-----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, S4U9xaUJur6hTLg4DQB5GteOWqry6Sr2FJn/QdS4o6gsSOwqiHQxvOI+d5fyi9TI RqstcCG6mKiCNx15Kpib0g== 0000007789-98-000015.txt : 19981118 0000007789-98-000015.hdr.sgml : 19981118 ACCESSION NUMBER: 0000007789-98-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98749773 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) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES ----- EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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) 1200 Hansen Road, Green Bay, Wisconsin 54304 - -------------------------------------------------------------------------------- Address of principal executive offices) (Zip code) (920) 491-7000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) 112 North Adams Street, Green Bay, Wisconsin 54301, (920) 433-3166 - -------------------------------------------------------------------------------- (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 September 30, 1998, was 63,294,700 shares. ASSOCIATED BANC-CORP TABLE OF CONTENTS Page No. -------- PART I. Financial Information Item 1. Financial Statements: Consolidated Statements of Financial Condition - September 30, 1998 and December 31, 1997 Consolidated Statements of Income - Three and Nine Months Ended September 30, 1998 and 1997 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 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 See Footnote (8) in Part I Item I on Form 8-K 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) September 30, December 31, 1998 1997 ---- ---- ASSETS (In Thousands, Except Share Data) Cash and due from banks $ 241,447 $ 290,184 Interest-bearing deposits in other financial institutions 10,348 5,019 Federal funds sold and securities purchased under agreements to resell 68,695 11,511 Investment securities: Held to maturity-at amortized cost (fair value of approximately $ 634,353 and $782,240 at September 30, 1998 and December 31, 1997, respectively 621,522 772,524 Available for sale-at fair value 2,118,320 2,167,694 Loans, held for sale 90,700 114,001 Loans, net of unearned income 7,180,810 7,072,550 Less: Allowance for possible loan losses (92,715) (92,731) ------------ ------------ Loans, net 7,088,095 6,979,819 Premises and equipment 134,612 127,824 Other assets 201,936 221,866 ------------ ------------ Total assets $ 10,575,675 $ 10,690,442 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Noninterest-bearing deposits $ 888,896 $ 904,638 Interest-bearing deposits 7,610,772 7,459,427 ------------ ------------ Total deposits 8,499,668 8,364,065 Short-term borrowings 1,040,095 1,337,008 Accrued expenses and other liabilities 125,459 160,406 Long-term borrowings 26,889 15,270 ------------ ------------ Total liabilities 9,692,111 9,876,749 Commitments and contingent liabilities --- --- Stockholders' equity Preferred stock --- --- Common stock (par value $0.01 per share, authorized 634 100,000,000 shares, issued 63,389,734 and 62,993,309 shares, respectively) 504 Surplus 224,982 218,072 Retained earnings 631,052 569,996 Accumulated other comprehensive income 30,512 26,144 Less: Treasury stock (95,034 and 23,618 shares, respectively at cost) (3,616) (1,023) ------------ ------------ Total stockholders' equity 883,564 813,693 ------------ ------------ Total liabilities and stockholders' equity $ 10,575,675 $ 10,690,442 ============ ============ (See accompanying Notes to Consolidated Financial Statements.) ITEM 1. Financial Statements Continued: ASSOCIATED BANC-CORP Consolidated Statements of Income (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------ ------------ 1998 1997 1998 1997 ---- ---- ---- ---- (In Thousands) INTEREST INCOME Interest and fees on loans $151,557 $151,163 $453,685 $439,573 Interest and dividends on investment securities: Taxable 40,794 46,915 126,678 137,657 Tax exempt 2,791 2,212 7,809 6,812 Interest on deposits in other financial institutions 256 120 1,441 653 Interest on federal funds sold and securities purchased under agreements to resell 778 231 1,265 737 ------- ------- ------- ------- Total interest income 196,176 200,641 590,878 585,432 INTEREST EXPENSE Interest on deposits 87,639 86,226 260,711 250,083 Interest on short-term borrowings 14,637 19,212 47,288 53,684 Interest on long-term borrowings 447 419 1,431 1,453 ------- ------- ------- ------- Total interest expense 102,723 105,857 309,430 305,220 ------- ------- ------- ------- NET INTEREST INCOME 93,453 94,784 281,448 280,212 Provision for possible loan losses 3,378 3,739 10,511 10,297 ------- ------- ------- ------- Net interest income after provision for possible loan losses 90,075 91,045 270,937 269,915 NONINTEREST INCOME Trust service fees 8,496 7,089 24,477 21,020 Service charges on deposit accounts 7,092 7,211 20,279 20,732 Investment securities gains, net 35 851 5,989 2,234 Mortgage banking activity 10,568 6,745 32,647 17,299 Retail commission income 3,873 3,968 11,249 11,831 Loan fees 5,106 4,276 14,139 12,039 Asset sale gains, net 543 512 6,919 875 Other 3,537 3,510 10,399 9,891 ------- ------- ------- ------- Total noninterest income 39,250 34,162 126,098 95,921 NONINTEREST EXPENSE Salaries and employee benefits 36,624 34,035 110,209 101,196 Net occupancy expense 5,082 5,010 15,303 15,865 Equipment rentals, depreciation and maintenance 3,499 3,165 10,366 9,370 Data processing expense 3,989 4,164 13,431 12,581 Stationery and supplies 1,572 1,450 4,454 4,026 Business development and advertising 3,233 3,962 10,569 11,653 FDIC expense 827 810 2,474 2,452 Other 17,225 15,752 49,677 44,863 ------- ------- ------- ------- Total noninterest expense 72,051 68,348 216,483 202,006 ------- ------- ------- ------- Income before income taxes 57,274 56,859 180,552 163,830 Income tax expense 18,874 20,037 61,288 57,669 -------- -------- -------- -------- NET INCOME $ 38,400 $ 36,822 $119,264 $106,161 ======== ======== ======== ======== Earnings per share: Basic $ 0.61 $ 0.59 $ 1.88 $ 1.69 Diluted $ 0.60 $ 0.58 $ 1.86 $ 1.66 (See accompanying Notes to Consolidated Financial Statements) ITEM 1. Financial Statements Continued: ASSOCIATED BANC-CORP Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, ------------ 1998 1997 ---- ---- (In Thousands) OPERATING ACTIVITIES Net income $ 119,264 $ 106,161 Adjustments to reconcile net income to net cash provided by Operating activities: Provision for possible loan losses 10,511 10,297 Depreciation and amortization 11,853 10,611 Amortization of mortgage servicing rights 4,822 3,811 Amortization of intangibles 4,380 4,673 Net amortization (accretion) of premiums and discounts (4,557) (11,392) Gain on sales of investment securities, net (5,989) (2,234) (Increase) decrease in interest receivable and other assets 32,748 (14,207) Decrease in interest payable and other liabilities (34,947) (6,027) Amortization of loan fees and costs 62 (395) Net (increase) decrease in mortgage loans acquired for sale 40,924 (17,245) Gain on sales of mortgage loans held for sale (17,623) (2,684) Gain on other asset sales (6,919) (875) ------- ------ Net cash provided by operating activities 154,529 80,494 INVESTING ACTIVITIES Net increase in federal funds sold and securities purchased under agreements to resell (57,184) (235) Net increase in interest-bearing deposits in (5,329) (2,723) other financial institutions Purchases of held to maturity securities (10,019) (158,955) Purchases of available for sale securities (468,136) (657,007) Proceeds from sales of available for sale securities 60,366 66,730 Maturities of held to maturity securities 160,554 203,542 Maturities of available for sale securities 474,366 367,274 Net increase in loans (123,923) (406,579) Proceeds from sales of other real estate 5,414 5,726 Purchases of premises and equipment, net of disposals (20,710) (11,762) Purchase of mortgage servicing rights (15,321) (6,225) Net cash received in purchase of subsidiary --- 5,051 Proceeds from sale of other assets 3,366 876 ----- ------- Net cash provided by (used in) investing activities 3,444 (594,287) FINANCING ACTIVITIES Net increase in deposits 135,603 290,601 Net increase (decrease) in short-term borrowings (297,578) 163,681 Cash dividends (47,744) (34,723) Proceeds from issuance of long-term borrowings 13,500 --- Repayment of long-term borrowings (1,216) (1,617) Proceeds from exercise of stock options 7,140 3,344 Stock purchases by pooled company --- (21,048) Purchase of treasury stock (16,415) (1,584) ------ ----- Net cash provided by (used in) financing activities (206,710) 398,654 ------- ------- Net decrease in cash and cash equivalents (48,737) (115,139) Cash and due from banks at beginning of period 290,184 369,934 Cash and due from banks at end of period $ 241,447 $ 254,795 ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 279,850 $ 296,091 Income taxes 52,129 57,640 Supplemental schedule of noncash investing activities: Loans transferred to other real estate 5,074 6,627 Loans made in connection with the disposition of other real estate 780 53 (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. 