spread 3.20% 3.17% 3.28% 3.32% 3.34% Net Free Funds Contribution 0.59% 0.63% 0.57% 0.54% 0.54% ---- ---- ---- ---- ---- Net Interest Margin 3.79% 3.80% 3.85% 3.86% 3.88% ==== ==== ==== ==== ==== Average Earning Assets to Average Assets 95.24% 95.34% 95.23% 95.27% 95.02% Free Funds Ratio (% of Earning Assets) 12.33% 13.12% 11.96% 11.73% 11.66% - -------------------------------------------------------------------------------- The decrease for the quarter was primarily attributable to a volume variance (change in interest income from incremental earning assets less the change in interest expense from incremental volumes of interest-bearing liabilities) of $776,000, a negative rate variance (change in interest income from incremental yields on earning assets less the change in interest expense from incremental rates on interest-bearing liabilities) of $83,000 and two less days in the first quarter of 1998 when compared to the fourth quarter of 1997. The fewer days decreased FTE net interest income by $133,000 in the first quarter of 1998. The net interest margin for the first quarter of 1998 was 3.79%, compared with 3.80% in the fourth quarter of 1997. The largest factor contributing to the decrease in net interest margin was the lower contribution (down 4 basis points) from net free funds. This was offset by a higher net interest spread of 3 basis points. An increase in yield recognized on earning assets of two basis points combined with a 1 basis point reduction on the rate paid on interest-bearing liabilities created the 3 basis point increase in net interest spread. Average earning assets decreased $72 million in the first quarter. Total average loans grew $41 million in the first quarter. The decrease in earning assets was primarily due to reduced balances of investment securities (down $152 million). The average loan growth of $41 million, was a result of increased time deposits (personal CDs and brokered CDs) of $6 million ($36 million increase in personal CDs and $30 million decrease in brokered CDs), higher balances of savings, NOW and MMA of $33 million offset by decreased net free funds of $89 million and decreased wholesale borrowings (funds purchased, repurchase agreements, FHLB borrowings and long-term borrowings) of $21 million. Earning Asset and Interest-Bearing Liability Volumes Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1998 1997 1997 1997 1997 - -------------------------------------------------------------------------------- Average Loans $ 7,201,937 $ 7,161,090 $6,990,922 $6,869,948 $6,729,338 Average Earning Assets 10,078,411 10,150,486 9,940,700 9,794,201 9,579,913 Average Noninterest- Bearing Deposits 778,957 824,393 726,945 704,798 696,793 Average Interest- Bearing Deposits 7,550,146 7,511,209 7,403,326 7,323,884 7,211,668 Average Deposits 8,329,103 8,355,602 8,130,271 8,028,682 7,908,461 Average Interest- Bearing Liabilities $ 8,835,493 $ 8,818,256 $8,751,596 $8,644,990 $8,462,754 - -------------------------------------------------------------------------------- LOAN LOSS The loan loss provision for the first quarter of 1998 was $3.8 million, an increase of $386,000 from the same period in 1997 and a decrease of $812,000 from the fourth quarter of 1997. Allowance for Possible Loan Losses Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1998 1997 1997 1997 1997 - -------------------------------------------------------------------------------- Provision Expense - Qtr $ 3,759 $ 4,571 $ 3,739 $ 3,186 $ 3,373 Merger Adjustment - Qtr 16,800 Provision Expense - YTD 3,759 14,868 10,297 6,559 3,373 Merger Adjustment - YTD 16,800 Net Charge-Offs - Qtr 3,075 3,113 2,947 2,752 2,620 Net Charge-Offs - YTD 3,075 11,432 8,319 5,372 2,620 Allowance at Period End $93,415 $92,731 $74,454 $73,682 $73,249 Allowance to Loans 1.30% 1.31% 1.05% 1.06% 1.09% Net Charge-Offs to Average Loans (Annualized) - Qtr .17% .17% .16% .16% .16% Net Charge-Offs to Average Loans (Annualized) - YTD .17% .16% .16% .16% .16% - -------------------------------------------------------------------------------- As of March 31, 1998, the allowance for possible loan losses of $93.4 million represented 1.30% of total outstanding loans, down from the 1.31% reported at December 31, 1997, and up from 1.09% reported at March 31, 1997. The increase in allowance for possible loan losses to loans from the first quarter of 1997 to the first quarter of 1998 is primarily attributable to the $16.8 million additional provision recorded in the fourth quarter of 1997 to conform FFC with the policies, practices and