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. Certain items in prior periods' consolidated financial statements have been reclassified to conform with the September 30, 1998 presentation. NOTE 3: Business Combinations The following table summarizes completed transactions during 1997 and through September 30, 1998: Consideration Paid ------------------------ Shares Total Method Cash of Assets Intangibles Name of Date of (In Common (In (In Acquired Acquired Accounting Millions Stock Millions) Millions) - -------------------------------------------------------------------------------- Centra 2/97 Pooling of $--- 517,956 $ 76 $--- Financial, Interests Inc. [A] West Allis, Wisconsin First 10/97 Pooling of 0.1 34,794,911 6,005 --- Financial Interests Corporation [B] Stevens Point, 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) September 30, 1998 - -------------------------------------------------------------------------------- Amortized Cost Fair Value - -------------------------------------------------------------------------------- Federal agency securities $ 90,763 $ 91,766 Mortgage-related securities 288,280 292,948 Obligations of state and political subdivisions 172,984 177,376 Other securities (debt) 69,495 72,263 - -------------------------------------------------------------------------------- Total $621,522 $634,353 ================================================================================ (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) September 30, 1998 - -------------------------------------------------------------------------------- Amortized Cost Fair Value - -------------------------------------------------------------------------------- U.S. Treasury securities 81,580 82,812 Federal agency securities 279,218 282,289 Mortgage-related securities 1,489,788 1,520,641 Obligations of state and political subdivisions 78,764 79,997 Other securities (debt and equity) 141,501 152,581 - -------------------------------------------------------------------------------- Total $2,070,851 $2,118,320 ================================================================================ (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 Nine For the Year Months Ended Ended September 30, 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 10,511 31,668 Net loan charge-offs (10,527) (11,432) Balance at end of period $92,715 $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 Nine For the Year Months Ended Ended September 30, December 31, 1998 1997 ---- ---- (In Thousands) - -------------------------------------------------------------------------------- Balance at beginning of period $22,535 $20,238 Additions 15,321 9,801 Amortization (4,822) (6,472) Change in valuation allowance (4,599) (1,032) Balance at end of period $28,435 $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 Nine Months Ended Ended September 30, September 30, 1998 1997 1998 1997 ---- ---- ---- ---- (In Thousands, Except Per Share Data) Basic: Net income available to common stockholders $ 38,400 $ 36,822 $119,264 $106,161 Weighted average shares outstanding 63,306 62,738 63,283 62,871 Basic earnings per share $ 0.61 $ 0.59 $ 1.88 $ 1.69 ==== ==== ==== ==== Diluted: Net income available to common stockholders $ 38,400 $ 36,822 $119,264 $106,161 Weighted average shares outstanding 63,306 62,738 63,283 62,871 Effect of dilutive stock options outstanding 635 1,282 716 1,127 ------ ------ ------ ------ Diluted weighted average shares outstanding 63,941 64,020 63,999 63,998 Diluted earnings per common share $ 0.60 $ 0.58 $ 1.86 $ 1.66 ====== ====== ====== ====== 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 annual required disclosures will be included beginning with the Corporation's 1998 Form 10-K Annual Report. The Corporation's comprehensive income for the three and nine month periods ended September 30, 1998 and 1997, is as follows: Three Months Nine Months Ended Ended September 30, September 30, (In thousands) 1998 1997 1998 1997 ---- ---- ---- ---- Net income $38,400 $36,822 $119,264 $106,161 Other comprehensive income (loss), net of tax- Unrealized gain (loss) on securities: Unrealized holding gains (losses) arising during the period (1,275) (970) 8,261 11,765 Less: reclassification adjustment for net gains realized in net income (23) (553) (3,893) (1,452) ------- ------- -------- -------- Subtotals (1,298) (1,523) 4,368 10,313 ------- ------- -------- -------- Comprehensive income $37,102 $35,299 $123,632 $116,474 ======= ======= ======== ======== 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. The following discussion refers to the impact of the Corporation's business combinations activity (see Note 3 of the Notes to Consolidated Financial Statements), particularly the acquisition of the $6.0 billion First Financial Corporation (FFC). The FFC acquisition was accounted for using the pooling-of-interests method. Thus, all consolidated financial information has been restated as if the transaction had been effected as of the beginning of the earliest reporting period. In addition all prior period per share results, period end shares and weighted average shares have been restated to reflect the five-for-four stock split effected in the form of a 25 percent stock dividend paid to shareholders on June 12, 1998. Finally, the following discussion will focus upon "operating earnings", with respect to the fourth quarter of 1997, for the Corporation. Operating earnings for the fourth quarter of 1997 exclude the impact of the merger, integration and other one-time charges recorded by the Corporation (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. EARNINGS SUMMARY Net income for the nine months ended September 30, 1998 totaled $119.3 million, an increase of $13.1 million or 12.3% over the $106.2 million earned during the same period of 1997. Earnings per diluted share were $1.86 for the nine months ended September 30, 1998, compared to $1.66 for the same period of 1997. Operating results for the first nine months of 1998 generated an annualized return on average assets (ROA) of 1.51% and an annualized return on average equity (ROE) of 18.77%, compared to 1.38% and 17.09%, respectively, for the comparable period in 1997. - The change between the comparable nine month periods was a result of higher net interest income (up $1.2 million, or 0.4%) and higher noninterest income (up $30.2 million, or 31.5%), offset by higher provision for loan losses (up $214,000, or 2.1%), higher noninterest expense (up $14.5 million, or 7.2%), and higher income tax expense (up $3.6 million, or 6.3%). Net income for third quarter 1998 was $38.4 million, up $1.6 million or 4.3% over 1997 third quarter net income of $36.8 million, and down from the $41.0 million reported in the second quarter of 1998. Earnings per diluted share were $0.60 in third quarter 1998, up 3.4% over the $0.58 reported in third quarter 1997, and down from the $0.64 net income per share reported in second quarter 1998. For third quarter 1998 ROA was 1.44% and ROE was 17.72%, up compared to 1.40% and 17.33%, respectively, for third quarter 