procedures of the Corporation. The first quarter of 1998 net charge-offs as a percent of average loans of 0.17% is generally consistent with net charge-offs to average loans of 0.16% in the first quarter of 1997 and net charge-offs as a percent of average loans of 0.17% in the fourth quarter of 1997. NONPERFORMING LOANS Management is committed to a nonaccrual and problem loan identification philosophy. This philosophy is embodied through the monitoring and reviewing of credit policies and procedures to ensure that all problem loans are identified quickly and the risk of loss is minimized. Nonperforming loans are considered a leading indicator of 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 student loan balances that are 90 days or more past due and still accruing and that have contractual government guarantees as to collection of principal and interest, from its definition of nonperforming loans. Loans are normally placed in nonaccrual status when contractually past due 90 days or more as to interest or principal payments. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact on the collectibility of principal or interest on loans, it is management's practice to place such loans on nonaccrual status immediately, rather than delaying such action until the loans become 90 days past due. Previously accrued and uncollected interest on such loans is reversed 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 collectability of the principal is in doubt, payments received are applied to loan principal. Loans past due 90 days or more but still accruing interest, with the exception of guaranteed student loans, are also included in nonperforming loans. Student loans past due 90 days or more but still accruing interest were $8.0 million at March 31, 1998. Loans past due 90 days or more but still accruing are classified as such where the underlying loans are both well-secured (the collateral value is sufficient to cover principal and accrued interest) and in the process of collection. Also included in nonperforming loans are "restructured" loans. Restructured loans involve the granting of some concession to the borrower involving the modification of terms of the loan, such as changes in payment schedule or interest rate. Total nonperforming loans at March 31, 1998 were $33.9 million, a decrease of $356,000 from December 31, 1997. The ratio of nonperforming loans to total loans at March 31, 1998 was .47% compared to .48% at December 31, 1997 and .51% at March 31, 1997. Other real estate owned increased in the first quarter to $4.3 million at March 31, 1998 up from $2.2 million at March 31, 1997 and $2.1 million at December 31, 1997. Contributing to the decrease in nonaccrual loans was a $1.4 million credit transferred from nonaccrual to other real estate owned in the first quarter of 1998. Nonperforming Loans and Other Real Estate (In Thousands) - -------------------------------------------------------------------------------- 3/31/98 12/31/97 9/30/97 6/30/97 3/31/97 ------- -------- ------- ------- ------- Nonaccrual Loans $30,072 $32,415 $36,202 $34,877 $32,047 Accruing Loans Past Due 90 Days or More 3,414 1,324 1,648 7,040 2,052 Restructured Loans 455 558 186 471 499 ------ ------ ------ ------ ------ Total Nonperforming Loans $33,941 $34,297 $38,036 $42,388 $34,598 ====== ====== ====== ====== ====== Nonperforming Loans as a Percent of Loans 0.47% 0.48% 0.54% 0.61% 0.51% Other Real Estate Owned $ 4,265 $ 2,067 $ 2,447 $ 2,510 $ 2,212 - -------------------------------------------------------------------------------- Impaired loans are defined as those loans where it is probable that all amounts due according to contractual terms, including principal and interest, will not be collected. The Corporation has determined that commercial loans and commercial real estate loans that have a nonaccrual status or have had their terms restructured meet the definition. Impaired loans are measured at the fair value of the collateral, if the loan is collateral dependent, or alternatively at the present value of expected future cash flows. Interest income on impaired loans is recognized only at the time that cash is received, unless applied to reduce principal. At March 31, 1998, the recorded investment in impaired loans totaled $11.2 million. Included in this amount is $9.2 million of impaired loans that do not require a related allowance for possible loan losses and $2.0 million of impaired loans for which the related allowance for possible loan losses totaled $907,000. The average recorded investment