1997, and down compared to 1.56% and 19.36%, respectively for second quarter 1998. - The change in third quarter 1998 net income (increase of $1.6 million) compared to the same period last year, was a result of higher noninterest income (up $5.1 million, or 14.9%), lower provision for loan losses (down $361,000, or 9.7%), lower income tax expense (down $1.2 million, or 5.8%), offset by lower net interest income (down $1.3 million, or 1.4%) and higher noninterest expense (up $3.7 million, or 5.4%). - The change in third quarter 1998 net income (decrease of $2.6 million, or 6.4%), when compared to second quarter 1998, was a result of lower net interest income (down $200,000, or 0.2%) and lower noninterest income (down $5.8 million, or 13.0%) offset by lower noninterest expense (down $806,000, or 1.1%) and lower income tax expense (down $2.6 million, or 12.3%). - -------------------------------------------------------------------------------- Net Income: Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 1998 1998 1998 1997 1997 - -------------------------------------------------------------------------------- Operating net income (Qtr) $ 38,400 $41,004 $39,860 $ 36,017 $ 36,822 Operating net income (YTD) $119,264 $80,864 $39,860 $142,178 $106,161 Consolidated net income (Loss) (Qtr) $ 38,400 $41,004 $39,860 $(53,802) $ 36,822 Consolidated net income (YTD) $119,264 $80,864 $39,860 $ 52,359 $106,161 Operating EPS - basic (Qtr) $0.61 $.65 $.63 $.57 $.59 Operating EPS - diluted (Qtr) $0.60 $.64 $.62 $.57 $.58 Operating EPS - basic (YTD) $1.88 $1.28 $.63 $2.26 $1.69 Operating EPS - diluted (YTD) $1.86 $1.26 $.62 $2.22 $1.66 Consolidated EPS - basic (Qtr) $0.61 $.65 $.63 $(1.86) $.59 Consolidated EPS - diluted (Qtr) $0.60 $.64 $.62 $(0.85) $.58 Consolidated EPS - basic (YTD) $1.88 $1.28 $.63 $.83 $1.69 Consolidated EPS - diluted (YTD) $1.86 $1.26 $.62 $.82 $1.66 Operating ROE - Quarter 17.72% 19.36% 19.51% 16.46% 17.33% Operating ROE - YTD 18.77% 19.43% 19.51% 16.93% 17.09% Operating ROA - Quarter 1.44% 1.56% 1.53% 1.34% 1.40% Operating ROA - YTD 1.51% 1.54% 1.53% 1.37% 1.38% - -------------------------------------------------------------------------------- NET INTEREST INCOME Third Quarter 1998 Compared to Third Quarter 1997: Fully taxable equivalent (FTE) net interest income in the third quarter of 1998 was $95.1 million, a decrease of $1.1 million when compared to the third quarter of 1997 of $96.2 million. Balance sheet growth contributed $3.4 million to FTE net interest income, while the rate environment impacted net interest income unfavorably by $4.5 million. Average earning assets grew $102 million from the third quarter of 1997. The growth in average earning assets was concentrated in loans, with loans increasing $286 million, offset by a $184 million decrease in investment securities and other short-term investable funds, when compared to the third quarter of 1997. The net growth in average earning assets was funded by increased time deposits of $60 million, higher balances of savings, NOW and MMA of $155 million and higher net free funds of $115 million, offset by a $228 million decrease in wholesale borrowings (funds purchased, repurchase agreements, FHLB borrowings, and long-term borrowings). The net interest margin for the third quarter of 1998 was 3.76%, or 9 basis points less than the 3.85% margin in the third quarter of 1997. The interest rate spread (the difference between the average earning asset yield and the average rate paid on interest-bearing liabilities) also decreased, to 3.16% from 3.28% reported a year ago. The contribution from net free funds increased to 0.60% from 0.57%. The 26 basis point decline in the earning asset yield outpaced the 14 basis point decline in funding costs, contributing to the margin compression experienced between the comparable third quarter periods. The Corporation's net interest income was negatively impacted by the interest rate environment encountered in the third quarter of 1998 as compared to the third quarter of 1997. The lower rate environment accelerated the prepayment of higher yielding residential real estate loans and mortgage-related securities. The re-investment opportunities available were at lower yields. This rate environment also made it difficult to grow total earning assets, as commercial loan growth was offset by declining balances of residential real estate loans and mortgage-related securities. Residential real estate mortgage related loans and securities comprise 54.2% of the Corporation's total earning assets, down from 56.5% in the third quarter of 1997. - -------------------------------------------------------------------------------- Net Interest Income: Tax Equivalent Basis (In Thousands) - -------------------------------------------------------------------------------- 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 1998 1998 1998 1997 1997 - -------------------------------------------------------------------------------- Interest income $196,176 $196,252 $198,450 $201,788 $200,641 Tax equivalent adjustment 1,645 1,544 1,509 1,464 1,406 -------- -------- -------- -------- -------- Tax equivalent interest income $197,821 $197,796 $199,959 $203,252 $202,047 Interest expense 102,723 102,599 104,108 106,418 105,857 -------- -------- -------- -------- -------- Tax equivalent net interest income $ 95,098 $ 95,197 $ 95,851 $ 96,834 $ 96,190 - -------------------------------------------------------------------------------- Third Quarter 1998 Compared to Second Quarter 1998: FTE net interest income in the third quarter of 1998 was $95.1 million, a decrease of $99,000 compared to the second quarter of 1998 of $95.2 million. Balance sheet growth contributed $269,000 to FTE net interest income, while the rate environment impacted net interest income unfavorably by $442,000. Additionally, the extra day in the third quarter compared to the second quarter contributed $74,000 to net interest income. Average earning assets increased $2 million from the second quarter of 1998, with investment securities and other short-term investable funds growing $10 million and loans decreasing $8 million. Funding sources also shifted, with interest-bearing deposits growing $14 million and wholesale borrowings decreasing $23 million. The net interest margin for the third quarter of 1998 was 3.76%, down 1 basis point from the second quarter of 1998. The contribution from net free funds in the third quarter of 1998 remained at 0.60%. The rate spread decreased to 3.16% from 3.17% reported last quarter. - -------------------------------------------------------------------------------- Net Interest Margin: Quarterly Trends (Quarterly Info Only) - -------------------------------------------------------------------------------- 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 1998 1998 1998 1997 1997 - -------------------------------------------------------------------------------- Yield on earning assets 7.81% 7.86% 7.97% 7.95% 8.07% Cost of interest-bearing liabilities 4.65% 4.69% 4.77% 4.78% 4.79% ---- ---- ---- ---- ---- Interest rate spread 3.16% 3.17% 3.20% 3.17% 3.28% Net free funds contribution 0.60% 0.60% 0.59% 0.63% 0.57% ---- ---- ---- ---- ---- Net interest margin 3.76% 3.77% 3.79% 3.80% 3.85% ==== ==== ==== ==== ==== Average earning assets to average asset 95.10% 95.32% 95.20% 95.35% 95.24% Free funds ratio (% of earning assets) 12.99% 12.88% 12.30% 13.14% 11.97% - -------------------------------------------------------------------------------- Year-to-date (YTD) 1998 Compared to YTD 1997: FTE net interest income in the first nine months of 1998 was $286.1 million, an increase of $1.7 million over the same period in 1997 FTE net interest income of $284.4 million. The consolidated increase for this period was primarily attributable to a positive impact on net interest income from a volume variance of $14.3 million, offset by a negative impact on net interest income from a rate variance of $12.6 million. Average earning assets increased $236 million in the first nine months of 1998 compared to the same period last year. Total average loans grew $365 million in the first nine months of 1998 compared to the first nine months of 1997, while balances of investments and short-term investments declined $129 million. The net growth in average earning assets was funded by increased time deposits of $106, higher balances of savings, NOW and MMA of $156 million, and increased net free funds of $124 million, offset by decreased wholesale borrowings (funds purchased, repurchase agreements, FHLB borrowings and long-term borrowings) of $150 million. The net interest margin for the first nine months of 1998 was 3.77%, down 8 basis points from the 3.85% in the first nine months of 1997. The interest rate spread decreased to 3.17% from 3.29%, with the earning asset yield declining 11 basis points (loans down 17 basis points, investments down 5 basis points) and total interest-bearing liabilities moving up only 1 basis point (retail deposits up 3 basis points and wholesale funds down 1 basis point). The reduction in interest rate spread was offset by a 4 basis point increase in contribution from net free funds as a result of higher volumes of net free funds. The Corporation's net interest income was impacted by the lower interest rate environment experienced in the first nine months of 1998, which accelerated the prepayment of higher yielding residential real estate loans and mortgage-related securities (and lowered total yield on earning assets). Growth in total deposits reduced reliance on wholesale funding sources, which helped to control the total cost of interest-bearing liabilities as noted above. A 10.6% increase in the average balance of net free funds contributed $4.4 million to net interest income. If the interest rate environment of the third quarter 1998 continues, continued pressure on net interest income is likely. In addition, there will be impact on the margin going forward from the Corporation's October 1998 purchase of $100 million of bank-owned life insurance (BOLI), which will be recorded in the consolidated statement of financial condition in other assets. While the BOLI was funded with interest-bearing liabilities, the revenue will be a component of noninterest income in the consolidated statements of income. - -------------------------------------------------------------------------------- Earning Asset and Interest-Bearing Liability Volumes: Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 1998 1998 1998 1997 1997 - -------------------------------------------------------------------------------- Average loans $ 7,277,583 $ 7,285,819 $ 7,201,936 $ 7,161,089 $ 6,990,920 Average earning assets 10,043,826 10,041,932 10,075,172 10,151,828 9,941,498 Average noninterest- bearing deposits 826,204 796,361 778,885 824,332 726,880 Average interest- bearing deposits 7,618,798 7,605,270 7,550,146 7,511,209 7,403,326 Average deposits 8,445,002 8,401,631 8,329,031 8,355,541 8,130,206 Average interest- bearing liabilities $ 8,739,163 $ 8,748,600 $ 8,835,493 $ 8,818,256 $ 8,751,596 - -------------------------------------------------------------------------------- LOAN LOSS The provision for loan loss (PFLL) for the third quarter of 1998 was $3.4 million, unchanged from second quarter 1998, and a decrease of $361,000 from the third quarter of 1997. PFLL recorded in the third quarter of 1998 exceeded net charges recorded in the same quarter by $1.0 million. As of September 30, 1998, the allowance for possible loan losses (AFLL) of $92.7 million represented 1.29% of total outstanding loans, down from the 1.31% reported at December 31, 1997, and up from 1.05% reported at September 30, 1997. The increase in AFLL to loans from the comparable third quarter periods is attributable to the $16.8 million merger adjustment booked at year end 1997 in conjunction with the acquisition of FFC. During the third quarter of 1998, net charge-offs of $2.4 million were recorded. Net charge-offs as a percent of average loans (on an annualized basis) were 0.13% for the three month period ended September 30, 1998. - -------------------------------------------------------------------------------- Allowance for Possible Loan Losses: Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 1998 1998 1998 1997 1997 - -------------------------------------------------------------------------------- Provision Expense - Qtr $ 3,378 $ 3,375 $ 3,759 $ 4,571 $ 3,739 Merger Adjustment - Qtr --- --- --- 16,800 --- Provision Expense - YTD 10,511 7,134 3,759 14,868 10,297 Merger Adjustment - YTD --- --- --- 16,800 --- Net Charge-Offs - Qtr 2,370 5,081 3,075 3,113 2,947 Net Charge-Offs - YTD 10,527 8,156 3,075 11,432 8,319 ------- ------- ------- ------- ------- Allowance at Period End $92,715 $91,708 $93,415 $92,731 $74,454 ======= ======= ======= ======= ======= Allowance to Loans 1.29% 1.27% 1.30% 1.31% 1.05% Net Charge-Offs to Average Loans (Annualized) - Qtr 0.13% .28% .17% .17% .16% Net Charge-Offs to Average Loans (Annualized) - YTD 0.19% .23% .17% .16% .16% - -------------------------------------------------------------------------------- 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. The Corporation had $8.3 million of these loans at September 30, 1998 and $7.4 million at June 30, 1998. 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 collectibility of the principal is in doubt, payments received are applied to loan principal. Total nonperforming loans at September 30, 1998 were $43.0 million, a decrease of $3.2 million from June 30, 1998 and an $8.7 million increase from December 31, 1997. The ratio of nonperforming loans to total loans at September 30, 1998 was 0.60% compared to 0.64% at June 30, 1998, 0.48% at December 31, 1997 and 0.54% at September 30, 1997. Other real estate owned of $4.1 million at September 30, 1998 was essentially unchanged from $4.0 million at June 30, 1998. - -------------------------------------------------------------------------------- Nonperforming Loans and Other Real Estate (In Thousands) - -------------------------------------------------------------------------------- 9/30/98 6/30/98 3/31/98 12/31/97 9/30/97 - -------------------------------------------------------------------------------- Nonaccrual loans $36,566 $39,512 $30,072 $32,415 $36,202 Accruing loans past due 90 days or more 6,161 6,404 3,414 1,324 1,648 Restructured loans 287 287 455 558 186 ------- ------- ------- ------- ------- Total nonperforming loans $43,014 $46,203 $33,941 $34,297 $38,036 ======= ======= ======= ======= ======= Nonperforming loans as a Percent of loans 0.60% 0.64% 0.47% 0.48% 0.54% Other real estate owned $ 4,085 $ 4,012 $ 4,265 $ 2,067 $ 2,447 - -------------------------------------------------------------------------------- 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 September 30, 1998, potential problem loans totaled $69.8 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 September 30, 1998, no concentrations existed in the Corporation's loan portfolio in excess of 10% of total loans. Real estate construction loans at September 30, 1998, totaled $352 million, or 4.9% of loans while agricultural loans were 0.8% of total loans. As of September 30, 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 Third Quarter 1998 Compared to Third Quarter 1997: Noninterest income increased $5.1 million or 14.9% over the third quarter of 1997. Noninterest income, excluding net investment securities gains, increased $5.9 million, or 17.7%. Income from service charges on deposit accounts and retail commission income decreased from the third quarter of 1997. All other categories of noninterest income increased from the third quarter of 1997. Trust service fees increased $1.4 million or 19.8% compared to the same quarter last year, as a result of higher trust assets under management and general market conditions. Net investment securities gains decreased $816,000 or 95.9% compared to the third quarter of 1997. Mortgage banking income increased $3.8 million, or 56.7% from the third quarter of 1997. Increases were recognized in higher servicing fees (up $420,000), and increased gains on