in impaired loans during the twelve months ended March 31, 1998, was approximately $12.8 million. Interest income recognized on a cash basis on impaired loans during the first three months of 1998 totaled $94,000. The following table shows, for those loans accounted for on a nonaccrual basis and restructured loans for the three months ended March 31, 1998, the gross interest that would have been recorded if the loans had been current in accordance with their original terms and the amount of interest income that was included in net income for the period. For the Three Months Ended March 31, 1998 -------------------- (In Thousands) Interest income in accordance with original terms $ 662 Interest income recognized (154) --- Reduction in interest income $ 508 === Potential problem loans are loans where there are doubts as to the ability of the borrower to comply with present repayment terms. The decision of management to place loans in this category does not necessarily mean that the Corporation expects losses to occur but that management recognizes that a higher degree of risk is associated with these performing loans. At March 31, 1998, potential problem loans totaled $66.9 million compared to $74.0 million at the end of 1997. 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, e.g. communications, wholesale trade, manufacturing, finance/insurance/real estate, and services. Management does not presently expect significant losses from credits in this category. LOAN CONCENTRATIONS Loan concentrations are considered to exist 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. The Corporation's loans are widely diversified by borrower, industry group and area. At March 31, 1998, no concentrations existed in the Corporation's loan portfolio in excess of 10% of total loans. Real estate construction loans at March 31, 1998, totaled $331 million, or 4.6% of loans while agricultural loans were 0.8% of total loans. As of March 31, 1998, the Corporation did not have any cross-border outstandings to borrowers in any foreign country where such outstandings exceeded 1% of total assets. NONINTEREST INCOME First Quarter 1998 Compared to First Quarter 1997 Noninterest income increased $11.1 million, or 36.3% over the first quarter of 1997. Noninterest income, excluding net investment securities gains, increased $7.0 million, or 23.8%. Income from service charges on deposit accounts, retail commission activity and net asset sale gains decreased from the first quarter of 1997. All other categories of noninterest income increased from the first three months of 1997. Noninterest Income Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1998 1997 1997 1997 1997 - -------------------------------------------------------------------------------- Trust Servicing Fees $ 7,915 $ 7,744 $ 7,089 $ 6,983 $ 6,948 Service Charges on Deposit Accounts 6,370 7,177 7,211 7,023 6,499 Mortgage Banking Activity 10,896 8,410 6,745 5,438 5,117 Loan Fees 4,160 4,379 4,270 4,074 3,684 Retail Commission Income 3,390 3,614 3,969 3,992 3,870 Asset Sale Gains (Losses), net 185 (23) 511 165 198 Other 3,522 3,780 3,509 3,249 3,127 ------ ----- ----- ----- ----- Total, excluding Securities Gains $36,438 $35,081 $33,304 $30,924 $29,443 Investment Security Gains, net 5,311 280 851 188 1,195 Merger, Integration and Other One-Time Charges --- (35,290) --- --- --- ------ ------ ------ ------ ------ Total Noninterest Income $41,749 $ 71 $34,155 $31,112 $30,638 - -------------------------------------------------------------------------------- Trust service fees increased $967,000, or 13.9% compared to the same quarter last year. The increase is a result of higher trust assets under management. Net investment securities gains increased $4.1 million, or 344.4% over the first quarter of 1997. In the fourth quarter of 1997, the Corporation hedged certain agency issued zero coupon bonds by executing various interest rate futures contracts. In the first quarter of 1998, these contracts were closed and the zero coupon bonds were sold. As a result, a net gain of $5.1 million was recognized contributing to the variance. The $1.2 million in net investment securities gains recognized in the first quarter of 1997 consisted primarily of gains on sales of mortgage related securities and gains from the sale of Sallie Mae stock. Mortgage banking income increased $5.8 million, or 112.9% from the first quarter of 1997. Increases were recognized in higher origination fees (up $276,000), underwriting fees (up $475,000), servicing fees (up $181,000), escrow