sales of loans (up $3.0 million). The remaining increase was a result of production related revenue (origination, underwriting and escrow waiver fees). Production volumes in the third quarter of 1998 were $471 million compared to the same period last year at $287 million. The increased gains on sales of loans is the result of this increased production in a lower rate environment. Income from loan fees increased $830,000, or 19.4% compared to the third quarter of 1997. The increase is a result of increased fees on credit cards (up $526,000) and commercial loans (up $262,000). - -------------------------------------------------------------------------------- Noninterest Income: Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 1998 1998 1998 1997 1997 - -------------------------------------------------------------------------------- Trust servicing fees $ 8,496 $ 8,066 $ 7,915 $ 7,744 $ 7,089 Service charges on deposit accounts 7,092 6,816 6,370 7,177 7,211 Mortgage banking activity 10,568 11,183 10,896 8,410 6,745 Loan fees 5,106 4,872 4,161 4,389 4,276 Retail commission income 3,873 3,987 3,390 3,614 3,968 Asset sale gains (losses), net 543 6,191 185 (22) 512 Other 3,537 3,341 3,522 3,780 3,510 ------- ------- ------- ------- ------- Total, excluding securities gains $39,215 $44,456 $36,440 $35,092 $33,311 Investment security gains, net 35 642 5,311 279 851 Merger, integration and other one-time charges --- --- --- (35,290) --- ------- ------- ------- ------- ------- Total noninterest income $39,250 $45,098 $41,751 $ 81 $34,162 - -------------------------------------------------------------------------------- Third Quarter 1998 Compared to Second Quarter 1998 Noninterest income decreased $5.8 million, or 13.0% in the third quarter of 1998 compared to second quarter 1998. Noninterest income, excluding net investment securities gains and asset sale gains increased by $407,000, or 1.1%. All categories showed moderate increases, except mortgage banking revenue, asset sale gains and investment security gains. Second quarter 1998 carried certain gains that did not recur in third quarter 1998. Net investment security gains decreased $607,000. Asset sale gains decreased $5.6 million compared to the second quarter of 1998. Gains in the second quarter of 1998 of $6.1 million were recognized on the sales of office buildings, an affinity credit card portfolio and leased equipment. Mortgage banking income decreased $615,000 or 5.5% from the second quarter of 1998. The decrease was principally a result of lower production between the quarters ($471 million third quarter 1998 versus $539 million second quarter 1998), with net gains on sales down $782,000 between the sequential quarters. YTD 1998 Compared to YTD 1997: Noninterest income increased $30.2 million, or 31.5% in the first nine months of 1998 compared to the same period last year. Increases in trust service fees, net investment securities gains, mortgage banking activity, loan fees and net asset sale gains more than offset decreases in service charges on deposit accounts and retail commission income compared to the first nine months of 1997. Noninterest income, excluding net investment securities gains and asset sale gains, increased $20.4 million, or 22.0% Net investment security gains increased $3.8 million. 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, resulting. As a result, a net gain of $5.1 million was recognized. Asset sale gains increased $6.0 million over the first nine months of 1997. Gains recognized in the first nine months of 1998 included a gain of $2.8 million on the sale of an office building and a gain of $3.0 million on the sale of an affinity credit card portfolio. Mortgage banking income increased $15.3 million, or 88.7% from the first nine months of 1997, primarily as a result of higher production volumes between the two periods ($1.506 billion for the nine months of 1998 compared to $672 million for the comparable prior period). Thus, gains on sales of loans were up $12.6 million, servicing fees increased $720,000, underwriting fees grew $1.1 million, while other production related revenue accounted for the remaining increase. The increased gains on sales of loans is the result of increased production and a falling mortgage rate environment. For the nine months of 1998 mortgage banking income represented 28.8% of noninterest income before asset and securities gains, compared to 18.6% for the comparable period last year. Mortgage banking activity income can fluctuate over time. This is greatly due to its dependence on production volume and the influence of the interest rate environment, the secondary market and general economic conditions. Trust service fees increased $3.5 million, or 16.4% compared to the same period last year, as a result of higher trust assets under management and general market conditions. Income from loan fees increased $2.1 million, or 17.4% from the first nine months of 1997 to the first nine months of 1998. The increase is a result of increased fees on credit cards (up $1.2 million), with the remainder from real estate fees and commercial loan fees. NONINTEREST EXPENSE Third Quarter 1998 Compared to Third Quarter 1997: Total noninterest expense increased $3.7 million, or 5.4% in the third quarter of 1998 compared to the same period last year. All categories of noninterest expense, with the exception of data processing and business development/advertising, increased when compared to the third quarter of last year. Salaries and employee benefit expenses increased $2.6 million, or 7.6% when compared to the third quarter of 1997. Total salary related expenses accounted for $2.3 million, or 8.5%, of the increase, attributable to base merit increases, transitional overlapping positions as support functions are centralized, and new positions added. Equipment rentals, depreciation and maintenance increased $334,000 or 10.6% over the third quarter of 1997, primarily due to increased depreciation on computer equipment. Business development and advertising decreased $729,000, or 18.4%, compared to the third quarter of 1997, primarily in reducing duplicative advertising expense from FFC. Other miscellaneous expense, from various sources, increased $1.5 million compared to the third quarter of 1997. The primary item contributing to the increase was higher amortization of mortgage servicing rights (up $2.8 million) as a function of the increase in capitalized mortgage servicing rights. - -------------------------------------------------------------------------------- Noninterest Expense: Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 1998 1998 1998 1997 1997 - -------------------------------------------------------------------------------- Salaries and employee benefits $36,624 $37,322 $36,263 $ 33,123 $34,035 Net occupancy expense 5,082 5,054 5,168 4,432 5,010 Equipment rentals, depreciation and maintenance 3,499 3,458 3,409 3,230 3,165 Data processing expense 3,989 4,789 4,654 4,347 4,164 Stationery and supplies 1,572 1,486 1,396 1,505 1,450 Business development and advertising 3,233 4,069 3,266 4,283 3,962 FDIC expense 827 817 830 831 810 Other 17,225 15,863 16,589 18,269 15,752 ------- ------- ------- ------- ------- Noninterest expense, excluding merger, integration and other one-time charges 72,051 72,858 71,575 70,020 68,348 Merger, integration and other one-time charges --- --- --- 51,622 --- ------- ------- ------- -------- ------- Total noninterest expense $72,051 $72,858 $71,575 $121,642 $68,348 - -------------------------------------------------------------------------------- Third Quarter 1998 Compared to Second Quarter 1998 Total noninterest expense decreased $807,000, or 1.1% in the third quarter of 1998 compared to the second quarter of 1998. An increase in other miscellaneous expense was offset by decreases in data processing expense, business development and advertising and salaries and employee benefits. Salaries and employee benefit expenses decreased $698,000, or 1.9% when compared to the second quarter of 1998, primarily due to second quarter carrying