waiver fees (up $85,000) and gains on sales of loans (up $4.8 million). The production related revenue, (origination, underwriting and escrow waiver fees) was higher due to higher production volumes in the first quarter of 1998 ($495 million) compared to the same period last year ($195 million). The increased gains on sales of loans is the result of this increased production in a more favorable mortgage banking rate environment. Retail commission income decreased $480,000, or 12.4% compared to the first three months of last year. Decreases in income from annuities (down $418,000) and stocks (down $398,000) were offset, in part, by an increase in income from the sale of mutual funds (up $375,000). Income from loan fees increased $476,000, or 12.9% from the first quarter of 1998 to the first quarter of 1997. The increase is a result of increased fees on commercial loans (up $319,000) and real estate loans (up $122,000). Other miscellaneous income, from a variety of sources, increased $395,000, or 12.6% over the first quarter of 1997. The increase is primarily attributable to higher income from TYME/electronic funds transfer/automatic teller machine fees (up $367,000) and increased check charge income (charges on check orders and rebates from check vendors) of $71,000. First Quarter 1998 Compared to Fourth Quarter 1997 Noninterest income increased $6.4 million, or 18.1% in the first quarter of 1998 compared to the fourth quarter of 1997. Noninterest income, excluding net investment securities gains, increased $1.4 million, or 3.9%. Decreases in service charges on deposit accounts, retail commission income, loan fees and other noninterest income were more than offset by increases in trust service fees, net investment security gains, mortgage banking activity and net asset sale gains compared to the fourth quarter of 1997 Service charges on deposit accounts decreased $807,000, or 11.2% during the quarter. Reduced service charges were mainly on demand deposit accounts. Net investment security gains increased $5.0 million. In the fourth quarter of 1997, the Corporation hedged certain agency issued zero coupon bonds by executing various interest rate futures contracts. In the first quarter of 1998, these contracts were closed and the zero coupon bonds were sold. As a result, a net gain of $5.1 million was recognized. Mortgage banking income increased $2.5 million, or 29.6% from the fourth quarter of 1997. Increases were recognized in higher origination fees (up $174,000), underwriting fees (up $274,000), servicing fees (up $133,000), escrow waiver fees (up $26,000) and gains on sales of loans (up $1.9 million). The production related revenue, (origination, underwriting and escrow waiver fees) was higher due to higher production volumes in the first quarter of 1998 ($495 million) compared to the fourth quarter of 1997 ($410 million). The increased gains on sales of loans is the result of increased production and a more favorable mortgage banking rate environment. Net asset sales gains increased $208,000 in the first quarter of 1998. Primarily contributing to the favorable change was an $85,000 gain on the sale of an operations building recognized in the first quarter of 1998. The Corporation will recognize pre-tax net asset sales gains of approximately $5.7 million in the second quarter of 1998. These gains are the result of a bank office building sale (gain of approximately $2.7 million) and a sale of a third party affinity credit card program (gain of approximately $3.0 million) which occurred in the third week of April this year. NONINTEREST EXPENSE First Quarter 1998 Compared to First Quarter 1997 Total noninterest expense increased $4.7 million, or 7.0% in the first quarter of 1998 compared to the same period last year. All categories of noninterest expense, with the exception of net occupancy expense and business development and advertising, increased when compared to the first quarter of last year. Noninterest Expense Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1998 1997 1997 1997 1997 - -------------------------------------------------------------------------------- Salaries and Employee Benefits $ 35,943 $ 32,933 $ 33,883 $ 33,518 $ 33,322 Net Occupancy Expense 5,168 4,432 5,010 5,193 5,662 Equipment Rentals, Depreciation and Maintenance 3,409 3,230 3,165 3,026 3,179 Data Processing Expense 4,654 4,347 4,155 4,270 4,128 Stationery and Supplies 1,396 1,505 1,450 1,249 1,328 Business Development and Advertising 3,266 4,283 3,962 3,787 3,904 FDIC Expense 830 831 810 840 802 Other 16,908 18,459 15,913 14,910 14,539 ------ ------ ------ ------ ------ Noninterest Expense, Excluding Merger, Integration and Other One-Time Charges 71,574 70,020 68,348 66,793 66,864 Merger, Integration and Other One-Time Charges --- 51,622 --- --- --- ------ ------- ------ ------ ------ Total Noninterest Expense $ 71,574 $121,642 $ 68,348 $ 66,793 $ 66,864 - -------------------------------------------------------------------------------- Salaries and employee benefit expenses increased $2.6 million, or 7.9% when compared to the first quarter of 1997. Total salary related expenses increased $2.3 million, or 8.8%, compared to the first quarter of 1997 while fringe benefit related expenses increased $326,000, or 4.5%. The 8.8% increase in salary expense is attributable to base merit increases, transitional overlapping positions as support functions are centralized, and new positions added. The fringe benefit increase was primarily due to higher social security tax expense (up $134,000) linked to the higher levels of salary expense. Data processing increased $526,000, or 12.7%, compared to the first quarter of 1997. This increase is primarily due to the cost of processing volumes in excess of the volumes covered in the base contract with the third party processor. Business development and advertising decreased $638,000, or 16.3%, compared to the first three months of 1997. The variance was a result of decreased direct mail and printed materials and other advertising. Other miscellaneous expense, from various sources, increased $2.4 million compared to the first quarter of 1997. Primarily contributing to the increases were higher consulting expenses and higher amortization of mortgage servicing rights. First Quarter 1998 Compared to Fourth Quarter 1997 Total noninterest expense increased $1.6 million, or 2.2% in the first quarter of 1998. Increases in salaries and employee benefits, net occupancy expense, equipment rentals, depreciation and maintenance and data processing expense were partially offset by decreases in stationery and supplies, business development and advertising, FDIC expense and other expenses. Salaries and employee benefit expenses increased $3.0 million, or 9.1% when compared to the fourth quarter of 1997. Total salary related expenses increased $847,000, or 3.1% in the first quarter while fringe benefit related expenses increased $2.2 million, or 40.1%. Salary expense is up primarily as a result of base merit increases. Fringe benefit expenses increased due to higher unemployment expense, health insurance expense, profit sharing expense, social security expense and pension expense. The higher social security tax reflects a full quarter of social security tax. In the fourth quarter of 1997, the expense was less as a result of individuals reaching the maximum amount to be withheld, and thus the decrease of the company matchable portion, in the fourth quarter. Net occupancy expense increased $737,000, or 16.6% in the first quarter. A majority of the increase occurred due to real estate tax and personal property tax estimates. Business development and advertising decreased $1.0 million, or 23.7% in the first three months of 1998. The favorable variance was primarily due to the savings from reduced advertising costs. Expense Control Quarterly Trends - -------------------------------------------------------------------------------- 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1998 1997 1997 1997 1997 - -------------------------------------------------------------------------------- Efficiency Ratio - Quarter 54.10% 53.08% 52.78% 53.05% 54.50% Efficiency Ratio - Year 54.10% 53.33% 53.43% 53.76% 54.50% Expense Ratio - Quarter 1.41% 1.37% 1.40% 1.47% 1.58% Expense Ratio - Year 1.41% 1.45% 1.48% 1.53% 1.58% - -------------------------------------------------------------------------------- INCOME TAXES The effective tax rate for the first quarter of 1998 decreased to 34.40%, down from the 35.86% in the fourth quarter of 1997 and the 35.14% in the first quarter of 1997. Income Tax Expense Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1998 1997 1997 1997 1997 - -------------------------------------------------------------------------------- Operating Income Before Taxes $60,759 $ 56,151 $56,859 $54,770 $52,200 ------ ------ ------ ------ ------ Merger, Integration and Other One-Time Charges Before Taxes --- (103,713) --- --- --- ------ ------- ------ ----- ------ State Tax Expense - Operating $ 1,747 $ 1,586 $ 1,836 $ 1,676 $ 1,474 Federal Tax Expense - Operating 19,152 