non-recurring levels of expense for certain contractual payouts. Business development and advertising decreased $836,000 million, or 20.5% in the third quarter of 1998 compared to the previous quarter, primarily in advertising expense. Other miscellaneous expense, from various sources, increased by $1.4 million, or 8.6% compared to the second quarter of 1998. The increase was primarily a result of higher mortgage servicing rights amortization (up $1.3 million). - -------------------------------------------------------------------------------- Expense Control Quarterly Trends - -------------------------------------------------------------------------------- 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 1998 1998 1998 1997 1997 - -------------------------------------------------------------------------------- Efficiency ratio - Quarter 53.64% 52.17% 54.10% 53.08% 52.78% Efficiency ratio - YTD 53.29% 53.11% 54.10% 53.33% 53.43% Expense ratio - Quarter 1.30% 1.13% 1.41% 1.37% 1.40% Expense ratio - YTD 1.28% 1.27% 1.41% 1.45% 1.48% - -------------------------------------------------------------------------------- YTD 1998 Compared to YTD 1997 Total noninterest expense increased $14.5 million, or 7.2% in the first nine months of 1998 compared to the same period last year. Increases in salaries and employee benefits, equipment rentals, depreciation and maintenance, data processing expense and other were partially offset by decreases in net occupancy and business development and advertising, Salaries and employee benefit expenses represent 62% of the increase in noninterest expense, increasing $9.0 million, or 8.9% when compared to the first nine months of 1997. Total salary related expenses increased $7.8 million, or 9.7% in the first nine months while fringe benefit related expenses increased $1.2 million, or 6.0%. Salary expense is up primarily as a result of base merit increases, variable pay, transitional overlapping positions as support functions are centralized, and new positions. Fringe benefit expenses increased primarily as a result of higher expenses associated with the pension, profit sharing and 401k plans. Net occupancy expense decreased $562,000, or 3.5% in the first nine months of 1998 compared to the first nine months of 1997. All categories of occupancy expense have contributed to the decline in the first nine months of 1998 when compared to the first nine months of 1997. Equipment rentals, depreciation and maintenance increased $996,000 or 10.6% over the first nine months of 1997. This increase was primarily attributable to higher levels of depreciation on computer equipment (up $1.4 million) offset by lower levels of depreciation on furniture and other equipment (down $445,000). Data processing increased $850,000 or 6.8%, compared to the first nine months of 1997, primarily due to increases in the base contract processing costs and additional data processing systems engineer hours. Business development and advertising decreased $1.1 million, or 9.3% in the first nine months of 1998 compared to the same period last year. The favorable variance was seen in reduced advertising costs. Other miscellaneous expense, from various sources, increased by $4.8 million, or 10.7% compared to the first nine months of 1997. This increase was primarily due to increased mortgage servicing rights amortization and valuation provision (up $5.4 million), increased legal/professional/consulting fees (up $915,000), increased EFTS fees (up $521,000), increased placement/relocation/moving expenses (up $495,000) offset by lower expenses on various other expense categories. The systems integration of FFC will occur in fourth quarter 1998. Thus, total noninterest expense levels will continue to absorb related system integration costs. In addition, noninterest expense levels will continue to be impacted by technology enhancements and the introduction of various products to new markets from recently completed and pending acquisitions. INCOME TAXES The effective tax rate for the third quarter of 1998 decreased to 32.95%, down from 34.41% in the second quarter of 1998, down from 34.40% in the first quarter of 1998 and down from 35.24% in the third quarter of 1997. The decrease in effective tax rate, compared to 1997, is primarily due to the utilization of capital loss carryforwards from the sales of assets and the settlement of a tax examination issue. The capital loss carryforwards will be recognized throughout the 1998 tax year. BALANCE SHEET During the past twelve months, total assets decreased $131 million, or 1.2%. Investment securities have decreased to support loan growth. Loan growth has been steady through the period, but offset in part by loan sales. Deposit growth has also been steady through the period. - -------------------------------------------------------------------------------- Selected Balance Sheet Trends (In Thousands) - -------------------------------------------------------------------------------- September 30, December 30, 1997 September 30, 1998 1997 1997 - -------------------------------------------------------------------------------- Loans held for sale $ 90,700 $ 114,001 $ 62,419 Loans, net of unearned income 2,118,320 2,167,694 1,951,462 Investment securities (1) 2,739,842 2,940,218 2,991,366 Other short-term investments 79,043 16,530 38,924 Total assets 10,575,675 10,690,442 10,707,097 Total deposits 8,499,668 8,364,065 8,317,490 Short-term borrowings 1,040,095 1,337,008 1,380,335 Long-term borrowings 26,889 15,270 16,438 Stockholders' equity 883,564 813,693 874,026 (1) includes securities held to maturity at cost and available for sale at fair value - -------------------------------------------------------------------------------- During the first nine months of 1998, total assets decreased by $115 million, or 1.5% on an annualized basis. Loans (including loans held for sale) increased $85 million, or 1.5% on an annualized basis. The loan growth was funded with a $138 million reduction of investments and short-term investments, a $151 million increase of interest-bearing deposits and an increase in net free funds of $81 million offset by a $285 million decrease in wholesale funding. The $151 million increase in interest-bearing deposits reflects a $2 million decrease in outstanding brokered CD's and an increase of $153 million in retail interest-bearing deposits. The loan growth was all in commercial (up $264 million, or 14.3% on an annualized basis). Real estate and consumer loans decreased from December 31, 1997 ($97 million, or 3.6% and $58 million, or 8.3% on an annualized basis, respectively). A sale of an affinity credit card portfolio, ($24 million of outstanding balances), in the second quarter of 1998 contributed to the decline in consumer loans. Loans held for sale also declined by $23 million, or 27.3% on an annualized basis, as a function of secondary market activity. 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 $151.3 million, while noninterest-bearing deposits fell $15.7 million from the seasonally high year-end balance. As of September 30, 1998, the securities portfolio contained $360.8 million at amortized cost of U.S. Treasury and federal agency securities available for sale, representing 13.4% of the total securities portfolio. These government securities are highly marketable and had a market value equal to 101.2% 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 $72.0 million in the third quarter of 1998 compared to $27.0 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 September 30, 1998, the Corporation had $79.0 million outstanding in short-term money market investments, serving as an essential source of liquidity. The amount at quarter end represents .7% of total assets compared to .2% at December 31, 1997. Short-term borrowings totaled $1.0 billion at September 30, 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 $53.9 million in the first nine months of 1998 and will continue to be the parent's main source of long-term liquidity. At September 30, 1998, the parent company had $150 million of established lines of credit with non-affiliated banks, of which $87 million was in use for nonbank affiliates. The Corporation's long-term debt to equity ratio at September 30, 1998, was 3.0%, 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 subsidiaries 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 September 30, 1998 increased $69.9 million, or 8.6% since December 31, 1997. This increase was composed of $71.5 million of retained earnings, $10.4 million from option exercises and $4.4 million increase in the net SFAS 115 investment market value adjustment, reduced by $16.4 million from treasury stock purchases. Equity to assets at September 30, 1998 increased to 8.35%, with the Tier 1 leverage ratio climbing to 7.82%. Cash dividends of $0.29 per share were paid in the third quarter of 1998, representing a pay-out ratio of 47.54% for the quarter. 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 effected in the form of a 25 percent stock dividend was paid on June 12, 1998, to shareholders of record at the close of business on June 1, 1998. All share data has been adjusted retroactively to reflect the stock split effected in the form of a stock dividend. Any fractional shares resulting from the dividend were paid in cash. - -------------------------------------------------------------------------------- Capital: Quarterly Trends (In Thousands) - -------------------------------------------------------------------------------- 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 1998 1998 1998 1997 1997 - -------------------------------------------------------------------------------- Stockholders' equity $883,564 $867,286 $836,826 $813,693 $874,027 Average equity to average assets 8.14% 8.07% 7.83% 8.15% 8.08% Equity to assets - period end 8.35% 8.21% 7.83% 7.61% 8.16% Tier 1 capital to risk weighted assets - period end 12.30% 12.14% 10.89% 10.61% 12.45% Total capital to risk weighted assets - period end 13.54% 13.37% 12.14% 11.86% 13.49% Tier 1 leverage ratio - period end 7.82% 7.63% 7.34% 7.10% 7.77% Market value per share - period end $31.44 $37.63 $43.16 $44.09 $36.05 Book value per share - period end $13.96 $13.70 $13.24 $12.92 $13.91 Market value per share to book value per share 225% 275% 326% 341% 259% Dividends per share - Quarter $0.290 $0.232 $0.232 $0.232 $0.232 Dividends per share - YTD $0.754 $0.464 $0.232 $0.889 $0.657 Basic operating earnings per share - Quarter $0.61 $0.65 $0.63 $0.57 $0.59 Basic operating earnings per share - YTD $1.88 $1.28 $0.63 $2.26 $1.69 Dividend payout ratio - Quarter 47.54% 35.69% 36.83% 40.70% 39.32% Dividend payout ratio - YTD 40.11% 36.25% 36.83% 39.34% 38.88% - -------------------------------------------------------------------------------- The adequacy of the Corporation's capital is regularly reviewed to ensure that sufficient capital is available for current and future needs and is in compliance with regulatory guidelines. The assessment of overall capital adequacy depends on a variety of factors, including asset quality, liquidity, stability of earnings, changing competitive forces, economic conditions in markets served and strength of management. As of September 30, 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 September 30, 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's Year 2000 Project is proceeding on schedule. The Year 2000 Project relates to systems designed to use two digits rather than four to define the applicable year. The Corporation has adopted a centralized approach to addressing the Year 2000 problem. The Corporation's Director of Systems and Operations has overall responsibility for the Year 2000 compliance efforts and is assisted by a project management office that is staffed with both internal and external resources. Overseeing the project is a steering committee composed of senior management officials. Monthly status reports are provided to each of the Corporation's affiliates and the Corporation's Board of Directors monitors progress on a quarterly basis. The Corporation has dedicated significant internal and external resources to assess, plan and execute a strategy for achieving Year 2000 readiness. Using the Federal Financial Institution's Examination Council (FFIEC) Year 2000 directives that have been published since 1996, the Corporation has established policy guidelines and time frames that are used to manage the work effort and guide Year 2000 compliance decision making. All project management activities and plans have incorporated the FFIEC guidelines published to date. The Corporation's Year 2000 compliance efforts have included completing an inventory of all products and services that may be affected by Year 2000 date related issues. Each product or service inventoried has been categorized as: mission critical, significant, ancillary or other, depending on its significance to the successful continuance of a business activity. Concurrent with and immediately following the completion of the inventory of products and services, the Corporation undertook and completed an awareness project involving all employees, management, boards of directors, and customers of the Corporation. The Corporation is adhering to FFIEC guidelines for completing Year 2000 remediation, testing and implementation for all Mission Critical products and services by June 30, 1999, and for Significant Products and services by December 31, 1999. The Corporation is currently on schedule to complete Year 2000 compliance activities within these designated timeframes. The Corporation uses national third party service providers and software vendors almost exclusively. The products and services provided by these organizations have been integrated to provide an overall technology infrastructure for the Corporation. As a result, a large part of the Corporation's Mission Critical product Year 2000 testing effort is for products processed by service bureaus. The Corporation must conduct Year 2000 testing with these service bureaus and/or verify that the service bureau's systems that the Corporation utilizes have successfully completed Year 2000 tests. The Corporation must determine not only that the service bureau's systems will function properly in the Year 2000 and beyond, but also test that the specific functions utilized by the Corporation will properly perform. The Corporation has no custom developed system code. Therefore, the remediation phase of the Corporation's Year 2000 compliance effort does not include code renovation. Product and service upgrades provided by the Corporation's service bureaus and other vendors are the primary remediation strategy. This also impacts the testing phase of the overall project plan and requires that it will be proportionally larger than a plan which has significant code renovation as its focus. The Corporation has been careful to consider non-information technology as well as information technology systems in its approach to Year 2000 compliance. Non-information technology systems include equipment in use in the business areas, which is not defined as computer hardware or peripheral devices. Equipment includes: calculators, time clocks, heating/ventilating/air-conditioning, elevators, telephones, facsimiles, satellite dishes, and security devices. The Corporation has contacted vendors of non- information technology systems to determine Year 2000 compliance of these systems and products and anticipates the completion of testing of these systems and products during 1999. The Corporation has also identified third parties with which it has a material relationship, such as telecommunications, power and other utility vendors. The impact and status of these services is being reviewed and appropriate steps are being taken to ensure continued operation for all areas. The Corporation's customers who are not preparing for the Year 2000 may experience a disruption in business that could potentially result in significant financial difficulties. Through the use of personal contacts and questionnaires, the Corporation has taken an active role in heightening customer awareness of the Year 2000 