18,547 18,201 17,615 16,866 ------ ------ ------ ------ ------ Total Income Tax Expense - Operating $20,899 $ 20,133 $20,037 $19,291 $18,340 Federal Tax - Merger, Integration and Other One-Time Charges --- (13,893) --- --- --- ------ ------ ------ ------ ------ Total Income Tax Expense $20,899 $ 6,240 $20,037 $19,291 $18,340 ====== ====== ====== ====== ====== Effective Tax Rate 34.40% 35.86% 35.24% 35.22% 35.13% ===== ===== ===== ===== ===== BALANCE SHEET March 31, 1998 Compared to December 31, 1997 During the first three months of 1998, total assets remained level increasing by only $1 million, or 0.1% on an annualized basis. Loans increased $91 million, or 5.2% on an annualized basis. The loan growth was all in commercial and other loans (up $157 million, or 25.8% on an annualized basis). Real estate and consumer loans decreased from December 31, 1997 ($48 million, or 5.3% and $18 million, or 7.7% on an annualized basis, respectively). The loan growth was funded with a $62 million reduction of investments and short-term investments and a $207 million increase of interest-bearing deposits offset by a $49 million decrease in net free funds and a $140 million decrease in wholesale funding. The $207 million increase in interest-bearing deposits reflects a $13 million increase in outstanding brokered CDs and an increase of $194 million in retail interest-bearing deposits. March 31, 1998 Compared to March 31, 1997 During the past 12 months, total assets increased $421 million, or 4.1%. Loans increased $418 million, or 6.2%. The loan growth was all in commercial and other loans (up $437 million or 20.1%). Real estate and consumer loans decreased from March 31, 1997 ($19 million or 0.5% and $285,000 or 0.1%, respectively). The loan growth was funded with $379 million of interest-bearing deposits and $168 million increase in net free funds offset by a $125 million decrease in wholesale funding. The $379 million increase in interest-bearing deposits reflects a $23 million increase in outstanding brokered CDs and an increase of $356 million in retail interest-bearing deposits. LIQUIDITY Liquidity refers to the ability of the Corporation to generate adequate amounts of cash to meet the Corporation's needs for cash. The subsidiary banks and the parent company of the Corporation have different liquidity considerations. Banking subsidiaries meet their cash flow requirements by having funds available to satisfy customer credit needs as well as having available funds to satisfy deposit withdrawal requests. Liquidity at banking subsidiaries is derived from deposit growth, money market assets, maturing loans, the maturity of securities, access to other funding sources and markets, and a strong capital position. Deposit growth is the primary source of liquidity at the banking subsidiaries. Interest-bearing deposits increased $206.7 million, while noninterest-bearing deposits fell $77.3 million from the seasonally high year-end balance. As of March 31, 1998, the securities portfolio contained $131.7 million at amortized cost of U.S. Treasury and federal agency securities available for sale, representing 4.9% of the total securities portfolio. These government securities are highly marketable and had a market value equal to 100.5% of amortized cost at quarter end. Money market investments, consisting of federal funds sold, securities purchased under agreements to resell, and interest-bearing deposits in other financial institutions, averaged $64.3 million in the first quarter of 1998 compared to $40.1 million during the same period in 1997. Being short-term and liquid by nature, money market investments generally provide a lower yield than other earning assets. The Corporation has a strategy of maintaining a sufficient level of liquidity to accommodate fluctuations in funding sources and will periodically take advantage of specific opportunities to temporarily invest excess funds at narrower than normal rate spreads while still generating additional net interest income. At March 31, 1998, the Corporation had $134.3 million outstanding in short-term money market investments, serving as an essential source of liquidity. The amount at quarter end represents 1.3% of total assets compared to .1% at December 31, 1997. Short-term borrowings totaled $1.2 billion at March 31, 1998, compared with $1.3 billion at the end of 1997. Within the classification of short-term borrowings are federal funds purchased, securities sold under agreements to repurchase and FHLB advances with a remaining maturity of less than one