issues, assessing and monitoring material customers' Year 2000 compliance efforts, and taking steps to minimize the Corporation's exposure. Material customers include fund takers, fund providers, and capital market and asset management counterparties. The Year 2000 readiness of material customers is being monitored by the Corporation on a quarterly basis and prospective credit customers are also assessed for Year 2000 compliance as part of the underwriting process. Additionally, consideration of Year 2000 credit risk has been incorporated into the Corporation's loan reserve methodology. The estimated costs for Year 2000 compliance are not expected to have a significant impact on the Corporation's results of operations, liquidity or capital resources. The Corporation estimates the total cost of addressing Year 2000 issues will be approximately $12 million, of which approximately $5 million has been expended as of September 30, 1998. Additional expenditures will be made in the fourth quarter of 1998 and will continue through 1999. Year 2000 compliance costs have been influenced by a heavy reliance on external resources that have been contracted to assist the Corporation in the project management, vendor management, and testing phases of its Year 2000 compliance effort. Scheduled systems upgrades and enhancements which would have taken place, notwithstanding the Year 2000 compliance process, have not been included in the estimated Year 2000 costs, even though certain of these expenses may result in Year 2000 solutions. Management of the Corporation believes that the potential effects on the Corporation's internal operations of the Year 2000 compliance effort can and will be addressed prior to the Year 2000. However, if required product or service upgrades are not made or are not completed on a timely basis prior to the Year 2000, the Year 2000 issue could disrupt normal business operations. Normal business operations could also be disrupted if third party servicers, upon which the Corporation depends for services, including service bureaus, payment systems, utilities, etc., encounter difficulties relating to the Year 2000 issue. The most reasonable likely worst case Year 2000 scenarios foreseeable at this time would include the Corporation temporarily not being able to process, in some combination, various types of customer transactions. This could affect the ability of the Corporation to, among other things, originate new loans, post loan payments, accept deposits or allow immediate withdrawals, and, depending on the amount of time such scenario lasted, could have a material adverse effect on the Corporation. Because of the serious implications of these scenarios, contingency plans have been established and are being monitored for all mission critical products to mitigate the risks associated with any failure to successfully complete Year 2000 compliance renovation, validation, or implementation efforts. Additionally, a business resumption contingency plan is being developed to mitigate risks associated with the failure at critical dates of systems that support core business processes. The Year 2000 business resumption contingency plan is designed to ensure that Mission Critical core business processes will continue if one or more supporting systems fail and would allow for limited transactions, including the ability to make certain deposit withdrawals, until the Year 2000 problems are fixed. The costs of the Year 2000 project and the date on which the Corporation plans to complete Year 2000 compliance are based on management's best estimates, which were derived using numerous assumptions of future events such as service bureaus' and other vendors' plans, the availability of certain resources (including internal and external resources), and other factors. However, there can be no guarantee that these estimates will be achieved at the cost disclosed or within the timeframe indicated, and actual results could differ materially from these plans. Factors that might affect the timely and efficient completion of the Corporation's Year 2000 project include, but are not limited to, vendors' and service bureaus' abilities to adequately correct or convert software and the effect on the Corporation's ability to test these systems, the availability and cost of personnel trained in the Year 2000 area, the ability to identify and correct all relevant computer programs, and similar uncertainties. Readers should be cautioned that forward-looking statements contained in the Year 2000 discussion should be read in conjunction with the Corporation's disclosures under the heading, "Special Note Regarding Forward-Looking Statements," appearing on page 3. RECENT DEVELOPMENTS On October 8, 1998, the Corporation announced its Board of Directors approved a repurchase of up to 900,000 shares of its common stock in relation to its pending acquisition of Citizens Bankshares, Inc. The repurchase has since been completed. PENDING COMBINATIONS 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 transaction, as amended, is expected to be completed in the fourth quarter of 1998, and will be accounted for using the purchase method of accounting. On October 1, 1998 the Corporation announced the signing of a definitive agreement to acquire Windsor Bancshares, Inc. ("Windsor"), parent company of the $190 million Bank Windsor, with offices in Minneapolis, Nerstrand, Sleepy Eye and Chisholm, Minnesota. The stock-for-stock merger transaction is contingent upon approval of regulatory authorities and the shareholders of Windsor. The transaction, expected to be completed in the first quarter of 1999, 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 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, and required disclosures will be included beginning with the Corporation's 1998 Form 10-K Annual Report. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued by FASB in June 1998. SFAS No. 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under the standard, entities are required to carry all derivative instruments in the statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies. If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss is reported in earnings immediately. The Corporation anticipates that the adoption of SFAS No. 133 will not have a material impact in the Corporation's financial statements. The FASB has issued SFAS No. 134, "Accounting for Mortgage-Backed Securities after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise: an amendment of FASB Statement No. 65," which is effective for the first fiscal quarter beginning after December 31, 1998. This statement requires that after the securitization of a mortgage loan held for sale, an entity engaged in mortgage banking activities classify the resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold those investments. This statement conforms the subsequent accounting for securities retained after the securitization of mortgage loans by a mortgage banking entity with the required accounting for securities retained after the securitization of other types of assets by a nonmortgage banking enterprise The Corporation anticipates that the adoption of SFAS No. 134 will not have a material impact in the Corporation's financial statements. 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 nine months ended September 30, 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: November 13, 1998 /s/ H. B. Conlon ------------------------------------------- H. B. Conlon Chairman and Chief Executive Officer Date: November 13, 1998 /s/ Joseph B. Selner -------------------------------------------- Joseph B. Selner Principal Financial Officer EX-27 2
9 9-MOS DEC-31-1998 SEP-30-1998 241,447 10,348 68,695 0 2,118,320 621,522 634,353 7,180,810 (92,715) 10,575,675 8,499,668 1,040,095 125,459 26,889 0 0 634 882,930 10,575,675 453,685 134,487 2,706 590,878 260,711 309,430 281,448 10,511 5,989 49,677 180,552 180,552 0 0 119,264 1.88 1.86 7.88 36,566 6,161 287 69,803 92,731 13,183 2,657 92,715 92,715 0 0
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