year. Federal funds are purchased from a sizable network of correspondent banks while securities sold under agreements to repurchase are obtained from a base of individual, business and public entity customers. FHLB advances with a remaining maturity of greater than one year are included in long-term borrowings. Deposit growth will continue to be the primary source of bank subsidiary liquidity on a long-term basis, along with stable earnings, the resulting cash generated by operating activities and strong capital positions. Shorter-term liquidity needs will mainly be derived from growth in short-term borrowings, maturing securities and money market assets, loan maturities and access to other funding sources. Liquidity is also necessary at the parent company level. The parent company's primary sources of funds are dividends and service fees from subsidiaries, borrowings and proceeds from the issuance of equity. The parent company manages its liquidity position to provide the funds necessary to pay dividends to shareholders, service debt, invest in subsidiaries and satisfy other operating requirements. Dividends received from subsidiaries totaled $20.4 million in the first three months of 1998 and will continue to be the parent's main source of long-term liquidity. At March 31, 1998, the parent company had $120 million of established lines of credit with non-affiliated banks, of which $92 million was in use for nonbank affiliates. The parent company also has access to funds from the issuance of the Corporation's commercial paper, although such funds are also downstreamed to the nonbank subsidiaries. Commercial paper outstanding at March 31, 1998, totaled $1.3 million. The Corporation's long-term debt to equity ratio at March 31, 1998, was 3.6%, compared to 1.9% at December 31, 1997. This increase is primarily attributable to an increase in outstanding long-term FHLB advances. Management believes that, in the current economic environment, the Corporation's subsidiary and parent company liquidity positions are adequate. There are no known trends nor any known demands, commitments, events or uncertainties that will result or are reasonably likely to result in a material increase or decrease in the Corporation's liquidity. CAPITAL Stockholders' equity at March 31, 1998, increased $23.1 million, or 2.8% since December 31, 1997. This increase was composed of $25.1 million of retained earnings, $4.8 million from option exercises and a $3.1 million increase in the unrealized gain on available for sale securities, reduced by $9.9 million from treasury stock purchases. Equity to assets at March 31, 1998 increased to 7.83%, with the Tier 1 leverage ratio climbing to 7.34%. Cash dividends of $.29 were paid in the first quarter of 1998, representing a payout ratio of 36.71% for the quarter. Capital Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 1998 1997 1997 1997 1997 - -------------------------------------------------------------------------------- Stockholders' Equity $836,826 $813,693 $874,027 $842,561 $813,192 Average Equity to Average Assets 7.83% 8.15% 8.10% 7.95% 8.11% Equity to Assets - Period End 7.83% 7.61% 8.16% 8.00% 7.92% Tier 1 Capital to Risk Weighted Assets - Period End 10.89% 10.61% 12.45% 12.21% 12.32% Total Capital to Risk Weighted Assets - Period End 12.14% 11.86% 13.49% 13.26% 13.36% Tier 1 Leverage Ratio - Period End 7.34% 7.10% 7.77% 7.72% 7.68% Market Value Per Share - Period End $53.94 $55.13 $45.06 $39.50 $36.75 Book Value Per Share - Period End $16.54 $16.15 $17.39 $16.80 $16.17 Market Value Per Share to Book Value Per Share 326.12% 341.36% 259.11% 235.12% 227.27% Dividends Per Share - This Quarter $0.29 $0.29 $0.29 $0.29 $0.24 Dividends Per Share - Year to Date $0.29 $1.11 $0.82 $0.53 $0.24 Earnings Per Share - This Quarter $0.79 $0.72 $0.73 $0.71 $0.67 Earnings Per Share - Year to Date $0.79 $2.83 $2.11 $1.38 $0.67 Dividend Payout Ratio - This Quarter 36.71% 40.28% 39.73% 40.85% 35.82% Dividend Payout Ratio - Year to Date 36.71% 39.22% 38.86% 38.41% 35.82% - -------------------------------------------------------------------------------- The adequacy of the Corporations capital is regularly reviewed to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. The assessment of overall capital adequacy depends on a variety of factors, including asset quality, liquidity, stability of earnings, changing competitive forces, economic conditions in markets served and strength of management. As of March 31, 1998, the Corporation's tier 1 risk-based capital ratio, total risk-based capital (tier 1 and tier 2) ratio and tier 1 leverage ratio were well in excess of regulatory minimums. Management of the Corporation expects to continue to exceed the minimum standards in the future. Similar capital guidelines are also required of the individual banking subsidiaries of the Corporation. As of March 31, 1998, each banking subsidiary exceeded the minimum ratios for tier 1 capital, total capital and the tier 1 leverage ratio. Management actively reviews capital strategies for the Corporation and each of its subsidiaries to ensure that capital levels are appropriate based on the perceived business risks, future growth opportunities, industry standards and regulatory requirements. YEAR 2000 The Corporation has completed its initial assessment of the Year 2000 issue. The Year 2000 issue relates to systems designed to use two digits rather than four to define the applicable year. This assessment was performed by an independent third party. Management believes that all operating systems critical to its delivery of customer service will be Year 2000 compliant prior to December 31, 1998. The cost of implementing the recommendations of the initial assessment are not deemed to be material and, thus, will not have a significant impact on the Corporation's results of operations, liquidity or capital resources. RECENT DEVELOPMENTS On April 22, 1998, the Corporation announced the awarding of a 5-for-4 stock split to be effected as a 25 percent stock dividend. The 5-for-4 stock split to be effected in the form of a 25 percent stock dividend is payable on June 12, 1998, to shareholders of record at the close of business on June 1, 1998. All share data will be adjusted retroactively to reflect the stock split effected in the form of a stock dividend at that time. Any fractional shares resulting from the dividend will be paid in cash. PENDING COMBINATION On February 17, 1998 the Corporation announced the signing of a definitive agreement to acquire Citizens Bankshares, Inc. ("Citizens"), parent company of the $164 million Citizens Bank, N.A., with four banking locations in Northeast Wisconsin. The stock-for-stock merger transaction is contingent upon approval of regulatory authorities and the shareholders of citizens. The transaction, expected to be completed in the third quarter of 1998, will be accounted for using the pooling-of-interests method. However, the transaction is not expected to be material to prior years' reported operating results and, accordingly, previously reported results will not be restated. ACCOUNTING DEVELOPMENTS The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Corporation adopted SFAS No. 131 on January 1, 1998, and required disclosures will be included beginning with the Corporation's 1998 Form 10-K Annual Report. The FASB has issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Post-Retirement Benefits," which is effective for fiscal years beginning after December 15, 1997. This statement revises employers' disclosures about pension and other post-retirement benefit plans. It does not change the measurement of recognition of those plans. It standardizes the disclosure requirements for pensions and other post-retirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer as useful. The Corporation adopted SFAS No. 132 on January 1, 1998. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The Corporation has not experienced any material changes to its market risk position from that disclosed in the Corporation's 1997 Form 10-K Annual Report. ASSOCIATED BANC-CORP PART II - OTHER INFORMATION Page No. -------- ITEM 6: Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: There were no reports on Form 8-K filed for the three months ended March 31, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. ASSOCIATED BANC-CORP --------------------------------------- (Registrant) Date: May 14, 1998 /s/ Brian R. Bodager --------------------------------------- Brian R. Bodager Chief Administrative Officer, General Counsel and Corporate Secretary Date: May 14, 1998 /s/ Joseph B. Selner --------------------------------------- Joseph B. Selner Principal Financial Officer EX-27 2
9 3-MOS DEC-31-1998 MAR-31-1998 286,476 101,007 33,301 0 2,024,805 734,928 745,401 7,167,335 (93,415) 10,692,532 8,493,505 1,181,363 150,688 30,150 0 0 507 836,319 10,692,532 150,884 46,735 832 198,451 86,297 104,108 94,343 3,759 5,311 16,908 60,759 60,759 0 0 39,860 0.79 0.78 7.97 30,072 3,414 455 66,936 92,731 4,031 957 93,415 93,415 0 0
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